Cleaning Up For the New Year - Thank You Maam

Originally published on Passive Activities and Other Oxymorons on January 3rd, 2011.
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I still have a good backlog of 2010 material, that isn't blossoming into full length posts so here are a few quickies.

CCA 201048042

I'm involved in doing a lot of partnership returns and I think we do a pretty good job.  One of the trickier parts is the liabilities section on the K-1.  From our individual practice, I get to see a lot of the K-1's that are prepared elsewhere.  Often it is pretty clear that they are wrong.  Frequently it does not matter, but sometimes it does.  A large deficit capital balance with no liability allocation is an example of a likely error. This CCA provides a little bit of a warning in deal with clearly erroneous K-1's.
Section 6222 requires the partners to report the amount and allocation of liabilities consistent with the partnership return unless they file a Notice of Inconsistent Treatment on Form 8082. In the absence of such a filing we are permitted to make an assessment without issuing a FPAA. I.R.C. 6222(c). They filed no such notice here so we do not need to conduct a TEFRA proceeding to make the assessment. Since outside basis is an affected item requiring partner-level determinations, however, we would have to issue an affected item notice of deficiency in order to assess a distribution in excess of basis. In the stat notice proceeding they could arguably rely on Roberts v. Commissioner, 94 T.C. 853, 860 (1990) to allege that the partnership books and records reflect the nonrecourse debt in issue, their reporting is consistent with the actual partnership books and records, and that the Schedule K-1 issued to them was incorrect. Cf. Treas. Reg. 301.6222(b)-3 (incorrect schedule provided to partner).

Private Letter Ruling 201048025, 12/03/2010

Code Sec. 1031(f); won't make benefits of Code Sec. 1031(a); unavailable to corp. under described circumstances provided that taxpayer, related party, and any affiliate undertaking exchange hold their respective replacement property for two years following their respective acquisition of replacement property.

This was a fairly convoluted set of facts.  It involves a sequence of related party exchanges.  I think the point of it was that since there was no ultimate cash out, nobody was getting away with anything.  I'd appreciate any comments that anybody else who has studied this ruling might have.

Lori A. Malchow-Bartlett v. Commissioner, TC Memo 2010-271

Taxpayer was denied deduction for use of home for day care, because she was not properly licensed :

Under section 280A(c)(4)(A), a taxpayer may be allowed business expense deductions relating to use of a residence to conduct child day care services. However, the deductions are allowed only where the taxpayer has obtained, or has applied for and has pending, a license to conduct child daycare services under applicable State law or is exempt from obtaining a license therefor under applicable State law. Sec. 280A(c)(4)(B).

The court concluded that taxpayer acted in good faith so no penalties were assessed.

U.S. v. BEDFORD, Cite as 106 AFTR 2d 2010-7271, 12/09/2010

This case is really outside my area of interest.  It is a criminal appeal.  The thing that got him in trouble was kind of interesting though.


The genesis of this case involved a business called Tower Executive Resources that billed itself as an executive recruitment business. In fact, Tower promoted to its members the opportunity to protect assets and to enjoy tax deferral through an offshore venture. Tower marketed its asset protection services to select clients through seminars at which Defendant and others spoke.

Essentially, clients learned at these seminars how to create bogus corporate entities called “international business corporations,” referred to as IBC-1s and IBC-2s. IBC-1s were domestic corporations that would hire and pay IBC-2s, foreign corporations, to perform services for the IBC-1s. Those services did not actually occur.

Mohamed M. Magan v. Commissioner, TC Summary Opinion 2010-173

In January 2007, petitioner moved from the State of Minnesota to the State of California in order to be closer to his sister and her family. Throughout 2007 petitioner's sister was married and lived with her husband and five children in a single- family home. Petitioner's sister was a stay-at-home mom and her husband was a full-time student who only started working in late 2007.

From January to August 2007, petitioner worked nights. Although petitioner did not live with his sister and her family during this time, he would spend much of his time at their home helping with childcare and doing the family's errands. In addition to assisting with childcare and errands, petitioner also provided his sister's family with financial assistance.

In August 2007, petitioner obtained a job located far away from where his sister and her family lived. For the remainder of 2007, petitioner was unable to help his sister with child care and errands, but he continued to provide financial assistance.

Petitioner claims that he is entitled to dependency exemption deductions for his two nieces because he provided financial assistance, as well as help with child care and the family's errands. We commend petitioner for contributing to the support of his sister's family. However, he has not demonstrated that he and his nieces shared the same principal place of abode for any portion, much less for more than one-half, of the taxable year in issue.

I thought the commendation from the Tax Court was a nice touch, even thought they couldn't help the poor guy, who seems to have deserved a break.

It looks like January will have a few more post like this as I work through my backlog.  If anything really significant develops, I'll be sure to do a bonus post.