Case Summaries

When Spousal Elective Share Paid Out of Foreign Trust, No Marital Deduction To That Extent.

In a recent IRS Chief Counsel Advice, the IRS determined that a marital deduction would not be allowed to the extent that the spousal elective share allowed under state law was paid via assets from a foreign trust.  The trust beneficiary was the decedent's child and the surviving spouse could not access the assets in the trust.  The trust was irrevocable and was administered in a foreign country.  The decedent was a resident of the U.S. at death and his spouse elected the state's elective share which consisted, in part, of assets that passed to the surviving spouse.  On the estate's Form 706, the trust assets were included to fully satisfy the elective share and a marital deduction was claimed equal to the elective share amount.  The trust assets were not eligible for the marital deduction.  C.C.A. 201416007 (Nov. 6, 2013).

No First-Time Homebuyer Tax Credit In Structured Transaction.

In this case, the IRS denied a first-time homebuyer credit (FTHBC) in a transaction involving a mother and her son.  Two properties were involved.  The mother conveyed property "A" to a third party who then conveyed it to the son later the same day.  While the home purchase was completely financed, the son never made full payment for the house pursuant to the purchase contract.  The son and his wife claimed a FTHBC for the home, but IRS denied the credit on the basis that the home was purchased from the mother via a lender who never had full possession of the home before its sale.  The court agreed with the IRS on the basis that the substance of the transaction was a purchase of the home was, in reality, a purchase from the mother.  Basically the same set of facts involved property "B".  The FTHBC that was claimed for that property was ultimately returned after consultation with IRS.  Moreland v. Koskinen, No. CV-13-S-579-NW, 2014 U.S. Dist. LEXIS 53308 (N.D. Ala. Apr. 17, 2014).

IRS Says Suspended Passive Losses Freed-Up In Transaction Involving Excludible Cancelled Debt.

In this Chief Counsel's Advice, the facts involved a taxpayer that had purchased a rental property for $1 million via a recourse loan.  The property generated suspended passive activity losses.  Later, a lender foreclosed on the property when the balance owed on the loan was $900,000, the fair market value was $825,000 and income tax basis was $800,000.  The transaction, therefore resulted in $25,000 of gain realized and recognized to taxpayer and CODI of $75,000.  The taxpayer was insolvent and, therefore, the CODI was excluded from income under I.R.C. Sec. 108(a)(1)(B).  The IRS determined that the transaction was a "fully taxable transaction" in accordance with I.R.C. Sec. 469(g)(1)(A) which freed-up the suspended losses to be used against the taxpayer's other income.  The suspended losses were not reduced as a tax attribute due to the suspended losses.  While there is no regulation that governs the situation (Treas. Reg. Sec. 1.469-6 is reserved) IRS determined that legislative history showed that the "fully taxable transaction" rule was intended to apply to any situation where the ultimate gain or loss could be determined.  C.C.A. 201415002 (Feb. 11, 2014).

IRS Tax Lien Attached to Insurance Settlement Payments.

Often it is believed that an IRS tax lien can only attach to real estate or bank accounts.  This case, however, points out that an IRS tax lien can attach to other property that the taxpayer owns or receives.  The decedent owned a building that was damaged in a fire.  An insurance company paid $50,000 in insurance proceeds.  A bank held a perfected first-priority lien over judgment liens and tax liens and was awarded over $24,000 in accordance with the lien.  The IRS sought entitlement to the remaining funds in accordance with its tax lien covering over $300,000 in unpaid federal income tax that the decedent owed from prior tax years.  The court determined that the IRS lien priority was based on first-in-time, first-in-right analysis because only competing lienholder was state revenue department which didn't implicate I.R.C. Sec. 6323(f) (state revenue department was not a purchaser, judgment lien holder or holder of security interest).  Owners Insurance Company v. McDaniel, et al., No. 2:13-dcv-882-JHH, 2014 U.S. Dist. LEXIS 48934 (N.D. Ala. Apr. 9, 2014).

Losses From Horse-Related Activities Not Subject to Passive Loss Rules.

In this case, the petitioner was a lawyer in Minnesota that had a client that introduced him to horse racing.  He got heavily involved in horse breeding activities in Louisiana.  The petitioner sustained losses associated with his horse activities and IRS limited deductibility under the passive loss rules of I.R.C. Sec. 469, conceding that petitioner was engaged in the horse activities with a profit intent.  Court determined that petitioner satisfied material participation test of I.R.C. Sec. 469 based on telephone logs, credit card invoices, and other contemporaneous materials including trips to Louisiana, buying insurance, recordkeeping and continuing education.  Court did not require petitioner to call customers as witnesses.  Tolin v. Comr., T.C. Memo. 2014-65. 

No Dependency Deduction For Non-Custodial Parent.

A married couple had a child, but later divorced.  The ex-wife had custody of the child, but the parties later agreed that the ex-husband could claim the dependency deduction for any year that the ex-husband was current with child support.  That agreement became part of a court order.  However, the IRS determined that the court order was insufficient to give the ex-husband the dependency deduction because the court order was not a "written declaration" signed by the custodial parent.  Such written declaration must be made on either Form 8332 or on a statement that conforms to Form 8332.  In addition, Treas. Reg. Sec. 1.152-4(e)(1)(ii) specified that a court order or decree or a separation agreement may not serve as a written declaration for tax years beginning after Jul. 2, 2008.  While this matter involved a pre Ju. 2, 2008 agreement, it still failed the I.R.C. Sec. 152(e)(2)(A) signature requirement and the requirement that the agreement wasn't unconditional.  Swint v. Comr., 142 T.C. No. 6 (2014).

