Case Summaries

Peterson v. Comr., T.C. Memo. 2013-271

(petitioner was Mary Kay consultant and formed defined benefit plan that petitioner's sole proprietorship adopted; petitioner then transferred consulting income to limited partnership, but Mary Kay refused to pay consulting income to partnership, but petitioner reported expenses of consulting business on the partnership; defined benefit plan restated and adopted by partnership; petitioner claimed deductions of approximately $750,000 for funding plan; income from partnership reported by petitioner on K-1; IRS claimed that partnership not a business and had no income on which to base plan contributions and partnership had no self-employment income on which to base contributions; court determined that petitioner conducting business and that restated plan document adopted when partnership formed said that employer sponsoring plan was "entity specified in Adoption Agreement, any successor which shall maintain this Plan and any predecessor which has maintained this Plan"; court reasoned that petitioner's sole proprietorship original plan sponsor and was employer for plan purposes and could contribute to plan and claim deduction; on separate issue, court determined that petitioner's income received in 2006-2009 (during retirement years) was derived from past Mary Kay sales work and was performance-based (calculated based on previous commissions, age at retirement and years of service) earned during employment and was subject to self-employment tax). 


Freedom from Religion Foundation, Inc., et al. v. Lew, et al., No. 11-cv-626-bbc, 2013 U.S. Dist. LEXIS 166076 (W.D. Wisc. Nov. 22, 2013)

(plaintiff, atheist organization, challenged as unconstitutional the cash allowance provision of I.R.C. §107(2) that excludes from gross income a minister’s rental allowance paid to the minister as part of compensation for a home that the minister owns; court determined that I.R.C. §107(2) is facially unconstitutional under the Establishment Clause based on Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989) because the exemption provides a benefit to religious persons and no one else, even though the provision is not necessary to alleviate a special burden on religious exercise; court noted that religion should not affect a person’s legal rights or duties or benefits, and that ruling was not hostile against religion; court noted that if a statute imposed a tax solely against ministers (or granted an exemption to everyone except ministers) without a secular reason for doing so, the law would similarly violate the Constitution; court noted that defendants (U.S. Treasury Department) did not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for non-minister taxpayers who must pay taxes on income used for housing expenses; court noted that Congress could rewrite law to include housing allowance to cover all taxpayers regardless of faith or lack thereof; I.R.C. §107(1) not implicated and, as such, a church can provide a minister with a parsonage and exclude from the minister’s income the rental value of the parsonage provided as part of the minister’s compensation). 


61 York Acquisition, LLC v. Comr., T.C. Memo. 2013-266

(plaintiff, a partnership,  granted façade easement on certified historic structure to National Architecture Trust; easement required grantor to obtain prior written consent from NAT before making any changed to façade; plaintiff claimed $10.7 million deduction for donation on partnership tax return and IRS fully disallowed deduction because at time of grant, plaintiff owned first 14 floors of building and third party owned top 6 floors and plaintiff did not own entire exterior of structure; plaintiff claimed that easement terms imposed enforceable restrictions on entire exterior and that under state (IL) law ownership of entire exterior not required to grant easement imposing enforceable restrictions on entire exterior; court agreed with IRS on basis that while state law determines nature of property rights, federal law determines appropriate tax treatment of those rights; based on state law, court noted that plaintiff only had rights to two sides of structure and did not have assignable right in entire exterior via maintenance agreement or need to get prior approval to make alterations). 


Rand, et al. v. Comr., 141 T.C. 12 (2013)

(petitioner’s return had zero tax liability but claimed refundable   credits which triggered refund of $7,327; IRS issued refund, but later recomputed and determined that petitioner owed $144 (petitioner had to repay the $7,327 and an additional $144) and assessed penalty of $1,494.20 (20% underpayment penalty); petitioner challenged IRS position that refundable credit counted as an “underpayment”; court noted that accuracy-related penalty is on deficiencies based on how much the taxpayer underpaid the “tax required to be shown on the return” and determined that refundable credits cannot take the tax below zero for purposes of the accuracy-related penalty; thus, underpayment was $144 for penalty computation purposes). 


