Document

Federal Tax Update – September 2018

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

INDIVIDUALS

In De Los Santos v. Commissioner, TC Memo 2018-155, the Tax Court determined that a split dollar life insurance arrangement generated income to a key employee to the extent of the cost of current life insurance protection plus the cash value of the policy to which he had current access.

In Jackson v. Commissioner, TC Summary Opinion 2018-43, the Tax Court determined that speculative contingent obligations do not count as liabilities for purpose of determining insolvency and whether relief from indebtedness may be nontaxable; the contingent liability in this case related to possible buyback payments.

In Birdsong v. Commissioner, TC Memo 2018-148, the Tax Court determined that the wife of a physician whose sole work outside the home was to manage nine rental units was a real estate professional as the Court accepted her testimony and corroborating documentation that showed upwards of 1,100 hours of time for the year in issue.

In Vanderhal v. Commissioner, TC Summary Opinion 2018-41, the Tax Court found that a husband’s payments of a student loan of his ex-wife following a divorce constituted the payment of alimony notwithstanding that his assumption of the obligation was placed in a section of the Separation Agreement titled “Tax Free Transfers”, the Court stating that the other requisites of alimony were satisfied and the agreement did not clearly categorize the payments as other than alimony.

In Evensen v. Commissioner, TC Memo 2018-141, the Tax Court found that a tax preparer, alleging over $176,000 in losses from a Ponzi scheme, failed to prove multiple elements of her claim and disallowed a theft loss; the Court also denied an additional $100,000 of alleged theft loss from unpaid compensation, noting that she was a cash basis taxpayer.

RETIREMENT PLANS

In United States v. Young, 122 AFTR2d 2018-________, a Michigan Federal District Court, agreeing with the First, Sixth, Seventh and Ninth Circuit Courts of Appeal, allowed a criminal defendant’s retirement plan to be levied upon to satisfy a restitution order following a criminal conviction; the Court determined that the Mandatory Victim’s Restitution Act superseded ERISA.

BUSINESS

In Yapp v. Commissioner, TC Memo 2018-147, the Tax Court disallowed a deduction for hundreds of thousands of dollars of expenses prior to the start of operations, the Court noting that a business is commenced upon first sales; in De Sylva v. Commissioner, TC Memo 2018-165, the Tax Court again reached the same result.

In Champions Retreat Golf Founders, LLC v. Commissioner, TC Memo 2018-46, the Tax Court denied a charitable deduction for an easement of over $10 million as the golf course owners could not show that the easement provided a habitat for “rare, endangered, or threatened species of animals, fish, or plants” and could not qualify alternatively for preserving open space as it could not be enjoyed by the general public.

In Potter v. Commissioner, TC Memo 2018-153, the Tax Court determined that a payment upon retirement of an insurance agent that is tied to prior year commissions is subject to self-employment tax as it arose from an income producing activity of the agent.

In News Release 2018-178, IRS clarified that businesses can deduct payments to charities for which they receive state tax credits provided the expense is an “ordinary and necessary” business expense (which would appear to preclude a flow through or disregarded entity from successfully getting around the $10,000 deduction cap on personal taxes).

PROCEDURE

In Ioane v. Hodges, 122 AFTR2d 2018-________, the Ninth Circuit Court of Appeals agreed with a California Federal District Court that an IRS agent did not have immunity from suit where she had entered a home pursuant to a search warrant and insisted on being in the bathroom while the owner relieved herself.

In Lowery v. United States, 122 AFTR2d 2018-________, a North Carolina Federal District Court concluded that preparer penalties cannot be assessed against an owner of a firm unless the owner prepared a portion of the return.

In United States v. Vazquez, 122 AFTR2d 2018-________, a California Federal District Court granted injunctive relief against a tax preparer for alleged ongoing preparation of fraudulent tax returns.

In Deaton Oil Company, LLC v. United States, 122 AFTR2d 2018-________, the Eighth Circuit Court of Appeals agreed with an Arkansas Federal District Court that the timely filing and paying of payroll taxes is a nondelegable duty and IRS need not abate penalties because of the business’ reliance upon a nonperforming employee and outside CPA.

In United States v. Estate of Schoenfeld, 122 AFTR2d 2018-________, a Florida Federal District Court indicated that an FBAR penalty survives the death of the account holder and an action may be maintained against the estate or a distributee.

In Arlin Geophysical Company v. United States, 122 AFTR2d 2018-________, a Utah Federal District Court allowed IRS to seize corporate assets for an individual tax debt on a theory that the corporation was a nominee of the individual who had been convicted of tax fraud and had a history of comingling entity and individual monies.

In Loveland v. Commissioner, 151 TC No. 7, the Tax Court found that IRS abused its discretion in failing to consider multiple collection alternatives in the case of a couple who lost their home to foreclosure about the time that the husband became disabled from a heart condition and the wife was fighting cancer causing both to retire.

In Merlo v. Commissioner, TC Summary Opinion 2018-47, an IRS revenue agent was granted innocent spouse relief as to disability income unknown to him that his former wife received and then deposited in a separate checking account; in Neitzer v. Commissioner, TC Memo 2018-156, the Tax Court granted innocent spouse status to a wife separated from her husband who did not know her husband would not or could not pay the liability and had a deteriorating medical condition.

In Benson v. Commissioner, TC Memo 2018-157, a husband was denied innocent spouse equitable relief following separation where he entered into a joint return which included known income from fraudulent overbilling by his wife.

In News Release 2018-176, IRS announced that it will update procedures for voluntary disclosure of off shore accounts in the near future as the prior program ended on September 28 except for those not acting willfully who continue to qualify for the Streamlined Filing Compliance Procedures.

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