Slip opinions decided 2014 — Tax Court Memorandum

R determined that Ps were engaged in a civil fraud scheme and liable for the I.R.C. sec. 6663 75% civil fraud penalty for the tax years at issue. Held: R did not prove by clear and convincing evidence that Ps' underpayments were attributable to fraud. Accordingly, Ps are not liable for the I.R.C. sec. 6663 civil fraud penalty.

At the time of her death, D owned a 23.44% interest in a family-owned personal holding company ("PHC"), whose assets consisted primarily of publicly traded stock. D's estate tax return reported the fair market value of D's interest in PHC as $3,149,767, using a capitalization-of-dividends method to value the asset. R used instead a net asset value ("NAV") method and determined a deficiency in D's estate tax as well as an accuracy-related penalty under I.R.C. sec. 6662. Held: The fair market value of D's 23.44% interest in PHC is better determined by an NAV method and is $6,503,804 Held, further, P is liable for a 20% accuracy-related penalty under I.R.C. sec. 6662(a), (b)(5), and (g).

R included in P's gross income a portion of P's salary received from his employment as a Junior Reserve Officers' Training Corps instructor that P claims represents nontaxable amounts received as… Held: P did not receive any nontaxable allowances from the Federal Government because he was employed by the Baltimore City Public School System and was not on active duty. 2. Held, further, P is liable for an accuracy-related penalty.

Ps claimed mortgage interest deductions on their 2008 and 2009 Schedules C, Profit or Loss From Business, for a property they owned and had intended to rent out. R determined that Ps were not entitled to Schedule C deductions, but rather the property was a personal residence and Ps are able to deduct the mortgage interest payments only as qualified residence interest deductions on their Schedules A, Itemized Deductions, subject to the $1.1 million I.R.C. sec. 163(h) limitation. Held: The mortgage interest P-H paid in 2008 and 2009 on Ps' personal residence is not an ordinary business expense, but rather is deductible as an itemized interest deduction on each Schedule A and is subject to the qualified residence limitation of I.R.C. sec. 163(h). Held, further, P-H's property at 420 Cazador Lane is a personal residence. Held, further, for each year in issue, P-H is able to deduct the interest paid with respect to an amount allocable to the $1.1 million of acquisition and home equity indebtedness, but R properly disallowed a deduction for the remaining mortgage interest paid.

In 2004 Ps owned and operated several tiered business entities that promoted tax sheltered investments involving the purchase and sale of Brazilian receivables, brokered and developed real property, and attempted to bring a medical device to market. Ps failed to report as income some of the gross receipts of their business entities, and Ps contend that the unreported amounts were held "in trust" for another related entity. Ps' business entities claimed deductions associated with their operations that Ps could not substantiate. Ps also failed to report on Schedule C all of the income from P-H's attorney activity, claimed some deductions for that activity that they could not substantiate, and failed to deduct certain amounts that they did expend. By notice of deficiency issued in 2010, R determined that Ps did not report all of their income and that some of their claimed deductions were unsubstantiated and must be disallowed. R also determined that Ps are liable for an accuracy-related penalty. Held: With a few exceptions, Ps failed to substantiate their entitlement to business expense deductions beyond those R already allowed. Held, further, Ps failed to include certain amounts in gross income that should have been reported on their tax return. Held, further, certain receipts of one of Ps' business entities were not held in trust and were properly includable in that entity's gross receipts. Held, further, Ps are liable for an accuracy-related penalty.

Z and then spouse S sought to contribute a facade conservation easement on their property to the National Architectural Trust (Trust). Z and S obtained an appraisal claiming the value of the conservation easement to be $660,000 as of July 26, 2004. On or before September 22, 2004, Z, S, and the Trust all signed a conservation deed of easement. However, the deed was not recorded until January 26, 2005. Z and S each claimed a charitable contribution deduction of $330,000 for the conservation easement on their separately filed 2004 tax returns. Because of applicable gross income limitations on charitable contribution deductions, seeI.R.C. sec. 170(b)(1)(B), Z and S were able to use only part of the deduction for 2004 and they carried the excess forward. R issued a notice of deficiency to Z for 2004 and a notice of deficiency to S for 2005-07 disallowing the charitable contribution deductions. Held: The conservation easement was not protected in perpetuity until January 26, 2005. Held, further, Z is not entitled to a deduction for the conservation easement for 2004. Held, further, S substantially complied with the substantiation requirements with respect to the conservation easement, notwithstanding the premature nature of the appraisal. Held, further, the fair market value of the conservation easement is $157,500 as of January 26, 2005. S is entitled to a deduction of $78,750 for 2005. Held, further, Z and S meet the reasonable cause and good faith exception to the accuracy-related penalties for 2004 and 2005, respectively. Held, further, S is liable for gross valuation misstatement penalties for 2006 and 2007.

P has a serious and sometimes disabling illness, and did not timely file a return for the 2007 tax year. Held: Appeals properly considered the issues P raised during his CDP hearing when issuing its supplemental notice of determination.

