SCOTUS Reports

Tag: 2012

  • Bronstein v. Comm’r, 138 T.C. 382 (2012): Mortgage Interest Deduction Limits for Married Taxpayers Filing Separately

    Bronstein v. Commissioner, 138 T. C. 382 (U. S. Tax Ct. 2012)

    In Bronstein v. Commissioner, the U. S. Tax Court ruled that a married taxpayer filing separately is limited to deducting mortgage interest on $500,000 of acquisition indebtedness and $50,000 of home equity indebtedness. Faina Bronstein, who paid the mortgage on her home solely from her funds, sought to deduct interest on the full $1 million mortgage. The court upheld the IRS’s determination, clarifying the limits under IRC Section 163 for such taxpayers. This decision reinforces the statutory cap on deductions for separately filing married individuals, impacting how they claim mortgage interest deductions.

    Parties

    Faina Bronstein, as Petitioner, filed a petition against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court. Bronstein was the plaintiff throughout the litigation, while the Commissioner remained the defendant.

    Facts

    Faina Bronstein and her father-in-law jointly purchased a property in Brooklyn, New York, for $1. 35 million in February 2007. They secured a $1 million mortgage, and Bronstein resided in the property with her husband, using it as their principal residence. Throughout 2007, Bronstein made all mortgage payments solely from her own funds. Her husband and father-in-law did not contribute to these payments, nor did they have any legal obligation to do so. Bronstein filed her 2007 Federal income tax return as “married filing separately” and claimed a deduction for the entire $52,239 in mortgage interest and points paid on the mortgage. The IRS issued a notice of deficiency, limiting her deduction to interest on $500,000 of acquisition indebtedness and $50,000 of home equity indebtedness, resulting in a deficiency and an accuracy-related penalty.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to Bronstein on August 2, 2010, disallowing a portion of her claimed mortgage interest deduction and asserting an accuracy-related penalty. Bronstein timely filed a petition contesting the deficiency and penalty in the United States Tax Court. The case proceeded to a fully stipulated decision without trial under Rule 122 of the Tax Court Rules of Practice and Procedure. The Commissioner conceded an error in the notice of deficiency, acknowledging an additional deduction for points paid, which reduced the deficiency and penalty. The Tax Court upheld the Commissioner’s position on the mortgage interest deduction limits and the imposition of the accuracy-related penalty.

    Issue(s)

    Whether a married taxpayer filing separately is entitled to a deduction for interest paid on $1 million of home acquisition indebtedness under I. R. C. sec. 163(h)(3)(B)(ii)?

    Whether a married taxpayer filing separately is entitled to a deduction for interest paid on $100,000 of home equity indebtedness under I. R. C. sec. 163(h)(3)(C)(ii)?

    Whether the taxpayer is liable for a 20% accuracy-related penalty under I. R. C. sec. 6662(a)?

    Rule(s) of Law

    I. R. C. sec. 163(h)(3)(B)(ii) limits the aggregate amount treated as acquisition indebtedness for a married individual filing a separate return to $500,000. I. R. C. sec. 163(h)(3)(C)(ii) limits the aggregate amount treated as home equity indebtedness for a married individual filing a separate return to $50,000. I. R. C. sec. 6662(a) imposes a 20% accuracy-related penalty for any underpayment of tax due to negligence, disregard of rules or regulations, or a substantial understatement of income tax.

    Holding

    The Tax Court held that Bronstein was not entitled to a deduction for interest paid on the entire $1 million of acquisition indebtedness, being limited to $500,000 under I. R. C. sec. 163(h)(3)(B)(ii). Additionally, she was limited to a deduction for interest paid on $50,000 of home equity indebtedness under I. R. C. sec. 163(h)(3)(C)(ii). The court further held that Bronstein was liable for the 20% accuracy-related penalty under I. R. C. sec. 6662(a).

    Reasoning

    The Tax Court’s reasoning focused on the clear statutory language of I. R. C. sec. 163(h)(3)(B)(ii) and (C)(ii), which explicitly set the limits for acquisition and home equity indebtedness for married taxpayers filing separately. The court rejected Bronstein’s argument that these limits were intended to allow a married couple filing separately to claim a collective $1. 1 million in indebtedness across both returns. The court emphasized that statutory interpretation begins with the language of the statute, which should be construed in its ordinary, everyday meaning. The court found no ambiguity in the statute and no unequivocal evidence in the legislative history to override the plain meaning of the words used. Regarding the accuracy-related penalty, the court determined that the Commissioner met the burden of production by showing a substantial understatement of tax, and Bronstein failed to demonstrate substantial authority, a reasonable basis for her position, or a reasonable cause defense. The court noted that Bronstein did not meet the requirements for reliance on a tax professional’s advice.

    Disposition

    The Tax Court affirmed the Commissioner’s determination of the deficiency and upheld the imposition of the 20% accuracy-related penalty. The decision was entered under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    Bronstein v. Commissioner clarifies the application of I. R. C. sec. 163(h)(3)(B)(ii) and (C)(ii) to married taxpayers filing separately, reinforcing the statutory caps on mortgage interest deductions. This ruling has significant implications for tax planning and compliance among such taxpayers, emphasizing the need to adhere to the specified limits. The decision also underscores the importance of meeting the criteria for reliance on professional tax advice to avoid accuracy-related penalties. Subsequent courts have cited Bronstein in cases involving similar issues, indicating its doctrinal importance in interpreting these tax provisions. Practically, it affects how married taxpayers filing separately calculate and claim their mortgage interest deductions, potentially impacting their tax liabilities and planning strategies.

  • Fernandez v. Comm’r, 138 T.C. 378 (2012): Taxation of Divorce-Related Retirement Distributions

    Fernandez v. Commissioner, 138 T. C. 378 (U. S. Tax Ct. 2012)

    In Fernandez v. Commissioner, the U. S. Tax Court ruled that payments received by Shannon L. Fernandez from her former husband’s disability retirement benefits under a divorce agreement were taxable income. The court rejected Fernandez’s argument that the payments should be tax-exempt under I. R. C. sec. 104(a)(1), clarifying that the tax treatment applicable to the original recipient of disability benefits does not automatically extend to a former spouse receiving a portion of those benefits via a divorce settlement. This decision underscores the narrow interpretation of tax exclusions and the importance of specific statutory language in determining tax liabilities from retirement distributions.

