Volume 139 — Tax Court Reports

Ps, calendar year taxpayers, and their children resided in Israel during the years in issue. Held: Sec. 1.152-2(a)(1), Income Tax Regs., is valid. Ps could not claim a child as a dependent for calendar years before that child obtained his or her certificate of citizenship. 2. Held, further, P-W is not eligible for a child care credit for 2008 because she did not file a joint return. 3.

P operates a sole proprietorship whose principal business is the retail sale of medical marijuana pursuant to California law. Held: P underreported the business' gross receipts in amounts R alleges in an amendment to answer. Held, further, P may deduct cost of goods sold for the business in amounts greater than those R allows.

During 2005, P-H was the sole owner of JVT, a C corporation in the trucking business, and he actively participated in JVT's business. Held: For purposes of sec. 1.469-2(f)(6), Income Tax Regs., each individual tractor or trailer was an item of property and the income P-H received from TRI was subject to recharacterization.

P timely filed his 2008 Form 1040, U.S. Individual Income Tax Return, after previously filing a Form 1040-ES, Estimated Tax, and paying $4,000 in estimated taxes. Held: Even though the refund was recoverable by assessment and levy procedures, the refund also would have been recoverable by filing a civil suit pursuant to I.R.C. sec. 7405 and was therefore an erroneous refund under I.R.C. sec. 6602.

Q and its subsidiaries are an affiliated group (Ps). During Ps' taxable year ended Oct. 31, 1997 (TYE 1997), Ps actively pursued Q's making of two sales expected to result in millions of dollars in taxable capital gains for TYE 1997 and TYE 1998. Ps' outside accountants (D), mindful of the expected gains, approached Ps with an idea that D promoted to create a multimillion-dollar tax loss to shelter the gains for Federal income tax purposes. Q has a group benefits plan under which Q provides health and welfare benefits to its eligible employees and their dependents. Q's subsidiaries included two inactive corporations, QS and QW. In order to report a desired tax loss of approximately $38 million to shelter Ps' taxable gains from Federal income tax, Ps entered into a series of interrelated transactions in late October 1997 that included, among others, a recapitalization of QW (renamed QHMC), and Q's transfer to QS (and then QS' transfer to QHMC in exchange for newly issued class C stock) of $38 million and the assumption of certain contingent liabilities (i.e., Q's obligations to pay medical plan benefits (MPBs) under Q's benefits plan) which Ps valued at $37,989,000. Ps reported that the transfers qualified for nonrecognition under I.R.C. sec. 351(a) and that QS' basis in the class C stock was determined by taking into account the $38 million transferred to QHMC but not the value of the MPBs. Each share of class C stock was entitled to receive annual dividends of $9.50 and was not allowed to receive any other dividend. Upon the class C stock's redemption, which QHMC and the class C shareholders could respectively cause five and seven years after the stock's issuance, the class C shareholders were entitled to receive for each share the greater of $125 or an amount equal to the lesser of a percent of any cumulative cost savings in MPBs or of QHMC's book net equity. The transactions were structured in such a way that it was highly likely when the class C stock was issued that the class C stock would be redeemed within the five- and seven-year periods and that the redemption payment would be $125 per share. Shortly after the transfer to QHMC, QS sold its class C stock to a former employee of a Q subsidiary for $11,000 (the difference between $38 million and $37,989,000). Ps claimed that QS realized a $37,989,000 short-term capital loss on the sale, and Ps used that loss to offset Ps' unrelated capital gains totaling a similar amount. After the transactions, Q continued to process claims for MPBs, and Q's handling of the claims transferred to QHMC was the same as the handling of claims with respect to individuals whose MPBs were not transferred to QHMC. QHMC's reimbursements to Q for claims were made through intercompany entries recorded on Q's books as a receivable due from QHMC and on QHMC's books as a payable. QHMC lent the $38 million to a subsidiary of Ps, and QHMC eventually reimbursed Q for the MPBs when QHMC received payments on the loan. Held: The class C stock is nonqualified preferred stock under I.R.C. sec. 351(g) because it "does not participate in corporate growth to any significant extent" within the meaning of I.R.C. sec. 351(g)(3)(A). Accordingly, pursuant to the agreement of the parties, Ps are not entitled to deduct the claimed capital loss. Held, further, the transactions underlying the claimed capital loss lacked economic substance. Accordingly, $352,251 in fees incurred to effect the transactions is not deductible as an ordinary and necessary business expense under I.R.C. sec. 162. Held, further, in accordance with Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), rev'gT.C. Memo. 1988-408, and Todd v. Commissioner, 862 F.2d 540 (5th Cir. 1988), aff'g89 T.C. 912 (1987), which we follow under Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), Ps are not liable for the 40% accuracy-related penalty under I.R.C. sec. 6662(h) that R determined applied to any underpayment of tax attributable to the disallowed claimed capital loss. Held, further, Ps are liable for the 20% accuracy-related penalty under I.R.C. section 6662(a) to the extent of the underpayment of tax attributable to the disallowed claimed capital loss, and Ps are liable for that 20% accuracy-related penalty to the extent of the underpayment of tax attributable to the disallowed deduction for the fees.

