Slip opinions decided 2015 — Tax Court Memorandum

R determined deficiencies in income tax for Ps' 2002, 2003, and 2004 taxable years arising from Ps' failure to report income they received in connection with an ESOP and an S corporation, R's disallowance of deductions for passthrough losses from Ps' wholly owned partnership, and related computational adjustments. Before trial the parties settled outstanding issues other than Ps' entitlement todeductions for passthrough losses from their partnership, and they agreed to try the case as if Ps had directly claimed on their individual returns the deductions underlying the passthrough losses. Held: The stipulation of settled issues does not authorize Ps to deduct expenses reported by the S corporation and a related C corporation or a $100,000 passthrough loss for 2002 from the partnership. Held, further, R properly disallowed all deductions for passthrough losses from the partnership for 2002, 2003, and 2004. Held, further, Ps failed to substantiate most of the expenses underlying the partnership's losses for 2002, 2003, and 2004, and those expenses are therefore not deductible. Ps may deduct expenses as conceded by R and certain expenses that have been adequately substantiated. Held, further, Ps are liable for penalties under I.R.C. sec. 6662(a) as to any underpayments resulting from R's disallowance of deductions for passthrough losses from the partnership, to the extent Ps may not deduct the underlying expenses directly.

P petitioned for review of Appeals' determination to proceed by lien to collect unpaid income tax liabilities. Held: P's previous opportunities to challenge underlying tax liabilities for all but two of the years in issue preclude our considering underlying liabilities for those years. Held, further, P has failed to show that overpayments of tax were not properly applied by R.

P failed to collect and remit employment taxes on behalf of a corporation that she controlled. Held: This Court has jurisdiction under I.R.C. sec. 6330 because the bankruptcy stay applicable to P's corporation does not apply to her as an individual. Held, further, P is not entitled to CNC status because of the equity in her assets. Held, further, R correctly applied the payments against the corporate tax liability.

P was the president, sole shareholder, and treasurer of Company (C). In 2002 C filed for bankruptcy and P was removed and replaced by a bankruptcy trustee. Held: Appeals afforded P an opportunity to dispute his underlying liability for the assessed I.R.C. sec. 6672 penalties in the Letter 1153 Appeals conference, thereby precluding him under I.R.C. sec. 6330(c)(2)(B) from later disputing that liability at the CDP hearing.

In the answer, R asserted an increased deficiency in income tax on account of his disallowance of a legal expense deduction P claimed on one Schedule C, Profit or Loss From Business, addressing her… Held: P is entitled to one-half of the claimed legal expense deduction.

On his 2008 and 2009 Federal income tax returns P reported (1) significant wage income from full-time employment and (2) business losses resulting from deductions claimed and, for 2009, gross… Held: P is liable for the deficiencies. Held, further, P is liable for the accuracy-related penalties.

Held: P had unreported income from his wholly owned S corporation. Held, further, he had unreported rental income. Held: P had unreported income from his wholly owned S corporation. Held, further, he had unreported rental income. Held, further, he is entitled to a deduction for only one personal exemption. Held, further, he is not entitled to head of household filing status. Held, further, he is entitled to no child tax credit.

P operates two veterinary practices, one through a wholly owned S corporation (S). P donated trilobite fossils to an I.R.C. sec. 501(c)(3) qualified organization in 2006 and 2007. R audited P's and S's 2006, 2007, and 2008 Federal income tax returns and determined a deficiency in P's income tax for each year. R disallowed P's claimed I.R.C. sec. 170(a) deductions for his fossil donations and certain pass-through deductions from S for 2006, 2007, and 2008. R contends that P did not substantiate his and S's deductions. Although R did not make a determination under I.R.C. sec. 446(b), R asserts that S used the cash method of accounting and could not deduct accrued expenses. R further determined I.R.C. sec. 6662(a) accuracy-related penalties for all three tax years. Held: R properly disallowed P's I.R.C. sec. 170(a) non-cash charitable contribution deductions for 2006, 2007, and 2008 because P failed to obtain qualified appraisals of the donated fossils' values. Held, further, S was on the accrual method of accounting for tax years 2006, 2007, and 2008. Held, further, P adequately substantiated certain expenses of S, but because P failed to substantiate other expenses, R properly disallowed deductions for those other expenses. Held, further, P is not liable for I.R.C. sec. 6662(a) accuracy-related penalties with respect to certain portions of his underpayments for 2006 and 2007 because he established reasonable cause and good faith. P is liable for I.R.C. sec. 6662(a) accuracy-related penalties with respect to the balance of his underpayments for 2006 and 2007.