Nelson v. Comr., T.C. Memo. 2013-259

(petitioner, sole shareholder of mortgage broker business, deemed not to be in trade or business of trading securities; over $800,000 of claimed expenses disallowed and accuracy-related penalties imposed; court noted that I.R.C. Sec. 162(a) does not provide definition of "trade or business" but noted that relevant considerations include taxpayer's intent, nature of income derived from activity, frequency, extent and regularity of activity; court noted that trading activities must be substantial in terms of number of trades executed, amount of money involved and number of days on which trades executed; petitioner received substantial wage income and executed trades on investment account for which petitioner had no clients; in 2005, 535 trades executed on account on 121 days (out of available 250) with 95 trades occurring in one week; eight periods of at least seven days in which no trades occurred; in 2006, 235 trades executed on 66 days (out of 250 available days); holding period ranged from between one to 101 days; seven periods of at least seven days where no trades occurred; number of trades insufficient to constitute "substantial" amount for either 2005 or 2006 and even though amount of money involved "considerable" ($24 million to $33 million), amount not determinative of whether activity substantial; total number of trading days not substantial).


Gorra v. Comr., T.C. Memo. 2013-254

(petitioner donated qualified conservation easement to National Architectural Trust on petitioner's townhouse (façade easement on historic property); IRS challenged appraisal of property as not being a "qualified appraisal" because it did not contain state method of valuation (even though petitioner's appraiser testified that he used the "before and after" approach; IRS also argued that Pension Protection Act expanded requirements for qualified appraisal by requiring that appraisal follow "generally accepted appraisal standards"; IRS claimed easement had no value insomuch as it mirrored restrictions in local law; court did not accept IRS' argument and noted that an easement restriction does reduce value of the restricted property; court determined two percent reduction in value due to easement restriction which resulted in charitable deduction of $104,000 rather than $605,000 that petitioner claimed; petitioner liable for I.R.C. Sec. 6662 penalty).


Herrera v. Comr., No. 13-60018, 2013 U.S. App. LEXIS 22750 (5th Cir. Nov. 11, 2013), aff'g., T.C. Memo. 2012-308

(petitioner formed corporation to perform engineering consulting work and steel fabrication; steel fabrication business ultimately transferred into LLC and businesses separated; corporation used advanced funds from LLC and bank loans to continue operations; LLC claimed bad debt deduction on Form 1065 for 2006 and 2007 for amounts not repaid by corporation; IRS disallowed deductions on basis that they weren't bona fide debt; court agreed with IRS - advances not bona fide debt because no use of promissory note, lack of definitive maturity date, lack of repayment schedule, no collateral pledged and no interest paid or accrued; Tax Court decision affirmed on appeal)


Priv. Ltr. Rul. 201407009 (Nov. 8, 2013)

(taxpayer proposed to disclaim contingent right to receive trust corpus upon trust termination; disclaimer to be executed within nine months after reaching age 18; disclaimer determined to be made within timeframe of Treas. Reg. Sec. 25.2511-1(c); IRS noted that disclaimer must be unequivocal and be effective under local law; IRS determined that, based on facts represented, disclaimer would not be a taxable transfer).


Priv. Ltr. Rul. 201407008 (Nov. 6, 2013)

(taxpayer proposed to modify trust by appointing successor trustees, and IRS determined that such modification would not create a general power of appointment that would cause trust assets to be included in taxable estate of any trust beneficiary, and exercise of appointment power would not be a gift taxable transfer; IRS also determined that proposed modifications would not cause trust to lose exempt status from GSTT tax, and no distributions or terminations of trust would be subject to GSTT due to modifications). 


DeFrancis, et al. v. Comr., T.C. Sum. Op. 2013-88

(petitioners borrowed money from a relative of a petitioner with mortgage prepared as security for debt; mortgage not publicly recorded, thus mortgage holder could foreclose upon default, but other lenders not notified of debt such that mortgage subordinated to later mortgages and security interests; petitioners deducted interest paid to lender, but IRS denied deduction based on I.R.C. Sec. 163(h) which denies deduction for personal interest except for qualified residence interest, but debt must be secured by the residence to be deductible; court upheld IRS position on basis that Treas. Reg. Sec. 1.163-10T(o)(1) requires mortgage to be recorded or perfected in accordance with state law). 


