Volume 135 — Tax Court Reports

Ps owned and used a house as a principal residence for 2 years. Ps wanted to enlarge and remodel the house but were advised by an architect that more stringent building and permit restrictions had been enacted since the house was built. In 1999, rather than remodel the house, Ps voluntarily demolished it and constructed a new house on the property. Ps never occupied the new house, and in 2000 they sold it for $ 1,100,000. Ps realized capital gain of $ 591,406 on the sale of the new house. On their untimely 2000 Federal income tax return Ps did not report any of the gain from the sale of the new house. Ps subsequently agreed that $ 91,406 of the gain was taxable, but they claimed that $ 500,000 of the gain was excludable from income under sec. 121(a), I.R.C. In a notice of deficiency, R determined that Ps are not entitled to the $ 500,000 exclusion under sec. 121(a), I.R.C., and that Ps are liable for a deficiency in income tax and an addition to tax under sec. 6651(a)(1), I.R.C., for 2000. Held: Ps may not exclude from their income, under sec. 121(a), I.R.C., the gain on the sale of the new house because the new house was never used as Ps' principal residence. Held, further, Ps are liable for the addition to tax under sec. 6651(a)(1), I.R.C., for failure to timely file their 2000 Federal income tax return.

P, a nonprofit corporation founded by S, provides S's sperm free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization. S and his father, F, are P's board members and officers. S and F ultimately determine to whom P will distribute sperm. P, seeking tax exemption as a private operating foundation pursuant to sec. 501(c)(3), I.R.C., contends that it operates exclusively for the charitable purpose of promoting health. 1. Held: P's activities do not promote health for the benefit of the community. 2. Held, further, pursuant to sec. 501(c)(3), I.R.C., not operated exclusively for exempt purposes and therefore does not qualify for tax exemption.

In August 2001 P entered into an agreement with Derivium whereby P transferred 990 shares of IBM common stock to Derivium in exchange for $93,586.23. Held: The transaction between P and Derivium in August 2001 was a sale. P transferred all the benefits and burdens of ownership of the stock to Derivium for $93,586.23 with no obligation to repay that amount. 2.

P filed two claims for a whistleblower award with R under sec. 7623(b)(4), I.R.C. R sent a letter to P denying the claims because an award determination could not be made under sec. 7623(b), I.R.C. P… Held: R's letter was a determination conferring jurisdiction on this Court. We shall therefore deny R's motions to dismiss for lack of jurisdiction.

P-PA, an individual, owned P-AC, an S corporation. TAC is a wholly owned qualified subch. S subsidiary of P-AC, and its items of income and gain are reported on P-AC's Federal tax return. P-PA used TAC as an investment vehicle. TAC held the stock of companies that P-PA decided to invest in. TAC entered into a master stock purchase agreement (MSPA) for the sale of some of those corporate stocks in 2000 and 2001 to DLJ, an investment bank. The MSPA consisted of forward contracts and share-lending agreements. The forward contracts were prepaid in cash and would be settled with variable numbers of shares of stock. The share-lending agreements called for TAC to lend the shares of stock subject to the forward contracts to DLJ. P-PA and P-AC treated the MSPA as an open transaction and did not report any gain or loss on the transfers of stock. R determined that the MSPA was a sale of stock and that P-AC was liable for built-in gains tax pursuant to sec. 1374, I.R.C., as a result of TAC's income and gain being reported on P-AC's return. R also determined that there were deficiencies in the personal income tax of P-PA, the sole shareholder of P-AC, as a result of adjustments including in his income a distributive share of the built-in gain. Under sec. 1058, I.R.C., no gain or loss is recognized by a taxpayer who transfers securities pursuant to an agreement that meets the requirements of sec. 1058(b), I.R.C. Sec. 1259, I.R.C., provides for constructive sale treatment if a taxpayer enters into a transaction listed in sec. 1259(c)(1), I.R.C. Held: The MSPA constituted a sale and TAC and P-AC must recognize gain to the extent of the upfront cash payments received in 2000 and 2001; the MSPA called for the lending of shares but did not meet the requirements of sec. 1058(b), I.R.C., because it limited TAC's risk of loss. Held, further: TAC did not engage in constructive sales of stock in 2000 and 2001 pursuant to sec. 1259, I.R.C.

