Slip opinions decided 2009 — Tax Court Memorandum

R asserted trust fund recovery penalties under sec. 6672, I.R.C., against P and sent a preassessment notice to P's last known address by… Held: The notice of proposed assessment was mailed to P's last known address pursuant to secs. 6672, I.R.C., and 6212(b), I.R.C. Held, further, the assessment of the sec. 6672 penalty following the notice mailed to P's last known address did not violate P's due process rights. Held, further, R's supplemental determination is sustained.

Ps had unpaid liabilities of income tax for six years (some joint, and some the liability of P-H only), for which R sent notices of liens and proposed levies… Held: The Court's jurisdiction to review collection as to Ps' liability for six years of income tax enables the Court to review the exercise of discretion by R's appeals officer in rejecting OICs that included both those liabilities and other liabilities whose collection the Court does not have jurisdiction to review.

Sheldon Kay, Joseph DePew, and William Merrit for petitioner.

P failed to pay his self-reported Federal income tax liability for the year 2006, and R issued a notice of intent to levy. Held: R's Office of Appeals did not abuse its discretion in denying P's request for more time to complete and submit financial information.

R determined a deficiency in P's 2003 Federal income tax. After concessions, P and R dispute whether P is entitled to business expense deductions. Held: P is not entitled to business expense deductions.

Ps requested an abatement of interest on Federal income tax deficiencies for the taxable years 1997 through 2000. R determined that Ps were not entitled to an abatement of interest. Held: R's determination was not an abuse of discretion.

When this deficiency case was called for trial, the parties represented that they had just reached a basis of settlement, consisting of adjustments to income reflected on Forms 4549-A, Income Tax Discrepancy Adjustments. Each of the forms included a line 19(c) for "Interest", on which the amount "0.00" was typed for each year in suit; but no mention of interest was made by the parties among themselves or before the Court. After consultation, the parties confirmed that the calculations reflected on the Forms 4549-A were correct and that they were willing to settle on that basis, and the Court ordered them to file a stipulated decision document within 30 days. The parties could not stipulate. Instead, R moved the Court to enter decision in the amounts of tax, additions to tax, and penalties shown on the Forms 4549-A with no decision as to interest; P-W did not object to R's motion; and P-H cross-moved the Court to enter decision in those same amounts of tax, additions to tax, and penalties, plus zero amounts in interest. Held: In a deficiency case under sec. 6213(a),I.R.C., the Tax Court has no jurisdiction to determine interest due on the deficiency. Held, further, where R and P-W reasonably believed that interest was not included in the parties' proposed settlement, but P-H reasonably believed (from the zero entries for interest on line 19(c) of Forms 4549-A) that zero interest was a term in the parties' proposed settlement, the parties failed to have a meeting of the minds on a material term and did not settle the case.

P filed timely tax returns for 1995 through 1999. He was later charged with tax evasion under I.R.C. sec. 7201 for all five years. Held: R's notice of deficiency was valid, notwithstanding R's lack of the grand jury information.

In January 2006, R issued a final notice of intent to levy and filed a notice of Federal tax lien in respect of P's outstanding liabilities for taxable years no later than 2003. Held: R's action subjecting P to backup withholding is not a collection action within the meaning of secs. 6320 and 6330, I.R.C. 2. Held, further, P's motion to restrain will be denied.

R determined deficiencies in P's Federal income tax for 1994 and 1995. Held: Two of the five projects constitute qualified research under sec. 41(d), I.R.C. Held, further, P has established that it included all activities that were similar to the two qualified research projects in its calculation of its base amount under sec. 41(c)(4), I.R.C. Held, further, P has established that it incurred $ 1,045 of…

R determined deficiencies in Federal income tax for Ps' 2002 and 2003 tax years. Held: Ps are liable for the deficiencies, addition to tax, and accuracy-related penalties. Ps are also liable for a penalty under sec. 6673(a)(1), I.R.C., because their position in this case is frivolous.

John O. Kent, for intervenor.

Using proceeds of loans from a wholly owned partnership, Ps made annual loans of identical amounts to a wholly owned S corporation, which in turn paid equivalent amounts of rent back to the partnership. In certain years Ps also lent the S corporation additional amounts. R disallowed the S corporation's passthrough losses to Ps for the 2001 tax year, asserting that Ps lacked a sufficient basis under sec. 1366(d)(1), I.R.C. Held: Ps did not acquire a basis in indebtedness of the S corporation from the annual loans since the transaction involved a circular flow of funds and, therefore, Ps had made no economic outlay.

