Source: http://taxtrials.com/tag/tax-court/page/2/
Timestamp: 2019-04-20 12:40:29+00:00

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Where to Draw the Line in a Conservation Easement?
The Tax Court continues to take a page from Steven Tyler’s songbook when it comes to property lines and conservation easements. In Bosque Canyon Ranch, L.P. v. Commissioner, the Tax Court rejected two related partnerships’ deductions for the donation of conservation easements. Among the shortcomings the Court found with the partnerships’ donations was a deed provision permitting “modifications to the boundaries between the Homesite parcels.” The Homesite parcels were not subject to the conservation restrictions placed over the remainder of the development property.
The potential post-donation modifications to the Homesite parcels were subject to the approval (within reasonable judgment) of the North American Land Trust; could not affect the exterior boundaries of the property subject to the easement; and the overall property subject to the easements could not be decreased. Despite these limitations, the Court, following Belk v. Commissioner, 140 T.C. 1 (2013), found that because the potential boundary modifications were in place at the time of the donation, the restrictions on the use of the property were not granted in perpetuity in violation of IRC 170(h)(2)(C).
The Belk court found that the perpetual donation requirement of IRC 170(h)(2)(C) was violated by a deed allowing the substitution of property subject to the original easement for continguous property of equal area and value after the donation of the easement. The Belk court seemed to be concerned with its ability to identify the specific real property interest subject to the easement at the date the easement was granted. Presumably, the Court felt it could not do that because the potential substitution of adjacent property could change the boundaries of the burdened parcel at any time. And because the specific real property interest had not been identified upon donation, it had not been burdened in perpetuity.
The Bosque Canyon opinion does not provide the detailed deed language that the Belk opinion did, but it does describe the deed as forbidding a decrease in “the overall property subject to the easement” and changes in the “exterior boundaries of the property subject to the easement.” It also suggests that the boundary changes only occur between unburdened parcels (the Homesite lots). These deed provisions – at least as characterized by the court – seem to be a bit different from those in Belk.
Under the Bosque Canyon provisions there could be no change in the borders of the burdened parcel, no diminution of the property subject to the easement and apparently no change in or substitution of property not originally identified. It seems that the Bosque Canyon deeds were limited to redrawing internal boundary lines between unburdened parcels in the same development that included the conservation easement.
If that is the case, then does the deed language in Bosque Canyon really raise the same identification of restricted real property interest subject to the conservation easement issue that concerned the Court in Belk? Is the redrawing of these lines of any real consequence to the identification of a real property interest subject to perpetual protection?
Unfortunately, the Court took issue with much more than the deed modifications in Bosque Canyon (which we will discuss in a future post) so the prospect of appellate review on this discreet deed modification issue is slim. It seems unlikely that the Tax Court intends to create a “heads I win/tails you lose” situation when it comes to deed modifications in conservation easement cases. Nonetheless, Belk might warrant a closer look if it is going to continue to guide the Court’s interpretation of IRC 170(h)(2)(C).
Quality appraisals are still key to conservation easement donation deductions. In Costello v. Commissioner, T.C. Memo 2015-87, the Tax Court held that the taxpayers did not submit a “qualified appraisal” within the meaning of IRC § 170(f)(11)(E)(1) and upheld the substantial valuation misstatement penalties imposed on the taxpayers for the 2006, 2007, and 2008 tax years.
The taxpayers own a farm in Howard County, Maryland. Howard County uses a density exchange program in which each property has a certain number of development rights that may be sold to another developer of property, referred to as a “density exchange option.” Each development right essentially equates to one additional residence that a developer can build on a given property. In order to sell their development rights to a third party, the landowner must grant an easement to Howard County.
In 2006, the taxpayers granted the county a land preservation easement on their property. The taxpayers sold 16 of their 17 available development rights to a developer for a total purchase price of $2.56 million. Upon recordation of the deed of easement on October 17, 2006 all future development was prohibited on the taxpayers’ farm with the exception of farming.
