Document

Federal Tax Update – March 2018

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

INDIVIDUALS

In Spireas v. Commissioner, 121 AFTR2d 2018-________, the Third Circuit Court of Appeals agreed with the Tax Court that royalties paid to the inventor on a technology license agreement were ordinary income and not capital gain inasmuch as the inventor had not transferred all of his rights away – as to the technology in general and as to the particular product which was not even in existence at the time of the alleged transfer.

In Keefe v. Commissioner, TC Memo 2018-28, the Tax Court found that an individual who spent years renovating a property purportedly for rental but never actually having a tenant was not in the business of renting and could only claim a capital loss deduction; in Levitz v. Commissioner, TC Summary Opinion 2018-10, the Tax Court concluded that the acquisition of a single piece of property for the purpose of resale is by itself not sufficient to cause an individual to be in the business of real property development and gave capital loss treatment to the individual.

In Franco v. Commissioner, TC Summary Opinion 2018-9, the Tax Court found that a licensed architect spent in excess of 1,100 hours managing two rental properties (one of them a “fourplex”) making him a “real estate professional” as he spent less than 700 hours providing architectural services; the Court relied not only on his testimony but also on a contemporaneous activity log as well as email exchanges and receipts; in Pourmirzaie v. Commissioner, TC Memo 2018-26, the Tax Court rejected calendars provided by the owner of four rental properties who was attempting to show that she performed more than 750 hours of services related to the properties, the Court noting that the calendar was not kept contemporaneously and was inconsistent with her testimony.

In Tolin v. Commissioner, TC Memo 2018-29, an attorney was able to show material participation in a horse breeding activity through phone records; the Court noted that he was an “incessantly phoning micromanager.”

In Platts v. Commissioner, TC Memo 2018-31, the Tax Court denied a deduction of an appraised value of a building to a charity both because it should have been valued for building parts and for failure to get a timely qualified appraisal.

In Jahangirian v. Comissioner, TC Summary Opinion 2018-14, the Tax Court determined that an individual whose family was in California but who worked continuously in multiple jobs in Oklahoma, visiting his family three times during the calendar year in issue, had his tax home in Oklahoma as his plans for working there were indefinite; the Court disallowed almost $45,000 in expenses related to his home in Oklahoma.

In Notice 2018-71, IRS warned of the consequences for failure to report virtual currency transactions including criminal charges of tax evasion and/or filing a false tax return.

In Chief Counsel Advice 201810007, IRS determined that the value of tax preparation services provided for the benefit of employees working outside the United States is includable in gross income and is not a working condition fringe benefit, one which (historically at least) would be deductible as a business expense if employee-paid.

RETIREMENT PLANS

In In Re:  Kees, 121 AFTR2d 2018-________, an Oregon Bankruptcy Court determined that an Individual Retirement Account transferred from a spouse’s IRA as part of a divorce settlement is an exempt asset in bankruptcy (unlike one transferred from a decedent).

In Shank v. Commissioner, TC Memo 2018-33, the Tax Court noted that the Cohan rule is applicable to estimating basis in appropriate circumstances and allowed an individual to estimate his basis in an IRA where he was not eligible for deductible contributions for a number of years due to high adjusted gross income.

BUSINESS

In RJ Channels, Inc. v. Commissioner, TC Memo 2018-27, the Tax Court required a corporation to include in income over $268,000 in fees related to tax services where the fees were returnable if favorable results were not achieved.

In Thompson v. Commissioner, TC Summary Opinion 2018-11, the Tax Court refused to allow vehicle costs of a mountain lion researcher who had no contemporaneous records but rather estimated the mileage to three destinations and multiplied that number by the quantity of trips he thought he had taken to each destination.

In Argosy Technologies, LLC v. Comissioner, TC Memo 2018-35, the Tax Court stated that a husband-wife LLC could not argue that it had a single owner to avoid the penalty on late filing of a partnership return where it had filed partnership returns in the past.

In Bennett v. Bascom, 121 AFTR2d 2018-________, a Kentucky Federal District Court determined that IRS had a valid tax lien as to an estate’s 40 percent share of proceeds from the sale of assets in  two limited partnerships, finding based on notes receivable on the books that disproportionate payments to the decedent were loans not reducing the decedent’s interest rather than distributions.

In Davis v. United States, 121 AFTR2d 2018-915, a Colorado Federal District Court found a coowner of a business personally responsible for unpaid payroll taxes notwithstanding that the other owner had primary responsibility for the financial affairs of the company and that the other owner testified that she exercised “total” control; the Court noted he had signing authority although he was in the field and had used his authority to direct a downpayment on a sports car.

In Chief Counsel Advice 201808016, IRS stated that an employer may offset self-employment tax paid by its workers against its liability for employees’ share of social security where the workers were found to be employees rather than an independent contractors.

PROCEDURE

In Marinello v. United States, 121 AFTR2d 2018-1053, the US Supreme Court by a 7 to 2 vote reversed a decision of the Second Circuit Court of Appeals affirming the conviction by a New York Federal District Court jury of obstructing or impeding administration of the Internal Revenue laws, the Court holding that a conviction could not be sustained for failure to keep records and that this “omnibus’ statute applies only to conduct after notification of an audit or other targeted administrative action.

In Whistleblower 23711-15W v. Commissioner, TC Memo 2018-34, the Tax Court struck down an attorney’s claim of a whistleblower award for showing tax evasion using offshore entities, finding that IRS did not use the information provided because it was inadmissible due to attorney-client privilege.

In Montana v. The Real Property Located at 6350 West Montana Highway, 121 AFTR2d 2018-________, a Montana Federal District Court determined that an earlier federal tax lien gave the United States priority over Montana which sought forfeiture of property related to production and manufacture of marijuana.

In United States v. Poff, 121 AFTR2d 2018-________, the Ninth Circuit Court of Appeals agreed with a Washington Federal District Court that once veteran disability benefits are banked they can be seized in an IRS levy (in this case on an inmate trust account); in Maehr v. Commissioner, 121 AFTR2d 2018-________, a Colorado Federal District Court reached the same result.

In Heedram v. Commissioner, TC Memo 2018-25, the Tax Court gave equitable innocent spouse relief to a divorced husband, finding that the factor of hardship was neutral despite the fact that he sent $400 monthly to his family in Jamaica.

In Internal Revenue Service v. Davis, 121 AFTR2d 2018-________, a New Jersey Federal District Court agreed with the weight of authority that a tax debt may not be discharged in bankruptcy after a Substitute for Return (SFR) has been filed by IRS, citing that returns filed after assessment are not “returns” for discharge purposes; in In Re:  Ward, 121 AFTR2d 2018-________, a Florida Bankruptcy Court with no evidence other than the testimony of the widow of a CPA, determined that an individual tax return was not filed prior to the filing of the bankruptcy case not permitting discharge of the liability in bankruptcy.

In News Release 2018-52, IRS announced that it will close the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018 but will continue the Streamlined Filing Compliance Procedures thereafter for those unaware of their obligations.

———————————–