Slip opinions decided 2011 — Tax Court Memorandum

R determined a deficiency in income tax for petitioners' 2004 tax year. Held: Ps used no more than 43 percent of their residence exclusively for business and are liable for the deficiency to the extent herein decided.

R determined a deficiency in P's income tax for the 2005 tax year based on P's unreported dividend income and a disallowed deduction for an IRA contribution. In an amended answer, R increased the determined deficiency by disallowing an income tax withholding credit of $20,060.89 and Schedule C business expense deductions of $29,942.74 for the 2005 tax year. Held: This Court does not have jurisdiction to decide the withholding credit issue. P is liable for the deficiency arising from the disallowed Schedule C business expense deductions.

After P failed to file his 2004, 2005, and 2006 tax returns, R determined deficiencies in his income tax and additions to tax under secs. 6651(a)(1) and (2) and 6654(a), I.R.C. P contested the deficiencies and additions to tax arguing he was entitled to a $5,000 moving expense deduction and a $36,250 casualty loss deduction for his 2005 tax year. Held: For his 2005 tax year, P is entitled to a moving expense deduction of $3,000 and a casualty loss deduction of $15,000. Held, further, P is liable for the additions to tax under secs. 6651(a)(1) and (2) and 6654(a), I.R.C.

P filed joint Federal income tax returns with her husband H for the 2000 and 2002 taxable years. Following H's death, P seeks relief from joint and several liability under sec. 6015(f), I.R.C., with respect to the 2000 and 2002 tax liabilities. Held: P is not entitled to relief from joint and several liability pursuant to sec. 6015(f), I.R.C., with respect to her 2000 and 2002 taxable years.

P mailed his petition using the registered mail service of a foreign country on the 145th day after the mailing of a notice of deficiency to him at an address in the foreign country. Held: The petition was timely filed, and the Court has jurisdiction to hear P's case.

TR, a psychiatrist, sought advice from C, a C.P.A. specializing in tax planning for small businesses, as to how he might minimize the tax liability arising from his practice. C restructured TR's practice from a sole proprietorship to a limited liability company (LLC) with two members: TR, owning 95 percent, and a "manager" corporation (PC), owning 5 percent. C also organized a second corporation (W) to perform services associated with TR's practice. TR's 95-percent interest in LLC was divided between a 10-percent general partner interest and an 85-percent limited partner interest attributable to intangibles associated with the practice. TR paid self-employment tax only on distributions associated with his 10-percent general partner interest, whereas, as a sole proprietor, he was required to pay self-employment tax on the entire net income from his psychiatric practice. See secs. 1401 and 1402, I.R.C. R alleges that PC and W are without substance and must be disregarded for Federal tax purposes. As a result, LLC becomes a single-member LLC, which, because it did not elect association status, also must be disregarded for Federal tax purposes, and, therefore, TR's practice must be treated as a sole proprietorship for 2002-04. See sec. 301.7701-3(b)(1)(ii), Proced. & Admin. Regs. R's disregard of PC, W, and LLC would result in tax deficiencies against TR for 2002-04. R also seeks to impose a sec. 6662(a), I.R.C., penalty on TR. 1. Held: Because the organization of PC and W accomplished no significant business purpose and because PC and W were, in substance, hollow corporate shells formed primarily for tax avoidance, they are disregarded for Federal tax purposes and TR is taxable as a sole proprietor for 2002-04. 2. Held, further, TR is subject to the sec. 6662(a), I.R.C., penalty for 2002-04.

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

Ps filed a motion for reconsideration of our opinion in DeNaples v. Commissioner, T.C. Memo 2010-171, and a motion to vacate or revise the decisions entered thereunder, arguing that our disposition of these cases constitutes substantial error. Held: Ps' motions will be denied.

In 2002 P-H was involved in a car accident in which he struck a pedestrian, who later died. In 2004 P-H paid the pedestrian's estate $250,000 in settlement of a wrongful death lawsuit. Held: P-H's payment of $250,000 in settlement of a wrongful death claim stemming from an automobile accident is not a casualty loss deductible under I.R.C. sec. 165(c)(3).

Ps held ownership interests in and controlled an S corporation. Ps' Roth IRAs formed a DISC which entered into a commission agreement with the S corporation. Held: The transactions must be treated consistently for sec. 4973, I.R.C., and income tax purposes. Held, further, the commission payments from Ps' S corporation do not represent excess contributions to Ps' Roth IRAs.

P filed income tax returns for 2000, 2001, and 2002 that reported tax due; but he did not pay the tax. Held: Where P engaged in day trading in disregard of his outstanding Federal income taxes, the resulting losses constitute dissipation of assets. R's Office of Appeals did not abuse its discretion in denying P's proposed OIC and upholding the filing of the NFTL.

P and H filed joint returns and failed to pay tax for 8 years (1985-91 and 1993). R served a notice of proposed levy in September 1999. Held: Res judicata precludes P's attempted relitigation of her I.R.C. sec. 6015(f) claim for the years that were the subject of the prior District Court collection suit.

