Time Frame for IRS Whistleblower Claims

The IRS is slow in making awards to whistle blowers. It can take years just to get the final rejection letter from the IRS. This can be very frustrating for informants. In the Whistleblower 769-16W v. Commissioner, 152 T.C. 10 (2019), case, the IRS asked the court to send the case back to the IRS…Continue readingTime Frame for IRS Whistleblower Claims

Return Preparer Liable for Returns She Didn’t Prepare

The IRS has been increasing its focus on tax return preparers who file false or fraudulent tax returns. Congress recently beefed up the due diligence requirements preparers have to comply with and the penalty amounts have also been increased. But these laws only apply to tax returns the preparer actually prepared. In Tolentino v. United…Continue readingReturn Preparer Liable for Returns She Didn’t Prepare

Tax Refunds for Equitable Innocent Spouse Relief

Innocent spouse relief can provide a remedy for spouses who file joint tax returns. This relief is particularly useful if the innocent spouse can obtain a tax refund for amounts previously paid. But not all innocent spouse requests can result in refunds. One has to be careful what they ask for. The Henry v. Commissioner,…Continue readingTax Refunds for Equitable Innocent Spouse Relief

Does an IRS Appeals Protest Count as a Refund Claim?

Taxpayers generally have to submit refund claims to recoup taxes paid to the IRS. The law generally says that these claims have to be in writing, but not necessarily on the IRS’s official forms. Taxpayers submit a number of documents to the IRS. Written protests submitted to the IRS are an example. Can such a…Continue readingDoes an IRS Appeals Protest Count as a Refund Claim?

Did You Update Your Address With the IRS?

The IRS relies heavily on the U.S. Postal Service to deliver notices to taxpayers. Many of these notices are received by taxpayers. This often comes up when the taxpayer has changed addresses. When the taxpayer does this and the address change is reported to the IRS, should the IRS have to update its records and…Continue readingDid You Update Your Address With the IRS?

Is IRS Manger Approval Required for Computer Generated Penalties?

The IRS and the courts have invalidated penalties where the IRS fails to obtain IRS manager approval before assessing the penalty. It has done so in cases where the penalties are manually assessed by IRS personnel. But what about penalties that are automatically assessed by the IRS’s computers? The court addresses this in Atl &…Continue readingIs IRS Manger Approval Required for Computer Generated Penalties?

Can Gambling Losses be Deducted as Casualty Losses?

If a taxpayer cannot deduct gambling losses given the restrictions on gambling losses, can they deduct them as casualty losses instead? What if the gambling loss are attributable to prescription medications known to cause compulsive gambling? The court addresses this in Mancini v. Commissioner, T.C. Memo. 2019-16. Facts & Procedural History The taxpayer diagnosed with…Continue readingCan Gambling Losses be Deducted as Casualty Losses?

The IRS’s Math Error Powers

With our tax system, taxpayers are generally required to file returns to tell the IRS how much tax is due. This is no easy task as the tax reporting process can be confusing. Errors happen. Congress has authorized the IRS to correct mathematical and clerical errors made on tax returns. The IRS’s CCA 129453-17 memorandum…Continue readingThe IRS’s Math Error Powers

The Sec. 179D Government-Owned Building Allocation

Section 179D provides an incentive for building owners to install energy efficient systems. The IRS released CCA 2018-005, which addresses one of the controversial aspects of Sec. 179D–namely, the ability for government building owners to allocate the deduction to the designer of the energy efficient property. About Section 179D Section 179D was enacted in 2005,…Continue readingThe Sec. 179D Government-Owned Building Allocation

Use of Accounting Board Order in Criminal Tax Case

If an accountant is disciplined by the accounting board, can the discipline be used to increase his criminal sentence for tax fraud when the accounting board’s discipline did not prohibit or address fraud? The court addressed this in United States v. Iley, No. 17-1269 (10th Cir. 2019). Facts & Procedural History The defendant was a…Continue readingUse of Accounting Board Order in Criminal Tax Case

How to Allocate Tax Basis for Real Estate

If you sell real estate, you pay tax on the gain. Gain is the product of the sales price less tax basis. Tax basis in turn is the amount invested in the property. But how do you calculate and then prove tax basis for buildings located on the property when you sell some but keep…Continue readingHow to Allocate Tax Basis for Real Estate

Is Election to Waive NOL Carryback Irrevocable?

You have to be careful when electing to waive the right to carry back a net operating loss. This is particularly true if there are items on your tax returns from earlier years that the IRS may eventually adjust if audited. The Bea v. Commissioner, No. 18-10511 (11th Cir. 2019), case provides an example of…Continue readingIs Election to Waive NOL Carryback Irrevocable?

Research Tax Credit Records Must Be Kept for 40+ Years

A frequent question is how long one has to keep records for tax purposes. The United States v. Quebe, No. 3:15-cv-294 (S.D. Ohio 2019) case provides the answer for research tax credits. The answer is that you have to keep records that pre-date the formation of your business by twenty years and then you have…Continue readingResearch Tax Credit Records Must Be Kept for 40+ Years

How to Correct Late Accounting Method Changes

A consistent mistake on a tax return for more than two years may require an accounting method change to correct. The IRS has procedures for making these elections, which generally require a timely filed tax return. But what if you miss the filing deadline–are you out of luck? Private Letter Ruling (“PLR”) 201850013 provides the…Continue readingHow to Correct Late Accounting Method Changes

Can Defective Deed Defeat IRS Estate Tax Lien?

