Case Summaries

Wife Not Estopped from Challenging Husband’s Alleged Divorce-Related Expenses Because She Signed Tax Return Claiming Same Expenses.

In a divorce proceeding, the husband submitted expenses for reimbursement that he incurred in caring for cattle that he owned with his wife before their sale. The trial court awarded him only some of his requested expenses, and the husband appealed. On review, the court affirmed, finding that it was for the trial court to make determinations as to the credibility of the husband’s assertions. The court also declined to adopt a rule of quasi-estoppel and find that since the wife signed a tax return on which the same expenses were claimed by the husband, she should have been estopped from complaining as to the validity of the same expenses in the divorce action. Else v. Else, No. A-13-156, 2014 Neb. App. LEXIS 106 (Neb. Ct. App. Jun. 10, 2014).

No Deduction For Exacted Conservation Easement Because No Proof Of Consideration.

In this case from Colorado, the petitioner sought to develop an historic site into condominiums.  The petitioner sought to build the condos in the parking lot for the historic building  and preserve the historic building in order to get the city to modify existing zoning restrictions, but the city sought conservation easements in return.  Petitioner valued easement at $7 million, but did not indicate on return that it had received anything in return for the easement.  IRS claimed that filing and appraisal requirements were not satisfied with result that easement-related deduction was approximately $400,000.  The court determined that the petitioner was not entitled to any deduction due to the lack of consideration for the easements at issue.    Seventeen Seventy Sherman Street, LLC  v. Comr., T.C. Memo 2014-124.

Taxpayer’s Three-Acre Tract Properly Qualified for Both Homestead Exemption and Open-Space Land Valuation.

A taxpayer owned three contiguous parcels of land: a three-acre tract, a one-acre tract, and a nine-acre tract. He lived in a home located on the one-acre tract.  Before 2010, the taxpayer was granted by the appraisal district a valuation of the three-acre tract as open-space land for purposes of ad valorem taxes. In 2010 and 2011, the appraisal district denied the taxpayer’s application for a residence homestead exemption for the same three-acre tract.  The trial court ruled in favor of the taxpayer in his challenge to the appraisal district’s decision, and the appraisal district appealed. On appeal, the court affirmed the trial court’s ruling, finding that a taxpayer is entitled to a homestead exemption for an entire parcel of property if the contiguous lots total less than 20 acres and they are used as a residence homestead. The court rejected the appraisal district’s argument that the homestead exemption was incompatible with the “agricultural use” requirement necessary for the open-space land valuation. Tex. Tax Code Ann. § 11.13(k) (which provided that the amount of any residence homestead exemption for a qualified residential structure did not apply to the value of that portion of the structure used for other purposes) did not apply to the case at hand because the statute applied only to residential structures, not land. No legal authority provided that land could not be used as a residence homestead and also for agricultural purposes. In fact, Tex. Tax Code Ann. § 23.55(i) did provide that a parcel of land qualifying for open-space valuation did not undergo a change of use when it was claimed as part of a residence homestead.  Parker County Appraisal Dist. v. Francis, No. 02-13-00182-CV, 2014 Tex. App. LEXIS 6690 (Tex. Ct. App. Jun. 19, 2014).

No Tax Deduction For Façade Easement.

In this litigation that has generated multiple court opinions, the petitioner donated a façade conservation easement with respect to the petitioner's row house in an historic district in NYC.  Under the terms of the easement, the petitioner could not alter the façade without the permission of the donee and the petitioner was required to maintain the façade and the balance of the row house.  Under the existing rules of the historic district, the row house was already subject to substantial restrictions on construction and demolition.  In the initial Tax Court decision (T.C. Memo. 2010-151), the Tax Court determined that the petitioner was not entitled to any deduction.  On appeal, the U.S. Court of Appeals for the Second Circuit (682 F.3d 189 (2d Cir. 2012) upheld the charitable deduction of $59,959 because the petitioner's appraiser sufficiently explained how he arrived at valuation numbers before and after easement restriction.  The court determined that it was irrelevant that the IRS believed that the method employed was "sloppy" or haphazardly applied because the pertinent regulation required only that the appraiser identify the valuation method that was used and did not require that the method be reliabale.  The court held that the appraiser sufficiently supplied a basis for the valuation and the approach used was nearly identical to that approved in Simmons v. Comr., T.C. Memo. 2009-208.  In addition, the appraisal provided the IRS with sufficient information to evaluate the claimed deduction.  The petitioner submitted two Form 8283s when combined provided all of the required information and substantially complied with the requirement of the information required to be submitted. The court upheld the charitable deduction for the cash donation to the organization arranging for the donation of the easement (which was required as a condition of facade easement donation).  However, no deduction was allowed for the easement itself because there was no benefit to the taxpayer other than the facilitation of the facade easement.  However, the court remanded the case to the Tax Court to resolve other claims made by IRS.  On remand, the Tax Court (T.C. Memo. 2013-18) held that the petitioner was not entitled to any deduction for the façade easement because the subject property was already subject to substantial restrictions and didn't have any value for purposes of the charitable contribution deduction.  On further review, the appellate court affirmed.  Scheidelman v. Comr., No. 13-2650, 2014 U.S. App. LEXIS 11941 (2d Cir. Jun. 18, 2014).

Strict Substantiation Required For Unreimbursed Employee Business Expenses.

The petitioner traveled in his personal vehicle for his employer and was not reimbursed for his expenses.  He wrote down his mileage and claimed that 10 percent of his vehicle use was personal, and deducted the balance on Form 1040.  The IRS denied the deduction based on the strict substantiation requirements of I.R.C. Sec. 274(d) because the petitioner did not record the amount, time or business purpose of each business use of the vehicle.  The court, agreeing with IRS, denied the deduction.  Garza v. Comr., 2014 T.C. Memo. 121.

Lineal Descendant Is Not a Qualified Intermediary for Tax Deferred Exchange Purposes.

The petitioner bought a property for $488,000 and later divorced his wife.  The wife gave up all of her rights in the property in exchange for $500,000.  After the petitioner remarried and divorced again, he paid $80,000 to the second wife in release of all claims she might have against him.  The petitioner then sold the property for $2,250,000 and two weeks later bought another property for $1,430,000 and claimed that the transactions qualified as an I.R.C. Sec. 1031 exchange.  He also maintained that his basis in the initial tract was $1,068,000 ($488,000 + $500,000 + $80,000).  The petitioner used his attorney-son as the qualified intermediary for the deferred (non-simultaneous) exchange.  The court noted that Treas. Reg. Sec. 1.1031(k)-(3) explicitly barred family members, including ancestors and lineal descendants from being a qualified intermediary.  The court also determined that the monetary payments to his former spouses were gifts in accordance with I.R.C. Sec. 1041(b)(1) as a payment incident to a divorce, and that the petitioner could not increase his basis by the amount of the transfers.  Blangiardo v. Comr., T.C. Memo. 2014-110.   