Until it ceased operations in April 2007, P was a single-member LLC owned and managed by B who, because P was a disregarded entity under the check-a-box regulations, reported P's results on a… Held: We have jurisdiction to decide this case even though the notice of determination was mailed to and the case was instituted in the name of P, a defunct, disregarded entity. 2.

P requested an Appeals hearing after receiving a notice of Federal tax lien for her taxable years 2004 through 2008. Held: The documents R submitted are sufficient to establish the validity of R's assessments for 2005 through 2008; P's motion for summary judgment will be denied.

In 1998, P-H's wholly owned S corporation, H, became a participating employer in the A Plan, which purported to be a "10 or more employer" welfare benefit plan under I.R.C. sec. 419A(f)(6), providing death benefits to selected employees of an employer participating in the plan. To fund the death benefits for covered employees, each participating employer made cash contributions to a trust associated with the A Plan, which, by and through the plan trustee, used the cash to fund premiums for a life insurance policy on the life of each covered employee. The trustee was both owner and beneficiary of the policies. In September 2002, B, the plan administrator, advised employer participants that, under anticipated final IRS regulations, they would lose their deductions for payments to fund insurance policy premiums under the A Plan and that it intended to terminate the A Plan in 2003. In October and November 2002, P-H, on behalf of H, attempted, unsuccessfully, to terminate H's participation in the A Plan and have the policy on P-H's life transferred directly from the A Plan to the BS Plan, a separate I.R.C. sec. 419A(f)(6) welfare benefit plan. On several occasions during 2003, B advised H to voluntarily terminate its participation in the A Plan, which, under the terms of the plan, would entail a distribution of the policies to covered employees, taxation of each employee on the net cash surrender value of his or her policy, and the employee's transfer of the policy to a new plan. B stated that it could not allow a direct transfer of an insurance policy from it to another plan administrator. Pursuant to that advice, in October 2003, H executed a corporate resolution terminating its participation in the A Plan. After receiving that resolution, B, on October 29, 2003, mailed to P-H a transfer of policy ownership form, signed by the trustee under the A Plan as the "Old Owner" of P-H's policy, and a blank change of beneficiary designation form. On November 11, 2003, a representative of the BS Plan signed the transfer of policy ownership form as the "New Owner" of the policy. The actual transfer of the policy did not occur until January 2004. Ps argue that (1) they could not have received taxable income with respect to the policy transfer any earlier than 2004 when P-H's policy was actually transferred to the BS Plan and (2) that transfer was exempt from tax under I.R.C. sec. 1035, which provides for nonrecognition of gain on an exchange of life insurance policies. R argues that (1) Ps were taxable in 2003 under I.R.C. sec. 402(b)(1) or (2), either when H terminated its participation in the A Plan or when B provided to P-H the transfer of policy ownership form signed by the A Plan trustee, which allowed P-H to either retain the policy or transfer it to a new owner, and (2) I.R.C. sec. 1035 is inapplicable because there was no exchange of policies. R also seeks to impose a 20% substantial understatement penalty under I.R.C. sec. 6662(a). 1. Held: Ps are taxable, under I.R.C. sec. 402(b)(1), on the net cash or "accumulation" value of P-H's policy in 2003, either when H terminated its participation in the A Plan or when B provided to P-H the transfer of policy ownership form signed by the A Plan trustee. Gluckman v. Commissioner, T.C. Memo. 2012-329, aff'd, 545 F. App'x 59 (2d Cir. 2013), followed. 2. Held, further, I.R.C. sec. 1035 is inapplicable because there was no exchange of life insurance policies. 3. Held, further, I.R.C. sec. 6662(a) penalty sustained.