Federal Tax Update – January 2019
In 2590 Associates LLC v. Commissioner, TC Memo 2019-3, the Tax Court allowed an entity owned in part by Alabama football coach, Nick Saban, to claim a bad debt deduction as assignee of a loan made by Saban to a developer, the Court finding that Saban expected repayment on advancing the funds as did the assignee after the transfer.
In Bea v. Commissioner, 123 AFTR2d 2019-________, the Eleventh Circuit Court of Appeals agreed with the Tax Court that no remedy was available when a preparer unilaterally without a discussion with the taxpayer waived the net operating loss carryback in an amount of almost $12 million.
In Totten v. Commissioner, TC Summary Opinion 2019-1, the Tax Court agreed with the IRS denial of most employee business expenses and charitable contributions for lack of substantiation, the Court noting that the strict substantiation rule applies to transportation expenses and to larger donations.
In Mann v. United States, 123 AFTR2d 2019-________, a Maryland Federal District Court disallowed a donation of a house for purpose of training by the fire department, citing Maryland law that there is no conveyance without recordation but noting, even with recordation, the deduction would have been disallowed as the house should have been valued for salvage.
RETIREMENT AND ESTATE PLANNING
In In Re: Arehart, 123 AFTR2d 2019-________, a Idaho Bankruptcy Court determined that an inherited IRA was protected in bankruptcy under state law notwithstanding a prior unanimous decision of the US Supreme Court that an inherited IRA is not protected under federal law.
The IRS Website corrects prior instructions and states that the exemption for qualified disability trusts applies from 2018-2025 despite the general repeal and is not subject to a phaseout.
Final Regulations under Code Section 199A provide numerous definitions for computation of the Qualified Business Income Deduction (QBID) including “net capital gain” and “related trade or business” and clarify that qualified business income from a Specified Service Trade or Business must be reduced by the mandated percentage within the phase-out range before application of the netting and carryover rules.
In Revenue Procedure 2019-3, IRS announced that it will not give an advanced ruling on whether an activity constitutes a trade or business.
In Revenue Procedure 2019-12, IRS indicated that payments made by a C corporation to a nonprofit organization in consideration for a state or local tax credit are fully deductible; however, in the case of a pass through entity, the payment is ordinarily only deductible if it reduces a tax imposed at the entity level.
In Revenue Procedure 2019-11, IRS created alternative definitions for the term “W-2 wages” for purpose of the Section 199A deduction requiring in any event exclusion of any wages that do not relate to qualified business income; the simplest of the alternatives is to total entries in box 1 (wages for federal income tax) or in box 5 (wages for medicare) and take the lesser number.
In Notice 2019-7, IRS created a “safe harbor” under Code Section 199A for determining whether real estate constitutes a business for individuals and passthrough entities under which multiple properties can be separated or combined (except for commercial and residential real estate) with consistent treatment required from year to year absent a significant change in facts; the safe harbor requires separate record keeping, 250 hours of rental services exclusive of financial or investment management until 2023 (for that year and subsequent years a three out of five year test will be utilized) as shown by detailed contemporaneous records (triple net lease property is excluded from the safe harbor) and a signed statement that the requirements of the safe harbor are met.
In Estate of Andersen v. Commissioner, TC Memo 2019-2, the Tax Court threw out a large number of business and personal deductions where there was no substantiation and accepted the IRS recomputation of basis in two properties which were sold where the taxpayer had claimed little gain.
In Haynes v. United States, 123 AFTR2d 2019-________, the Fifth Circuit Court of Appeals reversed and remanded a decision of a Texas Federal District Court and, while stating that reliance on an accountant alone is not reasonable cause, indicated that a rejected e-filed return where the taxpayer did not receive notice may constitute reasonable cause for late filing.
In Horowitz v. United States, 123 AFTR2d 2019-362, a Maryland Federal District Court determined that an individual who failed to disclose Swiss bank accounts acted with “willful blindness” when he testified that he believed the income was nontaxable based on conversations with other expatriates although he failed to ask the question of his accountant; however, the wife was found not responsible for years prior to when she was given a power of attorney over the account (which did not happen at its opening due to her unavailability).
In United States v. Flor, 123 AFTR2d 2019-________, a Minnesota Federal District Court balanced the equities and allowed IRS to seize a principal residence of an individual who falsely reported income, received an erroneous refund and, without significant other assets, could not make payment; in United States v. Jackson, 123 AFTR2d 2019-________, a Missouri Federal District Court did the same and allowed seizure of a principal residence where a couple owed almost $2.4 million and engaged in fraudulent conveyances.
In Notice 2019-11, IRS announced that it would not penalize individuals whose total withholding and estimated tax payments exceed 85 percent of the tax shown on 2018 returns (down from 90 percent) as a result of the late release of withholding calculators following the 2017 legislation.