Federal Tax Update – September 2019
In Saunders v. Commissioner, TC Summary Opinion 2019-________, the Tax Court denied a pre-2018 exemption and child tax credit for three children taken in by an unrelated couple who paid all of their expenses as they failed to prove that their mother released the dependency allowance.
In New York v. Mnuchin, 124 AFTR2d 2019-________, a New York Federal District Court threw out a lawsuit filed by four states alleging that the cap on deducting state and local taxes was unconstitutional.
In Conyers v. Internal Revenue Service, an unpublished designated order in docket number 13969-18, the Tax Court determined that a car awarded to a high school senior for good grades and attendance by a local car dealership was taxable as an award.
In Eger v. United States, 124 AFTR2d 2019-5717, a California Federal District Court held that the exception allowing real estate professionals in some cases to treat what would otherwise be passive income as non-passive does not apply to short-term rentals of less than seven days, resulting in an unusable passive loss for the taxpayer; the Court found that actual use and not the right of a management company to continuously use the properties was the standard.
In Revenue Procedure 2019-38 and News Release 2019-158, IRS set forth guidelines for the 250 hour safe harbor for real estate constituting a business for purpose of the QBID including:
● The 250 hour test is annual in the first three years of a real estate enterprise and then becomes a three out of five year test.
● Time spent procuring property, arranging financing, reviewing financial statements for operational reports, improving property and travel time does not count toward the 250 hours.
● Separate books and records must be maintained even if properties are combined into a single enterprise.
● If properties are aggregated, residential and commercial properties must be aggregated separately while mixed-use property must be bifurcated into separate residential and commercial portions.
● The taxpayer must attach a statement of reliance on the safe harbor to a timely filed return.
RETIREMENT AND ESTATE PLANNING
In Xiao v. Chorches, 124 AFTR2d 2019-________, a Connecticut Federal District Court agreed with a Bankruptcy Court that a single participant pension plan was not an exempt asset in bankruptcy when required updates had not been made and the plan was not “permanent” having been frozen prior to the participation of others.
In Letter Ruling 201939002, IRS stated that a pending merger is to be considered in valuing a company’s stock for gift tax purposes where a hypothetical purchaser could have reasonably foreseen the merger; however, the valuation may be less than the proposed merger price to take into account the likelihood of the transaction.
Final Regulations Under Code Sec. 168 decline to follow the legislative intent to treat commercial leasehold improvements as 15-year property which would have made them eligible for 100 percent bonus depreciation; a technical correction will be needed to allow an immediate write off.
Proposed Regulations under Code Section 451 confirm that the statutory change effective in 2018 prohibiting deferral of income items for tax purposes beyond when they are reported for financial purposes applies only to those businesses which have produced a GAAP statement to regulatory bodies, bankers or owners.
In Benavides & Co., PC v. Commissioner, TC Memo 2019-115, the Tax Court determined that an accountant husband and bookkeeper wife with a C corporation offering tax and accounting services and who diverted gross receipts to both a controlled partnership and themselves had to report income at the corporate level and had taxable dividends inasmuch as the corporation would have had earnings and profits through proper reporting of the income.
In Bercy v. Commissioner, TC Memo 2019-118, an individual who had made millions of dollars in loans over his lifetime was entitled to an ordinary loss on an unpaid $65,000 loan as he was in the business of lending.
In Tomseth v. United States, 124 AFTR2d 2019-________, an Oregon Federal District Court found that distributions from an S corporation that it sought to attribute to its AAA account from a prior period as an S corporation before becoming a C and reverting to S status were taxable as the AAA benefit was permanently lost on conversion to C.
In WP Realty, LP v. Commissioner, TC Memo 2019-120, the Tax Court found that a golf course was operated with the intention of making a profit and not with a philanthropy motive, allowing the claiming of losses in excess of $14 million.
In Bishay v. United States, 124 AFTR2d 2019-________, the US Court of Claims threw out a taxpayer’s suit contesting payroll tax liability where the potentially responsible individual had paid $100 to IRS and could not show that the payment was enough to cover one employee for one quarter.
In United States v. Cohen, 124 AFTR2d 2019-________, a California Federal District Court ruled that the maximum penalty for willful FBAR violations is not limited to $100,000 as a newer statute overrode a prior regulation; other courts have reached a different conclusion.
In United States v. Snyder, 124 AFTR2d 2019-________, the Sixth Circuit Court of Appeals reversed an Ohio Federal District Court and vacated the conviction of an individual charged with multiple counts of failure to pay trust fund taxes inasmuch as the lower court had admitted testimony that the accused had failed to file personal tax returns.
In United States v. Doll, 124 AFTR2d 2019-________, a Nebraska Federal District Court held that the six-year period for criminal prosecution for failure to pay over withheld taxes from employees begins on the April 15 of the year following the applicable calendar quarter based on statutory interpretation similar to determining the deadline for assessment of the Trust Fund Recovery Penalty.
In Seaview Trading, LLC v. Commissioner, TC Memo 2019-122, the Tax Court determined that filing a partnership return by facsimile to an IRS revenue agent is not a proper filing and keeps the statute of limitations open indefinitely for assessment.
In Stauffer v. Internal Revenue Service, 124 AFTR2d 2019-________, the First Circuit Court of Appeals agreed with a Massachusetts Federal District Court that the statute of limitations on a refund claim continued to run despite a taxpayer’s disability where his son held a durable power of attorney notwithstanding that the son had no knowledge of the potential claim.
In Welwood v. Commissioner, TC Memo 2019-113, the Tax Court denied equitable innocent spouse relief to a widow of an individual who had suffered a series of debilitating strokes followed by a serious automobile accident where the income arose from a “burned out” tax shelter, and she knew, or had reason to know, of underpayments and no hardship existed were she to pay the liability.
In Moore v. Commissioner, TC Memo 2019-129, the Tax Court found that IRS abused its discretion at a CDP hearing in not considering reinstatement of an Offer in Compromise revoked due to multiple late filings and late payments.
In Chief Counsel Advice 201937017, IRS indicated that an extension of the statute of limitations executed by the taxpayer prior to its expiration is invalid when the IRS failed to timely execute the extension due to the government shutdown.