The IRS lien is broad and attaches to the taxpayer’s property. Creative tax attorneys have tried to find ways around the lien with limited success. The recent Saccullo v. United States, No. 17-14546 (11th Cir. 2019) case raises the question as to whether a defectively executed deed be used to defeat the IRS’s estate tax…Continue readingCan Defective Deed Defeat IRS Estate Tax Lien?

Can Foreign Government Use U.S. Court to Collect From U.S. Person?

If a U.S. person commits tax fraud under the laws of a foreign county, can the foreign country’s tax collector use the U.S. court system to collect from the U.S. person? The court recently addressed this in In re SKAT Tax Refund Scheme Litigation, No. 18-md-2865 (LAK) (S.D.N.Y. 2019). Facts & Procedural History The plaintiff…Continue readingCan Foreign Government Use U.S. Court to Collect From U.S. Person?

Retaining Rights With a Charitable Conservation Easement

Conservation easements can result in significant charitable deductions for real estate owners and investors. But can an owner or investor retain rights to the property and still get the charitable deduction. The courts continue to define when this is possible. The Pine Mountain Preserve LLLP v. Commissioner, 151 T.C. 14, case is the latest case…Continue readingRetaining Rights With a Charitable Conservation Easement

Statements Made to IRS Special Agents

If you are contacted by an IRS special agent for an informal meeting, can statements made during the meeting be used against you in court? The answer is “maybe.” The court addresses this in United States v. Henry, No. 2017-0001 (D. VI 2018). Facts & Procedural History The IRS criminal investigation unit received a tip…Continue readingStatements Made to IRS Special Agents

Appropriate a Book of Business, Capital or Ordinary Gain?

If an investment advisor is terminated by the bank he works for and the bank keeps the advisors book of business, is the bank compensating the investment advisor for the sale of his book of business or is it paying compensation for services? One would seem to produce capital gain and the other ordinary gain.…Continue readingAppropriate a Book of Business, Capital or Ordinary Gain?

Innocent Spouse Relief for One’s Own Income

While taxpayers are often aware that innocent spouse relief can eliminate their liability for tax on items of income earned by their spouse (or ex-spouse), fewer taxpayers realize that innocent spouse relief can also help with tax on income they earned themselves. The recent Heydon-Grauss v. Commissioner, T.C. Memo. 2018-209, case provides an opportunity to…Continue readingInnocent Spouse Relief for One’s Own Income

IRS Can Collect Father’s Tax Restitution from Son

The rules that allow the IRS to assess and collect criminal restitution as if it is a tax due present some unique questions.  In Bontrager v. Commissioner, 151 T.C. 12, the court considered whether the IRS can assess and collect a father’s tax restitution payment as tax restitution against the son.   Facts & Procedural History…Continue readingIRS Can Collect Father’s Tax Restitution from Son

IRS Appeals Guidance on In-Person Conferences

The IRS Office of Appeals has been making changes to how it conducts appeals conferences.  In this past few years, these changes have made it difficult to obtain an in-person conference.  The IRS recently issued interim guidance AP-08-1118-0013 to authorize appeals to allow for more in-person conferences. About the IRS Office of Appeals The IRS…Continue readingIRS Appeals Guidance on In-Person Conferences

The Dilemma: File A Timely or An Accurate Tax Return?

If you have an ongoing dispute with the IRS for one or more years and the outcome of that dispute will impact the current year, can you take a wait and see approach to filing the current year tax return?   The Namakain v. Commissioner, T.C. Memo. 2018-200, case provides an opportunity to consider this question. Facts…Continue readingThe Dilemma: File A Timely or An Accurate Tax Return?

Court Clarifies Inventory Capitalization Rules for Producers

There are a few items that are low hanging fruit that make for easy adjustments for IRS auditors.  The adjustment for indirect costs is an example of such an adjustment that can be made for any taxpayer that has inventory.  The recent Patients Mutual Assistance Collective Corporation v. Commissioner, 151 T.C. No. 11 (2018), case provides…Continue readingCourt Clarifies Inventory Capitalization Rules for Producers

Early IRA Distribution, Gambling Not a Disability

Early distributions from IRAs are subject to a 10 percent additional tax.  The 10 percent additional tax does not apply if the distribution is taken when the IRA owner is disabled.  The recent Gillette v. Commissioner, T.C. Memo. 2018-195, case addresses whether medically-induced compulsive gambling qualifies as a disability. The Facts & Procedural History The taxpayer-wife is a…Continue readingEarly IRA Distribution, Gambling Not a Disability

Planning for Tax Deductible Entertainment Expenses

Entertainment expenses are deductible but the deduction is limited to 50 percent of the amount spent. There have been a number of disputes between taxpayers and the IRS as to what counts as a limited entertainment expense. The law was recently changed such that entertainment expenses are no longer deductible.  This change to full disallowance…Continue readingPlanning for Tax Deductible Entertainment Expenses

