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Federal Tax Update – September 2016

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

INDIVIDUALS

In Estate of Barnhorst v. Commissioner, TC Memo 2016-177, the Tax Court determined that amounts received by an individual with cancer were not pursuant to a health plan as the payment structure was not tied to actual medical expenses but rather to the loss of body function, effectively creating taxable disability or a deferred compensation arrangement inasmuch as premiums were paid by the employer in pretax dollars.

In White v. Commissioner, TC Memo 2016-167, the Tax Court found that a founding pastor who took a vow of poverty but retained amounts he received from his church in excess of his basic needs was taxable on all funds that he received.

In Leslie v. Commissioner, TC Memo 2016-171, the Tax Court determined that $5.5 million received by a woman from a former spouse constituted taxable alimony income; although the document did not indicate that payments stopped upon her death, California state law provides that marital support terminates on the death of either party unless otherwise agreed in writing (as a consolation victory, the Court permitted her to deduct $400,000 as a theft loss for payments made to an illegitimate African diamond scheme).

In Jasperson v. Commissioner, 118 AFTR2d 2016-5173, the Eleventh Circuit Court of Appeals agreed with the Tax Court that an individual who claimed losses in prior years now closed to adjustment still needs to be able to prove those losses in order to use a net operating loss in a subsequent year.

In Boree v. Commissioner, 118 AFTR2d 2016-________, the Eleventh Circuit Court of Appeals agreed with the Tax Court that an individual who sold 1,000 acres of Florida woodland had ordinary income based on continuing efforts to develop the property.

In Program Manager Technical Advice 2016-010, IRS analogized Coverdell Education Savings Accounts to IRAs and indicated that only one rollover of such an account is permitted by an individual in any one-year period; this limitation does not apply to direct transfers.

By Letter from Commissioner John Koskinen to Congressman Patrick Murphy, IRS indicated that payments received by individuals from charitable organizations as the result of disaster or emergency hardship are excludable from income as gifts (referencing the Orlando nightclub shooting).

RETIREMENT PLANS

Final Regulations under Code Section 417 permit defined benefit plans to allow participants to divide their accrued benefit between a lump sum and an annuity subject to spousal consent on any portion not taking the form of a joint and survivor annuity.

ESTATES

In Estate of Heller v. Commissioner, 147 TC No. 11, the Tax Court permitted an estate to deduct a Madoff-related theft loss on an estate tax return notwithstanding that the account was in a limited liability company owned 99 percent by the decedent, concluding that the estate tax is imposed on the value of property transferred to beneficiaries and any loss during administration affecting the value of property passing to the living must be credited.

In Specht v. United States, 118 AFTR2d 2016-5243, the Sixth Circuit Court of Appeals agreed with an Ohio Federal District Court that IRS properly imposed late filing and late payment penalties on an estate notwithstanding that the Personal Representative was an elderly homemaker and that the attorney she engaged was battling brain cancer; the Personal Representative was aware of the deadline and that the attorney had missed prior probate deadlines.

In Revenue Procedure 2016-49, IRS dealt with the interaction between the QTIP election and the new portability law, stating that the usual rule voiding a QTIP election when unnecessary to save estate taxes is inapplicable in the event of a portability election.

BUSINESS

In Barnhart Ranch Co. v. Commissioner, TC Memo 2016-170, the Tax Court ruled that a C corporation was the owner and operator of a cattle ranch rather than the underlying individuals who claimed that the corporation was only their agent; the losses denied on the individual returns were in excess of $2.5 million over a three-year period.

In CRI-Leslie, LLC v. Commissioner, 147 TC No. 8, the Tax Court determined that a seller has ordinary income rather than capital gain on a retained deposit from a cancelled sale of real property used in a business (Section 1231 property), stating that the result would be different if the real estate had been a capital asset.

In Galbreath v. Commissioner, TC Memo 2016-168, the Tax Court sided with the IRS and disallowed an individual’s vehicle mileage deduction where his produced records showed lower odometer readings at yearend than those shown in prior years.

In Cave Buttes, LLC v. Commissioner, 147 TC No. 10, the Tax Court allowed a charitable deduction for property sold to a Government instrumentality at less than fair value, rejecting claims of technical deficiencies in the valuation including the signature of only one of two appraisers on Form 8283 and a two week difference between the date of valuation and the date of contribution.

In Gann v. United States, 118 AFTR2d 2016-5224, the Court of Federal Claims determined that a majority shareholder of a staffing company was liable for payroll taxes for all but two early quarters as he had final control and knew or should have known of the unpaid tax liability; he forced the CEO and President to sign a statement admitting responsibility.

In Pitts v. United States, 118 AFTR2d 2016-5181, the Ninth Circuit Court of Appeals agreed with a California Federal District Court that IRS did not need to assess a general partner for unpaid partnership employment taxes during the customary three-year period inasmuch as a general partner is automatically liable for the debts of the partnership.

In Field Attorney Advice 20163701F, IRS ruled that the payor of a deal termination fee receives a capital rather than an ordinary loss, contradicting a 2015 decision of the Fifth Circuit Court of Appeals in Pilgrim’s Pride Corporation v. Commissioner and a prior letter ruling which indicated that a termination fee received by a party to a broken transaction is ordinary income.

PROCEDURE

In Canty v. Commissioner, TC Memo 2016-169, the Tax Court denied innocent spouse status to a financial management analyst married to a lawyer who claimed that she did not know or have reason to know of her husband’s understatement of net income on his Schedule C.

In News Release 2016-125, IRS announced that tax delinquents will receive two notices concerning transfer of their accounts to one of four collection agencies before any telephone contact is initiated by the agency.

The IRS website set forth a new trial program at least through September 30, 2017 permitting individuals who owe up to $100,000 to get an installment agreement with ACS or campus locations through direct debit without providing detailed financial information; the minimum payment  is the liability divided by 84 or the payment needed to satisfy the liability by the expiration of the limitations period (the most recent maximum without a financial statement has been $50,000 divided by 72 months if it stays within the limitations).

In Chief Counsel Advice 201637012, IRS declined to find reasonable cause for a late filed tax return where the taxpayer had given a power of attorney but had not yet been diagnosed with incapacity from dementia.