Slip opinions decided 2010 — Tax Court Memorandum

R determined a deficiency and an addition to tax under sec. 6651(a)(1), I.R.C., for failure to file on time. In response, P claimed a qualified business stock exclusion under sec. 1202, I.R.C., deductions for uncollected software development invoices under sec. 165, I.R.C., as business losses or, alternatively, under sec. 166, I.R.C., as bad debt losses, and deductions for meals and entertainment, advertisement, rent, and utilities expenses under sec. 162, I.R.C. Held: P may not claim a sec. 1202, I.R.C., qualified business stock exclusion to shield from tax any part of the proceeds from the sale of stock acquired upon exercise of employee stock options where P has not established that either the options or the stock constituted qualified small business stock within the meaning of sec. 1202, I.R.C. Held, further, P may not deduct billed and unreceived amounts that have not been previously included in income. Held, further, P may not deduct as business expenses meals and entertainment, advertisement, rent, and utilities expenditures that are substantiated solely by a log of such expenditures and in the absence of any primary evidence of having made such expenditures. Held, further, P is liable for the late filing addition to tax where he has admitted to having filed his return late and has failed to provide any reasons for the delay.

P's petition is one of eight that he has filed in this Court, in addition to three complaints in the District Court -- all advancing frivolous arguments. Held: R's motion to dismiss for lack of prosecution will be granted. Held, further: A penalty of $ 25,000 is imposed against P under I.R.C. sec. 6673 for his maintaining frivolous positions and for his instituting and maintaining this suit primarily for delay.

R determined to proceed with collection of P's income tax liability for 2002 without allowing P to challenge the underlying tax liability at a sec. 6330, I.R.C., hearing before the Office of Appeals. Held: Pursuant to sec. 6330(c)(2)(B), I.R.C., P is entitled to raise the existence or amount of the underlying tax liability at an Appeals hearing, unless P has previously received a notice of deficiency or otherwise had an opportunity to dispute the liability.

Ps claimed charitable contribution deductions for the donation of equipment in 2001 and 2002. Held: Ps did not establish substantial compliance because they did not provide adequate descriptions of the equipment and did not identify the valuation methods used, the manner of acquisition, and the cost bases of the equipment.

From 1989 to 2006 P grew flowers and vegetables for sale in greenhouses on the same property as his personal residence. Held: P is not entitled to deductions under I.R.C. sec. 162 for his greenhouse activity or his wife's stamping activity for the 2001 through 2004 tax years, because he failed to substantiate those deductions by adequate records or other evidence.

P owned shares in an S corporation and in 2000 personally guaranteed a line of credit to the corporation. The S corporation incurred losses in 2003, and P deducted $ 199,141 of those losses on his 2003 income tax return. In March 2004 P personally took out a loan and paid off the corporation's line of credit in the amount of $ 150,174. The IRS disallowed the 2003 loss on the grounds that P had insufficient basis in the S corporation and determined a tax deficiency, a late-filing addition to tax, and an accuracy-related penalty. Held: P's guaranty of the S corporation's line of credit did not increase his basis in the S corporation during the year in issue. Therefore P may not deduct the loss in 2003. Held, further: P is liable for the late-filing addition to tax under sec. 6651(a)(1), I.R.C., and the accuracy-related penalty under sec. 6662(a), I.R.C.

P received wages and other income in 2003-2006 from third-party payers who reported the income to the IRS. P filed untimelyzero returns, reporting no income and no tax liability. Held: R is entitled to summary judgment as to P's liability for income tax on his wages and other income and his liability for additions to tax under I.R.C. sec. 6651(a)(1) and (2) for all 4 years 2003-2006.

