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Federal Tax Update – March 2019

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

INDIVIDUALS

In Gaylor v. Mnuchin, 123 AFTR2d 2019-1056, the Seventh Circuit Court of Appeals reversed a decision of a Wisconsin Federal District Court and determined that the housing allowance for the clergy is constitutional and does not violate the First Amendment as endorsing religion, the Court concluding that the law was to offer religious leaders the same benefit as secular employees whose jobs have housing requirements.

In Cash v. United States, 123 AFTR2d 2019-________, a Pennsylvania Federal District Court determined that the individual shared responsibility payments do not violate the Fifth or Tenth Amendment and reiterated that the Supreme Court had already ruled the absence of a violation of the Sixteenth Amendment.

In Mancini v. Commissioner, TC Memo 2019-16, the Tax Court denied a user of pramipexole, a treatment for Parkinsons’s Disease but believed to cause loss of impulse control, a casualty loss deduction for his $3.5 million net gambling losses.

The IRS Website, despite the literal language of the statute to the contrary pending a technical correction, was revised to show that a deduction for attorney fees is permitted by victims of sexual harassment by employers even if a confidentiality agreement is included.

RETIREMENT AND ESTATE PLANNING

In In Re:  Correra, 123 AFTR2d 2019-________, a Texas Bankruptcy Court declined to protect IRAs in bankruptcy when they had engaged in prohibited transactions.

In Kress v. United States, 123 AFTR2d 2019-________, a Wisconsin Federal District Court examined two valuations by donors of stock in a family-owned S corporation and one by IRS, accepting one of the valuations by the donors subject to reducing the lack of marketability discount by three percent to 27 percent in two years and 25 percent in the third year because the valuation considered non-arms lengths restrictions in a shareholder agreement; the donors’ primary expert utilized comparables and a second expert reached a close result by weighing capitalized earnings to the extent of 86 percent and market to the extent of 14 percent (the Court found S status to be a neutral consideration in valuation due to both advantages and disadvantages).

In Dieringer v. Commissioner, 123 AFTR2d 2019-1020, the Ninth Circuit Court of Appeals agreed with the Tax Court that the proper charitable deduction on Form 706 is the amount actually received by the charity and not necessarily the date of death value.

In Notice 2019-18, reversing 2015 guidance, IRS announced that it will no longer be proposing regulations which would have prohibited taking a lump sum or other accelerated payment from a defined benefit plan after commencing an annuity.

BUSINESS

Proposed Regulations under Sections 301-304 have been withdrawn; in the withdrawal, IRS asserted that shareholders should compute gain on a share by share basis and not be able to shift unrecovered basis to other stock in most cases which conflicted with certain portions of the withdrawn Proposed Regulations.

In Langston v. Commissioner, TC Memo 2019-19, a tax attorney and her husband were denied depreciation deductions for a yacht and a recreational vehicle that they claimed were used in his marina management business after the Revenue Agent examined both and found substantial evidence of personal use.

In Rodriguez v. Commissioner, TC Summary Opinion 2009-4, the Tax Court agreed with IRS that two Schedule Cs for a consultant and delivery business were primarily to provide private tutorials and transportation for a couple’s severely handicapped daughter.

In Bonilla v. United States, 123 AFTR2d 2019-________, a Connecticut Federal District Court determined that a former wife who received a stock interest in an S corporation whose charter had lapsed still had to report her distributive share of income and notwithstanding that she was only the equitable and not the legal owner due to the lack of formalities in providing her with a stock certificate.

In Kurdziel v. Commissioner, TC Memo 2019-20, the Tax Court concluded that a retired fighter pilot and commercial airline captain who bought a British warplane intending to sell rides but limited by law to using them in air shows and who claimed tax losses in excess of $117,000 in each of four years was engaged in a hobby despite the plane’s arguable rise in value prior to a crash.

In Revenue Ruling 2019-9, IRS suspended two old revenue rulings regarding the active conduct of a trade or business in order to study issues; the 62 year old rulings denied tax retreatment to divisions when one segment of the divided business was real estate assets in one case and exploratory activities in the other.

PROCEDURE

In Montrois v. United States, 123 AFTR2d 2019-920, the District of Columbia Circuit Court of Appeals reversed a DC Federal District Court and determined that the PTIN charge is valid.

In Burbach v. Commissioner, TC Memo 2019-17, the Tax Court agreed with IRS that a late filing penalty applies where a corporation delayed filing because its preparer advised that corporations had six years in which to file their returns.

In ATL & Sons Holdings, Inc. v. Commissioner, 152 TC No. 8, the Tax Court concluded that an S corporation was liable for the failure to file penalty even though all shareholders timely filed their individual returns and found that supervisory approval was not needed for this penalty as it was automatically calculated.

In United States v. Garrity, 123 AFTR2d 2019-941, a Connecticut Federal District Court found that IRS could impose the statutory FBAR penalty of 50 percent of the account balance despite old regulations with a $100,000 cap which had not been changed; the courts are deeply divided.

In Gregory v. Commissioner, 152 TC No. 7, the Tax Court held that a notice of deficiency was valid even if sent to an old address and that a taxpayer’s last known address to IRS does not change by the filing of a power of attorney or extension of time to file.

In Jordan v. Commissioner, TC Memo 2019-15, the Tax Court determined that the date on a late US Post Office postmark controlled over a timely private postage label and threw out a Tax Court petition as untimely.

In Turner v. Internal Revenue Service, 123 AFTR2d 2019-1099, a California Federal District Court ruled that the petitioner, who was serving 29 years to life for first degree murder, could not use a writ of habeas corpus to seek a tax refund.

In United States v. Nelson, 123 AFTR2d 2019-________, a South Dakota Federal District Court ruled that the spouse of a tax delinquent whose individually titled home was seized by IRS had a homestead right under state law equivalent to the value of her life estate in the property and, accordingly, must be compensated by IRS despite not being on the title to the property.

In Henry v. Commissioner, TC Memo 2019-24, the Tax Court granted equitable innocent spouse relief to an individual who claimed that she was unaware of income received by her former husband even though he had income from this secondary source in the previous year and it was a subject in divorce proceedings, the Court finding that she should have known of the unreported income but that this was the only factor weighing against relief and five other factors favored relief.

In Brooks v. Commissioner, TC Summary Opinion 2019-5, the Tax Court denied innocent spouse relief to an individual who earned most of the income shown on a joint return and whose wife had filed for bankruptcy, noting that the only factors in his favor were health issues and that he did not receive a significant benefit from the unpaid tax liability.

In Notice 2019-25, IRS announced that the penalty for underpayment of estimated taxes will not apply for 2018 if 80 percent of actual liability is paid in estimated tax installments or through withholding.

In Chief Counsel Advice 201906008, IRS stated that it may use “reliable secondary evidence” to prove that a taxpayer signed an extension of the statute of limitations on collection that could not be located.

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