Volume 136 — Tax Court Reports

New Jersey Sports and Exposition Authority (NJSEA) and Pitney Bowes (PB) formed Historic Boardwalk Hall, LLC, to allow PB to invest in the historic… Held: Historic Boardwalk Hall was not a sham and did not lack economic substance. Held, further, PB did become a partner in Historic Boardwalk Hall. Held, further, NJSEA did transfer the benefits and burdens of ownership of the East Hall to Historic Boardwalk Hall. Held, further, the sec. 6662, I.R.C., penalty is not applicable.

K, an S corporation 100 percent owned by P's spouse, adopted and, through its subsidiary KSM, made contributions to a multiemployer… Held: R was not required to send P a 30 day letter, and the notice of deficiency adequately sets forth R's position in this case and is therefore valid. Held, further, P's interest in the plan became substantially vested upon the plan's conversion from a multiemployer plan to a single-employer plan. Sec. 1.402(b)-1(b)(1), Income Tax Regs.

Partnership P entered into a Son-of-BOSS transaction. This generated more than $1 million in artificial losses which P's partners claimed on their 2001 returns. R adjusted various partnership items and determined a penalty under sec. 6662(h), I.R.C., for a gross-valuation misstatement of P's inside basis in an asset distributed by P. P now contests only that penalty, alleging it has a reasonable-cause-and-good-faith defense. Held: The Court has jurisdiction over the penalty in this partnership-level proceeding after Petaluma FX Partners v. Commissioner, 135 T.C. 29 (2010), because the penalty relates to an adjustment to inside basis, a partnership item, that results in a computational adjustment to the partner's tax return that can be assessed without a partner-level affected items proceeding. Held, further, we agree with the Court of Appeals for the Seventh Circuit in American Boat Co. LLC v. United States, 583 F.3d 471 (7th Cir. 2009), that a partnership can assert its own reasonable-cause-and-good-faith defense in a partnership-level proceeding. Held, further, P cannot reasonably rely in good faith on the tax advice given by a "promoter", defined as an adviser who participates in structuring the transaction or who is otherwise related to, has an interest in, or profits from the transaction.

P-H was engaged in the trade or business of gambling on horse races during 2001. Held: I.R.C. sec. 165(d) applies to P-H notwithstanding his engagement in the trade or business of gambling and limits his allowable losses from wagering transactions to the extent of gains from such transactions. The holding of Offutt v. Commissioner, 16 T.C. 1214 (1951), to that effect followed.

The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1511(a), 100 Stat. 2744, modified sec. 6621, I.R.C., to increase the interest required to be paid by taxpayers to the Government on underpayments to a… Held: Pursuant to sec. 7481(c), I.R.C., this Court has jurisdiction to determine interest netting pursuant to sec. 6621(d), I.R.C., and the uncodified special rule.

Ps received life-insurance policies from a nonqualified employee-benefit plan that had surrender charges in excess of their stated values. Ps did not report the distributions on their joint return. Held: Pursuant to sec. 402(b), I.R.C., Ps must include in income the fair market value of each of these insurance policies as of the date of distribution.

P is the tax matters partner of a Kansas limited liability partnership engaged in the practice of law. Held: R's reallocation of the law firm's net business income for its tax year ended April 30, 2004, is sustained. Held, further, the law firm's three attorney partners' distributive shares of the law firm's net business income for its tax years ended April 30, 2004, and April 30, 2005, are subject to the tax on self-employment income.

In 1998 P-H transferred stocks and cash to X, an organization described in I.R.C. sec. 501(c) that was not a private foundation. Held: P-H retained dominion and control over the property transferred to X. Accordingly, Ps are not entitled to any charitable contribution deduction on account of the transfers and must include in gross income the capital gains realized upon X's sales of the transferred stocks as well as the dividends and interest generated by the assets…

P's business experienced financial difficulties and cashflow problems, and P fell behind on its Federal employment tax deposits. Held: It was an abuse of discretion for R to refuse to consider P's request to subordinate the NFTL on the basis of R's erroneous conclusion of law that the lender's security interest already had priority over the NFTL in P's accounts receivable.

P is an engineering and heavy construction company that primarily erects or rehabilitates streets, bridges, airport runways, and other… Held: P's receipts are DPGR to the extent P erected or substantially renovated real property, and the extent to which P substantially renovated real property turns on whether P's activities with respect to each freestanding item of real property that operated and performed a discrete function in and of itself: (1) Materially increased the…

P owned stock in CV, a cooperative housing corporation as defined in sec. 216(b), I.R.C., and leased from CV pursuant to a so-called proprietary lease an apartment in a building that CV owned. Held: P is not entitled to a deduction under sec. 165(a)and (c)(3), I.R.C., or sec. 216(a), I.R.C., with respect to the retaining wall assessment.