Taxpayers Fail To Meet Real Estate Professional Exception To Passive Loss Rule.

The petitioners, a married couple, each worked full time at their respective jobs and also owned rental properties.  However, the evidence demonstrated that they did not work more in their rental activities than they did in their non-rental activities.  Thus, I.R.C. Sec. 469(c)(7)(B) was not satisfied.  The fallback test of active participation allowing up to $25,000 in annual losses from rental real estate activities to be deducted was also not available because petitioners income exceeded $150,000.  Passive losses were not deductible.  An accuracy-related penalty was not imposed because the petitioners had reasonable cause with respect to the underpayment.  Alfaro v. Comr., T.C. Sum. Op. 2014-54.

Rental Real Estate Activities Determined To Be Passive and Accuracy-Related Penalty Applied.

The petitioners, a married couple, each worked full-time at their respective jobs and also managed three rental properties.  On a joint return, losses exceeding $19,000 in each of two years were claimed with respect to the properties.  The court held that the petitioners did not satisfy the tests for being a real estate professional.  Based on petitioner's logs, petitioner would have had to spend every spare hour working on the rental properties.  Accordingly, there was no credible documentation and testimony such that 50 percent test of I.R.C. Sec. 469(c)(7)(B)(i)not satisfied.  Bogner v. Comr., T.C. Sum. Op. 2014-53. 

Definition of Alimony Not Based on Intent of Parties.

The petitioner got divorced and the marital settlement agreement stated that the parties entered into it freely and voluntarily.  However, the agreement designated the divorce-related payments petitioner made to ex-spouse on behalf of child as child support rather than alimony, and court order validated the agreement.  Later, petitioner claimed that the agreement was in error and that payments should have been designated as alimony (deductible).  The court issued a ruling to correct its prior ruling, but IRS disregarded the ruling as controlling for federal tax purposes.  The Tax Court agreed with the IRS on the basis that the agreement was freely entered into by the parties and the divorce court was not making a retroactive judgment to correct a divorce decree that mistakenly failed to reflect the court's true intent at the time the decree was entered.  The Tax Court also applied the substantial understatement penalty.  Baur v. Comr., T.C. Memo. 2014-117.

No Involuntary Conversion When Taxpayer Not Forced To Sell.

The defendants, a married couple, entered into a contract (purchase agreement) to sell a tract of real estate to a third party.  After entering into the contract, the defendants refused to close.  The buyer sued for specific performance and a court ordered the sale to close.  The funds from the sale were distributed in various ways, but were not reinvested in replacement property.  However, the defendants did not report the gain from the sale, claiming instead that the gain was deferrable under I.R.C. Sec. 1033 as an involuntary conversion.  The IRS audited and claimed that the income from the sale was not deferrable under I.R.C. Sec. 1033 and imposed an accuracy-related penalty.  The court granted the government's motion for summary judgment on the basis that the tract was not "compulsorily or involuntarily converted" because the defendants voluntarily tried to sell the property and, in any event, didn't reinvest the proceeds in replacement property within two years.  United States v. Peters, No. 4:12CV01395 AGF, 2014 U.S. Dist. LEXIS 79316 (E.D. Mo. Jun. 11, 2014).

Court Approves Tax Court's Method in Valuing Conservation Easement and Valuation Amount, but Not Application of Valuation Misstatement Penalty.

This case involves the valuation of an historic structure permanent facade easement donated to charity, and the corresponding charitable deduction.  The petitioner utilized a before-and-after appraisal to value the easement at $7.445 million.  The IRS allowed a $1.15 million charitable deduction and assessed a 40% penalty for gross misstatement of tax.  At the Tax Court, the petitioner's appraiser used replacement cost and the income approach to value the easement and determined the easement value to be $10 million.  The IRS determined the easement to have no value.  The Tax Court utilized the comparable sales method to value the easement at $1.8 million.  On further review by the Fifth Circuit, the court noted that the Tax Court should have included the impact of the easement on an associated building's fair market value and whether penalty was appropriate based on whether the reasonable cause burden of proof test had been satisfied.  On remand, the Tax Court determined that the easement value (and corresponding deduction) were overstated by more than 400%, and that the petitioner failed to establish a basis for valuation or properly utilize the comparable sale approach.  The Tax Court also determined that a gross valuation misstatement had occurred, and that no reasonable cause exception was applicable and that an accuracy-related penalty should be imposed.  On further review by the Fifth Circuit, the court approved the methods that the Tax Court used to value the easement and the amount of easement valuation, but reversed the Tax Court on the imposition of the valuation-related penalty related to the easement because the taxpayer obtained two qualifying appraisals and had the return professionally prepared.  Whitehouse Hotel Limited Partnership, et al. v. Comr., No. 13-60131, 2014 U.S. App. LEXIS 10963 (5th Cir. Jun. 11, 2014), aff'g. and rev'g., 139 T.C. No. 13 (2012), on rem. from 615 F.3d 321 (5th Cir. 2010), vac'g. and rem'g., 131 T.C. 112 (2008).

IRA Trustee Agreement Does Not Allow Investment In Land, So Owner's Withdrawal To Buy Land Nets 10 Percent Penalty and Penalty For Substantial Understatement.

The petitioner had an IRA and placed it with a company with trustee agreements specifying that investments of IRA account funds only allowed in financial instruments.  The petitioner ordered a cash withdrawal and checked Code 1 Box on the withdrawal slip which meant that the petitioner was making an early withdrawal with no known exception.  The funds were wired to purchase the land and title was taken in the petitioner's name.  IRS asserted the 10 percent early withdrawal penalty and the 25 percent penalty for substantial understatement.  The court determined that terms of trustee agreement controlled, and the petitioner purchased the land personally with the IRA funds.   Court noted that a trustee-to-trustee transfer to a trustee that could invest in land would have been allowed.  Dabney v. Comr., 2014 T.C. Memo. 108.   

No Homebuyer Credit Where Wife Still Had Interest In Old Home.

