Document

Federal Tax Update – November 2017

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

INDIVIDUALS

In Wolens v. Commissioner, TC Memo 2017-236, the Tax Court applied US law to a UK divorce order which was silent on whether spousal payments ceased on the death of the recipient and found that they would continue as a matter of law and, accordingly, denied an alimony deduction (the payor argued unsuccessfully that the law of New York where the parties were married and the recipient continued to live should apply); in Logue v. Commissioner, TC Memo 2017-234, the Tax Court applied Texas law where a Settlement Agreement was silent and reached the same result.

In Hudson v. Commissioner, TC Memo 2017-221, the Tax Court found that a pilot for Korean Airlines who spent a majority of his time in the United States and stayed at a hotel in Korea when in that country was not a bona fide foreign resident but was a resident of the United States where his family stayed.

In Syed v. Commissioner, TC Memo 2017-226, the Tax Court determined that a 75-year old urologist who worked full time in the practice did not participate over 500 hours per year in a surgical center; he testified that he spent “at least ten hours per week” at the center but offered no details and accordingly could not use flow through losses.

In Barry v. Commissioner, TC Memo 2017-237, the Tax Court disallowed a deduction for the legal fees of an individual seeking to recoup excess alimony payments as not incurred in the production of income.

In Revenue Procedure 2017-60, IRS concluded that deterioration in concrete foundations as the result of using pyrrhotite in the concrete mixture gives rise to a casualty loss upon written evaluation from a licensed engineer indicating that the foundation was made with defective concrete containing that mineral.

In Letter Ruling 201743011, IRS determined that an employer overpayment of a defined benefit pension which is not corrected due to employer discretion does not give rise to relief from indebtedness income.

RETIREMENT PLANS

In a Memo of the Tax Exempt and Government Entities Division, IRS indicated that a retirement plan will be in violation of the required minimum distribution rules if it fails to distribute to a participant aged 70½ because of a failure to locate the former employee unless it has searched employer and plan records, attempted contact through mailing addresses, email address and phone numbers found in records, as well as used an outside locator service or similar.

ESTATES

In Smith v. Commissioner, TC Memo 2017-218, the Tax Court found a sham where a couple transferred all of their liquid assets to an S corporation which then moved those assets into a family limited partnership and subsequently liquidated the S corporation and claimed a loss as the result of a 40 percent combined discount for lack of marketability and lack of control upon dissolution of the S corporation; the Court imposed an accuracy penalty notwithstanding that the advice came from an attorney-CPA.

In Chief Counsel Advice 201747005, IRS denied a charitable deduction to a trust when the original language was modified by consent (rather than through a controversy in interpretation) to allow donations to private foundations.

BUSINESS

In VHC, Inc. v. Commissioner, TC Memo 2017-220, the Tax Court denied a business bad debt deduction for millions of dollars advanced, finding that there was no intention to force repayment; the arrangement continued even after the company first claimed a bad debt deduction.

In Messina v. Commissioner, TC Memo 2017-213, the Tax Court determined that S corporation shareholders who lent money to a qualified subchapter S subsidiary (QSUB) did not get basis in these loans as they were not made directly to the parent.

In Welch v. Commissioner, TC Memo 2017-229, the Tax Court found that a ranch with cattle, hay and horse operations was operated with the intention of making a profit notwithstanding reported losses of almost $10 million over a three-year period, the Court noting that a taxpayer’s “suffering years of multimillion-dollar losses beyond an activity’s startup phase does not bar a profit motive” but warning that future losses must be “reined in” as it cannot be considered a for-profit activity ad infinitum.

PROCEDURE

In United States v. Bussell, 120 AFTR2d 2017-5444, the Ninth Circuit Court of Appeals agreed with a California Federal District Court that the civil penalty for willful FBAR violations does not violate the “Excessive Fines Clause” of the US Constitution.

In Pearson v. Commissioner, 149 TC No. 20, the Tax Court found a petition to have been filed late when an attorney’s staff got postage and a certified mail label through Stamps.com on the 89th day and testified that the petition was mailed on the same day but the post office tracking commenced two days later.

In Fidelity and Deposit Company of Maryland v. Ohio Department of Transportation, 120 AFTR2d 2017-5528, an Ohio Federal District Court determined that IRS could not levy on payments to a contractor working on a road project as, under Ohio law, the surety bond company had the only interest in the funds until completion of the project.

In In Re Petersen, 120 AFTR2d 2017-6368, a California Bankruptcy Court, seemingly disregarding precedent in the Ninth Circuit, took the minority position that tax liability on late filed returns can be dischargeable if requisite time periods are satisfied and no Substitute for Return (SFR) was issued previously.

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