P-H owned 86.75 percent of Keys Granite, a C corporation, and 100 percent of Keys Holdings, a limited liability company that was treated as… Held: Because Keys Granite is a C corporation subject to section 469, Ps may group their activities in Keys Granite with P-H's activities in Keys Holdings but only for purposes of determining whether the taxpayer [P-H] materially or significantly participates in P-H's activities in Keys Holdings. Sec. 1.469-4(d)(5)(ii), Income Tax Regs.

P filed tax returns for 1993 through 2000. He was later charged with tax evasion under I.R.C. sec. 7201 for all 8 years. Held: The superseding criminal information, P's allocution and plea, and the conviction all explicitly assert tax evasion in all 8 years.

In April 1999 Ps requested an extension of time to file their 1998 Federal income tax return and separately submitted a $ 70,000 estimated tax payment. Although Ps' 1998 return includes signature dates in July 1999, R did not receive the return until 2004. R assessed the tax reflected on the return, along with additions to tax and interest, in 2004. In October 2000 Ps filed their 1999 return and paid their 1999 taxes in full. In November 2000, R refunded the $ 70,000 estimated tax payment that R received in April 1999 and had credited to Ps' account for 1999. After receiving a notice of deficiency for 2000, Ps filed a 2000 return. R processed this return and assessed tax, additions to tax, and interest in December 2002. Ps later conceded that they omitted income from their 2000 return and agreed to an additional assessment. Ps submitted an offer-in-compromise (OIC) seeking relief based upon doubt as to collectibility and doubt as to liability, and R rejected it. R's Appeals Office sustained the rejection and rejected a second OIC, affirming that Ps' reasonable collection potential exceeded the amounts offered and concluding that Ps' liability was properly determined and assessed. R filed a Federal tax lien and notified Ps. Ps requested a CDP hearing, seeking relief from interest and penalties. R's settlement officer sustained the filing of the Federal tax lien. Held: R's determination is sustained, and Ps are not entitled to any abatement of interest.

P alleges that during tax year 2004 he had a real estate investment and rental business. Held: P was not actively engaged in a real estate investment and rental business when he incurred and paid the expenses he deducted as Schedule C business expenses in 2004. Therefore, the costs P deducted are pre-operational start-up expenditures and may not be deducted as business expenses under I.R.C. sec. 162.

P granted a conservation easement to a qualified conservation organization and claimed a $ 3,100,000 charitable contribution deduction on his 2000 Federal income tax return. Held: P is liable for the deficiency.

Ps are husband and wife. In 2002 and 2003 they were U.S. citizens residing in Taiwan. Held: Ps claimed excessive exclusions and are liable for deficiencies.

P timely filed his 2001 Federal income tax return reporting an income tax liability of $ 3,303. Held: R did not abuse his discretion in denying P's abatement of interest request and requiring P to pay interest on his entire deficiency. Thus, P is not entitled to relief under I.R.C. sec. 6404.

