Federal Tax Update – May 2018
In Voigt v. Commissioner, TC Summary Opinion 2018-25, the Tax Court agreed with IRS that an individual who was laid off from Tulane University and received tuition waivers for his children as part of his severance package was properly taxed on the value of the benefit as the general exclusion for undergraduate education of dependents only applied to current employees or to those who retired or became disabled.
In Hamilton v. Commissioner, TC Memo 2018-62, the Tax Court determined that a taxpayer’s assets for purpose of the insolvency exception to the general rule that cancellation of indebtedness is taxable included transfers made to a child where the taxpayer continued to enjoy the benefit of the transferred funds.
In Azam v. Commissioner, TC Memo 2018-72, the Tax Court failed to believe a couple who claimed that they turned over a “black book” containing receipts and logs to IRS but it was not returned and accordingly they were unable to prove significant personal and business expenses at trial.
In Fehr v. Commissioner, TC Summary Opinion 2018-26, the Tax Court disallowed substantial employee business expenses claimed by a sales manager due to inadequate substantiation and huge charitable deductions of property due to inadequate descriptions or acknowledgements.
In Farolan v. Commissioner, TC Summary Opinion 2018-28, the Tax Court disallowed a taxpayer’s deduction for otherwise allowable business and personal expenses due to inadequate substantiation including uncorroborated contributions to her church though the court took note of her “sincere testimony” (the Court also denied a deduction for clothing worn to trade shows as they were found suitable for street wear); in Fiedziuszko v. Commissioner, TC Memo 2018-75, the Tax Court again disallowed unsubstantiated expenses including church donations despite “credible” testimony (the Court also threw out over $27,000 in alleged donations of clothing and electronics in a single year to Goodwill).
In Lakhani v. Commissioner, 121 AFTR2d 2018-1709, the Ninth Circuit Court of Appeals agreed with the Tax Court that an accountant could not deduct separate and apart from a losing horse racing wager itself an amount equal to the percentage of his wagers representing the track’s takeout that is not returned to bettors.
In News Release 2018-122, IRS set forth its adverse position on avoiding the limits on deductibility of state and local taxes through alternative characterization of the payments as charitable contributions, noting that federal tax law and not state characterizations control the deduction.
In Letter Ruling 201819004, IRS ruled in the case of a disability plan for police officers that paid the greater of 50 percent of final average compensation or the retirement value based on employer and employee contributions that payments are excludable by the officer or spouse (in the case of a deceased officer) to the extent that benefits do not exceed 50 percent of final average compensation; IRS also ruled that such payments made to spouses pursuant to a domestic relations order are not excludable.
In Revenue Ruling 2018-17, IRS stated that a payment by a trustee of an IRA to a state unclaimed property fund is subject to federal income tax withholding.
In Sarvak v. Commissioner, TC Memo 2018-68, the Tax Court denied a business bad debt deduction for unsecured advances made to a business partner that were shown on the books as advances but were not evidenced by notes and were unsecured; the Court expressed doubt that these amounts were loans in light of the last payment changing hands only ten days before the yearend when worthlessness was claimed.
In Dynamo Holdings Limited Partnership v. Commissioner, TC Memo 2018-61, the Tax Court determined that advances between related companies were bona fide loans when the transfers were shown as debt on the company books notwithstanding the lack of contemporaneous formalities, allowing the borrower to deduct the interest expense; notes were subsequently executed and repayments commenced.
In Triumph Mixed Use Investments III, LLC v. Commissioner, TC Memo 2018-65, the Tax Court determined that a real estate development company could not get a charitable deduction of $11 million for land transferred to a city as it was found to be an exchange for approval of a development plan notwithstanding that the agreement with the city contained a “no consideration” clause and language that the donation was voluntary.
In Pexa v. United States, 121 AFTR2d 2018-730, a California Federal District Court, following prior decisions of the Seventh and Ninth Circuit Courts of Appeal, found that termination payments received by a retiring insurance agent were ordinary income and not capital gain; the Court noted that the insurance carrier reserved property rights such that the retiree did not have a capital asset.
In Phillips v. Commissioner, 121 AFTR2d 2018-1776, the Eleventh Circuit Court of Appeals agreed with the Tax Court that shareholders in an S corporation are not entitled to an increase in basis due to guaranteed loans which were never paid inasmuch as an “economic outlay” is required to obtain a basis increase.
In Samadi v. Commissioner, TC Summary Opinion 2018-27, the Tax Court denied a deduction for over $38,000 in expenses over two years with no offsetting income in the case of an individual who showed his primary occupation as a “tax specialist” but who sought to get into the business of flipping homes; the Court determined that a business had not yet commenced despite the taxpayer having obtained a real estate license and did not need to get into other issues such as the veracity of the mileage logs.
In Barker v. Commissioner, TC Memo 2018-67, the Tax Court concluded that an individual with nine consecutive years of losses was attempting to make a profit through music promotion of artists including his son; however, the Court threw out many deductions based on lack of substantiation.
In IRS Tax Tip 2018-68, IRS appeared to accept the legislative intent despite a needed technical correction by recognizing that nonstructural improvements to a building are generally “15 year property” and accordingly are subject to 100 percent bonus depreciation (in any event they may apparently be expensed).
In Letter Ruling 201821012, IRS found that relinquishment of television broadcast spectrum rights based on fear of being forced to operate on less reliable frequencies constitutes a disposition under threat of condemnation and is an involuntary conversion under Code Section 1033.
In Full-Circle Staffing, LLC v. Commissioner, TC Memo 2018-66, the Tax Court found that a trust which had majority ownership of four partnerships was a sham, causing taxation of the individual on sufficient enough income such that a six-year statute of limitations applied on assessment.
In Becker v. Commissioner, TC Memo 2018-69, the Tax Court threw out up to $3.5 million in civil fraud penalties or, alternatively, accuracy penalties because IRS could not prove at trial a requirement that the penalty determination was approved in writing by a supervisor despite admission during trial of “fake deductions that amounted to over $1.2 million over the course of four years” and omissions of “great dollars of income.”
In United States v. Colliot, 121 AFTR2d 2018-775, a Texas Federal District Court reached a different result than had the Ninth Circuit Court of Appeals and ruled that IRS could not impose an FBAR penalty permitted by recent statute to the extent that lower amounts provided for in earlier regulations had not been changed to reflect the increase.
In United States v. Pest Bureau, Inc., 121 AFTR2d 2018-________, a South Carolina Federal District Court granted an injunction against a business and its employees and attorneys, enjoining them from continuing to fail to withhold and pay over employment and unemployment taxes under penalty of civil and criminal sanctions for contempt of court.
In Weiss v. Commissioner, 121 AFTR2d 2018-________, the District of Columbia Circuit Court of Appeals agreed with the Tax Court that the 30-day period for a timely CDP appeal is measured from the mailing date of the notice and not from the date on the letter; the Court noted that it had to choose between a “taxpayer deliberately attempting to manipulate the Code to prevent paying his own taxes or a government agency that seems not to care whether it provides the citizenry with notice of their rights and liabilities.”
In Chief Counsel Advice 201818015, IRS concluded that an internet domain name used in a business is an asset generally exempt from levy in the absence of a jeopardy assessment or approval at a high level.
In Chief Counsel Advice 201820018, IRS concluded that it could seize equipment involved in the marijuana industry without violating federal drug laws.