Federal Tax Update – December 2016
P.L. 114-292, the Combat-Injured Veterans Tax Fairness Act, extended the statute of limitations on recovery of improper withholding on disability benefits from combat injuries not subject to taxation where the Department of Defense improperly withheld taxes; the statute of limitations on refunds will not expire until one year after affected individuals are provided notice of the improper withholding along with instructions for filing an amended return.
In Elkins v. United States, 118 AFTR2d 2016-________, an Ohio Federal District Court determined that the exclusion for wrongfully incarcerated individuals receiving compensation does not extend to family members for loss of consortium.
In Long v. Commisioner, TC Summary Opinion 2016-88, the Tax Court allowed an individual almost continuously employed to deduct the cost of an MBA degree from Wharton as an employee business expense as the degree did not qualify him for a new trade or business.
In Polsky v. Commissioner, 118 AFTR2d 2016-________, the Third Circuit Court of Appeals agreed with a Pennsylvania Federal District Court that the child tax credit is unavailable for a disabled child over the age of 17 despite the child continuing as a dependent.
In Letter Ruling 201648001, IRS concluded that payments of spousal support not terminating on the recipient’s death under the terms of the document did not terminate automatically under Minnesota law as a result of language in the Separation Agreement removing jurisdiction of the Court to effectuate a modification.
In Ozimkoski v. Commissioner, TC Memo 2016-228, the Tax Court determined that a widow owed tax on amounts improperly rolled over into her IRA that should have been paid to her late husband’s estate where she utilized the funds to effectuate a settlement with his son; she was also liable for the penalty on early withdrawal.
In Estate of Backemeyer v. Commissioner, 147 TC No. 17, the Tax Court allowed a farmer’s widow to deduct expenses for seed, fertilizer and fuel in the year following his death although they were deducted by the husband in the preceding year; notwithstanding that no estate tax was paid, the Court allowed the heir a deduction for the business use of inherited property.
In Wasco Real Properties I, LLC v. Commissioner, TC Memo 2016-224, the Tax Court determined that an almond growing farm partnership must capitalize property taxes and interest because the land is used to grow the almond trees; the taxpayer argued unsuccessfully that the property taxes and interest related not to the production of the trees but to the underlying farmland.
In Chaganti v. Commissioner, TC Memo 2016-222, the Tax Court determined that an attorney could not deduct an $18,000 court sanction, noting that allowing such a deduction would substantially dilute the actual punishment imposed.
In Transupport, Inc. v. Commissioner, TC Memo 2016-216, the Tax Court agreed with IRS that four sons of the business owner, each averaging $657,000 in compensation, received excessive compensation from a C corporation where they failed to detail their purported tasks before the Court which reduced the average allowable deduction to $232,000 apiece; the father’s compensation which averaged $477,000 per year was reduced to an average of $353,000.
In Hargis v. Commissioner, TC Memo 2016-232, the Tax Court found that a couple had insufficient basis in a business taxed as an S corporation as loans were not made directly by the taxpayers although they were called “co-obligors” rather than “guarantors” on certain of the obligations; rather, the Court considered the loans as running directly between the lenders and the operating company.
In Mack v. Commissioner, TC Memo 2016-229, the Tax Court required a partner in a New York law firm to report his distributive share of partnership income; he had reported only a fraction of this amount, claiming that remaining amounts were left in the Firm to pay partnership expenses.
In Carmody v. Commissioner, TC Memo 2016-225, the Tax Court determined that a salesman raced horses as a hobby and did not have a profit motive; he had 20 straight years of losses despite some winning horses, never creating a formal business plan, budget or projections.
In Hylton v. Commissioner, TC Memo 2016-234, the Tax Court found that a horse breeding, training, showing and sales activity was not engaged in for profit despite the taxpayer’s extensive knowledge of horses and the running of the operation in a business like manner where expenses over a 17-year period exceeded $18 million with revenues of $1.3 million and not a single profitable year.
In Moyer v. Commissioner, TC Memo 2016-236, the Tax Court, noting that an activity not engaged in for profit may be broader than a hobby, determined that an individual engaged in human relations training who ran losses for six consecutive years after losing Dupont as a primary client could not deduct those losses; the Court found that the activity was used “as a vehicle to claim various personal, living or family expenses as business deductions.”
In Noffke v. United States, 118 AFTR2d 2016-________, the Court of Federal Claims determined that a CPA who was chief financial officer and executive vice president of a corporation was liable for unpaid payroll taxes although the approval of the chief executive officer was needed to pay bills; the CFO had check-signing authority.
The Office of Associate Chief Counsel (Passthroughs and Special Industries) announced that IRS will cease rulings on multiple S corporation issues including whether S corporation status is jeopardized by unplanned disproportionate distributions, missing information on Form 2553 or a lost S status confirmation.
In Technical Advice Memorandum 201650014, IRS determined that a corporation responsible for grading and soil compaction was involved in residential construction such that it was eligible to use the completed contract method of accounting.
In Chief Counsel Advice 201653017, IRS stated that a C corporation cannot avoid the accumulated earnings tax by lacking liquidity where activities consisted solely of holding various partnership interests.
In Bohanec v. United States, 118 AFTR2d 2016-5537, a California Federal District Court determined that a couple’s failure to timely file an FBAR report was willful where they stopped using a bookkeeper or keeping any books after opening a foreign bank account and made several misrepresentations under penalty of perjury.
In Snodgrass v. Commissioner, TC Memo 2016-235, the Tax Court rejected the claim of a nonfiler since 1983 that IRS did not send Notices of Deficiency to her last known address.
In United States v. Peeler, 118 AFTR2d 2016-________, a Mississippi Federal District Court permitted the Government to foreclose its tax liens against real property owned by a revocable trust where the delinquent taxpayer was both trustee and beneficiary.
In Morton v. Commissioner, TC Memo 2016-227, the Tax Court sustained an IRS levy against an individual who was asked to explain the use of a $1.4 million withdrawal from his IRA and refused to provide information.