Document

Federal Tax Update – August 2020

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

INDIVIDUALS

In Brzyski v. Commissioner, TC Summary Opinion 2020-25, the Tax Court denied dependency allowances under pre-2018 law for an individual claiming a common law marriage to the mother of the children, noting that one night together in a state recognizing common law marriages is insufficient particularly when he referred to the children’s mother as his fiancee. 

In Perkins v. Commissioner, 126 AFTR2d 2020-_______, the Second Circuit Court of Appeals agreed with the Tax Court that an enrolled member of the Seneca Nation of Indians was properly subject to income tax on a gravel business on land belonging to the Nation; the Court looked at 1794 and 1842 treaties and found no individual exemption from income derived from the land.

In Connell v. Commissioner, 126 AFTR2d 2020-5574, the Third Circuit Court of Appeals agreed with the Tax Court that cancellation of a broker’s debt to his company was taxable as ordinary income and not capital gain for transferring his book of business.

In Matzkin v. Commissioner, TC Memo 2020-117, the Tax Court determined that a dentist got no added basis through a buyout of his wife’s marital interest in assets or by his payment of attorney fees.

In Johnson v. United States, 126 AFTR2d 2020-________, a Nevada Federal District Court found that a couple with four rental properties, two of which were not rented during the years in issue and two that were rented by property management companies, did not take the wife to 750 hours in a real estate activity for purpose of utilizing the losses as a real estate professional

In Eger v. United States, 126 AFTR2d 2020-________, the Ninth Circuit Court of Appeals agreed with a California Federal District Court that properties with average use under seven days are not rental properties under the Regulations such that owners cannot argue that they are real estate professionals potentially able to use losses against nonpassive income; the Court noted that only “creative tax lawyers” could argue that the customer was not the user of the property but instead was the rental management company.

In Winslow v. Commissioner, TC Summary Opinion 2020-22, the Tax Court disagreed with the IRS and found under pre-2018 law that an exchange of emails setting support payments for the wife and showing her acceptance constitutes a written agreement between the spouses. 

In Emanouil v. Commissioner, TC Memo 2020-120, the Tax Court allowed a deduction for a developer donating three parcels of land to the town where the donation was not contingent on approval of the development; the Court also found that the income tax statement, despite some missing information, was in substantial compliance such as not to disqualify the donation.

In Cottonwood Place LLC v. Commissioner, TC Memo 2020-115, and in Red Oak Estates LLC v. Commissioner, TC Memo 2020-116, the Tax Court again denied charitable deductions for conservation easements where a possible future extinguishment would not pay a proportionate share of the proceeds on any increase in value attributable to improvements.

In Notice 2020-65, IRS provided limited guidance on the prior Presidential Memorandum permitting deferral of the employee portion of social security taxes from September-December 2020 to January-April 2021 on a ratable basis; the deferral is available only in the case of an employee grossing $4,000 or less for a biweekly pay period or equivalent and is not employer mandated.

The IRS website, citing Notice 2006-59, sets forth that an employee who donates leave under an employer leave-sharing plan to assist other employees adversely affected by COVID-19 does not create taxable income to employees who donate.

In Chief Counsel Advice 202035011, IRS advised that the receipt of virtual currency for services generates ordinary income and may be subject to self-employment tax depending on circumstances. 

RETIREMENT AND ESTATE PLANNING

In an FAQ on the IRS website, IRS stated that a taxpayer cannot rollover an outstanding loan balance from a retirement plan into an IRA inasmuch as IRAs cannot make loans and a rollover would disqualify the IRA. 

In Letter Ruling 202033008, IRS declined to waive the 60-day rollover rule where a taxpayer’s real estate agent suggested that the taxpayer pay cash for a home and put the funds back in his IRA upon sale of the current residence and did not mention the 60-day rule.

BUSINESS

Final Regulations under Code Section 162 allow a deduction for promotional rather than charitable expense for payments to charitable organizations bearing a direct relationship to a taxpayer’s business made with a reasonable expectation of financial return commensurate with the amount of the payment. 

In VHC Inc. v. Commissioner, 126 AFTR2d 2020-5578, the Seventh Circuit Court of Appeals agreed with the Tax Court that purported loans in excess of $132 million over a 16-year period with only $39 million repaid did not give a bad debt deduction to the lender entity, owned by the father, as the Court agreed that there was no likelihood of repayment from the borrower which was owned by the son of the owner of the lender entity.

In Brashear v. Commissioner, TC Memo 2020-122, the Tax Court stated that involvement in “projects” is not necessarily a trade or business, disallowing losses claimed from a “development project” and a “waste management” project.

In Sham v. Commissioner, TC Memo 2020-119, the Tax Court in a detailed 94 page opinion denied most business expenses as well as additional personal expenses due to lack of substantiation; the Court also disallowed other expenses for developing “soft skills” and “general self-help guidance” including hypnosis and travel to India and Europe for lack of relevance.

In Preimesberger v. United States, 126 AFTR2d 2020-5552, a California Federal District Court refused to give summary judgment in favor of the Government on the willfulness of a 10 percent owner of a nursing home facility who did not pay the payroll taxes due to slow payments by medicare as well as a bank loan compelling the payment of other bills including net payroll.

PROCEDURE

In Babu v. Commissioner, TC Memo 2020-121, the Tax Court agreed with the failure of IRS to abate an accuracy penalty in the case of an attorney who had taken tax courses and owned a business supplying owners with software for return preparation and did not report over $2.9 million of flowthrough income from the entity over a two-year period.

In Thompson v. Commissioner, 155 TC No. 5, the Tax Court determined that supervisory approval is not required of discretionary penalties when a resolution is reached at the agent level inasmuch as the examination is not considered complete. 

In Hidy v. United States, 126 AFTR2d 2020-5545, a Nebraska Federal District Court found no reasonable cause for abating the non-willful FBAR penalties for five years where the taxpayer had ten different accounts at eight different foreign banks of up to $1 million in the aggregate; although the taxpayer prepared his own return, the Court said that he should have looked into the question on Schedule B of the tax return.

In Gregory v. United States, 126 AFTR2d 2020-________, the Court of Federal Claims agreed with the IRS denial of a refund based on an amended return where the return was not signed; the Court noted that the requirement of a signature was statutory and could not be waived. 

In Porporato v. Commissioner, TC Summary Opinion 2020-24, the Tax Court stated that, where a taxpayer’s refund from an overpayment is barred due to the statute of limitations, any offset of another year is also barred. 

In Yiu v. Commissioner, TC Summary Opinion 2020-23, the Tax Court determined that Congress intentionally denied claimants of innocent spouse status a refund if proceeding under Section 6015(c) as opposed to Subsections (b) or (f). 

In News Release 2020-182, IRS announced that Form 1040-X, amending individual income tax returns, can now be filed electronically. 

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