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                                                                                                  ARCHIVED TAX BULLETINS

Federal Tax Research Bulletin - The Latest Tax and Accounting Articles

              

Parker's Federal Tax Bulletin
Issue 87     
April 24, 2015     

 

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 1. In This Issue ... 

 

Tax Briefs

May AFRs Issued; IRS Sustained Lien in Violation of Bankruptcy Proceedings; Recharacterization of Workers' Comp Created Tax Liabilities in Excess of Received Benefits; IRS Publishes 2015 Adjustment Factors for Certain Energy-Related Credits ...

Read more ...

IRS Relies on Self-Rental Rule to Treat S Corp's Rental Income as Nonpassive

The Tax Court held that income taxpayers received through their S corporation for property rented to their C corporation was nonpassive income, and could not be used to offset their passive losses. Williams v. Comm'r, T.C. Memo. 2015-76.

Read more ...

IRS Provides Penalty Relief to Taxpayers Affected by Erroneous Forms 1095-A

The IRS has provided penalty relief for the 2014 tax year for taxpayers who received a delayed or incorrect Form 1095-A, Health Insurance Marketplace Statement. Notice 2015-30.

Read more ...

Allocation of Tax Credits to Minority Partner Deemed a Disguised Sale

The Tax Court held that a cash contribution for a minority interest in a partnership that was closely followed by an allocation of state tax credits was a disguised sale resulting in ordinary income and not a tax-free capital contribution. SWF Real Estate LLC v. Comm'r, T.C. Memo. 2015-63.

Read more ...

Payment for Accrued Vacation and Sick Leave on LAPD Detective's Retirement Not Excludable as Workmen's Comp

The Tax Court held that, although a former LAPD detective had accrued sick and vacation time while on temporary disability leave, the lump sum payment of that accrued time upon his retirement was not a payment pursuant to a workmen's compensation statute and therefore could not be excluded from his income. Speer v. Comm'r, 144 T.C. No. 14.

Read more ...

Travel Time Puts Taxpayer Over the Top for Real Estate Professional Status

The Tax Court held that a taxpayer's revised log detailing the time she spent traveling to her rental properties could be used to prove she satisfied the 750-hour material participation requirements for real estate professionals. Leyh v. Comm'r, T.C. Summary 2015-27.

Read more ...

Taxpayer Can't Claim Nonresident State Taxes on Partnership Income as Above-the-Line Deductions

The Tax Court held that because the imposition of state nonresident income taxes fell upon the taxpayer partner and not the partnership, the tax payments were deductible only as itemized deductions. Cutler v. Comm'r, T.C. Memo. 2015-73.

Read more ...

IRS Rules Proposed Disclaimers of Gifts from Deceased Wife were Qualified Disclaimers

The IRS ruled that a taxpayer's proposed disclaimers of securities gifted to him by his wife before her death were qualified disclaimers, resulting in certain gifts being treated as if they had never been made. PLR 201516056.

Read more ...

Dividends to Insurance Policyholders were Properly Deducted in Year Guaranteed

The Court of Appeals for the Federal Circuit held that an accrual basis insurance company properly deducted dividends in the year its board of directors calculated and guaranteed the amount to a class of policyholders, rather than in the year the dividends were paid. The court found the practice satisfied the "all events" test. Mass. Mutual Life Insurance Co. v. U.S., 2015 PTC 112 (Fed. Cir. 2015).

Read more ...

Rural Doctor Received Cancellation of Debt Income Stemming from Forgiveness of Incentive Loans

The Tax Court held that a hospital's forgiveness of loans provided as an incentive for a physician to establish a practice in rural Florida gave rise to cancellation of debt income. The court disagreed with the physician's contentions that he was not personally liable for the loan. Wyatt v. Comm'r, T.C. Summary 2015-31.

Read more ...

Eleventh Circuit Upholds Convictions in Stolen Tax Refund Check Scheme

The Eleventh Circuit upheld the convictions and 133-month prison sentences of a pair of co-conspirators who, with the help of a United States Postal Service worker, stole and cashed hundreds of federal income tax refund checks. U.S. v. Jones, 2015 PTC 121 (11th Cir. 2015).

Read more ...

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 2. Tax Briefs 

 

Applicable Federal Rates

May AFRs Issued: In Rev. Rul. 2015-08, the IRS issued the applicable federal rates for May 2015.

 

Bankruptcy

IRS Sustained Lien in Violation of Bankruptcy Proceedings: In Yuska v. Comm'r, T.C. Memo. 2015-77, a taxpayer filed for bankruptcy after a hearing with the IRS pursuant to a notice of federal tax lien filing. While the bankruptcy case was still open, the IRS issued a notice of determination sustaining the proposed lien, and the taxpayer petitioned the tax court to challenge the notice. The Tax Court held that the IRS issued the notice of determination in violation of the automatic stay on collection procedures during bankruptcy proceedings under 11 U.S.C. 362(a), and dismissed the notice and the taxpayer's petition.

 

Compensation and Fringe Benefits

Recharacterization of Workers' Comp Created Tax Liabilities in Excess of Received Benefits: In Carrancho v. Comm'r, T.C. Summary 2015-29, a taxpayer was required to recharacterize excludable workers' compensation as taxable social security benefits. The taxpayer's social security benefits had been reduced by his receipt of workers' compensation, and under Code Sec. 86(d)(3), the workers' compensation offset was included in the social security benefits he received, even though the increase in his tax liability exceeded the amount of the increased benefits.

 

Credits

IRS Publishes 2015 Adjustment Factors for Certain Energy-Related Credits: The IRS has published in the Federal Register (80 Fed. Reg. 20,295 (4/15/14)) the inflation adjustment factors and reference prices for calendar year 2015 for the Renewable Electricity Production and Refined Coal Production credits as required by Code Sec. 45.

IRS Reminds Employers of Extension to Claim Work Opportunity Tax Credit: In IR-2015-72 (4/21/15), the IRS issued a newly revised Form 8850 for used by employers to request certification from their state workforce agency for purposes of the work opportunity tax credit (WOTC). Pursuant to Notice 2015-13, businesses and tax-exempt organizations planning to claim the WOTC for eligible workers hired during 2014 have until April 30 to request the certification required for these workers.

