Transcript 2011 Business & Corporate Tax Update

By Dennis J. Gerschick,
Attorney, CPA, PFS, CFA



Worked as a CPA in the tax dept. of Ernst &
Whinney before law school and in the tax dept.
of a large Atlanta law firm
In 1990 Dennis started his own law firm
www.GerschickLaw.com and also manages a
wealth management firm. www.Gerschick.com
Dennis speaks frequently about a variety of
topics. See www.RegalSeminars.com




March 18 – Hiring Incentives to Restore
Employment Act (the “HIRE Act”)
In March, the health care reform, which included
many tax provisions
September 27, the Small Business Jobs Act
December 17, the Tax Relief, Unemployment
Insurance Reauthorization, and Jobs Creation Act
of 2010

Between December 2007 and December 2008,
there were eight pieces of federal tax legislation

The rules change fast!

Look for applicable dates – starting and ending
To reduce the federal budget deficit, Congress may
amend the tax code before December 31, 2011.
After the November, 2012 elections,
in 2013, more tax legislation is expected.
Scroggins v Com’r, T.C. Memo. 2011-103 (5-18-11)
Issue: Whether petitioner husband’s tax home is in
Georgia or California?
Petitioners, on the Forms 1040, both indicate their home is in Warner
Robins, Georgia. Petitioners filed California nonresident income tax
returns for the 2004, 2005, and 2006 tax years and Georgia individual
income tax returns for the 2004, 2005, and 2006 tax years.
According to Mr. Scroggins’ bank records, Mr. Scroggins banked at
Robins Federal Credit Union of Warner Robins, Georgia, throughout
2004 and used automatic teller machines (ATMs) in Florida from
January through March 2004. Those records show that Mr. Scroggins
used ATMs in California exclusively for the rest of 2004. Mr.
Scroggins’ whereabouts are further explained by his 2004 Forms W-2,
Wage and Tax Statement. In 2004 Mr. Scroggins received Forms W-2
from Huntington Beach Hospital in Huntington Beach, California,
Crestview Hospital Corporation in Crestview, Florida, and Valley
Presbyterian Hospital in Van Nuys, California.
Mr. Scroggins’ 2005 ATM banking activities demonstrate that he was
primarily in California. Not once did Mr. Scroggins use an ATM in
Georgia.
Deductions are a matter of legislative grace, and
the taxpayer must maintain adequate records to
substantiate the amounts of their income and
entitlement to any deductions or credits claimed.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992)
Sec. 6001 (the taxpayer “shall keep such records”);
sec. 1.6001-1(a), Income Tax Regs.
In certain circumstances, the taxpayer must meet
specific substantiation requirements to be allowed a
deduction under section 162. See, e.g., sec. 274(d). The
heightened substantiation requirements of section
274(d) apply to:
(1) Any traveling expense, including meals and
lodging away from home
(2) Any item with respect to an activity in the nature
of entertainment, amusement, or recreation
(3) Any expense for gifts
(4) The use of “listed property”, as defined in section
280F(d)(4), including any passenger automobiles.
In order to deduct such expenses, the taxpayer must
“substantiate by adequate records or by sufficient
evidence corroborating the taxpayer’s own
statement”:
(1) The amount of the expense or other item
(2) The time and place of the travel, entertainment,
amusement, recreation, or use of the property
(3) The business purpose of the expense or other item
(4) The business relationship to the taxpayer of the
persons entertained or receiving the described gift.
Sec. 274(d).
To satisfy the adequate records requirement of section
274, a taxpayer must maintain records and documentary
evidence that in combination are sufficient to establish
each element of an expenditure or use. Sec. 1.274-5T(c)(1)
and (2), Temporary Income Tax Regs., 50 Fed. Reg. 4601646017 (Nov. 6, 1985).
Although a contemporaneous log is not required,
corroborative evidence created at or near the time of the
expenditure to support a taxpayer’s reconstruction “of the
elements * * * of the expenditure or use must have a high
degree of probative value to elevate such statement” to the
level of credibility of a contemporaneous record. Sec. 1.2745T(c)(1), Temporary Income Tax Regs., supra.
Most of the issues in this case stem from
respondent’s determination that Mr. Scroggins’ tax
home was in California for the years at issue.
Claiming that Mr. Scroggins’ tax home was in
Georgia, during the extended period he worked in
California, petitioners deducted almost all of the
living expenses he incurred for the 3 years at issue.
In order to deduct travel expenses, petitioners
must show that Mr. Scroggins’ expenses are
ordinary and necessary, that he was away from
home on business when he incurred the expense,
and that the expense was incurred in pursuit of a
trade or business. See sec. 162(a)(2);
Commissioner v. Flowers,
326 U.S. 465, 470 (1946).
The expenses in dispute were not incurred while
Mr. Scroggins was away from his tax home.
All three conditions discussed above must be
satisfied for a taxpayer to be entitled to the
deduction. Commissioner v. Flowers, supra at 470.
This Court has interpreted a taxpayer’s “home”
under section 162 to mean his principal place of
employment and not where his personal
residence is located.
Mitchell v. Commissioner, 74 T.C. 578, 581 (1980);
Daly v. Commissioner, 72 T.C. 190, 195 (1979),
affd. 662 F.2d 253 (4th Cir. 1981).
However, we have also recognized an exception
to this general rule in situations where the
taxpayer is away from his home on a temporary
rather than indefinite or permanent basis.
Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958).
Petitioners assert that Mr. Scroggins falls within
this exception.
When a taxpayer seeks employment away from his
personal residence, the Court of Appeals for the Ninth
Circuit, to which this case is appealable, in Neal v.
Commissioner, 681 F.2d 1157 (9th Cir. 1982), affg. T.C.
Memo. 1981-407, explicitly adopted the following
reasoning from Kasun v. United States, 671 F.2d 1059,
1061 (7th Cir. 1982):
While it is assumed that a person will live near the place of
employment, it is not reasonable to expect people to move to a
distant location when a job is foreseeably of limited duration.
If, on the other hand, the prospect is that the work will
continue for an indefinite or substantially long period of time,
the travel expenses are not deductible.
Mr. Scroggins was employed exclusively in
California, with the exception of a short stint in
Florida, for all of the years at issue. We need not
separately determine whether, as may be the case,
Mr. Scroggins was away from home while he was
working in Florida and therefore possibly allowed to
deduct those traveling expenses, because as
discussed below, petitioners did not present any
evidence to substantiate any of the expenses
incurred. It was reasonably known to Mr. Scroggins
that he would be employed for a very long time away
from Georgia.
Where spouses have careers in different locations, “Each
must independently satisfy the requirement that
deductions taken for travel expenses incurred in the
pursuit of a trade or business arise while he or she is
away from home.”
Hantzis v. Commissioner, 638 F.2d 248, 254 n.11 (1st Cir.
1981), revg. T.C. Memo. 1979-299.
Because we have found that Mr. Scroggins’ tax home was
in California for the years at issue, he is not entitled to
deduct any of his personal expenses for lodging or meals
while in California.
Petitioners are also not entitled to deduct Mr.
Scroggins’ commuting costs in California. We
note that generally taxpayers may not “deduct
the daily cost of commuting to and from work, as
such expense is considered to be personal and
nondeductible.”
Brockman v. Commissioner, T.C. Memo. 2003-3
(citing Commissioner v. Flowers, 326 U.S. at 473474).
To satisfy section 274(d) petitioners must present
sufficient evidence in addition to testimony to satisfy
the three aspects of this requirement: (1) The amount,
(2) the time and place, and (3) the business purpose of
each expenditure.
See sec. 1.274-5T(b), Temporary Income Tax Regs., 50
Fed. Reg. 46014-46015 (Nov. 6, 1985). “
Congress has chosen to impose a rigorous test of
deductibility in the area of travel expenses. Each of
the foregoing elements must be proved for each
separate expenditure.
General vague proof, whether offered by testimony
or documentary evidence, will not suffice.” Smith v.
Commissioner, 80 T.C. 1165, 1171-1172 (1983).
Evidence which is vague or significantly incomplete is
not credible.
Harris v. Commissioner, T.C. Memo. 2010-248.
Petitioners did not testify, there are almost no
receipts in evidence, and there is absolutely no
explicit explanation of the business purpose of any
of the expenditures.