The taxpayers obtained an appraisal on July 1, 2007. The appraisal assumed they could purchase eight additional development rights and the highest and best use of the subdivision would be a subdivision with 25 homes. The appraiser estimated a fair market value of $7.69 million before the sale of the development rights and gauged the fair market value of the property after the sale of the development rights at $2.1 million.
The taxpayers’ appraisal stated the assumption that the property was “free and clear of any and all liens or encumbrances” as of December 1, 2006. The appraisal did not account for the $2.56 million that the taxpayers received from the developer and the easement granted to the county in exchange for 16 of their 17 available development rights.
Additionally, the taxpayers’ 2007 appraisal omitted a number of required items, including an accurate description of the property contributed, the date of the contribution, or the terms of agreement. It also did not use the words “conservation easement” or “land preservation easement.” Judge Lauber concluded that the appraiser was not aware of the deed of easement that the taxpayer’s transferred to Howard County.
The donee (Howard County) did not sign the appraisal summary, as required under Treas. Reg. § 1.170A-13(c)(4)(i)(B), because it had serious doubts about the taxpayer’s ability to take a charitable contribution deduction. At the taxpayers’ request, the appraiser prepared an addendum on March 25, 2008 taking into account the $2.56 million that the taxpayer’s received for their development rights in 2006. The addendum reduced the taxpayers’ noncash charitable contribution to $3,004,692.
An official from Howard County signed off on the addendum and the taxpayers filed an amended 2006 return on May 16, 2008. The taxpayers’ claimed a charitable contribution deduction of $1,058,643 on their amended 2006 return, $1,666,528 on their 2007 return, and the remaining $278,521 on their 2008 return.
The IRS issued a notice of deficiency for all three years on July 13, 2012 disallowing the charitable contribution deductions in full and assessing accuracy-related penalties. The notice of deficiency also disallowed like-kind exchange treatment on the sale of the development rights and deductions claimed for business use of the home. The taxpayers’ timely petitioned the Tax Court challenging the disallowance of the charitable contribution deductions, asserting a higher basis on the sale of the development rights, and disputing the accuracy-related penalties.
At trial, Judge Lauber did not consider the taxpayer’s addendum to the appraisal because it was made more than five months after the due date (including extensions) of the taxpayer’s 2006 return. Under Treas. Reg. § 1.170A-13(c)(3)(i)(A) to be “qualified” an appraisal must be made no more than 60 days before the contribution and no later than the due date (including extensions) of the return on which the charitable deduction is first claimed.
The taxpayers argued for application of the substantial compliance doctrine under Bond v. Commissioner, 100 T.C. 32 (1993) and Hewitt v. Commissioner, 109 T.C. 258 (1997). Judge Lauber held that the numerous defects and missing categories in the taxpayers’ appraisal prevented the taxpayers’ from successfully asserting substantial compliance. Judge Lauber further opined that even if the court assumed substantial compliance, the contribution was part of a quid pro quo exchange as defined in Hernandez v. Commissioner, 490 U.S. 680 (1989), because the taxpayers could not legally sell the development rights without first granting an easement to Howard County.
The Court also dismissed the taxpayers’ contention that the transaction was a bargain sale because once the taxpayers signed the contract to sell their development rights, they had no excess development potential to grant Howard County through a bargain sale.
In sum, the Court held that the appraisal “failed to inform the IRS of the essence of the transaction in which petitioner’s engaged.” Thus, the appraisal was not a qualified appraisal under Treas. Reg. § 1.170A-13(c)(3)(i).
Judge Lauber also denied the taxpayers’ reasonable cause defense to the application of the 20% substantial valuation misstatement penalties under IRC § 6662(b)(3) for all three-tax years because the taxpayers did not get a qualified appraisal under IRC § 170(f)(11)(E)(1).
In Buczek v. Commissioner, 143 T.C. 16 (2014), the Tax Court granted the IRS’s motion to dismiss for lack of jurisdiction under IRC § 6330(g) where the taxpayers offered only frivolous arguments as the basis for a Collection Due Process (“CDP”) hearing. Of note, however, is the Court’s refusal to overturn the Tax Court’s decision in Thornberry v. Commissioner, 136 T.C. 356 (2011), which also involved a IRC § 6330(g) determination.