No Enhanced Deduction for Donated Personal Care Products.

The taxpayer was a C corporation that gave various personal care products (various hair care products, and other bath and body products) to charity.  I.R.C. Sec. 170(e)(3)(A) allows for an enhanced charitable deduction for donated property used exclusively for the ill, needy or infants.  The IRS determined that the donation did not qualify for the enhanced deduction because the donated items were not used solely for the care of the ill, needy or infants.  Instead, the IRS determined that the donated items were luxury items rather than necessities.  C.C.A. 201414014 (Aug. 23, 2013). 

No Homebuyer Credit For Beneficiary Who Purchased Home from Estate.

A mother died, leaving her two sons as beneficiaries and executors of her estate. One son purchased the home from the estate at a price of $215,000. The deed was given from the two brothers, individually and as executors of their mother’s estate, to the purchasing brother. The purchasing brother claimed an $8,000 first-time homebuyer’s credit on his 2008 tax return. The IRS denied the credit on the grounds that the brother, as a beneficiary of his mother’s estate, purchased the home from a related person, namely the executors of the estate. The purchasing brother alleged that he was entitled to the credit because siblings are not “related persons” under IRC §36(c)(3)(A)(i) and he purchased the house from his brother. Affirming the tax court, the Third Circuit Court of Appeals disagreed, finding that while the definition of related persons in the statute exempted siblings, it included “an executor of an estate and a beneficiary of such estate.” The documentation attendant to the transfer supported the determination that the taxpayer purchased the property from the estate, not from his brother as an individual. New Jersey law specifying that property vests immediately in the beneficiaries upon the death of the decedent did not mean that title transferred to the brothers upon their mother’s death.  Zampella v. Comm'r, No. 13-1672, 2014 U.S. App. LEXIS 6245, 2014-1 U.S. Tax Cas. (CCH) P50250 (3d Cir. Apr. 4, 2014).

IRA Custodian Not To Blame For Lateness of IRA Rollover.

In this "small" Tax Court case, the petitioner was an electrical contractor that had completed a project and was owed payment.  In the process of getting paid for his work, the petitioner took a distribution from his SEP-IRA and then took out a loan with the same company that maintained his IRA account with the loan proceeds to be rolled back into the IRA within 60 days.  However, the funds were rolled back into the account on the 66th day after the petitioner received the distribution from the IRA account.  The petitioner received a 1099-R reporting the distribution as an early distribution but not showing a taxable amount.  The petitioner filed his return for the year and didn't include in income the IRA distribution.  The IRS claimed that a tax deficiency existed including a 10 percent early withdrawal penalty.  The court determined that no deposit had occurred with 60 days and that petitioner had not actually borrowed from his IRA (note - had he done so, the full amount of the IRA account would have been included in income under I.R.C. Sec. 4975).  The court noted, however, that the petitioner was free to pursue an IRS waiver from the 60-day rule in accordance with Rev. Proc. 2003-16).  The court upheld the imposition of the 10 percent penalty.  Alexander v. Comr., T.C. Sum. Op. 2014-18. 

No Deduction for Façade Easement Donation, But Big Penalties Imposed.

This is the most recent court opinion in a line of opinions involving the petitioners and their attempt to obtain a tax deduction for a permanent conservation easement donation.  Initially, the court disallowed a deduction on the basis that the easement was not protected in perpetuity.  That decision was affirmed on rehearing and a negligence penalty was not imposed on the basis that the matter was one of first impression.  On appeal of that decision, the appellate court reversed on the basis that the Tax Court analyzed the case incorrectly.  On remand, the Tax Court focused on valuation and did not give any weight to the taxpayer's expert that took a flat 12 percent reduction from fair market value for the "after easement" value of the property.  The Tax Court found the testimony of the expert for the IRS more credible.  That testimony, based on sales data, demonstrated that the façade easement restriction had no impact on market value of the property due largely to existing restrictions imposed by local historical district ordinances.  The Tax Court imposed negligence penalties of 40 percent of the amount of the underpayment and a 20 percent negligence penalty.  Kaufman v. Comr., T.C. Memo. 2014-52.

IRS Provides Guidance on Flex Spending Account Carryovers and Health Savings Account Eligibility

The IRS pointed out that a person with an FSA is not eligible for an HSA,  and that HSA ineligibility will continue for the entire plan year even if the balance is exhausted during the plan year.  But, IRS noted that an FSA could be designed to allow the participant to elect any carryover amount could be used as limited purpose, post deductible, or both, thus making the FSA compatible with the HSA.  The IRS noted that the carryover amount could not be transferred into any other non-health FSA, including any carryover amounts.  In addition, a cafeteria plan can design the health FSA so that an election for high-deductible health plan coverage forces the participant into the FSA.  IRS also noted that a person can decline or waive an FSA carryover amount to become HSA-eligible.  C.C.A. 201413005 (Feb. 12, 2014). 

IRS Says Partnership is Presumed When "Husband and Wife" Own An Entity

In a Chief Counsel Advice, the IRS has said that it will presume that an entity is a partnership when a "husband and wife" own the entity unless, of course, an election is made for the entity to be disregarded for tax purposes.  The IRS cited I.R.C. Sec. 761(a) & (f) as the basis for its conclusion.  Only additional facts indicating a sham will cause the IRS to disregard the "wife" as the partner, IRS stated.  IRS also indicated that each spouse should have reported "his/her" share of net earning from self-employment, with appropriate adjustments.  The IRS did not indicate how entities owned by homosexual couples are to be treated.  C.C.A. 201411035 (Apr. 12, 2013).

U.S. Supreme Court Declines To Review Case Involving Travel Expense Deductions.