 

Deductions

IRS Disregards Transaction with Offsetting Loan and Contractual Rights: In CCA 201515020, the IRS Office of Chief Counsel advised that the taxpayers' participation in a transaction with an offsetting loan and contractual rights may be disregarded under the economic substance doctrine. Although the transaction had a remote possibility for earning a profit, that factor was outweighed by the transaction's expected tax benefits relative to that profit potential, and by the inflated cost the taxpayers paid for the transaction. The IRS found the taxpayers entered into the transaction to generate cash flow through expected tax benefits, rather than through the expectation of a profit, and could not claim deductions from the transaction.

Taxpayer Can't Deduct Startup Expenses of Engineering Business: In Tarighi v. Comm'r, T.C. Summary 2015-28, a taxpayer claimed expenses incurred while setting up his civil engineering business. The IRS disallowed the expenses, claiming that the taxpayer's business had not commenced for purposes of Code Sec. 162(a), as he did not have any income or clients and did not seek to bid on any jobs. The Tax Court determined the amounts claimed were nondeductible startup expenses, and sustained the IRS's disallowance.

 

Foreign

IRS Provides 2015 Foreign Housing Adjustments: In Notice 2015-33, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911 for specific locations for 2015. The adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. While the notice is effective for tax years beginning on or after January 1, 2015, a taxpayer may elect to apply the 2015 adjusted housing limitations contained in the notice to his or her tax year beginning in 2014.

 

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-31, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rates on certain 30-year Treasury securities.

 

Liens and Levies

Taxpayer's Wrongful Levy Claims Dismissed for Failure to Exhaust Remedies: In Goldsmith v. IRS, 2015 PTC 110 (D. Nev. 2015), a taxpayer claimed the IRS had violated Code Sec. 6331(k), barring tax levies while installment agreements are pending or in effect. The taxpayer was the sole owner of a C Corporation and had reached an installment agreement with the IRS to pay off taxes owed, but prior to the start date of the agreement, the taxpayer discovered he was unable to transfer funds from his corporate account to a payroll account due to an IRS levy. The taxpayer brought suit, claiming the IRS had improperly levied his accounts in violation of the agreement, alleging fraud, but because the taxpayer had not exhausted all his administrative remedies with the IRS, the district court dismissed the case.

 

Partnerships

Limitation Period for Bad-Debt Refund Claims Unavailable for Cash Basis Taxpayer: In CCA 201515018, the IRS Office of Chief Counsel advised that that the seven-year limitations period for bad-debt refund claims under Code Sec. 6511(d)(1) did not apply to a partnership's refund claim for overstating income because it did not relate to bad-debt deductions under Code Sec. 166. The taxpayer was a majority owner of partnerships that kept internal accounting records under the accrual method, but used cash-basis reporting for tax purposes. The court determined that the taxpayer, as a cash basis taxpayer, incorrectly claimed a bad-debt deduction under Code Sec. 166, which is available to accrual-basis taxpayers. Because Code Sec. 166 was inapplicable, the seven-year limitations period did not apply, and the partnership was precluded from making the bad-debt refund claim.

 

S Corporations

Trust Beneficiaries Inadvertently Terminate S Corporation Status: In PLR 201516003, the IRS granted an S corporation relief for an inadvertent termination of its S corporation status. A grantor trust eligible to be a qualified subchapter S trust (QSST) became a shareholder of the corporation, but on the grantor's death the beneficiaries of the trusts failed to timely file a QSST election and trust became an ineligible shareholder, terminating the S election. The IRS ruled the termination was inadvertent, and granted relief contingent on the beneficiaries filing QSST elections within 120 days of the ruling.

 

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 3. In-Depth Articles 

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IRS Relies on Self-Rental Rule to Treat S Corp's Rental Income as Nonpassive

The Tax Court held that income taxpayers received through their S corporation for property rented to their C corporation was nonpassive income, and could not be used to offset their passive losses. Williams v. Comm'r, T.C. Memo. 2015-76.

Background

Larry and Dora Williams were the sole owners of BEK Real Estate Holdings, LLC, an S Corporation, and of BEK Medical, Inc., a C corporation. Mr. Williams worked full time for BEK Medical, and materially participated in the business, though the couple did not materially participate in the activities of BEK Real Estate.

In 2009 and 2010, BEK Real Estate leased to BEK Medical commercial real estate which BEK Medical used in its trade or business activities. BEK Real Estate had net rental income of $53,285 and $48,657 from the rental of commercial real estate to BEK Medical in those years. The taxpayers reported those amounts as passive income on Schedules E, Supplemental Income and Loss, attached to their tax returns for 2009 and 2010, and offset the amounts with passive losses from other S corporations, partnerships, and rental properties.

In a notice of deficiency, the IRS reclassified BEK Real Estate's rental income for the two years as nonpassive income pursuant to Reg. Sec. 1.469-2(f)(6), and disallowed the taxpayers' passive losses that that exceeded their passive income.

Analysis

Code Sec. 469 prevents taxpayers from using losses from passive activities to offset nonpassive income. With certain exceptions, the term "passive activity" includes any rental activity, regardless of the level of a taxpayer's material participation in such activity (Code Sec. 469(c)(2)). Reg. Sec. 1.469-2(f)(6) generally recharacterizes as nonpassive the net rental activity income from an item of property if (1) the property is rented for use in a trade or business activity and (2), the taxpayer materially participates in the trade or business. This is commonly referred to as the "self-rental rule."

The IRS claimed that during 2009 and 2010, the taxpayers received income through BEK Real Estate from property that was rented to BEK Medical, in which Mr. Williams materially participated. The IRS argued the income could be recharacterized as nonpassive because the Williams satisfied the two components of Reg. Sec. 1.469-2(f)(6).

The taxpayers made two counterarguments, claiming that Code Sec. 469 does not apply to S corporations, and that the self-rental rule did not apply because BEK Real Estate did not materially participate in the trade of business of BEK Medical.

The Tax Court acknowledged that Code Sec. 469 does not specifically refer to S corporations, but pointed out that because passthrough entities do not pay tax, the individual shareholders of an S corporation are the taxpayers to whom Code Sec. 469 applies. The court noted it had previously recognized that income and losses from passthrough entities are subject to the passive activity limitations (Harnett v. Comm'r, T.C. Memo. 2011-191). Thus, the court held Code Sec. 469 applied to the Williams, who conducted real estate activities through their S corporation, BEK Real Estate.