In November 2013, the IRS sent the taxpayers a final notice of intent to levy to collect unpaid Federal income tax and interest assessed for 2009. The taxpayers timely filed Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response. The taxpayers did not check any boxes on the Form 12153 but wrote “common law hearing” on the form where they could state another grounds for requesting a CDP hearing. The taxpayers submitted seven additional pages with the Form 12153, including a copy of the notice of intent to levy stamped with common tax protestor arguments, “Pursuant to UCC 3-501”, “Refused from the cause”, “Consent not given”, and “Permission DENIED”.
The IRS sent the taxpayers a letter in January 2014 requesting that the taxpayers amend their CDP hearing request to provide a legitimate reason for the hearing or to withdraw the request. The taxpayers did not timely respond to this letter. In March 2014, the IRS sent the taxpayers a letter informing the taxpayer that the IRS was disregarding the taxpayers’ CDP request under the authority of IRC § 6330(g).
In June 2014, the IRS filed a motion to dismiss for lack of jurisdiction asserting that the Court does not have jurisdiction when a disregard letter is issued under IRC § 6330(g). The motion to dismiss was contrary to the Court’s decision in Thornberry, which held that while IRC § 6330(g) denies further administrative or judicial review of the portions of a CDP request that the Appeals office deem frivolous, the statute does not deny judicial review of that determination.
Judge Dawson, writing for the court, denied the IRS’s request to overturn Thornberry, distinguishing this case on its facts. Unlike the taxpayers in Thornberry, who presented four valid grounds for a CDP hearing under IRC § 6330(c)(2), here the taxpayers’ CDP request did not make any assertions that would raise a legitimate issue under IRC § 6330(c)(2). The taxpayers did not challenge the appropriateness of the collection action, request collection alternatives, or properly contest the underlying tax liability. Also, unlike Thornberry, where the taxpayers’ CDP request and petition properly raised issues under IRC § 6330(c)(2)(A) and (B), here the taxpayers did not raise any valid issues that could be considered in a CDP hearing.
Judge Dawson granted the IRS’s motion to dismiss for lack of jurisdiction based upon his determination the the taxpayers did not make a proper request for a CDP hearing and thus the CDP request was properly treated as if it was not submitted. However, Judge Dawson clearly states that the Court’s review of IRS determinations under IRC § 6330(g) are important in protecting taxpayers from determinations that are “arbitrary and capricious” and did not overturn Thornberry.
In Crile v. Commissioner, T.C. Memo. 2014-202 (2014), the Tax Court held that the taxpayer engaged in the “trade or business” of being an artist under IRC § 183 (also known as the “Hobby Loss Rule“).
The taxpayer is a full-time tenured professor of studio art at Hunter College in New York City. She has worked as an artist for over 40 years, exhibited and sold her art through leading galleries, and received numerous awards for her art. She devotes approximately 30 hours per week to her art during the school year and works full-time on the business during the summers. The taxpayer had works of art displayed in several prominent museums including the Metropolitan Museum of Art, the Guggenheim Museum, and the Brooklyn Museum of Art.
The taxpayer received notices of deficiency for the tax years 2004, 2005, 2007, 2008, and 2009 based on the determination that the taxpayer’s claimed Schedule C expenses were actually unreimbursed employee business expenses that should have been reported on Schedule A, Itemized Deductions. The IRS made the determinations on the grounds that the taxpayer’s activity was not “engaged in for profit” under IRC § 183, and even if the art activities were a business, she claimed several deductions that were not “ordinary and necessary” under IRC § 162(a).
The taxpayer petitioned the Tax Court and Judge Lauber ordered the two theories be examined separately for purposes of briefing and opinion. This case considers whether the taxpayer’s activities were in the trade or business of being an artist under IRC § 183.