Since 2005, there has been:
a. No tax legislation
b. Many pieces of tax legislation
c.
No other significant developments
d. No IRS action of any kind
Relevant factors include:
(1)
The degree of control exercised by the principal
(2)
Which party invests in the work facilities used by the worker
(3)
The opportunity of the individual for profit or loss
(4)
Whether the principal can discharge the individual
(5)
Whether the work is part of the principal’s regular business
(6)
The permanency of the relationship
(7)
Whether the worker is paid by the job or by the time
(8)
The relationship the parties believed they were creating
(9)
The provision of employee benefits.
See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001); DeTorres v.
Commissioner, T.C. Memo. 1993-161; see also 1 Restatement, Agency 2d,
sec. 220 (1958).
We consider all of the facts and circumstances of each case, and no single
factor is dispositive. Ewens & Miller, Inc. v. Commissioner, supra at 270.
The principal’s degree of control over the details of the
taxpayer’s work is the most important factor in determining
whether a common law employment relationship exists.
See Clackamas Gastroenterology Associates, P.C. v. Wells, 538
U.S. 440, 448 (2003); Weber v. Commissioner, supra at 387.
In an employer-employee relationship the principal must have
the right to control not only the result of the employee’s work
but also the means and method used to accomplish that result.
Packard v. Commissioner, 63 T.C. 621, 629 (1975); Youngs v.
Commissioner, T.C. Memo. 1995-94, affd. without published
opinion 98 F.3d 1348 (9th Cir. 1996).
The degree of control necessary to find employee
status varies according to the nature of the services
provided.
Weber v. Commissioner, supra at 387.
Where the nature of the work is more independent, a
lesser degree of control by the principal may still result
in a finding of an employer employee relationship.
Potter v. Commissioner, supra; Reece v.
Commissioner, supra.
Mayo v. Com’r, 136 T.C. No. 4 (1-25-11)
New law is made
P-H was engaged in the trade or business of
gambling on horse races during 2001. Ps attached a
Schedule C, Profit or Loss From Business, to their
2001 Federal income tax return, on which they
reported the results of P-H’s gambling business,
including gross receipts of $120,463 and expenses
of $142,728, consisting of $131,760 for wagers
placed and $10,968 in expenses incurred in
connection with the conduct of the gambling
business. Ps deducted the excess of the Schedule
C expenses over gross receipts, $22,265, as a
business loss against their other income.
R issued a notice of deficiency disallowing $22,265 of
Ps’ claimed loss from gambling; i.e., the amount by
which expenses from P-H’s gambling activity
exceeded gross receipts from gambling. R contends
that Ps’ allowable losses from P-H’s gambling business
are limited to the reported gross receipts from the
business pursuant to I.R.C. sec. 165(d).
R further maintains that the “Losses from wagering
transactions” for purposes of I.R.C. sec. 165(d) include
both the $131,760 cost of wagers placed by P-H and the
$10,968 in expenses he incurred in connection with the
conduct of the gambling business.
Issues are:
(1) Whether petitioner’s engagement in the trade or
business of gambling entitles him to deduct the losses
from his gambling business from gross income
without regard to section 165(d), which allows
wagering losses only to the extent of wagering gains?
(2) Whether petitioner is entitled to deduct the
expenses, other than the costs of wagers, incurred in
carrying on his gambling business pursuant to section
162(a) without regard to section 165(d)?
Expense
Car and truck
Interest
Office
Travel
Meals & entertainment
Telephone & Internet
Admission/Entry fees
Subscriptions
Handicapping data
ATM fees
Total
Amount
$3,109
91
256
776
1,651
670
1,251
1,056
1,960
148
10,968
The parties have stipulated that petitioner was in the
trade or business of gambling on horse races in 2001
and that he “wagered” a total of $131,760 on the
outcome of horse races and won a total of $120,463 as a
result of this wagering during that year. Petitioner’s
wagering expenses thus come within the description
of both section 162(a) and section 165(d).
See, e.g., Boyd v. United States, 762 F.2d 1369, 1372-1373 (9th Cir.
1985); Nitzberg v. Commissioner, 580 F.2d 357, 358 (9th Cir.
1978), revg. T.C. Memo. 1975-154 and T.C. Memo. 1975-228;
Offutt v. Commissioner, 16 T.C. 1214, 1215 (1951); Crawford v.
Commissioner, T.C. Memo. 2010-54; Valenti v. Commissioner,
T.C. Memo. 1994-483.
Petitioner contends that under Commissioner v.
Groetzinger, 480 U.S. 23 (1987), the limitation of
section 165(d) on the deduction of gambling losses
does not apply to professional gamblers.
Citing the Supreme Court’s observation that “basic
concepts of fairness * * * demand that * * * [gambling]
activity be regarded as a trade or business just as any
other readily accepted activity”, id. at 33, petitioner
contends that section165(d) does not apply to an
individual engaged in the trade or business of
gambling since it does not apply to other trades or
businesses.
In 1951 this Court considered whether an
individual engaged in the trade or business of
gambling is subject to the section 165(d) limitation
on wagering losses, holding that the limitation
applied in these circumstances.
Offutt v. Commissioner, supra at 1215-1216; accord Skeeles v.
United States, 118 Ct. Cl. 362, 372, 95 F. Supp. 242, 246-247
(1951).
In recent years we have repeatedly rejected the
claim that Groetzinger modified this settled law
and should be read as confining the application of
section 165(d) to casual or recreational gamblers
and eliminating the section’s limitation on the
deduction of the gambling losses of professional
gamblers.
See Crawford v. Commissioner, supra; Lyle v.
Commissioner, T.C. Memo. 1999-184, affd. Without
published opinion 218 F.3d 744 (5th Cir. 2000); Valenti v.
Commissioner, supra.
We must now decide whether the section 165(d)
limitation on “Losses from wagering transactions” is
confined to petitioner’s wagering expenses or extends
to his business expenses, as the parties dispute the
point.
An implicit holding in Offutt is that a professional
gambler’s “Losses from wagering transactions” for
purposes of section 165(d) include amounts expended
on wagers as well as other expenses incurred in
carrying on the trade or business of gambling.
Neither the statute nor the regulations provide any
definition of “Losses from wagering transactions” as
used in section 165(d). The legislative history also
provides no insight, as it does not address this
specific point.
Offutt offered no reasoning to support the conclusion
that “Losses from wagering transactions” should be
interpreted to cover both the cost of losing wagers as
well as the more general expenses incurred in the
conduct of a gambling business. Although Offutt’s
interpretation of “Losses from wagering transactions”
has generally been followed by this Court in the 60
years since the case was decided,
For the reasons discussed below, we conclude that
reconsideration of Offutt’s interpretation of
“Losses from wagering transactions” is warranted
and that it should no longer be followed.
For the foregoing reasons, we conclude that the holding in
Offutt v. Commissioner, supra, that “Losses from wagering
transactions” include the trade or business expenses of a
professional gambler other than the costs of wagers, should no
longer be followed.
We accordingly hold that petitioner is entitled to deduct under
section 162(a) the $10,968 in business expenses claimed in
connection with carrying on his gambling business.
Respondent has not argued that any of petitioner’s claimed
business expenses were so integral to his wagers that they
should be treated as part of the wagers’ cost. We leave any such
issue for another day.


COLVIN, COHEN, THORNTON, MARVEL,
GOEKE, WHERRY, KROUPA , HOLMES,
GUSTAFSON, PARIS, and MORRISON, JJ.,
agree with this opinion.
HALPERN, J., concurring: I agree with the
result reached by the majority and write
separately only to question the vitality of our
Memorandum Opinion in Libutti v.
Commissioner, T.C. Memo. 1996-108,
Section 183
Zenzen v. Com’r , T.C. Memo 2011-167 (7-12-11)
Drag Racing - Taxpayer lost
Campbell v. Com’r, T.C. Memo 2011-42 (2-17-11)
Amway Distributorship – Taxpayer lost
Blackwell v. Com’r, T.C. Memo 2011-188 (8-8-11)
Horse racing – Taxpayer won!
Reading tax cases:
a. Is a complete waste of time
b. Shows that the IRS wins every time
c.
Is boring
d. Is a great way to learn tax law
Under section 183(a) and (b), if an activity is not
engaged in for profit by a taxpayer the deductions
claimed by the taxpayer relating to the activity are
not allowed except to the extent of income
received from the activity.
