Katherine Heigl Fights IRS Over Disallowed Expenses

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By Matthew Beddingfield

Feb. 2 — Actress Katherine Heigl and her mother are contesting an IRS assessment for more than $256,000 based on a dispute over flow-through income and expenses from a ranch run as a separate business entity.

Heigl, who lives in Burbank, Calif., argued in her Jan. 21 petition to the U.S. Tax Court that the Internal Revenue Service incorrectly assessed a deficiency of more than $132,000 against her in an October 2015 deficiency notice covering tax years 2011 to 2013 (Heigl v. Commissioner, T.C., No. 1815-16, petition, 1/21/16).

According to the petition, the Service erred in issuing the deficiency notice for the 2011 amounts after the period of limitations had expired. “The notice of deficiency for 2011 was issued on or about October 29, 2015, more than three years after the 2011 return was filed,” the petition said.

Heigl argued further that the IRS also erred in assessing penalties and making adjustments to flow-through income and expenses stemming from an entity called Badlands LLC.

Ranch Deductions Listed

Heigl owns a ranch in the mountains near Park City, Utah that she calls Badlands Ranch, and in the IRS's Form 866-A, Explanation of Items, Badlands LLC is described as formerly Padfoot Ranch, LLC. The ranch includes dozens of farm animals and a training arena for horses.

The IRS rejected more than $704,000 worth of net farm profit losses reported by Heigl for the three tax years at issue, saying that Heigl failed to establish that the business expense was ordinary and necessary to her business.

The IRS also said the Heigls' deductions were denied because they weren't in the trade or business while the start-up costs were incurred by the partnership and because the transaction was not entered into for profit “but was a transaction structured for tax avoidance.”

According to the petition, Badlands properly reported all of its income and deductions, and all of the deductions from the entity were ordinary and necessary business expenses for which adequate substantiation exists. Regarding the penalties assessed, Heigl argued that no negligence or intentional disregard of rules or regulations within tax code Section 6662(b)(1) exists because there is no underpayment.

Heigl's mother, Nancy, was issued a notice with an October 2015 deficiency notice and penalty assessment in the amount of more than $124,000. Nancy contested her tax deficiency and penalty assessment in a Jan. 21 petition on the same grounds as her daughter.

Steve Mather and Lydia B. Turanchik of Mather Law Corporation in Beverly Hills, Calif., represents the Heigls.

To contact the reporter on this story: Matthew Beddingfield in Washington at mbeddingfield@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

For More Information

Text of Katherine Heigl's petition and exhibits is at http://src.bna.com/cny. Text of Nancy Heigl's petition and exhibits is at http://src.bna.com/cnx .

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