Charles E. Strange Sherrie R. Strange v. Commissioner of Internal Revenue

Charles and Sherrie Strange (“Taxpayers”) appeal the Tax Court’s assessment of federal income tax deficiencies. The Tax Court found that Taxpayers, in calculating adjusted gross income, had improperly deducted nonresident state income taxes on net oil and gas royalties. We have jurisdiction under Internal Revenue Code (“Code” or “I.R.C.”) § 7482, and we affirm.

I.

Taxpayers, residents of Nevada, own income-producing gas and oil interests in nine other states. Each of these states imposes nonresident state income tax on income-producing activity within the state. Accordingly, Taxpayers paid state taxes on the net royalty income earned in each state during tax years 1993 through 1995. In filing their federal income tax returns for these years, Taxpayers deducted their nonresident state income taxes from gross income, yielding adjusted gross income. In addition, Taxpayers took the standard deduction to arrive at taxable income.

Upon an audit of the federal returns for tax years 1993 through 1995, the Commissioner of Internal Revenue (“Commissioner”) determined that Taxpayers’ nonresident state income taxes were not deductible from gross income under I.R.C. § 62(a)(4). As a result,…