In a notice of final partnership administrative adjustment (FPAA) issued to TET regarding a transaction of the type the IRS determined in Notice 2000-44, 2000-2 C.B. 255, is a "listed transaction", R determined inter alia that TET was not a partnership, had no business purpose other than tax avoidance, lacked economic substance, and was an economic sham for Federal income tax purposes. In the FPAA R determined that amounts reported on the 1999 partnership return for contributions, distributions, other deductions, and other losses were reduced to zero, that TET's partners' outside bases in their partnership interests were zero, and that accuracy-related penalties determined at the partnership level should be imposed at the partner level. L and one of the three grantor trusts (PP) L used to engage in the transaction challenge the proposed adjustments in the FPAA and wish in this partnership-level proceeding to raise L's reasonable cause defenses to accuracy-related penalties applicable to any deficiency resulting from the FPAA adjustments to partnership items. L claims that, in reporting losses from the transaction on his return, he relied on the advice of professionals, including two attorneys and a C.P.A., and a written legal opinion of CM to L and the three grantor trusts on the tax consequences of the transaction. PP has filed a motion for partial summary judgment to declare invalid sec. 301.6221-1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26, 1999) (the temporary regulation), on the ground that it would prevent PP and L from raising in this partnership-level proceeding partner-level reasonable cause defenses to accuracy-related penalties applicable to any deficiency of L resulting from the FPAA adjustments to partnership items. R has filed a motion in limine to exclude from evidence PP's expert report prepared by SS that the legal opinion of CM on the tax consequences of the transaction was of such quality and character that PP and L could reasonably rely on the opinion in preparing their income tax returns. R argues that the report should be excluded on the alternative grounds that it relates solely to PP's partner-level defenses and that it expresses legal conclusions. Alternatively, R asserts that portions of the report should be excluded because they constitute advocacy. R is also asserting that CM was a promoter of TET and the transaction, that L and his grantor trusts could not reasonably rely on the opinion of a promoter, and that the status of CM as a promoter should be determined in this partnership-level proceeding. Held: Following New Millennium Trading, LLC v. Commissioner, 131 T.C. ___ (2008), the temporary regulation is valid and potentially applicable in the case at hand, so that, should the Court sustain R's determinations in the FPAA that TET or PP's transactions with TET should be disregarded and that all other requirements for application of the accuracy-related penalties have been satisfied, PP may not assert in this partnership-level proceeding any partner-level defenses to application of the penalties; PP's motion for partial summary judgment will be denied. Held, further: We have jurisdiction in this partnership-level proceeding to decide whether CM was a promoter. Held, further: If the Court should decide that CM is not a promoter of the transactions at issue, the reasonableness of L's reliance on the CM opinion, as well as his reliance on the advice of his personal attorneys and C.P.A., would be a partner-level defense as defined in the temporary regulation that would not be assertable in this partnership-level proceeding because it would require the Court to consider factors that are personal to L, such as his education and business experience and the nature and length of his relationship with the adviser, and would require the production of evidence unrelated to the underlying adjustments in the FPAA. Held, further: PP's expert report consists of legal discussion and argument; R's motion in limine will be granted and the expert's report excluded from evidence, irrespective of whether CM is determined to be a promoter. David De Coursey Aughtry, Hale E. Sheppard, and William E. Buchanan, for A. Scott Logan, Trustee, A. Scott Logan Grantor Retained Interest Annuity Trust I, a partner other than the tax matters partner.

P failed to pay its self-reported Federal payroll taxes for various quarters in 2002-04, and R issued a notice of intent to levy. Held: R's Office of Appeals did not abuse its discretion in denying P's proposal for a partial payment installment agreement when P did not provide to Appeals the financial information requested.

C and A were either the sole or controlling trustees of three trusts (the shareholder trusts) whose corpora, together, consisted… Held: Because the undisputed facts establish that it was not the primary purpose of the assumed gratuitous transfer of partnership interests to the family partnerships to provide an economic benefit to them and, derivatively, to the shareholder trusts, that assumed transfer (which, under the agreed facts, we find to have been unintentional…

In 2005 P deducted as alimony under I.R.C. sec. 215(a) payments of $ 8,676 made to or on behalf of his former spouse pursuant to a property settlement agreement and divorce decree.

The IRS examined P's returns for 6 tax years and, in July 2006, issued a Form 886A as to P's liability for those years. Held: Neither P's March 2008 filing of his Tax Court petition nor his August 2008 oral request constituted the filing of an application for administrative costs under I.R.C. sec. 7430(b)(4).

R determined deficiencies in P's 2002, 2003, and 2004 Federal income tax. Held: P's Federal income tax liabilities were not finally determined in a ch. 13 bankruptcy proceeding. P is liable for Federal income tax deficiencies, additions to tax, and penalties.

R determined that Ps are liable for additions to tax pursuant to sec. 6653(a), I.R.C., for their 1983 tax year and for an addition to tax pursuant to sec. 6661(a), I.R.C., for their 1985 tax year. Held: Ps are liable for the additions to tax pursuant to sec. 6653(a), I.R.C., for their 1983 tax year and pursuant to sec. 6661(a), I.R.C., for their 1985 tax year.

In 2000 P-H sued a mortgage company over an attempted foreclosure of his residence. Held: P-H's settlement award is not excludable from gross income under I.R.C. sec. 104(a)(2) for tax year 2004 because Ps failed to prove that the settlement award, or any part thereof, was received on account of personal physical injuries or physical sickness.

R issued to P a notice of filing of Federal tax lien, and P timely requested a hearing under I.R.C. sec. 6320. Held: R's Office of Appeals did not abuse its discretion in sustaining the filing of a Federal tax lien when (1) P generally requested a collection alternative, but made no concrete proposals, (2) P failed to supply his financial information as requested, and (3) P was not current with his filing and/or payment obligations.

Beginning in 1988 P suffered discrimination in his workplace, the apparent results of which included some physical injuries as late as 1998. Held: P's settlement award is not excludable from gross income under I.R.C. sec. 104(a)(2), because P failed to prove that the settlement award, or any part thereof, was received on account of personal physical injuries or physical sickness.