    Parties

    Shannon L. Fernandez, Petitioner, was represented by J. Christopher Toews. The Commissioner of Internal Revenue, Respondent, was represented by Kris H. An and Laura Beth Salant.

    Facts

    Shannon L. Fernandez received a portion of her former husband’s disability retirement benefits from the Los Angeles County Employees Retirement Association (LACERA) pursuant to a divorce agreement. The agreement, which was treated as a qualified domestic relations order (QDRO), awarded Fernandez a percentage of her former husband’s retirement benefits. During the 2007 tax year, Fernandez received $11,850 from LACERA, with $11,691 reported as taxable income on a Form 1099-R. Fernandez did not include any of this amount in her 2007 federal income tax return, leading to a deficiency determination by the IRS.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to Fernandez on December 28, 2009, determining a $3,587 income tax deficiency for 2007 due to the unreported income from LACERA. Fernandez timely petitioned the U. S. Tax Court for a redetermination of the deficiency on February 2, 2010. The case was submitted fully stipulated under Rule 122 of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether the $11,691 received by Fernandez from LACERA, pursuant to a divorce agreement, is excludable from her gross income under I. R. C. sec. 104(a)(1)?

    Rule(s) of Law

    I. R. C. sec. 61(a) defines gross income as all income from whatever source derived, including pensions, unless otherwise provided. I. R. C. sec. 104(a)(1) provides an exclusion for amounts received under workmen’s compensation acts as compensation for personal injuries or sickness. I. R. C. sec. 402(e)(1)(A) treats an alternate payee under a QDRO as the distributee of any distribution or payment for purposes of I. R. C. sec. 402(a) and sec. 72, but does not reference sec. 104(a).

    Holding

    The Tax Court held that the $11,691 received by Fernandez from LACERA is not excludable from her gross income under I. R. C. sec. 104(a)(1). The court found that the statutory language of sec. 402(e)(1)(A) does not extend the exclusion under sec. 104(a)(1) to an alternate payee receiving benefits under a QDRO.

    Reasoning

    The court’s reasoning focused on the strict construction of statutory exclusions from gross income. It emphasized that sec. 104(a)(1) exclusions are construed narrowly and only apply to compensation for personal injuries or sickness received by the injured party. The court noted that sec. 402(e)(1)(A) explicitly refers to sec. 402(a) and sec. 72 but does not mention sec. 104(a), indicating that Congress did not intend for the exclusion to apply to alternate payees under a QDRO. The court also rejected Fernandez’s argument that she should step into her former husband’s shoes for tax treatment, as she did not suffer the personal injury for which the disability benefits were awarded. The court found no relevant law supporting Fernandez’s position and adhered to the principle that all income is taxable unless explicitly excluded by statute.

    Disposition

    The Tax Court entered a decision for the Commissioner, affirming the deficiency determination and finding the $11,691 taxable to Fernandez.

    Significance/Impact

    Fernandez v. Commissioner clarifies the tax treatment of retirement benefits distributed pursuant to divorce agreements and treated as QDROs. It reinforces the principle that tax exclusions must be explicitly provided by statute and cannot be inferred from provisions designed for other purposes. This decision has implications for the tax planning of divorcing parties who receive portions of their former spouse’s retirement benefits, emphasizing the need to consider the tax implications of such distributions carefully. It also highlights the limitations of QDRO protections in altering the tax treatment of retirement benefits for alternate payees.

  • Settles v. Commissioner, 138 T.C. 372 (2012): Automatic Stay and Dismissal of Tax Court Proceedings

    Settles v. Commissioner, 138 T. C. 372, 2012 U. S. Tax Ct. LEXIS 20, 138 T. C. No. 19 (U. S. Tax Court 2012)

    In Settles v. Commissioner, the U. S. Tax Court ruled that the automatic stay imposed by a debtor’s bankruptcy filing does not bar the dismissal of a Tax Court case upon the debtor’s motion. Thomas Edward Settles, who challenged his federal tax liabilities in the Tax Court, had his case stayed due to his bankruptcy filing. Despite the ongoing bankruptcy, Settles moved to dismiss his Tax Court petitions, and the court granted the motion, clarifying that such dismissal does not contravene the automatic stay under 11 U. S. C. § 362(a)(8). This decision underscores the court’s authority to manage its docket efficiently, even amidst bankruptcy proceedings.

    Parties

    Thomas Edward Settles, the petitioner, filed the petitions pro se. The respondent was the Commissioner of Internal Revenue, represented by Shawna A. Early.

    Facts

    Thomas Edward Settles filed petitions in the U. S. Tax Court on June 1, 2009, challenging his underlying federal income tax liabilities for the tax years 1998, 1999, 2000, 2001, and 2002. At the time of filing, Settles resided in Tennessee. On September 25, 2009, Settles filed a Chapter 11 bankruptcy petition in the U. S. Bankruptcy Court for the Eastern District of Tennessee. As a result, on October 29, 2009, the Tax Court issued orders staying the proceedings pursuant to 11 U. S. C. § 362(a)(8). On April 9, 2010, Settles filed an adversary proceeding against the Commissioner in the bankruptcy court under 11 U. S. C. § 505(a), seeking a declaratory judgment regarding his tax liabilities. On June 10, 2011, the bankruptcy court granted the Commissioner’s motion for summary judgment, ruling that Settles was estopped from challenging the tax liabilities in question. Despite the ongoing bankruptcy, Settles moved to dismiss his Tax Court petitions on July 11, 2011, which the Commissioner did not oppose.

    Procedural History

    Settles filed petitions in the U. S. Tax Court on June 1, 2009, challenging his tax liabilities. Following his Chapter 11 bankruptcy filing on September 25, 2009, the Tax Court proceedings were automatically stayed on October 29, 2009, under 11 U. S. C. § 362(a)(8). Settles then initiated an adversary proceeding in the bankruptcy court on April 9, 2010, which resulted in a summary judgment against him on June 10, 2011. On July 11, 2011, Settles moved to dismiss his Tax Court petitions, and these motions were filed by the court on September 15, 2011. The Commissioner did not object to the dismissal, and the Tax Court granted the motions, issuing orders of dismissal.