The IRS issued to P a notice of filing of Federal tax lien for 2005, and P timely requested a CDP hearing before the IRS's Office of Appeals under I.R.C. sec. 6320. During the hearing P asked Appeals to reconsider its rejection of an offer-in-compromise (OIC) P had submitted to compromise $ 2.7 million in tax owed for 8 tax years, including 2005. Appeals did not reconsider the rejection in the CDP hearing but affirmed the rejection outside the CDP hearing. We remanded to Appeals to consider the appeal of the rejected OIC as part of the CDP hearing for 2005. Appeals collected more information, held another CDP hearing, and then sustained the rejection of the OIC again. R moved for summary judgment, and P opposed R's motion but submitted no evidence. Held: Appeals did not abuse its discretion in sustaining the filing of a Federal tax lien when P failed to provide information regarding what happened to $ 2 million in income he earned during the years covered by the OIC, failed to explain his current income sources, and failed to respond to concerns that his asset disclosure was intentionally incomplete. R's determination to sustain the filing of the Federal tax lien is sustained.

Recovery Group, Inc. (RG), an S corporation, redeemed all of the stock held by E, a minority shareholder and employee. Held: The cost of the covenant not to compete may not be amortized over its 1-year term; the covenant is an amortizable I.R.C. sec. 197 intangible and must be amortized over 15 years.

R determined tax deficiencies and accuracy-related penalties pursuant to sec. 6662(a), I.R.C., for Ps' 2004 and 2005 tax years. The parties stipulated Ps' deficiencies for 2004 and 2005. Held: Ps are liable for sec. 6662(a), I.R.C., accuracy-related penalties for 2004 and 2005.

R determined a deficiency and an accuracy-related penalty pursuant to sec. 6662(a), I.R.C., for the 2004 tax year. Held: Ps are liable for the deficiency and the accuracy-related penalty.

R determined a deficiency in P's 2004 Federal income tax. Held: P is not entitled to deduct Schedule E expenses relating to the real property in California. Held: The real property in California was a residence of P during 2004 for purposes of sec. 280A, I.R.C. P is liable for the income tax deficiency.

R filed a notice of Federal tax lien and issued final notices of intent to levy to collect unpaid joint tax liabilities of P and P's husband. Held: P's petition is an innocent spouse petition. Held, further, P is not entitled to relief under sec. 6015(b) or (c), I.R.C., because there was no understatement of tax. Held, further, P cannot be treated as the payor of the joint tax liabilities.

P's duly assessed income taxes for 1991, 1992, and 1993 were still unpaid in 2008. Held: Appeals did not abuse its discretion in declining to conduct a face-to-face hearing in P's home. Held, further, the Paperwork Reduction Act of 1995, 44 U.S.C. ch. 35 (2006), does not apply to CDP hearings; and Appeals did not abuse its discretion in requiring P's financial information on Form 433-A.

P began receiving pension benefits in 1981. He claimed he was entitled to disability benefits, but his employer denied that claim. In 2002, 2004, and 2005, P received pension benefits and incurred medical expenses. He filed no returns for those years. The IRS prepared a substitute for return (SFR) for each year and issued for each year a notice of deficiency determining a deficiency in tax plus additions to tax pursuant to I.R.C. secs. 6651(a)(1) and (2) and 6654. The IRS's determination included the pension benefits in P's taxable income and allowed P only the standard deduction pursuant to I.R.C. sec. 63(c). In September 2008 P filed petitions to commence these cases, and the Court scheduled the cases to be tried a year later in September 2009. P moved for a continuance, asserting a need for more time to obtain documents to substantiate itemized deductions. The Court granted the continuance and ordered P to produce by December 2009 all the documents that P relies on to substantiate deductions. P requested and was granted an additional 2 months but did not produce substantiating documents in February 2010. R moved for summary judgment, asserting that P's pension income is taxable, that P is entitled only to the standard deduction, and that P is liable for the additions to tax. P did not respond to R's motion for summary judgment. Held: P's pension benefits are taxable and are not "amounts received under workmen's compensation acts as compensation for personal injuries or sickness" for purposes of I.R.C. sec. 104(a)(1). Held, further, P is not entitled to itemized deductions. Where P has the burden to prove his entitlement to those deductions but fails to produce substantiation of those deductions in compliance with the Court's order, R is entitled to partial summary judgment on the issue. See Celotex v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Held, further, P is liable for the additions to tax under I.R.C. secs. 6651(a)(1) and 6654 for 2002, 2004, and 2005, and for the addition under I.R.C. sec. 6651(a)(2) for 2002 and 2005. Held, further, genuine issues of material fact preclude summary judgment on the issues of: the precise amount of P's pension income in 2004; the precise amount of the taxable portion of P's Social Security benefits in 2004; the number of personal exemptions to which P is entitled; the amount of the standard deduction to which P is entitled; and P's liability under I.R.C. sec. 6651(a)(2) for the failure-to-pay addition to tax for 2004, for which year R has not shown that the SFR was signed in compliance with I.R.C. sec. 6020(b)(2).