In 1993 P established a British Virgin Islands (BVI) corporation, A, and placed the shares in a BVI trust of which he was the sole beneficiary. P opened accounts in the name of A with a bank in Switzerland. P provided consulting, negotiation, and other services to companies and governments, and his clients transferred money into A's accounts to pay for those services. P did not report any of this income on any U.S. Federal income tax return for 1993 through 2000, except that in 2003 he amended his 1999 and 2000 individual income tax returns to report investment income earned on the amounts in the Swiss bank accounts. P did not include the payments for services in income on any of those original or amended returns. Also in 2003 P pleaded guilty to one count of tax evasion for all 8 years from 1993 through 2000 and to one count of conspiracy to defraud the IRS for those same years. In 1996 P signed an agreement purporting to commit to purchasing works of art. The seller, S, ostensibly agreed to hold the art for 1 year before donating it on P's behalf to charity and promised that the art would cost P no more than 24 percent of the final appraised value of the art. S donated works of art on P's behalf in 1997, 1999, and 2000; P paid for the art close in time to the donations (within a year of each donation); and he claimed charitable contribution deductions for the full value determined in appraisals that S arranged. By a notice of deficiency issued in 2007, R determined deficiencies in P's original returns for all 8 years, determining that P is liable for tax on the services and investment income deposited into A's accounts and allowing P deductions for the contributions of art only to the extent of P's basis in the art. R determined fraud penalties related to the unreported income deposited in A's Swiss bank accounts and also determined accuracy-related penalties on the disallowed portions of P's charitable contribution deductions. Held: P is liable for tax on the net amounts deposited into A's accounts in each year, and P is liable for the fraud penalties on the underpayments resulting from this unreported income. Held, further, P is entitled to charitable contribution deductions only in the amount of his basis in the art contributed, and he is liable for the accuracy-related penalties on the underpayments resulting from the disallowed deductions.

P-H's Roth IRA formed an FSC which entered into a commission agreement with P-H's wholly owned C corporation. For excise tax purposes only, R recharacterized commission payments from the C corporation to the FSC as distributions to P-H followed by P-H's contribution of the proceeds to his Roth IRA. R determined that Ps were liable for excise taxes on excess contributions to P-H's Roth IRA under sec. 4973, I.R.C., and additions to tax under sec. 6651(a)(1), I.R.C., for failing to file the appropriate information returns. Held: The transactions must be treated consistently for sec. 4973, I.R.C., and income tax purposes. Held, further, the commission payments from P-H's C corporation do not represent excess contributions to P-H's Roth IRA. Held, further, Ps are not liable for excise taxes under sec. 4973, I.R.C. Held, further, Ps are not liable for additions to tax under sec. 6651(a)(1), I.R.C.

R issued a notice of deficiency determining deficiencies in Ps' Federal income tax and accuracy-related penalties pursuant to sec. 6662(a), I.R.C., for Ps' 2004, 2005, and 2006 tax years. The tax deficiencies relate primarily to a dispute as to petitioner husband's tax residence. Held: Ps are liable for a portion of each deficiency to the extent decided herein. Held, further: Ps are liable for the applicable accuracy-related penalties.

C is guardian of the property of P, a minor who is mentally and physically handicapped. C arranged for P's parents to transfer title of their home to C in his individual capacity. Held: P is not entitled to the first-time homebuyer credit because he purchased the home from related persons (his parents). See I.R.C. sec. 36(c)(5). Economic substance and step transaction doctrines applied.

R found additional interest income, disallowed certain business expense deductions and itemized deductions P claimed on his 2005 tax return, and determined a deficiency in income tax and an… Held: P is liable for the deficiency to the extent decided herein. Held, further, P is liable for the accuracy-related penalty under sec. 6662(a), I.R.C.

Decedent owned 3,970 units of Paxton Media Group, LLC, representing a 15-percent ownership interest in the limited liability company. Held: Fair market value of the units determined. Sec. 2031, I.R.C. Held: Fair market value of the units determined. Sec. 2031, I.R.C.

R determined deficiencies in income tax and additions to tax under secs. 6651(a)(1), (2), and (3) and 6654(a), I.R.C., for Ps' 2001, 2002, and 2003 tax years that were based on R's determination that… Held: Ps received taxable income in 2001, 2002, and 2003 which they failed to report. The unreported taxable income is community property, not P-H's sole and separate property. Held, further, Ps are subject to the additions to tax to the extent redetermined herein.

P filed a petition for review pursuant to secs. 6320 and 6330, I.R.C., in response to R's determination that the lien and levy actions were appropriate. Held: P exercised ordinary business care and prudence in providing for payment of its tax liability. R's determination to impose a failure to deposit penalty and a failure to pay addition to tax and to proceed with collection actions is reversed.

