Federal Tax Update – August 2018
Proposed Regulations under Code Section 164 generally deny a charitable deduction to the extent of any state or local tax credit for a contribution in lieu of payment of taxes; an exception is carved out where the tax reduction is no more than 15 percent of the amount transferred.
In Yaryan v. Commissioner, TC Memo 2018-129, the Tax Court allowed only a nonbusiness bad debt for losses incurred in a real estate joint venture as the taxpayer’s activities did not constitute a business (this case disfavors those hoping on a broad definition of business for the Section 199A deduction).
In Householder v. Commissioner, TC Memo 2018-136, the Tax Court agreed with IRS that a successful financial advisor was unable to take huge losses related to horse breeding inasmuch as he did not materially participate in the activity, the Court noting that “reading, talking and thinking” do not count toward the required hours nor do any hours which were expended solely for the purpose of avoiding passive losses.
In Harbor Lofts Associates v. Commissioner, 151 TC No. 3, the Tax Court determined that a long-term lessee could not claim a charitable deduction for the contribution of a façade easement as the leasehold was not a qualified real property interest.
In PBBM-Rose Hill, Limited v. Commissioner, 122 AFTR2d 2018-5131, the Fifth Circuit Court of Appeals agreed with the Tax Court that there were multiple deficiencies in an attempted easement in perpetuity and denied a charitable contribution for a conservation easement and concurred that a gross valuation misstatement penalty can apply when the issue is denial of a deduction.
In Letter Ruling 201831011, IRS ruled that recovery by an insured against an attorney for malpractice constitutes tax free recovery of capital where the lost monies would have been tax free due to physical injury.
In Thompson v. United States, 122 AFTR2d 2018-________, a California Federal District Court held that the exception to the 10 percent penalty in the event of an IRS levy does not apply to a withdrawal by the participant due to the threat of levy.
Proposed Regulations under Code Section 199A exclude real estate from the Qualified Business Income Deduction unless constituting a business under Code Section 162 (except in the case of rentals to a controlled business); the Proposed Regulations also contain anti-abuse rules to discourage a “specified service business” from spinning off nonprofessional functions, permit small amounts of specified service income by all businesses and adopt a very narrow “catch-all” as to when the principal asset is the “reputation or skill” of at least one employee.
In Allen v. United States, 122 AFTR2d 2018-5352, a Wisconsin Federal District Court found that a jury award of damages was taxable in its entirety based on a claim for lost farming profits; the taxpayer attempted to argue that a portion was nontaxable recovery of capital from stray voltage on his property diminishing his enjoyment but no evidence of such was presented at trial.
In Singh v. Commissioner, 122 AFTR2d 2018-5109, IRS disallowed approximately $200,000 in cost of goods sold, other business expenses and itemized deductions, constituting every deduction claimed on the return, because the taxpayer could not substantiate a single item, claiming his records were destroyed in a fire; in Weaver v. Commissioner, TC Summary Opinion 2018-40, the Tax Court denied all business expense deductions for a music production business which lacked substantiation and used almost exclusively rounded numbers.
In Forlizzo v. Commissioner, TC Memo 2018-137, an attorney with a master of laws in taxation degree was denied a deduction for the alleged worthlessness of an LLC interest when he presented no substantiation as to the entity’s worthlessness when certain individual assets did have value and the taxpayer did not abandon his interest.
In Becnel v. Commissioner, TC Memo 2018-120, the Tax Court disallowed a deduction related to ownership and operation of a $2 million yacht by a developer who tainted his case by labeling expenses under various nondescript categories.
In American Institute of Certified Public Accountants v. IRS, 122 AFTR2d 2018-5139, the DC Circuit Court of Appeals reversed a District of Columbia Federal District Court and held that required registration of unenrolled return preparers does not violate the Administrative Procedure Act.
In Azarian v. Commissioner, 122 AFTR2d 2018-5279, the Eighth Circuit Court of Appeals stated that it did not have jurisdiction to hear an appeal where the Tax Court reclassified distributions from an S corporation as wages for reason that the appeal arose from an employment tax audit and the Tax Court’s jurisdiction is limited to determining whether a worker is an employee or independent contractor (the decision forces affected taxpayers to pay, file a claim for refund and subsequently go into Federal District Court or US Claims Court).
In United States v. Erilus, 122 AFTR2d 2018-5493, a Florida Federal District Court followed precedent and found that an injunction against further tax preparation could be imposed on preparers with a history of preparing returns knowing that they were incorrect.
In Guerra v. Teixeira, 122 AFTR2d 2018-5124, a Maryland Federal District Court agreed with a prior decision out of Virginia that Code Section 7434(a), providing for civil damages for filing a fraudulent information return, was not intended to address situations where one receives a Form 1099 as an independent contractor rather than a W-2 as an employee.
In Norman v. United States, 122 AFTR2d 2018-5089, the Court of Federal Claims disagreed with two earlier 2018 Federal District Court decisions regarding the maximum amount of the FBAR penalty, allowing imposition of the increased statutory penalty notwithstanding that earlier regulations with the lower penalty have not been amended.
In In Re: Johnson, 122 AFTR2d 2018-________, a Georgia Bankruptcy Court held that an IRS tax lien does not have priority over judgment creditors until the notice of lien is filed.
In Bletsas v. Commissioner, TC Memo 2018-128, the Tax Court stated that the Trust Fund Recovery Penalty can be assessed against applicable individuals even where the entity is paying under an installment agreement.
In United States v. Brabant-Scribner, 122 AFTR2d 2018-5557, the Eighth Circuit Court of Appeals agreed with a Minnesota Federal District Court that, after balancing the equities, it could authorize forced sale of a principal residence notwithstanding the pendency of an Offer in Compromise (in this case the Offer was for $1,000 to settle $578,000 in debt).
In United States v. Orr, 122 AFTR2d 2018-________, a Texas Federal District Court permitted IRS to seize the community property interest of a tax delinquent in the marital home.
In United States v. Ness, 122 AFTR2d 2018-________, a Minnesota Federal District Court ruled that IRS may sell a remainder interest in property owned by a tax delinquent but subject to his parents’ life estate.
In In Re: Clothier, 122 AFTR2d 2018-5520, a Tennessee Bankruptcy Court engaged in statutory interpretation and determined that the pendency of a Chapter 13 reorganization does not extend the three-year period before filing and discharging taxes in a Chapter 7 bankruptcy.
In In Re: Harold, 122 AFTR2d 2018-________, a Michigan Bankruptcy Court denied discharge of two years in bankruptcy when the alleged original filing date of the return could not be proven and IRS records showed an original being submitted several days before the filing of the bankruptcy petition.
A National Taxpayer Advocate Blog criticized IRS policy not to copy taxpayer representatives on passport revocations arising from “serious tax delinquency.”