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Federal Tax Update – June 2018

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

INDIVIDUALS

In Johnson v. Commissioner, TC Summary Opinion 2018-31, the Tax Court stated that the test as to primary physical custody between divorced parents as to dependency allowances is based on comparative number of nights as opposed to comparative time with the children.

In Palsgaard and Kelly v. Commissioner, TC Memo 2018-82, the Tax Court rejected two arguments of a disabled physician that social security disability benefits are excludable from income – as akin to workers compensation or payments on account of physical injury.

In Leslie v. Commissioner, 121 AFTR2d 2018-1991, the Ninth Circuit Court of Appeals agreed with the Tax Court that a lump sum payment to a spouse was additional alimony as it was called “spousal support” although placed in a section of the separation instrument entitled “division of community and co-owned property”; the Court noted that under California law alimony payments stopped necessarily on the death of the recipient notwithstanding lack of specific language in the document.

In Singh v. Commissioner, TC Memo 2018-79, the Tax Court disallowed tens of thousands of dollars of claimed itemized deductions and hundreds of thousands of dollars in claimed business expenses that could not be substantiated; the couple alleged that records were lost for multiple reasons including the death of the accountant, seizure by local officials and destruction in a fire.

RETIREMENT PLANS

In Letter Ruling 201821008, IRS allowed a surviving spouse to rollover her husband’s Section 457 governmental plan to an IRA in her name notwithstanding that his estate was the beneficiary and her husband had not yet reached age 70½ and would have been subject to the “five year rule” on distributions in the absence of a rollover.

In Letter Ruling 201822033, IRS waived the 60-day rollover deadline where the taxpayer claimed that she relied to her detriment on the incorrect tax advice provided by her husband.

ESTATES

In Estate of Cahill v. Commissioner, TC Memo 2018-84, the Tax Court rejected numerous arguments of an estate that the includible asset in a split dollar life insurance policy was the termination right of $183,700 rather than the $9,611,624 death benefit where the decedent had paid $10 million for the policy.

BUSINESS

In Little Mountain Corporation v. Commissioner, 121 AFTR2d 2018-870, the Ninth Circuit Court of Appeals agreed with the Tax Court in denying a commodities brokerage business a deduction for almost $900,000 in “consulting fees” made payable to “cash” in amounts less than $10,000 and allegedly given to another company but cashed by various individuals with no relation to that company; the taxpayer issued no 1099s and provided no specificity at trial.

In Lucas v. Commissioner, TC Memo 2018-80, the Tax Court agreed with IRS that almost $3 million in legal fees over a two-year period in which the taxpayer was divorcing was not deductible as business expenses or otherwise; the Court distinguished these expenses where the taxpayer was attempting to show the nonmarital character of distributions from a prior case decided favorably for an individual whose business was being disrupted by a divorcing spouse.

In Gaunt v. Commissioner, TC Memo 2018-78, the Tax Court disallowed a deduction for amounts paid by a father’s business to his son’s business where the son did not have a proper license and the father billed jobs on behalf of the son, the Court ignoring the agency relationship and simply stating that it was not an “ordinary and necessary” business expense.

In Reserve Mechanical Corporation v. Commissioner, TC Memo 2018-86, the Tax Court found that the taxpayer, a captive, was not an insurance company because there was no true shifting of risk.

In Alterman v. Commissioner, TC Memo 2018-83, the Tax Court determined that the statutory ban on deduction of business expenses other than cost of goods sold for those in the marijuana business extends to expenses associated with other products in the case of a unitary business (while most of the other products complimented the sale of marijuana; the business also sold chicken soup); in Loughman v. Commissioner, TC Memo 2018-85, the Tax Court held that certain wages were improperly placed in cost of goods sold and that there was no impermissible discrimination by disallowing the deduction for wages to an owner-officer of a marijuana business who had to report the underlying income.

In Hargis v. Koskinen, 121 AFTR2d 2018-________, the Eighth Circuit Court of Appeals agreed with the Tax Court and rejected an S corporation owner’s argument that he could get basis in his stock through guarantees, although the Court seemed to accept a principal from the Eleventh Circuit factually distinguishable here that a guarantor could get basis if the lender looked to him as if he were the obligor.

In Hampton Software Development, LLC v. Commissioner, TC Memo 2018-87, the Tax Court found that a property manager of an apartment complex was an employee and not an independent contractor and also denied Section 530 relief due to lack of consistency and failure to issue 1099s.

In Robison v. Commissioner, TC Memo 2018-88, the Tax Court found that a computer science executive with a 500 acre ranch which lost $9 million over 18 years was attempting to make a profit in light of the professional manner of operations but found that he did not spend the needed 500 hours for material participation.

In Legal Advice Issued by Field Attorney 20182502F, IRS permitted a business to deduct an ongoing commitment fee to secure a line of credit, noting that it did not create, acquire, enhance or facilitate a distinct intangible or future benefit.

PROCEDURE

In Jones, Bell, Abbott, Fleming & Fitzgerald, LLP v. United States, 121 AFTR2d 2018-2085, a California Federal District Court sustained a late filing penalty imposed on a law partnership as it could not prove timely mailing of an extension; the Firm’s testimony was limited to its Comptroller testifying that he knew he prepared the extension and placed it in the office mail and the mail clerk testifying about his procedures.

In United States v. Kenny, 121 AFTR2d 2018-1925, an Ohio Federal District Court granted an injunction requiring an individual to comply with ongoing tax obligations following 25 years of “sustained non-compliance” during which time he lived an extravagant lifestyle that was well beyond his means.

In Hudak v. United States, 121 AFTR2d 2018-________, a Maryland Federal District Court ordered an individual owing in excess of $2.3 million in back payroll taxes to make installment payments to IRS despite resigning employment and shifting income to his wife who received payments as an independent contractor from the same company.

In United States v. Thompson, 121 AFTR2d 2018-________, an Oregon Federal District Court, dealing with a return that was filed on April 13, 2007 where the Government filed a lawsuit on May 22, 2017, found that the suit was filed before expiration of the statute of limitations as the IRS assessment was not made until May 28, 2007.

In Findling v. United States, 121 AFTR2d 2018-________, a Michigan Federal District Court determined that an earlier ex-spouse’s lien against nonqualified retirement plan assets of her former husband has priority over a subsequent IRS tax lien.

In Gallagher v. Commissioner, TC Memo 2018-77, the Tax Court held that it has jurisdiction to review collection alternatives (in this case an Offer in Compromise) which includes years that were not the subject of a CDP hearing but indicated that it lacked jurisdiction to consider any substantive tax issue for non-CDP years.

In Hale v. Commissioner, TC Memo 2018-93, the Tax Court agreed with IRS that the widow of a lawyer who committed suicide receiving almost $8 million in life insurance did not qualify as an innocent spouse as her ability to pay was considered more significant than other factors supporting relief.

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