P filed income tax returns for 2000, 2001, and 2002 that reported tax due; but he did not pay the tax. The Internal Revenue Service (IRS) assessed the tax and issued to P a notice of the filing of a tax lien (NFTL). P timely requested a collection due process (CDP) hearing, which is to be "conducted by an officer or employee" of the IRS Office of Appeals, I.R.C. sec. 6320(b)(3), and which is to conclude with a "determination by an appeals officer", I.R.C. sec. 6330(c)(3). P's CDP hearing was conducted by a settlement officer in the IRS Office of Appeals, and after the CDP hearing a team manager in that office issued to P a notice of determination upholding the NFTL. P filed with the Tax Court a timely appeal pursuant to I.R.C. sec. 6330(d)(1). After initial proceedings, this Court ordered a remand to the Office of Appeals for further consideration. A second CDP hearing was conducted by another settlement officer, and the team manager issued a supplemental notice of determination again upholding the NFTL. The team manager and both settlement officers had been hired by the Commissioner pursuant to I.R.C. sec. 7804(a) and were not appointed by the President or the Secretary of the Treasury. P moved for a second remand so that a CDP hearing could be conducted by, and a notice of determination issued by, an officer appointed by the President or the Secretary of the Treasury, in compliance with the Appointments Clause. See U.S. Const., art. II, sec. 2, cl. 2. Held: An "officer or employee" or an "appeals officer" under I.R.C. sec. 6320 or 6330 is not an "inferior Officer of the United States" for purposes of the Appointments Clause. P's motion to remand will be denied.

P filed a bankruptcy petition in December 2007 that the Bankruptcy Court dismissed in March 2009; and P filed a second bankruptcy petition in October 2009, 7 months after the Bankruptcy Court had dismissed his first case. Two weeks later R issued P a notice of deficiency for 2006. In January 2010 (13 weeks after he filed his second bankruptcy petition and while the second bankruptcy case was still pending) P filed a petition in this Court for redetermination of the deficiency. After the Bankruptcy Court dismissed P's second bankruptcy case, he filed a succession of four more bankruptcy petitions—three of which the Bankruptcy Court has dismissed; the latest case, his sixth, is still pending. Held: Pursuant to 11 U.S.C. sec. 362(c)(3) (2006), the automatic stay arising from P's second bankruptcy petition terminated in November 2009—i.e., 30 days after P filed that bankruptcy petition. The stay therefore did not bar the commencement of P's deficiency case under 11 U.S.C. sec. 362(a)(8), and this Court has jurisdiction to consider P's deficiency case. Held, further: Pursuant to 11 U.S.C. sec. 362(c)(4), no automatic stay arose following P's third, fourth, fifth, and sixth bankruptcy petitions because P had two or more bankruptcy cases dismissed during the year before he filed each of those bankruptcy petitions. Therefore, 11 U.S.C. sec. 362(a)(8) does not stay the continuance of this deficiency case.

P's subsidiary (S) is an operating electric utility engaged in the generation, transmission, and distribution of electricity. It provides various lighting services (e.g., street lighting) for public and private entities. Street light assets include the light fixtures, hardware to mount the fixtures, various types of poles, and wires. The parties dispute the length in years of the recovery period that S must use to calculate its annual depreciation deduction for street light assets. Held: Street light assets are neither assets used in the distribution of electricity for sale nor land improvements. Thus, street light assets do not fall within asset class 49.14, Electric Utility Transmission and Distribution Plant (with a recovery period of 20 years), or asset class 00.3, Land Improvements (with a recovery period of 15 years), specified in Rev. Proc. 87-56, 1987-2 C.B. 674. Rather, street light assets are property without a class life, classified as "7-year property" (with a recovery period of 7 years) pursuant to sec. 168(e)(3)(C)(ii), I.R.C. (1997).