U.S. Taxpayer With U.S. Residence Cannot Exclude Foreign-Earned Income

There are a number of tax issues that U.S. citizens and residents who live abroad have to consider.  One of these is whether they qualify to exclude their foreign-earned income in computing U.S. income taxes.  This exclusion has resulted in a number of tax disputes.  The Leuenberger v. Commissioner, T.C. Summary Opinion 2018-52, case addresses the…Continue readingU.S. Taxpayer With U.S. Residence Cannot Exclude Foreign-Earned Income

Documenting Tax Losses for Worthless Securities

Tax losses for worthless securities are often challenged by the IRS.  It particularly important to document the loss.  There are several elements taxpayers have to establish to secure the benefit of tax losses for worthless securities.  The recent Giunta v. Commissioner, T.C. Memo. 2018-180, case provides an opportunity to consider these elements. Facts & Procedural History The…Continue readingDocumenting Tax Losses for Worthless Securities

Court May Explain How to Allocate Tax Basis to Intangible Assets

If the U.S. government allows a taxpayer to call a liability an asset and then acts to make the asset worthless, can the taxpayer take a tax loss for the loss of the so-called asset?  The Citigroup, Inc. v. United States, No. 15-953T (Ct. Cl. 2018) court case addresses this fact pattern.  The case gets to one…Continue readingCourt May Explain How to Allocate Tax Basis to Intangible Assets

The IRS Isn’t Charged With Knowledge of Other Federal Agencies

The IRS only has to mail a notice of deficiency to a taxpayer’s last known address in order to assess or record a tax liability for the taxpayer.  This “last known address” rule is often the subject of disputes.  The Sadek v. Commissioner, T.C. Memo. 2018-174, case provides an example where information available to the…Continue readingThe IRS Isn’t Charged With Knowledge of Other Federal Agencies

Donations to Pastor are Taxable Income, Not Gifts

The distinction between taxable compensation and non-taxable gifts comes up in a number of contexts and has led to a number of tax disputes.  Severance payments made to workers are an example.  The recent Felton v. Commissioner, T.C. Memo. 2018-168, court case addressed this issue in the context of segregated donations made by a congregation…Continue readingDonations to Pastor are Taxable Income, Not Gifts

Planning for Start-Up Businesses, Yacht Rental Example

New businesses may not be immediately profitable.  To help mitigate the financial risk, many businesses are started by workers who have a day job.  If the business is not immediately profitable it can help the owner finance the business if the owner is able to use the tax losses from the business to offset the…Continue readingPlanning for Start-Up Businesses, Yacht Rental Example

Income Earned by Child Taxed to Parent

If a minor child earns income, is the income taxable to the parent or the child?  There have been quite a few tax disputes involving this question.  The Ray v. Commissioner, T.C. Memo. 2018-160 court case provides an opportunity to consider these rules. The Facts & Procedural History Mr. Ray the financial officer for a non-profit…Continue readingIncome Earned by Child Taxed to Parent

Conservation Easement Denied for Private Golf Course

Tax benefits can cause investors to put money were they otherwise would not.  The conservation easement is one example.  Conservation easements reward investors with charitable deductions for putting money into projects that conserve real property.  The charitable deductions can be very large in relation to the amount invested.  The recent Champions Retreat Golf Founders, LLC v.…Continue readingConservation Easement Denied for Private Golf Course

Line of Credit Standby Fees, to Deduct or to Capitalize?

Many businesses rely on a standby line of credit to cover their expenses, to weather downturns, and to grow.  But this credit can be expensive in terms of interest and fees. The fees can be problematic as they may not be deductible for federal income tax purposes at the time they are paid.  The IRS…Continue readingLine of Credit Standby Fees, to Deduct or to Capitalize?

Court Says Partnership is Worth Less, Not Entirely Worthless

The IRS often challenges tax loss deductions.  In many cases, it does so by challenging the year in which the loss is allowable.  It can be difficult to determine which year the loss should be taken.  When an asset is losing value over time, there is a time when the asset is worth less than…Continue readingCourt Says Partnership is Worth Less, Not Entirely Worthless

Intercompany Fee Arrangement Lacks Economic Substance

If the employees and owners of a profitable C corporation set up a related entity and lease the employee-owner’s services back to the C corporation, can the C corporation deduct the payments?  Taking it a step further, what if the related entity is owned by a retirement plan so that most of the payments by…Continue readingIntercompany Fee Arrangement Lacks Economic Substance

The Trade or Business Requirement for the Sec. 199A Deduction

The new Sec. 199A deduction that provides a 20 percent benefit for flow through entities has been in the news as of late.  The Yaryan v. Commissioner, T.C. Memo. 2018-129, case provides an opportunity to consider one aspect of this new Sec. 199A deduction.  Specifically, the Treasury released regulations that adopt a “trade or business” standard…Continue readingThe Trade or Business Requirement for the Sec. 199A Deduction

