## Facts

- Steve K. Backemeyer and Julie K. Backemeyer were married; Steve operated a sole-proprietor farming business using the cash method of accounting.
- In 2010, Steve bought farm inputs (e.g., seed, fertilizer, herbicides, fuel) intended for the 2011 crop year and deducted the expenditures in 2010 as ordinary and necessary business expenses under I.R.C. § 162.
- Steve died in March 2011 before using any of the inputs; the unused inputs became estate property and were transferred to Julie.
- Julie began her own sole-proprietor farming business after Steve’s death, treated the inherited inputs as having a stepped-up basis under I.R.C. § 1014, used all inputs in 2011, and deducted their cost in 2011 as consumed in her business.
- The IRS determined a 2011 income tax deficiency and asserted an accuracy-related penalty under I.R.C. § 6662; after concessions, the dispute centered on whether the tax benefit rule required 2011 income inclusion (recapture) of Steve’s 2010 input deductions and whether the penalty applied.
- The case was submitted on a fully stipulated record under Tax Court Rule 122.

## Issues

1. Whether the tax benefit rule required income inclusion in 2011 attributable to Steve’s 2010 deductions for farm inputs that remained unused at his death and were transferred to Julie.
2. Whether the I.R.C. § 6662(a) accuracy-related penalty for substantial understatement applied to petitioners’ 2011 return.

## Decision

- The Tax Court held that the tax benefit rule did not require recapture in 2011 of Steve’s 2010 cash-method deductions for the farm inputs.
- The Tax Court held that the I.R.C. § 6662 accuracy-related penalty did not apply.

## Legal Principles

- The tax benefit rule generally requires income inclusion when a later event is fundamentally inconsistent with the premise of a prior deduction that produced a tax benefit.
- A decedent’s death and the transfer of property through the estate are not, by themselves, a “recovery” or other fundamentally inconsistent event that triggers the tax benefit rule as to a proper prior-year business deduction.
- I.R.C. § 1014’s stepped-up basis regime applies to inherited property included in the decedent’s estate, and the tax benefit rule will not be used to negate that statutory basis treatment absent a qualifying inconsistent event.
- Alleged “double deduction” concerns are weaker where deductions arise in different years and are claimed by different taxpayers based on distinct tax attributes (a cash-method expenditure by the decedent versus the heir’s deduction tied to basis and later consumption).
- An accuracy-related penalty for substantial understatement requires meeting statutory thresholds; where the taxpayer’s substantive reporting position is sustained and the remaining adjustments do not meet the threshold, the penalty is not imposed.

## Conclusion

The Tax Court concluded that Steve Backemeyer’s proper 2010 cash-method deductions for farm inputs were not recaptured in 2011 under the tax benefit rule merely because he died before using the inputs and they passed to his spouse with a § 1014 stepped-up basis, and it further declined to impose the § 6662 accuracy-related penalty.


Estate of Backemeyer v. Comm’r, 147 T.C. No. 17 (2016)