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Federal Tax Update – October 2017

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

INDIVIDUALS

Public Law 115-63, the Disaster Tax Relief and Airport and Airway Extension Act of 2017, modifies existing law to provide tax relief to victims of Hurricanes Harvey, Irma and Maria as follows: 

  • Allows casualty losses to be claimed without the 10 percent of adjusted gross income floor as well as by non-itemizers (in their case by increasing the standard deduction by the net disaster loss) with no reduction for alternative minimum tax purposes while increasing the $100 per casualty floor to $500.
  • Suspends the adjusted gross income limitations on related charitable contributions.
  • Allows optional use of prior year earned income in determining the allowable earned income tax credit and child tax credit.
  • Allows withdrawals from qualified retirement plans by those under 59½ without penalty with the right to recontribute over a three-year period.
  • Increases maximum borrowing from qualified retirement plans to the lesser of present value or $100,000 with repayment commencing one year later than otherwise required.

In Knez v. Commissioner, TC Memo 2017-205, the Tax Court determined that a married individual who filed improperly as head of household could change to a married filing joint status even after issuance of a Notice of Deficiency; the Court noted that it previously permitted a change from an improper single filing status to married filing joint after issuance of a Notice of Deficiency and distinguished both situations from a change from married filing separate to married filing joint after the Notice of Deficiency.

In Gaylor v. Mnuchin, 120 AFTR2d 2017-________, a Wisconsin Federal District Court determined that the housing allowance available to ministers and other religious leaders constitutes a violation of the principal of separation of state and church.

In Palmolive Building Investors, LLC v. Commissioner, 149 TC No. 18, the Tax Court denied a deduction for a conservation easement not passing the “perpetuity” requirement due to two liens on the property not fully subordinate in all events to the easement.

In Czarnecki v. United States, 118 AFTR2d 2017-5372, the Court of Federal Claims ruled that costs of a Ph.D. program did not qualify an engineer for a deduction as it would have permitted him to commence a career in education while not on the evidence improving required skills.

In Mihelick v. United States, 119 AFTR2d 2017-5358, a Florida Federal District Court determined that a reimbursement of $300,000 by a former wife to the husband resulting from a 50 percent indemnification provision in their Separation Agreement was not deductible to her although the reimbursement was caused by a claim of a minority stockholder based on an allegation of excess compensation to the husband. 

In Boneparte v. Commisioner, TC Memo 2017-193, the Tax Court determined that a tunnel bridge agent who spent about one-half of his nights in Atlantic City and kept incomplete records was not engaged in the business of gambling.

 

RETIREMENT PLANS

In Letter Ruling 201742034, IRS waived the 60-day rollover time period where a divorcing wife failed to receive promised funds from her husband.

 

ESTATES

Proposed Regulations under Code Section 2704, which would have restricted discounting in the case of transfers of partial interests in entities, were formally withdrawn by the Internal Revenue Service.

 

BUSINESS

In Wycoff v. Commissioner, TC Memo 2017-203, the Tax Court rejected a deduction for huge management fees paid by chemical operative companies to a related company as part of a tax avoidance scheme.

In Feinberg v. Commissioner, TC Memo 2017-211, the Tax Court refused to allow a Colorado licensed marijuana seller to deduct cost of goods sold based on industry averages where the seller had some records and they showed a lesser percentage in relation to gross receipts.

In Huzella v. Commissioner, TC Memo 2017-210, the Tax Court stated that a coin dealer could estimate his basis in certain inventory but only in appropriate circumstances when there is a foundation upon which an estimate may be made.

In Chief Counsel Advice 201741018, IRS objected to the allocation of partnership losses to those partners who had no obligation to restore any negative capital account in the event of liquidation. 

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