Federal Tax Update – June 2019
By David S. De Jong, Esq., CPA, Stein Sperling Bennett De Jong PC
Final Regulations under Code Section 170 reiterate Proposed Regulations stating that the charitable deduction applies only to the difference between what a taxpayer contributes to a state-sponsored charitable fund and the tax savings arising from the relationship; however, this rule may be disregarded if the tax benefit does not exceed 15 percent of the taxpayer payment.
In Brown v. Commissioner, TC Memo 2019-69, the Tax Court ruled for a second time in a year that donations received by a pastor were unreported income rather than gifts, analyzing each of the determining factors in favor of taxability, also holding that a pastor’s receipt of income could not be considered as a parsonage allowance as it was not designated as such before receipt through an employment contract, a budget item or a notation in Board minutes.
In Frey v. Commissioner, TC Memo 2019-62, the Tax Court rejected the “zeroing out” of wage income as an assignment of income to a controlled entity which had unused losses.
In Rose v. Commissioner, TC Memo 2019-73, the Tax Court cited noncontemporaneous records and found implausible a taxpayer’s claim that she was a real estate professional spending over 750 hours per year in managing three rental properties; she claimed that she worked 16-18 hour days related to the properties despite having three young children.
In Malulani Group v. Commissioner, 123 AFTR2d 2019-2190, the Ninth Circuit Court of Appeals agreed with the Tax Court that a purported like-kind exchange was tax avoidance and akin to a sale where the taxpayer received replacement property from related persons in an exchange and they promptly disposed of the relinquished property, rejecting an argument by the taxpayer that it first diligently sought replacement property from an unrelated party.
In Breland v. Commissioner, TC Memo 2019-59, the Tax Court stated that a taxpayer cannot rely on prior tax returns to substantiate basis in the case of a like-kind exchange but must provide specific proof as to the elements of basis which carryover from one or more prior properties.
In Mihelick v. Commissioner, 123 AFTR2d 2019-2251, the Eleventh Circuit Court of Appeals reversed a Florida Federal District Court and allowed an ex-wife who had to report one-half of $600,000 in income that her former husband had taken improperly from his business prior to divorce to deduct her one-half repayment although it was made to her former husband who, in turn, paid it to the company.
In Baca v. Commissioner, TC Memo 2019-78, the Tax Court disallowed employee business expenses due to inadequate records and, in the case of travel expenses, due to his tax home having shifted for an indefinite work position.
RETIREMENT AND ESTATE PLANNING
In In Re: Kluck, 123 AFTR2d 2019-2234, a Wisconsin Bankruptcy Court found that an annuity is protected in bankruptcy as a retirement benefit under state law where the distribution can only be made on account of age or death.
In In Re: Yerian, 123 AFTR2d 2019-________, the Eleventh Circuit Court of Appeals agreed with a Florida Federal District Court and declined to protect an IRA in bankruptcy when there had been self-dealing and the IRA had purchased a condominium and cars for personal purposes.
In Estate of Kollsman v. Commissioner, 123 AFTR2d 2019-2296, the Ninth Circuit Court of Appeals agreed with the Tax Court which had accepted most of the testimony of the expert witness for the IRS regarding the value of a painting, the Court noting that the expert for the estate gave a value of one-fifth of the ultimate sales price one year later and rejecting the argument that there was a surge in prices for Old Masters during the year.
In Chief Counsel Advice 201926013, IRS stated that an election to use alternate valuation date is negated when an audit concludes that the date of death combined liability for estate and generation skipping tax is lower.
In Cooney v. Commissioner, TC Summary Opinion 2019-10, the Tax Court rejected a contemporaneous mileage log by a taxpayer as insufficient where a majority of the entries failed to show specific times and places of travel; in Burden v. Commissioner, TC Summary Opinion 2019-11, the Tax Court disallowed most business expenses of a pastor who had little substantiation including a mileage log that was necessarily not contemporaneous (he claimed that he drove two round trips in one year to the Dominican Republic).
In Frey v. Commissioner, TC Memo 2019-62, the Tax Court disallowed deductions of an individual claimed on a Schedule C for amounts earned as a stockbroker which he assigned to a defunct corporation with a net operating loss; he failed to consult with professionals “because of the cost” and attempted to rely on New Zealand law regarding assignment of income issues.
In Donoghue v. Commissioner, TC Memo 2019-71, the Tax Court found that horse breeding and racing activities were a hobby when the activity had made no profit in a single year, rejecting an argument by the taxpayers that the activity was in a startup phase for 27 years; in Sapoznik v. Commissioner, TC Memo 2019-77, the Tax Court found that horse showing activities were not intended as a profit-making activity in the absence of a business plan and adequate records.
In Slaughter v. Commissioner, TC Memo 2019-65, the Tax Court determined that amounts paid to an author for her name and likeness are subject to self-employment tax.
In Scott v. United States, 123 AFTR2d 2019-2186, a divided Eleventh Circuit Court of Appeals reversed and remanded a jury decision by a Florida Federal District Court which had found the daughter of the owner a responsible person who acted willfully in failing to pay over payroll taxes, the Court finding that the judge should have given an instruction to the jury that the statutory role of a corporate secretary is primarily ministerial in nature; in Dixon v. Commissioner, TC Memo 2019-79, the son of business owners who originally had ministerial responsibilities but who subsequently took over day-to-day operations was found personally liable for all except two quarters of unpaid payroll taxes.
In Hunsaker v. United States, 123 AFTR2d 2019-________, an Oregon Federal District Court agreed with a Bankruptcy Court that a couple was entitled to damages for emotional distress caused by four IRS notices sent during the period of an automatic stay, the taxpayers citing migraines, appetite loss and stress.
In United States v. Flume, 123 AFTR2d 2019-2211, a Texas Federal District Court found a failure to file FBAR returns to be willful, the Court noting the individual’s disingenuous testimony including setting forth that his reason for opening a Swiss bank account was the collapse of Lehman Brothers in the United States when it did not actually fold until three years after the Swiss account was opened.
In Park v. United States, 123 AFTR2d 2019-729, an
Illinois Federal District Court held that decedent heirs under a revocable
trust becoming irrevocable at death are liable for the decedent’s FBAR penalty;
the Court also held that the new higher statutory penalties were applicable
though the regulation promulgated unto prior law with a lower penalty had not
In Williams v. Commissioner, TC Memo 2019-66, the Tax Court found testimony of a taxpayer’s attorney to not be credible when he asserted he timely mailed a Tax Court Petition which arrived 36 days after the due date bearing no discernable postmark.
In United States v. TJ Enterprises & Acoustical, Inc., 123 AFTR2d 2019-2061, a Utah Federal District Court stated that an IRS tax lien applies to equitable ownership interests such as nominee or alter ego; however, it held that Utah law determines if the taxpayer has a property interest while federal law determines whether a federal tax lien can attach to the interest, finding here under the facts that no interest existed.
In United States v. Wilhite, 123 AFTR2d 201-________, the Tenth Circuit Court of Appeals agreed with a Colorado Federal District Court that IRS could force sale of an entire business where the delinquent individual was deemed to have only a 74 percent interest, with IRS retaining that applicable percentage of the proceeds.
In Briley v. Commissioner, TC Memo 2019-55, the Tax Court denied innocent spouse relief to an estranged spouse who did not inquire as to a net operating loss carryforward shown on the return from expensing rather than capitalizing construction costs on a speculative property, the Court noting that a “reasonably prudent taxpayer” who was college educated would have questioned the accuracy of the return particularly because she believed that the construction company made money.