Slip opinions decided 2017 — Tax Court Memorandum

P-H was the sole shareholder and president of CLCL, an S corporation. CLCL provided high-risk capital to various companies, including G-L, LFP, and WSC. Held: The advances by P-H through CLCL were not loans but investments in equity, and they did not become worthless in 2005. Therefore Ps are not entitled to a business bad debt deduction for 2005. Held, further, Ps are liable for an accuracy-related penalty under I.R.C. sec. 6662(a).

P asks us to review a determination by IRS Appeals sustaining a lien notice and a notice of proposed levy to collect delinquent installment payments of estate tax. Held: IRS Appeals' determination is sustained.

H and W owned INC and LLC, each an S corporation. During tax years 2000 through 2002, INC accumulated unpaid payroll tax liabilities, for which trust fund recovery penalties subsequently were assessed against H and W. INC did not file any tax returns from 2003 through 2011 and was administratively dissolved by the State of Arizona in 2007. In 2012 LLC sent $215,000 from its bank account to the trust account of H and W's attorney, who then sent a certified check in that amount to the Internal Revenue Service. INC filed a tax return for 2012, indicating that it is a cash basis taxpayer and showing no assets, income, or other tax items, with the exception of a deduction of $180,911 for salaries and wages. This deduction was passed through to H and W as an ordinary business loss. INC did not pay any salaries or wages in 2012, nor did it have any bank accounts at any point in 2012. Held: INC was not engaged in a trade or business in 2012. Held, further, even if its liabilities arose from the conduct of a prior trade or business, INC is not entitled to a deduction for 2012 of $180,911 for salaries and wages because by 2012 it was no longer in existence. Held, further, even if INC did exist in 2012, it is not entitled to the deduction because it did not actually pay the amount in question. Held, further, even if INC existed in 2012 and paid the amount in question, it is not entitled to the deduction because the payment was of nondeductible trust fund recovery penalties assessed against H and W. Seesec. 162(f); Patton v. Commissioner, 71 T.C. 389 (1978).

R mailed P a notice of determination sustaining a proposed collection action. P prepared a petition, applied postage using a private postage meter, and mailed the petition to the Court. The Court did not receive the petition within 30 days of the date of the notice of determination. Further, the petition was received by the Court later than a document "would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service on the * * * last day of the period, prescribed for filing the * * * [petition]." R moved to dismiss the case for lack of jurisdiction. Held: P's petition does not satisfy the requirements of sec. 301.7502-1(c)(1)(iii)(B)(2), Proced. & Admin. Regs., and we must dismiss this case for lack jurisdiction.

P-H is a real estate entrepreneur. During or before 1997, P-H and at least two Chinese citizens who he believed were politically influential formed a venture in China intending to prosper financially… Held: Ps failed to report income to the extent stated herein. Held, further, tax consequences determined as to four items that the parties dispute as to income that respondent determined was reportable on Schedule D, Capital Gains and Losses.

H operated bail bonding and towing businesses throughout tax years 2008, 2009, and 2010. Held: R's adjustments are sustained because Ps have failed to prove by a preponderance of the evidence that the determinations in the notice of deficiency are incorrect.

P provided information to the IRS Whistleblower Office (WO) regarding individuals TH and TW's alleged failure to disclose their ownership… Held: We need not decide the standard of review in this case because we would sustain R's determination under either a de novo or an abuse of discretion standard of review. Held, further, because the administrative action taken by the IRS against the taxpayers was not based on his information, P is not entitled to a whistleblower award.

P was a North Carolina fireman for over 24 years before retiring on disability in 1991. At that time he began receiving from LGERS a disability retirement allowance computed with reference to his age, length of service, and average final compensation. In a later year he also began receiving an FRSWPF pension. For 2012 P received information returns from LGERS and FRSWPF showing taxable distributions of $34,829 and $2,000, respectively, but reported only $2,324 of taxable retirement income. For 2012 P also failed to report as income certain distributions, an error he has since conceded. Held: The LGERS and FRSWPF distributions are not excludable from gross income as amounts received under workmen's compensation acts as compensation for injuries or sickness because they are retirement pensions determined by reference to P's age or length of service, or his prior contributions. Seesec. 1.104-1(b), Income Tax Regs.

Ps were the sole owners of a corporation (C). C partially redeemed Ps' shares for its liquid noncash assets and then sold all its operating assets, which generated a large tax liability. Held: Under I.R.C. sec. 6901, the question of whether we can or must recast a series of transactions is a question of state fraudulent-transfer law.