In this case, the court held that the petitioners, a married couple, couldn't claim a first time homebuyer credit.  While the home at issue was purchased more than three years after the wife quitclaimed her interest in her old home to her children, the court determined that she still held onto the benefits and burdens of ownership of the transferred home.  The court noted that she continued to reside in the old home until the new home was acquired, paid associated expenses and reported rental activity associated with the transferred home after it had been quitclaimed to the children.  While the husband qualified as a first-time homebuyer, both spouses needed to qualify for the credit to be available.  Douglas v. Comr., T.C. Memo. 2014-104. 

Excluded Gain On Home Sale Recaptured When Buyer Defaults and Seller Reacquires Home.

In this case, the petitioner sold his home and 80-acres of land on the installment basis for a gain of $657,796.  The petitioner calculated the gain by excluding $500,000 of gain attributable to the home sale exclusion of I.R.C. Sec. 121.  The buyers defaulted and the petitioner reacquired the property in full satisfaction of the debt.  The IRS claimed the petitioner had to recognize gain upon repossession to the extent of money and other property received before repossession, which would, in essence, recapture the Sec. 121 exclusion previously claimed.  The court agreed with IRS that the general rules of I.R.C. Sec. 1038 applied  and noted that the petitioner was actually in a better position than before the sale because he had received some payments for the sale before the buyer's default and recouped the property. The case is on appeal to the Eighth Circuit Court of Appeals.  Debough v. Comr., 142 T.C. No. 17 (2014).

Contracts Were Not Home Construction Contracts, So Completed Contract Method Not Available.

The petitioner was in the land development business and sold land to builders for home construction.  The petitioner accounted for the income from the sales under the completed contract method which applies to home construction contracts and other real estate construction contracts if the taxpayer estimates that the contracts will be completed within two years of the contract commencement date and the taxpayer satisfies a $10 million gross receipts test under the Treasury Regulations.  Under the completed contract method, no income is reported until the contract is complete irrespective of when contract payments are actually received.  The IRS asserted that the contracts didn't qualify for the completed contract method of accounting because the contracts could not be considered long-term and were not construction contracts because the taxpayer did no construction activities.   The court determined that the custom lot and bulk sale contracts were long term contracts and were construction contracts.  However, the court determined that none of the contracts were home construction contracts because the taxpayer merely paved the road leading to a home.  Thus, gain under the contracts could not be reported under the completed contract method.  The court also determined that none of the contracts involved a general contract or subcontractor relationship.  The Howard Hughes Company, LLC v. Comr., 142 T.C. No. 20 (2014).

Land Sale Income Was Ordinary in Nature Rather Than Capital Gain.

The taxpayers, a married couple, sold 2.63 acres of undeveloped land that generated over $60,000.  The taxpayers reported the income as capital gain subject to tax at favorable capital gain rates.  IRS claimed that the income was "other income" that should be taxed as ordinary income.  The taxpayers admitted that they bought the land for the purpose of developing the property and did attempt to find a partner to develop the property.  Ultimately, the property was sold to a developer and the taxpayers received a payment each time a developed portion of the property was sold.  The IRS denied capital gain treatment because they asserted that the income was from property "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."  The court noted that the determination of the nature of the income is a fact-based determination, and that the facts supported the IRS position.  The taxpayers intended to develop and sell the property at the time it was acquired and that the taxpayers were active in getting the property developed.  The fact that the property was the only one purchased for development was not determinative.  The court granted summary judgment to the IRS.  Allen v. United States, No. 13-cv-02501-WHO, 2014 U.S. Dist. LEXIS 73367 (N.D. Cal. May 28, 2014).    

Suspended Passive Losses Taken When Interest Entirely Disposed Of.

Here, the petitioner had passive losses that were not currently taken and were suspended.  The petitioner claimed that he disposed of his interest in the passive activities involved in the year that the bank foreclosed on the two properties involved.  However, the court disagreed because the foreclosure action was not final in that year.  Simply filing a final partnership return for the partnership that owned the properties was inadequate proof that a disposition had occurred.  Herwig v. Comr., T.C. Memo. 2014-95.

Facts Remain On Whether Statute Of Limitations on Gift Tax Assessment Began.

The decedent's pre-deceased husband founded a farm supply company after WWII.  At the time of her death, the decedent owned a significant amount of stock in the company, but also had been making stock gifts to family members each year from 1999 to 2008, the year of her death. Gift tax returns reporting the gifts were filed each year. The IRS issued deficiency notices for nine of the 10 years involved, increasing the value of the adjusted taxable gifts significantly. The deficiency notice was issued to the estate due to the enhanced estate tax due because of the increased value of the adjusted taxable gifts. At issue was when the period of limitations on gift tax assessment began to run. Generally, gift tax must be assessed within three years after Form 709 is filed. The court noted that the value of a prior taxable gift is treated as finally determined if it is shown on a Form 709 and IRS does not contest it before the period of limitations on assessment runs and is adequetely disclosed on Form 709 (or attached statement) in a manner that sufficiently apprises IRS of the nature of the gift (Treas. Reg. Sec. 301.6501(c)-1(f)(2)). Court determined that issues of material fact remained concerning nature of gifted stock or basis of value reported. The court denied the estate's motion for summary judgment. Estate of Hicks, T.C. Memo. 2014-100.

You Cannot Take The (Former) Penalty Associated With Filing Frivolous Tax Returns With You

In this case, the taxpayer filed frivolous tax returns and got hit with the I.R.C. Sec. 6702(a) penalty (pre-Apr. 3, 2007 version) for doing so.  She paid the penalty and sued for a refund.  However, before the case came to trial, the taxpayer died.  The issue was whether the penalty survived her death.  The statute at issue was silent on the matter and the court determined that it was a civil penalty by nature and survived the decedent's death.  The court noted that its opinion had no bearing on whether the current version of the statute (with a much larger penalty) was still civil in nature that would survive a decedent's death.  United States v. Molen, No. 2:10-cv-2591-MCE KJN, 2014 U.S. Dist. LEXIS 69966 (E.D. Cal. May 21, 2014).   

Taxpayer Was Developer With Gains on Sale Taxed as Ordinary Income.

