Document

Federal Tax Update – April 2018

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

INDIVIDUALS

In Hatcher v. Commissioner, 121 AFTR2d 2018-1397, the Fifth Circuit Court of Appeals agreed with the Tax Court that an individual who lent her then boyfriend in excess of $582,000 was not in the business of lending and could only claim a capital loss when only $7,000 of it was repaid.

In Davidson v. Commissioner, TC Memo 2018-38, the Tax Court determined that payments made toward marital debt were not deductible alimony as the family law court had decreed that the former wife should not receive any alimony and that the obligation did not necessarily terminate upon the recipient’s death under Arkansas law.

In Davis v. Commissioner, TC Memo 2018-56, the Tax Court denied a deduction for $1,700 of cash donations and $1,391 of noncash donations to an inactive church where the donor was the church’s president and senior minister and the only substantiation was a non-contemporaneous letter from the taxpayer himself.

In Wendell Falls Development, LLC v. Commissioner, TC Memo 2018-45, the Tax Court denied a $1.8 million charitable contribution deduction for land donated to a county for use of a park inasmuch as the Court determined that a quid pro quo would exist as the homes to be developed near the park would become more desirable and hence the conservation easement did not diminish value.

In Notice 2018-37, IRS announced that future regulations will apply pre-2019 law to income from an alimony trust payable to a former spouse pursuant to a divorce or separation instrument executed before 2019 (unless modified after that date with language stating that post-2018 law applies).

RETIREMENT PLANS

In Pizza Pro Equipment Leasing, Inc. v. Commissioner, 121 AFTR2d 2018-682, the Eighth Circuit Court of Appeals agreed with the Tax Court that a defined benefit plan with a normal retirement age of 45 was overfunded in light of the special limitations where a stated normal retirement age is less than 62.

In Marks v. Commissioner, TC Memo 2018-49, the Tax Court determined that deemed distributions of two promissory notes from an IRA were not income because the IRA was disqualified a decade prior to the distributions for impermissible loans.

BUSINESS

In Velez v. Commissioner, TC Memo 2018-46, the Tax Court refused to allow a tax attorney to deduct $19,000 in automobile expenses although he maintained five offices across Ohio as he neither maintained a formal mileage log nor could produce a calendar (he tried unsuccessfully based on credit card statements to reconstruct a log two days before trial); in Dimitrov v. Commissioner, TC Summary Opinion 2018-21, the Tax Court disallowed automobile expenses of a business which purchased and renovated real property where contemporaneous records were not kept and summaries contained numerous irregularities.

In Moore v. Commissioner, TC Memo 2018-58, the Tax Court disallowed meals and entertainment expenses of an online instructor as she could not show a business purpose for those expenses she could prove; in Vallejo v. Commissioner, TC Memo 2018-39, the Tax Court disallowed business expenses proven by a part-time self-employed engineer because he failed to tie in the purpose of the expenses, noting that his testimony was “irrelevant and unhelpful.”

In Nicholson v. Commissioner, TC Summary Opinion 2018-24, the Tax Court allowed some expenses of an engineer who moonlighted as a musician and produced two albums despite showing no revenues; however, the Court disallowed expenses which allegedly “enhanced his artistic creativity and productivity” such as dining out with his children, bowling, hiking and camping, and traveling to new destinations.

In Povolny Group, Incorporated v. Commissioner, TC Memo 2018-37, the Tax Court held that payments from three entities to a fourth were capital contributions and also constructive dividends to the individual in the absence of a note and consistency among the parties; the Court noted that “[t]aking money from one corporation and routing it to another will almost always trigger bad tax consequences unless done thoughtfully.”

In Williams v. Commissioner, TC Memo 2018-48, the Tax Court determined that a chiropractor who had 15 years of losses from a ranch did not have a profit motive inasmuch as he did not have a business plan, financial statement or other similar records which might have showed a profit intent.

In Sherman v. Commissioner, TC Summary Opinion 2018-16, the Tax Court gave the same result as in a case five years earlier and found that nonqualified deferred compensation benefits from Mary Kay are subject to self-employment tax because the payments are tied to prior labor – in this case average commissions over the five years prior to retirement.

In Notice 2018-28 and in News Release 2018-82, IRS provided interim guidance for the business interest expense limitation under the Tax Cuts and Jobs Act, indicating that consolidated groups share a single $25 million revenue base before application of the limitation.

PROCEDURE

In United States v. Law Offices of Forbush-Moss PSC, 121 AFTR2d 2018-________, a Kentucky Federal District Court granted a permanent injunction against the law firm and sole owner requiring compliance with tax laws; the Court found it “necessary and appropriate” to issue the injunction following years of continued noncompliance with filings and required payments.

In United States v. Garrity, 121 AFTR2d 2018-629, a Connecticut Federal District Court, following the weight of authority on both points, held that an FBAR violation can be shown by the preponderance of the evidence and that willfulness can be shown by reckless conduct as an alternative to intentional violation of a known legal duty.

In In Re:  Parrish, 121 AFTR2d 2018-1413, a North Carolina Bankruptcy Court concluded that the individual shared responsibility penalty for failure to obtain health insurance is, in fact, a penalty and not a tax for priority purposes in a bankruptcy action.

In Schuster v. Commissioner, 121 AFTR2d 2018-1228, the Eleventh Circuit Court of Appeals agreed with the Tax Court that an erroneous credit to a taxpayer’s account not actually refunded to him but rather credited as an overpayment to the following year is not a refund subject to a two-year statute of limitations on IRS recovery; the Court concluded that the usual ten-year statute on collections applies in this case.

In United States v. Hendrick, 121 AFTR2d 2018-665, a Pennsylvania Federal District Court agreed with a prior decision of the Ninth Circuit Court of Appeals that requesting a CDP hearing suspends the statute of limitations during its pendency plus 120 days as opposed to the 90 days set forth directly in the statute; the Court indicated that the 90 days does not start to run until the 30-day appeal period has concluded irrespective of whether the taxpayer filed an appeal.

In United States v. Gerard, 121 AFTR2d 2018-640, an Indiana Federal District Court set aside the transfer of a wife’s interest in tenancy by the entirety property to her husband where she owed payroll taxes; she unsuccessfully argued that the transfer was for consideration inasmuch as he provided most of the funds for acquisition of the properties and she had consumed more of the joint assets in the past.

In In Re:  Quiroz, 121 AFTR2d 2018-________, an Oklahoma Bankruptcy Court determined that tax debts could be discharged in bankruptcy, finding no willful attempt to evade the payment of taxes in the case of an immigrant who was not sophisticated and did not know how to use a computer notwithstanding the submission of a grossly inaccurate 433A-OIC (blamed on his accountant) and expenditures for a Cadillac and Jaguar, a $4,000 charitable donation and $5,000 per year in withdrawals at casinos.

In Letter Ruling 201815005, IRS ruled that grants to homeowners to modify their dwellings to secure them to their foundations and to prevent lateral movement are taxable to homeowners in that they do not qualify under the “general welfare” exclusion as the payments were not tied to individual or family need.

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