This consolidated U.S. Tax Court case addressed IRS determinations of tax deficiencies and civil fraud penalties under I.R.C. § 6663 against Albert and Wendy Hee for tax years 2004–2012, and against Waimana Enterprises, Inc., for tax years 2003, 2004, and 2006–2008, along with an addition to tax under § 6651(a)(1) for Waimana in 2003. The deficiencies stemmed primarily from the Hees' failure to report constructive dividend income received from Waimana, a C corporation holding company, as well as overstated deductions and omitted income by both petitioners. The court held that the IRS proved by clear and convincing evidence that the underpayments were due to fraud, citing multiple badges of fraud including inadequate records, implausible explanations, and incomplete information provided to tax preparers, which kept the years open under § 6501(c)(1) and allowed assessment of the deficiencies and penalties.
The case involved partners of an architecture firm, AS+GG, challenging the IRS disallowance of research tax credits under section 41 claimed for six sample sustainable architectural projects in tax years 2008-2010, with the credits flowing through to the partners' personal returns. The Tax Court found that the research activities met the qualified research requirements but addressed whether any projects involved funded research under section 41(d)(4)(H), concluding that payments under four contracts were not contingent on research success and that AS+GG retained substantial rights, permitting partial credits, while the other two were ineligible. The court also held that the partners' 2008 compensation was reasonable under the independent investor test for purposes of section 174(e) deductibility. Precise credit amounts could not be determined from the record, and the parties were directed to apply the sample project findings pro rata to the remaining projects.
The case involved William P. Wells and Ruth E. Wells challenging an IRS Notice of Deficiency that disallowed carryover charitable contribution deductions claimed for tax years 2019, 2020, and 2021 based on a 2016 noncash donation of real property (land and structures) to Chamberlain-Hunt Academy. The Tax Court ruled that the taxpayers did not satisfy the contemporaneous written acknowledgment requirements under IRC section 170(f)(8), so the deductions were disallowed. The court also held that section 6662 accuracy-related penalties did not apply because the taxpayers established a reasonable cause defense through good-faith reliance on their long-time CPA's advice regarding the donation documentation. The decision focused on whether the donation letter and related documents met the specific statutory substantiation rules for noncash charitable contributions of property.
This U.S. Tax Court case involved petitioners who had claimed deductions for payments made by their S corporation to microcaptive insurance companies, which the court in a prior opinion (Kadau I) had already ruled were not deductible because the arrangements were not insurance in the commonly accepted sense and lacked legitimate business purpose. The remaining issue was whether the IRS could impose a 40% accuracy-related penalty under sections 6662(b)(6) and (i) for tax years 2012-2015 on the ground that the underpayments resulted from transactions lacking economic substance under section 7701(o) and were not adequately disclosed. Following the precedent set in Patel v. Commissioner, the court held that the microcaptive arrangement lacked economic substance and that the returns (Forms 1120S and individual returns) failed to include sufficient details or required disclosure forms to alert the IRS to the nature of the transactions. The court therefore sustained the increased 40% penalties for those years while continuing to apply the 20% penalties for 2016 and 2017 as previously determined.
The case involved partnerships that claimed large charitable contribution deductions on their 2016 federal tax returns for granting conservation easements over land in Meriwether County, Georgia, to the Oconee River Land Trust. The IRS disallowed the deductions through notices of final partnership administrative adjustment, and after concessions the Tax Court addressed the fair market values of the easements and applicable penalties. The court determined the values to be $81,000 for one property and $145,000 for the other, far below the amounts claimed, and held that the 40% gross valuation misstatement penalty under section 6662(h) applied because the claimed values exceeded the determined values by more than 200%. The decision rested on the court's evaluation of expert testimony and evidence concerning the properties' highest and best uses, with other penalties deemed inapplicable once the correct values were established.
The case concerned a limited partnership, Otay Project LP, that claimed a deduction exceeding $743 million on its 2012 tax return, primarily stemming from a prior positive basis adjustment under section 743(b) made to a partner's outside basis in the partnership. The IRS issued a final partnership administrative adjustment disallowing over $713 million of the deduction, relying on the subchapter K anti-abuse rule, the economic substance doctrine, and other theories, while also asserting accuracy-related penalties. After concessions, the Tax Court sustained the disallowance, holding that the partnership had incorrectly determined the section 743(b) basis adjustment and that the transactions lacked economic substance as shams. The court rejected the penalties, however, because the partners had demonstrated reasonable cause through reliance on multiple substantial-authority tax opinions addressing the complex basis and partnership tax issues.