Charuka-Justin v. Comr., T.C. Sum. Op. 2013-85

(petitioner owned and operated customs brokerage business along with dog breeding and showing business; dog breeding business showed profit in one of prior 16 years; court determined that dog breeding activity not conducted with profit intent because no changes made to activity to make it profitable and losses from activity offset substantial income from petitioner's other activities; petitioner received substantial pleasure from dog breeding activity).


Phillips v. Comr., T.C. Memo. 2013-250

(petitioner received distribution from IRA and such amount was included in income; second distribution also included in income in spite of "accounting dispute").  


Moore v. Comr., T.C. Memo. 2013-249

(petitioner worked for S corporation and purchased 5 percent ownership interest from a shareholder and later purchased $5.8 million worth of additional shares from another shareholder via loan from corporation and paid total of $5.353 million to shareholder; petitioner sued corporation on basis that stock purchased only worth $1 million and, thus, petitioner should only be liable on note for $1 million rather than $5.353 million and that he paid higher amount as favor to corporation; lawsuit settled for $1 million and loan reduced to $1 million and was later paid off; petitioner later sold his stock for $3 million and claimed basis of $4,502,519 (original $5.353 million less S corporation adjustments) resulting in claimed capital loss of $1,502,519; IRS claimed that petitioner should have reported capital gain of $2 million ($1 million original basis) with additional tax of $746,984 and accuracy related penalty of $149,397; court agreed with IRS on basis issue because indebtedness owed and paid based on $1 million value which is to be used for basis calculation; court also determined that original $212,334 paid for initial 5% interest should be included in basis computation and that accuracy-related penalty should not apply because petitioner relied on competent tax counsel; petitioner's basis determined to be $1,212,334).


I.R.S. Notice 2013-70

(provides guidance on the credits under I.R.C. Secs. 25C and 25D with respect to nonbusiness energy property and residential energy efficient property and incorporates changes made by 2010 legislation and ATRA of 2012).


Herring v. Comr., T.C. Sum. Op. 2013-84

(petitioner inherited partial interest in home owned by parent and began using home as principal residence in 1999; in 2001, petitioner owned second tract on which home fully constructed in 2008 at which time petitioner moved into home; first-time homebuyer credit claimed on home and IRS denied credit on basis that petitioner had ownership interest in residence as of 2007; on petitioner's 2010 and 2011 returns, petitioner repaid $500 of credit on each return and petitioner argued entitlement to credit because IRS accepted repayment amounts; court noted that filing of return establishes petitioner's tax claim position but does not create contract between IRS and taxpayer; court denied offset of $1,000 against outstanding tax liability due to credit denial, but suggested that petitioner file for overpayment refund)


Ellis v. Comr., T.C. Memo. 2013-245

(petitioner used funds in IRA to start business; petitioner was paid a salary and leased property from an LLC that petitioner owned along with spouse and children; payment of salary to and leasing of property from a disqualified person held to be prohibited transaction via I.R.C. Sec. 4975).


Fine v. Comr., T.C. Memo. 2013-248

(petitioner not entitled to mortgage interest deduction due to lack of substantiation and self-serving statement and testimony that could not be corroborated did not substitute for adequate records).


Fitch v. Comr., T.C. Memo. 2013-244

(petitioners, married couple, reside in community property state, where wife ran real estate brokerage and husband operated separate accountancy business; under Social Security Protection Act of 2004, if one spouse runs the business the income is community property but s.e. tax is borne by operating spouse without any sharing with other spouse). 


Advo, Inc. & Subsidiaries, 141 T.C. No. 9 (2013)

(petitioner is direct mail advertising company that distributed direct mail advertising in U.S. to potential customers for products and services sold by petitioner's clients; petitioner supplied advertising material that it had contracted with third party commercial printers for printing; petitioner claimed DPAD (I.R.C. Sec. 199) on material that petitioner supplied which included rough art, reprint with changes and client-supplied art; petitioner retained ownership of intellectual property for rough art and reprints with changes; printing agreements contained "risk of loss" provision stating that risk of loss passed to petitioner upon delivery to petitioner's branch facility; petitioner assembled and shipped finished product; petitioner claimed that gross receipts from printed direct mail advertising and distribution products qualified as DPGR, but IRS claimed that petitioner's use of third-party printers eliminated "manufacturing" aspect for petitioner; issue was whether petitioner manufactured advertising mail packages or produced only intangible property used by printers to produce tangible personal property in the form of advertising mail packages; under Treas. Reg. Sec. 1.199-3(f)(1), court determined that petitioner did not bear benefits and burdens of ownership; petitioner had to be exclusive owner of underlying property with benefits and burdens of ownership such that petitioner was only taxpayer that could claim DPAD; multiple factor weighed in favor of government - legal title passing; how parties treated transaction; whether rights of possession vested in purchaser and which party controlled production process, which party received profits from operation and sale of property and whether petitioner actively and extensively participated in management and operations of activity; petitioner did not bear benefits and burdens of ownership while advertising material was printed and, thus, no MPGE present and no DPGR available). 