R determined tax deficiencies and accuracy-related penalties pursuant to sec. 6662(a), I.R.C., for Ps' 2001 through 2007 tax years. Held: Ps' are liable for sec. 6662(a), I.R.C., accuracy-related penalties for their 2001 through 2006 tax years.

R determined a deficiency in income tax for Ps' 2006 tax year. The issue for decision is whether Ps had taxable income for their 2006 tax year upon the maturity of P-H's life insurance contract. Held: The maturity of P-H's insurance contract resulted in taxable income to Ps for the 2006 tax year.

R determined deficiencies in Federal income taxes and additions to tax pursuant to sec. 6651(a)(1), I.R.C., for Ps' 2004 and 2006 tax years. Held: Ps are not entitled to deduct expenses relating to the foreclosure of the mortgage on their then residence for their 2004 or 2006 tax year. Held, further, Ps are not entitled to deduct expenses relating to wage garnishments for their 2004 and 2006 tax years.

Held: Ps, who concede deficiencies in tax attributable to PH's participation in a Custom Adjustable Rate Debt Structure (CARDS) transaction, are liable for accuracy-related penalties for gross valuation misstatements or, for 1 year, negligence, on account of resulting underpayments in tax.

R issued a notice of deficiency determining deficiencies in Ps' Federal income taxes for Ps' 2005 and 2006 tax years. The deficiencies primarily stem from R's determination that Ps could not deduct expenses exceeding income from their timeshare activity. Held: Ps are liable for a portion of the deficiency for each year as decided herein.

R determined that Ps had unreported income which caused deficiencies in Federal income taxes and that Ps are liable for accuracy-related penalties pursuant to sec. 6662(a), I.R.C., for their 2005 and… Held: Ps had unreported income and are liable for the deficiencies in Federal income taxes and the penalties. Held, further: P-W is not entitled to relief from joint and several liability for the deficiencies pursuant to sec. 6015, I.R.C.

R's disallowance of a short-term capital loss and the capitalization of certain improvements made to P's home before its sale caused deficiencies in Federal income tax for P's 2005 tax year. Held: P is liable for a portion of the deficiency consistent with the findings herein. Held, further: P is liable for the sec. 6651(a)(1), I.R.C., addition to tax but is not liable for the sec. 6662(a), I.R.C., penalty.

On his 2007 tax return, P claimed dependency exemption deductions and child tax credits for his two minor sons and head of household filing status. R disallowed P's claims. Held: R's determinations are sustained.

P filed a petition for review of a lien filing pursuant to sec. 6320, I.R.C., in response to R's determination that the collection action was appropriate. Held: R's determination is sustained. Held: R's determination is sustained.

P mailed his petition using the registered airmail service of a foreign country on Sept. 27, 2010, the 145th day after the mailing of a notice of deficiency to an address in the foreign country where… Held: The petition was timely filed, and the Court has jurisdiction to hear P's case.

In December 1995, P, the principal shareholder, president, and CEO of SBE, a Vermont-based manufacturing corporation, on the advice of… Held: For all audit years, P was in constructive receipt of (1) amounts equal to the excess of SBE's payments to L for his services on behalf of SBE over the sum of the amounts he reported as wages plus the employer portions of the Social Security and Medicare taxes that L paid with respect to those reported wages and (2) the capital gains…

R determined that Ps underreported income and claimed excess deductions and expenses, causing deficiencies in Federal income taxes, and are liable for accuracy-related penalties pursuant to sec.… Held: After a small concession by R with respect to 2006, Ps are liable for the remaining deficiencies and sec. 6662(a), I.R.C., penalties.

P filed a petition for review of a lien filing pursuant to sec. 6320, I.R.C., in response to R's determination that the collection action was appropriate. Held: R's determination is sustained. Held: R's determination is sustained.

P filed a joint Federal income tax return with her husband (H) for the 2006 tax year. Held: P is not entitled to relief from joint and several liability pursuant to sec. 6015(f), I.R.C., with respect to her 2006 tax year.

R issued to P a notice of proposed levy, and P timely requested a hearing under I.R.C. sec. 6330. In that request P asked for a face-to-face hearing and indicated that she desired an installment agreement or an offer-in-compromise, but P never made a concrete proposal of either. P did not submit current evidence of proper tax withholding. As a result, R did not offer a face-to-face conference as P had requested. P refused to participate in a telephone collection due process conference, and R issued to P a final notice of determination that R would sustain the proposed levy. P appealed that determination to this Court, arguing that she was entitled to a face-to-face hearing. R moved for summary judgment, and P opposed R's motion. Held: R's Office of Appeals did not abuse its discretion in sustaining the proposed levy when (1) P generally requested an installment agreement but disregarded Appeals' multiple requests for a concrete proposal, and (2) P failed to supply information as to her current compliance with tax withholding obligations.

P filed his 1996 tax return over 10 years late. Held: R's determinations are sustained to the extent decided herein.