In this case, a contractor incurred expenses in traveling between home and work.  The U.S. Court of Appeals for the Third Circuit upheld the Tax Court's holding that the expenses were non-deductible commuting expenses.  The bank and various supply stores were not regular work locations for the contractor.  In addition, no depreciation was allowed for the contractor's vehicle and tools.  However, other business expenses were substantiated and were deductible.  The court also rejected the contractor's tax protestor arguments concerning the unconstitutionality of the federal income tax.  Accuracy-related penalties were imposed and upheld.  The U.S. Supreme Court declined to review the case.  Bogue v. Comr., 522 Fed. Appx. 169 (3d Cir. 2013), afff'g., T.C. Memo. 2011-164, cert. den., No. 13-1030, 2014 U.S. LEXIS 2279 (Mar. 31, 2014).

Court's Reasoning Results in Marriage Penalty in Homebuyer Credits.

The petitioner and his wife married in late 2008 and purchased the marital home in late 2009.  Before the purchase, the wife had owned a principal residence and resided in it for more than five consecutive years as required by I.R.C. Sec. 36(b)(1)(D) to qualify as long-term homeowner.  The petitioner had not owned a home during the prior three-year period and, therefore, qualified as a first-time homeowner.  On the couple's joint tax return for 2009, the couple claimed a $6,500 long-term homeowner tax credit.  The IRS denied the credit in full on the basis that the spouses did not both qualify for long-term homeowner credit.  The IRS conceded that the petitioner would have qualified for the first-time homeowner credit in his own right and that the wife would have qualified for the long-term homeowner credit in her own right, but read the statute to require both spouses to satisfy either the long-term homeowner requirement or first-time homeowner requirement on joint return. The Tax Court reasoned that such a statutory construction  was "absurd," and held that both spouses qualified for one of the homeowner credits and that the credit was limited to the long-term homeowner credit of $6,500.  On appeal, the appellate court reversed on the basis that the statute was clear that the term "individual" included both spouses in a marriage and that each homeowner credit was independent of the other.  Thus, both spouses had to qualify for the same credit.  While the petitioner would have been able to claim the first-time homebuyer credit ($8,000) had he merely lived with his girlfriend in the purchased home without marrying her, the three-judge panel stated that it's holding was not "so gross as to shock the general moral...sense."  Packard v. Comr., 139 T.C. No. 15 (2012), rev'd. and rem'd., No. 13-10586, 2014 U.S. App. LEXIS 5584 (11th Cir. Mar. 27, 2014).

Court Tells Gambler, "You Gotta Know When To Fold Up."

In this case, the estate of a deceased gambler, tried to deduct gambling losses in excess of gambling winnings and also tried to deduct gambling business expenses.  The court, however, held that the gambler did not engage in gambling activities with the intent of making a profit.  The gambler had significant losses from gambling and reported them along with gambling winnings on Schedule C.  The gambler had significant losses for a five-year period, had no business plan, no budget for gambling activities, did not have a separate bank account for gambling activities, made no attempt to make gambling activities profitable, did not consult anyone with expertise in gambling and didn't operate gambling activities  in a businesslike manner.  The court imposed an accuracy-related penalty.  Estate of Chow v. Comr., T.C. Memo. 2014-49 .

Corporation Could Deduct Compensation Over $1,000,000.

In general, a deduction is disallowed for compensation exceeding $1,000,000. However, an exception allows a deduction when the compensation is based on an incentive plan that satisfies a "narrow set"  of requirements - (1) a compensation committee of the corporate board comprised solely of two or more outside directors sets the performance goals; (2) the material terms under which remuneration is to be paid are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before payment of the remuneration; and (3) before the remuneration is paid, the compensation committee certifies satisfaction of the performance goals.  This case involved numerous shareholder claims against the company, one of which involved the effectiveness of a proxy statement in satisfying the above-mentioned rules.  The company had a long-term incentive plan for some its employees that became effective in 2006.  In 2011, the company sought to amend the plan and issued a proxy statement.  One of the shareholders sued on the basis that the proxy wasn't worded properly to allow the company to deducting the excess compensation.  The court, however, determined that the language of the proxy statement did give shareholder a real choice as to whether to accept the compensation plan in accordance with Treas. Reg. Sec. 1.162-27(e)(4)(i).  The court noted that the shareholders were to choose between the old incentive plan and the amended plan, and the language of the proxy was not coercive.  Kaufman v. Alexander, et al., No. 11-00217-RGA, 2014 U.S. Dist. LEXIS 39712 (D. De. Mar. 26, 2014). 

Protective Election For Installment Payment of Federal Estate Tax Does Not Extend Statute of Limitations

The IRS sought to collect estate taxes.  The estate had made a protective election preserving the estate's ability to make an installment payment election under I.R.C. Sec. 6166 if the estate were later determined to be eligible to make the election.  About four years later, IRS issued a Notice of Deficiency and the estate moved for a redetermination of tax.  The court entered a stipulated decision for a deficiency which IRS assessed in April of 2005.  In late 2006, the IRS issued a final notice to levy and notice for hearing.  In early 2007, the estate requested a due process hearing and IRS responded to that request in May of 2008.  The estate argued that the collection of the original tax assessment was barred by the statute of limitations.  The court noted that a 10-year  statute of limitations for collection of estate taxes applied under I.R.C. Sec. 6502(a).  The estate claimed that the IRS action was filed more than 10 years after the date of the original assessment.  The IRS claimed that additional tolling was available under I.R.C. Sec. 6166 and 6503(d) which would extend the statute of limitations.  The court noted that the estate did not receive an extension of time to pay tax, but had merely made a protective election which did not extend the statute.  United States v. Baileys, No. 8:13-cv-966-JLS (CWx), 2014 U.S. Dist. LEXIS 67822 (C.D. Cal. Mar. 25, 2014).