P and R entered into two advance pricing agreements (APAs) establishing a transfer pricing methodology for covered transactions between P and its subsidiaries. The first APA (APA I) applied for P's 2001-05 tax years, and the second APA (APA II) applied for P's 2006-10 tax years. P and R agreed that the legal effect and administration of APA I and APA II were governed by Rev. Proc. 96-53, 1996-2 C.B. 375, and Rev. Proc. 2004-40, 2004-2 C.B. 50, respectively. In 2011 R determined that P had not complied with the applicable terms of the revenue procedures and canceled APA I, effective January 1, 2005, and APA II, effective January 1, 2006. As a result of canceling the APAs, R determined that under I.R.C. sec. 482 an adjustment was necessary to reflect an arm's-length result for P's intercompany transactions. P contends that R's cancellation of APA I and APA II was an abuse of discretion because there was no basis for the cancellation under the applicable revenue procedures. R contends that the determination to cancel both APA I and APA II was not an abuse of discretion because P did not comply in good faith with the terms and conditions of either APA I or APA II and failed to satisfy the APA annual reporting requirements. As an alternative position, R determined that P transferred intangible property compensable under I.R.C. sec. 367(d) to P's controlled foreign affiliates for tax year 2006. On July 15, 2005, P entered into a stock purchase agreement to purchase all of the outstanding stock of THI. THI planned to enter into bonus agreements with certain executives that provided for stock option grants. THI entered into agreements with certain executives to provide them with cash bonuses in exchange for their release of claims related to any stock options. For tax year 2005 P claimed a deduction for the bonus amount payments. R determined that P was not entitled to the deduction and that the bonus payments should have been capitalized under I.R.C. sec. 263. P contends that it is entitled to a deduction under I.R.C. sec. 162(a) because the bonus payments represented additional employee compensation. Held: R's determination to cancel APA I and APA II was an abuse of discretion. Held, further, P did not transfer intangibles subject to I.R.C. sec. 367(d). Held, further, P's bonus payments represented employee compensation, entitling P to a deduction under I.R.C. sec. 162(a).

P-H flew airplanes for a South Korean airline company in 2011 and 2012, but he spent only about a third of each year in South Korea and more than 40% of each… Held: For 2011 and 2012, P-H was not a qualified individual for purposes of the foreign earned income exclusion of I.R.C. sec. 911(a), because his abode was within the United States for purposes of I.R.C. sec. 911(d)(3) and because he was not a bona fide resident of South Korea for purposes of I.R.C. sec. 911(d)(1)(A).

The due date for Federal individual income tax returns for tax year 2005 was Apr. 17, 2006. Ps filed their returns for that year on Oct. 16, 2006. Held: Ps are liable for I.R.C. sec. 6651(a)(1) additions to tax because, while R has carried his I.R.C. sec. 7491(c) burden of production, Ps have not come forward with evidence sufficient to persuade the Court that R's determination is incorrect. Higbee v. Comm'r, 116 T.C. 438 (2001), followed.

P, upon service retirement from the U.S. Army, became entitled to a pension, which the Army reported to R as taxable. The Department of Veterans Affairs subsequently assigned P a disability rating retroactive to the day after his retirement. P unavailingly petitioned the Army to reclassify his retirement as disability based, hoping to make his pension nontaxable. SeeI.R.C. sec. 104(a)(4). P did not file a Federal income tax return for 2011. R determined that P was liable for an income tax deficiency and failure-to-file and failure-to-pay penalties. R sent P a notice of deficiency, which P did not contest. R assessed the tax. P failed to pay, and R issued a final notice of intent to levy. P requested a collection due process hearing, wherein Appeals sustained the levy notice. P, seeking to challenge his underlying tax liability, timely petitioned this Court for review of the Appeals determination. R has moved for summary judgment. Held: P is precluded under I.R.C. sec. 6330(c)(2)(B) from contesting his underlying tax liability before Appeals and this Court because he received a notice of deficiency and failed to contest it timely. Goza v. Commissioner, 114 T.C. 176 (2000), followed. Held, further, R is entitled to summary adjudication that Appeals did not abuse its discretion in sustaining the final notice of intent to levy.

CP and CPII are limited partnerships. Their sole general partner and tax matters partner ceased to be a general partner on Mar. 3, 2000, because of a consent decree appointing a receiver that stemmed from the partner's guilty plea on three felony counts. KN, in his capacity as the State-court-appointed receiver, filed AARs and thereafter a petition for adjustment of each partnership's partnership items under I.R.C. sec. 6228 for the 1997, 1998, and 1999 taxable years. R moved to dismiss the cases for lack of jurisdiction on the basis that the petitions and the underlying AARs were not filed by the tax matters partner. Held: R's motions to dismiss for lack of jurisdiction will be granted because the receivership has been terminated by the State of New Jersey and there remains no party with legal standing to pursue this litigation.

Ps, in this collection due process case, ask us to review a determination by the IRS Appeals Office sustaining a notice of proposed levy to collect… Held: R initially applied a credit offset from a tax year not before us in this case to eliminate Ps' unpaid prior year liability for a year before us. R reversed that credit upon determining that Ps had not in fact overpaid their subsequent year tax. We lack jurisdiction over Ps' claim to a credit from the year not before us.

P moved to vacate or revise the Court's decision in Taylor v. Commissioner, T.C. Memo 2017-132. Held: P's motion will be denied because it was not filed timely and because P failed to argue or show any unusual circumstances or substantial error justifying the Court's revisitation of its decision.

As of the 2012 tax year, M and K together owned 80% of S1, an S corporation, which owned Q, a qualified subchapter S subsidiary. Held: S2 is not the incorporated pocketbook of M and K. Held, further, S2 is neither an agent of M and K nor a conduit. Held, further, M and K had made an actual economic outlay to S2, which in turn made an actual economic outlay to S1 and Q. Held, further, the step transaction doctrine does not apply.

P did not file his 2009 income tax return. R prepared a return and assessed the tax and additions to tax computed by him to be due from P. To collect, R filed a Federal tax lien. Held: R mailed a notice of deficiency to P. Held, further, P did not properly raise the issue of his underlying tax liability during the CDP hearing. Held, further, R did not abuse his discretion in sustaining the filing of the Federal tax lien for the 2009 taxable year.