The taxpayers based their second argument, in part, on Dirico v. Comm'r, 139 T.C. 396 (2012), in which the court had phrased the second prong of the self-rental rule as "the lessor-taxpayer must materially participate in the trade or business." The Williams claimed that because BEK Real Estate, as the lessor, did not participate in the trade or business of the lessee, BEK Medical, Reg. Sec. 1.469-2(f)(6) was inapplicable. The tax court disagreed with this interpretation, reasoning the case did not add to the requirements of the self-rental rule, and was merely a statement of the rule in the context of that particular case.

Instead, the court found the requirements of the self-rental rule were clearly met. The first prong was met because the property owned by BEK Real Estate was rented to BEK Medical for use in its trade or business. The second prong was satisfied because the Williams, not BEK Real Estate, were taxpayers subject to the requirements of Code Sec. 469, and they received passthrough income in 2009 and 2010 from property that was rented for use in a trade or business in which Larry materially participated.

Finding that the two requirements of Reg. Sec. 1.469-2(f)(6) were met, the Tax Court sided with the IRS and held that the income the Williams received from the rental of property by BEK Real Estate to BEK medical must be recharacterized as nonpassive income, which the taxpayers could not offset with passive losses.

For a discussion of the difference between passive and nonpassive income, see Parker Tax ¶ 247,145.

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IRS Provides Penalty Relief to Taxpayers Affected by Erroneous Forms 1095-A

The IRS has provided penalty relief for the 2014 tax year for taxpayers who received a delayed or incorrect Form 1095-A, Health Insurance Marketplace Statement. Notice 2015-30.

Background

On February 20, 2015, the Centers for Medicare and Medicaid Services (CMS) announced that it had sent incorrect Forms 1095-A to over 800,000 individuals who had purchased health insurance through a federal exchange.

The errors stemmed from a mistake in the benchmark plan used to calculate the amount of the premium tax credit that enrolled taxpayers were eligible to receive. Approximately 20 percent of Forms 1095-A included the monthly premium amount of the Silver plan for 2015 instead of 2014, leading to incorrect calculations of the tax credit. Read more...

Allocation of Tax Credits to Minority Partner Deemed a Disguised Sale

The Tax Court held that a cash contribution for a minority interest in a partnership that was closely followed by an allocation of state tax credits was a disguised sale resulting in ordinary income and not a tax-free capital contribution. SWF Real Estate LLC v. Comm'r, T.C. Memo. 2015-63.

Background

In 2001, John L. Lewis IV formed SWF Real Estate, LLC (SWF) as an entity taxed as a partnership. Lewis, through a wholly owned S corporation, purchased a large tract of land in Albemarle County, Virginia (Sherwood Farm) and contributed it to SWF. Lewis intended Sherwood Farm to be used for SWF to start a farming business and a cattle breeding operation, but the land was also zoned for residential development. During a regional rise in real estate prices in 2005, many large farms around Albemarle were being developed into subdivisions, and land owners like Lewis felt pressure to do the same. To encourage the preservation of rural land, in 2005 and 2006, Virginia provided a state income tax credit to individuals and corporations equal to 50 percent of the fair market value of any interest in land, including conservation easements, donated to public and private organizations and entities for conservation or preservation purposes. During that time, a taxpayer holding unused Virginia tax credits was able to sell or transfer the unused credits.

In 2005, Lewis was advised by a consulting firm that a charitable gift of an easement on Sherwood Farm would produce state tax credits of approximately $3.2 million (in addition to a potential $6.7 million charitable contribution deduction for federal tax purposes). The consultants advised Lewis that he had two options with respect to any unused Virginia tax credits: he could sell them or he could allocate them using a partnership structure. They further suggested that any unused credits could be transferred or allocated to Virginia Conservation Tax Credit Fund LLLP (VTC), at a rate of 53 cents per dollar of Virginia tax credits.

Lewis decided to move forward with the conservation easement on Sherwood Farm. Because SWF was not profitable enough to use all of the Virginia tax credits, he began planning a transaction to transfer the credits SWF would receive from the easement to VTC (the "VTC transaction"). VTC agreed to contribute to SWF funds of 53 cents per dollar of allocated tax credits and receive a 1 percent nonvoting minority interest in SWF and an allocation of the tax credits. The agreement also specified that SWF would indemnify VTC for any disallowed or reduced tax credits.

Before the transaction was initiated, a second appraisal of the property found the land would produce a $7.4 million charitable gift and associated tax credits of $3.4 million. Lewis agreed VTC would receive the extra credits for a proportional increase in its capital contribution, though VTC would not receive a greater interest in SWF.

In December of 2005, SWF executed a deed conveying a conservation easement on Sherwood Farm to Albemarle County. VTC then transferred $1,802,000 to SWF as a capital contribution in exchange for a 1 percent interest in SWF. On its 2005 Form 1065, U.S. Return of Partnership Income, SWF reported a charitable contribution of $7,398,333 from the easement, and on its Schedule VK-1, filed with its Form 502, Virginia Passthrough Entity Return of Income, SWF allocated $3,400,000 in Virginia tax credits to VTC, pursuant to their agreement.

In 2011, after examining SWF's 2005 return, the IRS issued a Final Partnership Administrative Adjustment (FPAA) with respect to SWF's 2005 tax year. The IRS determined that of the $1,802,000 received from VTC, only $124,857 represented a capital contribution in exchange for a 1 percent interest in SWF, and the remaining $1,677,143 was a disguised sale of the Virginia tax credits pursuant to Code Sec. 707.

Regulations on Disguised Sales

Generally, a partner may contribute capital to a partnership tax free (Code Sec. 721). However, this nonrecognition treatment will not apply if the contribution is a disguised sale under Code Sec. 707(a)(2). A disguised sale occurs when (1) a partner directly or indirectly transfers money or property to a partnership, (2) there is a related direct or indirect transfer of money or other property by the partnership to such partner, and (3) the transfers are properly characterized as a sale or exchange of property when viewed together (Code Sec. 707(a)(2)(B)).

In addition, Reg. Sec. 1.707-3(b)(1) provides that a disguised sale has occurred only if, on the basis of all of the facts and circumstances, (1) the transfer of money or other consideration would not have been made but for the transfer of property and (2) in cases in which the transfers are not made simultaneously, the subsequent transfer is not dependent on the entrepreneurial risks of partnership operation.

