Document

Federal Tax Update – October 2019

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

David S. De Jong, Esq., CPA

INDIVIDUALS

In Bellwood v. Commissioner, TC Memo 2019-135, the Tax Court denied an income earned abroad exclusion based on bona fide residence to a helicopter pilot who worked in Saudi Arabia but alternated between 28 days in Saudi Arabia and 28 days back in the United States where his family resided; the Court determined that the taxpayer had a stronger connection to the US as he dealt only with items related to his employment while in Saudi Arabia.

In Weschenfelder v. Commissioner, TC Memo 2019-133, the Tax Court barred a couple from claiming the income earned abroad exclusion for lack of a valid election; in two of three years they filed after IRS prepared a Substitute for Return (SFR) and owed liability after the exclusion which violated one requisite and for the third year the required statement at the top of page 1 was not included which violated a second requisite.

In Presley v. Commissioner, 124 AFTR2d 2019-________, the Tenth Circuit Court of Appeals sustained the Tax Court disallowance of multiple property donations where Form 8283 was deficient for multiple reasons and there was no “reasonable cause” for failure to substantially comply with requirements.

In Coal Property Holdings, LLC v. Commissioner, 153 TC No. 7, a divided Tax Court denied a conservation easement where the deed provided that the donee would receive a share of proceeds if there was a judicial extinguishment of the easement.

In Revenue Ruling 2019-24, IRS provided further guidance on cryptocurrency, indicating that a “hard fork” does not in itself give rise to a taxable event but that one followed by an “airdrop” does.

RETIREMENT AND ESTATE PLANNING

In Rosenberg v. Commissioner, TC Memo 2019-124, the Tax Court determined that the transfer of portions of an IRA to a spouse pursuant to a marital termination and followed by an immediate distribution was taxable by the transferee and subjected the individual to a 10 percent early withdrawal penalty; the Court Order provided that the spouse pay him from the proceeds of her retirement account and she accomplished it by transferring pretax retirement money.

In Cavallaro v. Commissioner, TC Memo 2019-144, the Tax Court on remand from the First Circuit Court of Appeals found that parents gave their sons a gift of $22.8 million by virtue of the parents accepting a disproportionately low number of shares in the new company after a merger with a similar company owned by their sons.

In Estate of Skeba, 124 AFTR2d 2019-5333, a New Jersey Federal District Court found that the refusal by IRS to abate the failure to file penalty on a 706 due to pending litigation was arbitrary and should be granted.

BUSINESS

In Katusha v. Commissioner, TC Summary Opinion 2019-31, the Tax Court found that a part-time race car mechanic did inadequate reconstruction of his expense records following a wildfire that destroyed his accountant’s office and threw out most expenses; his credibility was hurt by his admission that he failed to report $10,000 in receipts.

In Bagdan v. Commissioner, TC Summary Opinion 2019-30, the Tax Court denied a deduction by a sports official for automobile expenses when his spreadsheets and calendar lacked specificity and conflicted in certain instances.

In Plano Holding, LLC v. Commissioner, TC Memo 2019-140, the Tax Court found that an acquired business could not deduct a finder’s fee that the acquirer had agreed to pay.

In Northern California Small Business Assistants, Inc. v. Commissioner, 153 TC No. 4 (2019), a divided Tax Court once again stated that the nondeductibility of general and administrative expenses by a marijuana business does not violate the Eighth Amendment as cruel and unusual punishment.

In Sarkin v. Commissioner, TC Memo 2019-131, the Tax Court found that an architect from South Africa who returned there while his wife stayed in New York was not engaged in his line of work for profit for which he claimed large losses; the Court found that much of his work was remodeling his mother-in-law’s home.

In Action on Decision 2019-03, IRS announced its nonacquiescence with a decision of the Tax Court in Greenteam Materials Recovery Facility PN, TC Memo 2017-122, in which the Tax Court allowed capital gain treatment on the sale of service contracts where the transferor retained no significant interest; IRS stated that it does not consider contracts to be capital assets.

PROCEDURE

In Ghadiri-Asli v. Commissioner, TC Memo 2019-142, the Tax Court found that an engineer/physician couple were liable for the civil fraud penalty when the understatement of gross receipts and the overstatement of expenses increased over a 3-year period per IRS reconstruction of the books.

In United States v. Kemp, 124 AFTR2d 2019-________, a Louisiana Federal District Court magistrate recommended that a motion to suppress statements by a defendant tax preparer be dismissed; a revenue agent told the defendant’s counsel that he had no knowledge of any criminal investigation but two days later referred the case to CID, the Court noting that the statement was accurate at the time and not a “criminal case in civil clothing.”

In United States v. Todd, 124 AFTR2d 2019-________, the Eleventh Circuit Court of Appeals agreed with a Georgia Federal District Court that evidence of a prior tax-related conviction was admissible in a subsequent trial for a new offence 20 years later as it showed “motive, opportunity, intent, preparation, plan, knowledge, absence of mistake, or lack of accident.” 

In In Re:  Burge, 124 AFTR2d 2019-145, an Oklahoma Bankruptcy Court held that federal lien law prevails over state homestead exemptions allowing an IRS lien to attach to a principal residence where other creditors would not be in a similar position.

In Dase v. Commissioner, 124 AFTR2d 2019-5281, an Alabama Federal District Court determined that a tax delinquent had only a 50 percent interest in property where his father died intestate leaving each child a 50 percent owner; IRS argued that the delinquent was a 100 percent owner as he had contracted with his parents to purchase the property by making monthly payments with conveyance upon completion which did not occur before the death of both parents.

In Kruja v. Commissioner, TC Memo 2019-136, the Tax Court granted innocent spouse status to a divorced wife as to unreported business income of her former husband notwithstanding a prior Tax Court trial of which she was unaware despite the attorney for the taxpayer’s entering his appearance on behalf of both spouses.

In Lassek v. Commissioner, TC Memo 2019-145, the Tax Court gave innocent spouse relief for a year in which the taxpayer did not have actual knowledge of unreported income from a retirement plan distribution but denied even equitable relief the following year where she was aware of tax liability shown on the return and should have known that her then husband could not pay the tax liability.

In Sleeth v. Commissioner, TC Memo 2019-138, a former wife, whose ex-husband was a doctor and lawyer, was denied innocent spouse status where she had actual knowledge of the unpaid taxes at the time of signing, the Court noting that her knowledge of the unpaid liability and her unwillingness to face financial issues outweighed the subsequent divorce and all other factors which favored relief.

In Jones v. Commissioner, TC Memo 2019-139, the Tax Court denied innocent spouse status to a divorcee who was aware of the tax liability and financial difficulties but signed the return; in Nishi v. Commissioner, TC Memo 2019-143 the Tax Court denied innocent spouse status to a wife who knew her husband was making large deposits and that their spending was beyond their reported income.

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