Slip opinions decided 2009 — Tax Court Memorandum

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.

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.

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.

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).

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.

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.

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 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.

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.

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.