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Federal Tax Update – May 2017

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

INDIVIDUALS

In Bates v. Commissioner, TC Memo 2017-72, the Tax Court determined that an individual who received compensation for emotional distress, lost wages and attorney fees because she was terminated for missing too many workdays due to a back injury could not exclude any of the settlement payments as the “origin of the claim” was discrimination and wrongful discharge and not the physical injury itself.

In Cooke v. Commissioner, TC Memo 2017-74, the Tax Court gave a narrow definition to the term “repair or maintenance work” for purpose of the 14-day limitation on personal use of a property and determined that the use for other purposes related to the property constitutes a personal day.

In McNally v. Commissioner, TC Memo 2017-93, the Tax Court determined that a junior high teacher was not a “real estate professional” and did not spend more time managing 6-8 rental properties than he did teaching; his time descriptions were vague and included terminology such as “real estate stuff.”

In Adkins v. United States, 119 AFTR2d 2017-737, the Federal Circuit Court of Appeals disagreed with the Court of Federal Claims and stated that an individual may claim a theft loss in the year in which there appears no reasonable prospect of recovery despite continuing to maintain a claim in the courts.

In Creigh v. Commissioner, TC Summary Opinion 2017-26, the Tax Court denied a deduction for the cost of an MBA to a software engineer who testified that the courses she took “did not really help in my area, in terms of project management” and found that the degree would qualify her for a new business.

ESTATES

In Estate of Powell v. Commisioner, 148 TC No. 18, the Tax Court determined that a decedent’s transfer of $10 million to a family limited partnership through her power of attorney followed by the transfer of her 99 percent interest to a charitable lead trust one week before death was void as outside the authority given in the power of attorney (concurring judges would have reached the same result but set the transfer aside as a sham).

BUSINESS

In Byrne v. United States, 119 AFTR2d 2017-1824, the Sixth Circuit Court of Appeals reversed a Michigan Federal District Court, determining that the Chief Executive Officer and President did not willfully fail to pay over payroll taxes when they had no actual knowledge and relied on incorrect audited financial statements showing no unpaid taxes and accordingly did not personally investigate despite prior issues of unpaid taxes.

In an Executive Order, President Trump directed that tax-exempt status not be denied nor any penalty be imposed on any religious organization for taking a political stance from a religious perspective.

In Letter Ruling 201717010, IRS determined that a C corporation which performed a particular medical test and prepared a laboratory report for health providers was eligible for the 100 percent exclusion on the disposition of small business stock, finding that it was not engaged in performing nonqualifying services in the field of health.

PROCEDURE

In United States v. Padron, 119 AFTR2d 2017-764, a Texas Federal District Court, noting that the courts are in disagreement, determined that IRS can get an injunction against a taxpayer (here one owing over $2.7 million in unpaid payroll taxes) if appropriate for the enforcement of Internal Revenue laws without reference to the traditional equitable factors which would have required irreparable harm to IRS if the injunction were not granted, a balancing between this harm and the potential injury to the taxpayer, the probability that IRS would succeed on the merits and the public interest.

In Bulakites v. Commissioner, TC Memo 2017-79, the Tax Court imposed the accuracy penalty on an individual who claimed improper deductions for alimony, interest and a net operating loss and blamed it on TurboTax; the Court noted that “tax preparation software is only as good as the information one inputs into it.”

In Ervin v. United States, 119 AFTR2d 2017-725, a Kentucky Federal District Court required IRS to refund an accuracy-related penalty based on a jury verdict notwithstanding that the taxpayer had received a settlement from the tax advisor which might constitute a double recovery.

In Rubel v. Commissioner, 119 AFTR2d 2017-742, the Third Circuit Court of Appeals agreed with the Tax Court that the Tax Court had no jurisdiction to hear an appeal from denial of innocent spouse status when the petition was filed after the 90th day notwithstanding an intervening letter from IRS following the Notice of Deficiency which gave an incorrect deadline for filing the petition.

In Cardaci v. United States, 119 AFTR2d 2017-1735, the Third Circuit Court of Appeals disagreed with a Pennsylvania District Court and stated that actuarial considerations are required in determining the percentage of proceeds that IRS retains on the forced sale of tenants by the entirety real estate; the Court distinguished real estate from cash accounts held as tenants by the entirety.

In Palomares v. Commissioner, 119 AFTR2d 2017-________, the Ninth Circuit Court of Appeals reversed the Tax Court and ruled that an error by a volunteer attorney in filing the “injured spouse” form rather than the “innocent spouse” form on behalf of a non-English speaking battered wife put IRS on sufficient notice of the claim so as not to bar innocent spouse status for failure to timely assert the claim.

In In Re:  Giacchi, 119 AFTR2d 2017-733, the US Court of Appeals for the Third Circuit agreed with a Pennsylvania Federal District Court and, following the weight of authority with only the Eighth Circuit disagreeing, ruled that tax liability for a year is nondischargeable in bankruptcy following the preparation of a Substitute for Return by IRS.

In Chief Counsel Advice 201719026, IRS stated that a taxpayer reporting undisclosed income from foreign sources for the eight preceding years under the OVDP program cannot offset years of tax liability with a loss in another year unless the usual statute of limitations has not run on the loss year.

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