The petitioner was a self-described real estate real estate professional that received income from the sale of land.  The petitioner reported the income as capital gain, but the Tax Court held that it was ordinary income because the petitioner held the property primarily for sale to customers in the ordinary course of the petitioner's real estate business.  The court noted that the issue of whether the petitioner was a developer (ordinary income treatment) or an investor (capital gain treatment) was fact dependent, and that the facts supported developer status.  The petitioner held his business out to customers as a real estate business and engaged in development and frequent sales of numerous tracts over an extended period of time.  In prior years, the petitioner had reported the income from sales as ordinary income and had deducted the expenses associated with the tracts.  Boree v. Comr., T.C. Memo. 2014-85.

LLC Members Subject To Self-Employment Tax on Distributive Shares.

The LLC at issue serves as the investment manager for a managed fund which is a family of investment partnerships.  The LLC has full authority and responsibility to manage and control fund business and affairs, and is primarily responsible for conducting market research and trading activity of the fund.  The LLC receives management fees for its work.  The LLC treated all partners/members as limited partners such that their distributive shares were not subject to self-employment tax.  Only guaranteed payments were subject to self-employment tax.  The IRS determined that I.R.C. Sec. 1402(13) only excluded from self-employment tax the income distributed to partners/members that were mere investors and did not actively participate in the partnership's/LLC's business operations.  The IRS determined that the present situation was analogous to the facts of Renkemeyer, Campbell, and Weaver LLP v. Comr., 136 T.C. 137 (2011), and the earnings of each partner/member were a direct result of the services rendered on behalf of the LLC by the partners/members.  The payments were also not "wages" and the reasonable compensation rules of corporations are inapplicable.  CCM 201436049 (May 20, 2014).   

Taxpayer At Risk and Not Engaged in Rental Activity - Passive Loss Rules Inapplicable.

The petitioner sued for a refund as a result of a $4.8 million loss that IRS disallowed.  The loss stemmed from the petitioner's acquisition and leasing of a jet during 2005.  The court determined that the petitioner was at risk under I.R.C. Sec. 465 with respect to his aircraft leasing activity and that the leasing activity was within the exception from rental activities contained in Treas. Reg. 1.469-1T(e)(3)(ii)(A) because the average period of customer use of the aircraft was less than seven days.  As a result, the $4.8 million loss was not subject to the passive activity loss limitations.  Moreno, et al. v. United States, No. 6:12CV2920, 2014 U.S. Dist. LEXIS 69363 (W.D. La. May 19, 2014).

Excluded Gain On Home Sale Recaptured When Buyer Defaults and Seller Reacquires Home

In this case, the petitioner sold his home and 80-acres of land on the installment basis for a gain of $657,796.  The petitioner calculated the gain by excluding $500,000 of gain attributable to the home sale exclusion of I.R.C. Sec. 121.  The buyers defaulted and the petitioner reacquired the property in full satisfaction of the debt.  The IRS claimed the petitioner had to recognize gain upon repossession to the extent of money and other property received before repossession, which would, in essence, recapture the Sec. 121 exclusion previously claimed.  The court agreed with IRS that the general rules of I.R.C. Sec. 1038 applied  and noted that the petitioner was actually in a better position than before the sale because he had received some payments for the sale before the buyer's default and recouped the property.   Debough v. Comr., 142 T.C. No. 17 (2014).

Available Funds Must Be Used to Pay Tax Liability.

The petitioner had an outstanding tax liability at the time he received proceeds from the sale of his home and business.  However, the petitioner spent the funds without paying the tax liability.  The court upheld the position of the IRS that the sale proceeds constituted "dissipated assets" that should be included in the petitioner's reasonable collection potential based on all of the facts and circumstances.  The petitioner failed to carry the burden of proof that the proceeds were spent on reasonable living expenses.  The court computed the petitioner's reasonable collection potential.  Porro v. Comr., T.C. Memo. 2014-81.

Rejected Installment Agreement Is No Abuse of Discretion.

In this case, the petitioner proposed an installment agreement for paying delinquent taxes.  The IRS rejected the proposal asserting that the petitioner should liquidate life insurance policies and a 401(k) retirement account to pay the taxes.  The court upheld the IRS position as not an abuse of its discretion.  Boulware v. Comr., T.C. Memo. 2014-80.

No Homebuyer Credit When House Deeded From Mom's Estate to Taxpayer Within Prior Three Years.

The petitioner's mother died in early 2006 and the petitioner moved into her home after the death to comfort his sister who also lived in the home.  In early 2007, the petitioner moved into an apartment.  About that same time, the mother's estate deeded the mother's home to the petitioner and his sister as tenants-in-common.  In May 2008, the petitioner purchased a condo as his principal residence, and claimed a FTHBC on the 2008 return of $7,500.  The IRS denied the credit and imposed an accuracy-related penalty of $1,500.  The petitioner claimed that he never used his mother's home as his principal residence.  Based on the facts, the court disagreed.  The court noted that the petitioner lived at the home, slept there and had no other place in which he could have resided or returned to.  Petitioner had an ownership interest in the mother's home at the time it was deeded to him (within the prior three years of buying the condo) and was not entitled to the credit.  However, the court did not uphold the imposition of the accuracy-related penalty on the basis that the petitioner acted with good faith and had reasonable cause for believing that he was entitled to the credit.  Goralski v. Comr., T.C. Memo. 2014-87

No Deduction for Conservation Easement Where Property Already Restricted By Local Rules.

The key to obtaining a charitable deduction for the donation of a permanent conservation easement is to make sure that the easement restrictions actually diminish the value of the property.  Here, the petitioners, a married couple, owned two buildings in a historic area of Boston.  The buildings were already subject to local historic preservation rules that restricted what could be done to the buildings.  The petitioners placed historic façade easements on both buildings and claimed IRC Sec. 170 deductions. The IRS disallowed the deductions because the properties were already restricted by local law and the donated conservation easements did not further reduce value.  The court agreed with the IRS and noted that the facts of the case were identical to those of Kaufman v. Comr., T.C. Memo. 2014-52 where the court determined that there were no differences between the two sets of restrictions.  The total amount of deductions claimed exceeded what could be claimed in any given year based on the petitioners' income, so the deduction was spread out over three years.  IRS sought to impose 40 percent gross misstatement penalty for each year.  A portion of the petitioners' underpayment resulted from carryover of charitable deductions first claimed on 2004 return which was filed before effective date of the revisions to the understatement penalty at issue in the case that eliminated the reasonable cause defense.  Consequently, no 40 percent penalty applied for the two years at issue when reasonable cause was a defense.  But, the 40 percent penalty applied to the 2006 return (filed after Jul. 25, 2006) because the understatement was due solely to gross valuation misstatements.  No charitable deduction allowed for permanent conservation easement even though petitioners followed advice of National Park Service and the National Architectural Trust ensured that the buildings remained in their original state.  Chandler v. Comr., 142 T.C. No. 16 (2014).    