W, a wholly owned subsidiary of parent, P, proposed to transfer its assets and most of its liabilities to a newly formed LLC in which W and GP, an unrelated… Held: W's asset transfer to the LLC was a disguised sale under sec. 707(a)(2)(B), I.R.C. P must include gain from the sale on its consolidated Federal income tax return for 1999. 2. Held, further, P is liable for an accuracy-related penalty for a substantial understatement of income tax under sec. 6662(a), I.R.C.

Claiming to be a bona fide resident of the U.S.Virgin Islands at the close of 2002, 2003, and 2004, and claiming he was qualified for the gross income tax exclusion provided by I.R.C. sec. 932(c)(4), P, a U.S. citizen, filed territorial income tax returns with the Virgin Islands Bureau of Internal Revenue. He did not file Federal income tax returns for those years. R determined that P was not a bona fide resident of the Virgin Islands and was not qualified for the gross income tax exclusion as claimed. Therefore, R issued a notice of deficiency determining income tax deficiencies and penalties for 2002, 2003, and 2004. For protective reasons, P filed a petition in this Court but asserts that the deficiency relates to a Virgin Islands tax matter over which this Court lacks jurisdiction. Held: Although this case involves putative Virgin Islands transactions, the notice of deficiency determines deficiencies in Federal income tax. Whether P satisfies all the requirements set forth in I.R.C. sec. 932(c)(4), and thus need not file a Federal tax return or pay Federal income tax for 2002, 2003, and 2004, is a matter which this Court has jurisdiction to decide. It is further Held: P's motion to dismiss for lack of jurisdiction will be denied.

R may proceed with collection of tax liability and civil penalties for filing frivolous tax returns. 1. Held: Submission of a "Bonded Promissory Note" of P's husband was not payment of liabilities and penalties. 2. Held, further, P is subject to sanction under sec. 6673(a)(1), I.R.C., for procedures instituted primarily for delay, etc.

P, as an employee of a subch. S bank, received a bonus that was repayable in part if he quit or was fired for cause. Held: R's failure to assess the amount of the deficiency attributable to the amount reported inconsistently with the Schedule K-1 before issuing the notice of deficiency does not exclude this amount of tax from the deficiency as defined in sec. 6211, I.R.C., and we have jurisdiction to redetermine R's adjustment.

P, a homeowners association exempt from tax under sec. 501(c)(4), I.R.C., operated two parking lots and a beach club eight miles from the area in which its members lived. The parking lots and the primary beach club facilities were accessible only to the association's members and their guests. The association did not report its net income from the parking lot and beach club activities as unrelated business taxable income on its tax returns for 2003 and 2004. R issued a notice of deficiency determining that the net income was subject to the unrelated business income tax because the operation of the parking lots and the beach club is not substantially related to the promotion of community welfare (the purpose constituting the basis of the Association's exemption under sec. 501, I.R.C., see secs. 1.501(c)(4)-1(a)(2), 1.513-1(a), (d)(1), Income Tax Regs.) and because the revenue received from operating the parking lots is not rent from real property under sec. 512(b), I.R.C. Held: The operation of the parking lots and the beach club is not substantially related to the promotion of community welfare because the facilities are not open to the general public. Held, further, the revenue received from operating the parking lots is not rent from real property.

Husband (H) and wife (W) established an inter vivos trust that was to be split into four shares upon the death of the first spouse to die. Held: The limitations of sec. 2013(b) and (c), I.R.C., apply. Held, further, the amount of the taxable estate of the transferor for the purposes of sec. 2013(b), I.R.C., is not reduced by the applicable exclusion amount.

Held: The United Kingdom windfall tax enacted on July 2, 1997, and imposed on certain British utilities is a creditable tax under sec. 901, I.R.C.