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.

Ocie F. Murray, Jr., for intervenor.

P owned approximately 22,000 square feet (six stories) of unused development rights over a certified historic structure within the meaning of I.R.C. sec. 170(h)(4)(B). Held: The conservation easement does not preserve a historically important land area or a certified historic structure within the meaning of I.R.C. sec. 170(h)(4)(A)(iv).

R determined a deficiency in Ps' 2005 Federal income tax. Held: Ps are liable for the deficiency as determined by R.

As part of his estate plan, D created two family limited partnerships (FLPs) and four trusts. Held: Because, within the meaning of sec. 2036(a)(1), I.R.C., D retained for his life the possession and enjoyment of the stock he transferred to the FLPs and did not transfer that stock in a bona fide sale for an adequate and full consideration in money or money's worth, the value of D's gross estate includes the value of that transferred…

In 1999 and 2000 P worked as a courier for an auto parts delivery business. Each workday, P drove his own vehicle from a warehouse to several customers in a loop through Maryland and Delaware, dropping off auto parts and picking up cash and returned auto parts to deliver back to the warehouse. P drove from the location of his last customer to his home in the evening and then drove from his home to the warehouse in the morning to deliver the cash and returned auto parts he had collected the previous day. At trial P alleged for the first time that his wife also worked as a courier for the auto parts delivery business and earned some of the income he reported as his own. Held: P is entitled to deduct his mileage incurred in connection with the auto parts delivery business, except for mileage added by his commute to and from his home. Held, further, P is not entitled to exclude his wife's alleged income from the auto parts delivery business or deduct her alleged mileage incurred in connection with that business.

A single-member LLC failed to pay employment taxes for several periods. Notices of lien and of intent to levy were sent to P, the sole member of the LLC. Held: R abused his discretion in determining to proceed with collection without making the requisite verification under I.R.C. sec. 6330(c)(1) that all legal and procedural requirements had been met. Held, further, that R's motion to reopen the record to admit Forms 4340 into evidence is denied.

P failed to report wage income that he received in 2000. Held: P is liable for the deficiency and the additions to tax. P is also liable for a penalty under sec. 6673(a)(1), I.R.C.

P was liable for a Federal income tax deficiency for his 1982 tax year and paid that deficiency on Mar. 13, 2007. Held: R's determination that P was not entitled to interest abatement for the period before Apr. 13, 2005, was not an abuse of discretion.

Ps ran a horse-breeding and -boarding operation in which they kept and cared for as many as 60 horses on the same property as their personal residence. Held: On the basis of all the facts and circumstances, the horse-breeding and -boarding operation was an activity engaged in for profit under I.R.C. sec. 183 in the years 1993 to 2002.

P submitted a 2001 Form 1040, listing as -0- his income, adjusted gross income, tax and credits, other taxes, and amount owed. Held: R failed to show there is no genuine issue as to the material fact of whether R sent a notice of deficiency to P. 2. Held, further, R failed to show there is no genuine issue as to the material fact of whether P received a notice of deficiency. 3.

P was married to I in 2002 and 2003, but she originally filed her tax returns for those years using the status of married filing separately, and she paid her separate liabilities. P and I divorced in 2004, and P was ordered pursuant to a divorce decree to file amended tax returns for those years with I using the status of married filing jointly. The divorce decree provided that P and I would each be liable for half of their 2003 Federal income tax, but it was silent as to the 2002 tax liability. The amended joint tax returns for 2002 and 2003 showed a balance of tax due that was attributable solely to I's income. P requested equitable relief from the IRS under I.R.C. sec. 6015(f) for both the 2002 and 2003 tax liabilities, but the IRS denied P's request. Held: P is entitled to equitable relief under I.R.C. sec. 6015(f) with respect to half of the 2002 and 2003 liabilities.

R issued to P's L.L.C. for 1999 a notice of final partnership administrative adjustment (FPAA) which determined that losses claimed by P in 2001 from the sale of stock should be disallowed because… Held: The issuance of the FPAA is not barred by any period of limitations. Held, further, The period for assessing P's 2001 tax liability remains open. Held, further, P's motion for summary judgment will be denied, and R's motion for partial summary judgment will be granted.