The IRS took the position that the taxpayer’s art (and expenses associated with producing that art) was included in the single activity of her work as an art professor within the meaning of Treas. Reg. § 1.183-1(d)(1). The taxpayer argued that the two activities were separate and should be analyzed accordingly under IRC § 183. Judge Lauber considered three factors from Treas. Reg. § 1.183-1(d)(1) including 1) the degree of organizational and economic interrelationship of her art activities, 2) the business purpose which is (or might be) served by carrying on her activities as an artist and an art professor separately; and 3) the similarity of her activities as an artist and an art professor.
Citing Treas. Reg. § 1.183(d)(1), Judge Lauber stated that “the taxpayer’s characterization will be rejected only where it ‘is artificial and cannot be reasonably supported under the facts and circumstances of the case.'” The Court noted several important facts in favor of the taxpayer’s job as a professor and activities as an artist being treated separately under IRC § 183, including her work as an artist for over 10 years prior to becoming a professor, the different job requirements of a business owner and a professor, and the hundreds of hours the taxpayer spent on the administrative requirements of her business that did not benefit her activities as a professor.
Judge Lauber mentioned several other professions (lawyers, accountants, economists) where an individual’s job requirements as a professor were different than those used in their teaching. Thus, the Court held that the taxpayers activity as an artist was separate from her activity as a professor and the Court evaluated the activity separately under IRC § 183.
Once the Court determined that the taxpayer’s activity as an artist needed to be analyzed on its own merits, the next step was for the Court to determine whether the taxpayer engaged in her art business for profit under IRC § 183. Judge Lauber addressed each of the nine factors set forth in Treas. Reg. § 1.183-2(b) to determine whether the taxpayer engaged in her art activities with the intent to make a profit.
The taxpayer kept all the receipts, invoices, and sales records for her art business dating back to 1971. Also, the taxpayer hired a bookkeeper for the tax years at issue. Additionally, the Court cited Churchman v. Commissioner, 68 T.C. 696 (1977), stating that being represented by an art gallery was “critically important in assessing profit motive, because it demonstrates that petitioner conducted her activity in the same manner as other successful artists.” The taxpayer also sent exhibition announcements to her mailing list of 3,000, attended art-related networking events, and had a website for her art. Thus, the court held that the taxpayer had a profit objective and the manner in which she conducted her art activities strongly favored the taxpayer’s argument that her art activity was a business.
Judge Lauber found that the facts were strongly in favor of the taxpayer having expertise in her field, dedicating substantial time and effort to her art business, and she had a reasonable expectation that her artwork would appreciate significantly in value over the course of her career. Additionally, the Court concluded that the taxpayer’s success as an art professor, her financial status, and her enjoyment of her art activity were of limited relevance to the IRC § 183 analysis.
The IRS’s argument focused on factors six and seven of Treas. Reg. 1.183-2(b) – history of income or losses and the amount of occasional profits. Citing Churchman, Judge Lauber noted that a history of losses is less persuasive for artists than it is for other professions. The taxpayer reported substantial losses in 18 of her last 20 years on her Federal income tax return. She had significant profits from sales of art in 1995 and 2013. In addition to Churchman, Judge Lauber cited Hughes v. Commissioner, T.C. Memo 1995-202 (holding that photographer was engaged in a trade or business despite 7 years of continuous losses), and Richards v. Commissioner, T.C. Memo. 1999-163 (holding that screenplay writer was engaged in a trade or business despite 5 straight years of substantial losses).
The taxpayer earned $667,902 from the sale of 356 works of art between 1971 and 2013. Despite the IRS’s arguments to the contrary, the Court noted that the art business was highly speculative and that a single event could lead to a substantial increase in an artist’s income.
On balance, the Court held that the taxpayer’s activity as an artist was engaged in for profit within the meaning of IRC § 183. Judge Lauber ordered that the issue of whether the taxpayer’s expenses were “ordinary and necessary” under IRC § 162(a) be decided in a separate opinion.
In Dynamo Holdings v. Commissioner, 143 T.C. No. 9, the Tax Court upheld the taxpayers’ motion to use predictive coding to respond to the IRS’s discovery request. The decision is an important development for e-discovery providers and taxpayer representatives who can now use predictive coding in response to electronic discovery requests.