R determined a deficiency in P's income tax and a penalty pursuant to sec. 6662(a), I.R.C., for the 2005 tax year. The deficiency and the sec. 6662(a), I.R.C., penalty were based on P's failure to substantiate deductions for: Self-employed health insurance expenses, business expenses, Simplified Employee Pension plan, medical and dental expenses, home interest expenses, and unreimbursed employee business expenses. Held: P is liable for the deficiency and the sec. 6662(a), I.R.C., penalty.

R determined tax deficiencies and accuracy-related penalties pursuant to sec. 6662(a), I.R.C., for Ps' 2005 and 2006 tax years. Ps and R dispute whether Ps are entitled to business expense deductions in excess of gross income from their bass fishing contest activity. Held: Ps are not entitled to the excess business expense deductions but are not liable for the sec. 6662(a), I.R.C., accuracy-related penalties for 2005 and 2006.

R determined a deficiency in income tax for Ps' 2005 taxable year on account of disallowed business expense deductions. Held: Although Ps established that H's author activities were an existing trade or business engaged in for profit, they failed to substantiate most of their claimed deductions, and those expenses are therefore nondeductible. Held: Ps are not liable for a penalty under sec. 6673(a)(1), I.R.C.

After P failed to file a timely return for tax year 2005, R determined a deficiency and additions to tax under sec. 6651(a)(1) and (2), I.R.C ., for failure to file on time and failure to pay on time, respectively, and an addition to tax under sec. 6654(a), I.R.C., for failure to pay estimated tax.

On Mar. 22, 2005, P and R reached a basis of settlement in a deficiency case. Two days later, P filed for bankruptcy. Held: The Apr. 12, 2005 decision is void because it was entered in violation of the automatic stay of 11 U.S.C. sec. 362(a)(8) (2000). R's motion for leave and R's motion to vacate shall both be granted.

R determined deficiencies in P's 2003, 2004, and 2005 Federal income tax. P and R dispute whether P is entitled to business expense deductions in excess of the gross income from her horse activities. Held: P is not entitled to the excess business expense deductions.

Ps' property was taken by eminent domain, and they reached a settlement on the amount of compensation, along with an amount designated as interest (settlement interest). Held: No part of the settlement interest is excludable from Ps' gross income under sec. 103, I.R.C. Held, further, the interest on installments is not excludable from Ps' gross income under sec. 103, I.R.C.

Ps commenced these TEFRA partner-level cases to challenge affected items notices of deficiency. Held: The fees are affected items subject to the deficiency procedures of subch.

D's trust, the residual beneficiary of his estate, took out a loan to pay the estate tax liability. Held: The interest is not deductible because the estate has not shown that the loan was necessary.

Ps granted two facade easements to a qualified conservation organization and claimed a $154,350 charitable contribution deduction on their 2004 Federal income tax return. Held: Ps are liable for the deficiency. Held, further, Ps are not liable for that portion of the accuracy-related penalty under sec. 6662, I.R.C., that relates to the disallowed charitable contribution deduction.

Ps filed a petition for judicial review pursuant to sec. 6320, I.R.C., in response to a determination by R that lien action was appropriate. Held: Ps are liable for the addition to tax for failure to pay their tax liability in a timely manner. R's filing of the lien to protect the Government's interest and denial of an installment agreement do not constitute an abuse of discretion. R's determination to proceed with collection action is sustained.