P, a manager of venture capital funds, lent $5 million in 2000 to S, a business associate who provided leads on companies in which the venture capital funds might invest. Held: P was in the trade or business of managing venture capital funds. His bad debt loss was proximately related to that trade or business, and it is deductible under I.R.C. sec. 166(a).

In Kaufman v. Commissioner, 134 T.C. 182 (2010), we granted R partial summary judgment, sustaining his disallowance of charitable contribution deductions Ps claimed on account of PW's grant to N of a… Held: We did not err in Kaufman v. Commissioner, supra, in concluding that the contribution of the facade easement failed as a matter of law to comply with the enforceability-in-perpetuity requirements under sec. 1.170A-14(g)(6), Income Tax Regs.

In a conservation easement donation case, R moved to exclude P's experts' report as unreliable and irrelevant under Fed. Held: Standards of reliability and relevance apply in trials without a jury, including Tax Court trials, subject to the discretion of the trial Judge to receive evidence.

In 2004 Ps donated a qualified conservation easement to a qualified charitable organization. As a result, Ps received conservation easement income tax credits from the State of Colorado. Held: The State tax credits Ps sold are capital assets. Held, further, Ps do not have any basis in their State tax credits. Held, further, Ps' holding period in their State tax credits is insufficient to qualify for long-term capital gains treatment.

The IRS issued notices of intent to levy and notices of Federal tax lien filing to Ps for unpaid income taxes assessed for 2000, 2001,… Held: The statements in the Appeals Office letters that the IRS collection office could proceed with collection action are determinations for purposes of sec. 6330(d)(1), I.R.C. Held, further, sec. 6330(g), I.R.C., denies further administrative or judicial review of the portions of a request for an administrative hearing under sec. 6320 or…

P moved for summary judgment on the ground that R's partnership item adjustments were made after the general 3-year period of limitations for assessing tax had expired. Held: The 3-year period of limitations is applicable. Thus P's motion for summary judgment will be granted.

Decedent's estate claimed a deduction of $30 million in relation to litigation pending against the estate at the date of death. Held: Different standards apply to including a claim in favor of an estate in the gross estate and deducting a claim against an estate for estate tax purposes.

In this sec. 6330, I.R.C., CDP case, R determined to collect P's unpaid tax for 2005 by levy. Held: Because P did not file suit within the 2-year period prescribed in sec. 6532, I.R.C., sec. 6514, I.R.C., bars any credit for the alleged prior years' overpayments that might otherwise be available to satisfy P's unpaid liability for 2005. Held, further, R's determination to levy is sustained.

P filed joint tax returns with her husband—timely for tax year 1999 and untimely (in October 2004) for 2002 and 2003. Each return showed a balance due that was not paid when the return was filed. P signed the returns but did not review or question them. She knew or should have known that the taxes reported on them were not fully paid, but she did not know that her former husband had omitted income from one of the returns. She received no specific benefit from the nonpayment of the taxes. In 2003 the IRS issued a levy notice to P for 1999. P and her former husband separated in late 2004. In 2005 the IRS issued levy notices for 2002 and 2003. Thereafter, P divorced her former husband, and the State court allocated all of the couple's tax debts to him and awarded him proceeds from the sale of their jointly owned house, from which proceeds he could have paid the liabilities. P requested "innocent spouse" relief from the IRS on April 22, 2008 (more than 2 years after the IRS's collection activity began), and the IRS denied the requested relief. P petitioned this Court for relief, and by the time of trial she was disabled as a result of complications from surgery. This case would be appealed to the U.S. Court of Appeals for the Eighth Circuit. Held: We will follow our holding in Lantz v. Commissioner, 132 T.C. 131 (2009), revd. 607 F.3d 479 (7th Cir. 2010)—i.e., that the 2-year deadline imposed by 26 C.F.R. sec. 1.6015-5(b)(1), Income Tax Regs., is invalid—notwithstanding the contrary decisions by the U.S. Courts of Appeals for the Seventh Circuit in Lantz and for the Third Circuit in Mannella v. Commissioner, 631 F.3d 115 (3d Cir. 2011), revg. 132 T.C. 196 (2009). Held, further, P is entitled to relief from joint and several liability under I.R.C. sec. 6015(f).

