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.

R determined a deficiency in income tax for P's 2008 taxable year arising from P's alleged failure to report additional income from her business. Held: P established by a preponderance of the evidence that she received some of the deposits allegedly constituting unreported income as an agent, trustee, and/or mere conduit, but she failed to prove this theory for other deposits and must include these latter deposits in income.

In 2003 B, a partnership, granted a perpetual conservation easement on a 22-acre parcel of land to a nonprofit corporation. Held: The easement is not a qualified real property interest of the type described in I.R.C. sec. 170(h)(2)(C).

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.

Ps, husband and wife, are U.S. citizens. Held: The assertion that the period of limitations expired before the IRS' mailing of a notice of deficiency is an affirmative defense which Ps must prove.

Until 2004 P was the guardian of M.W. A State court placed M.W. in P's home from 1991 to 2004. In 2004, when M.W. turned 18, P's guardianship over M.W. was terminated under State law. However, P continued to maintain and provide for M.W. In 2006, M.W. had a child, H.A.W. On her timely filed 2011 tax return, P claimed dependency exemption deductions for M.W. (as a "qualifying relative") and H.A.W. (as a "qualifying child"), as well as an earned income tax credit, a child tax credit, and head of household filing status. The IRS disallowed these deductions and credits and the claimed filing status. The IRS later conceded P's entitlement to the dependency exemption deduction as to M.W. but not the other adjustments. Held: P is not entitled to a dependency exemption deduction for M.W.'s child, H.A.W., as a "qualifying child". Held, further, P is not entitled to the earned income tax credit or the child tax credit for H.A.W. Held, further, P is not entitled to file as head of household.

R determined a deficiency in Ps' Federal income tax for tax year 2001 on the basis of their amended 2001 Federal income tax return. Held: Regardless of whether P-H transferred the K shares to P-W for U.S. tax purposes before their sale, Ps had zero bases in the K shares when they were sold.

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.

During 2002 and 2003 P-H was the sole shareholder of J, an S corporation. J, an automotive dealership, accounted for its new and used vehicles inventories on the LIFO method of accounting. Held: J failed to satisfy the requirements for automatic consent under Rev. Proc. 99-49, 1999-2 C.B. 725, because it did not comply with all terms and conditions of the revenue procedure.

P failed to file a Federal income tax return for 2010 and to report compensation he received from two payors. Held: The Court may consider any relevant facts and circumstances to determine whether to impose an I.R.C. sec. 6673(a)(1) penalty on P. Held, further, the Court will take notice of its proceedings in a prior case, in which P's wife was the sole petitioner, because P participated in that prior case and was thereby given notice that his…

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.

P petitioned for review of a determination by the Internal Revenue Service Appeals Office upholding R's filing of a notice of Federal tax lien (NFTL) and rejecting P's proposed collection alternative. Held: P breached the agreement, and R was within his rights to terminate it, to reinstate unpaid tax, and to move to collect the unpaid tax by filing the NFTL. Held, further, remanded to Appeals Office to explain its basis for rejecting P's collection alternative.

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.

P was an officer and responsible person of C, which failed to pay its employment taxes for several calendar quarters. R mailed P a notice of intent to assess trust fund recovery penalties pursuant to I.R.C. sec. 6672, but P did not receive such notice. R then assessed the penalties. P did not satisfy them, and R issued a final notice of intent to levy. P filed a request for an administrative hearing. R's settlement officer ultimately sustained the proposed levy. P then filed a petition for judicial review, challenging the underlying liabilities and alleging abuse of discretion by the settlement officer. In due course the case was submitted for decision fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. Held: P is liable for the trust fund recovery penalties. SeeRules 122(b), 142(a), Tax Court Rules of Practice and Procedure. Held, further, R's determination to proceed with the levy is sustained in the absence of abuse of discretion by the settlement officer.

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.

Before 2010 P filed for unemployment benefits with the California Employment Development Department, which issued P biweekly checks during 2010 and reported to the Commissioner total 2010 payments to… Held: P is not entitled to relief from joint and several liability under I.R.C. sec. 6015(b), (c), or (f).

In 2007 P-H operated a medical practice through his wholly owned S corporation (S). On its 2007 Federal income tax return S reported income and claimed deductions for various expenses. Held: Ps established by a preponderance of the evidence that some of the alleged unreported income consisted of nontaxable loan proceeds, but the balance constitutes taxable income. Held, further, Ps adequately substantiated some, but not all, of the expenses for which S claimed deductions.

In 2008 and 2009 P-H operated a landscaping business as a sole proprietorship. Ps reported gross receipts from and claimed deductions for expenses incurred by the landscaping business on their 2008 and 2009 joint Federal income tax returns. Ps filed those tax returns untimely, and R audited them. On the basis of a bank deposits analysis R determined that Ps had received but failed to report additional business income and other income. R also disallowed for lack of substantiation many of Ps' claimed business expense deductions, including portions of their deductions for car and truck, interest, and other expenses. R determined for each tax year a deficiency in income tax, an I.R.C. sec. 6651(a)(1) addition to tax, and an I.R.C. sec. 6662(a) accuracy-related penalty. Held: Ps established by a preponderance of the evidence that some of the unreported deposits consisted of nontaxable transfers and loan proceeds, and that some of the alleged unreported income R determined resulted from computational errors in the bank deposits analysis. Ps failed to establish that the balance of the determined unreported income was nontaxable or resulted from computational errors. Held, further, with the exception of depreciation allowable for two vehicles used in P-H's business, Ps failed to adequately substantiate car and truck expenses in excess of the amounts R has already allowed. Ps further failed to adequately substantiate interest or other business expenses in excess of the amounts R has already allowed. Held, further, Ps are liable for the I.R.C. sec. 6662(a) accuracy-related penalty for the 2008 tax year.

P, a U.S. citizen, worked abroad in 2009 and failed to file a Federal income tax return for 2009. R prepared and filed a substitute for return ("SFR") for P's 2009 year in January 2012, and in April 2012 R issued to P a statutory notice of deficiency ("NOD"). In May 2012 P filed a Form 1040, "U.S. Individual Income Tax Return", for 2009 and reported $101,244 of income but excluded $23,032, claiming a foreign earned income exclusion ("FEIE"). With her return, P sent R a payment of the resulting balance due, and R processed the return and payment and closed the NOD. R subsequently audited P's return for 2009 and issued to P a second NOD which disallowed P's claimed FEIE because she did not make a valid election under 26 C.F.R. sec. 1.911-7(a)(2), Income Tax Regs. R filed a motion for partial summary judgment, and P filed an opposition and a cross-motion for partial summary judgment arguing that the regulation is invalid. Held: The Secretary of the Treasury had authority to promulgate the regulation under the specific authority granted to him under I.R.C. sec. 911 as well as under his general authority to promulgate regulations under I.R.C. sec. 7805(d). The regulation is a valid implementation of the statute. See Faltesek v. Commissioner, 92 T.C. 1204 (1989).

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.

Certain corporations (Cs) simultaneously entered economically offsetting long and short options and subsequently contributed the option spreads to one of two LLCs, ADI or ADG. Held: ADI and ADG are tax-ignored entities for Federal tax purposes; R's adjustments are sustained; further proceedings will be necessary to determine the treatment of reported items. Held, further, ADI's investment interest expense is not disallowed.

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.

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.