Volume 147 — Tax Court Numbered Opinion

Ps are the tax matters partners for G and N, Delaware statutory trusts that were purportedly involved in the production and sales of landfill gas to RTC, which had entered into landfill license agreements with the owners and operators of 24 landfills. G claimed credits for producing fuel from a nonconventional source under I.R.C. sec. 45K (and its predecessor, I.R.C. sec. 29) with respect to landfill gas asserted to have been produced from 23 landfills in 2005, 2006, and 2007. N claimed such credits for one landfill for 2006 and 2007. The 24 landfills had varying degrees of equipment, monitoring, and production, from the nonexistent to the substantive, depending on the respective landfill and time period in question. The levels of documentation of the gas rights, gas sales, and operation and maintenance agreements between RTC and G and N were variable. So too was the documentation of actual landfill gas production and the documentation of various expenses for which G and N claimed deductions. Held: Untreated landfill gas is "qualified fuel" within the meaning of I.R.C. sec. 45K. Held, further, in the landfill gas industry, to qualify as a "facility for producing qualified fuels" under I.R.C. sec. 45K(f)(1), a system of wells, pipes, blowers, and equipment for pretreatment and measuring production of gas, if necessary, must be connected to either a gas-to-energy system or a system that allows for storage and treatment of landfill gas before it is routed to gas pipelines or otherwise prepared for delivery to a customer. Held, further, for a landfill gas production facility, the "placed in service" date within the meaning of I.R.C. sec. 45K is the date when a gas-to-energy system becomes available for its specific function on a regular basis, not the date the first well is drilled. Held, further, G and N are not entitled to credits under I.R.C. sec. 45K because of inadequate substantiation of their alleged production and sale of landfill gas, except as to one landfill each and only for the time period during which gas-to-electricity equipment was running at those landfills. Held, further, G and N are not entitled to business expense deductions for 2006 and 2007, except to the extent they have been able to adequately corroborate those deductions as stated in this Opinion. Held, further, R's determination of the distributive share of each G partner is sustained. Held, further, G and N are liable for accuracy-related penalties under I.R.C. sec. 6662 for the 2006 and 2007 tax years.

P conducted marine surveys of the outer continental shelf in the Gulf of Mexico. Held: [G]eological and geophysical expenses are not limited to expenses incurred by taxpayers that own oil and gas interests. Held, further, the expenses P incurred to conduct its surveys were incurred in connection with the exploration for, or development of, oil or gas and so are deductible under I.R.C. sec. 167(h).

Whistleblower petitioned for review of the IRS' decision not to make an award to him for information that purportedly led to the collection of unpaid taxes and other amounts. Held: R's claim of lack of relevance presents an unsettled question of law as to when the IRS proceeds on the basis of information provided by a whistleblower. SeeI.R.C. sec. 7623(b)(1); sec. 301.7623-2(b), Proced. & Admin. Regs.

Ps, husband and wife, seek whistleblower awards authorized by I.R.C. sec. 7623(b). The Whistleblower Office rejected Ps' claims for awards as untimely and administratively closed their cases. In Whistleblower 21276-13W v. Commissioner, 144 T.C. 290 (2015), we (1) held that Ps' claims for awards were timely, (2) ordered the parties to attempt to resolve their differences and keep the Court informed as to their progress, and (3) retained jurisdiction. The parties subsequently agreed that Ps are eligible for an award of 24% of the collected proceeds. The targeted taxpayer pleaded guilty to a violation of 18 U.S.C. sec. 371 and paid $74,131,694 in tax restitution, a criminal fine, and civil forfeitures to the Government. The parties agree that the tax restitution payment constitutes collected proceeds for purposes of an award under I.R.C. sec. 7623(b). They disagree as to whether payments of the criminal fine and civil forfeitures constitute collected proceeds. Held: The criminal fine and civil forfeitures are collected proceeds for purposes of an award under I.R.C. sec. 7623(b).

In 1999, BD, a drugstore chain, entered into an agreement to purchase property L from a third party. Held: BD's disposition of E and acquisition of L in 2001 qualifies for nonrecognition treatment pursuant to I.R.C. sec. 1031 as a like-kind exchange, as EPC is treated as the owner of L during the period it held title to the property.