FICA Tax Is Owed on Severance Pay Unless Arrangement Structured Properly.

The U.S. Supreme Court reversed the United States Court of Appeals for the Sixth Circuit in holding that lump-sum severance paid to laid-off employees constitutes taxable wages for FICA purposes.  The employer paid the FICA tax on the severance payments and then filed for a refund.  The bankruptcy court, district court and appellate court all agreed with the employer that severance pay was not subject to FICA tax.  The appellate court, in supporting it's decision did not utilize the FICA definition of wages, but the Supreme Court did utilize the FICA definition contained in I.R.C. Sec. 3121(a). A different case had held that severance pay constituted FICA wages and the Supreme Court was asked to clarify the opposing court decisions.  However, the Supreme Court held that employers can avoid FICA taxes on severance pay if an employer creates a trust, funds it and employees are then paid weekly with payments tied to state unemployment benefits received.  United States v. Quality Stores, Inc., et al., No. 12-1408, 2014 U.S. LEXIS 2213, rev'g., 693 F.3d 605 (6th Cir. 2012).

Sibling Spat Leads To Non-Taxable Reorganization

Here the IRS ruled, in accordance with I.R.C. Sec. 368(a)(1)(D), that a proposed corporate reorganization resulting in the division of their corporation into two corporation would not trigger gain or loss.  The IRS noted that the proposed transaction satisfied all of the requirements of I.R.C. Sec. 355, but expressed no opinion on whether the reorganization had a legitimate business purpose as required by Treas. Reg. Sec. 1.355-2(b).  Priv. Ltr. Rul. 201411012 (Dec. 4, 2013).

IRS Confirms that Obamacare Individual Mandate is Optional

The IRS has followed-up comments by the President that people that find health insurance unaffordable, but are otherwise subject to the individual mandate, will not be fined if they claim a "hardship" exemption.  On, the Administration lists 13 things that can be claimed as a "hardship" for purposes of the exemption from the individual mandate.  A 14th item specifies that the exemption applies if a person "experienced another hardship in obtaining health insurance."  That opens the floodgates and makes the individual mandate completely illusory, with IRS having no way to monitor claimed hardships.  Given that forcing people to buy insurance is the key to Obamacare, the recognition by IRS that the individual mandate is really optional effectively guts the law.  IRS Health Care Tax Tip 2014-04 (Mar. 20, 2014). 

10% Penalty Owed on IRA Even Though Employer Withheld 20% for Taxes

The taxpayer severed employment with employer at a time when she was not yet 59 and 1/2 years old and received her 401(k) via check.  The taxpayer asked the employer to withhold taxes, and the employer withheld 20%, sent the amount to the IRS and gave the taxpayer a Form 1099-R.  The taxpayer reported the income from the 401(k) and the withheld amount on her self-prepared return.  IRS claimed that an additional 10 percent penalty tax applied on the early distribution.  The taxpayer couldn't show that she used the funds to pay medical expenses, health insurance premiums, expenses associated with a disability or to buy a first home.  Thus, no safe harbor applied.  The taxpayer argued that the penalty tax shouldn't apply because she asked the employer to withhold all taxes.  The court agreed with the IRS that the taxpayer needed to report the 10 percent penalty tax on line 58, and $639 refund not allowed.  Fields v. Comr., 2014 T.C. Memo. 48. 

Taxpayer in Constructive Receipt of Income Even Though No Attempt to Access Funds in Current Year.

The decedent utilized the cash basis of accounting and held stock in a company for which she held the stock certificates in her possession.  In late 2006, the company merged with another company and the decedent became entitled to $51/share with her stock then being canceled.  Under the merger agreement, the company deposited the decedent's funds with a paying agent, entitling the decedent to receive over $1 million as of the date of the deposit - Nov. 20, 2006.  The decedent could collect the funds by surrendering the stock certificates.  The decedent (or her daughter who was the decedent's agent under a duly executed power of attorney) took no action to receive the funds before the decedent's death on March 29, 2007.  In late 2007, some stock certificates were surrendered and the account funds were placed in the account of the decedent's estate on January 8, 2008.  In early 2009, the estate completed the procedure for receiving the balance of the account funds attributable to the stock certificates that could not be located with the balance of the account funds paid out in late 2009.  The company issued Form 1099 that indicated that the decedent received the full account balance in 2006, and the amount was initially reported on the decedent's 2006 return.  Also, the decedent's estate reported the full account balance on it's 2006 return, but then later sought a refund.  The IRS denied the refund, and the court upheld the denial.  Santangelo v. United States, No. 3:12CV71DPJ-FKB, 2014 U.S. Dist. LEXIS 36114 (S.D. Miss. Mar. 19, 2014). 

IRS Shows It Does Not Like Percentage Reduction Appraisal Valuations For Façade Easements.

In a news release, the IRS has said that it has reached a settlement with a "group of appraisers" that used a flat percentage reduction of typically 15 percent from fair market value when valuing permanent  façade easement donations.  While the Tax Court has said that flat percentage reductions are not qualified appraisals, the U.S. Court of Appeals for the Second Circuit vacated the Tax Court's decision (Scheidelman v. Comr., 682 F.3d 189 (2d Cir. 2012).  The news release notes that the settlement was based on admitted violations of Sections 10.22(a)(1) and (2) of IRS Circular 230, and that the appraiser group agreed to a 5-year suspension from valuing façade easements and engaging in any appraisal services that could subject them to penalties.  So while the IRS lost in court on the valuation issue, they were able to pressure the appraisers into a settlement on alleged Circular 230 violations. IR 2014-31 (Mar. 19, 2014).   

