Slip opinions decided 2012 — Tax Court Memorandum

R determined additional interest income, disallowed certain business expense deductions P claimed on his 2007 tax return, and determined a deficiency in income tax, an addition to tax for failure to timely file under sec. 6651(a)(1), I.R.C., and an accuracy-related penalty under sec. 6662(a), I.R.C., for P's 2007 tax year. Held: P is liable for the deficiency. Held, further, P is liable for the addition to tax for failure to timely file his tax return under sec. 6651(a)(1), I.R.C. Held, further, P is liable for the accuracy-related penalty under sec. 6662(a), I.R.C.

Ps, through a grantor trust, entered into an Offshore Portfolio Investment Strategy (OPIS) transaction through KPMG, an accounting firm. Held: the OPIS transaction is disregarded under the economic substance doctrine. 2. Held, further, Ps are liable for accuracy-related penalties for gross valuation misstatements and negligence under sec. 6662(a), I.R.C.

R determined deficiencies in Ps' income tax on the basis of his disallowance of the individual Ps' assignment of income to their personal service corporation. Held: Ps are liable for portions of the deficiencies and sec. 6662(a) accuracy-related penalties in accordance with this opinion.

Ps granted qualified conservation easements to a qualified conservation organization in 2004, reporting noncash charitable contributions on their respective 2004 tax returns. Held: Ps are liable for the income tax deficiencies to the extent redetermined herein as the result of overvaluing the contributed conservation easements. Held, further, the Holmeses and the Tempels are not liable for sec. 6662(a), I.R.C., accuracy-related penalties.

During 2006 P, a self-employed individual, made a contribution to her pension plan. P deducted the contribution on her Schedule C, Profit or Loss From Business. Held: P is entitled to deduct her pension contribution when calculating her income tax liability but not when calculating her self-employment tax liability. P is not liable for the accuracy-related penalty.

R issued notices of deficiency determining deficiencies in Federal income taxes for P's 2005 and 2007 tax years and an I.R.C. sec. 6662(a) accuracy-related penalty for 2007. Held: P is liable for the deficiencies. Held, further, P is liable for the accuracy-related penalty for 2007.

P, a waitress, received from a customer a winning lottery ticket from the prior night's Florida lottery drawing although the ticket's winning status was at the time apparently unknown to the customer. Held: P made a 1999 gift of a 51% share of her interest in the winning lottery ticket. The discounted taxable value of the gift was $1,119,347.90.

R determined that 10 of P's workers were employees rather than independent contractors, and determined employment taxes and penalties against P. Held: Seven of 10 workers listed in the notice of determination of worker classification were independent contractors, and 3 were employees. Held, further, P is liable for an I.R.C. sec. 6651(a)(1) addition to tax and an I.R.C. sec. 6656(a) penalty with respect to the three employees.

Among the issues that we decided in our prior Opinion in this case was the deductibility, by the Estate of Irene M. Black, of certain fees. Held: Deductibility of the contested fees determined.

R determined deficiencies in P's 1994-96 income tax and imposed fraud penalties under I.R.C. sec. 6663(a), based upon omission of gross income, determined under the bank deposits method of… Held: P omitted items of gross income from his 1994-96 Federal income tax returns. 2. Held, further, P is liable for fraud penalties under I.R.C. sec. 6663(a). 3. Held, further, R's determinations were timely under I.R.C. sec. 6501(c)(1), because P filed false or fraudulent returns.

1. Held: Ps have failed to prove that PH's receipt of an arbitrator's award from his former employer on account of its wrongfully failing to accommodate PH's disability was excludible from gross income under I.R.C. sec. 104(a)(2) because of its being paid on account of personal physical injuries or physical sickness. 2. Held, further, Ps are not liable for I.R.C. sec. 6662 accuracy-related penalty.

D transferred assets to four limited partnerships and retained over $1,100,000 in her own name. D gave limited partnership interests in three of the four partnerships to her children and their heirs. Held: D's transfer of assets to the limited partnerships was a bona fide sale for full and adequate consideration, and thus the value of the transferred assets is not includable in D's gross estate pursuant to I.R.C. sec. 2036(a).

Ps were foreign citizens who worked in the United States at foreign embassies whose countries had not been certified by the U.S. State Department under I.R.C. sec. 893(b). Held: Notwithstanding our Opinion in Abdel-Fattah, R's position in these cases, though incorrect, was substantially justified under I.R.C. sec. 7430(c)(4)(B)(i), so that Ps may not recover costs.

