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.

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.

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.

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.

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.

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 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.