P invoked the Court's jurisdiction under sec. 6404(h)(1), I.R.C., to determine whether R abused his discretion by not abating statutory interest. The interest related to Federal income tax deficiencies listed in the decision entered by the Court in P's earlier deficiency proceeding. The interest was not mentioned in the decision. P's sole argument is that she is not liable for the interest under the rationale of Hurt v. United States, 76 AFTR 2d 95-7815 (4th Cir. 1995). There, the Court of Appeals for the Fourth Circuit decided that the taxpayers were not liable for statutory interest because the decision relating to the taxable year from which the interest arose was silent as to their liability for interest. R moves for summary judgment, asking the Court to reject the rationale of (or otherwise distinguish) Hurt and to conclude that R did not abuse his discretion because P advances no other allegation of error. Held: The Court declines to decide whether we agree with the rationale of Hurt v. United States, supra, because such a decision rests exclusively on the applicability of sec. 6404(a), I.R.C., which has no applicability to this case by virtue of sec. 6404(b), I.R.C. Held, further, the Court will grant R's motion for summary judgment because no issue of material fact remains for trial.

R determined a deficiency and a penalty pursuant to sec. 6662(a), I.R.C., for Ps' 2005 tax year. Ps conceded that they are liable for the deficiency. Held: Ps are liable for the sec. 6662(a), I.R.C., penalty for 2005.

R determined deficiencies and additions to tax pursuant to sec. 6651(a)(1) and (2), I.R.C. Held: P is liable for the deficiencies and the additions to tax. Held: P is liable for the deficiencies and the additions to tax.

The IRS determined a deficiency in P's income tax for 1998. P petitioned the Tax Court, which sustained the IRS's determination. P did not file an appeal bond but appealed to the Court of Appeals for the First Circuit, which affirmed. The Supreme Court denied P's petition for certiorari. After the Tax Court's decision and during P's appeal, the IRS assessed tax and interest for 1998 and issued a levy notice. The IRS also imposed a failure-to-pay addition to tax under I.R.C. sec. 6651(a)(3). P requested a CDP hearing and challenged the addition to tax on the grounds that the IRS should not have assessed the addition while P pursued his appeals, that the assessment was improper because neither the notice of deficiency nor the Tax Court determined any penalties, and that he reasonably relied on statements by IRS examining agents that no penalties would apply. P requested abatement of the I.R.C. sec. 6651(a)(3) failure-to-pay addition to tax. IRS Appeals denied P's abatement request and sustained the levy notice. P appealed the notice of determination. Held: P is liable for the I.R.C. sec. 6651(a)(3) failure-to-pay addition to tax. Held, further, Appeals did not abuse its discretion in sustaining the collection action, and collection by levy may proceed.

P was assessed trust fund recovery penalties under I.R.C. sec. 6672, and when he failed to pay after notice and demand, the IRS issued a notice of intent to levy. Held: The Office of Appeals did not abuse its discretion when it did not grant P's request for further extensions of time and instead issued a notice of determination sustaining the proposed levy.

PC, a single-member LLC owned by AHI, entered into offsetting market-linked deposit contracts with SG. Each contract provided for potential premium interest on the deposit; the terms of the potential premium interest in each contract constituted a European-style foreign currency digital option. Shortly thereafter, CFA became a member in PC. As a result, PC was classified as a partnership for tax purposes, and the offsetting MLD options were treated as contributions to the newly formed partnership. AHI claimed a basis in its PC partnership interest that included the premium it owed for the long MLD option, but AHI did not reduce its partnership basis to account for any obligation under the short MLD option under sec. 752(b), I.R.C. Less than 2 months later, AHI acquired CFA's PC membership interest and again became PC's only member, causing liquidation of the PC partnership. Under sec. 732(b), I.R.C., in the only asset deemed distributed by PC, a foreign currency position in Canadian dollars, AHI claimed a basis that equaled AHI's basis in its PC interest, minus cash it received, as a deemed liquidating distribution. PC then sold the Canadian dollars and claimed a substantial ordinary tax loss. R issued a notice of final partnership administrative adjustment in which he determined that PC was a sham and that the MLD contracts lacked economic substance and should be disregarded. P petitioned this Court under sec. 6226(a), I.R.C. Held: The MLD transaction is disregarded under the economic substance doctrine. Held, further, the accuracy-related penalty under sec. 6662, I.R.C., applies.

R issued a partnership and its two pass-thru partners (lower-tier partnerships) notices of final partnership administrative adjustment (FPAAs) for 2001… Held: The investors were partners for Federal tax purposes rather than purchasers of State tax credits. Held, further, the transactions between the investors and the partnerships were not disguised sales under sec. 707, I.R.C. Held, further, the limitations period for assessment bars the adjustments for 2001 in the FPAAs.

Khadija Duma, petitioner.