Document

Federal Tax Update – February 2018

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

INDIVIDUALS

PL 115-123, the Bipartisan Budget Act of 2018:

  • Extends through 2017 the exclusion on discharge of acquisition indebtedness on principal residences, the treatment of mortgage insurance premiums as qualified residence interest, the “above the line” deduction for qualified tuition and related expenses and the credit for nonbusiness energy property.
  • Suspends the adjusted gross income limitations on cash charitable donations related to the California wildfire disaster.
  • Suspends the 10 percent adjusted gross income floor on casualty losses in the case of the California wildfire disaster and permits these losses to be claimed by non-itemizers but sets forth a $500 minimum.

In Sugar Land Ranch Development, LLC v. Commissioner, TC Memo 2018-21, the Tax Court determined that the intention of property owners changed from development to investment four years prior to a bulk sale, giving capital gain to the seller.

In In Re:  Nora, 121 AFTR2d 2018-________, a Minnesota Bankruptcy Court denied a casualty loss where a lawyer “lost” business records in a foreclosure on her residence.

In Colbert v. Commissioner, TC Summary Opinion 2018-7, the Tax Court allowed a security guard employed to drive and protect celebrities to deduct the cost of a pistol as he was required to carry a concealed weapon while on duty but disallowed most other employee business expenses including clothing suitable for street wear, a gym membership to look good for celebrities and office in home expenses.

In CRI-Leslie, LLC v. Commissioner, 121 AFTR2d 2018-794, the Eleventh Circuit Court of Appeals agreed with the Tax Court that a hotel owner who retained an advance deposit when a sale of the property did not go through had to report ordinary income rather than capital gain on the retained deposit, the Court accepting the distinction between a Section 1231 asset and a capital asset under which a retained deposit would have given rise to capital gain.

The Financial Crimes Enforcement Network confirmed that the FBAR extension from April 15 until October 15 is automatic and no extension form need be filed.

RETIREMENT PLANS

PL 115-123, the Bipartisan Budget Act of 2018:

  • Directs IRS to issue regulations to be effective in 2019 deleting the waiting period for new contributions after a hardship distribution.
  • Permits penalty-free replacements of amounts improperly levied on retirement plans or IRAs by IRS effective 2018.
  • Permits penalty-free withdrawals of up to $100,000 from retirement plans and IRAs through 2018 by residents within the California wildfire disaster area, allowing the income to be reported over three years, and permits recontributions within three years to avoid the reporting of income (also permitting recontributions by July 30, 2018 of withdrawals to purchase or improve a home in the disaster area); the maximum borrowing amount from plans permitting loans is increased to the lesser of 100 percent of the participant’s vested balance or $100,000.

In Kirkpatrick v. Commissioner, TC Memo 2018-20, the Tax Court agreed with IRS that a physician was subject to tax on a $100,000 withdrawal from an IRA which he was ordered to transfer to his wife pursuant to a divorce; however, he failed to accomplish a direct transfer from the IRA as required.

BUSINESS

Treasury Regulations under Code Section 199A will specifically exclude architects and engineers as service businesses based on Congressional intent, according to Donna Trier, Deputy Assistant Secretary for Tax Policy.

In Bass v. Commissioner, TC Memo 2018-19, the Tax Court denied all business expenses claimed by a part time landscaping and janitorial service provider, not only those requiring contemporaneous records but also all other expenses, finding that there was little documentary evidence and none of probative value.

In Christopher C.L. Ng MD, Inc. APC v. Commissioner, TC Memo 2018-14, the Tax Court completely denied a deduction where a C corporation deducted 100 percent of home mortgage payments as rent for use of a portion of the home; the doctor did not report any reciprocal rental income on his personal return and the Court declined to make any sort of estimate.

In Burke v. Commissioner, TC Memo 2018-18, the Tax Court agreed with IRS that over $11 million put into a business in Belize were loans rather than capital contributions; the Court balanced 11 factors and characterized the inbound funds as a contribution notwithstanding that financing was obtainable from other lenders.

In Norgaard v. United States, 121 AFTR2d 2018-________, a Massachusetts Federal District Court denied a business bad debt deduction on an individual guarantor’s payment of a corporate SBA loan used to expand the business.

In Transupport, Inc. v. Commissioner, 121 AFTR2d 2018-788, the First Circuit Court of Appeals agreed with the Tax Court that amounts paid by a C corporation to the owner’s three sons ($575,000, $675,000 and $720,000) in each of three consecutive years were unreasonably high in light of the routine work done by the sons.

PROCEDURE

PL 115-123, the Bipartisan Budget Act of 2018:

  • Directs IRS to create a Form 1040SR for use in 2019 and subsequent returns for those over 65 whose income is limited to social security, interest and dividends, retirement distributions, annuities and capital gains/losses.
  • Forbids IRS from increasing user fees on installment agreements after February 5, 2018 and requires that IRS not charge the fee to lower income individuals who do direct debit and to return the fee on successful completion if the low income individual is unable to use direct debit.

In United States v. Askins & Miller Orthopaedics, PA, 121 AFTR2d 2018-427, a Florida Federal District Court declined to give IRS an injunction requiring compliance with employment tax obligations; in United States v. Best Rate Tree & Landscaping, Inc., 121 AFTR2d 2018-________, a North Carolina Federal District Court granted an injunction under similar facts.

In Huene v. United States, 121 AFTR2d 2018-775, a California Federal District Court dismissed an action against an IRS Program Manager for failing to abate a late deposit penalty caused when the owner’s son died in a plane crash and no one knew the accessing password in time for the next deposit, the Court stating that the decision to leave the penalty in place, later reversed, does not amount to “cruel and unusual punishment” in violation of the Eighth Amendment.

In Cash v. United States, 121 AFTR2d 2018-430, the Third Circuit Court of Appeals reversed a Pennsylvania Federal District Court and stated that a claim for refund of the Shared Responsibility Penalty belongs on Form 843 rather than Form 1040X as a penalty rather than a tax is involved; in In Re:  Chesteen, 121 AFTR2d 2018-741, a Louisiana Bankruptcy Court agreed that the individual mandate under the Affordable Care Act is a penalty and not a tax in the context of priories in a bankruptcy proceeding.

In United States v. Schmidt, 121 AFTR2d 2018-714, a Washington Federal District Court determined that a conveyance of property by a tax delinquent in order to pay back a loan was valid and could not be set aside as a fraudulent conveyance as the transfer was for purpose of resolving a dispute and not for avoidance of tax payments.

In Minton v. Commissioner, TC Memo 2018-15, the Tax Court gave equitable relief to the former wife as to certain joint liability with her then husband, convinced by her testimony that she believed the taxes would be paid out of proceeds from a “big contract” that never occurred.

———————————–