Document

Federal Tax Update – May 2020

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

INDIVIDUALS

In Larkin v. Commissioner, TC Memo 2020-70, the Tax Court disallowed numerous deductions claimed by a transactional attorney at a large law firm for total lack of substantiation; the Court also found that the taxpayer’s spouse fell short of the 750 hours needed to claim she was a real estate professional managing four rental properties.

In Adkins v. United States, 125 AFTR2d 2020-________, the Federal Circuit Court of Appeals reversed a decision of the Court of Federal Claims and allowed a theft loss during the pendency of criminal charges against brokers who peddled a fraudulent investment scheme, the Court noting that every possible avenue of recovery need not be exhausted with the test being one of “reasonable prospect of recovery.”

In Richlin v. Commissioner, TC Memo 2020-60, the Tax Court awarded an overpayment shown on a prior year tax return as well as joint estimated payments to the husband whose funds were utilized for one quarter when the payment was made after divorce and in the other cases based on a prenuptial agreement of the parties which generally made the husband responsible for all tax liabilities. 

In Notice 2020-29, IRS indicated that, subject to employer discretion as to making amendments, it will permit cafeteria plan benefits expiring earlier in 2020 to be utilized through December 31, 2020 and will allow an election to participate or to modify salary reductions during the year without having to satisfy usual rules. 

IRS FAQs require the return of Economic Impact Payments (advanced payments) when the individual has died before receiving the payment, indicating that it should be returned unless the subject of direct deposit or a joint check was received in which case a check should be written back to IRS. 

BUSINESS

Proposed Regulations under Code Section 162 clarify that a taxpayer may generally not take a deduction for amounts paid to or incurred at the direction of the Government for violation or potential violation of any civil or criminal law; however, amounts related to restitution, remediation or payment to come into compliance with a law remain deductible.

In Novoselsky v. Commissioner, TC Memo 2020-68, the Tax Court determined that an attorney receiving funds from other law firms for handling a class action suit had to report these payments as income where repayment was contingent on a favorable outcome in the case. 

In Oakbrook Land Holdings, LLC v. Commissioner, 154 TC No. 10, the Tax Court upheld the regulations on conservation easements including the disqualification of a charitable deduction when the conservation purpose is not protected in perpetuity. 

In Champions Retreat Gold Founders v. Internal Revenue Service, 125 AFTR2d 2020-2057, the Eleventh Circuit Court of Appeals reversed the Tax Court and held that a conservation easement applied to land given by a developer for a private golf course (exclusive of buildings and the parking lot) despite only small portions of the course being visible by the public from the outside.

In Richmond Patients Group v. Commissioner, TC Memo 2020-52, the Tax Court once again denied a deduction for business expenses by a marijuana dispensary except for cost of goods sold as interpreted narrowly.

In NCA Argyle LP v. Commissioner, TC Memo 2020-56, the Tax Court disagreed with IRS and found that a lump sum payment in settlement of a dispute involving a joint venture dissolved as the result of litigation gave rise to capital gain as the consideration paid was for rights in the venture, the Court also noting that the parties had negotiated such in good faith and had differing tax consequences.

In Chief Counsel Memorandum 2020-5, IRS stated that, when a Section 351 transfer of property to a corporation occurs when no new stock is physically issued and the transfer is within 12 months of the disposition of stock, a pro rata portion of the gain on disposition of the stock is short-term in nature.

In Legal Advice Issued by Associate Chief Counsel 2020-003, IRS determined that a taxpayer cannot deduct previously capitalized costs for a public offering as an abandonment loss when the corporation ceased to be publicly traded and was taken private.

In Letter Ruling 202022007, IRS denied 501(c)(3) status to a dog obedience training organization for being too broad as to its purposes and for having most activities social or recreational in nature.

PROCEDURE

In CIC Services, LLC v. Internal Revenue Service, the US Supreme Court agreed to review a ruling of the Sixth Circuit Court of Appeals at 124 AFTR2d 2019-5653, which held that the Anti-Injunction Act generally precludes lawsuits attempting to restrain tax assessments or collections.

In United States v. Green, 125 AFTR2d 2020-1894, a Florida Federal District Court ruled that the FBAR penalty survives the death of the individual taxpayer.

In Schwarzbaum v. Commissioner, 125 AFTR2d 2020-747, a Florida Federal District Court found that a $12.9 million FBAR penalty for failure to file in four years where there were accounts in Costa Rica and Switzerland did not violate the excessive fines clause of the Eighth Amendment. 

In Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 TC No. 11, the Tax Court ruled that a taxpayer should have been allowed to raise substantive issues at a CDP hearing inasmuch as a computational adjustment was made to the return and, as such, there was not prior opportunity to raise substantive issues.

In Kirkley v. Commissioner, TC Memo 2020-57, the Tax Court ruled that an IRS Appeals Officer was incorrect in automatically rejecting an installment agreement when a couple owing almost $4.2 million had not first sold all of their properties; the Court stated that the IRS Manual only instructs IRS to consider whether to require liquidation of or borrowing against assets. 

In United States v. Eaton, 125 AFTR2d 2020-________, a West Virginia Federal District Court held that the wife of a couple owing over $1 million in taxes was eligible for discharge in bankruptcy as there was no willful avoidance conduct on her part inasmuch as her husband took care of the finances including spending the money on homes, boats and a large investment in a defunct energy drink business.

A revision to Internal Revenue Manual 20.1.1 sets forth guidance requiring supervisory approval of nonautomatic penalties prior to issuing any written communication to a taxpayer where the taxpayer is given an opportunity to consent to the assessment.

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