To be treated as “engaged in for profit” an activity
must be carried on by the taxpayer with an actual
and honest profit objective.
Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),
affd. without opinion 702 F.2d 1205 (D.C. Cir.
1983).
Activities carried on primarily for sport, hobby,
or recreation do not qualify as for-profit
activities. Sec. 1.183-2(a), Income Tax Regs.
Whether a taxpayer has the requisite profit
objective with respect to an activity is a question of
fact that is to be decided on the basis of all the
evidence in a case. Generally, the taxpayer bears
the burden of proving that he or she carried on the
activity with a profit objective.
Rule 142(a). In deciding this question, regulations
under section 183 set forth a nonexclusive list of
nine factors which generally are considered and
which we discuss below. Sec. 1.183-2(b), Income
Tax Regs.
1. Manner in Which the Activity Is Carried On
2. Expertise of the Taxpayer
3. Time and Effort Expended in Carrying On the
Activity
4. Expectation That the Horses May Appreciate in
Value
5.
6.
7.
8.
9.
Success in Other Activities
History of Income or Losses
Amount of Occasional Profits
Financial Status
Elements of Personal Pleasure
When a married couple divorces, many tax issues
can arise.
Who do you represent? Husband or wife?
Alimony is deductible by the payor and included
in the taxable income of the recipient. See Sections
71 and 215
Child support is not deductible by the payor and
not included in taxable income of the recipient.
Property settlements? Generally carryover basis.
See Section 1041
Moore v. Com’r, T.C. Memo. 2011-200 (8-16-11)
The sole issue for decision is whether payments
of $21,700.82 petitioner made to his ex-wife in 2006
are deductible as alimony under section 215(a).
Section 71(b)(1) defines alimony as any cash
payment meeting the four criteria provided in
subparagraphs (A) through (D) of that section.
SEC. 71(b). Alimony or Separate Maintenance
Payments Defined.--For purposes of this section—
(1) In general.--The term “alimony or separate
maintenance payment” means any payment in cash
if—
(A) such payment is received by (or on behalf of) a spouse
under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate
such payment as a payment which is not includible in gross
income under this section and not allowable as a deduction
under section 215,
(C) in the case of an individual legally separated from his
spouse under a decree of divorce or of separate maintenance,
the payee spouse and the payor spouse are not members of
the same household at the time such payment is made
(D) there is no liability to make any such payment for any
period after the death of the payee spouse and there is no
liability to make any payment (in cash or property) as a
substitute for such payments after the death of the payee
spouse.
Accordingly, if any portion of the payments made
by petitioner fails to meet any one of the four
enumerated criteria, that portion is not alimony and
petitioner cannot deduct it.
If the divorce instrument is silent as to the existence of a
postdeath obligation, the requirements of section 71(b)(1)(D)
may still be satisfied if the payments terminate upon the payee
spouse’s death by operation of State law.
Johanson v. Commissioner, supra at 977.
If State law is ambiguous in this regard, however, a “federal
court will not engage in complex, subjective inquiries under state
law; rather, the court will read the divorce instrument and make
its own determination based on the language of the document.”
Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir. 1996), affg.
T.C. Memo. 1995-183.
The divorce decree is silent as to whether petitioner’s
obligation to reimburse Ms. Moore terminates in the
event of Ms. Moore’s death.
Thus, we consider whether the obligation to make
payments terminates upon Ms. Moore’s death by
operation of Indiana law. Indiana statutory law is
silent as to whether the obligation to make
maintenance payments terminates on the death of the
payee spouse. The parties point us to no case law, and
we have discovered none, that expressly states
whether the obligation of maintenance terminates
upon the death of the payee spouse.
No Indiana statute or opinion says that the payor’s
obligation to pay alimony terminates upon the
death of the payee spouse. Therefore, we
conclude that Indiana law is ambiguous.
Finally, faced with a silent divorce decree and no State law
resolution of the question, we independently review the
decree to make our own determination as to the
satisfaction of the section 71(b)(1)(D) requirement.
See Hoover v. Commissioner, supra at 846.
We do not read the decree as requiring the termination of
payments in the event of Ms. Moore’s death. Hence, the
payments do not satisfy the requirements of section
71(b)(1)(D), and petitioner is not entitled to deduct as
alimony the $21,700.82 of payments to his wife in 2006.
Other tax issues:
Who gets the tax exemption for the children?
Who is liable for prior jointly filed tax returns?
Does either spouse qualify for “innocent spouse”
status?
Stephenson v. Com’r, T.C. Memo. 2011-16 (1-20-11)
Valarie Stephenson, pro se.
Every “innocent spouse” case is fact intensive.
Facts about education, life style, the relationship of
the married couple, etc.
What did they know and when did they know it?
If they didn’t know taxes were owed, why not?
After the wedding Mr. Stephenson was stationed in
Sacramento and petitioner remained in Phoenix to
begin her junior year of high school. Three months
into her junior year petitioner dropped out and moved
to Sacramento to live with Mr. Stephenson. She never
graduated from high school and has failed the General
Education Development (GED) test three times.
Petitioner also suffered from learning disabilities that
forced her to be held back in elementary school.
During their time in Sacramento Mr. Stephenson
began verbally abusing petitioner, often making fun of
her lack of education and learning disabilities in front
of Mr. Stephenson’s family and their friends.
Petitioner and Mr. Stephenson lived in Dallas from
1999 until 2002. Mr. Stephenson worked as a
stockbroker and day trader, and petitioner worked
at a doctor’s office. Mr. Stephenson was highly
successful, and he purchased a number of cars
including a BMW that petitioner drove to work.
They lived in three different condominiums
during their time in Dallas
At all relevant times Mr. Stephenson managed the couple’s
finances.
Petitioner used a debit card to make household purchases. Most
other purchases required Mr. Stephenson’s permission. He did
not allow petitioner access to the mail box or to a filing cabinet
that contained the checkbook and financial documents, both of
which required a key that only Mr. Stephenson possessed.
When Mr. Stephenson needed petitioner to sign something, he
placed it in front of her and told her where to sign. If petitioner
asked what she was signing, Mr. Stephenson made threats of
violence or told her she was not intelligent enough to
understand.
On January 11, 2008, petitioner filed Form 8857,
Request for Innocent Spouse Relief, requesting relief
from joint and several liability for the 1999 and 2004
tax years. Respondent granted petitioner’s request for
innocent spouse relief for 2004.
Respondent preliminarily denied petitioner’s request
for relief for 1999 because it was untimely. The
preliminary determination stated: “IRC section 6015
requires innocent spouse claims to be filed no later
than two years after the date we start collection
activity against you”.
In general, a spouse who files a joint Federal income
tax return is jointly and severally liable for the entire
tax liability. Sec. 6013(d)(3).
However, a spouse may be relieved from joint and
several liability under section 6015(f) if:
(1) Taking into account all the facts and circumstances,
it would be inequitable to hold her liable for any
unpaid tax
(2)
Relief is not available to the spouse under section
6015(b) or (c).
The Commissioner has published revenue
procedures listing the factors the Commissioner
normally considers in determining whether section
6015(f) relief should be granted.
See Rev. Proc. 2003-61, 2003-2 C.B. 296,
superseding Rev. Proc. 2000-15, 2000-1 C.B. 447.
Divorce taxation issues:
a. Should always be handled by the divorce
lawyers
b. Should be decided by a flip of the coin
c.
Present a tax planning opportunity
d. Are always decided by the divorce court
In determining whether petitioner is entitled to
section 6015(f) relief we apply a de novo standard of
review as well as a de novo scope of review.
See Porter v. Commissioner, 132 T.C. 203 (2009); Porter
v. Commissioner, 130 T.C. 115 (2008).
Petitioner bears the burden of proving that she is
entitled to relief.
See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311
(2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).
In order for the Commissioner to determine that a taxpayer is eligible
for section 6015(f) relief, the requesting spouse must satisfy the
following threshold conditions:
(1)
She filed a joint return for the taxable year for which she seeks
relief
(2)
Relief is not available to her under section 6015(b) or (c)
(3)
No assets were transferred between the spouses as part of a
fraudulent scheme by the spouses
(4)
The nonrequesting spouse did not transfer disqualified assets to
her
(5)
She did not file or fail to file the returns with fraudulent intent
(6)
With enumerated exceptions, the income tax liability from which
she seeks relief is attributable to an item of the nonrequesting
spouse.
Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-298.
We find, however, that the abuse exception in Rev.
Proc. 2003-61, sec. 4.01(7)(d), applies.
Mr. Stephenson abused petitioner throughout their
marriage, and she did not question or disobey him for
fear of abuse. If we find that petitioner is entitled to
relief on the basis of these circumstances, it would be
inequitable to hold her liable for the amount of the tax
liability attributable to the income she earned.
Accordingly, we find that petitioner has met the
threshold criteria for relief as to the entire tax liability.
When the threshold conditions have been met, the
Commissioner will ordinarily grant relief from an
underpayment of tax if the requesting spouse
meets the requirements set forth under Rev. Proc.
2003-61, sec. 4.02, 2003-2 C.B. at 298.
To qualify for relief under Rev. Proc. 2003-61, sec. 4.02,
the following elements must be satisfied:
(1) On the date of the request for relief the requesting
spouse is no longer married to, or is legally separated
from, the nonrequesting spouse, or has not been a
member of the same household as the nonrequesting
spouse at any time during the 12-month period ending
on the date of the request for relief
(2) On the date the requesting spouse signed the return she
had no knowledge or reason to know that the
nonrequesting spouse would not pay the income tax
liability
(3) The requesting spouse will suffer economic hardship if
relief is not granted.
Where a requesting spouse meets the threshold
conditions but fails to qualify for relief under Rev.
Proc. 2003-61, sec. 4.02, a determination to grant
relief may nevertheless be made under the criteria
set forth in Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B.
at 298-299. Rev. Proc. 2003-61, sec. 4.03, provides a
nonexclusive list of factors the Commissioner will
consider in making that determination.
In making our determination under section 6015(f),
we shall consider the factors set forth in Rev. Proc.
2003-61, sec. 4.03, and any other relevant factors.
No single factor is to be determinative in any
particular case, and all factors are to be considered
and weighed appropriately.
See Haigh v. Commissioner, T.C. Memo. 2009-140.
The Tax Court analyzed each of the factors. And
noted:
In summary, seven factors favor relief and one
factor is neutral. After weighing the testimony and
evidence in this fact intensive case, we conclude
that it is inequitable to hold petitioner liable for the
1999 joint tax liability. Accordingly, we relieve
petitioner from joint tax liability for tax year
1999.
There are many “innocent spouse” cases.
See Thomassen v. Com’r, T.C. Memo 2011-88 (421-011) Wife won.
Notice 2011-70
Equitable Relief Under Section 6015(f)
This notice expands the period within which individuals may request
equitable relief from joint and several liability under section 6015(f) of the
Internal Revenue Code.
Specifically, this notice provides that the Internal Revenue Service will consider
requests for equitable relief under section 6015(f) if the period of limitation on
collection of taxes provided by section 6502 remains open for the tax years at
issue.
If the relief sought involves a refund of tax, then the period of limitation on
credits or refunds provided in section 6511 will govern whether the IRS will
consider the request for relief for purposes of determining whether a credit or
refund may be available. This notice also provides certain transitional rules to
implement this change.
Individuals may request equitable relief under section
6015(f) after the date of this notice without regard to when
the first collection activity was taken.
Requests must be filed within the period of limitation on
collection in section 6502 or, for any credit or refund of tax,
within the period of limitation in section 6511.
The principal author of this notice is Stuart Murray of the
Office of Associate Chief Counsel, Procedure and
Administration.
For further information regarding this notice, contact
Stuart Murray at (202) 622-4940 (not a toll-free number).
New tax issues:
a. Arise periodically and may be called an issue of
“first impression”
b. Are easy to resolve
c.
Never arise because taxes have been around
forever
d. Are best ignored
Estate of Kenneth L. Lay v. Com’r, T.C. Memo. 2011-208 (829-11)
The status of the legal title to the annuity contracts does
not control in determining whether a sale occurred.
Beneficial ownership, and not legal title, determines
ownership for Federal income tax purposes.
Ragghianti v. Commissioner, 71 T.C. 346 (1978), affd.
without published opinion 652 F.2d 65 (9th Cir. 1981);
Pac. Coast Music Jobbers, Inc. v. Commissioner, 55 T.C.
866, 874 (1971), affd. 457 F.2d 1165 (5th Cir. 1972).
The Federal income tax consequences of property
ownership generally depend upon beneficial ownership,
rather than possession of mere legal title.
Speca v. Commissioner, 630 F.2d 554, 556–557 (7th Cir. 1980), affg.
T.C. Memo. 1979–120; Beirne v. Commissioner, 61 T.C. 268, 277
(1973).
“‘[C]ommand over property or enjoyment of its economic
benefits’ * * *, which is the mark of true ownership, is a
question of fact to be determined from all of the attendant
facts and circumstances.”
Monahan v. Commissioner, 109 T.C. 235, 240 (1997) (quoting Hang
v. Commissioner, 95 T.C. 74, 80 (1990)).
Beneficial ownership is marked by command over
property or enjoyment of its economic benefits.
Yelencsics v. Commissioner, 74 T.C. 1513, 1527
(1980) (stock was sold in accordance with an
agreement for the sale, even though the title to the
stock was not transferred, in accordance with the
agreement of the parties).
The Lays gave up all rights to alter or terminate the
annuity contracts and lost domination and control over
them. After selling the annuity contracts to Enron, the Lays
could not sell them, nor could they liquidate them or
borrow against them. They also could not alter the
investment options for the annuity contracts or make any
other elections or decisions regarding them. The Lays had
delivered the transfer documents and received the
consideration for the sale, and there was nothing else for
them to do in connection with the transfer of the annuity
contracts to Enron.
The Lays, therefore, properly reported the transaction on
their Federal income tax return as a sale of the two
annuity contracts.
Respondent’s first alternative position is that the
agreement provided for the transfer of the annuity
contracts by Enron to the Lays on September 21,
2001, in connection with the performance of
services by Mr. Lay and, therefore, caused the fair
market value of the property to be taxable to Mr.
Lay pursuant to section 83.
Section 83(a) provides, in pertinent part, that if
property is transferred to a taxpayer in connection
with the performance of services, the excess of the
fair market value of the property over the amount, if
any, paid for the property shall be included in the
taxpayer’s gross income in the first taxable year in
which the taxpayer’s rights in the property are not
subject to a substantial risk of forfeiture.
See Tanner v. Commissioner, 117 T.C. 237, 242 (2001),
affd. 65 Fed. Appx. 508 (5th Cir. 2003); sec. 1.83-7(a),
Income Tax Regs.
Taxability pursuant to section 83 would result only if
the provision in the agreement that granted Mr. Lay
the opportunity to earn back the Annuity contracts if
he remained with Enron for a period of 4.25 years (or
an earlier date if Mr. Lay’s employment terminated for
certain specified reasons beyond Mr. Lay’s control)
constituted property that:
(1) was transferred to Mr. Lay in 2001
(2)
was in connection with his performance of
services
(3) was transferable by Mr. Lay or not subject to a
substantial risk of forfeiture in 2001. See sec. 83(a).
The promise in the agreement to reconvey the
annuities to Mr. Lay after 4.25 years of service,
therefore, is not “property” within the meaning of
section 83. Consequently, the threshold requirement
for application of section 83 (that “property” be
transferred to the service provider) is not met. This
arrangement between Enron and Mr. Lay, for Enron to
transfer property to Mr. Lay if he provided services for
a period of years, is a nonqualified deferred
compensation plan not taxed at inception because the
property was not set aside or protected from the
creditors of Enron.
See sec. 83; sec. 1.83-3(e), Income Tax Regs.
Deferred compensation for services is included in
gross income in the taxable year in which it is actually
or constructively received.
Sec. 1.451-1(a), Income Tax Regs. (income is included in
income for the taxable year in which actually or constructively
received by the taxpayer)
Sec. 1.446-1(c)(1)(i), Income Tax Regs. (under the cash method
of accounting, gross income is included for the taxable year in
which actually or constructively received)
Rev. Rul. 60-31, 1960-1 C.B. 174.
A mere promise to pay, not represented by notes
or secured in any way, is not a receipt of income
for a cash method taxpayer.
Rev. Rul. 60-31, 1960-1 C.B. at 177.