No Hearing On Alleged Entitlement to First-Time Homebuyer Credit

The plaintiff sued the defendant, IRS, claiming entitlement to an $8,000 first-time homebuyer credit (FTHBC) associated with the plaintiff's purchase of a home in 2010.  However, from 2007 to March of 2010, the plaintiff held a joint tenancy ownership interest in another home (within the prior three years of the 2010 purchase for which the FTHBC was claimed).  The defendant moved for summary judgment and Magistrate Judge recommended granting of the IRS motion.  The plaintiff objected to the Magistrate's report and recommendations, arguing that I.R.C. Sec. 36 was ambiguous and that plaintiff was entitled to hearing.  The court disagreed, noting that I.R.C. Sec. 36 was not ambiguous on the specific issue presented and that plaintiff did not make specific written objections to the report.  Ballington v. Internal Revenue Service, No. 3:12-cv-01604-JFA, 2014 U.S. Dist. LEXIS 34991 (D. S.C. Mar. 18, 2014).

Oderio v. Comr., T.C. Memo. 2014-39

(wife had losses from rental real estate activities and could not satisfy tests for real estate professional via spouse's participation in combination with her participation because couple filed separate returns; losses disallowed as passive activity losses under I.R.C. Sec. 469).   

For Purposes of a Real Estate Investment Trust (REIT), Commercially Harvestable Crops are Real Estate.

In this IRS administrative ruling, a corporation that intended to be taxed as a REIT owned properties that it leased out via a triple-net lease on which the tenants would produce harvestable crops.  To qualify as a REIT, a requirement (contained in I.R.C. Sec. 856(c)(4)(A)) is that at the close of each quarter of the tax year, at least 75% of the value of a REIT's total assets must be real estate (including interests in real estate), cash (and cash items) and government securities.  IRS noted that Treas. Reg. 1.856-3(d) defines real property as land or improvements thereon and disregards the treatment of such items under local law.  Also, Prop. Treas. Reg. Sec. 1.856-10 (issued in May of 2014) indicates that water and air space superjacent to land and natural products and deposits that are unsevered from the land also count as "real estate" until they are severed or extracted.  Thus, the commercially harvestable plants, until severed, are "real property" for REIT purposes.  Priv. Ltr. Rul. 201424017 (Mar. 12, 2014).

United States v. Shriner, et al., No. MJG-11-2929, 2014 U.S. Dist. LEXIS 32449 (D. Md. Mar. 13, 2014)

(defendant was appointed as co-executor of a decedent's estate; decedent died in 2004, but had not filed federal income tax returns for 1997 and 2000-2003; in 2005, decedent's estate filed returns on decedent's behalf for years in which returns had not been filed; IRS asserted deficiency of $276,908 against the estate; in early 2006, law firm representing estate was notified of outstanding tax liability; law firm reported to probate court distributions to executors of $470,963 and that estate had insufficient assets to pay outstanding tax liability; court determined that co-executors personally liable for unpaid tax debt via 31 U.S.C. Sec. 3713; co- executors knew of tax liability before distributing estate assets that rendered the estate unable to pay tax debt; court found no merit in defendant's claim of reliance on erroneous advice from law firm representing estate because defendant had actual knowledge of tax debt; summary judgment for IRS).  

Properly Executed IRS Form 8332 is Key to Releasing Dependency Exemption and Trumps State Court Orders.

In this case, a married couple divorced with the ex-wife having custody of their son.  For the tax year at issue, the couple did not attach Form 8332 to the return, but did attach a copy of a 2003 arbitration award that allocated the exemption for the child to the ex-husband which allowed the ex-husband to claim the child and conditioned ex-wife providing ex-husband Form 8332 on ex-husband being current on child support payments in accordance with the divorce decree as of the end of the tax year.  Ex-husband was current on child support, but ex-wife did not execute and provide Form 8332.  IRS issued a notice of deficiency denying the child exemption for the ex-husband.   The ex-husband argued that the Congress intended that the parent entitled to the deduction be the one who receives it,  and that I.R.C.  Sec. 152(e)(2)(A) was ambiguous because the statute does not define “written declaration.”  The ex-husband also noted that state courts often allocate the federal dependency during divorce proceedings and that the principles of federalism required the IRS and federal courts to respect those allocations.  The  ex-husband also claimed that he was entitled to equitable relief.  The court noted, however, that I.R.C. Sec. 152(e)(2) requires that the taxpayer to attach a “written declaration signed by the custodial parent declaring the custodial parent “will not claim”  the child as a dependent in that calendar year.  In addition, the court noted that the statute  allows the custodial parent to transfer that claim to the non-custodial parent “by written release” which was not done. There must be an unconditional release of the right of the ex-wife to not claim the son as a dependent for the year in issue.  In addition, the court noted that the Child Tax Credit was unavailable.  Finally, since both parties were unable to claim their respective child as a dependent the Child Tax Credit was not allowed.  Armstrong v. Comr., No. 13-1235, 2014 U.S. App. LEXIS 4693 (8th Cir. Mar. 13, 2014), aff'g., 139 T.C. 468 (2012).