Litigation Award for Damage to Dairy Farm Ordinary Not Capital

If a dairy farmer receives an award for damages to the farm, is the damage award capital or ordinary?  The distinction is important.  Unlike ordinary income, capital gains are generally afforded lower tax rates and not subject to self-employment taxes.  The court considered this fact pattern in Allen v. United States, No. 16-C-1412 (E.D. Wis. 2018). Facts &…Continue readingLitigation Award for Damage to Dairy Farm Ordinary Not Capital

Whistleblower Cannot Remain Anonymous

We have previously written about the court’s position that serial whistleblowers, those who submit more than one whistleblower claim with the IRS, cannot remain anonymous when litigating the right to their whistleblower claims.  In Whistleblower 7208-17 v. Commissioner, T.C. Memo. 2018-118, the court confirms that this extends to those who use public information to submit…Continue readingWhistleblower Cannot Remain Anonymous

FBAR Not Limited to $100,000, Willfulness Upheld

There have been a number of recent court cases involving foreign bank account or FBAR reporting penalties.  This is likely due to the significant amount of the penalty and that many do not fully appreciate the amount of the liability they face if caught not complying with the FBAR rules.  The recent Norman v. United…Continue readingFBAR Not Limited to $100,000, Willfulness Upheld

When Forged Signatures Suffice: The Tacit Consent Exception

A tax return has to be signed to be valid.  But what if the return is signed by someone else?  Is a tax return with a forged signature a valid tax return?  The court addressed this in Coggin v. United States, No. 1:16-CV-106 (M.D.N.C. 2018). Facts & Procedural History The taxpayer relied on her attorney to…Continue readingWhen Forged Signatures Suffice: The Tacit Consent Exception

Avoiding Cancellation of Debt Using Rebates or Refunds

Can taxpayers avoid cancellation of debt income by structuring debt reductions as rebates or refunds?  The court touched on this issue in French v. Commissioner, T.C. Summary Opinion 2018-36. The Facts & Procedural History The taxpayers borrowed money to purchase a home.  When they failed to make their payments on the mortgage, the bank made contacted…Continue readingAvoiding Cancellation of Debt Using Rebates or Refunds

Legal Construction: Taxes Tied to Activities

When Congress provides a tax benefit contingent on some activity, there is often a question as to whether the activity can be read broadly to encompass many sub-activities or has to be read narrowly.  This impacts the amount of the tax benefit and how difficult it is to comply. Generally, if construed broadly, the tax…Continue readingLegal Construction: Taxes Tied to Activities

Perception Can Be As Important as Substance in Tax Disputes

Taxpayers voluntarily submit information to the IRS.  The IRS not only evaluates the substance of this information, but also the taxpayer’s candor in preparing and providing the information.  The perception of candor is just as important as the substance in many cases.  The Guess v. Commissioner, T.C. Memo. 2018-97, provides an example of how things can…Continue readingPerception Can Be As Important as Substance in Tax Disputes

Loaning Money to Business Triggers Trust Fund Penalty

You work hard to build a business, you find success over the years, and then you find out that your long term accountant did not remit payroll taxes and you owe a significant balance.  What do you do?  The recent McClendon v. United States, No. 17-20174 (5th Cir. 2018) case provides some answers. The Facts & Procedural…Continue readingLoaning Money to Business Triggers Trust Fund Penalty

Shareholder Cannot Make S Corp. Separately Stated Item Election

S corporation’s account for separately stated items that flow through to the shareholder’s tax returns. They are computed on page 3 of the Form 1120S and then listed separately on the Schedule K-1. The idea for breaking these items out separately is that they can impact the shareholder’s individual returns differently. That makes sense, but…Continue readingShareholder Cannot Make S Corp. Separately Stated Item Election

The Statutory Employee Classification Post-TCJA

The Tax Cuts and Jobs Act (“TCJA”) made several changes to our tax laws. One such change is that employees are no longer able to deduct unreimbursed expenses incurred as an employee. Given this change, employers and their workers may need to re-evaluate their relationship. For some workers, this may mean re-evaluating whether the worker…Continue readingThe Statutory Employee Classification Post-TCJA

Guaranteeing a Loan for Your S Corporation

In Phillips v. Commissioner, No. 17-14439 (11th Cir. 2018), the court concluded that a judgment against the owner of an S corporation for guaranteeing the business debts does not increase the owners tax basis in the S corporation.  This is one area where a little advance planning can go a long way to avoiding a tax…Continue readingGuaranteeing a Loan for Your S Corporation

Court Says No Legal Right to IRS Appeals Review

Does the Taxpayer Bill of Rights create a legal right to have a tax dispute considered by the IRS Office of Appeals?  The court recently addressed this question in Facebook, Inc. v. Internal Revenue Service, No. 17-cv-06490-LB (N.D. Calif. 2018), concluding that there is no legal right to have an administrative appeal for a tax dispute. Facts…Continue readingCourt Says No Legal Right to IRS Appeals Review

When the IRS Raises A New Matter on the Eve of Trial

During the course of litigating a tax matter, the IRS may increase the amount of tax, penalties, and interest that it alleges the taxpayer owes. The IRS is typically allowed to do this. If it does, the IRS may have a harder time prevailing on this type of issue. This “new matter” rule was recently…Continue readingWhen the IRS Raises A New Matter on the Eve of Trial