Income is constructively received in the taxable
year in which it is credited to the taxpayer’s
account or set apart for the taxpayer so that he
may draw upon it at any time.
Sproull v. Commissioner, 16 T.C. 244 (1951), affg. 194
F.2d 541 (6th Cir. 1952); sec. 1.451-2, Income Tax Regs.
“However, income is not constructively received if
the taxpayer’s control of its receipt is subject to
substantial limitations or restrictions.”
Sec. 1.451-2(a), Income Tax Regs.
Mr. Lay had no control over the annuity contracts
in 2001. Enron’s listing the annuity contracts as
assets when it filed for bankruptcy confirms that
the annuity contracts were not set aside for Mr.
Lay.
Section 83 requires inclusion of the fair market
value of the property in income when the
property is first either transferable or not subject
to a substantial risk of forfeiture.
Rights of a person in property are “transferable” if
the person may transfer any interest in the
property to any person other than the transferor,
but only if the property is not subject to a
substantial risk of forfeiture.
Sec. 1.83-3(d),Income Tax Regs.
Property is not considered to be transferable
merely because the person performing the services
may designate a beneficiary to receive the property
in the event of his or her death.
Sec. 1.83-3(d), Income Tax Regs.
A substantial risk of forfeiture exists where the right to
property is conditioned on the future performance of
substantial services or the occurrence of a condition
related to a purpose of the transfer, and the possibility
of the forfeiture is substantial if such condition is not
satisfied.
Sec. 83(c); sec. 1.83-3(c)(1), Income Tax Regs.
Forfeiture of property upon termination of
employment before retirement at a specified age or
time, death, or disability generally constitutes a
substantial risk of forfeiture.
Sec. 1.83-3(c)(4), Example (1), Income Tax Regs.
Forfeiture of the annuity contracts if Mr. Lay
voluntarily terminated his employment before the 4.25
years constitutes a substantial risk of forfeiture. See id.
Because Mr. Lay had to work 4.25 years for Enron in
order to receive the annuity contracts and could
terminate his employment before those 4.25 years only
under specific circumstances outside his control
without forfeiting the annuity contracts, there was a
“substantial risk of forfeiture” in 2001.
The events in 2002 regarding Mr. Lay’s resignation are
not before us. In conclusion, section 83 does not
apply to the deferred compensation arrangement at
issue.
Respondent’s second alternative position is that the
$10 million purchase price Enron paid for the annuity
contracts was in excess of their fair market value as of
September 21, 2001, and that the excess represented
additional compensation to Mr. Lay.
There is nothing in the record to indicate that any
portion of the $10 million that Enron paid the Lays for
the annuity contracts represented a premium or
additional amount in excess of the fair market value of
the annuity contracts that would otherwise constitute
compensation
Nevertheless, the Compensation Committee
reasonably found that $10 million was a fair price for
the annuity contracts.
The issue is not whether the value of the annuity
contracts was, in fact, $10 million. The issue is whether
the $10 million that Enron paid to the Lays was
intended for the purchase of the annuity contracts. In
determining whether the annuities transaction was in
fact a sale, the Court considers whether the purchase
price was within a reasonable range.
See Commissioner v. Brown, 380 U.S. at 572.
Ken Lay’s Estate:
a. Lost because the Court was upset Enron failed
b. Lost because the Court assumed fraud was
involved
c.
Won because it had the facts and law on its side
d. Lost because the judge owned Enron stock
Tempel v. Com’r, 136 T.C. No. 15 (4-5-11)
In 2004 Ps donated a qualified conservation easement to a
qualified charitable organization. As a result, Ps received
conservation easement income tax credits from the State of
Colorado. These credits were transferable to other taxpayers.
That same year Ps sold a portion of those credits. Ps reported
short-term capital gains from the sales of the State credits. Ps
claimed an allocated portion of the professional fees they
incurred to complete the conservation easement donation, as
adjusted basis in the State tax credits they sold.
R determined the State income tax credits that Ps sold were not
capital assets and that Ps had no adjusted basis in the credits.
Capital gains are derived from the sale or
exchange of capital assets.
Sec. 1222. Section 1221 defines “capital asset” as
held by a taxpayer, except for eight categories of
property specifically excluded from the definition.
SEC. 1221. CAPITAL ASSET DEFINED.
In General.–-For purposes of this subtitle, the term “capital asset” means property
held by the taxpayer (whether or not connected with his trade or business),
but does not include:
(1) stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory
(2) property, used in his trade or business, of a character which is subject to the
allowance for depreciation provided in section 167, or real property used in
his trade or business
(3) a copyright, a literary, musical, or artistic composition
(4) accounts or notes receivable acquired in the ordinary course of trade or
business
(5) a publication of the United States Government
(6) any commodities derivative financial instrument held by a commodities
derivatives dealer, unless
(7) any hedging transaction
(8) supplies of a type regularly used or consumed by the taxpayer in the
ordinary course of a trade or business of the taxpayer.
None of the excluded categories is applicable to the State
tax credits at issue.
There is “no single definitive” definition of a capital asset.
Gladden v. Commissioner, 112 T.C. 209, 218 (1999), revd. on a
different issue 262 F.3d 851 (9th Cir. 2001).
Instead, it is a very broad term. As the Supreme Court
observed: The body of § 1221 establishes a general
definition of the term “capital asset,” and the phrase
“does not include” takes out of that broad definition only
the classes of property that are specifically mentioned. ***
* * * Ark. Best Corp. v. Commissioner, 485 U.S. 212, 218 (1988).
Faced with determining the character of assets that do not fit any of the
section 1221 exceptions to the definition of a capital asset yet do not
appear to properly fit that of a capital asset, courts use the substitute
for ordinary income doctrine to exclude certain property.
See Lattera v. Commissioner, 437 F.3d 399, 402-403 (3d Cir. 2006), affg. T.C.
Memo. 2004-216.
Under this doctrine, “capital asset” does not include mere rights to
receive ordinary income.
Commissioner v. P.G. Lake, Inc., 356 U.S. 260, 265-266 (1958).
The practical effect of the substitute for ordinary income doctrine is
that the Supreme Court “has consistently construed ‘capital asset’ to
exclude property representing income items or accretions to the value
of a capital asset themselves properly attributable to income.” United
States v. Midland-Ross Corp., 381 U.S. 54, 57 (1965).
The doctrine has been applied by courts directly and
indirectly to exclude a variety of assets from the
breadth of section 1221.
Watkins v. Commissioner, 447 F.3d 1269, 1273 (10th Cir. 2006)
(treating the transfer of rights to lottery payments as ordinary
income), affg. T.C. Memo. 2004-244; Saviano v. Commissioner,
765 F.2d 643, 653-654 (7th Cir. 1985) (holding that the sale of a
“gold option” did not result in capital gains when the option
represented a right of first refusal to net profits from mining),
affg. 80 T.C. 955 (1983); Freese v. United States, 455 F.2d 1146,
1152 (10th Cir. 1972) (determining that a settlement payment
was a substitute for the taxpayer’s services as an employee);
Hallcraft Homes, Inc. v. Commissioner, 336 F.2d 701, 705 (9th
Cir. 1964)
(finding sale of water refund agreements resulted
in ordinary income), affg. 40 T.C. 199 (1963);
Bisbee-Baldwin Corp. v. Tomlinson, 320 F.2d 929,
936 (5th Cir. 1963) (treating consideration for
mortgage servicing contracts as a substitute for
commissions); Dyer v. Commissioner, 294 F.2d
123, 126 (10th Cir. 1961) (finding sale of fractional
interests in mineral leaseholds was a substitute for
future income), affg. 34 T.C. 513 (1960); Forrer v.
Commissioner, T.C. Memo. 1981-418 (concluding
that assignment of rights to book royalties was a
transfer of an ordinary income asset).
It is also apparent that the transferred State tax credits
never represented a right to receive income from the state.
Instead, they merely represented the right to reduce a
taxpayer’s State tax liability. It is without question that a
government’s decision to tax one taxpayer at a lower rate
than another taxpayer is not income to the taxpayer who
pays lower taxes.
A lesser tax detriment to a taxpayer is not an accession to
wealth and therefore does not give rise to income. All
“accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion” are income.
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
None of the categories of property in section 1221
that Congress specifically excepted from the term
capital asset is applicable to the State tax credits.