R's Appeals Office determined that R was warranted in filing a notice of Federal tax lien against P with respect to assessed I.R.C. sec. 6672 responsible person penalties for certain… Held: Because the I.R.C. sec. 6672(b)(1) preliminary notice of proposed assessment of I.R.C. sec. 6672 penalties was mailed to P's last known (and, admittedly, correct) address, it satisfied the mailing requirements of that section, and the subsequent penalty assessments were valid. 2.

P, a lawyer, represented a criminal defendant who was cooperating with the Federal Government by facilitating the transfer of his foreign assets as restitution. Held: P realized income not when he received the stock, sold it, or borrowed against it, but only when he transferred sale proceeds to other accounts from which he later made personal expenditures.

P invested $310,000 in an oil and gas partnership in 2001; $110,000 of the investment was made in cash, and $200,000 was made by a subscription note maturing Dec. 31, 2009. Held: P's liability on the subscription note and related assumption agreement became nongenuine in 2003. Held, further, P must recognize a $200,000 gain for 2003 under I.R.C. sec. 465(e). Held, further, P is liable for an accuracy-related penalty under I.R.C. sec. 6662(a).

R denied P's request for interest abatement and sustained collection actions related to P's income tax deficiencies arising from P's participation in some of the Hoyt partnership tax shelters. Held: R's determinations are sustained.

R disallowed P's claimed $1 million general business credit resulting in his determining deficiencies in income tax and I.R.C. sec. 6662(a) accuracy-related penalties for P's 2005, 2006, and 2007 tax… Held: P is liable for the deficiencies. Held, further, P is liable for the I.R.C. sec. 6662(a) accuracy-related penalties.

P failed to timely file tax returns for his 2003, 2005, 2006, and 2007 tax years. Held: Respondent's determinations are sustained.

After R determined P had received income in 2007 which he failed to report, R issued a notice of deficiency determining a deficiency in income tax as well as additions to tax under I.R.C. secs.… Held: R's determinations are sustained.

P purchased an interest in a foreign corporation in 1996. A separate foreign shareholder held an interest in the foreign corporation that was four times greater than P's. The foreign corporation's business activities were effectively limited by its articles of incorporation and a shareholders agreement to include only the purchase of contingent interest notes from the separate foreign shareholder. As part of P's acquisition of its interest in the foreign corporation, P contemporaneously purchased a put option from the separate foreign shareholder. The option gave P the right to put its shares in the foreign corporation to the foreign shareholder in January 2003 or January 2007 or upon the occurrence of particular events that were beyond the control of the parties. The put amount was defined as the fair market value of the shares on the respective option exercise dates. The put agreement was referenced in the shareholders agreement, to which the foreign corporation was a party. The shareholders agreement also afforded P, upon the occurrence of certain events, the exclusive authority to convene a shareholders meeting at which the shareholders could (1) cause the foreign corporation to reduce its capital in order to redeem or repurchase P's shares, or (2) cause the foreign corporation to dissolve. P anticipated receiving dividends from its investment in the foreign corporation and claiming substantial direct and indirect foreign tax credits associated with those distributions. Held: P's investment in the foreign corporation is more appropriately characterized as a loan for Federal income tax purposes. Held, further, P is not entitled to deduct a capital loss in connection with its exit from the transaction.

Ps owed outstanding Federal income tax liabilities for tax years 2004, 2005, and 2006. R issued to Ps a levy notice to collect those unpaid liabilities. Held: There is a genuine issue of material fact as to whether Appeals, having advised Ps that their submission was sufficient, abused its discretion in terminating the CDP hearing and rejecting Ps' proposal for an installment agreement, rather than soliciting a satisfactory substitute proposal.

This case is before the Court on remand. Petaluma FX Partners, LLC v. Commissioner, 2012 U.S. App. LEXIS 4011 (D.C. Cir. Feb. 27, 2012), remanding without published opinion135 T.C. 581 (2010). We are instructed by the Court of Appeals for the District of Columbia Circuit to determine whether our decision in Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 2012 U.S. Tax Ct. LEXIS 6 (Feb. 13, 2012), "altered or overruled" our decision in Petaluma FX Partners, LLC v. Commissioner, 135 T.C. 581 (2010) (Petaluma III), on remand from591 F.3d 649, 656, 389 U.S. App. D.C. 64 (D.C. Cir. 2010) (Petaluma II), aff'g in part, rev'g in part and remanding on penalty issues131 T.C. 84 (2008), and to explain the current status of Petaluma III. Held: Tigers Eye did not expressly or implicitly alter or overrule Petaluma III; rather, Tigers Eye recognized that Petaluma III was rendered: (1) under the strict constraints of the law of the case doctrine and the rule of mandate; and (2) without consideration of Mayo Found. for Med. Educ. & Research v. United States, 562 U.S.    , 131 S. Ct. 704, 178 L. Ed. 2d 588 (2011), and Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d 691, 397 U.S. App. D.C. 7 (D.C. Cir. 2011), rev'g and remanding134 T.C. 211 (2010), supplementingT.C. Memo. 2009-195, vacated and remanded,132 S. Ct. 2100, 182 L. Ed. 2d 866, 2012 U.S. LEXIS 3308, 2012 WL 1468531 (Apr. 30, 2012). Held, further, the current status of Petaluma III remains unchanged.