Ps did not file U.S. Federal income tax returns for 2001 but instead filed individual territorial income tax returns with the Virgin Islands Bureau of Internal Revenue for that year. Held: Ps are not allowed to credit against their U.S. income tax liabilities under I.R.C. sec. 901 the amounts paid as tax to the Virgin Islands for their 2001 taxable years.

P, the tax matters partner for a limited liability company treated as a TEFRA partnership for Federal income tax purposes, asserts that the partnership is entitled to capital gain treatment under… Held: The partnership is not entitled to capital gain treatment on the forfeited deposit. I.R.C. sec. 1234A applies only to capital assets, not to I.R.C. sec. 1231 property.

P, a corporation engaged in the production, transmission, and distribution of electricity to residential, commercial, and industrial customers in Northern Illinois, sold its fossil fuel power plants in 1999 for $4.813 billion. Seeking to manage the taxable gain of $1.6 billion resulting from the sale, P pursued a series of like-kind exchanges employing sale-leaseback strategies between P and unrelated third parties C and M, each of the latter a tax-exempt public utility. P fully funded the transactions using the proceeds from the sale of its own power plants. In the transactions, C or M would lease a power plant to P for a term exceeding the plant's useful life, receiving in turn a lump-sum payment of cash, and P would sublease the power plant back to C or M. Part of the amount paid to C or M would be returned to P as a prepayment of the sublease, another part would be set aside for investment and to secure a cancellation option allowing C and M to purchase back their power plants at the end of the sublease periods, and the remainder would be retained by C and M and used for their own needs. Since exercising the cancellation options was expected to be the only economically viable option, the parties to the transactions anticipated that at the end of the sublease periods C and M would exercise their cancellation options and regain ownership of the power stations leased to P. The primary tax benefits that P expected to derive were from the deferral of income tax under I.R.C. sec. 1031 and various deductions related to the replacement properties. P identified appropriate replacement properties, conducted due diligence, and closed the transactions within the timeframes provided for in I.R.C. sec. 1031. Held: The agreements between P and C and M are not true leases but rather properly characterized as loans since the transactions did not transfer the benefits and burdens of ownership to P. The substance of the transactions is not consistent with their form. Held, further, P did not satisfy the requirements of I.R.C. sec. 1031 for the 1999 tax year since P exchanged power plants for an interest in financial instruments. Held, further, P is not entitled to depreciation deductions claimed for 2001 with respect to its transactions with C and M. Held, further, P may not deduct interest or include rental income with respect to the transactions with C and M for the 2001 tax year since the transactions are not lease agreements for Federal tax purposes under I.R.C. sec. 467. Held, further, P must include in income for the 2001 tax year original issue discount income arising out of P's equity contribution, which is to be repaid with interest through the cancellation options in P's agreements with C and M. Held, further, P is not entitled to deduct transaction costs related to its transactions with C and M for its 2001 tax year and must instead include them as an additional amount lent to C and M. Held, further, P is liable for accuracy-related penalties under I.R.C. sec. 6662 for the 1999 and 2001 tax years on the grounds of negligence or disregard of rules or regulations. P did not show reasonable cause and good faith under I.R.C. sec. 6664(c) to meet the exception for those penalties.

A limited liability company (C) sold property to the Maricopa Flood Control District for what it believed was less than fair market value. Held: C's appraisal report substantially complied with the requirements of sec. 1.170A-13(c)(5)(iii), Income Tax Regs., by including one of the two appraisers' signatures on Form 8283, Noncash Charitable Contributions.

E held a 99% interest in L, which held an account with MS as its only asset. Held: E, pursuant to I.R.C. sec. 2054, is entitled to a deduction relating to its interest in L.

P filed with the IRS Whistleblower Office Form 211, Application for Award for Original Information, with respect to TP1. Held: W properly exercised his authority under Delegation Order 25-7 when he executed Form 11369 approving the denial of P's claim for an award. Nothing in that delegation order (or anywhere else) required that W personally sign the letter informing P that his claim had been denied. 2.

