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Federal Tax Update – March 2017

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

INDIVIDUALS

In Malev v. Commissioner, Bench Opinion in Docket No. 1282-16S, the Tax Court determined that integrative medical care costs, otherwise known as “alternative” medicine, are deductible based on a subjective test of whether the individual believed that they may be effective at least where they are of the type that would not be routinely incurred for non-medical reasons, stating that medical care must take into account not only what is known but what is less understood as well, namely the role that an individual’s state of mind plays in the treatment of disease.

In Izen v. Commissioner, 148 TC No. 5, the Tax Court agreed with the IRS disallowance of a charitable donation of $338,080 for a 50 percent interest in an early generation private jet acquired three years before for $21,000; besides issues of valuation, the strict statutory substantiation requirements were defective.

In Liljeberg v. Commissioner, 148 TC No. 6, the Tax Court determined that students from other countries working in the United States during the summer were not away from their “tax home” as they were not working in their home countries and accordingly could not deduct their travel to the United States and their living expenses over the summer.

BUSINESS

In Robb Evans & Associates, LLC v. United States, 119 AFTR2d 2017-1001, the First Circuit Court of Appeals reversed a Massachusetts Federal District Court and disallowed a Court-appointed receiver’s use of Code Section 1341 which lets taxpayers deduct an amount included in income in an earlier year if the taxpayer is later required to repay the amount and it is established that the taxpayer did not have an unrestricted right to the income; the Court determined that a fraudster cannot have an unrestricted right to ill-gotten gains and that the receiver stood in the position of the taxpayer.

In Dalton v. Commissioner, TC Memo 2017-43, the Tax Court determined that a withdrawing S corporation stockholder had to report over $450,000 shown on his K-1 despite receiving no distributions in the year that he withdrew.

In McClendon v. United States, 119 AFTR2d 2017-506, a Texas Federal District Court found the owner of a family medical practice liable for $4 million dollars in unpaid trust taxes resulting from employee embezzlement where the owner lent $100,000 to the business to pay employees four days after discovery of the theft; he was found liable for the full trust portion because he failed to submit evidence that all other unencumbered funds were used to pay IRS.

In Field Attorney Advice 20171201F, IRS indicated that a business remains liable for unpaid payroll taxes notwithstanding that it used an employee leasing company which failed to pay the required tax.

In Chief Counsel Advice 201713010, IRS determined that the costs of satisfaction of regulatory conditions in order to permit a merger may be expensed depending on their nature (direct costs of a merger must be capitalized).

PROCEDURE

In Sexton v. Hawkins, 119 AFTR2d 2017-552, a Nevada Federal District Court ruled that the federal statute regulating tax professionals does not extend to the offering of written tax advice but is limited to those representing taxpayers before IRS in an administrative proceeding (a District of Columbia Federal District Court had previously determined that practice before IRS does not include return preparation).

In Shiner v. Turney, 119 AFTR2d 2017-542, the Seventh Circuit Court of Appeals reversed an Illinois Federal District Court and determined that an issuer of a Form 1099 did not commit fraud when it sent out the information return on its “due date” having not heard from the recipient who had been sent the check with a “full release on negotiation” condition; the Court noted, however, that a recipient is not considered to be in constructive receipt of a restricted check when the account is disputed.

In Keller Tank Services II, Inc. v. Commissioner, 119 AFTR2d 2017-869, the Tenth Circuit Court of Appeals agreed with the Tax Court that a taxpayer may challenge underlying tax liability at a Collection Due Process hearing only if the taxpayer had no opportunity to dispute the liability through judicial review or Appeals; in Iames v. Commissioner, 119 AFTR2d 2017-1050, the Fourth Circuit Court of Appeals concurred and in Bitter v. Commissioner, TC Memo 2017-46, the Tax Court reiterated its same interpretation.

In Lindsay Manor Nursing Home, Inc. v. Commissioner, 140 TC No. 9, the Tax Court accepted the IRS interpretation of the law that allows only individuals and not businesses to obtain a levy release due to economic hardship.

In United States v. Davis, 119 AFTR2d 2017-529, the Fifth Circuit Court of Appeals concurred with a Louisiana Federal District Court that IRS could seize and sell a residence owned by the marital community where the husband was one of several individuals responsible for payment of over $3 million in trust fund liabilities and had defaulted on modest monthly payments; the Court also concurred that the entire equity in the house after satisfaction of the prior liens was payable to IRS as the spouse had died and state law provided that a separate obligation of one spouse during the community property regime could be satisfied from the entire property after termination of the marital community.

In United States v. Baker, 119 AFTR2d 2017-________, the First Circuit Court of Appeals agreed with a Massachusetts Federal District Court that the transfer of assets to a spouse following a divorce was a fraudulent conveyance when his separate returns were the subject of an ongoing audit; despite the divorce, they continued to live and vacation together.

In In Re Pendergraft, 119 AFTR2d 2017-566, a Texas Bankruptcy Court concluded that it has the jurisdiction to determine innocent spouse status in the case of an IRS claim against a bankruptcy estate provided the individual had followed the required prior administrative procedures.

In Okorogu v. Commissioner, TC Memo 2017-53, an immigrant physician on welfare was granted equitable innocent spouse relief when she was physically abused on at least ten separate occasions and was kept in the dark as to finances, not being allowed to spend more than $10 while her husband purchased multiple expensive vehicles.

In Lock v. Commissioner, TC Summary Opinion 2017-10, the Tax Court gave innocent spouse relief to a divorced spouse on a joint assessment with her former husband, a Government contractor in Iraq, who improperly claimed an income earned abroad exclusion and deducted disallowed employee business expenses; the Court found that she was unsophisticated and did not know the facts or review the tax returns.

The IRS Website has been revised to state that, effective March 27, 2017, it will return new Offers in Compromise with the application fee if a taxpayer has any past due tax returns but will keep the initial payment submitted; a return on a valid extension is not considered a past due return.

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