Deducting Fringe Benefits for Family Members

Small business owners often look for ways to reduce their taxes.  With family businesses, these plans often involve employing the owner’s children.  This raises the question of whether a small business owner employ their children as independent contractors and deduct seemingly personal expenses for the children as fringe benefits if the children did in fact…Continue readingDeducting Fringe Benefits for Family Members

The Government’s Ability to Recoup Tax Preparation Fees

Tax preparers can grow their businesses in a short period of time by filing fraudulent tax returns.  As word spreads about the size of the refunds these preparers are able to secure for their clients, the preparers pick up new clients and increase the amount of fees they earn.  These noncompliant tax return preparers are…Continue readingThe Government’s Ability to Recoup Tax Preparation Fees

Credit for Employment Taxes Reported in Error for Another Entity

If employment taxes are paid by one legal entity but incorrectly reported to the IRS for another legal entity, can the entity that paid the taxes get credit for the payment? The IRS said ‘no;’ the U.S. Tax Court said ‘yes.’ The case is E.C.C.B.A. v. Commissioner, T.C. Memo. 2018-55. Facts & Procedural History The case…Continue readingCredit for Employment Taxes Reported in Error for Another Entity

Transferring Property to a Spouse After IRS Lien

There are a number of difficult questions that come up when one spouse has a debt with the IRS and also owns property jointly with their spouse. The question is often whether the spouses can transfer the property to the non-liable spouse. The answer is, maybe. The court recently addressed this in U.S. v. Gerard,…Continue readingTransferring Property to a Spouse After IRS Lien

Applying Tax Overpayments to Later Years is Usually a Bad Idea

Instead of requesting a refund, taxpayers can ask the IRS to hold the overpayment and apply it to the taxpayer’s tax liability for the following year. These tax payment credits can result in significant headaches. The recent Schuster v. Commissioner, No. 17-11647 (11th Cir. 2018) case provides an example of why taxpayers should request refunds…Continue readingApplying Tax Overpayments to Later Years is Usually a Bad Idea

Establishing Tax Basis in IRA Contributions

Contributions to IRAs are deductible.  If not deductible, the taxpayer has basis in his IRA so that this amount is not taxable when taken out of the IRA.  The idea is that the taxpayer probably paid income taxes on the money prior to putting it into the IRA and should not be taxed on it…Continue readingEstablishing Tax Basis in IRA Contributions

Failures in Reporting Taxes is Not Tax Obstruction

Does a taxpayer commit a felony offense if they pay a babysitter without withholding taxes, fail to keep receipts for charitable donations, or neglect to provide every record to an accountant? A strict reading of the law would suggest that these actions are felony offense. The U.S. Supreme Court recently addressed this in Marinello v.…Continue readingFailures in Reporting Taxes is Not Tax Obstruction

What is a Real Estate Trade or Business?

There are a lot of questions about the new Sec. 199A pass thru deduction.  One question is whether real estate will qualify as a trade or business.  Since it is not defined in Sec. 199A, general tax law will apply.  There are a number of court cases on point.  The court recently issued its opinion…Continue readingWhat is a Real Estate Trade or Business?

Documenting Loans to Closely-Held Corporations

In Norgaard v. United States, No. 16-12107-FDS (D. Mass. 2018), the court addressed whether a personal loan made to a closely held corporation can be deducted as a bad debt when the business goes out of business. The case highlights why it is important to document loans made to corporations. The Facts & Procedural History…Continue readingDocumenting Loans to Closely-Held Corporations

Freedom of Information Act Reaches Whistleblower Documents

Since its inception, the IRS’s process for paying whistleblower claimants has been widely criticized. Setting aside these criticisms, there have been a number of developments that would-be informants have to consider before submitting IRS Whistleblower claims. The recent Montgomery v. Internal Revenue Service, No. 17-918 (JEB) (Dist. D.C. 2018) adds another factor to consider. Facts…Continue readingFreedom of Information Act Reaches Whistleblower Documents

Limited Window of Time to Structure Divorce Settlements

The tax deduction and income provisions for alimony have been repealed for divorce decrees entered into after December 31, 2018 or for earlier divorces where the agreements are modified after that date. This gives married couples and formerly married couples a window of time to structure or restructure their agreements to reduce their overall taxes.…Continue readingLimited Window of Time to Structure Divorce Settlements

Improbable Position by IRS Sufficient to Impose Tax

The Transupport, Inc. v. Commissioner, No. 17-1265 (1st Cir. 2018) case involved evidence that was not sufficient to support imposing a penalty, but the same evidence was sufficient to hold the taxpayer liable for the tax. The case provides an opportunity to consider how courts evaluate evidence in tax cases. The Facts & Procedural History…Continue readingImprobable Position by IRS Sufficient to Impose Tax

IRS Summons Reaches Attorney’s Client Names

Communications with an attorney are generally protected from disclosure.  But what about client names?  And what power does the IRS have the power to force an attorney to disclose the names of his clients?  The court addressed this in U.S. v. Servin, No. 17-1371 (3d Cir. 2018). Facts and Procedural History The case involved an attorney…Continue readingIRS Summons Reaches Attorney’s Client Names