Ps owned two S corporations whose businesses were related: one an auto dealership, the other, a finance company that purchases customer notes from the auto dealership. During the years in issue the finance company operated at a profit and the dealership operated at a loss. Ps did not have sufficient bases in the dealership to deduct its losses. Ps had substantial bases in the finance company. At the end of each year the finance company owned substantial accounts receivable due from the dealership. At the end of each year Ps received distributions of the accounts receivable from the finance company and then contributed them to the related dealership in order to increase their bases in the dealership enough to allow for the deduction of its losses. R disallowed the claimed loss deductions on the basis of R's determination that Ps' actions were insufficient to increase their bases in the dealership because the transactions between Ps and their related S corporations did not amount to Ps' making an economic outlay. Held: Shareholders in two related S corporations are not prohibited from receiving a distribution of assets from one of their S corporationsand then contributing those assets into another of their S corporations in order to increase their bases in the latter. The effect is to decrease the shareholders' bases in the S corporation making the distribution and thereby reducing the shareholders' ability to get future tax-free distributions from the distributing S corporation, while increasing the shareholders' bases in the S corporation to which the contributions are made. The fact that the two S corporations have a synergistic business relationship and are owned by the same shareholders does not preclude accomplishing Ps' goal, so long as the underlying distributions and contributions actually occurred. We find that these transactions did actually occur.

Held: On the evidence before us, Ps' acquisition of stock in an S corporation did not occur for the principal purpose of evading or avoiding income tax by obtaining the benefit of a deduction to… Held: On the evidence before us, Ps' acquisition of stock in an S corporation did not occur for the principal purpose of evading or avoiding income tax by obtaining the benefit of a deduction to which Ps would not otherwise have been entitled. SeeI.R.C. sec. 269.

P owed over $30,000 in income tax, penalty, and interest for 2004, but as a result of disability P was retired and was in financial hardship. Held: Appeals did not abuse its discretion in sustaining the filing of the notice of lien, and R's motion for summary judgment will be granted.

R determined deficiencies and penalties for Ps' 2001-04 tax years. Held: The property was a capital asset, and petitioners are liable for the portion of the deficiency in income tax attributable to the sale of the property as determined in this opinion.

After P failed to file valid or timely tax returns for the 2001 and 2003 through 2007 tax years, R prepared substitutes for returns under I.R.C. sec. 6020(b) and issued a notice of deficiency… Held: P is liable for the deficiencies in income tax and additions to tax under I.R.C. sec. 6651(a)(1) and (2). Held, further, P is liable for an I.R.C. sec. 6673 penalty of $3,000.

P failed to file Federal income tax returns for the 2004 through 2007 tax years. Held: P's basis in 2115 India Street, Los Angeles, Cal., is the $63,500 price he stated he paid for it. Held, further, P did not meet his burden of substantiating claimed expense deductions and is not entitled any of the disallowed expense deductions.

Ps, husband and wife with many children, resided in Israel at all relevant times; P-H was a U.S. citizen whereas P-W was not. Held: R's summary judgment motion will be granted; Ps are not entitled to either the dependency exemption deductions or the child tax credits. SeeI.R.C. secs. 152(b)(3), 24(c)(2); Carlebach v. Commissioner, 139 T.C. , 2012 U.S. Tax Ct. LEXIS 25 (July 19, 2012).

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

Held: The termination or rollout of equity split-dollar life insurance arrangements triggered Ps' realization of $710,376 in compensation income for 2003. Held: The termination or rollout of equity split-dollar life insurance arrangements triggered Ps' realization of $710,376 in compensation income for 2003.

P failed to file tax returns for 2003 and 2004. Held: P is liable for the deficiencies in income tax and additions to tax under I.R.C. secs. 6651(f) and (a)(2) and 6654 for 2003 and 2004. Held, further, P is liable for an I.R.C. sec. 6673(a)(1) penalty of $15,000.

P sold shares of M at a gain but failed to report that gain, claiming that he is entitled to defer recognizing that gain because a substantial… Held: P is not entitled to defer recognition of gain on sales of M stock because he failed to prove a qualifying rollover to another qualified small business stock; we need not therefore consider P's claim that R improperly denied him administrative relief from his failed election. Held, further, P failed to prove capital losses.

