Wednesday, August 4, 2021
Tax developments continue to occur in the courts, state agencies and the IRS. Today’s post addresses some of the developments that are relevant to rural landowners in addition to recurring issues that impact all taxpayers.
A potpourri of tax developments – it’s the topic of today’s post.
Assignment of Income Doctrine At Issue
Berry v. Comr., T.C. Memo. 2021-52
The petitioner and spouse owned 50 percent of an S corporation engaged in construction projects. They were also involved in drag racing. They reported the income and expenses of the racing operation on the S corporation’s books. The IRS took the position that the taxpayers merely assigned the income of the racing operation to the S corporation while in fact they were separate operations. The Tax Court upheld the IRS position that the income had to be reported on the taxpayers' personal return as other income. The S corporation also claimed an I.R.C. §179 deduction for the cost of a utility trailer and an excavator. The IRS also disallowed this deduction. The Tax Court determined that the petitioner failed to show that the trailer was used for business purposes. Instead, it was used to transport race cars. The I.R.C. §179 expense for the excavator was disallowed because all the S corporation could show with respect to the purchase was an undated bill of sale. The petitioner established that he made a cash withdrawal and purchased a money order for the purchase of the excavator, but failed to prove that the cash withdrawal was connected to the purchase.
Travel Expenses Not Deductible
West v. Comr., T.C. Memo. 2021-21
The petitioner lived in Georgia, but worked in Louisville, Kentucky as a nurse. She deducted over $30,000 in travel-related expenses traveling between Kentucky and Georgia. The IRS denied the deductions and the Tax Court agreed. The Tax Court determined that the petitioner’s tax home was Kentucky. She had no business ties in Georgia and her job in Kentucky was not temporary. The petitioner also rented an apartment in Kentucky, filled prescriptions there and registered her car in Kentucky. The Tax Court noted that those facts further indicated that Kentucky was the petitioner’s tax home.
Payment For Water Right is Business Expense.
Priv. Ltr. Rul. 202129001 (Apr. 21, 2021)
The IRS, in a private ruling, determined that a contractually obligated payment for part of the cost of acquiring a water right was an ordinary expense. The right, IRS determined, was used to mitigate environmental damage from a tract of real estate, not improve it. Also, because the water right was used to combat groundwater draw down was a business expense, the taxpayer was eligible to deduct the payment for tax purposes.
Study Hours Don’t Count Toward 750-Hour test
The petitioners, a married couple, sustained losses on rental properties from 2008-2010 and deducted them as non-passive losses on the basis that the wife was a real estate professional in accordance with I.R.C. §469(c)(7). As such, she had to put more than 50 percent of the personal services that she performed for any given year into real property trades or businesses in which she materially participated, and perform more than 750 hours of services during the tax year in real property trades or businesses in which she materially participated. The trial court determined that the wife did not satisfy the 750-hour test because it was not permissible to count her hours spent during 2008-2009 studying for her real estate license. The appellate court affirmed on this point, and also affirmed the trial court’s finding that the wife failed to meet the 750-hour test in 2010 because the time spent working on the couple’s personal properties could not count toward the required 750 hours to be spent on real property trades or businesses.
Alimony Deduction Tied To Former Spouse
Berger v. Comr., T.C. Memo. 2021-89
The petitioners, a married couple paid their former son-in-law to visit their grandchildren and deducted the amounts as “alimony.” The IRS denied the deduction and the Tax Court affirmed on the basis that the deduction belongs exclusively to the former spouse, the petitioners’ daughter. The Tax Court noted that alimony obliges the former spouse, not anyone else that makes payments on behalf of an ex-spouse. The Tax Court also held that the petitioners could not deduct amounts allegedly as business expenses as rent for a greenhouse related to a cannabis business due to a lack of evidence that the amounts were spent on a business.
Solar Power Generation Taxed Assessed as “Farmland”
2021, A5434, eff. Jul. 9, 2021
New Jersey law now provides that land on which a dual-use solar energy project is constructed and approved is eligible for farmland assessment, subject to certain conditions. To receive farmland assessment, a dual-use solar energy project must: (1) be located on unpreserved farmland that is in operation as a farm in the tax year for which farmland assessment is applied for; (2) in the tax year preceding the construction, installation, and operation of the project, the acreage used for the dual-use solar energy project must have been valued, assessed, and taxed as land in agricultural or horticultural use; (3) be located on land that continues to be actively devoted to agricultural and horticultural use, and meets the income requirements set forth in state law for farmland assessment; and (4) have been approved by the state Department of Agriculture. In addition, no generated energy from a dual-use solar energy project is considered an agricultural or horticultural product, and no income from any power sold from the dual-use solar energy project is considered income for the purposes of eligibility for farmland assessment. To be eligible, the owner of the unpreserved farmland must obtain the approval of the Department of Agriculture, in addition to any other approvals that may be required pursuant to federal, state or local law, rule, regulation, or ordinance, before the construction of the dual-use solar energy project.
Corporate Payment of Personal Expenses Not Deductible
Blossom Day Care Centers, Inc. v. Comr., 2021 T.C. Memo. 86
The petitioner paid for personal expenses of its officers and their family members via credit cards issued in the petitioner’s name. The cards were also used to pay officers (and family members) personal credit card, and family members continued to make personal purchases on the petitioners’ cards even during periods when they were not employees of the petitioner. The IRS disallowed the deductions, and the Tax Court agreed. The petitioner also recorded the personal expenditures as a “Note Receivable from Officers” in multiple entries on the corporate books and maintained a running balance, indicating the personal nature of the expenses. The Tax Court also disallowed the petitioner’s I.R.C. §45A tax credit (Indian tax credit) because the petitioner was owned 51 percent by an Indian.
Hoop Buildings are Farm Machinery and Equipment in Missouri
MDOR Priv. Ltr. Rul. No. LR 8152 (Jun. 29, 2021)
A taxpayer sold hoop buildings that are designed and used for livestock production. The buildings are of a permanent nature and can be used in multiple livestock production cycles. The Missouri Department of Revenue (MDOR) determined that is a buyer used a hoop building exclusively, solely, and directly for raising livestock for ultimate sale at retail, the hoop building constitutes "farm machinery and equipment" exempt from sales and use tax under Mo. Rev. Stat. §144.030(2)(22). In addition, the MDOR concluded that the mere fact that the purchaser ultimately attaches the system to a wood or concrete foundation does not make the hoop building subject to sales and use tax. But, MDOR determined that the taxpayer's sales of hoop buildings would not be exempt from sales and use tax as farm machinery and equipment if they are used for purposes such as grain, hay, and other commodity storage, feed rations storage, sand, salt and gravel storage, and storage of equipment and machinery. The MDOR reasoned that hoop buildings used for grain storage are not used in the production of crops. Grain storage is not an agricultural purpose under Mo. Rev. Stat. §144.030.2(22). Neither is the storage of machinery and equipment.
These are some recent state and federal developments touching upon legal issues that farmers, rancher and rural landowners face. Some of the developments have also been more general in nature. Today’s post has been a “heads-up” on just a few.