2025 Houston Law Guide | Federal and Texas State Law Guidance

Tag: investing

  • Tax Court Denies Summary Judgment in Brauser v. Commissioner Over Restricted Stock Donation

    Case Overview

    In Brauser v. Commissioner, No. 20434-23, 2025 U.S. Tax Ct. LEXIS 2460 (U.S. Tax Ct. Oct. 10, 2025), the United States Tax Court, Judge Emin Toro presiding, denied a motion for summary judgment filed by taxpayers Michael and Betsy Brauser.

    The case concerns whether the Brausers may claim a charitable contribution deduction carryover for tax year 2017, stemming from their 2015 donation of 1,576,680 shares of Orbital Tracking Corp. stock to Friendship Circle of North Broward and South Palm Beach, Inc., a Florida-based tax-exempt organization under section 501(c)(3).

    Factual Background

    In late December 2015, the Brausers donated 1,576,680 shares of stock in Orbital Tracking Corp. At the time, the shares were quoted on an over-the-counter market, but trading was infrequent and typically involved low volumes. Historical pricing data showed the stock price at $1.30 per share on December 28, 2015, and $1.25 per share on December 29, 2015.

    The stock was volatile. In 2014, the price ranged from $9.00 to $0.51 per share; in 2015, it ranged from $2.37 to $0.81. By March 28, 2016, it had fallen to $0.199 per share.

    The donated stock was subject to a restrictive legend under SEC Rule 144, 17 C.F.R. § 230.144, which governs the resale of securities acquired in unregistered private offerings. Restricted shares cannot be freely traded until certain holding periods and disclosure requirements are met, or until an opinion letter removes the legend.

    The Brausers did not obtain or attach a qualified appraisal to their 2015 or 2017 tax returns. They valued the donated shares at $1 per share, below the quoted market prices.

    In February 2020, they filed an amended 2017 return to include additional Schedule C and Schedule K-1 items. The IRS examined the amended return and, on October 4, 2023, issued a Notice of Deficiency disallowing the entire charitable contribution deduction carryover and determining an additional $93,382 of tax due for 2017. The Brausers petitioned the Tax Court.

    Legal Framework

    The central issue is whether the donated stock constituted “publicly traded securities” for purposes of the charitable contribution substantiation rules in section 170(f)(11) of the Internal Revenue Code.

    Under section 170(f)(11)(D), taxpayers claiming charitable deductions exceeding $500,000 must attach a qualified appraisal to their return. The rule does not apply to “readily valued” property, such as cash or publicly traded securities, under section 170(f)(11)(A)(ii)(I).

    A security qualifies as publicly traded if, as of the contribution date, market quotations are readily available on an established securities market. Treas. Reg. § 1.170A-13(c)(7)(xi)(A)(2). However, several limitations apply:

    1. If the security’s value is based only on an interdealer quotation system, the issuer must meet five additional reporting and recordkeeping requirements. Treas. Reg. § 1.170A-13(c)(7)(xi)(B)(1)–(5).
    2. A security is not publicly traded if restrictions materially affect value or prevent free trading. Treas. Reg. § 1.170A-13(c)(7)(xi)(C).
    3. A deduction cannot be based on a value differing from the published market quotations. Id.

    The Brausers’ Position

    The Brausers argued that the Orbital Tracking shares qualified as publicly traded securities and therefore required no appraisal. They maintained that the shares were regularly traded on an over-the-counter market with published quotations. They also contended that the SEC Rule 144 legend did not materially affect value or restrict free transferability.

    They further argued that their valuation of $1 per share, although below the market quotes of $1.25 to $1.30, did not violate Treasury Regulation § 1.170A-13(c)(7)(xi)(C) because they substantially complied with the rule or because the regulation was invalid.

    In the alternative, they argued that any failure to attach an appraisal was excusable under the reasonable cause exception of section 170(f)(11)(A)(ii)(II), asserting that they relied on their long-time accountant’s professional advice in preparing their returns.

    The Commissioner’s Response

    The Commissioner opposed summary judgment, asserting that several material factual disputes remained.

    First, the Commissioner argued that the Brausers had not shown that Orbital Tracking stock was “regularly traded” as required by Treasury Regulation § 1.170A-13(c)(7)(xi)(A)(2). Evidence indicated that the stock was quoted but not consistently or actively traded.

    Second, the Commissioner noted that Orbital Tracking’s own SEC filings described the quotations as interdealer prices “without retail mark-up, mark-down or commission,” which “may not represent actual transactions.” Because the quotations were interdealer-based, the Commissioner argued that the Brausers were required to satisfy the five additional regulatory requirements under § 1.170A-13(c)(7)(xi)(B), which they had not addressed.

    Third, the Commissioner maintained that the Rule 144 legend did materially affect value because a “sell-by” legal opinion would have been required before the shares could be sold. No such opinion was obtained, and the Brausers provided no evidence about who could issue one, how long it would take, or how much it would cost.

