Document

Federal Tax Update – October 2020

David S. De Jong, Esq., CPA

INDIVIDUALS

In Lucero v. United States, 126 AFTR2d 2020-________, a New Mexico Federal District Court allowed a discharged employee to challenge the “agreed” value of privately owned stock received in a settlement for wrongful termination and accepted a significantly lower value after allowing a 38 ½ percent combined discount.

In Langston v. Commissioner, 126 AFTR2d 2020-6330, the Tenth Circuit Court of Appeals agreed with the Tax Court that an individual who held vacant property for over ten years and then rented it for one year at a below market price could not deduct a loss as it was acquired for personal use and was only rented in order to keep insurance costs down through occupancy. 

In Pine Mountain Preserve v. Commissioner, 126 AFTR2d 2020-________, the Eleventh Circuit Court of Appeals reversed the Tax Court citing conservation easements as the “intersection of obscure common-law property concepts and the often byzantine Internal Revenue Code”, stating that a clause in an easement permitting parties to bilaterally amend the grant to modify location of reserve rights to put up structures has no material adverse effect on the purposes of the easement and, accordingly, should be treated as being granted in perpetuity.

In Coleman v. Commissioner, TC Memo 2020-146, the Tax Court found that a compulsive slot machine gambler netted losses despite over $350,000 of gambling winnings reported to him on 160 separate forms W-2G from three Maryland casinos and one Delaware casino; his diary of wins and losses was incomplete but he was able to show 210 withdrawals from credit cards and accounts in a single year and no accretion to wealth assisted by his expert witness who testified that, based on gambling 193 full days during the year, there was a 99 percent level of certainty that he had gambling losses of at least $151,000 for the year.

In Scholl v. Mnuchin, 126 AFTR2d 2020-________, a California Federal District Court permanently enjoined IRS from following its FAQ which declines to send advanced refunds under the CARES Act to incarcerated individuals. 

In Chief Counsel Advice 202042015, IRS stated that participation in fantasy sports constitutes wagering transactions for purpose of using such losses to offset gambling winnings. 

RETIREMENT AND ESTATE PLANNING

In Revenue Ruling 2020-24, IRS stated that employers must withhold federal income taxes on paying out employee retirement benefits into state unclaimed property funds; in Revenue Procedure 2020-46, IRS added that account holders can claim a waiver of the 60-day rollover period when the transfer is accomplished within 30 days of being able to access funds.

BUSINESS

In Watts v. Commissioner, TC Memo 2020-144, the Tax Court refused to allow an individual to bring in evidence of intention of the parties in a tax allocation when the language of the document was clear.

In Notice 2020-43, IRS announced its intention to require partner capital accounts to reflect basis information in 2002 rather than interrelationships among the partners with penalties to apply effective in 2021.

In Letter Ruling 202042001, IRS ruled that the creation of a second class of stock in the Operating Agreement of an LLC electing to be taxed as an S Corporation was inadvertent and S status was not lost if the improper language was corrected.

PROCEDURE

In Gaetano v. United States, 126 AFTR2d 2020-________, a Michigan Federal District Court concluded that IRS may have a valid purpose for seeking documents beyond the tax periods under investigation. 

In Oropeza v. Commissioner, 155 TC No. 9, the Tax Court rejected the IRS imposition of the 40 percent accuracy penalty as a separate addition to liability where it did not obtain timely supervisory approval for the lesser 20 percent penalty.

In United States v. Horowitz, 126 AFTR2d 2020-________, the Fourth Circuit Court of Appeals agreed with a Maryland Federal District Court that a couple who claimed that they were unaware of the FBAR filing requirement and placed earnings from Saudi Arabian sources into a Swiss bank account acted willfully through their recklessness. 

In United States v. Wolin, 126 AFTR2d 2020-________, a New York Federal District Court agreed with earlier caselaw that the FBAR penalty survives the death of a taxpayer and, as such, the decedent’s estate is liable for payment.

In Shire Hampton Drive Trust v. United States Department of Treasury, 126 AFTR2d 2020-________, a Nevada Federal District Court stated that an earlier IRS lien has priority over a subsequent homeowners association assessment.

FinCEN extended the filing date for the 2019 FBAR from October 15, 2020 until October 31, 2020 because of a misleading notice that the deadline had been extended to yearend where that was only to apply only to victims of a natural disaster. 

In Chief Counsel Advice 202038010, IRS stated that state and local governments may take advantage of Section 530 which prohibits IRS from reclassifying workers as employees when they have been consistently treated as independent contractors and received a Form 1099 as long as there was a rational basis for treating them as independent contractors (including industry norms).

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