Document

Federal Tax Update – May 2019

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

INDIVIDUALS

In Jim v. United States, the US Supreme Court denied certiorari, declining to review a ruling of the Eleventh Circuit Court of Appeals at 121 AFTR2d 2018-1939 which held that shared gaming revenue among Native American tribe members was not exempt from taxation as welfare payments.

In Barbara v. Commissioner, TC Memo 2019-50, the Tax Court determined that a couple running a lending business materially participated, finding that their hours exceeded 700 per year and that participation was regular, continuous and substantial. 

In Williams v. Commissioner, 123 AFTR2d 2019-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that an individual’s airplane rental activity was not a single economic unit with a telephone skills training business, causing the airplane rental to be a passive activity.

In Conner v. Commissioner, 123 AFTR2d 2019-________, the Eleventh Circuit Court of Appeals agreed with the Tax Court that the character of several pieces of land had changed from being held for development to being held for investment when developmental steps got stymied and ceased, giving only a capital loss.

In Milkovich v. United States, 123 AFTR2d 2019-________, a Washington Federal District Court determined that a homeowner could not deduct interest paid to the lender on a mortgage debt where personal liability was discharged in an earlier bankruptcy as the debt had become nonrecourse to the taxpayer.

In Oliveri v. Commissioner, TC Memo 2019-57, the Tax Court denied tens of thousands of dollars of charitable contributions claimed by an evangelist who deducted substantial personal expenses; the taxpayer argued that all meals in restaurants were deductible as he was evangelizing the wait staff and other customers while eating.

In Blau v. Commissioner, 123 AFTR2d 2019-________, the District of Columbia Circuit Court of Appeals agreed with the Tax Court that a deduction for a donation of commercial property to a university could be denied where the taxpayer failed to comply with the regulatory requirement of furnishing basis information as this is only excusable if a valid explanation is provided for noncompliance. 

RETIREMENT AND ESTATE PLANNING

In Reed KRON/IBEW Local 45 Pension Plan, 123 AFTR2d 2019-________, the Ninth Circuit Court of Appeals reversed a California Federal District Court and allowed a domestic partner to receive surviving spouse benefits, noting that California law applied in the absence of federal guidance which did not exclude domestic partners from the definition of “spouse” until September 2, 2016.

BUSINESS

In Petersen v. Commissioner, 123 AFTR2d 2019-699, the Tenth Circuit Court of Appeals agreed with the Tax Court that stock in an ERISA trust is deemed to be owned by the beneficiaries for purpose of the related party rule which denies a deduction to an accrual basis payor for amounts owed to a related party until such time as amounts are includable in the recipient’s income.

In Hawk v. Commissioner, 123 AFTR2d 2019-1822, the Sixth Circuit Court of Appeals agreed with the Tax Court that owners of a C corporation that became a “shell” after an asset sale had transferee liability when they sold the stock to an unrelated company and the corporate taxes never got paid.

In Meruelo v. Commissioner, 123 AFTR2d 2019-1784, the Eleventh Circuit Court of Appeals agreed with the Tax Court that intercompany loans among various business entities partly owned by the taxpayer and an S corporation in which he had significant losses could not be used to the extent he was seeking to claim basis as the result of reclassifications of these loans as being from the taxpayer to the S corporation, the Court finding that the taxpayer could not establish a bona fide indebtedness running directly to the taxpayer.

In Myers v. United States, 123 AFTR2d 2019-1782, the Eleventh Circuit Court of Appeals found a CPA who was chief financial officer of two companies owing payroll taxes to be personally responsible for the trust portion despite the parent company being receivership where the Small Business Administration was the receiver and a government agent allegedly told him not to pay the payroll taxes.

In Letter Ruling 201917008, IRS refused to give tax exempt status to an organization providing financial aid to patients who could not afford their medical marijuana, noting that the activity is one in contravention of federal law.

In Letter Ruling 201918013, IRS determined that the issuance of stock under an employee stock compensation plan with more restrictions on disposition of shares than that of the controlling shareholder did not create a second class of stock for the S corporation.

PROCEDURE

In United States v. Askins & Miller Orthopaedics, 123 AFTR2d 2019-________, the Eleventh Circuit Court of Appeals reversed a Florida District Court and allowed IRS to get an injunction against a business which has failed to withhold employment taxes for nine years, the Court holding that IRS had no adequate remedy at law and that the collectability of money is relevant to determining whether a legal remedy is adequate; the Courts are deeply divided on the issue.

In Taylor Lohmeyer Law Firm v. United States, 123 AFTR2d 2019-________, a Texas Federal District Court ruled that a law firm engaged in setting up foreign accounts, foreign trusts and foreign corporations could not avoid compliance with an IRS summons to produce names of clients, the identity of a client normally falling outside the attorney-client privilege unless it is the “last link” in an existing chain of incriminating evidence likely to lead to the client’s indictment.

In United States v. Park, 123 AFTR2d 2019-________, an Illinois Federal District Court held that the FBAR penalty can be collected post-death from an estate.

In In Re:  Bailey, 123 AFTR2d 2019-________, a North Carolina Bankruptcy Court found that the shared responsibility payment was a penalty; the courts are deeply divided.

In Harper v. United States, 123 AFTR2d 2019-657, a California Federal District Court held that it did not have jurisdiction to consider a couple’s claim for refund when IRS denied the original claim for failure to adequately set forth the factual basis of their position, providing supporting documents to IRS only after denial of the claim.

In Kearse v. Commissioner, TC Memo 2019-53, the Tax Court indicated that IRS Appeals abused its discretion in not producing direct proof of mailing of a Notice of Deficiency to the proper address when both proper mailing and receipt were challenged by the taxpayer.

In Romano-Murphy v. Commissioner, 152 TC No. 16, the Tax Court on remand from the Eleventh Circuit Court of Appeals threw out an assessment of the trust fund recovery penalty where IRS failed inadvertently to provide a pre-assessment Appeals conference despite the timely filing of a Protest as, per the Eleventh Circuit Court of Appeals, this is a statutory requirement.

In Briley v. Commissioner, TC Memo 2019-55, a college-educated wife was denied innocent spouse relief from her husband who went to prison for assaulting a police officer where she should have seen negative income and questioned the accuracy of the return.

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