Accordingly, we hold the State tax credits
petitioners sold are capital assets.
Section 1012 sets forth the foundational principle
that the basis of property for tax purposes shall be
the cost of the property. Cost, in turn, is defined by
regulation as the amount paid for the property in
cash or other property.
Sec. 1.1012-1(a), Income Tax Regs.
Petitioners argue that they have a cost basis in their State tax
credits. On their tax return they claimed a cost basis in the
credits based upon an allocation of $11,574.74 of professional
fees they incurred in connection with establishing and donating
the conservation easement. The fees consisted of accounting,
appraisal, surveying, and other professional services.
In their cross-motion for partial summary judgment petitioners
appear also to argue some portion of their basis in their land
should be allocable to the State tax credits. While petitioners did
not raise their position in their pleadings, raising it in their
motion has not prejudiced respondent.
We find neither position tenable.
Petitioners paid transaction fees to establish a
conservation easement that they donated to an unrelated
third party. Petitioners did not acquire the State tax
credits by purchase. This Court also notes that it has
previously declined to adopt the “unusual concept that
cost basis can be allocated to property other than * * *
property purchased.”
Solitron Devices, Inc. v. Commissioner, 80 T.C. 1, 17 (1988),
affd. without published opinion 744 F.2d 95 (11th Cir.
1984).
These credits are not a right petitioners possessed
in their land. Instead, their rights in the credits,
although achieved because of the property, arose
on account of the grant from the State. Unlike the
easement granted in Fasken v. Commissioner,
supra, the State tax credits are not a property right
in land that would necessitate the allocation of
basis in the land to the credits.
We conclude petitioners do not have any basis in
their State tax credits.
Petitioners’ holding period in their credits began at
the time the credits were granted and ended when
petitioners sold them. Since petitioners sold their
State tax credits in the same month in which they
received them, the capital gains from the sale of
the credits are short term
The sale of tax credits is:
a. Produces tax-exempt income
b. Voids the tax credits because they are not
transferable
c.
Should never be done
d. Is done and gets capital gain treatment
Bengtson v. Com’r, T.C. Memo 2011-50 (3-1-11)
In the late 1990s petitioners agreed with Joan Thomley,
Mrs. Bengtson’s sister, to invest in stocks.
In 1999, 2000, and 2001, petitioners provided funds to
Mrs. Thomley, who in turn purchases stock in
Maintenance Depot, Inc. (Maintenance), Sideware, Inc.
(Sideware), and other companies. Mrs. Thomley made
the purchases through her brokerage account, and all
shares were purchased and held in her name.
In 2000, Mrs. Thomley informed petitioners that
her 1999 stock transactions had resulted in a
taxable gain, asked petitioners for money to pay
the taxes relating to the transactions, and told
petitioners that the proceeds of the transactions
would be reinvested.
Maintenance in 2001 was taken off the exchange on which
it was traded and in 2005 repurchased its outstanding
shares. In 2003, Sideware sold its assets and ceased
operations.
On their 2005 joint Federal income tax return (2005
return), petitioners reported a long-term capital loss
relating to 29,488 shares of Maintenance and 3,680 shares of
Sideware.
Petitioners also reported a long-term capital gain relating
to the exercise of International Business Machines Corp.
stock options. Respondent began an audit of petitioners’
2005 return in 2007.
During the audit, respondent asserted that the
Maintenance and Sideware stocks became worthless in
2001 and 2002.
Section 165 (g) allows a deduction for any loss
resulting from stock that becomes worthless during
the taxable year. A taxpayer must, however, maintain
sufficient records to substantiate the loss.
Sec. 6001; Reg. 1.6001-1 (a).
There is insufficient evidence in the record to establish
the ownership, bases, and dates of worthlessness
relating to the Maintenance and Sideware stocks for
which petitioners claiming a long-term capital loss.
Accordingly, petitioners are not entitled to deduct a
loss relating to the stocks.
On December 17, 2010, President Obama signed
the “Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010”
(the “2010 Act”).
The 2010 Act made significant changes affecting
the estate and gift tax laws.
The 2010 Act sets the estate, gift and generationskipping tax exemption at $5 mil for each tax. The
$5 mil is indexed beginning in 2012.
The $5 mil estate tax exemption also applies for
2010 but the gift tax exemption for 2010 remained
at $1 million.
The maximum rate is 35%.
No estate tax in 2010
The executors of estates of decedents who died in
2010 may elect to use either: (1) the $5 mil
exemption with step-up in basis rules, or (2) no
estate tax but use the modified basis rules of Code
§1022.
IRS Form 8939 for Decedents Who Died in 2010
Notice 2011-76, IRB 2011-40, dated October 3, 2011.
This notice applies to each Executor of a 2010
Estate and to recipients of property acquired from
decedents who died in 2010.
Section 301(c) of TRUIRJCA, however, allows the
Executor of a 2010 Estate to elect not to have the estate
tax provisions and section 1014 apply, but rather, to
have the provisions of section 1022 apply (Section 1022
Election).
With the election, the estate will pay no estate tax and
in most cases the basis of the property acquired from
the decedent will be determined under section 1022. In
addition, the executor may allocate additional basis to
certain property.
See Rev. Proc. 2011-41, 2011-35 I.R.B. 188.
The due date for filing Form 8939 is changed from
November 15, 2011, to January 17, 2012.
Thus, a Section 1022 Election is timely if made on a
Form 8939 filed by (and may be amended or revoked
on or before) January 17, 2012.
The Treasury Department and IRS will not grant any
further extension of time to file Form 8939, to make the
Section 1022 Election, or to amend or revoke the
Section 1022 Election, except as provided in sections
I.A, B, or D.1 or 2 of Notice 2011-66.
This notice is effective on September 13, 2011. This
notice applies to each Executor of a 2010 Estate and to
persons acquiring property from a 2010 Decedent.
The principal authors of this notice are Laura Daly,
Theresa Melchiorre, and Mayer Samuels of the Office
of Associate Chief Counsel (Passthroughs & Special
Industries).
For further information regarding this notice contact Laura
Daly, Theresa Melchiorre, or Mayer Samuels on (202) 6223090 (not a toll-free call).
The 2010 Act creates the “portability concept.”
Code §2010(c) is amended to provide that the
estate tax exclusion amount is equal to:
(1) the basic exclusion amount ($5 mil as indexed),
plus
(2) for a surviving spouse, the “deceased spousal
unused exclusion amount” (DESUEA).
The DESUEA is the lesser of:
(1)the basic exclusion amount
or
(2) the basic exclusion amount of the surviving
spouse’s last deceased spouse over the
combined amount of the deceased spouse’s
taxable estate plus adjusted taxable gifts
(described in new Code §2010(c)(4)(B)(ii)).
The second item is the last deceased spouse’s
remaining unused exemption amount.
There appears to be a strict privity requirement. A
spouse may not use his or her spouse’s DESUEA.
Example: assume H1 dies and W has his DESUEA.
Assume W remarries H2. If W dies before H2, H2 may
then use the DESUEA from W’s unused basic
exclusion amount, but may not use any of H1’s unused
exclusion amount.
The executor of the first deceased spouse’s estate
must file an estate tax return on a timely basis and
make an election to permit the surviving spouse to
utilize the unused exemption amount.
Only the most recent deceased spouse’s unused
exemption may be used by the surviving spouse.
See Code §2010(c)(5)(B)(i).
The portability concept applies to the gift tax too.
The new estate and gift tax laws are effective for
only 2011 and 2012. Then we are back to
uncertainty.
If no further change is made, we go back to the
2001 law.
Do gifts make sense if the estate tax exemption is
increased further?
Gifts may remove the post-gift appreciation in value from the
estate
Gifts may allow the use of valuation discounts
If the donor lives three years after the gift, the gift taxes paid
are removed from the gross estate
How much can/should the donors gift away?
The new law did not change family limited
partnerships or family LLCs
The new law did not change GRATs (there is no
minimum 10 year term)
Irrevocable life insurance trusts are still viable
Review their current financial position and
consider likely future changes
Review their existing estate plan (Wills, trusts, etc.)
Consider what changes, if any, should be made
Estate planning:
a. Has always been easy and will continue to be
b. Is no longer needed
c.