P filed consolidated Federal income tax returns for the years at issue (TYE Sept. 30, 2000, 2001, and 2002) on which it claimed environmental remediation expense deductions. Held: P is not entitled to the environmental remediation expense deductions claimed on its Federal income tax returns for TYE Sept. 30, 2000, 2001, and 2002.

A partnership entered a complicated series of transactions involving currency options and stock trades. Held: The statutory period for assessing tax attributable to partnership items was still open under I.R.C. sec. 6229(e) with respect to H and W at the time the FPAA was issued. Held, further, the doctrine of estoppel does not preclude R's asserting that the statutory period for assessment was open with respect to H and W.

The parties cross-moved for partial summary judgment on whether P was required, as asserted by R, to include nonsales income, including dividends, interest, rent, and other income, in its "average annual gross receipts" for purposes of calculating its I.R.C. sec. 41 research credits for taxable years 1999 through 2001. Held: P was required to include such amounts in its "average annual gross receipts" in determining available research credits for the taxable years at issue. Accordingly, we will grant R's motion on this matter.

P filed no tax return for either 2005 or 2006. R prepared substitutes for returns and issued notices of deficiency for those years. P principally argues that he is not liable for the deficiencies because the individuals who prepared the substitutes for returns and issued the notices of deficiency were not delegated authority to do so. R also determined additions to tax for failure to timely file a return and failure to timely pay tax due and asks that we sanction P for making frivolous arguments. 1. Held: The individuals who certified the substitutes for returns and issued the notices of deficiency had the delegated authority to do so; generally, intervening line supervisors enjoy the same delegated authority as their specifically delegated subordinates. 2. Held, further, additions to tax are sustained. 3. Held, further, P is sanctioned for maintaining frivolous positions.

R issued to P a final notice of intent to levy with regard to P's unpaid trust fund recovery penalties totaling $471,696. P timely requested a collection due process (CDP) hearing with the Office of Appeals (Appeals) and submitted to Appeals an offer-in-compromise (OIC) of $10,000, followed by an amended OIC of $74,857. The settlement officer assigned to the case recommended that the amended OIC be accepted and submitted the matter to R's Area Counsel for review in accordance with I.R.C. sec. 7122(b). Upon review, Area Counsel discovered that P and his wife were named as defendants in a lawsuit alleging that P had fraudulently conveyed assets to his wife. Area Counsel recommended that P's amended OIC be rejected, and the Appeals Team Manager agreed. Appeals issued to P a final notice of determination rejecting his amended OIC and determining that it was appropriate to proceed with the proposed levy. P filed a timely petition for review with the Court.

P-H participated in an employee stock ownership plan (ESOP) that was disqualified for the 2000 to 2004 taxable years. Held: Ps must include in income for 2004 the entire amount of P-H's vested accrued benefit in the ESOP.

