2024 TC Memo 109
T.C.2024Background
- The IRS determined deficiencies, late-filing additions, and accuracy-related penalties for Leon A. Greenblatt III and Leslie N. Jabine Greenblatt for their 2008 and 2009 taxes, stemming mainly from large claimed net operating loss (NOL) deductions and business credits.
- Petitioners had complex investments in various business ventures, including S corporations (Scattered, Rumpelstiltskin, Loop), oil and gas ventures, and used corporate funds to pay personal expenses.
- The IRS disallowed most claimed deductions and credits due to lack of substantiation, improper basis computations, and procedural failures (like missing QSub elections and not substantiating NOL carrybacks).
- Petitioners represented themselves at trial (pro se) and primarily relied on their long-time accountant, Michael May, for tax compliance.
- The court consolidated the cases for the 2008 and 2009 tax years. Key disputes included the validity and calculation of NOLs, unreported constructive dividends, business credits, and imposition of penalties.
Issues
| Issue | Greenblatt's Argument | IRS's Argument | Held |
|---|---|---|---|
| NOL Carryforward | Entitled to large NOL carryforwards from prior years, including S corp and investment losses. | NOLs unsubstantiated: lack of documentation, basis, and failure to show proper carrybacks. | NOLs mostly disallowed; insufficient substantiation and failure to properly carry back per statute. |
| Unreported Income/Dividends | Payments for personal expenses by controlled corps were not income—they were reimbursed deposits. | Payments by corporations were constructive dividends; not proven to be reimbursements. | Payments treated as constructive dividends; income was unreported. |
| General Business Credit | Entitled to business/energy credits via passthrough from RTC landfill gas business. | No QSub election, RTC losses/credits can't be passed through; landfill gas not qualifying energy property. | Credits disallowed; RTC property/services do not qualify; no passthrough due to missed QSub. |
| Penalties/ Additions to Tax | Additions/penalties inappropriate as deficiencies not owed or conduct was reasonable, in good faith. | Penalties proper; returns filed late, substantial understatements, no valid excuse. | Additions to tax for late filing upheld; accuracy penalty not imposed due to reasonable reliance on CPA. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (burden of proof rests with taxpayer to show IRS error)
- New Colonial Ice Co. v. Helvering, 292 U.S. 435 (tax deductions are a matter of legislative grace; taxpayer must substantiate)
- United States v. Olympic Radio & Television, Inc., 349 U.S. 232 (taxpayer bears burden of establishing existence and extent of NOLs)
- United States v. Boyle, 469 U.S. 241 (reasonable cause may exist when taxpayers reasonably rely on competent professionals)
- Helvering v. Taylor, 293 U.S. 507 (where IRS bases a tax on arbitrary computation, burden may shift)