Ps' S corporation (S1) purchased inventory from Ps' other S corporation (S2) on credit. S1, using the accrual method of tax accounting, reduced its sales by cost of purchased goods in the year of purchase, whereas S2, using the cash method of accounting, would not report income from the sales to S1 until the year that S2 was paid. For 2004 R determined that S1 is not entitled to reduce its sales by the cost of purchases from S2 until S2 reports the corresponding income. R also made a sec. 481, I.R.C., adjustment to Ps' income to account for the deductions taken in years prior to 2004 even though the period for assessment had expired in some of the years. For all of the years under consideration, S1 did not pay S2 and no sales income was reported by S2 although S1 reduced its income in each year by the amount of the purchases from S2. Held: Sec. 481, I.R.C., applies and adjustments can be made for closed prior years as part of R's 2004 determination.

Using the bank deposits method, R determined deficiencies in Federal income tax for P's 2002, 2003 and 2004 tax years. Held: Bank deposits representing cash receipts from P's sister that P used to make payments on a car loan on her sister's behalf are not includable in P's income. The remaining unexplained bank deposits are includable in P's taxable income.

After P failed to file his 2004 tax return, R determined a deficiency in income tax and additions to tax under sec. 6651(a)(1) and (2), I.R.C. P contested the deficiency, arguing that a State court… Held: P is liable for the deficiency and for additions to tax under sec. 6651(a)(1) and (2), I.R.C. Held, further, P is liable for a sec. 6673, I.R.C., penalty.

Ps filed petitions for judicial review pursuant to sec. 6320 and/or 6330, I.R.C., in response to determinations by R that lien and levy action was appropriate. Held: R's filing of the lien and levy to protect the Government's interest does not constitute an abuse of discretion. R's determination to proceed with collection action is sustained.

P failed to report his 2006 wages, and R determined a deficiency. P contested the deficiency, arguing that the U.S. Government did not have the authority to tax him because he is a citizen only of Alabama and not of the United States. Held: P is liable for the deficiency. Held, further, P is liable for a sec. 6673, I.R.C., penalty.

Massage therapists, cosmetologists, and nail technicians (service providers) operated on the premises of Ps' spa. Ps generally charged each service provider weekly "booth rent" equal to the greater of approximately $80 base rent or 25 percent of the service provider's gross revenues. Ps contend that they had a landlord/tenant relationship with the service providers. R determined that the service providers were Ps' employees. Held: The service providers were independent contractors.

P filed a petition for judicial review pursuant to sec. 6330(d)(1)(A), I.R.C., in response to determinations by R that lien and levy action was appropriate. Held: R's determination to maintain the lien and levy to protect the Government's interest does not constitute an abuse of discretion. R's determination to proceed with collection action is sustained.

R determined a deficiency and an accuracy-related penalty pursuant to sec. 6662(a), I.R.C., for the 2005 tax year. The issues for decision are: (1) Whether a lump-sum settlement payment Ps received in 2005 is excludable from their gross income pursuant to sec. 105, I.R.C.; and (2) whether Ps are liable for the accuracy-related penalty pursuant to sec. 6662(a), I.R.C.Held: Ps' lump-sum settlement payment constitutes taxable income under sec. 105(a), I.R.C., for the 2005 tax year. Held: Ps are not liable for a penalty under sec. 6662(a), I.R.C.

R determined a deficiency in income tax and a penalty under sec. 6662, I.R.C., for P's 2005 tax year that were based on P's failure to include certain receipts in income and the disallowance of… Held: R's determinations are sustained.

After P failed to file a tax return for the 2004 tax year, R filed a substitute for return and issued a notice of deficiency determining a deficiency in P's Federal income tax and additions to tax… Held: P is liable for a portion of the deficiency to the extent decided herein. Held, further: P is liable for the applicable additions to tax.

R disallowed Ps' claimed charitable contribution deduction of $27,727 and determined a deficiency in income tax and an accuracy-related penalty under sec. 6662(a), I.R.C., for Ps' 2006 tax year. Held: Ps are liable for the deficiency. Held, further, Ps are liable for the accuracy-related penalty under sec. 6662(a), I.R.C.

R determined a deficiency in P's income tax for the 2006 tax year based on P's failure to substantiate a deduction claimed on Form 1040, U.S. Individual Income Tax Return, Schedule A, Itemized Deductions. Held: P is liable for the deficiency.