Priv. Ltr. Rul. 201405005 (Oct. 22, 2013)

(taxpayer proposed to transfer ownership of S corporation from two co-equal owners to key employees; IRS determined that profit on redemption of co-owners' shares in return for notes will be treated as capital gain in co-owners' hands and will be spread-out over term of notes; no gain to S corporation; S corporation entitled to deduction for interest paid on notes; notes do not constitute second class of S corporate stock). 


Hoelscher v. Comr., T.C. Memo. 2013-236

(petitioners determined to have engaged in ranching activity without requisite profit intent - losses denied; gross income of $195,473 from activity and expenses of $2,826,336; no meaningful action taken to reduce expenses or increase income; court did not believe ranch acquired to profit from increase in value; court noted that enhanced value as intent to profit is useful only if income from activity exceeds deductions from ranching activity that are not attributable to holding the land). 


Karch v. Comr., T.C. Memo. 2013-237

(court denied petitioner's deductions for contract labor due to lack of documentation (contracts, invoices, Forms 1099-Misc, canceled checks, etc.); no deductions allowed for wages paid to employees because amounts on Forms W-2 did not match W-3 transmittal and no evidence presented that forms filed with IRS).


Schlievert v. Comr., T.C. Memo. 2013-239

(petitioner's record label activity not engaged in for profit; no separate entity formed as expert had advised, no records kept to aid analyzing business, etc.; eight factors favored IRS and one factor was neutral; court determined that petitioner engaged in activity to aid daughter's career rather than make a profit). 


Cor v. Comr., T.C. Memo. 2013-240

(petitioner traveled from home to worksite four times weekly, a 320-mile roundtrip; petitioner argued that due to lack of public transportation and extraordinary nature of trip, he could deduct travel-related expenses as miscellaneous itemized deduction; court ruled for IRS on basis that petitioner didn't cite any exception to application of Coombs doctrine). 


Van Alen v. Comr., T.C. Memo. 2013-235

(petitioners were two children of 1994 decedent and were beneficiaries of residuary testamentary trust that received most of decedent’s estate, including 13/16 interest in cattle ranch; ranch value reported on estate tax return at substantially below FMV in accordance with I.R.C. Sec. 2032A; petitioners signed consent agreement (one via guardian ad litem) agreeing to personal liability for any additional taxes imposed as result of sale of elected property or cessation of qualified use; IRS disputed reported value but matter settled; years later, trust sold easement on ranch restricting development; gain on sale of easement reported with reference to Sec. 2032A value and K-1s issued showing proceeds had been distributed to beneficiaries; beneficiaries did not report gain as reflected on K-1s and then asserted that ranch undervalued on estate tax return and that gain reportable should be reduced by using FMV tax basis; court determined that Sec. 2032A value pegs basis via I.R.C. Sec. 1014(a)(3); court upheld consent agreement; accuracy-related penalty imposed because advice sought only after petitioners failed to report any gain). 


Schoppe v. Comr., 711 F.3d 1190 (10th Cir. 2013), aff'g., T.C. Memo. 2012-153, cert. den., No. 13-6098, 2013 U.S. LEXIS 6524 (U.S. Sup. Ct. Oct. 7, 2013)

(petitioner was real estate agent, broker and instructor of real estate licensing classes in addition to financial planner and insurance agent; petitioner failed to file income tax returns and didn't pay tax; petitioner filed Tax Court petition, but court upheld determinations of IRS including penalties; petitioner filed appeal and also filed bankruptcy during pendency of appeal; automatic stay inapplicable to case because Tax Court petition is independent judicial proceeding initiated by debtor; decision agrees with decisions of the 1st, 3rd, 5th and 11th Circuits, but is opposite to a decision of the 9th Circuit).


