Federal Tax Update – November 2018
In Duncan v. Commissioner, TC Memo 2018-190, the Tax Court agreed with IRS that a lawyer who handled a disability claim for a fixed fee of $2,500 and reached a great result causing the client to give the lawyer an additional $30,000 had reportable income rather than a nontaxable gift despite the lack of the client’s obligation to make the added payment; the client had deducted the $30,000 payment.
In Wentworth v. Commissioner, TC Memo 2018-194, the Tax Court, looking at 11 factors and seeming to give greatest consideration to the indefinite nature of his employment, determined that an individual working for a firm providing security under a Government contract was a bona fide resident of Iraq despite being required to leave the country annually and having little ties to daily life in Iraq; in Leuenberger v. Commissioner, TC Summary Opinion 2018-52, the Tax Court found that a pilot who was a government contractor spending about one-half his time in Afghanistan was not a bona fide foreign resident, having no ties whatsoever to Afghanistan and living on an airbase because of the hostile environment.
In Liljeberg v. Commissioner, 122 AFTR2d 2018-5395, the DC Circuit Court of Appeals agreed with the Tax Court that foreign students in the US as part of a work-travel exchange program cannot offset their wage income with travel costs, largely because the expenses were not incurred in the pursuit of a trade or business.
In Valle v. Commissioner, TC Summary Opinion 2018-51, the Tax Court agreed with IRS that an attorney with an LLM degree in Spain could not deduct the cost of getting another LLM in the United States as it qualified him for a new business – practicing law in the United States as opposed to Spain.
In Ballard v. Commissioner, TC Summary Opinion 2018-53, the Tax Court rejected a log kept by the wife of a CPA who attempted to show that she was a real estate professional by virtue of owning seven real properties, noting that the log was neither contemporaneous and exceeded 750 hours only by including time akin to that of an investor; in Estate of Ramirez v. Commissioner, TC Memo 2018-196, the Tax Court again found that a seriously ill woman was not a real estate professional when her estate could not prove that she had worked 750 hours in real estate nor could it show that this time exceeded her time in other activities.
In Legal Advice Issued by Associate Chief Counsel 2018-4, IRS stated that the test as to convenience of the employer in the case of employer-provided meals is whether the meals are necessary for the employee to properly perform duties of the job, giving favorable examples of occasional emergencies or busy periods at mealtimes; the Advice suggests that IRS should look at employer policies and how they serve employer goals to see if the meals constitute disguised income.
In Plaza Staffing Services, Inc. v. Commissioner, 122 AFTR2d 2018-5396, the Third Circuit Court of Appeals agreed with the Tax Court that an ESOP failed to satisfy minimum participation standards when it covered only the sole employee of one corporation in a brother-sister controlled group and did not cover any of the five employees of the sister entity.
In Gillette v. Commissioner, TC Memo 2018-195, the Tax Court determined that a taxpayer who took prescription medication for restless legs syndrome and demonstrated compulsive behavior including incessant casino gambling could not avoid the early withdrawal penalty due to disability.
Proposed Regulations under Code Section 2010 provide that an individual utilizing the higher unified credit from 2018 through 2025 for gifts will not be adversely affected upon death through a “clawback” after the credit is cut in half in 2026.
In Estate of Turner v. Commissioner, 151 TC No. 10, a divided Tax Court determined that an estate is not required to reduce the marital deduction by the amounts of federal estate and state death taxes as these taxes are solely attributable to property included in the gross estate; the Court also found that the marital deduction amount could not be increased by post-death income generated by marital deduction property.
In Patients Mutual Assistance Collective Corporation v. Commissioner, 151 TC No. 11, the Tax Court once again denied a marijuana dispensary a deduction for expenses other than cost of goods sold; the dispensary attempted to argue that its carrying of other merchandise accounting to about ½ percent of revenue negated the prohibition.
In Ford v. Commissioner, 122 AFTR2d 2018-5398, the Sixth Circuit Court of Appeals agreed with the Tax Court that an heiress and former recording artist lacked a profit motive in owning a music venue where expenses consistently exceeded revenue and amounts charged for admission, snacks and beverages were low.
In Curtis v. Commissioner, TC Summary Opinion 2018-50, taxpayers failing to report a distribution from a retirement plan were determined not to be responsible for the accuracy penalty because the IRS did not introduce any evidence of managerial approval of the penalty.
In Czerw v. Lafayette Storage & Moving Corporation, 122 AFTR2d 2018-5416, a New York Federal District Court ruled that both a business and a responsible individual can be liable in a civil action by an injured party where a fraudulent information return was filed.
In Khafra v. United States, 122 AFTR2d 2018-6610, a Maryland Federal District Court threw out a claim for refund filed April 16, 2015 where the original deadline for filing the 2011 return was April 17, 2012, the Court stating that the three-year period for claiming refunds runs from the applicable April 15 without consideration for weekends and holidays.
Feshbach v. Department of Treasury, 122 AFTR2d 2018-6661, a Florida Federal District Court agreed with a Bankruptcy Court that a couple who made an average of $1.5 million per year over nine years while tax debt was accruing could not discharge the liability in bankruptcy due to willful evasion.
In Rogers v. Commissioner, 122 AFTR2d 2018-6683, the Seventh Circuit Court of Appeals agreed with the Tax Court that an attorney-MBA spouse who assisted her attorney spouse in a merits trial could not subsequently argue that she was an innocent spouse.
The IRS Manual was revised to explain a new process for international and domestic voluntary disclosures, generally involving six years, with willful FBAR penalties applying and the civil fraud penalty applying on Form 1040 to the year with the highest tax liability.