In a memorandum opinion, the Tax Court has held that a taxpayer’s 17 years of losses in the horse-breeding business was not an activity motivated by profit under IRC §183. The taxpayer’s deductions attributable to the activity were disallowed and a substantial underpayment penalty was imposed.
Read the opinion here:
Dodds v. Commissioner, T.C. Memo. 2013-76
The taxpayer in Kurek v. Commissioner was a sole proprietor in the business of home renovations. He reported his business income on Schedule C and hired approximately 30 workers to assist him on various projects. He did not: issue Forms 1099 or W-2 to any of the workers, offer employee benefits, carry unemployment insurance or workers compensation insurance. An IRS examination determined that the workers were employees for FICA, FUTA and federal income tax withholding purposes. Mr. Kurek petitioned the Tax Court.
Whether a worker is classified as an employee or independent contractor is a facts and circumstances test based on a variety of factors. The determinative question, however, is whether the employer has the right to control and direct the worker, even if he did not actually do so.
Mr. Kurek had some pretty good facts in his favor: None of the workers worked full-time; each worker was paid on a project-by-project basis; each worker set his own hours and schedule; each worker used his own tools; workers could work for other construction groups; and workers were replaced if they failed to meet a deadline. All of these facts weigh in favor of independent contactor status.
However, the Tax Court found otherwise. The Court emphasized that the taxpayer (1) exercised ultimate authority over the workers as to their job responsibilities, (2) approved the quality of their work, and (3) paid them weekly rather than at the end of the project. It also considered the fact that only the taxpayer communicated with the homeowners, and that he alone was responsible for the success or failure of the projects. It gave considerably less weight to the factors in favor of independent contractor status and concluded that the workers should be classified as employees because the taxpayer failed to prove that he did not control them.
The taxpayer also did not qualify for Section 530 relief because he did not file a Form 1099 for any of the workers.
Read the opinion here:
Kurek v. Commissioner, T.C. Memo 2013-64
I want to be a tax accountant.
Tax Season is in full swing, so it seems appropriate to bring out this little gem again. Credit to Thompson Reuters for the production.
The taxpayers in Historic Boardwalk Hall are seeking review in the United States Supreme Court. As reported here last summer, the Third Circuit Court of Appeals reversed the Tax Court and denied the public/private partnership between the New Jersey Sports and Exposition Authority (“NJSEA”) and Pitney Bowes the benefit of historic rehabilitation tax credits because the two parties were not bona fide partners.
The petition faces an uphill battle to gain a hearing at the Supreme Court. There is no split in the Circuit Courts of Appeal on this issue and the high court seems reluctant to tackle tax matters without that prompt. The petition rightly argues that this is the first case “where the Internal Revenue Service has made a broad based challenge to the allocation of Congressionally-sanctioned federal historic rehabilitation tax credits by a partnership to a partner.” The public policy implications of the Third Circuit’s decision are broad and the impact has already been felt in the historic rehabilitation context and beyond. Many parties will be watching to see what happens with this petition.
Read the petition for writ of certiorari here:
Historic Boardwalk Hall Petition for Writ of Certiorari
The Second Circuit Court of Appeals has reversed the Tax Court’s decision that a New York City co-op owner, Ms. Alphonso, could not deduct casualty losses that occurred on grounds owned in common with other cooperative shareholders.
The Tax Court held that Ms. Alphonso could not take a deduction for a casualty loss because she did not hold a property interest in the damaged property. The damage in question occurred when a retaining wall along the common property of the cooperative apartment building collapsed. The co-op shareholders contributed to the necessary repairs and clean-up. Ms. Alphonso took a deduction of about $23,000 for her share of the repairs, claiming that it qualified as a casualty loss under under IRC §165(c)(3).
The Tax Court did not address the merits of the casualty loss claim. Rather, the Court ruled as a matter of law that Ms. Alphonso did not hold a “sufficient” property interest in the common area of the apartment building to qualify for the deduction.