Hannon v. City of Newton, No. 13-1022, 2014 U.S. App. LEXIS 3854 (1st Cir. Feb. 28, 2014)

(plaintiff owed tax debt to IRS of approximately $5.5 million; IRS put lien on plaintiff's home in Newton, Massachusetts; after lien in place third party creditor of plaintiff received judgment against plaintiff for approximately $100,000; defendant then sought to take plaintiff's home via eminent domain and wanted the IRS lien discharged; home valued at $2.3 million; IRS issued certificate of discharge pursuant to I.R.C. Sec. 6325(b)(2)(A); plaintiff's taken via eminent domain and plaintiff then sued for additional compensation; judgment creditor asserted interest, IRS issued notice of levy asserting right to any amount recovered; additional compensation awarded and IRS asserted claim to judgment proceeds; trial court determined that IRS had discharged its lien; appellate court reversed on basis that IRS certificate of discharge under I.R.C. Sec. 6325(b) discharges only the property specifically listed on the discharge certificate).

Priv. Ltr. Rul. 201410001-201410010 (Oct. 21, 2013)

(identical rulings concluding that trust with distribution committee was not a grantor trust of the grantor or any committee members; the only possibility of being a grantor trust was with respect to an I.R.C. Sec. 675 committee; powers held by grantor and committee resulted in contributions to trust being incomplete gifts that were only complete upon trust distribution of gifted amounts).

Estate of Saunders v. Comr., No. 12-70323, 2014 U.S. App. LEXIS 4647 (9th Cir. Mar. 12, 2014)

(court ruled that a $30 million malpractice claim against the pre-deceased spouse of the decedent that was outstanding at the time of the surviving spouse's death was not deductible by the estate because the value of the claim was not certain enough as of the date of death; thecourt did allow, however, a $250,000 deduction for the amount that the estate paid to settle the claim).

Lakhani v. Comr., 142 T.C. No. 8 (2014)

(petitioner, professional gambler, claimed losses from bets on horse races that exceeded petitioner's gambling winnings; in Mayo v. Comr., 136 T.C. 81 (2011), non-wagering business expenses claimed in connection with conduct of gambling business are deductible business expenses and are not subject to the limitation on the deductibility of wagering losses (limited to gambling winnings); petitioner argued that his pro rata share of amount race track took out of betting pool to cover expenses and fees was a deductible business expense not subject to the I.R.C. Sec. 165(d) limitation on wagering losses to extent of wagering gains, and that I.R.C. Sec. 165(d) violated the equal protection clause of the Constitution because gambling is no longer "taboo"; court disagreed with both of petitioner's arguments; track's obligations do not obligate petitioner in any manner and basis for enactment of I.R.C. Sec. 165(d) still applies).

Wachter v. Comr., 142 T.C. No. 7 (2014)

(petitioners, married couple, held interests in two entities that were treated as partnerships for tax purposes; one entity reported cash contribution to North Dakota Natural Resource Trust (NRT) of $170,000, $171,150, and $144,500 in the years at issue; the other entity reported bargain sales of conservation easements and charitable contributions in the amount of $349,000, $247,550, and $162,500 for the years at issue; the easements were in accordance with the 2002 Farm Bill program designed to protect topsoil; under state (ND) law, easements limited to 99 years; court determined that easements not perpetual and, therefore, not a qualified conservation easement; 99-year lease caselaw involving I.R.C. Sec. 1031 inapplicable because of a lack of perpetuity requirement in I.R.C. Sec. 1031).

Williams v. Comr., No. 23883-12 (U.S. Tax Court Mar. 10, 2014)

(Tax Court order converting motion for summary judgment to motion for partial summary judgment and motion denied; petitioner's S corporation held real estate which was rented to petitioner's C corporation; petitioner materially participates in C corporation's business and self-rental rule of Treas. Reg. Sec. 1.469-2(f)(6) triggered and negates petitioner's passive losses; petitioner argued that self-rental rule inapplicable to S corporations; court noted that passive loss rules apply to petitioner as an individual and disallows petitioner's passive losses; court noted that petitioner's activities include those activities conducted through an S corporation citing Dirico v. Comr., 139 T.C. 396 (2012); court also noted that self-rental rule applies to S corporation's rental income passed through to petitioner from property rented to C corporation and used in C corporation's business because petitioner materially participated in C corporation's business, citing Veriha v. Comr., 139 T.C. 45 (2012)).

Almquist v. Comr., T.C. Memo. 2014-40

(petitioner worked for realty company and also personally owned and managed various rental properties; petitioner claimed that he worked less than 1,000 hours for realty company, but couldn't verify that number; petitioner's wife also worked for different realty company; a personally owned rental property was over 130 miles from petitioner's home; petitioner lived in CA, but had another rental property in FL; log of time spent on rental properties incomplete and second log completed after audit began; petitioner incurred loss on rental activities and attempted to deduct losses; IRS determined that losses were subject to passive loss limitations of I.R.C. Sec. 469; petitioner failed to satisfy test to be a rental real estate professional for failure to meet 750-hour test; 20 percent accuracy-related penalty imposed).

Esgar Corp., et al v. Comr., No. 12-9009, 2014 U.S. App. LEXIS 4261 (10th Cir. Mar. 7, 2014), aff'g, T.C. Memo. 2012-35