Staffmore, LLC v. Comr., T.C. Memo. 2013-87

(Tax Court has no jurisdiction to review determination of IRS of employment status of petitioner's workers; IRS determined that petitioner's worker was employee and not independent contractor via Form SS-8; Tax Court only has jurisdiction to review employment status determinations only if determination arises in connection with IRS audit and exam). 


Scully v. Comr., T.C. Memo. 2013-229

(petitioner was a Jazz musician and music professor that claimed deductions for performance-related activities; deductions partially claimed on Schedule A and partially on Schedule C; certain expenses not deductible due to lack of substantiation, but others deductible on Schedule A as related to skill as professor and not reimbursable expenses by employer; accuracy-related penalties upheld with respect to unsubstantiated deductions claimed).


Frontier Custom Builders, Inc., T.C. Memo. 2013-231

(issue was whether petitioner, custom homebuilder, subject to I.R.C. Sec. 263A (which requires producers and retailers with gross receipts in excess of $10 million to capitalize tax depreciation exceeding financial statement depreciation, indirect labor and overhead costs attributable to production activities as part of cost of inventory or constructed property); petitioner claimed its activities were marketing and sales, rather than production-related due to custom nature of home built and work involved in building homes is subcontracted out and only has employees that perform services; court noted that creative design of custom homes merely ancillary to actual physical work on land and is the equivalent to digging foundation or completing structure's frame; capitalization required of specific costs attributable to production activities including part of owner's salary, employee bonuses, design costs, salaries for office employees, employee benefits, payroll taxes insurance and office expenses).


Steinberg v. Comr., 141 T.C. No. 8 (2013)

(petitioner gifted cash and marketable securities to her three daughters on the condition (pursuant to written net gift agreement) that the daughters pay any related gift tax and pay any related estate tax on gifted property if petitioner died within three years of gifts; petitioner deducted value of daughters' agreement to be liable for gift or estate tax from value of gifts and IRS claimed gift tax understated by almost $2 million; each daughter and petitioner represented by separate counsel and appraisal undertaken who used mortality tables to compute petitioner's life expectancy which impacted values as reported on Form 709; IRS primary argument was that daughters' assumption of potential estate tax liability under I.R.C. Sec. 2035(b) did not increase petitioner's estate and, as such, did not amount to consideration in money or money's worth as defined by I.R.C. Sec. 2512(b) in exchange for gifted property; court determined that primary question was whether petitioner received any determinable amount in money or money's worth when daughters agreed to pay tax liability; court held the petitioner did receive determinable value as to the gift tax; likewise, assumption of potential estate tax liability may have sufficient value to reduce petitioner's gift tax liability; immaterial that intrafamily deal at issue because all persons represented by separate counsel; issue of fact remains for trial on assumption of estate tax issue). 


Riether v. United States, No. 2:2011cv00664 (D. N.M. Sept. 30, 2013)

(married couple liable for self-employment tax on distributions from LLC treated taxwise as partnership; earning from partnership self-employment income to general partners).


White v. Comr., T.C. Sum. Op. 2013-77

(petitioner divorced spouse and separation agreement provided for joint custody, said nothing about allocation of tax deductions, and listed ex-spouse as custodial parent; petitioner claimed HOH filing status, dependency exemption deduction, child tax credit, and earned income tax credit on account of petitioner's two minor children;  IRS denied deductions, credits and HOH filing status; court disagreed with IRS, noting that I.R.C. Sec. 152(e) lists circumstances where noncustodial parent can claim child and, under statute, the issue is which parent had custody of child for the greater portion of tax year; "custodial parent" defined as parent with whom child resides for greater number of nights during calendar year; petitioner proved that her two minor children resided with her more than 1/2 of each of the years in question; petitioner provided more than 1/2 of support for one child in each of the two years in issue, and more than 1/2 of support for other child for one year; one child proper age for both years and other child proper age for one year).