Ps attempted to amend year 1 return to add loss from business reported on Schedule C, Profit or Loss From Business. Held: Ps failed to prove (1) error in year 1 adjustment or (2) year 1 expenses beyond those agreed to by R. Held, further, Ps failed to prove (1) year 2 expenses or (2) that Ps erroneously reported year 2 gross receipts. Held, further, accuracy-related penalties sustained.

R issued a notice of transferee liability to P to collect N's unpaid Federal income tax pursuant to I.R.C. sec. 6901. R argues that under Texas State law: (1) P has transferee liability with respect to a special dividend that N distributed to P and (2) P has transferee-of-transferee liability with respect to P's proceeds from his sale of N stock. Held: P is a transferee under Federal law principles pursuant to I.R.C. sec. 6901. Held, further, under Texas State law, P has transferee liability with respect to the special dividend. Held, further, under Texas State law, P has transferee-of-transferee liability with respect to the proceeds from the sale of N stock.

R disallowed P's costs of goods sold and deductions for expenses relating to his sports memorabilia activity and to his computer activity. R disallowed those costs and deductions relating to the memorabilia activity on the grounds that P had failed to show that the activity was an activity engaged in for profit or, if it was, that P had substantiated those expenditures. R disallowed the costs and deductions relating to the computer activity for lack of substantiation. 1. Held: R's denial of deductions is sustained for P's lack of substantiation and, with respect to the memorabilia activity, because P failed to show that it was "for profit within the meaning of section 183." 2. Held, further, additions to tax sustained.

In 2004 Ps granted to a qualified organization a facade easement on a townhouse they owned. With respect to that donation they claimed a charitable contribution deduction for 2004 and carryover charitable contribution deductions for 2005 and 2006. R disallowed the deductions because he determined the easement was valueless. R also determined that Ps were liable for a gross valuation misstatement penalty pursuant to I.R.C. sec. 6662(h) on the underpayment attributable to the easement overvaluation for each year. Ps and R now agree that the easement Ps contributed to the qualified organization was valueless. They further agree that Ps had underpayments attributable to gross valuation misstatements on their 2004, 2005, and 2006 returns attributable to the easement overvaluation but that Ps are not liable for penalties under I.R.C. sec. 6662(h) for 2004 and 2005 because Ps had reasonable cause for those underpayments. R claims that 2006 amendments to I.R.C. sec. 6664(c) preclude Ps from raising a reasonable cause defense to the penalty for their 2006 underpayment attributable to the carryover of the charitable contribution deduction. Ps argue that the reasonable cause exception is available to them because Congress did not intend to eliminate it for underpayments resulting from carryover deductions arising in years before the statute was amended. Held: Because their 2006 return was filed after the effective date of 2006 amendments to I.R.C. sec. 6664(c)(3), Ps are precluded under that section from raising a reasonable cause defense to imposition of the gross valuation misstatement penalty for the underpayment on their 2006 return attributable to the carryover of their charitable contribution deduction.

P filed a petition for redetermination with this Court on June 6, 2014. Some 3 1/2 hours later that same day P filed a petition for bankruptcy with the U.S. Bankruptcy Court for the Northern District of California. Thereafter R moved to dismiss the case in this Court for lack of jurisdiction on the ground that the automatic stay imposed by 11 U.S.C. sec. 362(a)(8) (2012) operated to bar the commencement of a case in this Court. Held: P filed her petition with this Court before she filed her petition with the bankruptcy court and thus before the automatic stay took effect. Accordingly, P properly invoked this Court's jurisdiction. Held, further, R's motion to dismiss will be denied.

P, a sculptor who works in cast bronze and sells his artwork through a wholly owned S corporation, filed a Federal income tax return for 2007 on which he self-reported a tax due of $163,928 that he failed to remit with his return. R assessed the unpaid tax plus certain additions to tax and interest, which totaled more than $200,000 and, thereafter, issued a notice of intent to levy. P requested and received a collection due process (CDP) hearing, which resulted in his agreeing with the Appeals officer on the terms of an installment agreement for full payment of his assessed liability. On the basis of her interpretation of relevant provisions of the Internal Revenue Manual (IRM) the Appeals officer insisted upon the filing of a notice of lien as a condition of entering into the installment agreement. P argued that a notice of lien would destroy his sculpting business, rendering him unable to satisfy the terms of the installment agreement, and he rejected the Appeals officer's proposal. Appeals then issued a notice of determination sustaining the notice of levy and authorizing collection by levy of the assessed liability. P filed a petition with this Court pursuant to I.R.C. sec. 6330(d)(1) alleging that the Appeals officer abused her discretion by misinterpreting the requirements of the IRM and believing she had no choice but to require that a notice of lien be filed in conjunction with the installment agreement. 1. Held: The Appeals officer erroneously concluded that the IRM required the filing of a notice of lien in the circumstances of this case. 2. Held, further, as a result, the Appeals officer failed to properly balance the need for the efficient collection of P's liability with P's legitimate concern that collection action be no more intrusive than necessary as required by I.R.C. sec. 6330(c)(3)(C). 3. Held, further, Appeals' determination to sustain the notice of levy and proceed with collection by levy is rejected and the case will be remanded to Appeals for a supplemental CDP hearing with directions to perform the balancing of factors required by I.R.C. sec. 6330(c)(3)(C) before determining the appropriate collection action.