Document

Federal Tax Update – January 2018

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

INDIVIDUALS

In McKenny v. United States, 121 AFTR2d 2018-314, a Florida District Court determined that proceeds from a lawsuit intended to make a client of a CPA firm whole for its negligence were taxfree.

In Sun v. Commissioner, 121 AFTR2d 2018-356, the Fifth Circuit Court of Appeals agreed with the Tax Court that gross income includes misappropriated funds, the Court noting that it is no longer a loan when entrusted money is not used for the agreed purpose notwithstanding an intent to repay; however, portions of the loan were made to the individual’s controlled corporation and they became constructive dividends upon personal misappropriation.

In Kiselev v. Commissioner, TC Summary Opinion 2018-2, the Tax Court ruled that a Russian citizen working as a graduate research assistant at Purdue University could exclude $22,000 from gross income pursuant to the US-Russia tax treaty which exempted grants from income; the Court determined that “grant” was to be defined broadly under the treaty and not necessarily by applying US tax law.

In Conner v. Commissioner, TC Memo 2018-6, the Tax Court determined that losses on undeveloped lakefront property held by a couple gave rise to a $2 million capital loss rather than an ordinary loss as the land was held for investment purposes notwithstanding that the taxpayer was a developer.

BUSINESS

Public Law 115-12, the Federal Register Printing Savings Act of 2017, delays until 2022 the “Cadillac” tax on employers for excess employer-sponsored health insurance coverage and delays until 2020 the excise tax on certain medical devices.

Proposed Regulations under Code Section 706 delineate how basis adjustments are to be made following an audit under the new centralized examination procedures.

In Sensenig v. Commissioner, 121 AFTR2d 2018-364, the Third Circuit Court of Appeals agreed with the Tax Court that advances to a company were capital contributions rather than loans as they were both undocumented and beyond amounts that a disinterested investor would lend based upon the financial circumstances.

In Wells v. Commissioner, TC Memo 2018-11, the Tax Court determined that about $250,000 paid by the owner of grapevines for underground piping, road improvements and similar represented capital expenditures and could not be expensed.

In Ford v. Commissioner, TC Memo 2018-8, the Tax Court determined that an heiress, whose few business records were commingled with her personal accounts, was not running a weekend music venue with the intention of making a profit.

In Field Advice Memorandum 20180101F, IRS allowed a grocery store to deduct the future costs of fuel reward card redemptions from gross income in the year that the rewards were earned inasmuch as they could be redeemed for gas with no contingency on the future purchase of gas, distinguishing this program from those which offer only discounts in which case no immediate deduction is allowable.

In Letter Ruling 201804001, IRS accepted a corporation’s S status from inception after multiple corrective actions due to failure to get all signatures on the election, issuing a second class of stock and making disproportionate distributions.

PROCEDURE

In Ankerberg v. Commissioner, TC Memo 2018-1, the Tax Court sustained the imposition of a civil fraud penalty against a CPA who underreported gross receipts by $110,000 over a three year period and overstated expenses by $67,000 during the same years; the CPA blamed his errors on bad eyesight although he continued to prepare returns for clients and never stopped driving a car.

In Bishop v. Commissioner, TC Summary Opinion 2018-1, the Tax Court gave innocent spouse relief to a divorced individual whose wife had withdrawn retirement funds into a joint account; the Court noted that he should have known of the distribution but believed that he did not have actual knowledge.

In Notice 2018-1, IRS set forth procedures related to revocation or denial of passports, indicating that an individual denied a passport has no administrative appeal rights beyond the contact person but may file suit in either Tax Court or Federal District Court.

The IRS Manual was revised to indicate that taxpayer representatives will now be asked for their social security number and date of birth in addition to their CAF number for verification of identity.

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