The Tax Court found that the first two prongs of Code Sec. 707(a)(2)(B) were satisfied because VTC had transferred money to SWF, and SWF subsequently transferred property in the form of Virginia tax credits to VTC. In order to determine if the transfers were properly characterized as a sale under the third prong, the court looked to the two factor test in Reg. Sec. 1.707-3(b)(1), considering (1) whether VTC would not have transferred $1,802,000 to SWF but for the corresponding transfer of $3,400,000 of Virginia tax credits from SWF; and (2) whether SWF's transfer was not dependent on the entrepreneurial risks of SWF's partnership operations.

The court determined VTC's promise to contribute money to SWF equal to 53 cents for each $1 of Virginia tax credits allocated to it was evidence that VTC would not have transferred money to SWF but for the corresponding transfer of credits. In addition, VTC was promised a legally enforceable, fixed rate of return of $1 of credits for every 53 cents contributed and was shielded from suffering any loss of credits through a clause that required SWF to indemnify VTC for any of its credits that were disallowed or revoked. Because of this indemnity clause, the court concluded that SWF's transfer of Virginia tax credits to VTC was not dependent upon the entrepreneurial risks of SWF's business.

10-Factor Facts and Circumstances Test For Disguised Sales

In addition to the three-prong test in Code Sec. 707(a)(2)(B) and the two-factor test of Reg. Sec. 1.707-3(b)(1), Reg. Sec. 1.707-3(b)(2) provides 10 facts and circumstances that help establish whether a transfer is a disguised sale:

(1) Whether the timing and amount of a subsequent transfer are determinable with reasonable certainty at the time of an earlier transfer;

(2) Whether the transferor has a legally enforceable right to the subsequent transfer;

(3) Whether the partner's right to receive the transfer is secured in any manner;

(4) Whether contributions to the partnership are required for the partnership to make the transfer;

(5) Whether loans to the partnership are required to enable the partnership to make the transfer;

(6) Whether the partnership must incur debt necessary to permit it to make the transfer;

(7) Whether the partnership holds money or other liquid assets, beyond the reasonable needs of the business, that are expected to be made available for the transfer;

(8) Whether partnership distributions are designed to effect an exchange of the burdens and benefits of ownership of property;

(9) Whether the transfer by the partnership to the partner is disproportionately large in relationship to the partner's interest in partnership profits; and

(10) Whether the partner has no obligation to return or repay the money or other consideration to the partnership.

Because the tax court found the VTC transaction could properly be characterized as a sale or exchange under Reg. Sec. 1.707-3(b)(1), it next considered the application of the facts and circumstances listed in Reg. Sec. 1.707-3(b)(2). The court selected six of the ten factors as relevant in determining whether the VTC transaction was a disguised sale.

The court first considered whether the timing and amount of the transfer of credits were determinable with reasonable certainty at the time of the transfer. Because the amount of the capital contribution to SWF was based directly on the amount of credits to be transferred and SWF agreed to record the easement on or before December 31, 2005, so that VTC could use the resulting Virginia tax credits on its 2005 income tax return, the court concluded this weighed in favor of treating the VTC transaction as a disguised sale.

Next, the court considered whether VTC had a legally enforceable right to transfer the tax credits. The court noted the agreement between VTC and SWF stated that VTC's contribution would entitle it to receive an allocation of Virginia tax credits and if SWF failed to fulfill the terms of the agreement, VTC could have pursued breach of contract claims, giving VTC a legally enforceable right. Additionally, the court determined that because the indemnity clause guaranteed SWF would indemnify VTC if any of the tax credits were disallowed or reduced, this secured VTC's rights to the credits and these two factors also supported finding a disguised sale.

The court then considered whether SWF held the Virginia tax credits beyond the reasonable needs of its business. The court noted that SWF agreed that it would not use any portion of the credits allocated to VTC to offset or satisfy its state income tax liability. Further, when the second valuation of the easement created more credits than originally expected, SWF agreed to transfer the additional credits to VTC, rather than use them or sell them to a different party. Because SWF held the credits beyond the reasonable needs of its business, the court concluded that this factor also evidenced a disguised sale.

The court noted that VTC was ultimately allocated 92 percent of the Virginia tax credits despite holding only a 1 percent interest in the partnership's profits and concluded the amount of tax credits that VTC received was proportionate to the amount of money it contributed to SWF, and not to its partnership interest. Because of this, the transfer of credits to VTC was disproportionately large and weighed in favor of finding a disguised sale.

Additionally, the court found that, as VTC was free to use or transfer the credits as it desired after it received them and had no obligation to repay SWF, the final factor also supported finding the transfer was a disguised sale.

Conclusion

After reviewing the facts of the transfer, the Tax Court concluded that the VTC transaction was, in fact, a disguised sale. The transaction included a transfer of money from VTC to SWF and a related transfer of Virginia tax credits from SWF to VTC that, when viewed together, were properly characterized as a sale or exchange of property pursuant to Code Sec. 707(a)(2)(B). In addition, the six relevant factors under Reg. Sec. 1.707-3(b)(2) that the court evaluated all favored finding a disguised sale.

Consequently, the Tax Court held that SWF engaged in a disguised sale pursuant to Code Sec. 707(a) and had improperly reported the VTC transaction as a tax-free contribution of capital. The court sustained the IRS's FPAA, allowing $124,857 as a tax free capital contribution stemming from VTC's 1 percent interest in SWF, and deemed the remaining $1,677,143 ordinary income.

Observation: The Tax Court noted that it had previously encountered facts nearly identical to those in the present case in Route 231, LLC v. Comm'r, T.C. Memo. 2014-30. There, the partnership had also entered into a transaction with VTC, and there the company also contributed substantial cash to Route 231 in exchange for a 1 percent membership interest in Route 231 and a large allocation of Virginia tax credits. As in SWF, the court held that Route 231 sold Virginia tax credits to VTC in exchange for cash and had engaged in a disguised sale under Code Sec. 707.

For a discussion of disguised sales, see Parker ¶25,520.

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Payment for Accrued Vacation and Sick Leave on LAPD Detective's Retirement Not Excludable as Workmen's Comp

The Tax Court held that, although a former LAPD detective had accrued sick and vacation time while on temporary disability leave, the lump sum payment of that accrued time upon his retirement was not a payment pursuant to a workmen's compensation statute and therefore could not be excluded from his income. Speer v. Comm'r, 144 T.C. No. 14. Read more...

Travel Time Puts Taxpayer Over the Top for Real Estate Professional Status

The Tax Court held that a taxpayer's revised log detailing the time she spent traveling to her rental properties could be used to prove she satisfied the 750-hour material participation requirements for real estate professionals. Leyh v. Comm'r, T.C. Summary 2015-27.

