Document

Federal Tax Update – November 2020

David S. De Jong, Esq., CPA

INDIVIDUALS

Proposed Regulations under Section 1031 adopt a broad definition of “real property” so that structural components of permanent structures as well as licenses and permits related thereto will qualify for like-kind exchange. 

In Cutting v. Commissioner, TC Memo 2020-158, the Tax Court determined that an international pilot made a fatal error when he advised the airline that he selected United States as his “home base” and was unable to claim the income earned abroad exclusion despite his residence in Thailand in a home leased by his wife.

In Kissling v. Commissioner, TC Memo 2020-153, the Tax Court recognized that the decline in value from a façade easement for federal tax purposes may be greater than that given by a local government where based on its historic preservation code.

In Glade Creek Partners v. Commissioner, TC Memo 2020-148, the Tax Court denied a deduction for a $17.5 million conservation easement because extinguishment would have subtracted any value attributable to subsequent improvements from the proceeds before determining the charitable entitlement.

In Castaneda v. Commissioner, 126 AFTR2d 2020-6760, the Ninth Circuit Court of Appeals agreed with the Tax Court that a gambler who kept no records of his losses was taxable on the gross winnings off of information returns.

In Bruno v. Commissioner, TC Memo 2020-156, the Tax Court determined that a former husband’s failure to pay over the wife’s share of marital property following a divorce is not a theft loss under state law and, in any event, the wife had a reasonable prospect of recovery in a succeeding year.

In Notice 2020-75, IRS indicated that future regulations will allow flowthrough entities to deduct state and local income taxes paid at the entity level in lieu of including all or a portion of that income at the individual level where a deduction would not be allowed.

BUSINESS

In Moore v. United States, 126 AFTR2d 2020-________, a Washington Federal District Court determined that the repatriation tax on accumulated income did not violate the Apportionment Clause or the Due Process Clause of the Constitution despite its retroactivity.

In Berry v. Commissioner, 126 AFTR2d 2020-6743, the Ninth Circuit Court of Appeals agreed with the Tax Court that a couple failed to prove that a cash deposit was a loan from a relative as opposed to income, producing only an unsigned note at trial.

In Lakew v. Commissioner, TC Summary Opinion 2020-27, the Tax Court declined to accept testimony that the owner gave cash refunds to unhappy customers at his driving school, producing evidence solely in the form of bad YELP reviews.

In Revenue Ruling 2020-27, IRS stated that expenses expected to be reimbursed through loan forgiveness pursuant to the PPP program should not be deducted on the 2020 tax return; in Revenue Procedure 2020-51, IRS stated that, on denial of forgiveness or a withdrawal of the forgiveness application, applicable expenses can be claimed in 2020 or in the year of denial (presumably 2021). 

In Chief Counsel Advice 202045012, IRS noted that the failure of a closely held corporation to pay more than a de minimis portion of its earnings as dividends is a “very significant factor” in determining the deductibility of compensation paid to owners.

PROCEDURE

In United States v. Wunder, 126 AFTR2d 2020-________, the Third Circuit Court of Appeals agreed with a Pennsylvania Federal District Court that an individual who cited the Declaration of Independence, Constitution, several inapplicable 19th Century Supreme Court cases and the long defunct Articles of Confederation, could not avoid the payment of taxes.

In Fakiris v. Commissioner, TC Memo 2020-157, the Tax Court found that the gross valuation misstatement penalty applies where the alleged charitable contribution is nonexistent and of zero value.

In Lashua v. Commissioner, TC Memo 2020-151, the Tax Court stated that a Notice of Deficiency is not invalidated by the lack of signature by an authorized IRS official.

In Sedlmayr v. United States, 126 AFTR2d 2020-________, a Missouri Federal District Court allowed IRS to show computer entries to “prove” that a taxpayer extended the statute of limitations on collections notwithstanding that it could not produce the signed extension.

In Alexander v. Internal Revenue Service, 126 AFTR2d 2020-________, a Connecticut Bankruptcy Court determined that the usual three-year rule for discharge of income tax measured from the extended due date of the return does not run during the pendency of a CDP appeal.

In United States v. Allahyari, 126 AFTR2d 2020-________, the Ninth Circuit Court of Appeals reversed a Washington Federal District Court and stated that a father’s security interest in property owned by his son and placed on the property upon paying off a bank loan prior to an IRS lien gave the father priority over IRS despite the allegation that the father knew of his son’s nonpayment of taxes.

In Leith v. Commissioner, TC Memo 2020-149, the Tax Court awarded innocent spouse status to a wife who agreed in the marital settlement agreement to be responsible for one-half of the debt as the factors supporting relief including the presence of abuse were substantially in her favor.

In Landers v. United States, 126 AFTR2d 2020-6744, a Texas Federal District Court determined that the exception to the Tax Anti-Injunction Act only applies to prospective levies and not prior pending levies when an innocent spouse claim is filed.

In News Release 2020-248, IRS expanded consideration of when a balance is temporarily uncollectible and will permit installment agreements without financial statements and substantiation and (for 2019 liabilities only) without the filing of a lien for more balances of up to $250,000 if the monthly payment proposal is sufficient; the short term ability to delay payment was increased from 120 day to 180 days.

In SBSE Memorandum 05-1120-0085, IRS indicated that the trust fund recovery penalty cannot be imposed prematurely for tax periods where the employee portion of social security is deferred through April 30, 2021.

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