Multi-Million Dollar Deduction Allowed in Conservation Easement Case.

The plaintiff donated a permanent conservation easement on 82 acres of Florida land.  The land is presently used as a public park and conservation area, and is preserved as open space.  IRS claimed that the easement was worth approximately $7 million and, as a result, the claimed $24 million deduction resulted in a 40 percent accuracy-related penalty.  The IRS based it's before/after valuation on its claim that the tract should be valued in accordance with its present zoning based on prior zoning problems and likely opposition to a zoning change that would allow a higher-valued use such as multi-family housing.  The plaintiff valued the before easement value of the tract based on the ability to obtain a zoning change that would allow multi-family housing on concentrated parts of the tract which left the environmentally sensitive areas as open space.  The court determined that there was a reasonable possibility that the tract could be rezoned to the higher valued use, but then adjusted the plaintiff's valuation downward to reflect the downturn in the real estate market.  The court determined that the easement had a value of almost $20 million, reflecting the pre-easement value of $21 million and the post-easement value of $1 million (reflecting a reduction in the property's value of slightly over 95 percent).  Palmer Ranch Holdings, Ltd. v. Comr., T.C. Memo. 2014-79.

Estate May Be Able to Show Reasonable Cause to Excuse Late Filing Penalty.

The decedent died with a large estate and with two grandchildren as his only heirs.  By the filing deadline for the estate tax return, the estate filed a request for an extension of time to file and paid $6.5 million in federal estate tax, a portion of the estate tax due.  The estate only made partial payment of estate tax due to legal advice that the estate might be able to elect installment payment under I.R.C. Sec. 6166.  The estate did receive a six-month extension to file.  The estate filed by the extended due date, but did not elect installment payment treatment.  The estate also requested an extension of time to pay.  The IRS denied an extension of time to pay and imposed a failure-to-pay penalty.  The estate then paid the estate tax due and a penalty of nearly $1 million, plus interest.  The estate then sued for a refund of the penalty and interest.  The trial court granted summary judgment for IRS.  On appeal, the court vacated the trial court's decision and remanded the case.  The court noted that the estate relied on the faulty advice of a tax "expert" and that could constitute reasonable cause for failure to pay by the deadline if the taxpayer can show either an inability to pay or undue hardship from paying at the deadline.  Estate of Thouron v. United States, No. 13-1603, 2014 U.S. App. LEXIS 8890 (3d Cir. May 13, 2014).   

Taxpayer Timely Made Partial Rollover To IRA, But No Bad Debt Deduction Allowed.

The plaintiff didn't file a federal income tax return for 2007 and IRS issued a notice of deficiency in 2010 based on a substitute return that IRS filed.  The deficiency claimed taxable salary of $150,000 and taxable IRA withdrawals of over $400,000.  The plaintiff then filed a 2007 return reporting about the same salary amount, but less in taxable IRA distributions and a business bad debt loss of over $400,000.  The Tax Court denied the bad debt deduction and rejected the plaintiff's claim that he made an offsetting IRA rollover contribution.  The end result was that the plaintiff owed about $275,000 in taxes for 2007 including penalties for failure to file.  On appeal, the court reversed the Tax Court on the IRA rollover issue.  The court noted that the $120,000 contribution on April 30 was of the same amount of the February 15 withdrawal, and also pointed out that the contribution was a qualifying partial rollover of the $168,000 IRA distribution made on April 9, which was within 60 days of the contribution as required by I.R.C. Sec. 408(d)(3)(A)(i).  On the bad debt issue, the court affirmed the Tax Court's denial of the deduction because the plaintiff had nonbusiness reasons for making the loans at issue rather than simply to protect his salary.  Haury v. Comr., No. 13-1780, 2014 U.S. App. LEXIS 8808 (8th Cir. May 12, 2014).

UPS Ground Is Not A "Private Delivery Service" - Mailbox Rule Inapplicable

Normally, for non-e-filed returns, having the return postmarked by the filing deadline is deemed timely filing of the return.  That is certainly the case for returns sent through the U.S. Postal Service.  The rule also applies for private delivery services specified in IRS Notice 2004-83.  The "mailbox rule" and the IRS Notice not only applies to the filing of returns, but also filing a petition with the U.S. Tax Court.  In this case, the petitioner received a statutory notice of deficiency (SNOD) which informed the petitioner that the last day he could file a petition with the Tax Court was May 3, 2012 (while the year was in error, the Court believed the error was apparent and harmless).  The petitioner filed a petition with the Tax Court dated May 1, 2013, and bore a UPS Ground label dated May 2, 2013.  The petition was filed on May 6, 2013.  The IRS claimed that the petition was filed late because UPS Ground did not qualify for the mailbox rule in Notice 2004-83.  The Tax Court agreed.  UPS Ground is not designated by IRS in the Notice as a private delivery service entitled to the timely mailing/timely filing rule of I.R.C. Sec. 7502.  The court noted that the petitioner could pay the tax deficiency and file a refund claim with the IRS and, when denied, sue for a refund in federal court.  Sanders v. Comr., T.C. Sum. Op. 2014-47.

No Escaping of Tax By Structured Investment Transactions.

In this case the plaintiff is a global financial services company that claimed a $291 million loss on its returns for 2000 and 2001 via a "strip" transaction in which the plaintiff bought money-market funds and segregated them between income and principal.  The plaintiff retained the right to earnings for a period of time and sold the remaining value.  All of the income tax basis was allocated to the part sold which triggered the loss.  The court determined that Treas. Reg. Sec. 1.61-6(a) required basis to be allocated to the respective components of the stripped securities.  The court stated that a determination of the application of penalties would be established at a later hearing.  Principal Life Insurance Company and Subsidiaries, et al. v. United States, No. 07-06T, 2014 U.S. Claims LEXIS 349 (Fed. Cl. May 9, 2014).

Taxpayers Not in Trade or Business of Real Estate Development.