Should be considered by everyone
d. Is null and void due to recent changes in the
law
Estate of Turner v. Com’r, T.C. Memo. 2011-209 (830-11)
Another fact intensive case
The taxpayer lost due to several mistakes
On April 15, 2002, Clyde Sr. and Jewell established Turner & Co.
as a Georgia limited liability partnership by filing a certificate of
limited partnership. The Agreement of Limited Partnership of
Turner & Company, L.P. (partnership agreement), provided that
Clyde Sr. and Jewell each would own a 0.5-percent general
partnership interest and a 49.5-percent limited partnership
interest.
After Clyde Sr.’s death, the Turner family held meetings, on
November 5, 2004, and November 19, 2005, to discuss Turner &
Co.’s past performance and future investment plans. The
meetings also included discussions of Clyde Sr.’s estate and the
provisions of his will. The record is not clear whether the Turner
family held any meetings to discuss Turner & Co.’s performance
before Clyde Sr.’s death. Although Marc and Betty suggested
they did, no objective evidence corroborates their statements.
In 2002 Clyde Sr. and Jewell each contributed assets to
Turner & Co. with a fair market value of $4,333,671
(total value $8,667,342). The list of assets to be
contributed was not finalized until at least July 2002,
and the transfers were not completed until at least
December 2002. The contributed assets consisted of
cash, CDs, and stocks.
Clyde Sr. and Jewell did not contribute to Turner &
Co. any interest in an operating business or in a
regularly conducted real estate activity that required
active management.
Clyde Sr. and Jewell retained more than $2
million of assets that were not contributed to
Turner & Co., including but not limited to their
residence in Cleveland, Georgia, investment real
estate in North Carolina, cash and certificates of
deposit, and 24,012 shares of Regions Bank stock.
The retained assets, together with Social Security
income, generated annual income of at least
$90,000--more than enough to pay Clyde Sr. and
Jewell’s living expenses.
The partnership agreement listed three general
purposes for creation of Turner & Co.:
(1) To make a profit
(2) To increase the family’s wealth
(3) To provide a means whereby family members
can become more knowledgeable about the
management and preservation of the family’s
assets.
To facilitate the general purposes, the partnership
agreement listed nine specific purposes for
formation of Turner & Co.
The partnership agreement was modeled on a standard form
that Stewart, Melvin & Frost used when drafting partnership
agreements. Consequently, some of the purposes listed in the
partnership agreement did not apply to the Turner family.
(For example, the partnership agreement provides that one of the goals
of the partnership is to consolidate or eliminate fractional interests in
realty. However, Clyde Sr. and Jewell did not contribute any interests in
real property, fractional or otherwise, to Turner & Co.)
Clyde Sr. and Jewell’s actual purposes for establishing Turner
& Co. were not necessarily reflected in the partnership
agreement.

The Tax Court analyzed the partnership
agreement noting many specific provisions
On December 31, 2002, and January 1, 2003, Clyde Sr.
and Jewell gave limited partnership interests in Turner
& Co. to their three children and to Joyce’s children.
According to the gift transfer documents, the
aggregate fair market values of the partnership
interests transferred on December 31, 2002, and
January 1, 2003, were $1,652,315 and $474,315,
respectively.
The values were derived from a valuation by Willis
Investment Counsel dated May 18, 2004, and were
added to the gift transfer documents on or after that
date.
Turner & Co. made several payments to Clyde Sr.
in 2002 a total of $41,500. Turner & Co. did not
make any payments to Jewell in her capacity either
as a general partner or as a limited partner, or to
any other limited partner in 2002.
Turner & Co. made many payments to Clyde Sr.
and Jewell in 2003, a total of $86,815. Turner & Co.
did not make any payments to any other limited
partners in 2003.
The purpose of section 2036(a) is to include in a
decedent’s gross estate the values of inter vivos
transfers that were “essentially testamentary” in
nature.
See United States v. Estate of Grace, 395 U.S. 316, 320
(1969) (interpreting section 811(c)(1)(B) of the Internal
Revenue Code of 1939, a predecessor to section 2036).
Section 2036(a) applies when three conditions are satisfied:
(1) The decedent made an inter vivos transfer of property,
(2) The decedent’s transfer was not a bona fide sale for
adequate and full consideration
(3) The decedent retained an interest or right enumerated
in section 2036(a)(1) or (2) or (b) in the transferred
property that he did not relinquish before his death.
Sec. 2036(a); Estate of Bongard v. Commissioner, 124 T.C. 95, 112
(2005).
If these conditions are met, the full value of the transferred
property is included in the value of the decedent’s gross
estate.
Estate of Bongard v. Commissioner, supra at 112.
In the context of a family limited partnership the bona fide
sale exception is satisfied where the record establishes the
existence of a legitimate and significant nontax reason for
creation of the family limited partnership and the transferors
received partnership interests proportionate to the value of the
property transferred.
Estate of Bongard v. Commissioner, supra at 118 (citing Estate of Stone
v. Commissioner, T.C. Memo. 2003-309, and Estate of Harrison v.
Commissioner, T.C. Memo. 1987-8).
The objective evidence must establish that the nontax reason
was a significant factor that motivated the partnership’s creation.
See id.; Estate of Harper v. Commissioner, supra;
Estate of Harrison v. Commissioner, supra. “A significant purpose must
be an actual motivation, not a theoretical justification.”
Estate of Bongard v. Commissioner, supra at 118.
Whether a sale is bona fide is a question of motive.
We must determine whether the record supports a
finding that Clyde Sr. had a legitimate and
significant nontax reason for forming Turner & Co.
The Turner & Co. partnership agreement lists three general reasons
and nine specific reasons for the formation of the partnership.
However, the reasons listed in the partnership agreement were taken
from a form partnership agreement and do not necessarily reflect
Clyde Sr. and Jewell’s actual reasons for establishing Turner & Co. For
example, the partnership agreement states that one of the purposes of
Turner & Co. was to consolidate or eliminate fractional interests in
realty and other family assets. In fact, Clyde Sr. and Jewell did not
contribute any real property to Turner & Co., and all of the contributed
property was easily divisible.
In any event, we do not simply rely on a list of reasons. See Estate of
Hurford v. Commissioner, T.C. Memo. 2008-278. Instead, we examine
the evidence to see whether any of the asserted nontax reasons was a
significant factor in creating the partnership. See id.
Petitioner argues that Clyde Sr. and Jewell created
Turner & Co. for at least one of the following
legitimate and significant nontax reasons
The objective facts in the record fail to establish
that any of these reasons was a legitimate and
significant reason for formation of Turner & Co.
Consolidated asset management may be a legitimate and significant
nontax purpose.
Estate of Schutt v. Commissioner, T.C. Memo. 2005-126; see also Estate of Black
v. Commissioner, 133 T.C. 340, 371 (2009).
However, consolidated asset management generally is not a significant
nontax purpose where a family limited partnership is “just a vehicle for
changing the form of the investment in the assets, a mere asset
container.”
Estate of Erickson v. Commissioner, T.C. Memo. 2007-107; see also Estate of
Schutt v. Commissioner, supra (“the mere holding of an untraded portfolio of
marketable securities weighs negatively in the assessment of potential nontax
benefits available as a result of a transfer to a family entity” (citing Estate of
Thompson v. Commissioner, 382 F.3d 367, 380 (3d Cir. 2004)))
Estate of Harper v. Commissioner, supra (“Without any change whatsoever in
the underlying pool of assets or prospect for profit * * * there exists nothing but a
circuitous ‘recycling’ of value.”).
Most of the cases in which we have held that
consolidated asset management is a legitimate
nontax purpose have involved assets requiring
active management or special protection.
Estate of Black v. Commissioner, supra at 371 (large bloc
of voting stock in closely held corporation)
Estate of Mirowski v. Commissioner, T.C. Memo. 200874 (patent royalties and related investments)
Estate of Stone v. Commissioner, supra (closely held
business); see also Kimbell v. United States, 371 F.3d 257
(5th Cir. 2004) (working oil and gas interests).
Clyde Sr. and Jewell owned passive investments rather
than a business requiring active management.
Petitioner does not dispute that Clyde Sr. and Jewell
contributed only passive assets to Turner & Co.
Unlike the partnership assets involved in Estate of
Mirowski v. Commissioner, supra, and Estate of Stone
v. Commissioner, T.C. Memo. 2003-309, the Turner &
Co. assets required no active management or special
protection. Moreover, unlike the decedents in those
cases, Clyde Sr. did not have a unique or distinct
investment philosophy that he hoped to perpetuate.
