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Federal Tax Update – April 2019

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

INDIVIDUALS

Proposed Regulations under Code Section 1400Z, define “substantially all” as at least 70 percent in the context of percentage of tangible assets in a qualified opportunity zone but define “substantially all” as at least 90 percent in the context of the holding period.

In Clay v. Commissioner, 152 TC No. 13, the Tax Court concluded that members of a Native American tribe receiving per capita distributions from the casino on tribal lands were subject to tax on the distributions as the payments were not directly derived from the land which would have exempted the distributions from tax. 

In McNely v. Commissioner, TC Memo 2019-39, the Tax Court under pre-2018 law denied a couple a theft loss for a fraudulent investment scheme because they failed to file an insurance claim and, in addition, could not show the unlikelihood of restitution.

In Brown v. Commissioner, TC Memo 2019-30, the Tax Court determined that the “tax home” of a CFO was where his sole service recipient was in New Jersey and not where his family was in Georgia making nondeductible his unreimbursed travel between locations.

In Program Manager Technical Advice 2019-2, IRS stated that it will deny the child tax credit to persons who have religious objections to obtaining social security numbers.

RETIREMENT AND ESTATE PLANNING

In In Re:  Jones, 123 AFTR2d 2019-________, an Illinois Bankruptcy Court held that an IRA remained protected in bankruptcy despite being commingled shortly before the filing of the bankruptcy with non-retirement funds for the up to 60 day period permitted under law.

In United States v. Johnson, 123 AFTR2d 2019-565, the Tenth Circuit Court of Appeals reversed a Utah Federal District Court and determined that a state statute of limitations restricting claims against third party beneficiaries of an estate to six years was not applicable to claims by IRS which enjoys a ten year limitations period under federal law.

In Revenue Procedure 2019-19, IRS expanded the Self-Correction Program (SCP) to allow more corrections to operational errors and inadequate documents without having to go through the Voluntary Correction Program (VCP).

BUSINESS

In Estate of Ronning v. Commissioner, TC Memo 2019-38, the Tax Court declined to allow expenses beyond the limited deductions allowed by IRS where a developer kept haphazard records.

In Zhou v. Commissioner, TC Summary Opinion 2019-6, the Tax Court found that a couple maintained contemporaneous mileage records for management of their investment properties and allowed transportation expense but disallowed most other deductions for failure to supply the required documentation and/or proof that it was a business rather than a personal expense.

In Brown v. Commissioner, TC Memo 2019-30, the Tax Court agreed with IRS that a consultant who lived in Georgia with his wife and who worked as a consultant an average of four days per week in New Jersey could not deduct travel expenses between the locations inasmuch as his “tax home” was in New Jersey and he traveled to Georgia for a personal purpose. 

In Syzygy Insurance Company, Inc. v. Commissioner, TC Memo 2019-34, the Tax Court again struck down use of a captive insurance arrangement for lack of distribution of the risk.

In Cavanaugh v. Commissioner, 123 AFTR2d 2019-1279, the Fifth Circuit Court of Appeals agreed with the Tax Court that payments by an S corporation to settle a wrongful death claim by the family of the girlfriend of the CEO and sole stockholder for a cocaine overdose while on vacation were nondeductible as they did not arise in connection with profit-making activities.

In Ferguson v. Commissioner, TC Memo 2019-40, the Tax Court reviewed a settlement payment by a contractor deducted on a Schedule C and determined that the source of the claim was alleged mistakes by each of two controlled entities, one of which recorded the check as a loan payable to the contractor individually, allowing a 50 percent deduction for a constructive payment by the entity recording the payable but allowing the other 50 percent of the settlement to be deducted only as an employee business expense.

In Steiner v. Commissioner, TC Memo 2019-25, the Tax Court agreed with IRS that a couple who chartered their yacht only once during the three-year period that it was available for renting was not engaged in an activity operated for profit given the absence of a formal business plan and the lack of expertise.

PROCEDURE

In Roth v. Commissioner, 123 AFTR2d 2019-663, the Tenth Circuit Court of Appeals agreed with the Tax Court that required supervisory approval of a penalty assessment can occur at any time in the administrative process or during Tax Court litigation as long as it is concurrent with the “initial determination” of the penalty.

In Dewees v. United States, 123 AFTR2d 2019-1454, the District of Columbia Circuit Court of Appeals agreed with the District Court that the FBAR penalty did not violate due process (5th Amendment) or equal protection (14th Amendment) and was not an excessive fine (8th Amendment).

In Baldwin v. United States, 123 AFTR2d 2019-619 the Ninth Circuit Court of Appeals reversed a California Federal District Court and acquiesced in a 2011 retroactive regulation that required direct proof of timely mailing and/or delivery and threw out the common law “mailbox rule” which allowed entry of circumstantial evidence; the Courts were deeply divided prior to the regulation.

In Timbron International Corporation v. Commissioner, TC Memo 2019-31, the Tax Court reiterated that it could not consider a Petition filed by a corporation whose powers were suspended by the state of incorporation unless the charter were reinstated during the 90-day period following the notice of deficiency.

In Gold Forever Music, Inc. v. United States, 123 AFTR2d 2019-1456, the Sixth Circuit Court of Appeals reversed a Michigan Federal District Court and found that royalties paid to a musical publishing company were not fixed in amount, thus a levy did not apply to future payments four years later (the owner was the co-author of a number of songs by the Supremes, Michael Jackson and Marvin Gaye among others).

In Francel v. Commissioner, TC Memo 2019-35, the Tax Court denied innocent spouse status to a dentist whose wife took funds from his medical practice, the Court stating that the unreported income was attributable to the husband as well as the wife; the Court noted that the wife moved back in with the husband after she got out of jail despite the practice obtaining a judgment against her for embezzlement. 

In In Re:  Hugger, 123 AFTR2d 2019-1426, a Ninth Circuit Court of Appeals Bankruptcy Appellate Panel agreed with an Arizona Bankruptcy Court that a debtor who filed too early to discharge income tax liabilities and was discharged could not set it aside and subsequently refile when the time period for discharge of tax debts had passed.

In In Re:  Cousins, 123 AFTR2d 2019-________, a Louisiana Bankruptcy Court determined that the individual shared responsibility payment is a tax and not a penalty; the Courts are divided on the issue.

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