Document

Federal Tax Update – July 2019

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

INDIVIDUALS

In DeMar v. Commissioner, TC Memo 2019-91, the Tax Court denied the noncustodial parent the dependency allowance because Form 3115 was not included with the return, notating, because it was received during litigation, the taxpayer would need to file an amended return and the custodial parent would also need to amend to withdraw her claim.

In Haskins v. Commissioner, TC Memo 2019-87, the Tax Court found that a Government contractor in Afghanistan whose family remained in the US was not a bona fide foreign resident where she could not leave military bases and she described her stay as “miserable.”

In Perry v. Commissioner, TC Summary Opinion 2019-15, the Tax Court denied a net operating loss carryforward to a couple who produced no breakout with the return and no details at trial.

In Krishnan v. Commissioner, TC Summary Opinion 2019-14, the Tax Court found a systems engineer who had assignments all over the country but stayed at his uncle’s home sporadically between assignments without the payment of rent should be treated as an “itinerant” and not “away from home” for purpose of deducting travel and related expenses.

In Zalesiak v. Commissioner, TC Summary Opinion 2019-16, the Tax Court determined that a full-time construction company manager was not in the business of gambling despite spending a large portion of his remaining waking time playing poker, as he needed and relied on his employment; in Wu v. Commissioner, the Tax Court reached the same result in the case of a slots player.

Form 1040 per a 2020 draft will revert to the pre-2018 format of two full pages, scrapping the “postcard” Form 1040-SR used in 2018; Form 1040-SR was released in draft for use by those at least age 65 by yearend (only one spouse on a joint return must have reached age 65).

In Letter Ruling 201927003, IRS determined that the transfer of a partnership interest from one grantor trust to another controlled by the spouse was a tax free interspousal transfer.

RETIREMENT AND ESTATE PLANNING

In Burack v. Commissioner, TC Memo 2019-83, the Tax Court determined that a redeposit of an IRA withdrawal that was received by the trustee 58 days later but not deposited for the next four days constituted a timely rollover.

In In Re:  Hoffman, 124 AFTR2d 2019-________, a Georgia Bankruptcy Court, citing the lack of specificity in the statute, held that Roth IRAs are not protected in bankruptcy under federal law and, on the facts, disallowed an exemption under state law which protected IRAs only if reasonably necessary for the support of the filer and dependents.

BUSINESS

In Dufresne v. Commissioner, TC Memo 2019-93, the Tax Court agreed with IRS that $1.5 million of cash deposits over a four year period by a psychic constituted unreported income; the taxpayer had claimed that the deposits were repayments for loans made to his late mother but he could produce only two “to whom it may concern” letters with his mother’s signature setting forth a debt with no other details.

In Rogers v. Commissioner, TC Memo 2019-90, the Tax Court denied hundreds of thousands of dollars in business and personal deductions claimed by separate S corporation of an attorney-CPA and his attorney wife as well as by the couple individually; the disallowed deductions included uncollectible receivables (cash basis) and personal legal expenses.

In Esteen v. Commissioner, TC Summary Opinion 2019-13, the Tax Court found a nurse’s one-page calendar insufficient to support a deduction of care expenses.

In Smith v. Commissioner, TC Summary Opinion 2019-12, the Tax Court found that marketing and other expenses prior to initial sales were deductible as beyond the start-up phase where the taxpayer had a business plan with agreements and licenses in place.

In Cristo v. Commissioner, 124 AFTR2d 2019-________, the Ninth Circuit Court of Appeals concurred with the Tax Court that undergraduate tuition paid by a father’s business for courses of the son related to the business and labeled as training expense was not deductible.

In Alpenglow v. Commissioner, the US Supreme Court denied certiorari where the taxpayer sought to challenge a decision of the Ninth Circuit Court of Appeals at 122 AFTR2d 2018-5035 which struck down all expenses of a medical marijuana business other than cost of goods sold.

In Marshall v. Commissioner, 124 AFTR2d 2019-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that transferee liability applied when C corporation owners engaged in a complex series of transaction that left the corporation with huge unpaid tax liability and effectively was akin to a liquidation without payment of creditors.

In Giving Hearts, Inc. v. Commissioner, TC Memo 2019-94, the Tax Court agreed with the revocation by IRS of exempt status of an organization allegedly created for purpose of providing promotion to participating businesses but which purpose was to avoid the “do not call” registry.

In Information Letter 2019-8, IRS stated that the shared responsibility penalty on larger businesses cannot be reduced based on hardship or otherwise despite the President’s Executive Order directing IRS to use its authority to ease regulatory burdens from the Affordable Care Act.

In Letter Ruling 201927005, IRS stated that a business must issue a Form 1099 when a debt is discharged not only upon action of the creditor but also when state law makes a debt uncollectible.

In Chief Counsel Advice 201928014, IRS stated that a C corporation utilizes current year charitable contributions before using the earliest carryforward year; the Advice explains the complex interaction between the corporate charitable deduction and a net operating loss carryforward or carryback.

PROCEDURE

Public Law 116-25, the Taxpayer First Act:

●          Places the IRS Office of Appeals directly under the IRS Commissioner and, effective one year after enactment, allows most taxpayers access to the nonprivileged portion of their file for an appeal.

●          Increases the minimum penalty for late filing and late payment from $205 to $330 where the taxpayer is more than two months late, effective with 2019 returns.

●          Allows IRS to refer cases to outside collection agencies as soon as two years from assessment effective 2021 and permits them on enactment to offer payment plans of up to seven years.

●          Prohibits the transfer to outside collection agencies of cases where taxpayer income is not in excess of 200 percent of the poverty level or those where substantially all income is from social security disability, effective 2021.

●          Limits seizures in “structuring” transactions to illegal source income or other violations of law, effective on enactment.

●          Eliminates the filing fee for Offers in Compromise for individual taxpayers with adjusted gross income for the most recent available year at no more than 250 percent of the applicable poverty level, effective on enactment.

●          Allows de novo review by the Tax Court of innocent spouse claims denied by IRS Appeals,  effective on enactment.

In United States v. Planes, 124 AFTR2d 2019-5108, a Florida Federal District Court agreed that limited liability entities should be disregarded when an individual owing more than $9 million in Trust Fund Recovery Penalties moved money between at least ten entities at will to hinder collection efforts, the Court enjoining further transfers.

In Kohan v. Commissioner, TC Memo 2019-85, the Tax Court determined that the statute of limitations on assessment remained open nine years after tax years in issue where a dentist reported gross receipts from insurance carriers but did not report over $745,000 paid directly to him by patients over two years, the Court finding fraud through maintaining inadequate records, deliberate concealment and failure to cooperate with IRS.

In Ogden v. Commisioner, TC Memo 2019-88, the Tax Court denied innocent spouse relief to a disabled individual as to failure to report her own disability income when she could not prove that she was the victim of abuse.

Form 1099-NEC per a 2020 draft will replace Form 1099-MISC for reporting nonemployee compensation; it has a due date of January 31.

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