Document

Federal Tax Update – August 2017

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

INDIVIDUALS

In Lopez v. Commissioner, TC Memo 2017-171, the Tax Court determined that income earned by a child in a beauty pageant is reportable by the child and not by the parents notwithstanding a state law on legal entitlement to the winnings; the parents had attempted to deduct expenses which were ten times the amount of the income.

In Acone v. Commissioner, TC Memo 2017-162, the Tax Court found that a pilot for a Korean airline was ineligible for the income earned abroad exclusion even though he was “stationed” in a South Korean city because he spent 40 percent of each year in the United States and stayed only in hotels in South Korea while his family remained in the United States; the Court found that he was nothing more than a transient with no steps to establish bona fide residence.

In Thompson v. Commissioner, 120 AFTR2d 2017-5146, the Ninth Circuit Court of Appeals agreed with the Tax Court that an individual working in Antarctica could not claim the income earned abroad exclusion as Antarctica is a sovereignless region and not a foreign country.

In Gardner v. Commissioner, TC Memo 2017-165, the Tax Court, noting that “there is no hunting like the hunting for tax deductions”, agreed with IRS that a donation of 177 animal specimens by a big game hunter was worth $138,000 based on market price rather than the $1.426 million claimed by the taxpayer based on replacement cost.

In 310 Retail, LLC v. Commissioner, TC Memo 2017-164, the Tax Court allowed a deduction for a conservation easement by determining that the deed executed with the gift constituted a “contemporaneous written acknowledgement” and, by stating that there was “consideration of One Dollar ($1.00) and other good and valuable consideration”, it effectively set forth that no goods or services were provided in exchange for the contribution.

In BC Ranch LP v. Commissioner, 120 AFTR2d 2017-5469, the Fifth Circuit Court of Appeals determined that the ability to tweak boundaries of a conservation easement does not violate the “perpetuity” rule and remanded the case back to the Tax Court for further proceedings.

In McGuire v. Commissioner, 149 TC No. 9, the Tax Court refused to look at equitable issues and indicated that the law was clear and required a couple to repay an advance health care premium tax credit when their income rose during the year.

In Owens v. Commissioner, TC Memo 2017-157, an individual who had made at least 89 loans over a 35 year period was found to be in the business of lending.

In Hickam v. Commssioner, TC Summary Opinion 2017-66, the Tax Court agreed with IRS that a mortgage broker is not a real estate professional for purpose of the passive activity loss rules.

In CA 2017-1, IRS confirmed that settlement payments made by an oil company for home remediation following petroleum contamination are generally nontaxable as they are for lost value or capital; however, per diem meal payments are taxable if victims are provided with temporary housing including kitchens.

RETIREMENT PLANS

In Omoloh v. Commissioner, TC Summary Opinion 2017-64, the Tax Court sustained an early withdrawal penalty on a taxpayer who received IRA distributions as the Court failed to believe that he was at least age 59½; his certificate of naturalization, his college transcript and a court petition showed that he was less than age 59½ while a newly issued birth certificate obtained during the pendency of the case showed him to be two years older.

ESTATES

In Estate of Simmons v. United States, 120 AFTR2d 2017-5109, an Indiana Federal District Court determined that an IRS tax lien for back federal income taxes and trust fund recovery penalties had priority over the payment of administrative  expenses (in this case Personal Representative fees for the spouse) of an estate, stating that IRS may in its discretion not assert priority.

BUSINESS

In Avrahami v. Commissioner, 149 TC No. 7, the Tax Court took 105 pages to disallow a jewelry store chain’s deduction for payments to a captive insurance company where total insurance costs soared from $150,000 to $1.3 million under the captive; the Court declined to impose an accuracy penalty as the taxpayer relied upon professional advice.

In Kardash v. Commissioner, 120 AFTR2d 2017-5400, the Eleventh Circuit Court of Appeals agreed with the Tax Court that a stockholder who received dividend payments while the corporation was insolvent was subject to transferee liability notwithstanding that he was unaware that two co-owners had siphoned all of the cash out of the corporation.

In Letter Ruling 201731015, IRS determined that a software user group with membership limited to organizations licensed to use particular software does not qualify as a tax-exempt business league.

PROCEDURE

In Estate of Chicorel v. United States, 119 AFTR2d 2017-5152, a Michigan Federal District Court determined that the filing of a proof of claim in a probate court tolls the 10-year statute of limitations on collection as if IRS had filed suit.

In Borenstein v. Commissioner, 149 TC No. 10, the Tax Court recognizing that an odd result was created, interpreted a statute literally and denied a refund of an overpayment to an individual who filed a tax return between two and three years after the deemed date of prepayments but received a notice of deficiency between one and two years from the extended due date; according to the Court, the three-year lookback period is inapplicable where a notice of deficiency is issued prior to the third year after the extended due date.

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