Court Rejects the ‘Taking All Necessary Steps’ Defense to Penalties

If you take all of the steps to prepare and remit a tax return to the IRS except for placing it in the mail, is this sufficient to avoid a failure to timely file penalty?  There is case law suggesting that it may be in some circumstances.  The U.S. Tax Court recently addressed this in…Continue readingCourt Rejects the ‘Taking All Necessary Steps’ Defense to Penalties

Misappropriated Money Subject to Tax, Even if No Criminal Violation

The proceeds of criminal activities are taxable income. Money that is embezzled from an employer is taxable to the embezzling employee. But what about money transferred between friends with the agreement that one of them will invest the funds, but he instead uses the funds personally and in doing so did not violate a criminal…Continue readingMisappropriated Money Subject to Tax, Even if No Criminal Violation

Some Filing Deadlines are Strict, Others are Not

When it comes to fixing tax problems, procedural footfaults can make solving the problem even more difficult. Filing deadlines are an example. The Duggan v. Commissioner, No. 15-73819 (9th Cir. 2018), case provides an example. Facts & Procedural History In Duggan, the taxpayer was contesting the IRS’s decision to proceed with collections. He requested a…Continue readingSome Filing Deadlines are Strict, Others are Not

Court: IRS Cannot Apply New Law Based on Conduct Predating the Law

In Rafizadeah v. Commissioner, 150 T.C. No. 1 (2018), the court concluded that the IRS made a late assessment of tax and penalties. The case turns on whether the IRS can benefit from the longer six-year assessment period based on an information return filing that the law did not obligate the taxpayer to make at…Continue readingCourt: IRS Cannot Apply New Law Based on Conduct Predating the Law

Family Cattle Operation Denied Tax Deductions

In Barnhart Ranch Co. v. Commissioner, No. 16-60834 (5th Cir. 2017), the court considered who was entitled to deduct expenses for cattle that were descended from cattle the taxpayers inherited and other cattle that were subsequently purchased. The case shows how important it is to implement an accounting system to capture income and expenses in…Continue readingFamily Cattle Operation Denied Tax Deductions

Is the IRS Bound by It’s Letters and Notices?

If the IRS sends a taxpayer a letter saying that it will process their refund claim but then it fails to do so, is the IRS bound by its letter? The court recently addressed this in Hawver v. Commissioner, T.C. Memo. 2017-244. The Facts & Procedural History The taxpayer filed his 2005 tax return in…Continue readingIs the IRS Bound by It’s Letters and Notices?

Payments to Foreign Student Studying in U.S. Subject to Tax

We get quite a few questions from students who are in the U.S. on student visas as to whether their research awards are taxable in the U.S.  The answer depends in large part on the terms of the applicable tax treaty and whether the awards are compensation for services or pure grants. The recent Dovzhenok…Continue readingPayments to Foreign Student Studying in U.S. Subject to Tax

IRS Cannot Use Court to Collect from Third Party Located in Another State

The IRS has a number of collection tools at its disposal. This includes the ability to take the taxpayer’s property without court intervention. This power doesn’t extend to all property. For example, the IRS has to go through the courts to get at property held by third parties. As the court reminded the IRS in…Continue readingIRS Cannot Use Court to Collect from Third Party Located in Another State

No Interest & Penalties on Restitution Assessments

The IRS can assess criminal restitution as if it is a tax tax. But can it assess interest and penalties on the restitution as it would a tax? The IRS policy is to do just that. The court addressed this in Klein v. Commissioner, 149 T.C. 341 (2017), concluding that the IRS policy violates the…Continue readingNo Interest & Penalties on Restitution Assessments

Valuation of Management Fees Paid by Related Parties

Related party transactions can raise difficult tax questions. This is especially true for management fees paid by one legal entity to another legal entity that has the same or similar owners or that are controlled by the same owners. As noted in the recent Wycoff v. Commissioner, T.C. Memo. 2017-203 case, related-party management fees often…Continue readingValuation of Management Fees Paid by Related Parties

IRS Rejects Court’s Passive Activity Loss 5% Owner and Grouping Decision

The passive activity loss (“PAL”) rules can limit the ability to deduct losses from passive activities, such as rental losses.  The real estate professional and activity grouping rules can allow taxpayers to avoid having their losses limited by the PAL rules.  Earlier this month, the IRS issued AOD  2017-007, IRB 2017-42 , to note its formal…Continue readingIRS Rejects Court’s Passive Activity Loss 5% Owner and Grouping Decision

Court Considers Medical Marijuana Company Substantiation

Medical marijuana companies face a number of challenges. The Section 280E limitation on business deductions is one example. There have been a number of court cases that address this limitation. The Feinberg v. Commissioner, T.C. Memo. 2017-211, case addresses a medical marijuana company’s efforts to substantiate cost of goods sold in light of the Section…Continue readingCourt Considers Medical Marijuana Company Substantiation

