IRS Forms VS. Statues – Net Capital Loss Deduction

JASON FREEMAN, JD - IRS Forms VS. Statues - Net Capital Loss Deduction

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

(Freeman Law Tax Court In Brief)

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

  • When a statute is clear, as here, we look no further than the statute to determine the meaning. Sullivan v. Stroop, 496 U.S. 478, [14] I.R.C. § 482 (1990); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241–42 (1989).
  • Form 1040 and its instructions cannot affect the operation of the tax statutes or a taxpayer’s obligations. Weiss v. Commissioner, 129 T.C. 175, 177 (2007) (citing Casa De La Jolla Park, Inc. v. Commissioner, 94 T.C. 384, 396 (1990)). Even if a form or schedules instructions are misleading, the sources of authoritative law in the tax field are the statute and regulations and not government publications. See Casa De La Jolla Park, Inc., 94 T.C. at 396
  • When a petition is timely filed in response to a notice of deficiency, sections 6213 and 6214 give the Tax Court jurisdiction to “redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount in the notice.” Winter v. Commissioner, 135 T.C. 238, 243–44 (2010): Further, the Tax Court has jurisdiction to determine overpayments and to determine the correct amount of tax even if a petitioner does not properly challenge the relevant notice.
  • When taxpayers who received an APTC files their annual return, they must use Form 8962 to reconcile (1) the amount of the APTC the taxpayer received during the year (which was based on their estimated eligibility) with (2) the amount of the PTC to which the taxpayer is actually entitled (which is based on household income when the taxpayer files his or her annual income tax return). See I.R.S. Publication 17, Your Federal Income Tax, 245–47 (Dec. 12, 2017). If the amount of the APTC is more than the amount of the PTC to which the recipient is ultimately entitled, the taxpayer owes the excess credit, which is reflected as an increase in tax.


  • Relying on ambiguities in language on IRS forms exposes taxpayers to risk of deficiency notices, audits, and penalties.
  • Taxpayers and their advisors should review the relevant statutes and other guidance if IRS forms and their instructions leave any doubt regarding how to properly report, claim or calculate certain items.

Have a question? Contact Jason Freeman, Freeman Law.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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