Tax Court in Brief | Powell v. Comm’r | IRS Forms vs. Statutes – Net Capital Loss Deduction

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon

Freeman Law is a tax, white-collar, and litigation boutique law firm. We offer unique and valued counsel, insight, and experience. Our firm is where clients turn when the stakes are high and the issues are complex.

The Tax Court in Brief – September 26th – September 30th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

Tax Litigation:  The Week of September 26th, 2022, through September 30th, 2022

Powell and Iakovenko v. Comm’r, T.C. Summary Opinion, 2022-19 | Copeland, J. | Docket No. 20268-19S

Short Summary

Petitioners claimed a $123,822 long-term capital loss deduction on their 2017 return, far in excess of the $3,000.00 per year limit on the net capital loss deduction. Due to this miscalculation, the Petitioners reported $1,001 in AGI for the year. They also received an advance premium tax credit (APTC) in monthly installments during their 2017 tax year under the Patient Protection and Affordable Care. In response, the IRS issued a math error notice limiting the net capital loss deduction to $3,000. The IRS then examined the petitioners return, concluding that household income disqualified the petitioners for the Premium Tax Credit (PTC). Thus, the IRS determined that: petitioners were not entitled to a PTC of $636 previously credited to them; they had an excess APTC of $17,652; and after allowing $4,000 of newly claimed tuition and fee deductions, they had a resulting deficiency of $17,288 for the 2017 tax year.

Key Issue

On appeal, petitioners had one argument. Petitioners argued that pursuant to a textual approach and applying formal logic to interpret line 21 of Schedule D to form 1041, they properly deducted the capital loss of $123,822 because negative $123,822 is mathematically smaller than negative $3,000. The Court interpreted the petitioners claim as one of overpayment and redetermined their income tax liability.

Primary Holding

The IRS properly limited the capital loss deduction to $3,000.00. Section 1211(b) specifically provides that when a taxpayer’s losses exceed gains from the sale or exchange of capital assets, the taxpayer’s net capital loss deduction is limited to $3,000. Schedule D, line 21, for the 2017 tax year, states:

“If line 16 is a loss, enter here and on Form 1040, line 13, or Form 1040NR, line 14, the smaller of: • The loss on line 16 or • ($3,000), or if married filing separately, ($1,500) Note: When figuring which amount is smaller, treat both amounts as positive numbers.”

The Tax Court held that Schedule D comports with section 1211(b), but also held that the statutes control in any case—not the language of the IRS on a tax form. The deficiency notice was correct, and petitioners were required to return the entire advance PTC they received in 2017.

Key Points of Law