Priv. Ltr. Rul. 201338035 (May 9, 2013)

(taxpayer, an LLC, seeks to form an entity that will be treated as a publicly traded partnership pursuant to I.R.C. Sec. 7704(b) (i.e., corporation tax treatment where the income from activities with respect to minerals or natural resources is treated as passive); entity will earn income by providing essential fluid, solids and other oil field waste handling, treatment and disposal services necessary in the fracking process for oil and natural gas extraction; such services to be provided through affiliated limited partnerships, LLCs or disregarded entities; IRS determined that entity's income from services provided would be qualifying income under I.R.C. Sec. 7704(d)(1)(E) as would associated income from marketing and distribution of salvaged hydrocarbons (but not income earned from marketing minerals and natural resources to end users at retail level).


Friedberg v. Comr., T.C. Memo. 2013-224, reconsidering T.C. Memo. 2011-238

(in the original Tax Court opinion, petitioners, married couple, not entitled to deduction for donated facade easement on petitioners' home; "qualified appraisal" not obtained; issues of material fact remained with respect to donation of home's unused development rights and whether such donation was perpetual in nature; on reconsideration, Tax Court noted that court's original opinion based on Tax Court's prior opinion in Scheidelman v. Comr., T.C. Memo. 2010-151, but that case was vacated by U.S. Court of Appeals for the 2d Cir. in Scheidelman v. Comr., 682 F.3d 189 (2d Cir. 2012); consequently, court held that petitioner's appraisal "qualified" under I.R.C. Treas. Reg. Sec. 1.170A-13(c)(3)(ii)(K) because regulation only imposes reporting requirement which appraisal satisfied (because appraisal explained valuation method and basis for development rights valuation) IRS appraiser not qualified appraiser; partial summary judgment for petitioners granted).


House Vote on Continuing Resolution (H.J. Res. 59, Sept. 19, 2014)

(on a bipartisan vote of 230-189, the U.S. House passed legislation to continue funding federal government operations through Dec. 15, 2013; bill also defunds Obamacare which contains many tax provisions)


McGovern v. Comr., T.C. Sum. Op. 2013-74

(petitioner, Hollywood actress, claimed deductions for clothing, makeup and other related items as business expenses; IRS denied deductions for lack of substantiation that tied such expenditures to items that would not be suitable for everyday wear; smallness of deduction immaterial; court upheld IRS position).


Zavadil v. Comr., T.C. Memo. 2013-222

(petitioner sold S corporation stock to ESOP and remained involved in S corporation business after sale, and paid for non-business expenses from corporate account which were recorded in ledger account; corporation, on behalf of petitioner, made significant charitable contributions and IRS denied deductibility because petitioner fully paid ledger account balances with personal funds and was the party that bore economic burden of such contributions; in latter half of year in which contributions made, petitioner used corporate funds to pay off ledger account balances previously incurred; court determined that S corporation actually bore economic burden of contributions; but, court determined that petitioners did not prove the portion of contributions made in latter half of tax year made with personal funds and did not establish with sufficient evidence that ledger account balances were bona fide debt of petitioner; as a result, associated deductions denied).


Rodriguez v. Comr., T.C. Memo. 2013-221

(petitioners, mother and daughter operated horse breeding partnership and incurred losses; IRS denied deductibility of losses under hobby loss rules; court agreed with IRS on basis that activity not engaged in with requisite profit intent based on nine-factor analysis of which none supported petitioners).


Cahill v. Comr., T.C. Memo. 2013-220

(petitioner paid for work done on behalf of partnership and received K-1showing $175,000 as guaranteed payment; petitioner claimed that amount was loan and that he wasn't partner during tax year because not signatory to partnership's amended and revised operating agreement; court determined partnership existence based on all of the facts and valid business purpose; court determined that facts showed partnership existence and that petitioner partner in partnership during tax year in issue and payment was guaranteed payment; court specifically noted that while partnership was a "small partnership" that meant that court had jurisdiction to determine partnership existence and petitioner's status as partner because partnership not subject to TEFRA; as such, court reiterated that "small partnership exception" has no bearing on whether partnership was a partnership or not for purposes other than TEFRA penalties).


C.C.A. 201405014 (Sept. 12, 2013)

(manufacturer paid retailers for products distributed through network of retailers, and retailers constructed display area in retail space for manufacturer's products to manufacturer's specifications; parties have agreement providing for repayment of all payments to manufacturer immediately if, within 15 years of constructing display area retailer no longer sells and maintains a full line of manufacturer's products and/or no longer provides servicing; payments made to retailers for construction of space need not be capitalized).