Background

Richard Leyh and Ellen O'Neill resided on a ranch in Dripping Springs, Texas and owned twelve rental properties in Austin, Texas. Eleven of the rentals were single family residences and one was a condominium unit. O'Neill worked regularly in the rental real estate activity. She performed some of the repairs and most of the maintenance on the properties, and handled advertising for, interviewing, and vetting of potential tenants. She also did all of the paperwork, bookkeeping, and research for potential properties to purchase. O'Neill maintained a contemporaneous log detailing the time spent on the various activities.

The taxpayers' residence was approximately 30 miles from the rental properties and O'Neill regularly drove to the Austin area to resolve problems, perform maintenance, and administer and operate the properties. The drive took an average of 50 minutes, and O'Neill kept a meticulous record of her daily activities.

On their joint 2010 tax return, Leyh and O'Neill deducted a $69,531 loss stemming from the rental real estate activity to reduce their non-passive-activity income. When the IRS examined the return, and the taxpayers offered O'Neill's log to support her deductions for real estate losses from their non-passive-activity income. Although the log detailed the dates, types of activity, and number of hours that O'Neill spent managing the rental properties, the number of hours spent traveling to the properties had not been included. As a result, she fell short of the 750 hour material participation requirement under Code Sec. 469. O'Neill revised and resubmitted the log to reflect the hours she spent traveling to the properties, but the IRS refused to accept the additional hours and disallowed the claimed deductions for real estate losses.

Analysis

Under Code Sec. 469, taxpayers are generally precluded from deducting passive activity losses, including rental activity, which is usually treated as a passive activity. Code Sec. 469(c)(7) provides an exception where the taxpayer is a real estate professional. A taxpayer qualifies as a real estate professional if:  

(1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates, and  

(2) the taxpayer performs more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates (Code Sec. 469(c)(7)(B)).

The extent of an individual's participation in an activity may be established by any reasonable means, which may include the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries (Reg. Sec. 1.469-5T(f)(4)).

The IRS argued that O'Neill did not meet the 750-hour test because the original log only reflected 632.5 hours spent on rental real estate activity, and further, her revised log was insufficient to remedy the shortfall. In denying O'Neill's revised log, the IRS relied on several prior Tax Court cases where inadequate recordkeeping and insufficient evidence failed to support the threshold hour requirement (Bailey v. Comm'r, T.C. Memo. 2001-296; Speer v. Comm'r, T.C. Memo. 1996-323; Goshorn v. Comm'r, T.C. Memo. 1993-578). In those cases, the Tax Court recognized that the recordkeeping requirements of the Code Sec. 469 regulations, while somewhat ambiguous, do not allow a postevent "ballpark guesstimate."

The Tax Court concluded that the cases the IRS relied on were inapplicable, however, because they did not involve a detailed contemporaneous log such as the one that O'Neill maintained. The court noted that O'Neill was aware of the record keeping requirements for deducting real estate losses, since she had been audited in the past, and found she provided detailed, accurate day-by-day explanations of the specific rental real estate activity in her log. Although the total hours originally recorded on the log did not reflect her travel time from her Dripping Springs home to Austin, the court determined that her revised log adequately accounted for the time.

The court noted that O'Neill's methodology in revising the log was to compute a 45-minute trip, or 1-1/2 hours round trip, for each day the log reflected the activity took place in Austin. Given O'Neill's detailed records in the original log, the court found it was easy to identify days when the activity took place in Austin, and determined the account of her travel time was reasonable, and could be used to establish that she met the 750-hour test. The court found that by including the travel time, taxpayer's hours totaled 846, exceeding the 750-hour threshold by almost 100 hours.

Observation: The Tax Court did not share its reasoning for treating the taxpayer's local travel time between Dripping Springs and Austin as time spent on the rental activity rather than as personal commuting time. The regulations do not address the treatment of travel time, and the Tax Court has been less kind to taxpayers in previous decisions involving the use of travel time toward material participation requirements (see, e.g., Mowafi v. Comm'r, T.C. Memo. 2001-111 and Truskowsky v. Comm'r, T.C. Summary 2003-130).

Because O'Neill's revised log was a reasonable and credible means to prove that she met the 750 hour threshold for real estate professionals to deduct real estate losses, the Court held that, contrary to the IRS's objections, the logbook satisfied the requirements of Reg. Sec. 1.469-5T(f)(4), and allowed O'Neill's claimed deductions.

For a discussion of the deductibility of rental losses, see Parker Tax ¶ 247,105.

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Taxpayer Can't Claim Nonresident State Taxes on Partnership Income as Above-the-Line Deductions

The Tax Court held that because the imposition of state nonresident income taxes fell upon the taxpayer partner and not the partnership, the tax payments were deductible only as itemized deductions. Cutler v. Comm'r, T.C. Memo. 2015-73.

Background

Matthew Cutler is a principle partner in the law firm Harness, Dickey & Pierce, PLC (HDP), which is treated as a partnership for Federal income tax purposes. The firm has offices in Michigan, Missouri, and Virginia, and occasionally operated in Illinois and Oregon. In 2008 and 2009, Cutler worked in HDP's Missouri office and, as a principle, had the authority to direct the firm's operations in all its offices. Although he did not perform services other than at the Missouri office, he nevertheless paid his portion of state nonresident income taxes for those years on HDP's income sourced in the other states.

On his income tax returns for 2007, 2008, and 2009, Cutler treated the nonresident income taxes as unreimbursed partnership expenses on his Schedules E, Supplemental Income and Loss deductions. Accordingly, he claimed deductions from adjusted gross income (AGI) of $11,943, $15,104, and $14,832 for the three years, respectively.

The IRS determined that Cutler was not entitled to deduct the nonresident income taxes on Schedule E, but rather as itemized deductions on Schedule A. The determination increased Cutler's AGI, resulting in increases in self-employment tax and alternative minimum tax.

Analysis

Under Code Sec. 62(a), AGI is gross income less certain deductions, frequently referred to as "above-the-line" deductions. Deductions are allowed above the line if they are attributable to a trade or business carried on by the taxpayer, provided such trade or business does not consist of the performance of services by the taxpayer as an employee (Code Sec. 62(a)(1)). The regulations clarify that expenses are deductible above the line when they are directly connected with the conduct of a trade or business (Reg. Sec. 1.62-1T(d)).