Tax Court Judge Buch cited Magistrate Judge Andrew Peck’s article, Search Forward: Will Manual Document Review and Keyboard Searches be Replaced by Computer-Assisted Coding?, L. Tech. News (Oct. 2011), to explain the technology and the accuracy of predictive coding.
Predictive coding is a technology-assisted review tool that uses human inputs and established algorithms to allow the computer to determine the relevance of a specific document. Typically, the human reviewer reads and codes a set of documents and the system identifies properties in those documents that it can use to identify other documents. Once the system establishes a pattern and can make confident predictions, counsel can use specific qualifiers to produce relevant documents and narrow the review. The court referred to the effective use of predictive coding by individuals at home and at work to filter out spam email.
The case came to Tax Court on the IRS’s motion to compel production of documents in cases concerning several transfers from Beekman Vista, Inc. (“Beekman”), to a related entity, Dynamo Holdings Limited Partnership (“Dynamo”). Notably, Dynamo is the limited partnership involved in U.S. v. Clarke, 573 U.S. (No. 13-301, June 20, 2014). The IRS alleged that these transfers are disguised gifts to Dynamo’s owners. The taxpayers argue that the transfers are loans.
The IRS requested that the taxpayers produce Electronically Stored Information (“ESI”) contained on two specific backup storage tapes, or produce the tapes (or copies) themselves. The taxpayers argued that it would cost at least $450,000 and take many months to fulfill this discovery request. They contend they would need to review each document on the tapes (between 3.5 million and 7 million), identify responsive documents, and withhold privileged or confidential information. The taxpayers requested the Tax Court deny the IRS’s motion or, in the alternative, the Court allow the use of predictive coding.
Judge Buch noted that the taxpayers’ request to use predictive coding was “somewhat unusual” because Rule 70(a)(1) requires the parties to use informal discovery prior to resorting to the formal discovery process. The Court explained that it is “not normally in the business of dictating to parties the process that they should use when responding to discovery.” However, the Tax Court held that it would publish an opinion in this case because the Court has not previously addressed computer-assisted review tools.
The Tax Court refused the taxpayers’ request to deny the IRS’s motion to compel because a party is generally required to produce ESI in the form in which it is maintained under Rule 72(b)(3). The Court found that Rule 70(c)(2) did not apply because the IRS showed good cause for the discovery. However, the Court did find that the taxpayers were reasonable in objecting to the IRS’s proposed solution of a clawback agreement. The clawback agreement would allow the IRS to see all of the confidential and privileged information on the tapes, but preserve the taxpayers’ right to later claim that all or part of the information is privileged and not subject to discovery.
Each party presented an expert witness to address the use of predictive coding in this case. The taxpayers’ expert examined certain details of the two tapes requested, interviewed the person most knowledgable about the backup process and backup tapes, and performed cost calculations comparing the IRS’s suggested method of discovery with the predictive coding approach. The taxpayers’ expert found that using the predictive coding approach 200,000 to 400,000 documents would be subject to review at a cost of $80,000 to $85,000. He found that under the IRS’s approach 3.5 million to 7 million documents would be subject to review at a cost of $500,000 to $550,000. The Court did not find anything in the IRS expert’s testimony to discredit the taxpayers’ expert’s analysis.
The Court disagreed with the IRS’s argument that predictive coding is an unproven technology finding that “the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.” The Court also cited several federal cases allowing computer-assisted review, and specifically predictive coding, as acceptable means to search for relevant ESI documents including Moore v. Publicis Groupe, 287 F.R.D. 182 (S.D.N.Y 2012), Hinterberger v. Catholic Health Sys., Inc., No. 08-CV-3805(F), 2013 WL 2250603 (W.D.N.Y. May 21, 2013), and In Re Actos, No. 6:11-md-2299, 2012 WL 7861249 (W.D. La. July 27. 2012). Thus, the Court granted the taxpayers’ order to allow use of predictive coding to fulfill the IRS’s discovery request.