    Issue(s)

    Whether the automatic stay under 11 U. S. C. § 362(a)(8), which arises from a debtor’s bankruptcy filing and has not been vacated or lifted, prevents the U. S. Tax Court from granting a debtor’s motion to dismiss a petition filed under I. R. C. § 6330(d)?

    Rule(s) of Law

    The automatic stay under 11 U. S. C. § 362(a)(8) applies to the “commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor. ” The Federal Rules of Civil Procedure, specifically Rule 41(a)(2), allow for voluntary dismissal of an action by the plaintiff with the court’s approval, provided that the dismissal does not prejudice the nonmovant.

    Holding

    The U. S. Tax Court held that the automatic stay under 11 U. S. C. § 362(a)(8) does not prevent the court from granting Settles’ motions to dismiss his petitions filed under I. R. C. § 6330(d) for review of collection actions.

    Reasoning

    The Tax Court reasoned that the automatic stay under 11 U. S. C. § 362(a)(8) only prohibits the “commencement or continuation” of a proceeding, not its dismissal. The court drew guidance from other judicial decisions that have addressed similar issues under 11 U. S. C. § 362(a)(1), which stays proceedings against a debtor. These decisions established that dismissing a case does not constitute a continuation of the proceeding if it does not require the court to consider issues related to the underlying case. The court further noted that the purpose of the automatic stay—to provide the debtor breathing room and to protect creditors from preferential treatment—would not be undermined by dismissing the Tax Court petitions, as the bankruptcy court had already adjudicated Settles’ tax liabilities. Additionally, the Tax Court distinguished between petitions filed for deficiency redetermination, which cannot be withdrawn, and those filed for collection review, which can be dismissed upon the taxpayer’s motion as per Wagner v. Commissioner, 118 T. C. 330 (2002). The court concluded that dismissing Settles’ petitions would serve judicial economy and align with the dual purpose of the automatic stay.

    Disposition

    The U. S. Tax Court granted Settles’ motions to dismiss his petitions and issued appropriate orders of dismissal.

    Significance/Impact

    The decision in Settles v. Commissioner clarifies the scope of the automatic stay in the context of Tax Court proceedings. It affirms that the Tax Court retains the authority to dismiss cases upon a debtor’s motion, even when a bankruptcy stay is in effect, provided that such dismissal does not require consideration of the underlying tax liability. This ruling enhances judicial efficiency by allowing the Tax Court to manage its docket without unnecessary delays caused by parallel bankruptcy proceedings. Moreover, it reinforces the distinction between deficiency cases and collection review cases in terms of dismissals, potentially impacting how taxpayers and their legal representatives approach Tax Court litigation strategies in conjunction with bankruptcy filings.

  • Weber v. Commissioner, 138 T.C. 348 (2012): IRS Discretion in Applying Overpayments

    Weber v. Commissioner, 138 T. C. 348 (U. S. Tax Court 2012)

    The U. S. Tax Court upheld the IRS’s discretion to apply a taxpayer’s overpayment from one year to an outstanding penalty from a previous year, rather than to the taxpayer’s estimated tax for the following year as elected. Hershal Weber’s 2006 overpayment was applied to a 2005 trust fund recovery penalty, not his 2007 estimated tax. This ruling clarifies the IRS’s authority under I. R. C. § 6402 and impacts how taxpayers can expect overpayments to be managed.

    Parties

    Hershal Weber, as the petitioner, challenged the Commissioner of Internal Revenue, as the respondent, in the U. S. Tax Court.

    Facts

    Hershal Weber filed his 2006 federal income tax return in 2007, reporting an overpayment of $46,717 and electing to apply it to his 2007 estimated income tax. However, the IRS assessed a $1,002,339 penalty against Weber under I. R. C. § 6672 for unpaid trust fund taxes from S&G Services, Inc. for 2005. The IRS applied Weber’s 2006 overpayment to this penalty instead of his 2007 estimated tax. In 2008, S&G’s liability was satisfied by third-party payments, but Weber’s 2007 return still claimed the 2006 overpayment, resulting in a reported overpayment for 2007 that he elected to apply to 2008. The IRS adjusted Weber’s 2007 and 2008 returns to eliminate the claimed overpayments, leading to a balance due for 2008. Weber contested this in a collection due process hearing, arguing his penalty was overpaid and should satisfy his 2008 liability.

    Procedural History

    The IRS assessed the § 6672 penalty against Weber in 2007 and applied his 2006 overpayment to this penalty. Weber filed his 2007 return claiming the 2006 overpayment, and the IRS adjusted this and his 2008 return, leading to a balance due for 2008. After receiving a notice of proposed levy, Weber requested a collection due process hearing under I. R. C. § 6330. The IRS Office of Appeals upheld the proposed levy, and Weber appealed to the U. S. Tax Court, which granted summary judgment to the Commissioner.

    Issue(s)

    Whether the IRS abused its discretion under I. R. C. § 6402 in applying Weber’s 2006 income tax overpayment to his § 6672 penalty liability rather than to his 2007 estimated income tax as elected?

    Whether the Tax Court has jurisdiction in a collection due process hearing to adjudicate Weber’s claim of an overpayment of the § 6672 penalty?

    Rule(s) of Law

    I. R. C. § 6402(a) states that the IRS “may” credit an overpayment against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and “shall” refund any balance to such person. I. R. C. § 6402(b) authorizes the Secretary to prescribe regulations for crediting overpayments against estimated income tax for the succeeding year. 26 C. F. R. § 301. 6402-3(a)(5) allows a taxpayer to elect to apply an overpayment to estimated tax for the succeeding year, but § 301. 6402-3(a)(6) clarifies that the IRS retains discretion to apply overpayments to other outstanding liabilities.

    Holding

    The Tax Court held that the IRS did not abuse its discretion under I. R. C. § 6402 in applying Weber’s 2006 overpayment to his § 6672 penalty rather than to his 2007 estimated income tax. The Court further held that it lacked jurisdiction in the collection due process hearing to adjudicate Weber’s claim of an overpayment of the § 6672 penalty.

