Originally published on Passive Activities and Other Oxymorons on February 7th, 2011.
I know that you haven't been wondering how I do my blog, but I am going to tell you anyway. I look at every federal court tax decision and an alphabet soup of IRS pronouncements (PLR, CCA, PMTA etc) as they are released by the Research Institute of America. A small percentage of them strike me as interesting for one reason or the other (practical utility, humor, cause for reflection). Those I copy into a draft post, which I will then labor over as the spirit moves me. Having the full text in my draft post allows me to easily paste quotes into the body of my post. The effect of this method is to leave me with a collection of draft posts. Sometimes when I look at them I wonder why I thought they were interesting in the first place. I've committed to a Monday Wednesday Friday schedule. If something seems of immediate interest, I will put it up as a bonus post. The side effect of this process is the accumulation of material that doesn't quite turn into a full length post. Rather than consign it to the dustbin (You might be surprised at the number of developments than nobody would write about if I didn't), I will group a bunch of them together. So in this post and maybe a subsequent one I will clean out anything left over from last year. The only thing the items have in common is that they came out in the waning days of 2010. If you can detect a theme, congratulations.
TAX PRACTICE MANAGEMENT, INC. v. COMMISSIONER OF INTERNAL REVENUE JOSEPH ANTHONY D'ERRICO v. COMMISSIONER OF INTERNAL REVENUE, TC Memo 2010-266
This was a fairly run of the mill substantiation case although the numbers were respectable (over 200k in deficiencies). The fact that it was a tax preparation business added a touch of irony. The most interesting feature was an airplane. It was purchased in December. Mr. D'Errico took it on a test flight which allowed him to visit some clients. He then leased it out, because he was to busy to fly around during tax season. He sold his tax business before he got to use the airplane to visit clients. He, of course, took a 179 deduction in the year of acquisition. The tax court didn't buy it.
TPM has not demonstrated that the airplane was acquired with the requisite intent or motive of making a profit. Other than D'Errico's self-serving testimony, TPM has not presented any evidence that it contemplated using the airplane for purposes of TPM's management or marketing operations. Further, the airplane leasing agreement specifically provides that TPM entered into the agreement with the intention of generating revenue to offset the airplane's operating costs.
Private Letter Ruling 201048025
This was a fairly convoluted like-kind exchange that was allowed. As far as I could make out an entity swapped with a related party, which then acquired property. The key to the whole thing seemed to be that as a group there was no net increase in cash.
Related Party intends to reinvest an amount equal to the total sale price of the Related Party Relinquished Properties less exchange costs. In the event that Related Party acquires replacement properties having a value less than 100 percent of the value of the Related Party Relinquished Properties, the difference will result in the Related Party recognizing gain arising from the exchange in the full amount of such difference, but the amount of gain so recognized will not exceed x% of the gain realized by Related Party on its transfer of the Related Party Relinquished Properties.
If somebody has studied this ruling and could post a comment I'd really appreciate it.
Edward Daoud, et ux. v. Commissioner, TC Memo 2010-282
This was also a substantiation case. It was notable for two reasons. The first was the introduction:
The Daouds owned two Wienerschnitzel franchises in Southern California, both of which gobbled up unusually large amounts of money. These expenses grabbed the Commissioner's attention and during his audit of the Daouds' 2000 and 2001 returns, he found that they had reported a large loss on kitchen equipment they never owned, and lacked substantiation for many of the other deductions that they claimed. The Commissioner determined a large deficiency for each year, and wants to add fraud or at least accuracy-related penalties. We make our way through the resulting menu of possibilities to determine the correct taxes and penalties.
You don't read a lot of stories about Tax Court judges shooting themselves, so you know that they have to have a sense of humor. Sometimes it comes through.
The story of the unallowed loss on the kitchen equipment is one that Robert Flach, The Wandering Tax Pro will love. (Mr. Flach still prepares returns by hand rather than use expensive and unreliable software):
Mr. Daoud conceded that he and his wife were not entitled to the loss on the sale of kitchen equipment, but he tried to explain why he reported a loss for equipment he had neither bought nor sold. He testified that he was unsure how the $110,015 loss got on his return, but he speculated that the bid was mixed up with all the other paperwork on his desk, which caused him to enter it into Turbo Tax by mistake. He also testified that the date he recorded on the Form 4797, Sales of Business Property, as the date that he sold the equipment was simply one that he chose at random after Turbo Tax prompted him to enter a date. He went on to explain that he gave the altered document to the revenue agent "out of panic."
The Turbotax made me do it defense was unavailing:
This case is a good example of why we allow the Commissioner to prove fraudulent intent using circumstantial evidence and the taxpayer's entire course of conduct. Mr. Daoud claims that he reported the loss by mistake, and he asks us to believe that he first learned about it when the revenue agent brought it to his attention. We do not believe him--Mr. Daoud's credibility suffered during trial. His testimony was often suspect, and the records he provided have proven not to be what he said they were on many subjects.
The judge elaborated on the credibility theme. He didn't yell "Pants on fire", but it was close.
Private Letter Ruling 201051025
In my more paternalistic moments, there is a provision of the tax law that I would keep secret from some people. One of the ways that you can avoid a 10% penalty on early withdrawal from you IRA is by committing to a series of distributions. I just turned 59, myself, and I am looking forward to my 1/2 birthday so I wouldn't need to consider something like that myself. And of course I'm glad my younger self never thought about it. Nonetheless, there might be circumstances where it makes sense. The ruling was about someone who adopted that course then managed to screw it up. The IRS was forgiving.
1. The failure to distribute the entire required distribution amount for Year 6, and a proposed makeup distribution for Year 7 will not be considered a modification of a series of substantially equal periodic payments and will not be subject to the 10 percent additional tax imposed on premature distributions under section 72(t)(1) of the Code.
2. The fact that the amount of the annual payment computed pursuant to section 72(t)(2)(A)(iv) of the Code was paid in a single sum in Year 1 and in monthly distributions in Year 2 through Year 7 will not be considered a modification of a series of periodic payments and will not be subject to the 10 percent additional tax imposed on premature distributions under section 72(t)(1) of the Code.
That is not a complete wrap on 2010, but it will do for now.