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Federal Tax Update – November 2019

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

INDIVIDUALS

In News Release 2019-182, IRS announced that it will increase examinations of abusive syndicated conservation easement transactions with possible criminal prosecution. 

In Letter Ruling 201944006, IRS allowed a principal residence gain exclusion and a likekind exchange on the same transaction, in this case where the character changed after a fire destroyed improvements.

RETIREMENT AND ESTATE PLANNING

Final Regulations under Code Section 2010 confirm earlier guidance that the scheduled reduction of the applicable exemption in 2026 will not cause a “claw back” such that gifts made between 2017 and 2025 inclusive will reduce the higher exemption and not the reduced amount. 

BUSINESS

In Tabe v. Commissioner, TC Memo 2019-149, the Tax Court denied tens of thousands of dollars in business expenses and itemized deductions for inadequate substantiation including the purpose of the expense.

In Den Besten v. Commissioner, TC Memo 2019-154, the Tax Court, balancing nine factors with six favoring the taxpayer, found that an individual who participated in an average of 12 quarterhorse competitions with some success including two world champion stallions, maintaining businesslike records, was engaged in an activity for profit despite years of losses.

In Letter Ruling 201944007, IRS ruled that an LLC taxed as an S corporation inadvertently terminated its S election when it had an Operating Agreement with provisions akin to more than one class but allowed the entity to be treated as an S for all periods.

PROCEDURE

In Norman v. United States, 124 AFTR2d 2019-________, the Federal Circuit Court of Appeals agreed with the Court of Federal Claims that a taxpayer willfully failed to file an FBAR, basing the willfulness inclusion on facts showing the taxpayer opened the account, actively managed it and withdrew money from it as needed.

In Beverly Clark Collection, LLC v. Commissioner, TC Memo 2019-150, the Tax Court concluded that the overstatement of basis in a sham transaction in which fraud was not alleged is akin to any other overstatement of basis such that IRS has a three-year statute of limitations on assessment.

In Laird v. United States, 124 AFTR2d 2019-6491, the Fifth Circuit Court of Appeals overrode a Mississippi Federal District Court and stated that IRS cannot offset an overpayment made by a party other than the taxpayer against other liabilities of the taxpayer, this case involving personal payment of employment taxes by a controlled corporation.

In Lowery v. Commissioner, TC Memo 2019-151, the Tax Court stated that IRS Appeals failed to consider the fiduciary responsibility of a delinquent taxpayer who was trustee of a trust holding real estate when the Appeals officer required sale of the property before approving a possible installment agreement; the Court also directed Appeals to consider employee business expenses including mandatory deductions in establishing reasonable collection potential.

In Sullivan v. Commissioner, TC Memo 2019-153, the Tax Court rejected a CDP appeal from the faculty director of the Harvard Trial Advocacy Workshop for failure to submit a collection alternative, failure to submit financial information and failure to be in compliance with current filing obligations; the Court also refused to consider substantive issues as the taxpayer had an opportunity to challenge the liability generated by a Substitute for Return.

In Fact Sheet 2019-15, IRS announced that it will step up face-to-face contacts with taxpayers on an unannounced basis to get financial information; however, the in-person will normally follow numerous mail contacts.

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