    Finally, the Commissioner argued that reasonable cause for failing to attach an appraisal was a question of fact that required cross-examination.

    The Court’s Analysis

    Judge Toro agreed with the Commissioner that genuine issues of material fact precluded summary judgment.

    The Court identified several unresolved questions, including the regularity of trading on the OTC market, whether the quotations were based solely on interdealer pricing, whether the Rule 144 restriction affected the value or transferability of the stock, and whether the taxpayers had reasonable cause for failing to attach an appraisal.

    Citing Fla. Peach Corp. v. Comm’r, 90 T.C. 678 (1988), and Sundstrand Corp. v. Comm’r, 98 T.C. 518 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994), the Court reiterated that summary judgment is appropriate only when there is no genuine dispute of material fact and a decision can be rendered as a matter of law.

    Because these factual issues remained, the Court denied the Brausers’ motion for summary judgment and ordered the parties to file a status report by November 10, 2025, describing the status of the case and recommending further proceedings.

    Practical Implications

    The decision serves as a cautionary example for taxpayers donating restricted or thinly traded stock. Even when stock is quoted on an over-the-counter market, it may not qualify as “publicly traded” if trading activity is sporadic, prices are derived solely from interdealer quotations, or SEC Rule 144 restrictions limit resale.

    To preserve charitable contribution deductions, donors should obtain qualified appraisals when in doubt, maintain evidence of market activity, and document reliance on professional advice.

    The Brauser case will proceed to further factual development, and its outcome will likely depend on expert testimony and evidence regarding trading volume, market accessibility, and the actual impact of the Rule 144 legend.

    Citation

    Brauser v. Comm’r, No. 20434-23, 2025 U.S. Tax Ct. LEXIS 2460 (U.S. Tax Ct. Oct. 10, 2025) (Toro, J.).

  • What Are Separately Stated Items in a Partnership Return?

    Why Aren’t All Partnership Items Reported Together?

    Partnerships file an annual information return, but unlike corporations, they are not subject to entity-level tax. Instead, income, deductions, credits, and other items flow through to the partners under IRC §702(a). However, not all items are treated the same for tax purposes. Some must be “separately stated” because their treatment depends on each partner’s individual tax circumstances.

    In other words, while ordinary business income can be reported as a lump sum, items like capital gains, charitable contributions, and foreign tax credits may have very different consequences depending on who the partner is. For that reason, the partnership must identify and pass these items through separately.

    What Counts as a Separately Stated Item?

    The Code and regulations identify a list of items that must be disclosed separately on a partner’s Schedule K-1, including:

    • Short-term and long-term capital gains and losses
    • Section 1231 gains and losses
    • Charitable contributions
    • Dividends (qualified or otherwise)
    • Foreign taxes paid or accrued
    • Tax-exempt interest
    • Other items identified in the regulations at Treas. Reg. §1.702-1(a)(8)(i)-(ii)

    Each of these can impact a partner’s tax liability in different ways, so they cannot simply be included in the “bottom line” partnership income.

    Example: Why Separate Reporting Matters

    Imagine a partnership with two equal partners. The partnership earns $100,000 of ordinary business income and also realizes a $20,000 long-term capital gain.

    • If everything were lumped together, each partner would be allocated $60,000 of “income.”
    • But that would obscure the fact that $10,000 of each partner’s allocation is a capital gain.

    For a partner in the 15% capital gains bracket, that $10,000 is taxed more favorably than ordinary income. For a partner with capital losses from other investments, that $10,000 might offset those losses. The Code requires that this item be separately stated so each partner can apply their own tax situation correctly.

    Example: Charitable Contributions

    Suppose the same partnership donates $10,000 to a qualified charity. The deduction must be reported separately because it is subject to each partner’s own §170 limitations (generally based on adjusted gross income). Partner A, with significant AGI, may deduct the full $5,000 share. Partner B, with limited AGI, may only deduct a portion this year and carry the rest forward. Without separate reporting, this individualized limitation would be impossible to apply.

    The Bottom Line

    Separately stated items under IRC §702(a) ensure that each partner’s distributive share reflects the real tax consequences applicable to them individually. While it adds complexity to partnership reporting, it is a necessary safeguard to make sure tax rules apply fairly and consistently.

  • What Tax Elections Can a Partnership Make?

    One of the defining features of partnerships is that the entity, not the individual partners, is responsible for making most tax elections. These elections can significantly affect how income, deductions, and credits are reported, so understanding who controls them is crucial. For example, if a partnership purchases equipment costing $100,000, it must decide whether to claim immediate expensing under §179 or depreciate the equipment over several years under MACRS. That election is made at the partnership level, and whichever method is chosen determines how each partner reports their share of income or loss. An individual partner cannot unilaterally decide to depreciate while others expense — the decision binds everyone.

