As the new year dawns it is tempting to go through my posts for the last year and attempt to extract meaning from their randomness. Maybe I will get to it. Probably more important, though, is to take a look at what I missed. I found this paper titled, Important Developments in Federal Income Taxation, by Edward Morse on The Tax Prof Blog. It is not nearly as amusing as going through my posts, but I have to admit, it appears a bit more thorough. Here are a few of the items that Professor Morse picked up on that I failed to cover.
Dorrance v US was a demutualization decision. The IRS has taken the position that taxpayers have no basis in stock that they receive in a demutualization transaction. The Dorrances argued that using the open transaction doctrine, they should be able to not recognize any gain at all. The District Court indicated that there should be an allocation.
Denaples v US was a Third Circuit decision. It concerns whether interest paid by a state on the amount it owed for taking property was excludible under Section 103 (Interest on State and Local Bonds). The Tax Court had ruled in favor of the IRS, but the Third Circuit overturned the decision. I had looked at this issue many years ago and concluded that the interest was excludable. I am glad to know that the Third Circuit agrees with me, even though the Tax Court obviously got it wrong.
Owen v Commissioner was a Tax Court Memorandum decision. It had a lot of moving parts to it, but the part that Professor Morse and I found of interest concerned Code Section 1045, which allows you to defer gain on the sale of small business stock by buying into a new business. The problem the IRS had with Mr. Owen’s new business was that there was not enough business going on. The new corporation invested about 8% of its assets in jewelry and only sold six pieces in its first year of existence. The Tax Court agreed with the IRS. It reminds me a bit of the hobby loss cases I cover.
Veriha v Commissioner was a regular Tax Court decision. It concerns Code Section 469 (Passive Activity Loss Rules). I noticed the case, but it was rather too convoluted for me to work it into a post. Mr. Veriha owned a trucking company and rented trucks to it. Code Section 469 was part of the Tax Reform Act of 1986 and was meant to drive a stake into the heart of tax shelters. The process of people coming up with clever ideas to avoid taxes and legislation to prevent that is something of an arms race. To buttress 469 there are rules to prevent income from your business (non-passive) from being converted to rental income (passive). Mr. Veriha, even though he wasn’t trying to get away with anything, got snarled up in those rules. Kind of collateral damage in the war against tax shelters.
Dirico v Commissioner, another Tax Court regular decision, was another convoluted 469 case involving the regulations about how to classify activities.
I skipped the Martin Olive Tax Court decision, because I though other bloggers had covered it well enough, but the referenda in Colorado and Washington make it even more timely. There was a quite a bit about substantiation and the Cohan rule in the case, but the most important element is the application of Code Section 280E (Expenditures in Connection With The Illegal Sale of Drugs). Since we have an income tax, not a gross receipts tax, you get to deduct your cost of goods sold, if you are selling illegal drugs. Even though Mr. Olive had lousy records, he was allowed cost of sales using the Cohan rule. None of the other deductions are allowed. So even if DEA is hands off on the pot business in Washington and Colorado, the IRS will still be in a position to shut it down.
So How Did I Miss All That ?
I actually look at almost all original source federal material and a lot of state material. I write about the ones that I feel like writing about. My criteria are practical utility, humor and matter for reflection. I’ve been at this for over two years now and have begun to feel responsible for certain issues. LGBT tax issues, the parsonage exclusion and hobby loss cases are among them. And of course we had the presidential candidate returns to keep up with this year. I should go back and count, but I think that I end up writing about approximately 20% of the cases I set aside as being potentially post worthy.
So many issues, so little time. Because of my particular method, I don’t keep that up to date on what the other tax bloggers are following. The only tax blog that I follow religiously is the Tax Prof, because that is how I find out about work like Professor Morse’s paper. The cases I mention above are just some of the ones that I would have written about if I had had the time. He also addresses much that I would not have even tried to write about. I strongly recommend that you take the trouble to download it. As a matter of pride, I would like to find a case that I wrote about that he did not mention, but I haven’t gone through the exercise.
Happy New Year.
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Originally published on Forbes.com Jan 2nd, 2013