(case involves appropriate valuation of donated conservation easements with specific issue of whether “highest and best use” of land subject to easements was gravel mining or agricultural use as irrigated farmland; petitioners, corporation and two couples, owned land with another corporation in undivided one-fourth interests; tract was 1,560 acres with part used for gravel mining; with help of local accounting firm (Kennedy & Coe), petitioners conducted series of like-kind exchanges impacting approximately 163 acres not zoned for mining gravel; after transactions, each petitioner owned about 55 acres outright; appraiser hired and each taxpayer claimed charitable contribution donation under “before and after” approach due to easement restrictions; petitioner claimed highest and best use was for gravel mining; IRS denied deductions; Tax Court determined that highest and best use of land was for agricultural use resulting in lower value of property before imposition of easement restrictions, resulting in deduction of $100,000 rather than $2,000,000; Tax Court determined that highest and best use of any land is its current use unless taxpayer shows compelling reason for different use; petitioners had also overstated demand for gravel; accuracy-related penalty not imposed; court noted that for post-8/17/06 filed returns, “reasonable cause” exception to penalties repealed; on further review, appellate court affirmed and found no difference between conservation easement valuation and just compensation valuation in context of determining highest and best use of particular property; on issue of holding period of associated state (CO) tax credits, court upheld Tax Court determination that petitioner had no property rights in conservation easement contribution state tax credit until donation was complete and credits were granted, and credits never became part of petitioner's real property rights; thus, holding period of credits began at time credits granted and ended upon petitioner's sale of credits (which occurred in same month that they were granted) and capital gain on sale was short-term).

Written Notices of Allocation Can Be Sent Electronically or Over the Web

In this private letter ruling, the IRS has said that a cooperative can use email or a website to send notices to members about patronage dividends.  The cooperative had many members that bought personal and family items from the cooperative.  Patronage dividends were paid annually in nonqualified written notices of allocation.  Historically, the cooperative had used the U.S. mail to send the notices.  To cut down on costs, the cooperative proposed to send the notices via email or their website.  The IRS approved using the website or email to send the notices and that the cooperative could take an exclusion or deduction under I.R.C. Sec. 1382(b)(2) or tax benefit under I.R.C. Sec. 1383(a)(2) when the nonqualified written notice is paid or redeemed.  Priv. Ltr. Rul. 201413002 (Mar. 6, 2014). 

No Sales Tax Exemption for Ag ATV.

The petitioner, an elderly Iowa farmer, leases his land to his son and nephew for crop production.  Because the petitioner's land is rocky, rocks must be removed every year.  To facilitate rock removal, the petitioner purchased an ATV, paying $980 of sales tax on the purchase.  The petitioner claimed that the ATV purchase was exempt from sales tax as ag equipment/machinery.  Iowa Code Sec. 423.1(17) sets forth the exemption for farm machinery and equipment used in ag production and requires the machinery and equipment be used directly and primarily in the production of agricultural products.  The petitioner testified that he used the ATV approximately 80 percent of the time for removing rocks from the fields.  The balance of the time of ATV use was spent spraying trees and weeds, checking crops, tile blowouts and wet spots.  The Iowa Department of Revenue (IDOR) denied the exemption on the basis that the ATV was not used directly as an integral and essential part of production more than 50 percent of the time.  The IDOR viewed the removal of rocks as not related to planting, growing or harvesting of crops.  In re Lickteig, No. 13DORFC025, Iowa Dept. of Inspection and Appeals (Mar. 5, 2014).  

Carrino v. Comr., T.C. Memo. 2014-34

(ex-wife had taxable income via I.R.C. Sec. 66 from community property interest in partnership irrespective of whether ex-wife was a partner for tax purposes; couple was legally separated in 2002 after husband had formed an LLC which was general partner of LP; husband made capital contributions to LLC that were contributed to LP and which wife did not have knowledge of; on LLC and LP partnership returns wife not listed as partner; amended return showed wife as partner, but she didn't report income from LP; wife had right to stream of income from community property that funded the LP).

Mountanos v. Comr., T.C. Memo. 2013-138, reconsideration den., T.C. Memo. 2014-38

(petitioner conveyed conservation easement on 882 acres of undeveloped land to land conservancy; at time easement granted, land under long-term contract limiting use and development; petitioner claimed $4,691,500 charitable deduction as value of easement, but could only take $1,343,704 of deduction in tax year due to ceiling imposed by I.R.C. Sec. 170(b)(1)(B); unused portion carried over to 2006, 2007 and 2008; IRS challenged carryover amount; petitioner claimed highest and best use of property was as residential development and vineyard and IRS claimed there was no reduction in FMV of property due to easement; court agreed with IRS - petitioner failed to establish that FMV after easement was less that FMV of property before easement grant; petitioner also failed to establish that either residential development or vineyard use was property's highest and best use before easement imposed; petitioner failed to show that vineyard use a legally permissible use or economically feasible due to restricted access to property and lack of water; 40 percent gross valuation misstatement penalty imposed for underpayments for years at issue - no reasonable cause exception; in 2014, court denied reconsideration). 

Assaderaghi v. Comr., T.C. Memo. 2014-33

(petitioner engaged in over 500 trades annually, incurred losses and claimed ordinary loss status; court determined that $2.6 million of gross proceeds did not amount to substantial trading activity and that executing those trades on 154 days during year at issue (with 50 percent of trades occurring in three month period) not frequent activity; record failed to establish that petitioner held trades for short periods of time; petitioner actually traded on margin involving security sales, call and put options and short sales; 40 percent of trades were day trades; petitioner had substantial income from full-time day job in engineering field; court determined that petitioner not a trader and losses were capital in nature). 

Smith v. Comr., T.C. Sum. Op. 2014-13

(petitioners, married couple, sustained rental real estate losses; losses subject to passive activity loss limitations; time log was "ballpark guesstimate" constructed after-the-fact and couldn't establish material participation; petitioners' income at high enough level such that $25,000 deduction amount phased-out). 