IRS Notice 2013-57, I.R.B. 2013-40

(health plan qualifies as high-deductible health plan in accordance with I.R.C. Sec. 223(c)(2) even if it provides, without any deductible, preventative health services that are required to be provided by a group health plan or a health insurance issuer offering group or individual health insurance coverage).


Phillips v. Comr., T.C. Memo. 2013-215

(petitioner is self-taught bowler that claimed loss deductions from bowling activity he claimed constituted a trade or business; for year at issue, petitioner employed by postal service and had wage income, but only expenses from bowling activity; return preparer refused to sign return for fear of audit; petitioner kept no records and relied solely on bank statements; court determined that losses were hobby losses deductible only as miscellaneous itemized deductions to the extent petitioner had income; petitioner satisfied none of factors for establishing profit motive and court determined that petitioner did not engage in bowling activity with profit intent;  court also determined, in any event, that losses not substantiated sufficiently to deduct in any event; 20 percent accuracy-related penalty imposed).


Sampson v. Comr., T.C. Memo. 2013-212

(petitioner owned two S corporations and used tax preparer to prepare corporate returns; tax information kept on QuickBooks by petitioner which preparer had access to, but for years in issue petitioner's office being renovated and hard-copy not available; preparer would not prepare returns without source documents; preparer ultimately prepared 1040s but not the 1120s, and noted on 1040s that pass-through income from 1120s not included but would be furnished when available; Form 8275 not attached to either 1040 for years at issue; consequently, Form 1120s late; statement included on return that K-1 income not included because K-1s not available and that petitioner's personal return would be amended as soon as K-1s available; omitted income exceeded $130,000; IRS assessed penalties based on lack of authority for underpayment and since no Form 8275 filed reasonable basis standard inapplicable; penalties affirmed by Tax Court; preparer should have estimated the K-1 income, Filed Form 8275 and then amended return).


T.D. 9636 (Sept. 13, 2013)

(IRS issues finalized regulations concerning the deduction versus capitalization of tangible personal property costs (e.g., “repair regulations); effective for tax years beginning on or after Jan. 1, 2014; taxpayers that don’t elect general asset account (GAA) will have same flexibility to forgo loss upon disposition of structural component as taxpayers not electing GAA treatment; amounts properly expensed under taxpayer’s financial accounting policies deductible (i.e., elimination of de minimis ceiling); safe harbor extended to routine maintenance of buildings, but require 10 years over which taxpayer must reasonably expect to perform relevant activities more than once; qualifying small taxpayer can elect to not apply improvement rules to eligible building property if total amount paid during tax year for repairs, maintenance, improvements and similar activities performed on eligible building does not  exceed lesser of $10,000 or 2 percent of building’s unadjusted basis (note – eligible building property includes building unit of property that qualifying taxpayer owns or leases if unadjusted basis of building unit of property is $1,000,000 or less); definitions changed for “betterments” and “restorations”; threshold for materials and supplies to be exempt from capitalization raised to $200; rules altered for partial dispositions of assets, and qualifying disposition election must be made in some circumstances when assets held in GAA).


Viola v. Comr., T.C. Memo. 2013-213

(petitioner’s tax preparer failed to report almost $800,000 of income on petitioner’s Schedule C; amount not reported to petitioner or IRS on Form 1099-Misc.; tax preparer suffered stroke and firm prepared return close to filing deadline; petitioner received copy of return three weeks after filed (after filing deadline) and noticed missing income, but assumed it was reported somewhere else on return; IRS asserted accuracy-related penalty, but petitioner argued that reasonable cause and good faith reliance on professional advice present; court agreed with IRS; petitioner should have confirmed that income actually reported elsewhere on return rather than simply assuming it was).