    Reasoning

    The Tax Court reasoned that I. R. C. § 6402 and the corresponding regulations grant the IRS broad discretion in applying overpayments. The IRS’s decision to apply Weber’s 2006 overpayment to the already assessed § 6672 penalty, rather than to the future 2007 estimated tax liability, was within this discretion. The Court emphasized that Weber’s election under 26 C. F. R. § 301. 6402-3(a)(5) to apply the overpayment to 2007 was not binding on the IRS. Regarding jurisdiction, the Court distinguished between credit elect overpayments, which could be considered in a collection due process hearing, and overpayments from unrelated liabilities, such as the § 6672 penalty, which require a separate refund suit. The Court noted that allowing such claims in a collection due process hearing would contradict the established refund litigation scheme and could lead to practical and conceptual issues, including the potential for delaying collection actions pending resolution of complex refund claims.

    Disposition

    The Tax Court granted summary judgment to the Commissioner, upholding the IRS’s determination to proceed with the levy to collect Weber’s 2008 income tax liability.

    Significance/Impact

    This case reinforces the IRS’s discretion under I. R. C. § 6402 to apply overpayments to any outstanding tax liability, rather than being bound by a taxpayer’s election. It clarifies that the Tax Court’s jurisdiction in collection due process hearings does not extend to adjudicating overpayment claims for unrelated liabilities, such as the § 6672 penalty, which must be pursued through separate refund litigation. This decision has practical implications for taxpayers, emphasizing the importance of understanding the IRS’s application of overpayments and the limitations of challenging such actions in collection due process proceedings.

  • Harrison v. Commissioner, 138 T.C. 340 (2012): Tax Exemption for Foreign Government Employees

    Harrison v. Commissioner, 138 T. C. 340, 2012 U. S. Tax Ct. LEXIS 18 (U. S. Tax Court 2012)

    In Harrison v. Commissioner, the U. S. Tax Court ruled that wages paid to a German citizen and U. S. permanent resident employed by a German defense administration office were not exempt from U. S. federal income tax. The court rejected claims of exemption under both U. S. tax law and the NATO Status of Forces Agreement, emphasizing the lack of reciprocity in German tax law and the resident status of the employee. This decision clarifies the tax treatment of foreign government employees residing permanently in the U. S. , impacting similar cases involving tax exemptions for non-diplomatic foreign workers.

    Parties

    Rosemarie E. Harrison, the petitioner, was the plaintiff at the trial level before the U. S. Tax Court. The Commissioner of Internal Revenue was the respondent and defendant.

    Facts

    Rosemarie E. Harrison, a German citizen and permanent resident of the United States, was employed by the Federal Republic of Germany, Office of Defense Administration, U. S. A. and Canada (German Defense Administration) from 1977 until her retirement. During the tax years in question (2006-2008), she worked as an administrative analyst and transportation specialist at Dulles International Airport in Sterling, Virginia. Harrison received wages of $83,249, $85,275, and $126,863 for 2006, 2007, and 2008, respectively, which were not taxed by Germany. She filed her U. S. federal income tax returns for these years but claimed her wages were exempt from U. S. taxation under I. R. C. section 893(a) and the NATO Status of Forces Agreement (NATO SOFA). The Commissioner determined deficiencies in her taxes, leading to this litigation.

    Procedural History

    Harrison timely filed her federal income tax returns for 2006-2008, asserting her wages were exempt from U. S. taxation. The Commissioner of Internal Revenue issued a notice of deficiency, determining that Harrison’s wages were taxable and assessing additional taxes. Harrison petitioned the U. S. Tax Court for a redetermination of the deficiency. The Commissioner conceded that the addition to tax under section 6651(a)(1) for 2008 was not applicable due to timely filing. The Tax Court then proceeded to decide the sole issue of whether Harrison’s wages were exempt from U. S. taxation under section 893(a) or NATO SOFA.

    Issue(s)

    Whether wages paid by the German Defense Administration to Rosemarie E. Harrison, a German citizen and U. S. permanent resident, are exempt from U. S. federal income tax under I. R. C. section 893(a)?

    Whether Harrison’s wages are exempt from U. S. federal income tax under the NATO Status of Forces Agreement?

    Rule(s) of Law

    Section 893(a) of the Internal Revenue Code provides that compensation paid by a foreign government to its employees for official services is exempt from U. S. taxation if the employee is not a U. S. citizen, the services are similar to those performed by U. S. government employees in foreign countries, and the foreign government grants an equivalent exemption to U. S. employees performing similar services in that foreign country.

    The NATO Status of Forces Agreement (NATO SOFA) exempts members of a force or civilian component from taxation in the receiving state on salary and emoluments paid by the sending state, provided they are not ordinarily resident in the receiving state.

    Holding

    The U. S. Tax Court held that Harrison’s wages were not exempt from U. S. federal income tax under either section 893(a) of the Internal Revenue Code or the NATO Status of Forces Agreement. The court found that the reciprocity condition required by section 893(a) was not met because German law does not exempt wages of U. S. government employees who are permanent residents of Germany. Additionally, the court determined that Harrison was not a member of the civilian component under NATO SOFA due to her status as a U. S. permanent resident.

    Reasoning

    The court’s reasoning focused on the interpretation and application of section 893(a) and NATO SOFA. For section 893(a), the court emphasized that the exemption requires reciprocity, which was not present because German law does not exempt wages of U. S. government employees residing permanently in Germany. The court cited the relevant provisions of German tax law, Einkommensteuergesetz (EStG), which explicitly excludes permanent residents from the tax exemption. The court also noted the absence of a certification by the U. S. Department of State under section 893(b) for the German Defense Administration, although this was not dispositive following the precedent set in Abdel-Fattah v. Commissioner.

    Regarding NATO SOFA, the court interpreted the agreement’s definition of “civilian component” and found that Harrison did not meet this definition because she was ordinarily resident in the United States, the receiving state. The court relied on the specific language of the agreement, which excludes individuals who are ordinarily resident in the receiving state from the civilian component and thus from the tax exemption.

    The court also addressed Harrison’s arguments regarding prior IRS concessions and audits. It rejected these arguments, citing the principle that the Commissioner is not bound by prior settlements or audits and that each case must be decided on its own merits.