Howerter v. Comr., T.C. Sum. Op. 2014

(innocent spouse case involving equitable relief under I.R.C. Sec. 6015(f); couple married in 1992 and divorced in 2010; wife prepared couple's returns and couple failed to report over $9,000 in husband's non-employee compensation reported on 1099-Misc.; former wife filed request for innocent spouse relief via Form 8857 for 2007 tax year and IRS proposed to grant relief to former wife; court determined that former wife had actual knowledge of former husband's non-employee compensation and failed to qualify for relief, but court considered whether former wife eligible for equitable relief under I.R.C. Sec. 6015(f) based on facts and circumstances; court determined that three factors of Rev. Proc. 2013-34 neutral (economic hardship; legal obligation to pay liability; physical or mental health) three factors weighed in favor of former wife (marital status; lack of significant benefit; compliance with tax laws after divorce) and one factor weighed against granting relief (knowledge or reason to know)).

Klamath Strategic Investment Fund, LLC v. United States, No. 12-44286, 2014 U.S. App. LEXIS 3965 (5th Cir. Mar. 3, 2014)

(operating costs (and investment advice fees) incurred by 90 percent owners of two partnerships were deductible by partners because partners controlled the partnerships and partnerships had profit motive (which is determined at the partnership level; court determined, based on partners' testimony, that sufficient profit motive attributed to partnership based on an investment strategy). 

K.H. Company, LLC Employee Stock Ownership Plan v. Comr., T.C. Memo. 2014-31

(ESOP that corporation established where corporation later became an LLC taxed as partnership failed to qualify under I.R.C. Sec. 401(a); LLC cannot be sponsor of ESOP because definition of "qualifying employer securities" includes "stock" that employer issues and "partnership" defined under I.R.C. Sec. 7701 to exclude corporation). 

Priv. Ltr. Rul. 201407024 (Nov. 18, 2013)

(issue was whether exempt organization (integrated health group operating hospitals and clinics) can conduct school activities along with exempt functions and still qualify as exempt organization under I.R.C. Sec. 170(b)(1)(A)(ii) and I.R.C. Sec. 514(c)(9)(c) such that debt-financed property rules inapplicable; IRS noted that to qualify as exempt under I.R.C. Sec. 170(b)(1)(A)(ii), organization's primary function must be school activities; primary function test not met where 13 percent of expenditures for instruction and 20 percent of employees involved with schooling and 6 percent of revenues derived from school activities). 

Cohen v. United States, No. 12 Civ. 5828 (GWG), 2014 U.S. Dist. LEXIS 26129 (S.D. N.Y. Feb. 28, 2014)

(petitioners, married couple, owned an apartment adjacent to their home and, after selling it, attempted to exclude the gain realized on sale from income via I.R.C. Sec. 121; petitioners had leased the apartment to third parties and then to their son and his family; court upheld the determination of IRS that apartment did not satisfy I.R.C. Sec. 121 because petitioners did not live in it an treat it as their personal residence for at least two of the previous five years immediately preceding the sale; court rejected petitioners' claim that their son and his family were part of the "family unit" because petitioners charged son rent and claimed depreciation on apartment; petitioners' son also utilized separate telephone line and mailbox and paid all bills associated with the apartment). 

Priv. Ltr. Rul. 201409018 (Nov. 19, 2013)

(taxpayer is an LLC treated for tax purposes as a partnership and is owned in-part by a disregarded entity for federal tax purposes; disregarded entity is wholly owned by LP and is partially owned by a management company that is a real estate investment trust (REIT) that is wholly owned by LP; LP is also affiliate of a trust - a publicly held statutory REIT;  taxpayer is related to LP for purposes of I.R.C. Sec. 1031; taxpayer owned retail building and wants to enter into sale agreement with unrelated third party; taxpayer to then enter into exchange agreement with qualified intermediary to which rights of transaction will be assigned; replacement property; replacement property is vacant urban office building which is subleased by ground lessee that is a wholly owned by LP; building to be demolished  then vacant land to be subleased to exchange accommodation party or sublease to exchange accommodation party which will then demolish building; sublease to have term of over 30 years and interests not to be disposed of within two years; transaction qualifies for like-kind exchange treatment).


In re Bryan, No. 10-10175, 2014 Bankr. LEXIS 773 (Bankr. N.D. Cal. Feb. 27, 2014)

(debtor claimed the first-time homebuyer tax credit under the original version which recaptured the credit by imposing a tax of 6.67 percent of the amount of the credit for 15 years beginning after the second year in which the credit was claimed; debtor then filed bankruptcy and asserted that credit was, in essence, a loan where the debtor's obligation to repay was discharged by the bankruptcy filing; court disagreed, noting that I.R.C. Sec. 36(f)(1) describes the repayment obligation as a "tax" of an additional 6.67 percent annually until credit repaid; hence, repayment obligation not discharged in bankruptcy). 

Leathers v. Leathers, et al., No. 08-12123-MLB, 2014 U.S. Dist. LEXIS 24901 (D. Kan. Feb. 27, 2014)

(decedent owned mineral interests which were distributed equally to two brothers with one brother's share reduced to one-fourth after brother's ex-wife received 50 percent of his 50 percent share; the brother owning a one-fourth mineral interest failed to file federal income tax returns for 1997 and 1999-2005 and IRS filed notices of federal tax liens (NFTLs) in the spring of 2005 for tax years 1997-2002 and another NFTL for the same years in September of 2006; on Oct. 6, 2006, the brother with the 1/4 mineral interest transferred his mineral interest to a trust; IRS moved to foreclose its liens; court determined that IRS had priority over royalties from brother's mineral interest with respect to those royalties for which the IRS liens were perfected before the brother's transfer of his mineral interest to the trust; with respect to the IRS lien filed in 2008, lien did not attach to brother's mineral interest because it had been transferred to the trust and lien only attached to brother's 45 percent interest in the trust, but not the trust's share of mineral interest royalties; IRS did not allege that transfer to trust was a fraudulent transfer)