The Second Circuit vacated the Tax Court holding that although Ms. Alphonso’s interest in the damaged common area was not exclusive with respect to her fellow tenant shareholders it was still a property right. Thus, the “property” element of section 165(c)(3) was satisfied. The Second Circuit remanded the case to the Tax Court for further proceedings on whether the claimed damages qualified as a casualty loss.
Read the Second Circuit’s opinion here:
Alphonso v. Commissioner, No. 11-2364 (2d Cir. Feb. 6, 2013)
Read the Tax Court opinion here.
The IRS recently released Schedule UTP filing statistics for the 2011 tax year. The statistics are not complete as returns from some late fiscal year filers and others still have not been processed.
As of December 2012, the IRS was able to report the following:
2011 also was the first tax year that prior year positions were required to be reported on the Schedule. The IRS has not yet gathered the data to share any statistics to break out the total number of positions reported in the current year and prior years.
No information was released regarding the most frequently reported code sections underlying the uncertain tax positions.
Read more about Schedule UTP here.
The Tax Court denied the taxpayers’ deduction for the donation of a conservation easement where the taxpayer granted the easement pursuant to negotiations with a local zoning authority for approval of a subdivision exemption.
The deductibility of conservation easement donations is drawn from the general rule allowing the deduction of charitable contributions under IRC §170. Charitable contributions must be freely given, i.e., a gift, to qualify for the deduction. If the contribution is made in exchange for a specific benefit, i.e., a quid pro quo, then it does not qualify for the deduction.
The Tax Court found that the taxpayer’s donation of the easement was not a gift because it was “part of a quid pro quo exchange for Boulder County’s approving his subdivision exemption request.” The court also approved the application of the 20% substantial understatement penalty under IRC §6662(b)(2) against the taxpayer. The court denied the taxpayer’s reasonable cause argument to avoid the penalty, specifically noting the lack of testimony from the CPA who prepared the returns and invoking the “Wichita Terminal rule” to find for the government. The Wichita Terminal rule is drawn from a 67 year-old Tax Court case and generally provides that when a litigant fails to produce the testimony of a person that might be expected to testify, that failure gives rise to a presumption that the testimony would be unfavorable to the litigant’s case.
While the taxpayer lost on the 20% penalty, the court did reject the government’s argument for the 40% gross valuation penalty under IRC §6662(h)(2). In support of its position the commissioner alleged that the appraisal:
(1) was made more than 60 days before the grant of the second conservation easement; (2) does not describe the property; (3) does not contain the expected date of contribution; (4) does not contain the terms of the second conservation easement; (5) does not include the appraised fair market value of the second conservation easement on the expected date of contribution; and (6) does not provide the method of valuation Mr. Roberts used in that the report does not adequately identify the highest and best use of the property.
The taxpayer urged that the penalty did not apply under the exception provided in IRC §6664(c)(2) because the taxpayer obtained a “qualified appraisal” from a “qualified appraiser” and made a good faith investigation of the value of the property before making the donation. The court sided with the taxpayer and rejected the government’s arguments. The court voiced its particular concern with the government’s claim that the appraisal was not qualified because did not provide a method of valuation. The court noted that the appraisal specifically identified the well-established “before and after” valuation method and repeated, though without citation, the same concerns expressed by the Second Circuit Court of Appeals in Scheidleman v. Commissioner, that is, that the government’s claim really was directed at the reliability of the report and not its validity or “qualification”.
Read the entire opinion here:
Pollard v. Commissioner, T.C. Memo 2013-38
As the IRS continues to challenge charitable deductions for the contribution of conservation and facade easements, the Tax Court is considering the details of these arrangements with greater scrutiny. In doing so, the Court is refining the law governing these transactions. In its most recent opinion on this issue, the Court clarified yet another requirement for taxpayers who wish to claim this charitable deduction.