R seeks to collect income taxes and sec. 6672, I.R.C., penalties by means of levy and lien. Held: P did not properly raise the income tax liabilities with the Appeals officer and may not raise that issue in this case. See Giamelli v. Commissioner, 129 T.C. 107, 111 (2007). Held, further, P having declined an administrative hearing, may not raise in this proceeding the sec. 6672, I.R.C., liability.

P challenges R's right to proceed with collection of any FUTA tax from P on the ground that, taking into account credits against the tax under sec. 3302, I.R.C., for actual and deemed contributions to a State employment fund, P has no outstanding liability. 1. Held: We apply a de novo standard in reviewing P's challenge to its underlying liability for FUTA tax. 2. Held, further, P has failed to carry its burden of proving its entitlement to any sec. 3302, I.R.C., credit. 3. Held, further, Appeals' determination to proceed with collection of the assessments against P for 1996 is sustained.

Ps owned rental properties that generated losses for the year in issue. R contends that Ps are subject to the passive activity loss limitations of sec. 469, I.R.C. Ps offered a summary of the time P husband worked on the rental properties. The summary showed that P husband worked on the properties for less than the 750 hours required by sec. 469(c)(7)(B)(ii), I.R.C. Ps, however, contend that, in addition to the time P husband actually worked, he was "on call" for work on the rental properties during the time that he was not at his full-time job and that the "on call" hours should count toward determining whether Ps meet the requirements of sec. 469(c)(7)(B), I.R.C. Held: P husband's "on call" time does not count toward satisfying the 750-hour requirement of sec. 469(c)(7)(B)(ii), I.R.C., because P husband did not perform any actual work on the rental properties during the "on call" hours. Held, further: The losses from Ps' rental properties are subject to the limited offset pursuant to sec. 469(i), I.R.C. Held, further: Ps are subject to the accuracy-related penalty for a substantial understatement of income tax pursuant to sec. 6662, I.R.C.

The parties have entered into a stipulation that P is entitled to relief under sec. 6015(f), I.R.C., but for the 2-year limitation for claiming such relief under sec. 1.6015-5(b)(1), Income Tax Regs. Held: We will continue to take the position that sec. 1.6015-5(b)(1), Income Tax Regs., is an invalid interpretation of sec. 6015(f), I.R.C.

R seeks to collect certain trust fund recovery penalties from Ps. In R's determination pursuant to sec. 6330, I.R.C., R rejected Ps' offer-in-compromise. Held: this Court has jurisdiction to decide whether R abused his discretion in rejecting Ps' offer-in-compromise because of Ps' alleged nominee interest in the trust property. Held, further, Ps do not have a nominee interest in the trust property under State law.

P's charter granted its preferred shareholders redemption rights which if exercised triggered obligations by P to pay interest on the redemption amount if P was not able to pay the redemption amount. P and its shareholders entered into several consecutive forbearance agreements by which the shareholders agreed to forgo the redemption elections if they received payments resembling the interest payments. P deducted these payments, and R disallowed the deductions for 2004 and 2005. Held: The payments in question were not interest and therefore were not deductible under sec. 163, I.R.C. Held, further, all payments in 2004 were deductible under sec. 162, I.R.C., and the 12-month rule of sec. 1.263(a)-4(f)(5)(i), Income Tax Regs. However, payments in 2005 were not deductible to the extent that sec. 1.263(a)-4(d)(2)(i), Income Tax Regs., requires capitalization.

P, a teacher from the Philippines, came to the United States under an exchange teacher program sponsored by the U.S. Department of State. P claims that her wages from teaching in the United States are exempt from taxation under art. 21 of the U.S.- Philippines income tax convention (art. 21), which provides that certain teacher's earnings may be exempt from income tax if the requirements of art. 21 are satisfied. The parties dispute whether P was invited to come to the United States "for a period not expected to exceed 2 years", as is required in order to receive the exemption. Held: Whether P was invited to the United States for a period "not expected to exceed 2 years", as contemplated by the convention, is to be determined on the basis of an objective consideration of all of the relevant facts and circumstances. The relevant facts and circumstances do not establish that P was invited to the United States "for a period not expected to exceed 2 years". Therefore, P's income is not exempt from taxation under art. 21.

