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Federal Tax Update – February 2017

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

INDIVIDUALS

In Smyth v. Commissioner, TC Memo 2017-29, the Tax Court expressed sympathy for a grandmother providing sole support for two grandchildren where the son had gotten a tax refund “check from the government, and cashed it to spend on drugs”; the Court stated that even a parent or parents not providing support have a statutory right to dependency allowances and, if claimed, may not be taken by a grandparent under any circumstance.

In Olson v. Commissioner, TC Memo 2017-33, the Tax Court determined that a teacher who was forced to retire due to an on the job injury and whose disability payments ceased at age 60 when retirement benefits commenced in a new amount determined by reference to age and years of service could not exclude payments following the conversion.

In Schieber v. Commissioner, TC Memo 2017-32, the Tax Court concluded that a defined benefit plan is not an asset for purpose of determining the insolvency exception to the general principle that relief from indebtedness is taxable; a Court reasoned that the interest in the pension plan could not be used immediately to pay the income tax on the relief from indebtedness.

In Zarrinnejar v. Commissioner, TC Memo 2017-34, the Tax Court determined that a dentist who worked 14 hours per week was a “real estate professional” after proving that he spent over 1,000 hours in real estate including brokerage-related activities and managing his four rental properties; he was able to show through contemporaneous records not only his hours but also that he did substantially all the work on his own rentals, resulting in permitted losses in excess of $200,000 in each of three years.

In Quintal v. Commissioner, TC Summary Opinion 2017-3, the Tax Court determined that payments were not alimony where conflicting provisions labeled them as “unallocated support” (originally titled alimony) and alternative language labeled them as child support.

In Sas v. Commissioner, TC Summary Opinion 2017-2, the Tax Court held that over $80,000 in legal fees paid by a bank executive terminated for alleged breach of fiduciary duty where the bank sought to recover a prior year bonus could only be deducted as a miscellaneous itemized deduction; the taxpayer counterclaimed on the suit by the bank, alleging employment discrimination but the Court found that the expenses related to retention of the bonus and not for seeking income on account of discrimination.

On the IRS website, IRS announced that it will not reject 2016 tax returns that are silent on whether a taxpayer has complied with the individual health insurance mandate provisions of the Affordable Care Act.

RETIREMENT PLANS

In Letter Ruling 201706004, IRS indicated that a court order approving a change in beneficiary designation from an inter vivos trust that was never actually created to the surviving spouse cannot create a “designated beneficiary” for purpose of avoiding the general rule that, where minimum distributions had not commenced prior to death, a decedent’s account must be completely distributed within five years in the absence of a designated beneficiary.

In Letter Ruling 201707001, IRS accepted a court reformation of trust beneficiaries to allow a surviving spouse, beneficiary of multiple IRAs through a trust in which she had complete discretion, to rollover IRAs to that trust.

ESTATES

In Estate of Hake v. United States, 119 AFTR2d 2017-727, a Pennsylvania Federal District Court found that there was reasonable cause for a late filing of an estate tax return when the attorney incorrectly advised that there was a one year rather than a six month filing extension, distinguishing the case from those where the deadline was known but the professionals were neglectful.

In Estate of Kollsman v. Commissioner, TC Memo 2017-40, the Tax Court valued a painting by Pieter Brueghel at the $2.1 million dollar number proffered by the IRS expert less a 5 percent discount related to anticipated cleaning where the estate’s expert had claimed a $500,000 value and the work was sold four years after death at $2.4 million; the taxpayer unsuccessfully attempted to attribute the rise in value to the superb cleaning efforts and a market rise due to Russian investors.

In Letter Ruling 201707007, IRS ruled that a transfer of assets under a divorce agreement by a husband into a trust for the benefit of his wife but where he retained a reversionary interest has no income or gift tax consequences but will ultimately be included in the husband’s estate whether he survives or predeceases his wife (subject in the latter case to a reduction by the fair market value of the wife’s interest).

BUSINESS

In Zarrinnegar v. Commissioner, TC Memo 2017-34, the Tax Court declined to allow an estimate of most categories of deductible expenses where no records were produced and the Court had only the testimony of a husband-wife team of dentists regarding the expenses.

In Shaffran v. Commissioner, TC Memo 2017-35, the Tax Court determined that the elderly father of a business co-owner was not a responsible individual for unpaid employment taxes where, as an unauthorized signator, he signed four checks when the owners were out of town; he had little involvement with the business, hanging out about 12 hours per week and with no managerial responsibility.

IRS Form 7004, as revised, grants a six-month extension for calendar year C-Corporations from April 15 until October 15 notwithstanding the statutory deadline of September 15; in a website posting IRS reiterated that it is granting an additional month on extended calendar year C-Corporation returns beyond that set forth in the 2015 statutory revision.

PROCEDURE

In Moss v. Commissioner, TC Memo 2017-30, the Tax Court rejected a joint return from a husband of a woman with a serious mental illness notwithstanding that her separate return included a delusional theft loss deduction of $350,000 for the “Madoff fraud”; the Court noted that the taxpayer had not yet been appointed as his wife’s guardian and did not have her power of attorney to force a joint return.

In Thompson v. Commissioner, 148 TC No. 3, the Tax Court determined that the penalty for failure to adequately disclose a reportable transaction is constitutional following an Eighth Amendment challenge that the 30 percent penalty is excessive.

In McNeill v. United States, 119 AFTR2d 2017-________, a Wyoming Federal District Court determined that a public company chairman and CEO, despite his business sophistication, had little tax knowledge and relied on his advisors including Ernst & Young, finding reasonable cause in claiming a $20 million loss in a tax shelter transaction in which he was the “tax matters partner”; the Court directed IRS to abate a $4.59 million penalty.

In Ruddy v. Commissioner, TC Memo 2017-39, the Tax Court determined that an assessment was within the statute of limitations when the Notice of Deficiency was sent within three years of the deemed filing date and the actual assessment was done within 60 days of the failure of the taxpayer to file a petition (150 days from the issuance of the Notice of Deficiency).

In Smaaland v. Commissioner, TC Memo 2017-31, the Tax Court determined that a divorcee had actual knowledge of unreported income of her former husband and denied innocent spouse relief under all three subsections in the law.

In Smith v. United States, the US Supreme Court declined to review a decision of the Ninth Circuit Court of Appeals at 118 AFTR2d 2016-5127 where the Court, in accord with seven other Courts of Appeal (the Eighth Circuit being an exception), held that income tax liability may not be discharged in bankruptcy after IRS has prepared a Substitute for Return.

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