P filed late purported income tax returns for 2002, 2003 and 2004 showing zero income and seeking refunds for taxes withheld. R notified P that two of the purported returns would not be accepted for lack of sufficient information and that they were based on frivolous positions. P resubmitted substantially identical purported tax returns for those two years. R assessed five frivolous return penalties under sec. 6702, I.R.C., against P for those years. P failed to pay the penalties. R then commenced collection action against P. P argues that R may not proceed with the proposed collection action as the penalties were invalid assessments. P maintains that the penalties were not properly assessed because no district director exists. District directors were eliminated after the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685. R moves for summary judgment. 1. Held: P is liable for the five frivolous return penalties under sec. 6702, I.R.C., which were validly assessed because the district director responsibilities were reassigned under the savings provision of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 1001, 112 Stat. 689, and IRS Deleg. Order 1-23 (formerly IRS Deleg. Order 193, Rev. 6), Internal Revenue Manual pt. 1.2.40.22 (Nov. 8, 2000). 2. Held, further, R may proceed with collection. 3. Held, further, P is not subject to a penalty under sec. 6673, I.R.C., but is warned that continued frivolous arguments may subject him to the sec. 6673, I.R.C., penalty in the future.

After this Court's remand of the instant case for R's Appeals Office to determine, pursuant to I.R.C. sec. 6330(c)(1), whether R properly sent P a notice of deficiency, R seeks, by way of a motion in limine, to have the administrative record from the remand hearing admitted into evidence. P objects on three grounds: (1) The matters in the record on remand were not considered at the original hearing; (2) R's counsel and the settlement officer engaged in improper ex parte contact; and (3) documents in the administrative record on remand are inadmissible hearsay. During the pendency of the instant case, R refiled the notice of Federal tax lien (NFTL) in issue. P moves to dismiss respondent's refiled NFTL. Held: At the hearing on remand, R's settlement officer was not limited to a consideration of matters considered by the Appeals officer in the original administrative hearing. Held, further, R's counsel and the settlement officer did not engage in prohibited ex parte contact. Held, further, the administrative record, once it has been authenticated, is admissible to show information available to the Appeals Office during the administrative consideration of petitioner's case on remand. Until documents from that record are offered to prove the truth of the matters asserted therein, it is unnecessary to rule on P's hearsay objection. Held, further, R may refile the NFTL.

P had taxable income of $1.7 million in 1999 and $1.8 million in 2000. P filed income tax returns for those years in 2002 but paid no income tax. The Internal Revenue Service (IRS) assessed tax of $514,164 for 1999 and $565,268 for 2000 and then served on P notice of the filing of a notice of Federal tax lien (NFTL) and a notice of proposed levy to collect P's liabilities that (with interest and penalties) totaled $1,586,952.45. P requested a collection due process (CDP) hearing, during which he proposed an offer-in-compromise (OIC), which he amended several times during 2008 and 2009 while the CDP hearing was in process. During the pendency of the CDP proceeding, P received, from sales of investments, proceeds that he did not pay to the IRS. In December 2008 P amended his OIC to propose payments totaling $400,000, but in April 2009 P advised that he could not afford to make the payments and that he would amend his offer downward to $140,000. R rejected the OIC and issued a notice of determination sustaining the notices of lien and proposed levy. P filed a petition for review of the determination under I.R.C. sec. 6330(d). During a remand, R's settlement officer determined that P's reasonable collection potential (RCP) was more than three times the amount he had informally proposed, which was based solely on the value of one asset he owned. In calculating RCP, R also took into account, as dissipated assets, certain of the proceeds of P's investment assets that he did not pay to the IRS. After remand R issued a supplemental notice of determination to proceed with collection by lien and/or levy of assessed income tax liabilities, plus interest and penalties, for taxable years 1999 and 2000. Held: Where P amended or withdrew an OIC, R's Office of Appeals did not abuse its discretion in declining the terms previously offered in that OIC. Held, further, in declining P's informal proposal on the grounds that it offered less than his RCP, R's Office of Appeals did not abuse its discretion by including, in its calculation of P's RCP, certain dissipated assets and the settlement officer's final projection of P's future earnings.

R determined a deficiency in P's 2007 income tax on the basis of wages that P did not report. At trial P admitted, I exchanged my skilled labor and knowledge for pay. Held: P was not entitled to a Court opinion addressing his frivolous arguments, and his motion for reconsideration will be denied. Held, further, P's penalty under sec. 6673 (a) is increased to $5,000.