For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business. Thus, state taxes on net income are not deductible even though the taxpayer's income is derived from the conduct of a trade or business. (Reg. Sec. 1.62-1T(d)).

Cutler argued that the nonresident income taxes were entity-level taxes imposed on, and therefore immediately connected with, the conduct of his trade or business, and thus were deductible from AGI. Cutler additionally argued that some of the Virginia nonresident taxes, were imposed on his gross income rather than on his net income.

The court first addressed whether the nonresident taxes were entity level taxes. Cutler conceded that the 2007 Virginia nonresident taxes were not imposed on HDP directly. However, because of certain amendments to the Virginia income tax laws that became effective January 1, 2008, he argued that the 2008 and 2009 Virginia taxes were entity-level taxes imposed on HDP's income directly, rather than on his income, and as such he was only liable for the Virginia tax that passed through the partnership to him.

The tax court was unconvinced by this argument, noting that Virginia generally taxes the net income of a nonresident partner receiving Virginia-source income, and a nonresident owner of a passthrough entity is liable in his or her separate or individual capacity for Virginia tax on income that passes through the entity. Accordingly, the court concluded that the 2008 and 2009 Virginia taxes were not imposed directly on HDP.

Cutler next argued, more generally, that all the nonresident income taxes, including the Virginia taxes, were entity level taxes because they were imposed on HDP constructively, rather than on himself. Cutler argued that because he performed no services in those states to generate the taxes in question, he lacked sufficient ties to the states to be taxed by them directly. The tax court disagreed, pointing out that because Cutler was a principle partner in HDP with the authority to manage the firm's business, including its business in Michigan, Virginia, Illinois, and Oregon, he did have sufficient ties to those states, and could be taxed directly. Therefore, the court found that Cutler failed to establish any of the nonresident taxes were directly or constructively imposed on HDP, rather than on himself.

The Court then addressed whether the Virginia taxes were imposed on Cutler's gross income.

Cutler argued that the Virginia taxes were deductible above-the-line because they were imposed on his gross income, rather than on his net business income. To support this claim, Cutler relied on Reg. Sec. 1.62-1T(d), providing that state taxes on net income are not deductible in determining AGI. Cutler reasoned that this meant state taxes on gross income are deductible for AGI. However, the tax court found that this argument failed, primarily because the relevant Virginia statute did in fact impose taxes on net income rather than gross income.

Finding none of taxpayer's arguments persuasive, the Tax Court sustained the IRS's determination that the nonresident taxes were not deductible from Cutler's gross income in determining his AGI, but instead were deductible only as itemized deductions under Code Sec. 164(a)(3).

For a discussion on deducting taxes as business expenses, see Parker Tax ¶ 92,100.

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IRS Rules Proposed Disclaimers of Gifts from Deceased Wife were Qualified Disclaimers

The IRS ruled that a taxpayer's proposed disclaimers of securities gifted to him by his wife before her death were qualified disclaimers, resulting in certain gifts being treated as if they had never been made. PLR 201516056.

Background

The taxpayer's wife maintained two accounts, each with publicly-traded stocks and other assets. She gratuitously transferred all of the assets in her first account to her husband's account, and added her husband as a joint owner with right of survivorship to her second account. After the wife made these transfers, the husband made cash withdrawals and transacted sales and purchases of securities in his account, and in his wife's second account. Subsequently, he transferred all of the assets, except one security, in his wife's second account to a second account of his own. A few months later, the wife died, leaving the husband as the executor of her estate.

After his wife's death, the taxpayer intended to disclaim his interests in the gifts. He stated he would, within nine months of the gift of the assets in the first account, execute a written, dated document that identified specific securities in his first account, acknowledged his receipt of those securities, and stated his irrevocable and unqualified refusal to accept the specific securities, noting that he would not include any security that was purchased or sold prior to the execution of the disclaimer. The taxpayer also intended to execute a similar document within nine months of his wife's death disclaiming his interests in the assets he had transferred from his wife's second account. In addition, he intended to establish two brokerage accounts on behalf of his wife's estate to which the disclaimed assets would be transferred.

The taxpayer requested a ruling that the two disclaimers would be qualified disclaimers for purposes of Code Sec. 2518.

Analysis

A donee's refusal to accept a gift is called a disclaimer. If a person makes a qualified disclaimer, then for purposes of estate and gift taxes, the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer (Code Sec. 2518(a)). For a disclaimer to be a qualified disclaimer:

(1) the donee's refusal to accept the gift must be in writing;

(2) the refusal must be received by the donor, the legal representative of the donor, the holder of the legal title to the property to which the interest relates, or the person in possession of the property within nine months after the transfer creating the interest is made;

(3) the disclaimant must not have accepted the interest or any of its benefits; and

(4) as a result of the refusal, the interest must pass without any direction from the disclaimant to either the spouse of the decedent or a person other than the disclaimant (Code Sec. 2518(b)).

Reg. Sec. 25.2518-3(a)(1)(i) provides that the disclaimer of all or an undivided portion of any separate interest in property may be a qualified disclaimer even if the disclaimant has another interest in the same property. Reg. Sec. 25.2518-3(a)(1)(ii) provides that a disclaimant may disclaim a portion of an interest in severable property if the disclaimer would be a qualified disclaimer if that portion were the only property in which the disclaimant had an interest. Severable property is property which can be divided into separate parts each of which, after severance, maintains a complete and independent existence. For example, a donee of shares of corporate stock may accept some shares of the stock and make a qualified disclaimer of the remaining shares.

The IRS ruled the husband's proposed disclaimers satisfied the requirements of Code Sec. 2518(b). The taxpayer represented that within nine months following each of the completed gifts, in order to implement the two proposed disclaimers, the husband would: (1) execute a written document that identifies specific securities, acknowledges his receipt of those securities, and states his irrevocable and unqualified refusal to accept those securities, and (2) transfer from his accounts to separate estate accounts the identified specific securities and all of the income earned on these securities from the time the gifts were complete through the date he executed the disclaimers and transferred the securities.