Form 2848 Must Specifically List Information Tax Returns

The IRS can generally disclose a taxpayer’s tax information with a representative that is designated by the taxpayer on a Form 2848, Power of Attorney and Designation of Representative.  This covers all forms included with the taxpayer’s tax return as long as the type of tax return is listed on the Form 2848.  This raises…Continue readingForm 2848 Must Specifically List Information Tax Returns

Revocation of Nonprofit Status Triggers Retroactive Interest

There are some areas of law where principles of equity and good faith play a big role. By and large, tax law does not adopt these principles. The CreditGUARD v. Commissioner, 149 T.C. 17 (2017) case provides an example. The case addresses whether the IRS is entitled to interest on a corporate tax liability when…Continue readingRevocation of Nonprofit Status Triggers Retroactive Interest

IRS Benefits from the Texas Homestead Exemption

In United States. v. Cobos, No. 3:13-CV-4924-L (N.D. Tex. 2017), the court addressed whether a third party who files a lien notice against a taxpayer before the IRS files its lien notice has a superior claim to the taxpayer’s home. The case highlights how the Texas homestead exemption can benefit the IRS to the detriment…Continue readingIRS Benefits from the Texas Homestead Exemption

Amending Tax Returns for FTC and NOL Carrybacks

The time limits for filing amended tax returns can present a number of difficult questions.  This is particularly true when tax attributes, such as foreign tax credits and net operating loss deductions, are carried back to prior years.  The carryback to one prior year can result in carrybacks to one or more years prior to…Continue readingAmending Tax Returns for FTC and NOL Carrybacks

Court Says Rent Income from S Corp Not Subject to Self-Employment Taxes

In Martin v. Commissioner, 149 T.C. 12 (2017), the court concluded that S corporation shareholders can avoid self-employment taxes by holding their farming operations in their S corporation. While the court case considered farming operations, its holding is not limited to farming operations. The case provides authority shareholders may cite in support of similar but…Continue readingCourt Says Rent Income from S Corp Not Subject to Self-Employment Taxes

Court Denies IRS Injunction in Employment Tax Dispute

It is common for the IRS to make various demands on businesses that are undergoing employment tax audits or businesess that are trying to deal with employment tax collection issues. One common demand is that the taxpayer immediately start complying with the employment tax laws. But what if the taxpayer cannot comply, perhaps due to…Continue readingCourt Denies IRS Injunction in Employment Tax Dispute

U.S. Treasury Says IRS Not Using Information from Foreign Governments

It wasn’t long ago that the IRS was completely in the dark as to what information taxpayers and others were reporting to foreign governments. The IRS would never show up on U.S. audit with information obtained from foreign governments. We do see this on audits occasionally, but it is still a rare occurrence. A recent…Continue readingU.S. Treasury Says IRS Not Using Information from Foreign Governments

Court Says Deduction for Tax Loss Not Allowed for Worthless Debt

Tax losses for worthless debts often trigger IRS audits. On audit, it is common practice for the IRS to disallow the losses based on the debt not being worthless, the amount of the loss not being correct, and that the taxpayer took the loss in the wrong tax year. Taxpayers can take steps to limit…Continue readingCourt Says Deduction for Tax Loss Not Allowed for Worthless Debt

Airline Pilot Stationed Overseas Not Entitled to Section 911 Foreign Income Exclusion

U.S. income tax laws can be challenging for U.S. citizens who live outside of the U.S. This is particularly true for airline pilots who accept jobs overseas. The recent Acone v. Commissioner, T.C. Memo. 2017-162, case addresses the challenge of determining whether an airline pilot stationed overseas qualifies for the Section 911 foreign income exclusion.…Continue readingAirline Pilot Stationed Overseas Not Entitled to Section 911 Foreign Income Exclusion

Court Says Mortgage Broker Not a Real Estate Professional

The passive activity loss rules can prevent real estate investors from being able to deduct their real estate losses.  That is the intent and purpose of the rules.  The rules and how they have been interpreted draw some known but arbitrary lines in the sand.  The recent Hickam v. Commissioner, T.C. Summary Opinion 2017-66, case…Continue readingCourt Says Mortgage Broker Not a Real Estate Professional

IRS Penalties for Late-Filed Forms 5471

The Dewees v. United States, 16-cv-01579 (D.D.C. 2017) case is a good reminder that late-filed Forms 5471 should include reasonable cause statements. These statements can be submitted under the IRS’s Delinquent International Information Return Submission Procedures to avoid penalties being assessed. The Facts and Circumstances in Dewees Dewees is a U.S. citizen who lived in…Continue readingIRS Penalties for Late-Filed Forms 5471

Intercompany Receivable Results in Section 956 Inclusion for U.S. Corp.

The Subpart F rules can result in foreign profits being subject to tax in the U.S.  In the recent Crestek v. Commissioner, 49 T.C. 5 (2017), the court addresses unpaid advances a controlled foreign corporation made to its U.S. parent.  The case shows how easy it is for a U.S. corporation that has an outbound transactions to…Continue readingIntercompany Receivable Results in Section 956 Inclusion for U.S. Corp.