P filed a petition for judicial review pursuant to I.R.C. sec. 6330(d)(1)(A) in response to R's determination that levy action was appropriate. Held: R's determination is sustained. Held: R's determination is sustained.

P-W filed joint Federal income tax returns with P-H for the 2004 and 2005 taxable years. P-H settled the 2004 and 2005 tax years with R. P-W seeks relief from joint and several liability under I.R.C. sec. 6015 with respect to the 2004 and 2005 tax liabilities. Held: P-W is entitled to relief from joint and several liability, pursuant to I.R.C. sec. 6015(c) with respect to her 2004 and 2005 taxable years.

R mailed a notice of deficiency to Ps on Apr. 8, 2011. Held: The petition was not timely filed, and the Court does not have jurisdiction to decide Ps' case.

R determined a tax deficiency, an accuracy-related penalty pursuant to I.R.C. sec. 6662(a) and an addition to tax pursuant to I.R.C. sec. 6651(a)(1) for P's 2004 tax year. The deficiency stems from R's disallowance of certain deductions taken by a wholly owned S corporation, thus increasing P's flowthrough income, and from R's determination that P received other income. The parties stipulated P's tax deficiency and the accuracy-related penalty, leaving only the I.R.C. sec. 6651(a)(1) addition to tax in dispute. Held: P is liable for the I.R.C. sec. 6651(a)(1) addition to tax.

Ps filed a petition for review pursuant to I.R.C. sec. 6330 in response to R's determination that the levy action was appropriate and that abatement of additions to tax under I.R.C. secs. 6651(a)(2) and 6654(a) should be denied Held: R's determination to proceed with collection action is sustained except to the extent modified herein. Held, further, Ps are liable for the I.R.C. sec. 6651(a)(2) addition to tax. Held, further, Ps are not liable for the I.R.C. sec. 6654(a) addition to tax.

R mailed to P duplicate notices of deficiency for P's 2007 tax year. The petition herein was not timely filed. R and P filed competing motions to dismiss for lack of jurisdiction. R seeks dismissal on the ground that the petition was not timely filed. P seeks dismissal on the grounds that the notice was invalid because R failed to send either notice to P's last known address and P did not receive notice in time to file a timely petition. Held: P received actual notice of the deficiency with ample time remaining to file a timely petition but failed to do so. Held, further: Because P failed to file a timely petition, we will dismiss in favor of R.

Held: Ps, who concede deficiencies in tax attributable to their failure to pay self-employment tax on P-H's compensation from the World… Held: Ps, who concede deficiencies in tax attributable to their failure to pay self-employment tax on P-H's compensation from the World Bank, do not qualify for the I.R.C. sec. 6664(c) reasonable cause exception to I.R.C. sec. 6662(a) accuracy-related penalties for failure to show the resulting underpayments in tax were due to reasonable…

P filed a petition for review of a lien and levy filing pursuant to I.R.C. secs. 6320 and 6330 in response to R's determinations that the collection actions were appropriate. Held: R's determinations are sustained.

R determined tax deficiencies and accuracy-related penalties pursuant to I.R.C. sec. 6662(a) for P's 2007, 2008, and 2009 taxable years. Held: R's disallowance of the gambling losses for all years and the American opportunity credit for 2009 is sustained. Held, further, P is entitled to an itemized deduction for taxes of $958 for 2009. Held, further, P is liable for the I.R.C. sec 6662(a) penalties.

Ps reported flowthrough income from P-H's business on their 2006 and 2007 tax returns. Held: R's determinations are sustained.

P is an attorney admitted to practice law in New York and before the U.S. Tax Court. Prior to trial P failed to follow various orders of the Court. Held: Pursuant to Rule 123, Tax Court Rules of Practice and Procedure, the Court may enter a decision against a party who fails to properly prosecute or is in default. P failed to properly prosecute his case and is in default. Decision will be entered against P.

R moves for summary judgment in his favor because the only issue P raised in this action to review R's determination to proceed with the collection of unpaid taxes is a challenge to the amounts of petitioner's underlying tax liabilities, which issue, R argues, P cannot raise because it received a statutory notice of deficiency (deficiency notice). SeeI.R.C. sec. 6330(c)(2)(B).

P owed Federal income tax liabilities for tax years 2004, 2005, and 2006. R issued to P a notice of proposed levy to collect those unpaid liabilities. Held: IRS Appeals did not abuse its discretion, and R's motion for summary judgment will be granted.

P and P's brother were appointed coexecutors of their mother's estate, which included a residence valued at $430,000. Held: P is not entitled to the first-time homebuyer credit because he did not purchase the single-family home as that term is defined by I.R.C. sec. 36(c)(3)(A)(i).