P, an attorney, seeks an award of administrative costs with respect to an administrative proceeding in which P represented a taxpayer. Held: I.R.C. sec. 7430 permits only a "prevailing party" to receive an award of reasonable administrative costs. Only a party to the underlying proceeding can be a prevailing party. Because P was not a party to the underlying administrative proceeding, he cannot be a prevailing party under the statute. Therefore P is not the proper party to file a claim under I.R.C. sec. 7430, and we lack jurisdiction.

P adopted the Plan, a defined benefit pension plan, effective Jan. 1, 1995. The Plan was a qualified plan under I.R.C. sec. 401(a) throughout the years at issue. Held: R applied the correct method to reduce the maximum benefits under I.R.C. sec. 415(b)(2)(C) to an actuarially equivalent value for a retirement age before age 62 in the Plan where the Plan did not provide for forfeiture of the participant's benefits at death.

P is a corporation that is a U.S. shareholder of a controlled foreign corporation (CFC). P repatriated cash dividends from the CFC and claimed an 85% I.R.C. sec. 965 dividends received deduction (DRD) for 2005. P reported no related party indebtedness during its testing period pursuant to I.R.C. sec. 965(b)(3) when it claimed the DRD. R determined, and P agreed, that the annual 2% royalty from CFC to P should be increased to 6% for 2001-05 to reflect arm's-length pricing. SeeI.R.C. sec. 482. In 2009 P and R executed a closing agreement pursuant to Rev. Proc. 99-32, 1999-2 C.B. 296, to effect the secondary adjustments required after a primary I.R.C. sec. 482 allocation. The closing agreement established accounts receivable as described in Rev. Proc. 99-32, sec. 4.01, 1999-2 C.B. at 299, for 2001-05 and deemed them created as of the last day of the taxable year to which they relate. R subsequently determined that the accounts receivable constituted an increase in related party indebtedness under sec. I.R.C. 965(b)(3) during P's testing period, which R determined decreased P's I.R.C. sec. 965 DRD. Held: The parties did not reach an agreement in the closing agreement with respect to the treatment of the accounts receivable under I.R.C. sec. 965. Held, further, I.R.C. sec. 965(b)(3) does not provide that the accounts receivable constituted related party indebtedness arising during P's testing period. Held, further, the accounts receivable did not increase CFC's related party indebtedness during the testing period. Held, further, P is entitled to the full amount of its claimed DRD.

Ps claimed on their 2004 income tax return a charitable contribution deduction for the donation of a facade easement to NAT and claimed on… Held: The notice of deficiency complied with I.R.C. sec. 6751(a). Held, further, because R has not yet assessed any 20% penalty, Ps' argument that R failed to comply with I.R.C. sec. 6751(b)(1) is premature. Held, further, the 20% accuracy-related penalty for a substantial understatement of income tax is sustained for 2004 and 2005.

Ps were husband and wife. H was a sole proprietor farmer. H purchased certain farm inputs in 2010 intending to use them to cultivate crops the following year. Held: The tax benefit rule does not require the recapture upon H's death in 2011 of deductions he claimed for 2010 for his expenditures on the farm inputs.

P, a calendar year taxpayer, applied to have its investments in a therapeutic discovery project certified under I.R.C. sec. 48D. On its application P requested certification of investments made in its 2009 and 2010 tax years. While certification generally results in a tax credit, P elected to receive cash grants in lieu of a credit. P received certification. P then changed its 2010 tax year from a calendar year to a short tax year ending November 30, 2010. P filed a second application under I.R.C. sec. 48D requesting certification of investments made in its fiscal year ending (FYE) November 30, 2011. P's second application did not result in certification. Held: P is not entitled to a grant related to investments made after the 2010 calendar year because P was not certified to make qualified investments after that year. Held, further, grant funds attributable to estimated qualified investments that exceeded actual investments made during the 2010 calendar year must be recaptured as tax. Held, further, P must recapture the excess grant funds for its FYE November 30, 2011, because that year includes the period in which the relevant grant was made.

On its 2007 partnership return LLC claimed a charitable contribution deduction of $64,490,000. Held: I.R.C. sec. 170(f)(8)(D) sets forth a discretionary delegation of rulemaking authority, and it is not self-executing in the absence of the regulations to which the statute refers. 2.