In Yari v. Commissioner, 143 T.C. No. 7, the Tax Court upheld a $100,000 statutory maximum, penalty under IRC § 6707A(b)(2)(A) assessed against the taxpayer for failing to report a listed transaction. The case presents an issue of first impression on the proper calculation of a penalty under IRC § 6707A(b).
The taxpayer participated in a listed Roth IRA transaction from 2002 to 2007. The transaction involved the taxpayer forming a disregarded entity, Topaz Global Holdings, LLC, and a Nevada corporation, Faryar, Inc., which elected to be treated as an S-Corporation for federal income tax purposes. The taxpayer opened a Roth IRA account in 2002 with an initial contribution of $3,000. The Roth IRA acquired all of Faryar, Inc.’s stock for $3,000 and became the sole shareholder of the corporation.
From 2002 to 2007, Faryar, Inc. reported management fees from related entity Topaz Global Holdings, LLC and interest income of $1,221,778. Because Faryar, Inc. was an S-Corporation with a Roth IRA as the sole shareholder, the income was not taxed at either the corporate level or the shareholder level. The structure allowed the taxpayer to exceed Roth IRA contribution limits and decrease the income he otherwise would have reported because Topaz Global deducted the management fee paid to Faryar, Inc.
In IRS Notice 2004-8, the IRS designated these Roth IRA transactions as “abusive.” The taxpayer filed a federal income tax return for 2004 in on October 17, 2005. This return did not disclose the taxpayer’s participation in the Roth IRA transaction. The IRS audited the taxpayer’s returns for 2002 through 2007 and issued notices of deficiency for each year. The IRS determined that the taxpayer should have included $482,912 from the management fee transaction as income in the 2004 tax year. After computational adjustments, this increased the taxpayer’s tax liability by $135,215. The IRS issued notices of deficiency and the taxpayer when to the Tax Court.
During the course of the audit, the taxpayer amended his 2004 tax return to correct reported Schedule K-1 information. The amended return also included $482,912 from the management fee transaction as income. The taxpayer then filed a second amended return claiming a net operating loss carryback from 2008, and again reporting the $482,912 management fee as income.
The taxpayer and the IRS settled the deficiency cases and entered into a closing agreement in 2011. The closing agreement required the taxpayer to include certain amounts in his income for each of the tax years, including $482,912 for the 2004 tax year. The Court entered stipulated decisions in the deficiency cases that reflected the closing agreement.
In September 2008, the IRS issued a IRC § 6707A penalty of $100,000 for the 2004 tax year because the taxpayer failed to disclose his participation in a listed transaction. The IRS issued a Notice of Intent to Levy in February 2009 and the taxpayer timely requested a Collection Due Process (CDP) hearing. Prior to the hearing, Congress amended IRC § 6707A as part of the Small Business Jobs Act (SBJA) to change the method of calculating the penalty. The change was effective retroactively for penalties assessed after December 31, 2006. The new statute designated a penalty of 75% of the decrease in tax shown on the return as a result of the listed transaction and set minimum and maximum penalties of $5,000 and $100,000, respectively, for individuals under IRC § 6707A(b).
The IRS suspended the CDP hearing to reconsider the calculation of the penalty and determined that the penalty did not need to be modified under the new statute. The taxpayer took the position that the amended returns should be used to calculate the decrease in tax, and thus the penalty should be the statutory minimum of $5,000 under IRC § 6707A(b)(2)(B). The revenue agent disagreed and used the original return to calculate the penalty, resulting in a maximum $100,000 liability under IRC § 6707A(b)(2)(A). At the taxpayer’s request, the settlement officer issued a notice of determination sustaining the collection action. The taxpayer challenged the calculation of the penalty and petitioned the Tax Court.