The taxpayer also represented that the assets identified in his proposed disclaimers would be only securities that were not purchased or sold from the date the gifts were complete through the effective date of the disclaimers, along with all of the income earned on the securities during that period. The IRS ruled that under Reg. Sec. 25.2518-2(d)(1), the husband was not treated as accepting the securities identified in the disclaimers even though he directed the purchase and sale of certain other securities transferred to his accounts prior to the effective date of the proposed disclaimers. Since the securities were severable assets, the IRS ruled the husband could make a qualified disclaimer with respect to certain securities, while accepting the benefit of other securities in the account, pursuant to Reg. Sec. 25.2518-3(a)(1)(ii).

Additionally, under relevant state law, the securities identified in the proposed disclaimers were to pass under the residuary clause of the wife's will to a trust. Consequently, the IRS concluded the disclaimed property would pass to the beneficiaries of the trust without any direction by husband, as required by Code Sec. 2518(b).

Accordingly, the IRS ruled that the taxpayer's proposed disclaimers of the identified portions of the assets transferred to him by his wife were qualified disclaimers.

For a discussion of disclaimers relating to gifts, see Parker Tax ¶ 222,100.

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Dividends to Insurance Policyholders were Properly Deducted in Year Guaranteed

The Court of Appeals for the Federal Circuit held that an accrual basis insurance company properly deducted dividends in the year its board of directors calculated and guaranteed the amount to a class of policyholders, rather than in the year the dividends were paid. The court found the practice satisfied the "all events" test. Mass. Mutual Life Insurance Co. v. U.S., 2015 PTC 112 (Fed. Cir. 2015).

Background

Massachusetts Mutual Life Insurance Company ("MassMutual") is an accrual basis taxpayer taxed under Subchapter L. In 1995, MassMutual implemented a policy of guaranteeing a minimum amount of dividends ("guaranteed dividends") it would pay the following year to a defined class of eligible policyholders. Under this policy, MassMutual would deduct for the current year the portion of the guaranteed dividends that would be paid the following year.

Observation: Although corporate dividends are not normally deductible, insurance companies may deduct policyholder dividends under Code Sec. 808(c).

The IRS argued that the company could not deduct the guaranteed dividends in the year they were calculated, but instead had to wait until they were actually paid, because the liability had not satisfied the "all events" test. Accordingly, the IRS proposed adjustments to MassMutual's returns, which the company paid under protest. In 2007, MassMutual filed an action in the Court of Federal Claims to recover overpaid income taxes for 1995, 1996, and 1997. The court found that the company's liabilities were fixed in the year the dividends were determined, holding that MassMutual was entitled to a refund for its overpayments of taxes and the IRS appealed.

Analysis

Taxpayers using the accrual method can deduct expenses in the year in which the liability is incurred, as opposed to the year in which it is paid. A liability accrues during the year in which it satisfies the "all events" test under Reg. Sec. 1.461-1(a)(2) and if economic performance or payment of the liability has occurred. The liability satisfies the "all events" test when all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy (Code Sec. 461(h)(4)).

On appeal, the IRS argued that because it was unknown whether a policyholder would surrender his or her policy before its anniversary date, the obligation to pay the dividend was contingent upon an event that would not occur until the next year, and was therefore not fixed under the "all events" test.

The Court of Appeals for the Federal Circuit disagreed, noting that because MassMutual promised dividends to a class of policyholders, an individual policyholder's decision to surrender his or her policy would not affect the obligation to pay the remaining policyholders. The court determined that the liability became fixed in the year the board of directors calculated and approved a minimum amount of guaranteed dividends. Finding the guaranteed dividends thus satisfied the "all-events" test, the appeals court affirmed the lower court's decision, holding MassMutual properly deducted the guaranteed dividends and was entitled to a refund for overpayments of taxes.

For a discussion of the "all events" test, see Parker Tax ¶ 241,520.30[a].

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Rural Doctor Received Cancellation of Debt Income Stemming from Forgiveness of Incentive Loans

The Tax Court held that a hospital's forgiveness of loans provided as an incentive for a physician to establish a practice in rural Florida gave rise to cancellation of debt income. The court disagreed with the physician's contentions that he was not personally liable for the loan. Wyatt v. Comm'r, T.C. Summary 2015-31.

Background

In 2006, Darrel Wyatt, a physician board certified in obstetrics and gynecology, moved to Putnam County, Florida and became affiliated with the Putnam Community Medical Center (hospital). Putnam County is in a medically underserved rural area of Florida, and the hospital recruited Wyatt as part of its effort to better serve the community's health needs.

In July of 2006, Wyatt and the hospital entered into a recruiting agreement whereby the hospital agreed to help Wyatt establish his practice in exchange for his commitment to practice in the area. An addendum to the agreement established a loan program, through which the hospital guaranteed gross payments of $32,953 a month and agreed to loan Wyatt the difference between that amount and the actual income he received from his practice each month for a year (the "guarantee period").

At the end of this guarantee period, Wyatt was required to immediately repay the loans, unless he requested a deferred payment plan and signed a promissory note. However, if Wyatt remained within Putnam County and continued his practice after the end of the guarantee period, the hospital agreed to forgive the loans ratably over a three year period.

During his first year, Wyatt received loans of $260,627 from the hospital pursuant to the agreement. After the one-year guarantee period, Wyatt remained in Putnam County practicing medicine and maintained his affiliation with the hospital. Over the next four years, the hospital forgave the loans in recognition of Wyatt's continuing service, as per the agreement. Wyatt did not request a deferred payment plan, and did not execute a promissory note or grant the hospital a perfected security interest in his accounts.

On his tax returns for 2007 to 2010, Wyatt included as "Other income" on his Schedule C attachments the amounts forgiven and canceled by the hospital, consistent with the Forms 1099-MISC that he received from the hospital. Wyatt reported total tax of $37,995 on his return for 2008, and $32,625 for his 2009 return. After Wyatt failed to pay any part of his tax liability for 2009, the IRS issued a notice of intent to levy for that year.

Wyatt sought to compromise his liabilities for 2007 through 2010, the four years for which the hospital forgave the loans. He offered to pay $20,055 in satisfaction of his outstanding tax liabilities, which was equivalent to the taxes for those years without regard to the canceled amounts, claiming there was doubt as to his liability for the canceled loans. The IRS rejected the offer and issued a notice of determination addressing only the 2009 tax year.

Analysis

A debt of a taxpayer that is discharged by the creditor generally must be included in the gross income of the taxpayer (Code Sec. 61(a)(12)).