Asserting it has a vital interest in a key aspect of this case, M filed a motion to intervene pursuant to Rule 1(b), Tax Court Rules of Practice and Procedure, and under Fed. R. Civ. P. 24. Held: M's interest does not satisfy the direct, substantial, and legally protectable requirements of Fed. R. Civ. P. 24(a)(2). Held, further, Because (i) P has raised the issue in which M asserts an interest as a matter central to his case and presumably the issue will be fully vetted during the course of these proceedings, and (ii) M's intervention could result in trial complications as well as delay the resolution of the issue in which M asserts an interest, M will not be permitted to intervene pursuant to Fed. R. Civ. P. 24(b)(2). Held, further, as an alternative to intervention, M will be permitted to file an amicus curiae brief.

In 1998 Ps donated a house to their local volunteer fire department (VFD) to be used for firefighter and police training exercises and eventual demolition. Held: R's quid pro quo argument is not new matter and will be considered, as Ps raised the issue in their petition.

P overstated his prepayment credits on his Federal income tax returns in order to claim refunds for 1992 through 1997. Held: P filed false returns with the intent to evade tax within the meaning of I.R.C. sec. 6501(c); therefore the issuance of the deficiency notices was not time barred. Held, further, sec. 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., is valid.

P provided automobile liability insurance. P was found by the Supreme Court of Utah to be liable for punitive damages related to its claims processing on this liability coverage. P reflected the amount of the punitive damage award as a "loss incurred" within the meaning of sec. 832(b)(5), I.R.C., entitling it to increase its insurance loss reserve, as shown on its annual statement for insurance regulatory purposes. R challenges this treatment for several reasons including that the punitive damage award was extracontractual to the insurance coverage P provided. Held: P may not include the punitive damage award in losses incurred under sec. 832(b)(5), I.R.C.

During each of the years at issue, an organization exempt from tax under sec. 501(a), I.R.C., paid to petitioner husband, an ordained minister, a so-called parsonage allowance that he used to provide… Held: Ps are entitled to exclude from gross income under sec. 107, I.R.C., the portion of the parsonage allowance with respect to a second home.

P claimed an alternative tax net operating loss (ATNOL) deduction for 2002. P calculated the deduction by taking into account a carryback of an ATNOL from 2004. The deduction of the carryback reduced P's alternative minimum taxable income (AMTI) to zero. Held: P's carryback of the ATNOL is not a "carryover" under sec. 56(d)(1)(A)(ii)(I), I.R.C.; thus, sec. 56(d)(1)(A)(i)(II), I.R.C., precludes P from deducting an ATNOL that offsets all of P's AMTI.

On remand we are instructed by the Court of Appeals for the District of Columbia Circuit to determine whether we have jurisdiction to determine whether a penalty under sec. 6662, I.R.C., is… Held: Applying the instructions set forth in the Court of Appeals' opinion, we do not have jurisdiction over any sec. 6662, I.R.C., penalty determination in this case.

Claiming to be a bona fide resident of the U.S.Virgin Islands (the Virgin Islands) during 2002, 2003, and 2004, and claiming he was qualified for the gross income tax exclusion provided by I.R.C. sec. 932(c)(4), P, a U.S. citizen, filed territorial income tax returns with, and paid income tax to, the Virgin Islands. He did not file Federal income tax returns or pay Federal income tax for those years. R determined that P was not a bona fide resident of the Virgin Islands and was not qualified for the gross income tax exclusion as claimed. P moves to interplead the Virgin Islands in this proceeding, asserting that the U.S. and the Virgin Islands have "adverse and independent claims" under Fed. R. Civ. P. 22(a)(1)(A) for tax on the same income. Held: Because this Court lacks jurisdiction to redetermine P's Virgin Islands tax liabilities, P will not be permitted to interplead the Virgin Islands.