Despite stipulations to the Tax Court’s jurisdiction over this matter, the Court determined its jurisdiction over the matter and distinguished this case from Smith v. Commissioner, 133 T.C. 424 (2009). In Smith, the Court found it lacked jurisdiction to redetermine an IRC § 6707A penalty because the penalty did not fit the statutory definition of deficiency and because the IRS could assess and collect the penalty without issuing a statutory notice of deficiency. However, the Tax Court held that the Court does have jurisdiction to redetermine a liability challenge asserted by a taxpayer in a Collection Due Process hearing pursuant to IRC § 6330(d)(1). Notably, the Tax Court reviewed the CDP determination de novo because the underlying tax liability was properly at issue. Sego v. Commissioner, 114 T.C. 604, 610 (2000).
The taxpayer stipulated that he participated in a listed transaction and that he failed to properly disclose his participation. The taxpayer argued that the amended returns should be used to calculate the decrease in tax, and thus the penalty should be the statutory minimum of $5,000, rather than the $100,000 maximum assessed by the IRS. He based his argument on the plain language of the statute, the statutory scheme, and legislative history.
The Court held that “the statute is clear and unambiguous: The penalty is calculated with reference to the ‘tax shown on the return’. IRC § 6707A(b).” In its analysis of legislative intent, the Tax Court found that Congress intended to penalize the failure to disclose participation in a listed transaction, not the tax savings produced by the transaction. The Court also noted that Congress could have referenced “a” return in the statute, rather than “the” return, if it intended for the IRS to use amended returns in calculating the penalty under IRC § 6707A. Thus, the Court upheld the maximum penalty of $100,000 assessed against the taxpayer.
The Tax Court did leave the door open for taxpayers who file an amended return prior to the due date of the original return.
Read the full opinion here: Yari v. Commissioner, 143 T.C. No. 7.
In Barkett v. Commissioner, 143 T.C. No. 6 (2014), the Tax Court held that gains reported from the sales of investments (not the amount realized) are used to determine whether the taxpayers understated gross income by more than 25% for purposes of the extended six-year statute of limitations under IRC § 6501(e)(1)(A). The issue came before the Tax Court on the taxpayers’ motion for partial summary judgment.
In Barkett, the taxpayers realized more than $7 million from the sale of investments in 2006, and reported $123,00 in gain. In 2007, the taxpayers realized more than $4 million from the sale of investments and reported $314,000 in gain. The gross income reported in 2006 and 2007 was $271,440 and $340,591, respectively. The IRS issued a Notice of Deficiency more than three years but less than six years after taxpayers filed their 2006 and 2007 returns.
The IRS asserted that taxpayers omitted $629,850 and $432,957 in gross income for tax years 2006 and 2007, respectively. The taxpayers stipulated to the amounts that were omitted but challenged the validity of the Notice of Deficiency on the grounds that the three year statute of limitations expired under IRC § 6501(a) and the amount omitted from gross income did not exceed the 25% threshold to extend the statute of limitations to six years under IRC § 6501(e).
The taxpayers’ relied upon the Supreme Court’s decision in United States v. Home Concrete & Supply, LLC, 566 U.S. ___, ___, 132 S. Ct. 1836 (2012), which invalidated a portion of Treas. Reg. § 301.6501(e)-1 and held that the six-year statute of limitations under IRC § 6501(e) does not apply to a taxpayer’s overstatement of basis. The taxpayers argued that amounts realized should be included in the denominator of the 25% omitted calculation for purposes of IRC § 6501(e)(1)(A).
The Tax Court rejected the taxpayers’ interpretation of Home Concrete and held that gross income stated in the return only includes gains reported from investment property – the excess of the amount realized over the basis in the assets sold. The Court cited Insulglass v. Commissioner, 84 T.C. 203 (1985) and Schneider v. Commissioner, T.C. Memo. 1985-139, stating that “capital gains, not the gross proceeds, are to be treated as the amount of gross income stated in the return for purposes of section 6501(e).” The Court distinguished this case from the Intermountain line of cases that led to the Supreme Court’s decision in Home Concrete because those cases addressed when gross income is omitted from the return, not how to calculate gross income (the issue in this case).
Read the full Tax Court opinion here: Barkett v. Commissioner, 143 T.C. No. 6 (2014).

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