Document

Federal Tax Update – July 2018

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

INDIVIDUALS

In Jusino v. Commissioner, TC Memo 2018-112, the Tax Court denied the personal exemption, child credit and earned income credit to a couple who had lost parental rights to children who were adopted by their aunt.

In Grainger v. Commissioner, TC Memo 2018-117, the Tax Court disallowed most of the $85,000 in charitable deductions for clothing claimed by a grandmother who would purchase at discounted prices and deduct the original retail price.

In Raifman v. Commissioner, TC Memo 2018-101, the Tax Court denied a couple a theft loss deduction arising from “investment” in a tax shelter, reasoning that the intention of the program was to defraud the US Treasury and not the couple.

In Washburn v. Commissioner, TC Memo 2018-110, the Tax Court denied a deduction for restitution payments arising from a fraudulent loan as the loan proceeds were not taxable income when received.

In Information Letter 2018-9, IRS clarified that it will disallow a 2017 deduction for property taxes not yet assessed (generally any tax year not starting by January 1, 2018).

BUSINESS

In Archer v. Commissioner, TC Memo 2018-111, the Tax Court disallowed most business expenses related to both a construction activity and a marketing activity (as well as charitable deductions) for lack of substantiation beyond testimony and handwritten notes.

In Najafpir v. Commissioner, TC Memo 2018-103, the Tax Court denied an office in home deduction to a self-employed smog tester as the stored business records did not constitute inventory which would have created an allowable deduction for office in home in the absence of meetings in the space.

In Alpenglow Botanicals LLC v. United States, 122 AFTR2d 2018-5035, the Tenth Circuit Court of Appeals agreed with a Colorado Federal District Court that the denial of most deductions for a cannabis business does not violate the Eighth or Sixteenth Amendments as deductions arise from legislative grace.

In Mowry v. Commissioner, TC Memo 2018-105, the Tax Court ruled that disproportionate distributions in an S corporation do not in and of itself create a second class of stock which would terminate the S election.

In Nix v. Commissioner, TC Memo 2018-116, the Tax Court determined that a Mary Kay “consultant” was not engaged in an activity for profit when her gross income over a three-year period was less than $5,000 and her expenses were more than $85,000, the Court noting that she deducted vacations in Europe and Disney World as well as 20 trips to volley ball tournaments in which her daughter participated.

PROCEDURE

In Presley v. United States, 122 AFTR2d 2018-________, the Eleventh Circuit Court of Appeals agreed with a Florida District Court that bank records of a law firm are not confidential communications but registries of financial transactions and may be the subject of an IRS summons.

In Williams v. Commissioner, 151 TC No. 1, the Tax Court held that managerial approval on a penalty assessment is not required where a taxpayer position is frivolous or groundless.

In United States v. Wadham, 122 AFTR2d 2018-5060, a Colorado Federal District Court reached the same conclusion as a Texas Federal District Court several months previously and held that the FBAR penalty was capped by the amount shown in old regulations and not by the increased amount in newer statute.

In Guess v. Commissioner, TC Memo 2018-97, the Tax Court held that the statute of limitations can be extended by fraud even if the fraud penalty could not be imposed due to lack of supervisory written approval.

In United States v. Gower, 122 AFTR2d 2018-5033, a Florida Federal District Court approved a seizure of a principal residence with potential equity of $143,000 where a couple owed $153,000 for six years and had sought installment agreements for as low as $1 per month.

In United States v. Nelson, 122 AFTR2d 2018-5088, a South Dakota Federal District Court refused to allow IRS to keep more than 50 percent of proceeds from the sale of a couple’s primary residence where only the husband owed back taxes; IRS argued unsuccessfully that a “homestead interest” is not a vested property right under state law.

In Jacobsen v. Commissioner, TC Memo 2018-11, the Tax Court granted innocent spouse status to a former spouse for the first year of his wife’s embezzlement but denied innocent spouse status for the next year when he knew of the theft.

In Coggin v. United States, 122 AFTR2d 2018-________, a North Carolina Federal District Court struck down separate returns by a widow where joint returns had previously been filed prior to her husband’s death, the Court noting that the widow had a filing responsibility due to separate income and, by not filing separately, she acquiesced in the joint returns where her husband forged her signature.

In Slone v. Commissioner, 122 AFTR2d 2018-________, the Ninth Circuit Court of Appeals reversed the Tax Court on the facts and found transferee liability for shareholders when they depleted the corporation of funds leaving it unable to pay taxes.

In Program Manager Tax Advisory 2018-17, IRS noted that it has the burden of proof for establishing the FBAR penalty by a preponderance of the evidence; it also noted that “willfulness” includes “recklessness” and “willful blindness.”

A revision to Internal Revenue Manual 8.6.4.1.3 allows specific dollar settlements without a Schedule of Adjustments in cases involving nonrecurring issues and no other taxpayers.

In Chief Counsel Advice 201825078, IRS expressed its agreement with a 2014 Sixth Circuit case holding that preparer penalties can apply to an employee of a business preparing its return internally.

In Chief Counsel Advice 201827012, IRS clarified that judicial approval is required before seizure of a property owned by a tax delinquent and used as a principal residence of the delinquent’s spouse, former spouse or minor child as well as the delinquent himself.

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