    Disposition

    The U. S. Tax Court ruled that Harrison’s wages were subject to U. S. federal income tax and were not exempt under either section 893(a) or NATO SOFA. The court entered its decision under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    Harrison v. Commissioner clarifies the tax treatment of foreign government employees who are permanent residents of the United States. The decision emphasizes the importance of reciprocity in tax treaties and the specific definitions and exclusions within such agreements. It impacts similar cases involving claims for tax exemptions by non-diplomatic foreign government employees residing in the U. S. , reinforcing the principle that such exemptions are not automatically granted and require specific legal and factual conditions to be met. The case also highlights the limited scope of exemptions under NATO SOFA, particularly for individuals with permanent resident status in the receiving state.

  • Mitchell v. Comm’r, 138 T.C. 324 (2012): Requirements for Charitable Contribution Deduction of Conservation Easements

    Mitchell v. Commissioner, 138 T. C. 324 (2012)

    In Mitchell v. Commissioner, the U. S. Tax Court ruled that a conservation easement donation was not deductible because the mortgage on the property was not subordinated to the easement at the time of the gift, as required by tax regulations. This decision underscores the strict requirements for claiming a charitable contribution deduction for conservation easements, emphasizing the need for the conservation purpose to be protected in perpetuity from the outset of the donation.

    Parties

    Petitioner: Ramona L. Mitchell (Taxpayer at trial and appeal stages) Respondent: Commissioner of Internal Revenue (Defendant at trial and appeal stages)

    Facts

    In 1998 and 2001, Charles Mitchell, Ramona L. Mitchell, and their son Blake purchased 456 acres of land in Colorado, known as Lone Canyon Ranch. In 2002, they formed a family limited partnership, C. L. Mitchell Properties, L. L. L. P. , to which the ranch was transferred, subject to a deed of trust securing a promissory note for the purchase of 351 acres of the land. On December 31, 2003, the partnership granted a conservation easement on 180 acres of the ranch to Montezuma Land Conservancy (Conservancy), a qualified organization. At the time of the grant, the deed of trust was not subordinated to the conservation easement. The partnership claimed a charitable contribution deduction of $504,000 on its 2003 federal income tax return, based on an appraisal. Two years later, in 2005, the mortgagee subordinated the deed of trust to the conservation easement.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency on February 23, 2010, disallowing the charitable contribution deduction claimed by Ramona L. Mitchell on her 2003 joint federal income tax return with Charles Mitchell. Mitchell timely filed a petition with the U. S. Tax Court on May 12, 2010, challenging the disallowance. The Tax Court reviewed the case de novo, applying a preponderance of the evidence standard.

    Issue(s)

    Whether a taxpayer is entitled to a charitable contribution deduction for a conservation easement donation when the mortgage on the donated property is not subordinated to the easement at the time of the gift?

    Rule(s) of Law

    Under I. R. C. § 170(h)(1), a taxpayer is allowed a deduction for a “qualified conservation contribution,” which must be made exclusively for conservation purposes. I. R. C. § 170(h)(5)(A) requires that the conservation purpose be protected in perpetuity. Treas. Reg. § 1. 170A-14(g)(2) specifies that no deduction will be permitted for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the donee organization to enforce the conservation purposes of the gift in perpetuity.

    Holding

    The Tax Court held that Mitchell was not entitled to the charitable contribution deduction for the conservation easement because the mortgage on the donated property was not subordinated to the easement at the time of the gift, failing to meet the requirement of Treas. Reg. § 1. 170A-14(g)(2). The court further held that Mitchell was not liable for the accuracy-related penalty under I. R. C. § 6662(a) due to her reasonable cause and good faith in attempting to comply with the requirements.

    Reasoning

    The court’s reasoning focused on the strict requirement of Treas. Reg. § 1. 170A-14(g)(2), emphasizing that a subordination agreement must be in place at the time of the gift to ensure the conservation easement is protected in perpetuity. The court rejected Mitchell’s argument that the so-remote-as-to-be-negligible standard of Treas. Reg. § 1. 170A-14(g)(3) should be considered when determining compliance with the subordination regulation. The court distinguished prior cases where this standard was applied, noting that it was not used to defeat a specific requirement of the regulations. The court also dismissed Mitchell’s claim that an oral agreement with the mortgagee provided the necessary protection, as it did not affect the mortgagee’s ability to foreclose and extinguish the easement. The court’s decision was based on a strict interpretation of the regulations, emphasizing the need for clear compliance to ensure the perpetuity of the conservation purpose.

    Disposition

    The Tax Court denied the charitable contribution deduction and entered a decision under Rule 155, directing the parties to compute the deficiency consistent with the court’s opinion. The court also held that Mitchell was not liable for the accuracy-related penalty.

    Significance/Impact

    The Mitchell decision underscores the stringent requirements for claiming a charitable contribution deduction for conservation easements, particularly the necessity for the conservation purpose to be protected in perpetuity from the outset of the donation. It clarifies that the so-remote-as-to-be-negligible standard does not apply to the requirement for mortgage subordination, emphasizing the importance of strict compliance with the regulations. This ruling has implications for taxpayers and practitioners in structuring conservation easement donations, ensuring that all legal requirements, including mortgage subordination, are met at the time of the gift. Subsequent cases have cited Mitchell in reaffirming the strict interpretation of the regulations governing conservation easement deductions.

  • Estate of Turner v. Comm’r, 138 T.C. 306 (2012): Marital Deduction and Inclusion of Gifted Assets Under Section 2036

    138 T.C. 306 (2012)

    When assets are included in a decedent’s gross estate under Section 2036 due to a retained interest in a family limited partnership, the estate cannot claim a marital deduction for assets underlying partnership interests previously gifted to individuals other than the surviving spouse.

    Summary

    The Estate of Clyde W. Turner, Sr. petitioned for reconsideration of a prior ruling that included assets transferred to a family limited partnership (FLP) in the gross estate under Section 2036. The estate argued that even if Section 2036 applied, a marital deduction should offset any estate tax deficiency due to a clause in Clyde Sr.’s will. The Tax Court held that the estate could not claim a marital deduction for assets underlying partnership interests gifted before death, as these assets did not pass to the surviving spouse as a beneficial owner. This decision reinforces the principle that the marital deduction is intended to defer, not eliminate, estate tax and that gifted assets are not eligible for the marital deduction.