P incurred unreimbursed volunteer expenses while caring for foster cats in her private residence. P's expenses consisted primarily of payments for veterinary services, pet supplies, cleaning supplies, and household utilities. P claimed a $12,068 charitable-contribution deduction for the expenses on her 2004 tax return. R issued a notice of deficiency denying the deduction. R claims that P did not render services to a qualifying charitable organization under sec. 170(c), I.R.C., and that P failed to substantiate her expenses under sec. 170(f)(8), I.R.C., and sec. 1.170A-13, Income Tax Regs. R also asserts that P's expenses have an indistinguishable personal component. Held: P's foster-cat expenses qualify as unreimbursed expenditures incident to the rendition of services to a charitable organization. See sec. 1.170A-1(g), Income Tax Regs. P's services were directed by a charitable organization. P thus rendered services to a sec. 170(c), I.R.C., organization when she cared for foster cats in her home. Some of P's expenses are disallowed because they are insufficiently related to foster-cat care or cannot be determined with precision. Held, further, the recordkeeping requirements of sec. 1.170A-13(a), Income Tax Regs. (for contributions of money), govern unreimbursed volunteer expenses of less than $250. Held, further, P's records meet the requirements of sec. 1.170A-13(a), Income Tax Regs., because they are acceptable substitutes for canceled checks under the substantial compliance doctrine. See Bond v. Commissioner, 100 T.C. 32 (1993). P can deduct foster-cat expenses of less than $250. Held, further, P cannot deduct foster-cat expenses of $250 or more. P did not obtain the contemporaneous written acknowledgment from the charitable organization required under sec. 1.170A-13(f)(10), Income Tax Regs. Held, further, P can deduct a $100 check donation made to a separate charitable organization.

From February 2001 until March 2002, M worked as a consultant for P1 and P2 (collectively, Ps). During this period, M prepared P1's 2000 tax return and P2's 2001 tax return. In March 2002, Ps hired M as their vice president of taxes. As Ps' vice president of taxes, M prepared and signed, on behalf of Ps, P1's 2001, 2002, and 2003 tax returns and P2's 2002, 2003, and 2004 tax returns. In 2000 through 2004, Ps incorrectly concluded that they were not liable for personal holding company taxes and, as a result, understated their tax liabilities relating to those years. R issued P1 a notice of deficiency relating to 2000 through 2003 and P2 a notice of deficiency relating to 2003 and 2004. In the notices, R determined that Ps were liable for accuracy-related penalties. Ps contend that they had reasonable cause for their underpayments and acted in good faith. Alternatively, Ps contend that they reasonably relied on the advice of M in 2000 when M served as a consultant and in 2001 through 2004 when he served as vice president of taxes. 1. Held: Pursuant to sec. 1.6664-4(b)(1) and (c)(1), Income Tax Regs., P1 is not liable for an accuracy-related penalty relating to 2000 because it reasonably relied on M to prepare its tax return. 2. Held, further, M does not qualify as "a person, other than the taxpayer", pursuant to sec. 1.6664-4(c)(2), Income Tax Regs., with respect to the returns which he signed on behalf of Ps, and therefore the aforementioned regulation is not applicable to Ps' underpayments of taxes relating to 2001 through 2004. 3. Held, further, Ps are liable for accuracy-related penalties relating to 2001 through 2004.

P, a professional golfer, entered into endorsement agreements with sponsors Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and… Held: The endorsement fees and bonuses P received from Acushnet, TaylorMade and Izod are allocated 50 percent to personal services income and 50 percent to royalty income. 2. Held, further, the royalty income P received from Acushnet, TaylorMade and Izod is 50 percent U.S.-source income effectively connected with a U.S. trade or business.

P, a South Korean national and nonresident alien, had U.S. gambling winnings and interest income that was not effectively connected with a U.S. trade or business. Held: The Treaty of Friendship, Commerce and Navigation, U.S.-S. Kor., art. XI, par. 5(b), Nov. 28, 1956, 8 U.S.T. 2217, provides exceptions to the most-favored-nation treatment under art. XI, par. 3 and thus does not extend to South Korean nationals the more favorable treatment regarding exemption from U.S. income tax of gambling winnings as provided for in some bilateral income tax treaties that the United States has entered into with other foreign countries. Held, further, P's gambling activities were not personal services or a U.S. trade or business; thus the gambling income is not considered income that is effectively connected with a U.S. trade or business and is taxable under I.R.C. sec. 871(a). Held, further, the interest income reported by a third party U.S. national bank is excluded from Federal income tax under I.R.C. sec. 871(i)(1) and (2) as income from bank deposits. Ps have not shown that the remaining interest income is from deposits that qualify for U.S. tax exemption under I.R.C. sec. 871(i). Held, further, Ps are liable for the accuracy-related penalties under I.R.C. sec. 6662(a) and (b)(1) or (2).

In 2006 Ps received gain of $3.4 million upon the termination of a swap transaction. Held: Ps' reliance on their return preparer did not constitute reasonable cause for their omission of the $3.4 million income item.

P filed two claims for a whistleblower award with R under sec. 7623(b)(4), I.R.C., and R sent a letter to P denying the claims because an award determination could not be made under sec. 7623(b),… Held: Our jurisdiction in whistleblower cases does not include opening an administrative or judicial action to predetermine the tax liability. P failed to meet the threshold requirements for a whistleblower award.