Sugarloaf Fund, LLC, et al v. Comr., 141 T.C. No. 4 (2013)

(petitioner, a partnership, established trusts and transferred consumer receivables to trusts which were then allocated to sub-trusts; receivables treated as having carryover basis and trust ultimately claimed bad debt deduction due to worthlessness of receivables; IRS issued FPAA to petitioner and asserted that petitioner’s basis in receivables was zero and disallowed loss deduction and asserted penalty petitioner; petitioner claimed partnership status and, as such, any basis adjustment in receivables would impact amount of deduction for bad debts which partnership member could claim on personal return; court held that merely  receiving assets from partnership does not make trust a direct or indirect partner of such partnership under I.R.C. Sec. 6231(a)(2)(B) because trust grantor does not satisfy definition of “partner” under I.R.C. Sec. 6231(a)(2); trust grantor, as such, not eligible to participate in unified audit proceedings under TEFRA).


North Central Rental & Leasing, LLC v. United States, No. 3:10-cv-00066 (D. N.D. Sept. 3, 2013)

(petitioner is subsidiary of business that sold construction equipment and machinery and conducted equipment rental and leasing which parent company previously did in-house; parent had working relationship with major equipment manufacturer and like-kind exchange program created with petitioner; transaction involved petitioner conveying equipment to qualified intermediary (QI) which then sold equipment to unrelated third party with parent buying replacement property from manufacturer; QI used sale proceeds to buy the replacement property from parent who then transferred replacement property to petitioner; result was petitioner ended up with replacement property, third party had relinquished property and parent corporation had proceeds and manufacturer’s bill not due for six months; in essence, parent ordered replacement parts in purported like-kind exchange from manufacturer without having to pay for six months; because third party and QI involved, petitioner argued that transaction was like-kind exchange; court determined that transactions were structured to avoid I.R.C. §1031(f) because both petitioner and subsidiary “cashed-out” on low-basis property; non-recognition treatment not allowed). 


Rev. Proc. 2013-30, I.R.B. 2013-36

(IRS provides relief to taxpayers requesting relief for S corporation elections; such relief had previously been provided in other revenue procedures, but IRS, with this notice, is consolidating the prior revenue procedures; provides the exclusive simplified methods for taxpayers to request relief for late S elections, ESBT elections, QSST elections and QSub elections and late corporate classification elections). 


Rev. Rul. 2013-17, I.R.B. 2013-38

(homosexual persons whose relationship is recognized as a legal "marriage" under state law will be treated as married persons for federal tax law purposes; thus such persons can later reside in state that does not recognize homosexual marriage and file a joint return; such persons can (but don't have to) amend returns to claim joint filing status for open tax years in which such persons married (but can't amend return to file single return); such persons can no longer file as single taxpayer; ruling inapplicable to state taxes; ruling specifically uses term "legal" to make clear that it is limited in application to states in which homosexual marriage is legal (and does not apply to civil unions, etc.), but is silent with respect to its application to homosexual marriage in states where such unions are not legal but are allowed; while U.S. Supreme Court opinion in Windsor directed at equal protection for homosexual couples, ruling uses phrase "same sex" rather than homosexual, and, therefore, has application to same-sex, non-homosexual marriages; ruling completely contrary to position of Social Security Administration (SSA) taken in Program Operations Manual System (POMS) in which SSA says that all claims filed on or after Jun. 26, 2013, or that were pending final determination as of that date, can be paid when the Number Holder was married in a state that permits homosexual marriage and is domiciled at the time of the application or while the claim is pending a final determination in a state that recognizes homosexual marriage;  SSA's position consistent with Sec. 216(h)(1)(A)(I) of SSA which determines family status by looking to courts of state in which individual domiciled and whether that state would consider applicant validly married at time of application; the 31 states that bar the state from recognizing a homosexual marriage granted in another state will need to enact legislation decoupling from federal definition).


Endicott v. Comr., T.C. Memo. 2013-199

(petitioner claimed trade or business treatment as a trader; petitioner held call options on average for one to five months and numerous stock positions for over a year; IRS deemed petitioner to be an investment portfolio manager rather than being in the trade or business of trading; petitioner had 204 trades in 2006 on 75 days, 303 trades in 2007 on 99 days (including seven months in 2006 in which petitioner executed less than three trades in any given month; in 2008, petitioner executed  1,543 trades but only on 112 days; petitioner claimed $300,000 deduction on Schedule C associated with trades including margin interest expense (should have been claimed on Schedule A and limited to investment income); IRS denied deductions and court agreed; trading days does not include days in which investments open; petitioner not attempting to swings in daily market due to overall holding period of call options).


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