    Facts

    Clyde Sr. and his wife, Jewell, formed Turner & Co., a family limited partnership (FLP), contributing significant assets in exchange for partnership interests. Clyde Sr. gifted a portion of his limited partnership interest to family members during his lifetime. Upon his death, the IRS included the assets he transferred to the FLP in his gross estate under Section 2036, arguing that he retained an interest in those assets. The estate argued for an increased marital deduction to offset the increased estate value.

    Procedural History

    The Tax Court initially ruled that Section 2036 applied to include the FLP assets in Clyde Sr.’s gross estate (Estate of Turner I, T.C. Memo. 2011-209). The estate then filed a motion for reconsideration, arguing that the marital deduction should offset the increased estate tax. The Tax Court denied the motion, issuing a supplemental opinion clarifying the marital deduction issue.

    Issue(s)

    Whether the estate can claim a marital deduction for assets included in the gross estate under Section 2036 that underlie partnership interests previously gifted to individuals other than the surviving spouse.

    Holding

    No, because the gifted assets and partnership interests did not pass to the surviving spouse as a beneficial owner and therefore do not qualify for the marital deduction under Section 2056.

    Court’s Reasoning

    The court reasoned that Section 2056(a) allows a marital deduction only for property “which passes or has passed from the decedent to his surviving spouse.” The court emphasized that under Treasury Regulations Section 20.2056(c)-2(a), “a property interest is considered as passing to the surviving spouse only if it passes to the spouse as beneficial owner.” Since Clyde Sr. had already gifted the partnership interests (and the underlying assets) to other family members, those assets could not pass to Jewell as a beneficial owner. The court further explained that allowing a marital deduction for these assets would violate the fundamental principle that marital assets should be included in the surviving spouse’s estate (or be subject to gift tax if transferred during life). The court noted the consistency of this approach with the QTIP rules under Sections 2056(b)(7), 2044, and 2519, which ensure that assets for which a marital deduction is taken are ultimately subject to transfer tax. The court stated, “Although the formula of Clyde Sr.’s will directs what assets should pass to the surviving spouse, the assets attributable to the transferred partnership interest or the partnership interest itself are not available to fund the marital bequest…Because the property in question did not pass to Jewell as beneficial owner, we reject the estate’s position and hold that the estate may not rely on the formula of Clyde Sr.’s will to increase the marital deduction.”

    Practical Implications

    This case clarifies the interaction between Section 2036 and the marital deduction, particularly in the context of family limited partnerships. It serves as a warning to estate planners that including assets in the gross estate under Section 2036 does not automatically entitle the estate to a corresponding increase in the marital deduction. Specifically, assets underlying partnership interests gifted before death cannot be used to increase the marital deduction. This decision reinforces the IRS’s position that the marital deduction is limited to assets actually passing to the surviving spouse as a beneficial owner and prevents the avoidance of estate tax on gifted assets. It highlights the importance of carefully considering the implications of family limited partnerships and retained interests when planning for estate tax purposes. This case has been cited in subsequent cases involving similar issues, reinforcing its precedential value.

  • Gray v. Commissioner, 138 T.C. 295 (2012): Jurisdiction in Tax Court for Interest Abatement and Innocent Spouse Relief

    Gray v. Commissioner, 138 T. C. 295 (2012)

    In Gray v. Commissioner, the U. S. Tax Court clarified its jurisdiction over tax collection actions, interest abatement, and innocent spouse relief. The court dismissed the case regarding collection actions due to an untimely petition but retained jurisdiction to review the Commissioner’s decision not to abate interest and to assess the eligibility for innocent spouse relief. This ruling underscores the strict timelines for appealing tax collection actions while affirming the court’s authority over interest abatement and spousal relief issues raised in collection due process (CDP) hearings.

    Parties

    Carol Diane Gray, the petitioner, filed the case against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court. Gray appeared pro se, while the Commissioner was represented by Brett Saltzman.

    Facts

    Carol Diane Gray owed unpaid income taxes for the years 1992 through 1995. On October 16, 2009, the Commissioner issued a Notice of Determination Concerning Collection Action(s) under I. R. C. sections 6320 and 6330, proposing to sustain a lien and levy against Gray’s property to collect these taxes. During her collection due process (CDP) hearing, Gray requested abatement of interest and penalties, as well as innocent spouse relief under I. R. C. section 6015. The notice abated certain penalties but denied interest abatement and was silent on the spousal relief request. Gray had previously sought and been denied innocent spouse relief for the same years in 2000, without appealing that decision. Gray filed a petition with the Tax Court on November 23, 2009, postmarked November 17, 2009, challenging the notice of determination.

    Procedural History

    The Commissioner moved to dismiss Gray’s petition for lack of jurisdiction, arguing it was untimely filed. The Tax Court reviewed the case to determine its jurisdiction under I. R. C. sections 6330(d)(1), 6015(e), and 6404(h). The court held a hearing on the motion and received briefs from both parties. The court ultimately granted the motion to dismiss for lack of jurisdiction over the collection actions due to the untimely petition but retained jurisdiction to consider the interest abatement and innocent spouse relief issues.

    Issue(s)

    Whether the Tax Court had jurisdiction under I. R. C. section 6330(d)(1) to review the collection action determinations due to the timing of Gray’s petition?

    Whether the Tax Court had jurisdiction under I. R. C. section 6015(e) to determine the appropriate relief available to Gray under I. R. C. section 6015?

    Whether the Tax Court had jurisdiction under I. R. C. section 6404(h) to review the Commissioner’s determination not to abate interest?

    Rule(s) of Law

    I. R. C. section 6330(d)(1) requires that a petition for review of a collection action determination must be filed within 30 days of the determination.

    I. R. C. section 6015(e) allows a petition for review of a denial of innocent spouse relief to be filed within 90 days of the mailing of the notice of determination, or within six months if no final determination has been made on the request for equitable relief under I. R. C. section 6015(f).

    I. R. C. section 6404(h) provides jurisdiction for the Tax Court to review a final determination not to abate interest, with a petition required to be filed within 180 days of the determination.

    Holding

    The Tax Court lacked jurisdiction under I. R. C. section 6330(d)(1) to review the collection action determinations because Gray’s petition was not filed within 30 days of the determination.

    The Tax Court retained jurisdiction under I. R. C. section 6015(e) to determine the appropriate relief available to Gray under I. R. C. section 6015, as the notice of determination was silent on her spousal relief request, and further proceedings were necessary to assess her eligibility.