This case presented the issue of what it takes to be determined to be in the trade or business for purposes of deducting related expenses.  The taxpayers, a married couple, bought two houses and fixed them up.  They claimed deductions for the cost of the improvements on the basis that they were in the trade or business of developing real estate.  The IRS denied deductions on the basis that the activity only amounted to home improvements.  During the years in issue the petitioners examined potential properties to acquire and participated in an e-mail listserve about local properties.  However, they did not examine their tax returns prepared by a firm "specialized in pitching its services to Israeli immigrants" such as the petitioners.  The court cited Groetzinger for the proposition of what constitutes a trade or business and noted that "Simply upgrading his homes with the desire to make a profit on a sale  [emphasis added] at some time in the future is not sufficient to meet the regular-and-continuous-activity test for a trade or business."  Accordingly, the determined that the petitioners were not engaged in the trade or business of real estate development for the years at issue and disallowed associated deductions.  Penalties were imposed.  Ohana v. Comr., T.C. Memo. 2014-83.

Capital Gain Deduction Not Allowed On Sale of Iowa Farmland

Iowa law allows a capital gain deduction on the sale of farmland if the seller held the property for 10 years before the sale and materially participated in farming with respect to the land.  Under the facts presented, the farmland had been in the family since the 1800s.  In 1966, the decedent's father began cash renting the land at issue to a farmer.  In 1972, the estate of the decedent's mother transferred 180 acres from the mother's estate to the decedent's father and the decedent subject to a life estate in the decedent's father.  In 1990, the decedent's father died and the decedent and his spouse acquired title to the entire 400 acres.  The decedent died in 2005 and his widow sold the 400 acres in 2006 and claimed an Iowa capital gain deduction attributable to the gain recognized on the sale, apparently on the belief that the 10-year material participation requirement had somehow been satisfied.  Importantly, the farmer that had cash rented the land since 1966 continued to do so up until the time the land was sold.  Indeed, the Iowa Department of Revenue (IDOR) stated that the evidence provided on the material participation test was ambiguous and not credible.  IDOR noted that the decedent had not farmed for over 30 years, the farm income was not necessary for the owners' livelihood and that the tenant was not inexperienced such that the owners bore little-to-no risk.  In re Koch, No. 2010-200-1-0066, IDOR Doc. No. 14201029 (Iowa Dept. of Rev. May 6, 2014).   

Lack of Proper Recordkeeping Dooms Travel-Related Expenses; Accuracy-Related Penalty Imposed.

The petitioner was in the business of building and repairing radio towers which required him to drive long distances.  He prepared handwritten invoices after a job was completed which he kept in a metal box and kept receipts for business expenditures in plastic bags with index cards that showed the amounts and types of expenses.  The petitioner claimed almost $140,000 of related expenses for the year at issue.  IRS largely denied the expense deductions for lack of substantiation.  Reconstructed calendar inadequate to substantiate expenses.  Fraud penalty not upheld, but accuracy-related penalty imposed.  Flake v. Comr., T.C. Memo. 2014-76.

IRS Took Inconsistent Position on Demutualization Tax Issue With Result That Statute Of Limitations Extended On Refund Claim.

In this tax refund case, the taxpayer is a tax-exempt voluntary employees' beneficiary association (VEBA) insurance trust that did not have to file a federal income tax return unless it had unrelated business income.  The taxpayer obtained a membership in a mutual insurance company that later demutualized.  As a result of the demutualization, the taxpayer received approximately $1.5 million in cash that IRS characterized as long-term capital gain with no income tax basis in accordance with Rev. Rul. 71-233.  The taxpayer filed a Form 990T reporting the income as UBIT and paid the associated tax.  At least two additional demutualization proceeds were reported similarly. Later Fisher v. United States, 82 Fed. Cl. 780 (2008) was decided rejecting the IRS position on amounts received in demutualization.  The taxpayer filed an amended return for 2006 and 2008 based on the Fisher case.  The IRS disallowed the refund claims, but later allowed the approved the refunds based on the affirmance of the Fisher case on appeal (333 Fed. Appx. 572 (Fed. Cir. 2009).  However, the IRS Appeals Office determined that the refund claim was not timely filed with respect to the 2004 refund and the plaintiff sued for a refund on Mar. 28, 2013.  The court noted that the taxpayer's 2004 return was filed on Oct. 15, 2004, and that a refund claim had to be filed within three years in accordance with I.R.C. §6511.  The taxpayer argued that I.R.C. Sec. 6511 was inapplicable because the taxpayer was a non-profit entity who was not required to file a return.  The court noted that numerous other courts have rejected the same argument.  On the issue of whether the mitigation provisions of I.R.C. §§1311-1314 provided equitable relief from the statute of limitations, the court noted that IRS had made a final determination which established a basis (by referring to the Fisher case) which meant that, but for the statute of limitations, the taxpayer would have been entitled to a refund.  In addition, the court noted that IRS had taken an inconsistent position between its position taken in the final determination and the IRS's position that demutualization payments are taxable (due to the taxpayer's lack of basis in the payments).  Thus, the taxpayer satisfied the mitigation provisions of I.R.C. §§1311-1314 (the taxpayer satisfied its burden of proof that (1) IRS made a determination that barred it from correcting its erroneous filing; (2) the determination concerned a specific adjustment; and (3) the IRS had adopted a position in the final determination and maintained a position inconsistent with the erroneous inclusion or recognition of taxable gain.  The court granted the taxpayer's motion for summary judgment and IRS is required to make a return for the plaintiff.  Illinois Lumber and Materials Dealers Association Health Insurance Trust v. United States, No. 13-CV-715 (SRN/JJK), 2014 U.S. Dist. LEXIS 59716 (D. MInn. Apr. 30, 2014).      

IRS Finds Another Argument To Extend Statute of Limitations.

In this case, the Tax Court held that the IRS failed to timely issue the plaintiff a Notice of Final Partnership Administrative Adjustment (FPAA) and, as a result, couldn't make adjustments to the plaintiff's partnership returns and to returns of individual partners.  Whether the FPAA was timely depended on whether the three-year or six-year statute of limitations for tax assessment applied.  The Tax Court determined that the shorter statute applied.  On appeal, the court noted that the issue turned on whether an omission from gross income exceeded 25 percent of the amount of gross income shown on the return in accordance with I.R.C. Sec. 6501(e)(1)(A)(i).  While court noted that overstated basis cannot constitute an omission from gross income, appellate court noted that Tax Court did not address other argument of IRS that individual partners had failed to disclose more than $10 million in proceeds earned by virtue of liquidation and sale of plaintiff to another entity in a sham transaction.  Tax Court's decision vacated and decision remanded.  Beverly Clark Collection, LLC v. Comr., No. 12-71968, 2014 U.S. App. LEXIS 8086 (9th Cir. Apr. 29, 2014). 

