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Federal Tax Update – April 2020

INDIVIDUALS

In Hamilton v. Commissioner, 125 AFTR2d 2020-1618, the Tenth Circuit Court of Appeals agreed with the Tax Court that a couple could not claim the insolvency exception on the discharge of loans they took out for their son’s medical school when at least $300,000 in assets were moved into the son’s name but used at least in part for living expenses of the couple.

In Hakkak v. Commissioner, TC Memo 2020-46, the Tax Court found that a successful personal injury attorney could not substantiate 1,500-1,600 hours in real estate where most of the work was done by a management company; the Court concluded in any event that most of the hours actually spent were those of an investor which do not get included in the count.

In Campbell v. Commissioner, TC Memo 2020-41, the Tax Court denied a charitable deduction for designer eyeglass frames purchased for $50,000 and donated after one year at an alleged value of $225,000; IRS argued successfully that there was not donative intent and that the appraisal lacked sufficient specificity. 

In Hoffman Properties II LP v. Commissioner, 125 AFTR2d 2020-1708, the Sixth Circuit Court of Appeals agreed with the Tax Court that a $15 million charitable tax deduction for keeping an historic facade was invalid because the facade could be changed if the American Association of Historic Preservation did not act in a 45-day period following a request for the change. 

In Littlejohn v. Commissioner, TC Memo 2020-42, the Tax Court concluded that the failure of real estate agents to intentionally deceive the taxpayers about defects was not a crime under state law and denied a deduction for a theft loss.

RETIREMENT AND ESTATE PLANNING

In Laue v. Commissioner, TC Summary Opinion 2020-14, the Tax Court ruled that the exception to the 10 percent penalty for early withdrawal from an employer sponsored retirement plan upon reaching age 55 did not apply to an individual who separated from service when he was 46 and did a withdrawal after reaching age 55 as he needed to be employed at age 55 for this exception to apply.

In Estate of Moore v. Commissioner, TC Memo 2020-40, the Tax Court found an estate liable for millions of dollars in gift taxes, finding no business purpose for a transfer of assets into multiple trusts and entities while terminally ill and knowing that the farm would be sold rather than managed in the near future. 

In Estate of Streightoff v. Commissioner, 125 AFTR2d 2020-1495, the Fifth Circuit Court of Appeals agreed with the Tax Court that a revocable trust with an 88.99 percent interest in a limited partnership was not a mere assignee but was rather the transferee owner of the partnership interest resulting in a reduction of the discounting.

BUSINESS

In Williams v. Commissioner, TC Memo 2020-48, the Tax Court noted that an “ordinary and necessary” business expense cannot occur until operations have actually commenced, finding in this case that the pursuit of target companies in the first year was insufficient but engaging in support operations for related companies in the second year was sufficient.

In Notice 2020-32, IRS clarified that expenses paid with forgiven Paycheck Protection Program (PPP) funds cannot be deducted (legislation is being introduced in Congress to override this Notice).

In Frequently Asked Questions, IRS stated that a business receiving a Paycheck Protection Program (PPP) loan, even if not forgiven, cannot claim the Employee Retention Credit, also clarifying that an “essential business” not required to close does not have a suspension of operations by virtue of its customers being required to stay at home but may qualify under facts and circumstances if its suppliers suspend operations by governmental order; the FAQ also stated that a “non-essential business” capable of remote operations does not qualify for the credit.

In Letter Ruling 202014019, IRS ruled that an organization operating a medical marijuana dispensary cannot pass the operational test for exempt status given the illegality under federal law.

PROCEDURE

In Taylor Lohmeyer Law Firm PLLC v. United States, 125 AFTR2d 2020-________, the Fifth Circuit Court of Appeals agreed with a Texas Federal District Court that a law firm cannot avoid turning over names of clients participating in a tax shelter as privilege does not generally go to identification of clients except where revelation would actually disclose the privileged communication.

In Collins v. Commissioner, TC Memo 2020-50, the Tax Court agreed with IRS that a tax preparer committed fraud on his own return where a bank account analysis of 22 accounts showed an understatement of $160,000 of income over a two-year period.

In United States v. LaRosa, 125 AFTR2d 2020-________, a Maryland Federal District Court indicated that an innocent spouse request stays a foreclosure action by IRS against real property until the innocent spouse claim is adjudicated by the Tax Court.

In Revenue Ruling 2020-24, IRS announced that waivers of the five-year net operating loss carryback period for 2018 and 2019 tax years, if desired for either or both, must be made on a timely basis on the tax return for the first year ending after March 27, 2020.

In Notice 2020-23, IRS extended additional filing and payment deadlines until July 15, 2020 that would have fallen between April 1 and July 14, including estate tax returns and certain nonprofit returns, and indicated that the July 15 date applies to extended deadlines as well as to claims for refund, Tax Court petitions, tax elections and administrative filings otherwise due within that period; the Notice gives IRS an extra 30 days for assessment, collection or filing of suit where the original deadline fell within this period.

In Action on Decision 2020-03, IRS indicated it disagrees with the decision of the Fifth Circuit Court of Appeals in Rothkamm v. United States, 116 AFTR2d 2015-6198, which held that the statute of limitations on a wrongful levy claim does not run while the Taxpayer Advocate is handling the issue.

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