In reaching our conclusion that asset management was
not a significant nontax purpose, we rely on our
finding that Turner & Co.’s portfolio of marketable
securities did not change in a meaningful way.
Regents Bank stock continued to dominate the
portfolio from the time of the partnership formation
until Clyde Sr.’s death. Whatever assets Turner & Co.
added to the portfolio had a risk/return profile similar
to the profile of the assets Clyde Sr. and Jewell
contributed to the partnership.
Several additional factors indicate that the
transfers to Turner & Co. were not bona fide sales.
First, Clyde Sr. stood on both sides of the
transaction, and he created Turner & Co. without
any meaningful bargaining or negotiation with
Jewell or with any of the other anticipated limited
partners; i.e., his children and grandchildren.
See Estate of Harper v. Commissioner, T.C. Memo. 2002121.
Second, Clyde Sr. commingled personal and
partnership funds when he used partnership funds
to make personal gifts to Marc and Travis, to pay
premiums on life insurance policies for the benefit
of his children and grandchildren, and to pay legal
fees relating to his and Jewell’s estate planning.
Third, Clyde Sr. and Jewell did not complete the transfer of
assets to Turner & Co. for at least 8 months after formation of the
partnership.
Petitioner argues that it took longer than expected for Clyde Sr.
and Jewell to transfer their assets to Turner & Co. because of
poor recordkeeping on their part. However, at the time Turner &
Co. was formed Marc had been assisting Clyde Sr. and Jewell
with their recordkeeping for approximately 8 years (since 1994
according to Marc’s testimony). Thus, any delays in transferring
assets to Turner & Co. cannot be blamed on Clyde Sr.’s and
Jewell’s poor recordkeeping.
See Estate of Hurford v. Commissioner, T.C. Memo. 2008-278
Estate of Bigelow v. Commissioner, T.C. Memo. 2005-65, affd. 503 F.3d
955 (9th Cir. 2007)
Estate of Harper v. Commissioner, supra.
On the basis of the foregoing, we conclude that the
formation of Turner & Co. falls short of meeting the bona
fide sale exception.
Rather, Clyde Sr. changed the form in which he held the
interest in the contributed assets, and the formation of
Turner & Co. was a part of a testamentary plan.
Accordingly, the bona fide sale exception of section 2036(a)
does not apply to Clyde Sr.’s transfer of property to Turner
& Co.
We therefore consider whether Clyde Sr. retained for his
life the possession or enjoyment of the transferred
property.
Factors indicating that a decedent retained an interest in transferred
assets under section 2036(a)(1) include a transfer of most of the
decedent’s assets, continued use of transferred property, commingling
of personal and partnership assets, disproportionate distributions to
the transferor, use of entity funds for personal expenses, and
testamentary characteristics of the arrangement.
Estate of Gore v. Commissioner, T.C. Memo. 2007-169
Estate of Erickson v. Commissioner, supra (citing Estate of Rosen v.
Commissioner, T.C. Memo. 2006-115 ,Estate of Harper v. Commissioner, supra).
The taxpayer bears the burden, which is especially onerous in
transactions involving family members, of proving that an implied
agreement did not exist.
Estate of Reichardt v. Commissioner, supra at 151-152.
We turn to the record and examine it for what it shows
about Clyde Sr.’s possession and enjoyment of the assets he
transferred to Turner & Co.
We start with the partnership agreement. The partnership
agreement expressly provides that the general partner is
entitled to a “reasonable” management fee, and Clyde Sr.
and/or Jewell chose to receive a management fee of $2,000
per month without any apparent regard for the nature and
scope of their actual management duties. There is nothing
in the record to suggest that a $2,000 management fee was
reasonable. The record does not disclose what, if anything,
Clyde Sr. and Jewell did to manage the partnership. In fact,
some of the evidence suggests that Clyde Sr. and Jewell did
not manage the partnership at all.
We turn now to an examination of the factors that tend to show
an agreement to retain possession and enjoyment of the
transferred assets.
Nearly all of the facts point to an implied agreement. Clyde Sr.
transferred most of his assets to Turner & Co. Nearly 60 percent
of the value of all property that Clyde Sr. and Jewell contributed
to Turner & Co. consisted of Regions Bank common stock.
Because of his and Jewell’s sentimental attachment to the
Regions Bank stock, Turner & Co. did not sell the Regions Bank
stock. Although he and Jewell retained sufficient assets outside
of the partnership to meet their living expenses, they opted to
receive management fees from Turner & Co. for few or no
management services and took distributions from Turner & Co.
at will.
Most importantly, contrary to petitioner’s assertions, we
find that the purpose of Turner & Co. was primarily
testamentary.
When Clyde Sr. purportedly approached Marc about
creating a vehicle to consolidate his assets, he allegedly
stated that he and Jewell were not getting any younger.
Petitioner’s own witnesses testified that when Clyde Sr.
met with attorneys at Stewart, Melvin & Frost, he said that
he wanted to discuss estate planning. Many of the specific
purposes Clyde Sr. purportedly outlined at the meeting
were testamentary, e.g., providing for Jewell after his
death, providing income for future generations, and
protecting his children and grandchildren from creditors.
We are particularly struck by the implausibility of
petitioner’s assertion that tax savings resulting
from the family limited partnership were never
discussed during a meeting focusing in part on
estate planning.
We do not find testimony to that effect to be
credible, and that lack of credibility infects all of
the testimony petitioner offered about what Clyde
Sr. allegedly said or intended about the purpose of
the family limited partnership.
In our finding we rely partially on Mr. Coyle’s letter to Clyde Sr. in
which he wrote: “A key element to a gifting plan is the need of a sound
appraisal of the partnership for tax purposes.” And indeed such
appraisal was the key to Clyde Sr.’s estate plan: both the gift tax and
estate tax returns used substantial discounts despite the fact that the
partnership assets at each relevant date consisted of, inter alia, cash,
cash equivalents, and marketable securities.
In summary, we conclude that the formation of
Turner & Co. had testamentary characteristics and
Clyde Sr. did not curtail his enjoyment of the
transferred assets after formation of the partnership.
As a general partner, Clyde Sr. had the sole and
absolute discretion to make pro rata distributions of
partnership income (in addition to distributions to pay
Federal and State tax liabilities) and to make
distributions in kind. Moreover, Clyde Sr. had the
authority to amend the partnership agreement at any
time without the consent of the limited partners.
Finally, even after the gifts of limited partnership
interests to their children and grandchildren, Clyde
Sr. and Jewell owned more than 50 percent of the
limited partnership interests in Turner & Co. and
could make any decision requiring a majority vote of
the limited partners.
Valuation of LLC Interest – Formula Clause
Estate of Petter v. Com’r, ___ F.3d ___ (9th Cir. 8-411)
Anne Y. Petter (“Taxpayer” or “Anne”) transferred
membership units in a family-owned LLC partly as a gift
and partly by sale to two trusts and coupled the transfers
with simultaneous gifts of LLC units to two charitable
foundations.
The transfer documents include both a dollar formula
clause —which assigns to the trusts a number of LLC units
worth a specified dollar amount and assigns the remainder
of the units to the foundations—and a reallocation clause—
which obligates the trusts to transfer additional units to the
foundations if the value of the units the trusts initially
receive is finally determined for federal gift tax purposes to
exceed the specified dollar amount.
Based on an initial appraisal of the LLC units, each
foundation received a particular number of units. But after
an Internal Revenue Service (“IRS”) audit determined that
the units had been undervalued, the foundations
discovered they would receive additional units.
Everyone agrees that the Taxpayer is entitled to a
charitable deduction equal to the value of the units the
foundations initially received. But is the Taxpayer also
entitled to a charitable deduction equal to the value of the
additional units the foundations will receive?
The Tax Court answered that she was. We agree.
QPRT is a qualified personal residence trust
Estate of Riese v. Com’r, T.C. Memo. 2011-60 (3-1511)
Taxpayer won despite making some mistakes
Regarding ways to save estate taxes:
a. There are none
b. There are thousands of ways but every one
requires an expensive lawyer
c.
It often pays to consult with competent tax
counsel
d. A taxpayer can try but the IRS will always
challenge them
Email Dennis at [email protected]
Call 770-792-7444
See www.RegalSeminars.com