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Federal Tax Update – August 2019

By David S. De Jong, Esq., CPA, Stein Sperling Bennett De Jong PC

INDIVIDUALS

In Gutierrez v. Commissioner, TC Summary Opinion 2019-23, the Tax Court allowed an unmarried individual to treat the grandchildren of his life partner as foster children and receive the dependency exemptions and other benefits for the partner’s grandchildren who were being raised in the home in which the taxpayer contributed the only income. 

In Hairston v. Commissioner, TC Memo 2019-104, the Tax Court denied real estate professional status to a couple with rental properties, finding that their tracking of hours caring for two properties was unreliable; the couple counted hours watching contractors do their work and showed a minimum of one hour for tasks that took minutes. 

In Litnick v. Commissioner, 153 TC No. 1, the Tax Court determined that the characterization of interest expense in the hands of a donee/legatee who received partnership interests by gift and inheritance was not determined by the father’s usage of funds which had given rise to investment interest; the Court allowed the son to determine the character of the continuing interest expense based upon the assets of the partnership (in this case becoming business interest). 

In Taylor v. Commissioner, TC Memo 2019-102, the Tax Court limited a casualty loss from Hurricane Ike to the direct unreimbursed loss in value, excluding additional alleged loss due to the stigma of flooding causing market decline.

In Letter Ruling 201933005, IRS concluded that the medical portion of DNA testing is deductible.

RETIREMENT AND ESTATE PLANNING

In Estate of Jones v. Commissioner, TC Memo 2019-101, the Tax Court accepted the estate’s valuation of blocks of stock in a timber business, accepting the estate’s discounted cash flow and market methodologies used at trial, tax effecting for a flow-through entity so as not to “overstate” the rate of return and 35 percent discounting.

BUSINESS

In Moore v Commissioner, TC Memo 2019-100, the Tax Court denied an investment interest deduction for payments purportedly made by a tax preparer to creditors who lent him money for business expansion, the court noting that the arrangements may not have been true loans as they did not state interest rates and had no execution dates and all but one were unsigned. 

In Nzedu v. Commissioner, TC Summary Opinion 2019-22, the Tax Court denied losses on a personal return for a lawyer’s side business because he could not prove that an S Corporation election was filed for the year in issue, IRS having an election form filed several years later.

In Wegener v. Commissioner, TC Memo 2019-98, the Tax Court threw out over $1 million in deductions over three years claimed by a business executive who sent money to Ghana allegedly for cocoa farming and rescue services activities; the Court found that he was not engaged in a business in Ghana nor in activities with the primary purpose of making a profit.

In McMillan v. Commissioner, TC Memo 2019-108, the Tax Court denied all expenses of a horse-related activity where the last horse owned by the taxpayer had died two years before, the taxpayer claiming that her “business model” was to search for a talented horse with potential for the right price.

PROCEDURE

In Intress v. United States, 124 AFTR2d 2019-5420, a Tennessee Federal District Court declined to distinguish electronically filed returns from paper returns in refusing to abate late filing penalties when the tax preparer believed an extension had been filed, the Court stating that the couple should have taken steps to verify that the filing was completed.

In Ott v. United States, 124 AFTR2d, 2019-5123, a Michigan Federal District Court stated that limited education and inexperience does not constitute an excuse for failure to file the required FBAR Forms, denying the taxpayer’s “reasonable cause” explanation in that she did not act in good faith and did not provide evidence that she informed her tax advisor of the foreign accounts; in United States v. Schwarzbaum, 124 AFTR2d, 2019-5172, a Florida Federal District Court stated that willfulness in the context of an FBAR violation does not require actual knowledge of the duty to report earnings from foreign accounts. 

In In Re:  Dickson, 124 AFTR2d 2019-________, an Indiana Federal District Court concluded that the filing of bankruptcy by a taxpayer does not delay the running of the two-year statute of limitations on refund claims; in Carter v. United States, 124 AFTR2d 2019-5467, an Alabama Federal District Court ruled that the disability of a Personal Representative, unlike that of an individual taxpayer, does not suspend the running of the statute of limitations on refunds. 

In Patel v. United States, 124 AFTR2d 2019-5097, a New Jersey Federal District Court stated that the “mailbox rule” does not apply to federal courts; the taxpayer mailed a refund claim two days before the second anniversary of an IRS denial but it was received by the clerk of the court five days later.

In Salter v. Commissioner, 124 AFTR2d 2019-______, the Fourth Circuit Court of Appeals agreed with the Tax Court in upholding a levy at a CDP appeal where the taxpayer was not in current compliance and did not submit requested information; in Gilmore v. Commissioner, TC Memo 2019-97, the Tax Court found that IRS did not abuse its discretion in upholding a levy at a CDP appeal where the taxpayer was not in compliance with current estimated taxes. 

In Benson v. Commissioner, 124 AFTR2d 2019-5387, the Eighth Circuit Court of Appeals agreed with the Tax Court that a divorcing husband was not entitled to equitable relief from unpaid tax liability resulting from his incarcerated wife’s overbilling fraud when he had reason to know that she would not or could not pay the tax liability and he was behind in current taxes.

In Davis v. United States, 124 AFTR2d 2019-5143, a Maryland Federal District Court concluded that preparer penalties must be paid in full before a claim for refund can be filed in federal court.

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