Document

Federal Tax Update – September 2017

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

INDIVIDUALS

In Linde v. Commissioner, TC Memo 2017-180, the Tax Court determined that a helicopter pilot in his mid-50s who spent two-thirds of the year working in Iraq and one-third in the United States with his wife and adult children was a bona fide resident of Iraq despite stating his intention to return to the United States upon retirement which was not in the foreseeable future; the Court noted that his ties were closer to Iraq than the United States with some involvement in the local community and with a local bank account notwithstanding that he kept a driver’s license and voter registration in the US and that he lived in a large metal container home for security in Iraq.

In Morrissey v. United States, 120 AFTR2d 2017-________, the Eleventh Circuit Court of Appeals agreed with a Florida Federal District Court that a gay man could not deduct the costs of in vitro related procedures as they were not paid for the purpose of affecting the taxpayer’s own reproductive function; the Court also denied a “equal protection” argument.

In Martin v. Commissioner, 149 TC No. 12, the Tax Court concluded that rent payments received for the use of a farm and structures were not subject to self-employment tax because fair market rent was paid apart from the landlord’s material participation in the farm.

RETIREMENT PLANS

In Chief Counsel Advice 201736022, IRS stated that missed installment repayments on a 401(k) loan will not be considered a deemed distribution if the delinquency is resolved within the applicable cure period which must not extend beyond the last day of the calendar quarter following the missed payment.

ESTATES

In Estate of Sower v. Commissioner, 149 TC No. 11, the Tax Court backed up the IRS position that, absent a closing agreement, it can adjust the unused exemption of the first spouse to die even if the estate tax return was “accepted as filed” following the first death.

BUSINESS

In Simonelli v. Commissioner, TC Memo 2017-188, the Tax Court denied a deduction to a retired government lawyer who wrote off his son’s LLM tuition on the grounds that he hoped they would practice law together although neither father nor son was actively practicing law at the time of payment.

In Rutter v. Commissioner, TC Memo 2017-174, the Tax Court, after balancing all of the applicable factors including the fact that no conventional lender would put up money, determined that advances of an entrepreneur in the millions of dollars to a corporation without promissory notes, interest or any attempt to collect were really equity contributions.

In Revenue Procedure 2017-52, IRS announced that it would again rule under a pilot program of 18 months on the tax consequences of a corporate division; in recent years, IRS would only rule on any unique issues in a division.

In Letter Ruling 201736002, IRS ruled that a company may deduct rather than capitalize payments to a target company’s shareholders to induce them to approve an acquisition by a third company to whom the taxpayer served as an investment advisor as the payments were not for acquisition of an asset.

PROCEDURE

In Rivera v. Internal Revenue Service, 120 AFTR2d 2017-________, the Tenth Circuit Court of Appeals agreed with a New Mexico Federal District Court that a non-credentialed tax return preparer could not seek to enjoin the IRS from establishing a voluntary education program.

In United States v. Moore, 120 AFTR2d 2017-5188, a New Jersey Federal District Court denied IRS an injunction against an orthodontist with 20 years of tax delinquencies which would have prohibited him from owning, operating or serving as an employee in any practice for five years or until he could demonstrate that he is likely to resume operating without interfering with Internal Revenue laws; the Court noted that such a step is appropriate against tax preparers but not in a punitive manner against others.

In Camara v. Commissioner, 149 TC No. 13, the Tax Court reversed its prior position, in light of contrary decisions by the Fifth and Eighth Circuit Courts of Appeal, and ruled that a married person filing improperly as single or head of household has not filed a “separate” return, facilitating a correction to a joint return within the statute of limitations without certain restrictions applicable where a married filing separate return was first filed.

In Bedrosian v. United States, 120 AFTR2d 2017-5253, a Pennsylvania Federal District Court determined that a pharmaceutical executive who had unreported Swiss accounts did not willfully fail to file FBAR returns; his first accountant never asked about the accounts for many years and they advised him to do nothing after he asked.

In Rodriguez v. Commissioner, TC Memo 2017-173, the Tax Court excluded over 700 pages of documents produced by an attorney at trial involving his own expenses when he failed to comply with the 14-day rule of providing documents to the other side and the documents provided were totally inadequate.

In Holland v. United States, 119 AFTR2d 2017-5233, a Michigan Federal District Court found that the transfer of assets to a limited partnership with adequate consideration could not be set aside on grounds of alter ego, fraudulent conveyance or nominee status where there was adequate consideration – in this case a partnership interest; IRS contended that it was left with only the ability of seizing a partnership interest rather than the underlying assets and asserted that there is not equivalent value when the debtor becomes “execution proof.”

In In Re Kardash, 120 AFTR2d 2017-________, a Florida Bankruptcy Court held that an IRS claim against an individual as a transferee in a fraudulent transfer gives no priority and that IRS is simply an unsecured creditor.

In Bruce v. Commissioner, TC Memo 2017-172, the Tax Court declined to allow a disabled army veteran to argue that his disability payments were nontaxable inasmuch as he had an opportunity to raise the issue following receipt of a Notice of Deficiency but did not file a Tax Court petition at that time.

In Mohamed v. Commissioner, TC Summary Opinion 2017-69, the Tax Court refused to allow a CPA to bring up substantive issues regarding preparer penalties at a CDP hearing inasmuch as he had previously presented his case before Appeals and chose then not to challenge the assessment in Tax Court.

In Cojocar v. Commissioner, TC Memo 2017-189, an individual earning $170,000 per year was denied innocent spouse relief where his former wife made $30,000 per year and the divorce decree required him to pay the couple’s outstanding tax liability.

In Notice 2017-47, IRS announced that partnerships will not be penalized for missing the new March 15 deadline if they filed a return or an extension by April 15, 2017 (and, in the case of an extension, filed the return by September 15, 2017).

Internal Revenue Service Office of Appeals announced that it is restoring the right to in-person conferences with detailed guidance to follow.

In Chief Counsel Advice 201735021, IRS stated its position that the Tax Court could not review a case where payroll taxes were assessed against a corporate officer who took no salary, proferring that the Tax Court shares jurisdiction with the Federal courts only in worker classification cases and where taxpayers are seeking Section 530 relief.

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