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Federal Tax Update – January 2020

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

INDIVIDUALS

In Gebman v. Commissioner, TC Memo 2020-1, the Tax Court denied numerous deductions related to a rental property, the application of basis in cashing an IRA and a net operating loss carryforward in excess of $1.4 million when none of it could be proven; the Court once again stated that providing a copy of a prior year return showing an NOL is insufficient proof.

In Christensen v. Commissioner, TC Memo 2020-14, the Tax Court denied a part-time professor with under $14,000 in wages a deduction for pre-2018 employee business expense of more than $34,000 including trips to Norway and Costa Rica which related to a business which had been defunct for about a decade.

In Near v. Commissioner, TC Memo 2020-10, the Tax Court denied a pre-2018 expense deduction to an attorney who failed to submit claims for business expenses to his employer for likely payment and, in any event, could not substantiate the actual costs.

The IRS website has been updated to require that charitable organizations provide the donor with a Form 8283 for noncash charitable contributions upon receipt of virtual currency.

RETIREMENT AND ESTATE PLANNING

In Gillette v. Commissioner, 125 AFTR2d 2020-518, the Seventh Circuit Court of Appeals agreed with the Tax Court that a gambling addiction allegedly caused by a prescription medication for restless leg syndrome was not a disability which allowed an early distribution from an IRA.

BUSINESS

In Isaacson v. Commissioner, TC Memo 2020-18, the Tax Court found that a disbarred tax attorney, who had assisted four victims of church abuse for a 60 percent contingency fee, had placed the $12.75 million settlement proceeds in a general account and was liable for taxes on his portion upon receipt, also sustaining a civil fraud penalty.

In Primus v. Commissioner, TC Summary Opinion 2020-2, the Tax Court stated that revenue is not required for a business to leave the start-up phase with nondeductibility of expenses and enter the active phase; the start-up phase includes expenses to create an active business.

In Abubakr v. Commissioner, TC Summary Opinion 2020-8, the Tax Court disallowed numerous expenses of a travel agent for lack of substantiation, duplication, prior reimbursement and personal travel (the taxpayer had claimed travel expense of twice his revenue); in Reliable Computer Services, Inc. v. Commissioner, TC Summary Opinion 2020-7, the Tax Court agreed with the IRS that the taxpayer failed to substantiate business expenses for both a controlled C corporation and a related sole propriatorship.

In Rivera v. Commissioner, TC Memo 2020-7, the Tax Court accepted an IRS bank deposits analysis in the reconstruction of income and also denied numerous expenses including paying college tuition of the taxpayer’s daughter through a controlled entity.

In Cuthbertson v. Commissioner, TC Memo 2020-9, the Tax Court denied $7.3 million in tax deductions for alleged losses related to a golf course, finding that there was no substance to “abandonment” of the golf course and the “sale” of promissory notes.

In Alta V. Limited Partnership v. Commissioner, TC Memo 2020-8, the Tax Court again found former shareholders of a C corporation liable for corporate taxes as transferees where they sold assets and distributed the proceeds without paying taxes. 

In Simonelli v. Commissioner, 125 AFTR2d 2020-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that the taxpayer was not practicing law with the intention of making a profit as he was not licensed where he lived or worked and was involved only in two lawsuits for his son and probate of his brother’s estate, none of which generated fees.

PROCEDURE

In Belair Woods, LLC v. Commissioner, 154 TC No. 1, and Tribune Media Company v. Commissioner, TC Memo 2020-2, the Tax Court held that supervisory approval of a nonautomatic penalty is required before the first formal communication to a taxpayer that IRS has imposed a penalty; in Tribune Media Company v. Commissioner, TC Memo 2020-2, the Tax Court determined that written supervisory approval of a penalty, required for the “initial determination” is not needed before the issuance of Form 5701 – Notice of Proposed Assessment.

In Chadwick v. Commissioner, 154 TC No. 5, the Tax Court, disagreeing with a 2014 decision of a New York Federal District Court, held that the Trust Fund Recovery Penalty is a penalty and not a tax and, accordingly, requires managerial approval in writing; however, the Court found in this case that managerial approval was given electronically.

In Harrison v. United States, 125 AFTR2d 2020-________, a Wisconsin Federal District Court reconsidered its decision of three weeks earlier which was adverse to the taxpayer and held that the date of mailing and not the date of receipt by IRS controls the ability to obtain a refund in the case of a late filed return.

In Hommel v. Commissioner, TC Memo 2020-4, the Tax Court threw out an IRS-imposed penalty for understatement of over $1 million in taxes as it failed to have timely approval by a manager; in Frost v. Commissioner, 154 TC No. 2, the Tax Court held that the IRS failed to get proper approval for imposing penalties for two of three years where the taxpayer could not substantiate basis and business expenses and created a calendar from memory.

In Seely v. Commissioner, TC Memo 2020-6, the Tax Court found that a petition was timely filed where the envelope did not have a postmark and the petition was received by the Court more than 90 days after the date on the Notice of Deficiency, finding credible the extrinsic evidence including testimony of the attorney as to timely filing despite receipt 21 days after mailing (with both parties agreeing that normal delivery to a Government office in Washington, DC, takes 8 to 15 business days).

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