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Federal Tax Update – April 2017

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

INDIVIDUALS

In Alexander v. Commissioner, TC Summary Opinion 2017-23, the Tax Court determined that a disbarred attorney who assisted a lawyer for payment had taxable compensation and did not receive a gift for the work done.

In Hurford Investments No. 2, Ltd. v. Commissioner, Docket No. 23017-11, the Tax Court granted summary judgment to a taxpayer who had argued that a transferee of phantom equity has a capital asset following a taxable transfer with the ability to get a step up in tax basis as the result of death.

In Penley v. Commissioner, TC Memo 2017-65, the Tax Court found that a full-time employee did not work more hours in real estate selling and managing three rental properties than the 2,194 hours he spent in his unrelated employment; in Windham v. Commissioner, TC Memo 2017-68, the Tax Court determined that a stockbroker who averaged 2½ hours a day in the office and who claimed 900 hours a year managing 11 properties was a real estate professional and met the test for material participation on a property by property basis, allowing her to deduct losses on these properties.

In Wainwright v. Commissioner, TC Memo 2017-70, the Tax Court determined that an individual who owned other properties with a friend of over 35 years was an equitable owner of an interest in another property titled solely in the friend’s name where he was found to have benefits and burdens of ownership as he paid mortgage payments and maintained the property.

RETIREMENT PLANS

In Trimmer v. Commissioner, 148 TC No. 14, the Tax Court determined that IRS abused its discretion in not waiving the 60-day rollover period in the case of a retired police officer suffering from depression who put IRA distributions in a joint bank account with his wife and did not make a correction for almost a year until meeting with his tax preparer.

ESTATES

In Estate of Koons v. Commissioner, 119 AFTR2d 2017-________, the Eleventh Circuit Court of Appeals agreed with the Tax Court’s limitation of a lack of marketability discount to 7½ percent instead of 31.7 percent claimed where most assets of the limited liability company were liquid (the Court also denied the estate a deduction for interest on a loan from the LLC as the entity could have made a distribution to the estate).

BUSINESS

In Zang v. Commissioner, TC Memo 2017-55, the Tax Court determined that amounts transferred from a parent company to the son of the owner who managed the subsidiary company were reportable income; the son and his wife attempted to treat the withdrawals as loans, altering the QuickBooks registers in the memo line of checks to identify the payments as loans.

In Musa v. Commissioner, 119 AFTR2d 2017-706, the Seventh Circuit Court of Appeals agreed with the Tax Court that the “duty of consistency” did not allow an employer to claim an income tax deduction for wages not reported on any employment tax return when the statute of limitations for amending the applicable employment tax returns had expired.

In Castigliola v. Commissioner, TC Memo 2017-62, the Tax Court determined that three co-owners of a professional limited liability company engaged in the practice of law were liable for self-employment tax not only on their guaranteed payments but also on their flowthrough income.

In United States v. Commander, 119 AFTR2d 2017-620, a New Jersey Federal District Court found a 50 percent owner of a company to be responsible for the unpaid trust payroll taxes although the co-owner had primary financial responsibility; after the taxpayer had knowledge of the unpaid taxes, sufficient funds existed to pay the taxes and he had check signing authority.

In Hodges v. United States, 119 AFTR2d 2017-653, the Tenth Circuit Court of Appeals agreed with an Oklahoma Federal District Court that a temporary manager of several nursing homes was liable for the Trust Fund Recovery Penalty on unpaid payroll taxes, rejecting his defenses of possible harm to nursing home residents and reliance on an Oklahoma statute giving nursing home temporary managers the ability to contract for indebtedness as necessary.

In Action on Decision 2017-2, IRS announced that it disagreed with the decision of a Louisiana Federal District Court in Stine, LLC v. United States, in which the Court had determined that a building is placed in service when substantially completed and in a condition or state of readiness for business as evidenced by an occupancy permit and not at the later time when actually first used.

In Action on Decision 2017-3, IRS announced that it disagreed with the decision of the Ninth Circuit Court of Appeals in Shea Homes, Inc. v. Commissioner reversing the Tax Court; the Ninth Circuit had allowed a developer using the completed contract method to report income and expenses on substantial completion of the entire community rather than on a home by home basis, at least where the homes shared community amenities.

In Action on Decision 2017-4, IRS indicated that it agreed with the result in Scott Singer Installations v. Commissioner in which the Tax Court had determined that a stockholder’s transfer of funds to a corporation cannot be considered a loan when there is no reasonable expectation of repayment as best evidenced by whether a disinterested creditor would lend funds to the business.

PROCEDURE

In Murray v. Commissioner, TC Memo 2017-67, the Tax Court assessed a penalty against a petitioner for instituting a proceeding primarily for delay when he first claimed that he was dead and then pretended that he had moved to Costa Rica.

In LG Kendrick, LLC v. Commissioner, 119 AFTR2d 2017-________, the Tenth Circuit Court of Appeals agreed with the Tax Court that a taxpayer who had a prior opportunity to contest the underlying tax liability is precluded from bringing up substantive issues at a Collection Due Process hearing, yet the Court stated that IRS in its discretion could hear substantive issues.

In Taft v. Commissioner, TC Memo 2017-66, the Tax Court gave innocent spouse relief to a nurse whose husband secretly liquidated corporate stock and retirement funds in order to pay for an affair and the husband signed his wife’s name on the authorization for electronic filing.

In Harris v. Commissioner, TC Summary Opinion 2017-21, the Tax Court gave innocent spouse status to a divorced woman as IRS could not prove that she knew her former husband was not operating a cattle farm for profit.

In Yancey v. Commissioner, TC Memo 2017-59, the Tax Court determined that a gambler’s ex-wife did not qualify for innocent spouse relief despite the decree putting responsibility on the husband, since, as the preparer of the return, he knew she was double counting his gambling losses.

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