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Federal Tax Update – September 2020

David S. De Jong, Esq., CPA

INDIVIDUALS

In McKenny v. United States, 126 AFTR2d 2020-5943, the Eleventh Circuit Court of Appeals reversed a Florida Federal District Court and found a settlement payment from a CPA firm for bad tax advice to be taxable (in contrast to a payment for error in tax preparation), allowing a deduction for legal expenses and other costs only as a miscellaneous itemized deduction under pre-2018 law inasmuch as a loss related to advice on how to handle business arrangements is personal in nature.

In Lucero v. Commissioner, TC Memo 2020-136, the Tax Court declined to accept non-contemporaneous records purportedly showing material participation related to a rental property, the Court also striking driving time as personal and time dealing with the property manager and preparing tax return schedules as “investor activities.”

In Armstrong v. Commissioner, TC Summary Opinion 2020-26, the Tax Court once again disallowed employee business expenses under pre-2018 law where the employee did not seek reimbursement from the employer as she thought it might not be approved.

RETIREMENT AND ESTATE PLANNING

Final Regulations under Code Section 642 amend Proposed Regulations to permit a beneficiary to carryover excess deductions on termination of an estate or trust to succeeding years if not usable by the beneficiary in the tax year to which the estate or trust terminates.

In Fridman v. United States, 126 AFTR2d 2020-________, the Second Circuit Court of Appeals agreed with a New York Federal District Court that a trustee cannot invoke Fifth Amendment privilege with regards to the trust itself as the trustee is holding documents in a representative capacity and the trust is an independent entity apart from its individual beneficiaries.

In Notice 2020-68, IRS gave guidance on the CARES Act and indicated that the $10,000 amount that can be taken from certain retirement plans on the birth or adoption of a child is to be applied on a per person basis in the case of multiple births or adoptions. 

BUSINESS

In Duncan v. Commissioner, 126 AFTR2d 2020-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that an attorney who received gratuitous money beyond the agreed fee from his client for a favorable result had to report the income where the client did not treat the payment as a gift.

In Franklin v. Commissioner, TC Memo 2020-127, the Tax Court disallowed numerous business expenses of an investment banker with an MBA including business bad debts for lack of substantiation; he created a travel log after receiving an audit notice and sought to deduct cross country flights to visit his son who was living with the taxpayer’s former wife. 

In Lothringer v. United States, 126 AFTR2d 2020-5663, a Texas Federal District Court determined that the owner of a corporation was, in essence, its alter ego and personally liable for corporate tax debt based, among other things, on failure to observe corporate formalities including filing income tax returns and annual reports as well as paying personal expenses out of the business.

PROCEDURE

In Patel v. Commissioner, TC Memo 2020-133, the Tax Court threw out accuracy related penalties that did not have supervisory approval at the time of issuance of the Revenue Agent Report and accompanying letter 5153.

In United States v. Toth, 126 AFTR2d 2020-________, a Massachusetts Federal District Court found not only that the FBAR penalty for willful failure to report foreign assets did not violate the due process clause or constitute cruel and unusual punishment but also that it was appropriate due to the individual’s conscious effort to be unaware of her responsibilities (she left a blank where asked on Schedule B whether she had an interest in any foreign account).

In United State v. Cantliffe, 126 AFTR2d 2020-________, a Colorado Federal District Court stated that an IRS lien attached to real property of a taxpayer transferred to a trust where there was not adequate consideration, no recordation and the taxpayer continued to reside in the property taking mortgage interest and home office deductions as a “beneficiary” of the trust.

In In Re:  Feshbach, 126 AFTR2d 2020-________, the Eleventh Circuit Court of Appeals agreed with a Florida Federal District Court that a couple could not discharge over $5 million in tax liability where they earned as much as $8.5 million a year but who spent the substantial portion; IRS had previously rejected multiple Offers in Compromise.

In United States v. Webb, 126 AFTR2d 2020-________, an Indiana Federal District Court allowed IRS to reverse, reinstate and enforce collection of liability improperly written off following bankruptcy but where prior liens remained collectible against assets.

In Robinson v. Commissioner, TC Memo 2020-134, the Tax Court granted innocent spouse status to a divorcee whose husband put her name on the business though she did not actually perform services and did not control the business funds (and only had restricted access to personal funds).

The IRS Manual was revised to reflect that nonautomatic/discretionary penalties must be approved by the immediate supervisor before any written communication of proposed penalties wherein the taxpayer may be asked to consent.

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