    Example: Suppose the partnership has $200,000 of ordinary business income before depreciation, with two partners: A owns 50% and B owns 50%.

    • If the partnership elects §179 expensing, the entire $100,000 deduction is taken in Year 1. Taxable income is reduced to $100,000, and each partner is allocated $50,000 of income.
    • If the partnership uses MACRS 5-year straight-line depreciation, only $20,000 is deducted in Year 1. Taxable income is reduced to $180,000, and each partner is allocated $90,000 of income. The remaining $80,000 deduction is spread evenly across future years, continuing to reduce each partner’s share of income by $10,000 annually.

    This comparison shows how a single partnership-level election can dramatically affect the timing of income recognized by each partner, even though the total deduction over time is the same.

    Who Makes Tax Elections in a Partnership?

    Under IRC §703(b), the partnership as an entity makes all elections affecting the calculation of taxable income, except for a few elections reserved to the individual partners. This means decisions about depreciation methods, accounting conventions, and the treatment of organizational expenses are made collectively at the partnership level and bind all partners.

    In other words, if you are a partner, you cannot simply choose your own depreciation schedule or accounting method for partnership items. Those decisions are made once, for the entire partnership, and apply uniformly to every partner’s distributive share.

    Example: Depreciation Election in a Partnership

    The Setup

    • Partnership has $200,000 of ordinary income before depreciation in years 1 and 2.
    • It buys $100,000 of 5-year equipment.
    • Two partners: A owns 60%, B owns 40%.
    • Partner A would prefer §179 expensing (immediate deduction).
    • Partner B would prefer MACRS 5-year straight-line depreciation (~$20,000 per year).

    Scenario 1: Partnership Elects §179 Expensing

    • Year 1 Deduction: $100,000
    • Taxable income: $200,000 – $100,000 = $100,000

    Allocations:

    • Partner A (60%): $60,000 income
    • Partner B (40%): $40,000 income
    • Year 2 Deduction: $0 (no depreciation left)
    • Taxable income: $200,000 – $0 = $200,000

    Allocations:

    • Partner A (60%): $120,000 income
    • Partner B (40%): $80,000 income

    Scenario 2: Partnership Uses MACRS Depreciation

    • Year 1 Deduction: $20,000
    • Taxable income: $200,000 – $20,000 = $180,000

    Allocations:

    • Partner A (60%): $108,000 income
    • Partner B (40%): $72,000 income
    • Year 2 Deduction: $20,000
    • Taxable income: $200,000 – $20,000 = $180,000

    Allocations:

    • Partner A (60%): $108,000 income
    • Partner B (40%): $72,000 income

    Why Partners Cannot “Split” Elections
    If Partner A expensed and Partner B depreciated, Year 1 would look like this:

    • A’s share of income: $60,000 – (A’s “share” of $60,000 deduction) = $0
    • B’s share of income: $80,000 – (B’s “share” of $20,000 deduction) = $60,000

    By Year 2, A would have no deduction while B would still get $8,000 of depreciation. That kind of mismatch is exactly why IRC §703(b) requires the partnership to make one election for all partners.

    Are There Exceptions Where Partners Make Their Own Elections?

    Yes. While the partnership controls most elections, certain ones are made at the partner level. These include elections under:

    • §108(b)(5): Reduction of basis of depreciable property when income from cancellation of debt is excluded.
    • §108(c)(3): Elections relating to qualified real property business indebtedness.
    • §617: Deduction and recapture rules for mining exploration expenditures.
    • §901: The foreign tax credit.

    Each of these elections reflects an area where Congress determined that the consequences are highly personal to the individual taxpayer’s circumstances.

    Example: Suppose a partnership incurs foreign income taxes. The election to claim a foreign tax credit under §901 is made individually by each partner. One partner might claim the credit, while another might deduct the taxes instead, depending on which treatment yields the greater benefit given their overall tax situation.

    What Happens With Contributed Property?

    Special rules apply when a partner contributes property with built-in accounting attributes. Under IRC §168(i)(7), if a partner contributes depreciable property to the partnership, the partnership must continue to use the contributor’s method and recovery period for that property. This prevents a “reset” of depreciation schedules simply by shifting the asset into partnership form.

    Example: If a partner has a machine that has been depreciated for three years under MACRS and contributes it to the partnership, the partnership cannot restart depreciation as if it were newly acquired. Instead, it must continue using the same depreciation method and remaining recovery period the partner was already using.

    Why Does This Matter for Partners?

    Because elections can shape the timing and character of income, they influence not only when tax is paid but also how it interacts with other parts of the Code. Uniformity at the partnership level promotes consistency and prevents manipulation, but it also means individual partners must live with decisions they did not personally make.

    For new partners, this highlights the importance of due diligence before buying into a partnership. The entity may already have made elections that bind every partner going forward. For existing partnerships, these rules underscore the need for careful planning, because the wrong election could have ripple effects for years.