In Belk v. Commissioner, the taxpayers donated a conservation easement over a 184 acre golf course and claimed a $10.5 million deduction on their 2004 tax return. The conservation easement agreement executed by the parties included a provision which allowed the owner of the property (i.e., the taxpayers) to substitute the property subject to the easement with “an area of land owned by Owner which is contiguous to the Conservation Area for an equal or lesser area of land comprising a portion of the Conservation Area.”
The IRS challenged the validity of the entire donation on the grounds that the real property interest (i.e., the golf course) was not donated in perpetuity because the substitution provision allowed it to be replaced by another property. The IRS argued that the substitution provision violated the requirement that the contribution be an interest in real property that is subject to a use restriction granted in perpetuity under IRC §170(h)(2)(C).
The IRS previously had argued that certain facade easements violated the “in perpetuity” requirement. See, Kaufman v. Commissioner, 134 T.C. 182 (2010) (Kaufman I) and Kaufman v. Commissioner, 136 T.C. 294 (2011) (Kaufman II). The Kaufman argument, however, was based on the language of IRC §170(h)(5) which requires that the conservation purpose of the easement be protected in perpetuity. Though the IRS prevailed in the Tax Court, Kaufman and the §170(h)(5) argument was overturned by the First Circuit Court of Appeals. Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012).
In Belk, the IRS, and apparently the taxpayers (see footnote 17), combined the two provisions of §170 while making the perpetuity argument. Judge Vasquez, writing for the Court, parsed the issue more carefully. He noted that §170(h)(2)(C) requires that the property must be subject to a perpetual restriction on use as distinguished from § 170(h)(5) which requires that the conservation purpose be protected in perpetuity. The Court made it clear that the two provisions were separate and distinct and based its decision on the former.
The Court held that the donation made by the Belk’s did not constitute a “qualified real property interest” under §170(h)(2)(C) because the conservation easement agreement allowed for substitution of the contributed property. The court found that the contributed property was not subject to a use restriction in perpetuity but in fact subject to the restriction only so long as the substitution provision in the agreement was not exercised. Accordingly, the charitable donation did not meet the requirements of §170(h) and the deduction was denied in full. The Court did not reach the question of conservation purpose or valuation.
Read the entire opinion here:
Belk v. Commissioner, 140 T.C. No. 1 (2013)
UPDATE: On February 20, 2013, the Department of Justice Tax Division filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia Circuit appealing the District Court’s ruling.
In a surprising decision, the U.S. District Court for the District of Columbia found in favor of three plaintiffs who challenged the Internal Revenue Service’s ability to govern tax return preparers pursuant to regulations issued in 2011. The 2011 regulations required, among other things, registration with the IRS and use of a registration number when preparing returns known as the PTIN (Preparer Tax Identification Number). The 2011 rules were based on 31 U.S.C. § 330 – a statute which the court noted was originally promulgated in 1884.
That statute gives the Department of Treasury the authority to regulate people who “practice” before it. As an agency of the Department of Treasury, the IRS is within the purview of the statute. The question that captured the District Court was whether tax return preparers were “practicing” before the IRS, and thus the Department, when they prepare and sign tax returns on behalf of others. It found that they were not and thus the IRS could not regulate them under the authority granted by the statute.
The District Court granted the plaintiff’s motion on summary judgment and also entered a permanent injunction preventing the IRS from enforcing the 2011 tax return preparer rules. The IRS responded to the court’s ruling on January 22, 2013 with an announcement on its website acknowledging that those tax return preparers specifically covered by the registration and reporting rules were no longer required to comply.
The case and the injunction does not apply to enrolled agents, CPAs, or attorneys. These individuals are still subject to the rules for practice before the IRS. Though the injunction is permanent, expect to see more action on this issue from the Department of Treasury and/or the IRS.
Read the entire opinion here:
Loving v. Internal Revenue Service, No. 12-385 (January 18, 2013, DC D.C.)
The U.S. Senate has confirmed Bingham’s Ron Buch and Georgetown’s Albert Lauber to serve as the two newest members of the United States Tax Court.