R denied P's whistleblower award claim under I.R.C. sec. 7623(b). P concedes that information he provided R has not led to R instituting an action or collecting proceeds. P filed a petition requesting that we order R to reopen his award claim. R moved to dismiss for failure to state a claim. Held: I.R.C. sec. 7623(b) does not authorize P's requested relief. Held, further, P did not state a claim upon which relief can be granted.

On remand from the U.S. Court of Appeals for the Fifth Circuit for further proceedings in accordance with its opinion in Whitehouse Hotel Ltd. P'ship v. Commissioner, 615 F.3d 321 (5th Cir. 2010),… Held: Value of contribution determined: deduction overstated. 2. Held, further, overstatement is gross valuation misstatement. 3. Held, further, accuracy-related penalty applicable because reasonable cause for underpayment of tax not shown.

Ps are members of an LLC which conveyed conservation easements encumbering two parcels of land (one conveyance in 2003 and the other in 2004) to COL, a qualified organization as defined in I.R.C sec.… Held: The conservation purpose of the easements was protected in perpetuity. Held, further, Ps' appraisal report met the requirements of a qualified appraisal as required by sec. 1.170A-13(c)(3)(ii)(G), Income Tax Regs.

P married W on Nov. 22, 2008, but they continued to reside in separate residences until they purchased the subject residence together on Dec. 1, 2009. Before purchasing the subject residence, W owned a principal residence where she resided for more than five consecutive years during the eight years before Dec. 1, 2009. P had no present ownership interest in a principal residence during the three-year period ending on Dec. 1, 2009. Held: Because W qualifies for the first-time homebuyer credit under the exception for longtime residents of the same principal residence pursuant to I.R.C. sec. 36(c)(6) and because P qualifies for the first-time homebuyer credit pursuant to I.R.C. sec. 36(c)(1) P and W are entitled to the first-time homebuyer credit of $6,500 as limited by I.R.C. sec. 36(b)(1)(D).

P-H leased land and telecommunication towers to S, his wholly owned S corporation, in exchange for a percentage of S's revenues from its leases of tower… Held: S used the towers and associated land leased from P-H in a rental (not a trade or business) activity with the result that P-H's income from those leases constituted passive activity income (or loss) pursuant to I.R.C. sec. 469(c)(2), regardless of P-H's material participation in that activity. Seesec. 469(c)(4). 2.

In 1984, P-H and several entities in which he owned interests filed voluntary petitions in ch. 11 bankruptcy. Held: For all audit years, P-H is not the grantor of the liquidating trust; the trust was not created and funded gratuitously on P-H's behalf; he did not acquire an interest in the trust from his bankruptcy estate upon its termination; nor is he the owner because trust income was used to discharge his indebtedness. 2.

P-H was divorced, and his ex-wife had custody of their son C.E. A May 2003 arbitration award, a June 2003 State court order, and a March 2007 State court order provided that P-H would be entitled… Held: As a substitute for Form 8332, the State court order signed by P-H's ex-wife (C.E.'s custodial parent) does not comply with I.R.C. sec. 152(e)(2)(A), because it fails to unconditionally declare that the ex-wife will not claim such child as a dependent for the year at issue.

In January 2007, in compliance with a State court order, P executed a Form 8332 ("Release of Claim to Exemption for Child of Divorced or Separated Parents"), which stated that "I agree not to claim an exemption for" her daughter S.S. as a dependent for the years at issue. However, P believed the State court order to be improper, so on her income tax returns for each of 2007 and 2008, P claimed a dependency exemption deduction and a child tax credit for S.S. P's former spouse also claimed S.S. as a dependent for those years and attached the executed Form 8332 to his tax returns. Held: The Form 8332 that P executed was not rendered invalid by any error in the State court order requiring it nor by the fact that P signed the form under the compulsion of that State court order. Rather, P's release of her claim to the exemption was valid. Consequently, under the terms of I.R.C. sec. 152(e), S.S. was not a qualifying child of P; and, therefore, P was not entitled to a dependency exemption deduction or a child tax credit for S.S. for 2007 or 2008.