Tax Court Says Royalties Paid to Roth IRA Were Excess Contributions to IRA

The U.S. Tax Court recently issued another opinion involving a LLC owned by a self-directed IRA. The case is Block Developers, LLC v. Commissioner, T.C. Memo. 2017-142. The case invovles an IRA LLC that purchased a patent and then licensed the patent back to the prior owner, with the intent of the IRA LLC collecting…Continue readingTax Court Says Royalties Paid to Roth IRA Were Excess Contributions to IRA

Cash-Basis Taxpayers Can Deduct Reclamation Costs Under Sec. 468

Section 468 allows a current deduction for mining and solid waste reclmation costs even though the expenses may not be incurred for several years–if not decades–in the future. It has traditionally been thought that only accrual-method taxpayers can benefit from Sec. 468. The court recently dispelled this notion in Gregory v. Commissioner, 149 T.C. 2…Continue readingCash-Basis Taxpayers Can Deduct Reclamation Costs Under Sec. 468

The Form 1045 Dispute & Possible Solution: Include a Detailed Cover Letter

The Form 1045, Application for Tentative Refund, is used to carryback losses, credits, etc. from the current year to prior years. In many cases it is used when a taxpayer was previously profitable and then incurrs a loss. The now unprofitable business can go back and recoup taxes paid in prior years and get a…Continue readingThe Form 1045 Dispute & Possible Solution: Include a Detailed Cover Letter

No Tax Due on Foreign Corporation’s Redemption of U.S. Partnership Interest

Many businesses that operate outside of the U.S. want to do business in the U.S. and they want to limit their exposure to U.S. income taxes. To do this, many in-bound investments are structured as U.S. partnerships with the parntership being formed in the U.S. to carry on the business activities in the U.S. This…Continue readingNo Tax Due on Foreign Corporation’s Redemption of U.S. Partnership Interest

Settlement Award for Discrimination Related to Physical Injuries is Taxable

Damage awards received on account of personal physical injuries or physical sickness are not taxable. If a taxpayer receives a non-taxable award under this rule and then is discriminated against by his employer due to the physical injuries, is a second award paid by the employer also non-taxable? The court recently addressed this in Rajcoomar…Continue readingSettlement Award for Discrimination Related to Physical Injuries is Taxable

Serial IRS Whistleblower Cannot Remain Anonymous

You would think that an IRS whistleblower could always remain anonymous. That is a fundamental feature of the whistleblower program. In Whistleblower 14377-16W v. Commissioner, 148 T.C. 25, the U.S. Tax Court concluded that a whistleblower claimant could not remain anonymous when litigating his claim in court. This case is one all whistleblowers should read…Continue readingSerial IRS Whistleblower Cannot Remain Anonymous

Tax Law is Not Determined by Common Industry Term

Just because businesses in a particular industry commonly use a term to describe a particular transaction or event, the industry term does not necessarily have any bearing on the Federal income tax consequences of the transaction or event. The court addresses this in Greenteam Materials Recovery Facility PN v. Commissioner, T.C. Memo. 2017-122, in the…Continue readingTax Law is Not Determined by Common Industry Term

Issue for the New Partnership Audit Procedures Raised in TEFRA Case

The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) procedures were intended to make it easier for the IRS to audit partnership tax returns. TEFRA failed to deliver. The rules are nuanced and hard to apply. The new partnership audit procedures are intended to remedy this. With the new partnership IRS audit procedures coming…Continue readingIssue for the New Partnership Audit Procedures Raised in TEFRA Case

Penalty Abatement for Reliance on Tax Advisor Who Made Obvious Errors

The IRS often willing to abate or remove tax penalties. To do so, taxpayers usually have to show that they acted with reasonable cause and in good faith. Relying on a competent tax professional can be one way taxpayers can make this showing. But what exactly is a competent tax professional? The court addressed this…Continue readingPenalty Abatement for Reliance on Tax Advisor Who Made Obvious Errors

Wholly Owned Corp and Parent Not the “Same Corporation” for Interest Netting

In Ford Motor Co. v. United States, No. 14-458T (Ct. Cl. 2017), the court addressed whether a wholly owned corporation and its parent were the “same corporation” when computing the amount of interest the taxpayer owed to the IRS. This “same corporation” issue is one that comes up in most interest-netting cases. The Interest Netting…Continue readingWholly Owned Corp and Parent Not the “Same Corporation” for Interest Netting

Two Years to File Refund Suit in District Court, Six Years in Federal Court of Claims

If the IRS owes the taxpayer a refund, the general rule is that the taxpayer has to file a refund claim with the IRS, wait for the IRS to disallow the claim, and then, within two years of the date the claim is disallowed, file suit to recoup the refund. This is the general rule.…Continue readingTwo Years to File Refund Suit in District Court, Six Years in Federal Court of Claims

Do You Have to Use the IRS’s Official Forms?

Do taxpayers have to use the official forms published by the IRS?  In May v. United States, No. 15-16599 (9th Cir. 2017), the court considered whether a taxpayer is subject to the listed transaction penalty if he fails to file the IRS’s reportable transaction form, but the IRS is otherwise furnished with all of the information…Continue readingDo You Have to Use the IRS’s Official Forms?