The Tax Court noted that both Wyatt and the IRS agreed that the payments Wyatt received from the hospital pursuant to the agreement represented a bona fide loan. However, Wyatt contended that the loan was a nonrecourse loan (i.e., that he was not personally liable for its repayment), and that, as a consequence, he did not receive income when the loan was forgiven and canceled by the hospital. Wyatt claimed that because he never signed a promissory note, he was not obligated to repay the loan.

The court disagreed with this characterization, stating that the fact Wyatt never executed a promissory note was not determinative of his personal liability for the loan. The court noted that if he had failed to honor his part of the bargain, there was nothing in the agreement that would have barred the hospital from suing him to recover the unrepaid loan amount. The court pointed out that the agreement required repayment of the loan immediately upon completion of the guarantee period unless he requested a deferred payment plan. Although Wyatt did not formally request a deferred payment plan, the hospital did not choose to demand immediate payment because he remained in the community, continued his medical practice, and maintained his affiliation with the hospital, and the hospital found it unnecessary to pursue any collection remedy against him.

The court found that the hospital assumed the risk of being an unsecured creditor, presumably because it had faith that Wyatt would fulfill his side of the bargain by remaining in Putnam County. But the court noted the assumption of that risk by the hospital did not negate the fact that a loan existed for which Wyatt was personally liable. Additionally, even if the loan was nonrecourse, the court observed that just because a taxpayer is not personally liable for a debt does not mean that cancellation of indebtedness cannot give rise to income (Gershkowitz v. Comm'r, 88 T.C. 984 (1987)).

The Tax Court held that because Wyatt had paid nothing to the hospital on his loan after the one-year guarantee period and the hospital forgave the balance of the loan ratably over the course of the next 36 months, Wyatt had received income from cancellation of indebtedness and was required to include those amounts on his 2009 return.

For a discussion of income from the discharge of indebtedness, see Parker Tax ¶ 72,300.

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Eleventh Circuit Upholds Convictions in Stolen Tax Refund Check Scheme

The Eleventh Circuit upheld the convictions and 133-month prison sentences of a pair of co-conspirators who, with the help of a United States Postal Service worker, stole and cashed hundreds of federal income tax refund checks. U.S. v. Jones, 2015 PTC 121 (11th Cir. 2015).

Background

In May 2011, Trevayne Jones and Dontreal Jenkins were arrested after state and federal authorities discovered that the pair had cashed 342 stolen federal income tax refund checks with a cumulative value of $713,000 at a convenience store in Albany, Georgia over a five month period. Jones and Jenkins were tried before a jury in January 2013, during which several witnesses, including Nainesh Patel, the owner of the convenience store, and Jamal Williams, a cooperating codefendant, explained how the pair carried out their scheme.

In early 2011, Jones approached Patel with a Treasury check claiming that his sister had a tax business, and informed Patel that he would be bringing income tax refund checks belonging to her customers into the convenience store for Patel to cash. Although Patel never took steps to confirm the tax business existed, he did verify the authenticity and amount of each check using the Treasury Department's website. After a short time, Jones told Patel that Jenkins also would be bringing in checks to be cashed as part of the same business.

Co-conspirator, Jamal Williams procured several checks from Deborah Echols, an employee at the United States Postal Service in Atlanta, and transported the stolen Treasury checks from Atlanta to Albany. Initially, Williams gave Jenkins two or three checks to test whether the process was reliable and after the first visit was successful, Williams requested more checks from Echols. By the third visit, Williams was transporting checks with a cumulative value of $80,000 to Albany for Jenkins to cash.

The scheme unraveled in May of 2011 after Williams was stopped for speeding during his fifth meeting with Jenkins. Because he had been smoking marijuana, the police searched his vehicle and found twelve stolen Treasury checks. When law enforcement later searched Williams's cell phone, they discovered that he had sent identifying information from two of the checks to Jenkins by text message.

In January of 2013, a jury found Jones and Jenkins guilty of three offenses: conspiracy to embezzle public monies; embezzlement of government property; and aggravated identity theft. The district court sentenced each of the men to a total term of 133 months imprisonment, and three years of supervised release. The court also ordered Jones and Jenkins to pay restitution to Patel in the amount of $713,000. The men appealed to the Eleventh Circuit.

Analysis

On appeal, Jones and Jenkins first argued that that there was insufficient evidence from which a jury could find them guilty, because Williams's testimony only established their connection to around forty stolen checks, claiming that the government did not present sufficient evidence that they cashed each of the checks.

The Circuit Court disagreed, noting that the trial record contained sufficient evidence for a jury to find the two guilty. Patel had testified that Jones and Jenkins cashed over 300 Treasury checks at his store, and that he kept detailed records of which checks were brought in by each of them. Patel also had explained the contents of surveillance footage that the jury could reasonably believe corroborated his account.

Second, Jones and Jenkins contested the sufficiency of the evidence to support their convictions, arguing that the trial evidence could support the inference that Patel was the operator of the check cashing scheme, not them.

The court found this argument meritless because the record contained more than enough evidence to support Jones and Jenkins's convictions, and the court could not discern any error in the jury's verdict. The jury could reasonably conclude based on Patel and Williams's testimony that Jones and Jenkins, not Patel, converted the checks to their own use without the victims' knowledge or consent. The Court saw no reason to disturb the jury's findings of Patel's credibility.

Lastly, Jones and Jenkins challenged their convictions claiming there was insufficient evidence to establish that they knew the checks belonged to real people. They also claimed that signing a person's signature was not "using their name" for purposes of liability for identity theft.

The court was unconvinced, concluding the jury could reasonably find based on "ordinary human experience" that the pair knew that the stolen Treasury checks had been issued to real people. Moreover, Patel's testimony that the defendants had consistent success cashing the checks and that he verified the authenticity of each check using the Treasury Department's website supported the conclusion the two knew the checks belonged to real people. Additionally, the court noted that a signature is a form of a name,' and thus Jones and Jenkins used the names of the victims without lawful authority, committing identity theft.

Finding none of their arguments convincing, the Eleventh Circuit affirmed each of Jones and Jenkin's convictions.

Practice Tip: Taxpayers who have not received an expected refund check, or have lost a check they received, can initiate a refund trace by completing Form 3911, Taxpayer Statement Regarding Refund. Once the trace is complete, if the check was not cashed, the government will issue a replacement check after the original check is cancelled. If the refund check was cashed, the Bureau of the Fiscal Service (BFS) will provide a claim package that includes a copy of the cashed check. BFS will review the claim and the signature on the cancelled check before determining whether a replacement can be issued.

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