    The Tax Court had jurisdiction under I. R. C. section 6404(h) to review the Commissioner’s determination not to abate interest, as Gray’s petition was filed within 180 days of the determination.

    Reasoning

    The court’s reasoning focused on the strict interpretation of jurisdictional timelines and the specific grants of jurisdiction for different types of tax disputes. The court applied the 30-day filing requirement under I. R. C. section 6330(d)(1) for collection actions and found Gray’s petition untimely. However, the court recognized the broader filing period for innocent spouse relief under I. R. C. section 6015(e), which could extend to 90 days or six months under certain conditions. The court noted the notice of determination’s silence on Gray’s spousal relief request and the need for further proceedings to assess whether her second request was “sufficiently dissimilar” from her previous denied request to confer jurisdiction.

    Regarding interest abatement, the court determined that the notice of determination constituted a final determination not to abate interest, thus conferring jurisdiction under I. R. C. section 6404(h). The court emphasized that the specific grant of jurisdiction for interest abatement claims controlled the timeliness of Gray’s petition, allowing for review within 180 days of the determination.

    The court’s analysis considered legal tests for jurisdiction, the implications of statutory silence, and the treatment of prior requests for relief. The court also addressed the Commissioner’s arguments on the nature of the proceedings and the form of the determination, concluding that the notice of determination met the criteria for a final decision on interest abatement.

    Disposition

    The court granted the Commissioner’s motion to dismiss for lack of jurisdiction over the collection actions but denied the motion regarding Gray’s claims for innocent spouse relief and interest abatement. The court ordered further proceedings to determine jurisdiction under I. R. C. section 6015(e) and to assess the merits of Gray’s claims under I. R. C. sections 6015 and 6404.

    Significance/Impact

    The Gray decision is significant for its clarification of the Tax Court’s jurisdiction over different aspects of tax disputes arising from CDP hearings. It underscores the importance of adhering to statutory filing deadlines for collection actions while affirming the court’s authority to review interest abatement and innocent spouse relief claims. The case also highlights the need for clear determinations in notices issued by the Commissioner and the potential for multiple requests for relief under certain conditions. The ruling impacts taxpayers and practitioners by delineating the procedural pathways for challenging various aspects of tax determinations, particularly in the context of CDP hearings and subsequent appeals.

  • Rawls Trading, L.P. v. Comm’r, 138 T.C. 271 (2012): TEFRA Jurisdiction and Computational Adjustments in Tiered Partnerships

    Rawls Trading, L. P. v. Commissioner, 138 T. C. 271 (U. S. Tax Ct. 2012)

    In Rawls Trading, L. P. v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction over a prematurely issued Final Partnership Administrative Adjustment (FPAA) to an interim partnership, Rawls Family, L. P. , which only reflected adjustments from lower-tier source partnerships. This decision underscores the importance of completing source partnership proceedings before issuing computational adjustments in tiered partnership structures, impacting how the IRS must proceed in similar cases.

    Parties

    Rawls Trading, L. P. , Rawls Management Corporation, as Tax Matters Partner, and other related entities (Petitioners) v. Commissioner of Internal Revenue (Respondent).

    Facts

    Jerry S. Rawls engaged in the “Son-of-BOSS” tax shelter using a tiered partnership structure involving Rawls Family, L. P. (Family), Rawls Group, L. P. (Group), and Rawls Trading, L. P. (Trading). The structure aimed to generate artificial losses to offset capital gains. Group and Trading, the source partnerships, executed transactions that allegedly overstated their bases. These overstated bases were then purportedly passed up to Family, the interim partnership, and ultimately to Rawls through other pass-through entities. The IRS issued simultaneous FPAAs to Family, Group, and Trading, disallowing the claimed losses. The FPAA issued to Family only reflected the adjustments from Group and Trading.

    Procedural History

    The IRS issued FPAAs to Group, Trading, and Family on March 9, 2007. Petitions for redetermination were filed for all three partnerships. The cases were consolidated, and the IRS moved to stay the Family proceeding, admitting the Family FPAA was issued prematurely but asserting its validity. The Tax Court, on its own motion, considered the jurisdictional issue.

    Issue(s)

    Whether the Tax Court has jurisdiction over the FPAA issued to Family, which only reflected computational adjustments based on the adjustments made to the source partnerships, Group and Trading?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), specifically section 6226(a), the Tax Court’s jurisdiction over partnership items is contingent on the issuance of a valid FPAA. Section 6231(a)(6) defines computational adjustments as changes in a partner’s tax liability reflecting the treatment of a partnership item. Section 6225(a) prohibits the assessment of a deficiency attributable to a partnership item before the partnership proceeding is final. The court’s prior decision in GAF Corp. & Subs. v. Commissioner, 114 T. C. 519 (2000), established that an FPAA or notice of deficiency reflecting only computational adjustments issued before the completion of the partnership-level proceedings is invalid and does not confer jurisdiction.

    Holding

    The Tax Court held that it lacked jurisdiction over the Family case because the FPAA issued to Family, which only reflected computational adjustments based on the adjustments to Group and Trading, was issued prematurely and thus invalid.

    Reasoning

    The court reasoned that the Family FPAA merely represented computational adjustments under section 6231(a)(6), as it only sought to apply the results of the Group and Trading proceedings to Family, an indirect partner. Applying GAF Corp. & Subs, the court determined that such an FPAA, issued before the completion of the source partnership proceedings, was ineffective for conferring jurisdiction. The court emphasized the statutory framework of TEFRA, which segregates partnership and nonpartnership items and requires the completion of partnership-level proceedings before assessing computational adjustments. The court rejected the IRS’s argument that the Family FPAA could be stayed rather than dismissed, noting that without jurisdiction, a stay was not possible. The court also addressed the IRS’s concern about the “no-second-FPAA” rule under section 6223(f), suggesting that the IRS might proceed directly against the indirect partner, Rawls, without issuing another FPAA to Family once the source partnership proceedings were completed.

    Disposition

    The court dismissed the Family proceeding for lack of jurisdiction.