From Strip Club to Horses - Court Says Profit Intent Present...At Least For Some of the Years Involved.

The petitioner bought an abandoned restaurant building in the late 1960s and operated it successfully until a kitchen fire shut it down.  The petitioner later reopened the business as a bar which eventually became a strip club.  The petitioner sold that business for moral reasons and opened a pizza parlor about five miles away.  He later reclaimed the strip club because the buyer defaulted on payments.  He continued to operate the club (having apparently jettisoned his prior moral concerns) successfully  and opened other strip clubs and restaurants and participated in strip club trade organizations.  In the late 1980s, petitioner bought farmland adjacent to the strip club and bought additional farmland in the late 1990s near the strip club on which a stable was located.  With the purchases, the petitioner created a 95-acre contiguous plot.  Petitioner relinquished control of the strip club businesses to his children and started an insulation business and used car dealership.  He ultimately terminated involvement in both of those businesses, and turned the 95-acre tract into a horse training facility to support his interest in horse racing.  He expanded the business and obtained a trainer's license.  The petitioner got crosswise with county officials with respect to building codes and his horse activities and ultimately sold the 95-acre tract in 2005 to an unrelated party for $2.2 million in a part-sale part like-kind exchange transaction.  The next year, petitioner bought a 180-acre parcel 16 miles from his home for horse-related activities, where he built a first-class training facility.  Petitioner was deeply involved in the activities, but due to mishaps in the early years involving, in part, disease and death of numerous horses, and his deductions for the four years in issue far exceeded his income from horse-related activities with cumulative losses just shy of $1.5 million.  The court determined that the taxpayer conducted the horse activities in a business-like manner, consulted experts, but significant time into the activities, had a legitimate expectation that the new property would appreciate in value, had successfully conducted other activities that were relevant to an expectation of profit in horse activities, was neutral on the history of loss issue, had a legitimate expectation of future profit, was not an "excessively wealthy" individual and had elements of personal please or recreation for only the first two of the four tax years under review, and while initially started the horse activities without profit objective, turned that intent into one with a profit objective.  As a result, the petitioner had the requisite profit intent for the last two years at issue, but not the first two.  Accuracy-related penalty not imposed, but petitioner liable for addition to tax for one of the tax years under review.  Roberts v. Comr., T.C. Memo. 2014-74.

Distribution From Retirement Plan of Ex-Husband Includible in Income of Ex-Wife.

In this case, an ex-husband participated in his employer's 401(k) and his ex-wife was an alternate payee.  The couple's divorce decree said that the ex-wife was liable for income tax on distributions.  In 2009, the ex-wife (petitioner) received a distribution with she reported as nontaxable pension and annuity income.  The IRS disagreed with that characterization and imposed an accuracy-related penalty.  The court determined that the distribution was includible in petitioner's income because it was not received as part of a divorce decree but as a transfer of property made incident to divorce.  Likewise, her ex-husband's adjusted basis (0) carried over to petitioner.  In addition, the petitioner did not opt to roll the distribution over into an eligible IRA within 60 days of receipt.  Petitioner received the distribution pursuant to a QDRO which provided that petitioner was liable for any tax on distribution.  Accuracy-related penalty upheld.  Weaver-Adams v. Comr., T.C. Memo. 2014-73.

Taxpayer Couldn't Prove Entitlement to Deduction For Unreimbursed Employee Business Expenses and Auto Expenses.

Substantiation of expenses is always important when claiming deductions.  In this case, a married couple deducted over $10,000 associated with employee business expenses and miscellaneous deductions for the husband and over $27,000 associated with the wife's auto expenses attributable to her real estate business.  As for the unreimbursed expenses, the court determined that the husband had failed to demonstrate that the employer would not have reimbursed his expenses if he had requested reimbursement.  Likewise, the wife failed to properly document her auto expenses in accordance with I.R.C. Sec. 274.  The court upheld the imposition of an accuracy-related penalty under I.R.C. Sec. 6662(a) and (b)(2).  Tocher v. Comr., T.C. Sum. Op. 2014-34.   

Passive Loss Material Participation and Active Participation Tests Not Satisfied - Passive Loss Deductions Disallowed.

The petitioner owned four rental properties with numerous rental units and was the landlord and maintained them.  He also owned an eight-acre tract that he was developing into a a family amusement center.  The petitioner did not keep a contemporaneous log of his involvement in the rental activities and later tried to reconstruct his activity.  In 2008 and 2009, he claimed a real estate loss of $35,755 and $40,969 respectively.  The IRS disallowed all but $852 of the loss deductions.  The court agreed with the IRS because the petitioner failed to substantiate his activities so as to satisfy the material participation tests.  The petitioner also did not satisfy the real estate professional exception for failure to make the required election under I.R.C. Sec. 469(c)(7) to aggregate all of his rental activities for purposes of the 750-hour test.  The petitioner also did not qualify for the fall-back active participation test because he was phased-out of the $25,000 deduction due to sufficiently high income.  An accuracy-related penalty was not imposed.  Billeci v. Comr., T.C. Sum. Op. 2014-38.

Child's Father Entitled to Dependency Deduction.

While the child's mother was designated as the custodial parent in a conciliation agreement entered into seven years earlier, that agreement was not reflective of the amount of time that the child spent with each parent for the years at issue.  Also, testimony revealed that the child's father spent a lot of time with the child while the child participated in sports and spent more nights at the father's home than the mother's home.  The court determined that the father was the custodial parent and was entitled to the dependency deduction, dependent care credit, child tax credit and earned income tax credit for the years in issue.  Harris v. Comr., T.C. Memo. 2014-69.

No Gross Estate Inclusion For Modified Trusts.

The  IRS issued a ruling on a set of facts involving a proposal to modify three trusts.  The IRS determined that the modifications would not cause the trusts' property to be included in the settlor's gross estate by virtue of either I.R.C. Sec. 2036 or 2038 because the settlor did not retain any possession or enjoyment of, or the right to income from, property transferred to trusts.  In addition, the IRS noted that the settlor could only participate in the trusts' modifications with the consent of the beneficiaries.  Priv. Ltr. Rul.s 201417001 and 201417002 (Dec. 10, 2013).

Spousal Maintenance Payments Were Non-Deductible Child Support.