    Significance/Impact

    The Rawls Trading decision clarifies the jurisdictional limits of the Tax Court under TEFRA in tiered partnership structures. It establishes that an FPAA issued to an interim partnership, reflecting only computational adjustments from source partnerships, is invalid if issued before the source partnership proceedings are completed. This ruling impacts IRS procedures in auditing tiered partnerships, requiring the completion of source partnership proceedings before issuing computational adjustments to interim partnerships. It also highlights the Tax Court’s duty to independently assess its jurisdiction, even absent a challenge from the parties, and underscores the need for the IRS to carefully sequence its actions in complex partnership structures to ensure valid jurisdiction.

  • Huff v. Comm’r, 138 T.C. 258 (2012): TEFRA Applicability and Entity Classification for Tax Purposes

    Huff v. Comm’r, 138 T. C. 258 (U. S. Tax Ct. 2012)

    In Huff v. Comm’r, the U. S. Tax Court ruled that the Tax Equity and Fiscal Responsibility Act (TEFRA) did not apply to the taxpayer’s case because the entity in question, NASCO, did not file a federal partnership return and was classified as a foreign corporation, not a partnership, for federal tax purposes. This decision clarified that filing a territorial return with the Virgin Islands did not constitute filing with the IRS and emphasized the distinct nature of U. S. and Virgin Islands tax jurisdictions. The case is significant for defining the jurisdictional limits of TEFRA and the classification of foreign entities under U. S. tax law.

    Parties

    George C. Huff, the Petitioner, was represented by William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo III, and Marjorie Rawls Roberts. The Respondent, Commissioner of Internal Revenue, was represented by Daniel N. Price, Ladd Christman Brown, Jr. , and Justin L. Campolieta.

    Facts

    George C. Huff, a U. S. citizen, claimed to be a bona fide resident of the U. S. Virgin Islands (Virgin Islands) and filed territorial income tax returns with the Virgin Islands Bureau of Internal Revenue (BIR) for the years 2002, 2003, and 2004, asserting he qualified for a gross income tax exclusion under I. R. C. sec. 932(c)(4). Huff did not file federal income tax returns with the IRS for those years. Huff was a member of NASCO Corporate Finance Consultants, LLC (NASCO), a Virgin Islands limited liability company (LLC) with more than 10 members, at least one of which was not an individual, a C corporation, or an estate of a deceased person. NASCO filed partnership returns with the BIR but not with the IRS. The IRS, conducting a nonfiler examination, determined Huff did not qualify for the I. R. C. sec. 932(c)(4) exclusion and issued him a notice of deficiency. Huff argued that the case involved partnership items under TEFRA and that the IRS should have issued a notice of final partnership administrative adjustment (FPAA) to NASCO’s tax matters partner instead of a notice of deficiency to him.

    Procedural History

    The IRS conducted a nonfiler examination of Huff’s tax situation for the years 2002, 2003, and 2004. Upon determining Huff did not qualify for the I. R. C. sec. 932(c)(4) exclusion, the IRS issued a notice of deficiency to Huff on February 27, 2009. Huff filed a petition in the U. S. Tax Court contesting the notice of deficiency and moved to dismiss for lack of jurisdiction, arguing that the IRS should have issued an FPAA under TEFRA procedures. The Tax Court denied Huff’s motion to dismiss, holding that TEFRA did not apply because NASCO did not file a federal partnership return and was not classified as a partnership for federal tax purposes.

    Issue(s)

    Whether the procedural rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) apply to Huff’s case, requiring the IRS to issue a notice of final partnership administrative adjustment (FPAA) to NASCO’s tax matters partner rather than a notice of deficiency to Huff?

    Rule(s) of Law

    TEFRA governs the tax treatment of partnership items at the partnership level, requiring the issuance of an FPAA to the partnership’s tax matters partner. I. R. C. sec. 6231(a)(1)(A) defines a partnership under TEFRA as any entity required to file a return under I. R. C. sec. 6031(a). Foreign partnerships are generally exempt from filing partnership returns and TEFRA unless they have U. S. -source income or income effectively connected with a U. S. trade or business, as per I. R. C. sec. 6031(e)(1) and (2). Entity classification for federal tax purposes is determined by I. R. C. sec. 7701 and the “check-the-box” regulations under 26 C. F. R. secs. 301. 7701-1 through 301. 7701-5.

    Holding

    The Tax Court held that TEFRA did not apply to Huff’s case because NASCO did not file a federal partnership return with the IRS, and NASCO was classified as a foreign corporation, not a partnership, for federal tax purposes. Consequently, the IRS properly issued a notice of deficiency to Huff, and the Tax Court had jurisdiction over the case.

    Reasoning

    The Tax Court’s reasoning focused on two key points: the filing of partnership returns and the classification of NASCO. Firstly, the court rejected Huff’s argument that NASCO’s filing of a partnership return with the BIR constituted filing with the IRS. The court clarified that the Virgin Islands is a distinct taxing jurisdiction from the U. S. , and the BIR is not an agent of the IRS. The court also distinguished the case from Beard v. Commissioner, emphasizing that the issue was not whether the return was valid but whether filing with the BIR constituted filing with the IRS. Secondly, the court addressed the classification of NASCO, concluding that it was a foreign corporation under the default rules of the “check-the-box” regulations because all its members had limited liability. The court rejected Huff’s attempt to apply I. R. C. sec. 1. 932-1(h)(4) retroactively, noting that the regulation’s effective date was after the years in question. The court’s analysis included the plain meaning of the regulations, the lack of evidence for retroactive application, and the distinct treatment of foreign entities under U. S. tax law.

    Disposition

    The Tax Court denied Huff’s motion to dismiss for lack of jurisdiction, holding that the IRS properly issued a notice of deficiency to Huff and that the case was within the court’s jurisdiction.

    Significance/Impact

    Huff v. Comm’r is significant for clarifying the jurisdictional limits of TEFRA and the classification of foreign entities for U. S. tax purposes. The decision reinforces the principle that filing a territorial return with the Virgin Islands does not satisfy federal filing requirements and emphasizes the distinct nature of U. S. and Virgin Islands tax jurisdictions. The case also provides guidance on the application of the “check-the-box” regulations to foreign entities and the effective dates of tax regulations. The ruling impacts taxpayers and entities operating in U. S. territories by clarifying the procedural requirements for tax disputes involving partnerships and the classification of business entities for federal tax purposes.