Alimony payments are deductible, but the payments must satisfy the Internal Revenue Code requirements for alimony.  For example, they cannot be contingent.  In this case, the ex-husband made payments to his ex-wife under a divorce decree that would end when the child graduated from high school.  The court said that violated the non-terminable rule of I.R.C. Sec. 71(c)(2) and, therefore, the payments were not deductible.  That was the case even though the divorce decree contained a specific child support obligation that was separate from the payments for "alimony" and a statement that the "alimony" payments would be deductible.  Johnson v. Comr., T.C. Memo. 2014-67.

No Deduction For Contract Labor Expenses Paid In Cash.

The petitioner, a mechanical engineer, wanted to expand his business into Central and South America and paid $25,000 to a consultant from El Salvador.  The payment was in cash that the petitioner borrowed from family and cash he kept in a lockbox.  The court did not believe the petitioner's testimony and characterized the receipts as unreliable hearsay that didn't prove the payments were actually made.  The court noted that it gave the petitioner a chance to provide an affidavit or other evidence to substantiate the payments, but the petitioner did not do so.  The contract labor expense deduction was denied. Van Velzor v. Comr., T.C. Memo. 2014-71

Worker For Adult Home-Care Business Determined To Be Employee

The line between an employee and an independent contractor is often defined by control.  The characterization has tax implications.  In this case, the petitioner was employed for part of the years at issue by an adult home-care business.  The business treated the petitioner as an independent contractor and issued a Form 1099-Misc and Form 1099-G (reflecting unemployment compensation from the state).  On his return for the year at issue, the petitioner did not report unemployment compensation or compensation from the business and did not report any self-employment tax liability.  The IRS determined that the petitioner was an independent contractor and was liable for self-employment tax.  The court disagreed with the IRS based on numerous factors - (1) the business controlled petitioner's work and specifically enumerated petitioner's duties and required daily reports; (2) the business covered all out-of-pocket costs of petitioner; (3) petitioner did not use his own "tools" in the activity; (4) the petitioner was paid an hourly rate and had no other opportunity for profit or risk of loss; (5) the business retained the right to discharge the petitioner; (6) the work petitioner performed was integral to the business's normal operations; and (7) the parties contemplated an employment relationship.  Accordingly, the petitioner was not liable for self-employment tax, but is liable for an accuracy-related penalty for failure to report income.  Rahman v. Comr., T.C. Sum. Op. 2014-38.

Stipend of Doctoral Student Includible in Income and Subject to Self-Employment Tax.

In this case, a doctoral student received a fellowship grant which paid his tuition and fees and provided an additional cash stipend.  IRS awarded a grant to the company of the student's father which paid the student to conduct grant-related research.  The company issued the student a 1099-Misc., but he only reported the amount not used to pay off student loans and other related education expenses.  The student also did not report the income as subject to self-employment tax.  The court determined that the student failed to substantiate the additional education expenses that he claimed were paid with the stipend from the company.  The court also determined that the student was engaged in the trade or business of medical research as an independent contractor of the company and, as a result, the full payment received from the company was subject to self-employment tax.  Wang v. Comr., T.C. Sum. Op., 2014-39.

Tax Court Says Attorney-Client Privilege Can Be Involuntarily Waived.

This case involved a tax shelter and the associated penalties that come along with engaging in such transactions.  The taxpayer, a partnership that had partners participating in the shelter, claimed to have a reasonable belief based on the law and facts involved that its transactions were permissible under the tax laws and that it would likely prevail if challenged.  The taxpayer didn't rely on the advice of counsel, so claimed that it had not waived the attorney-client privilege.  That determination hinged on the state of mind of the managing partner.  IRS argued that opinions of tax lawyers were necessary to determine whether the managing partner conducted an independent review of the law and facts or relied on what he had read in the legal applicable legal opinions.  IRS argued that the taxpayer waived the attorney-client privilege by raising the issue and putting the managing partner's state of mind in issue.  The court agreed, noting that a tax penalty defense that involves a subjective state of mind, requires IRS access to relevant evidence to either prove or disprove that particular intent.   Ad Investment 2000 Fund LLC, et al. v. Comr., 142 T.C. No. 13 (2014)

Amway Business Not Engaged In For Profit.

The hobby loss rules bar deducting expenses that exceed income when a business activity is not engaged in with an intent to make money.  It's a multi-factor analysis that determines whether the taxpayer had the required profit intent.  In this case, a D.O. and his wife started an Amway business which they reported on a Schedule C.  Over a seven-year period, they reported $29,489 in gross receipts and $192,427 in net losses.  IRS audited and this case involved a year in which they had $4,811 of gross receipts and a net loss of $39,919.  For that same year, the petitioners reported over $25,000 in expenses associated with vehicle and travel expenses.  The petitioners sold many of their Amway products out of their home, but did make some trips associated with the business.  The court agreed with the IRS that the petitioners did not engage in the business with a profit intent.  They didn't use their business records to analyze the business or prepare profit projections or make a budget.  They also didn't consult other disinterested professionals about how to conduct the business and had no prior related experience.  Seven consecutive years of substantial losses were present.  Penalties not imposed due to reliance on CPA to prepare returns and maintenance of good records.  Mikhail v. Comr., T.C. Sum. Op. 2014-40 

IRS Guidance On Guaranteeing LLC Debt.

In an IRS Chief Counsel Legal Advice, the IRS has provided guidance as to the tax effect of guaranteeing debt in an LLC.  Under I.R.C. Sec. 465, losses incurred in the conduct of a trade or business or in an activity where the production of income is desired are deductible to the extent the taxpayer is "at risk."  The amount "at risk" is generally measured by the amount of money and adjusted basis of other property that the taxpayer contributes to the activity and amounts borrowed with respect to the activity.  For an LLC member that guarantees the LLC's debt, the member will be treated as being "at risk" for the amount guaranteed, but only to the extent that the member can't be reimbursed from persons other than the LLC and the debt is bona fide and the LLC's creditors can enforce it.  With respect to LLCs that hold real estate, the IRS position is that LLC liabilities constitute amounts "at risk" if (1) the debt is held for the purpose of holding real estate; (2) the debt is borrowed from a qualified person such as a bank; (3) there is no personal liability for the indebtedness (which eliminates the possibility that one LLC member can make the guarantee, and if so guaranteed, eliminates such guaranteed amount from being included in the amount at-risk by any other member and could cause recapture of previously deducted losses if a member's at-risk amount becomes negative as a result of the member's guarantee); and (4) the indebtedness cannot be converted.  AM2014-003 (Aug. 27, 2013).