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

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

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 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

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

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

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

U.S. Foreign Tax Credit Not Impacted by Repayment of Foreign Tax Refund

The tax assessment and collection process in most foreign countries is markedly different than the process in the U.S. These differences can present a number of challenges for U.S. citizens who reside in foreign countries. In Sotiropoulos v. Commissioner, T.C. Memo. 2017-75, the court considered one of these challenges, namely, how does one determine whether…Continue readingU.S. Foreign Tax Credit Not Impacted by Repayment of Foreign Tax Refund

Court Considers Economic Substance in S Corp Transactions

The IRS challenges some tax positions by asserting that the transactions lack economic substance. This can allow the government to unwind or ignore transactions that comply with our tax laws if there is no legitimate business purpose for the transactions other than tax savings. There is a growing body of court cases that helps define…Continue readingCourt Considers Economic Substance in S Corp Transactions

IRS Says Personal Expenses Paid by S Corp. Not Loan Repayments

If a Subchapter S corporation pays its shareholders personal expenses, can the payments be for the repayment of loans not subject to employment instead of wages subject to employment taxes? This is a common issue that has to be addressed when preparing S corporation tax returns. The IRS addressed this in AOD 2017-04 disagreeing with…Continue readingIRS Says Personal Expenses Paid by S Corp. Not Loan Repayments

Court Says Employer Entitled to Worker’s IRS Records

When the IRS determines that independent contractors are taxed as employees, it is up to the employer to show that the IRS determination is incorrect. One way to do this is to show that the workers paid tax even though the employer did not withhold the tax. In Mescalero Apache Tribe v. Commissioner, 148 T.C.…Continue readingCourt Says Employer Entitled to Worker’s IRS Records

Court Decides Transfer Pricing Buy-in Payment Case

The transfer pricing disputes often involve transfers of property offshore. Taxpayers make these transfers so that the post-transfer profits earned from the offshored property are not subject to tax in the U.S. or, in many cases, not subject to tax in the foreign countries either. The U.S. Tax Court recently decided Amazon Inc. v. Commissioner,…Continue readingCourt Decides Transfer Pricing Buy-in Payment Case

S Corporation Owner Who Didn’t Receive Distribution Subject to Tax

Taxpayers who own an interest in an S corporation but who are not familiar with the tax rules are often surprised to learn that they have to pay tax on the business profits even if they do not receive distributions from the business. The court recently addressed this fundamental concept in Dalton v. Commissioner, T.C.…Continue readingS Corporation Owner Who Didn’t Receive Distribution Subject to Tax

Subchapter S Corporation Losses Limited by Tax Basis

One of the benefits of Subchapter S corporations is the ability to have losses flow through from the business’ tax return to the individual shareholder’s tax return. These flow-through losses are limited by the shareholder’s tax basis in the S corporation stock. The court recently addressed this limitation in Tinsley v. Commissioner, T.C. Summary Opinion…Continue readingSubchapter S Corporation Losses Limited by Tax Basis

Bad Credit Results in Disallowance of Bad Debt Deduction

The IRS often challenges bad debt deductions–particularly when the loan is from a family member or friend.  The courts have developed several factors that they consider in these disputes.  One of these factors is whether the borrower would have been able to secure a loan from a third party.   The court recently addressed this in…Continue readingBad Credit Results in Disallowance of Bad Debt Deduction

Appeals Court Upholds IC-DISC Roth IRA Tax Strategy

The Sixth Circuit Court of Appeals upheld the IC-DISC Roth IRA tax strategy in In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (2017). This tax strategy allows business owners to sidestep the annual Roth IRA contribution limits, thereby allowing the taxpayers to amass sizable amounts in their Roth IRAs to grow tax-free. The case is…Continue readingAppeals Court Upholds IC-DISC Roth IRA Tax Strategy

Discount Loyalty Programs are Not Trading Stamp Companies

Accrual method taxpayers generally must recognize advance payments in taxable income in the year of receipt, because receipt satisfies the all events test. The trading stamp rules are an exception to this all-events test. These rules apply to businesses that have customer loyalty programs. The rules can result in significant tax deferral as they allow…Continue readingDiscount Loyalty Programs are Not Trading Stamp Companies

Deducting Back Taxes in Current Year for Defunct Business

Can an S corporation shareholder for a defunct business pay unpaid taxes in the current year, and have the defunct business deduct the payment in the current year?  The court addresses this in Brown v. Commissioner, T.C. Memo. 2017-18.  Most business owners may miss this deduction given that the business is no longer operating. Facts &…Continue readingDeducting Back Taxes in Current Year for Defunct Business

Deducting Pre-Acquisition Stock Compensation

In Qinetiq US Holdings, Inc. v. Commissioner, No. 15-2192 (4th Cir. 2017), the court addresses the situation where a taxpayer acquired a target corporation and then claimed a substantial tax deduction for expenses the target corporation had paid prior to the acquisition. There are rules intended to prevent taxpayers from being able to deduct pre-acquisition…Continue readingDeducting Pre-Acquisition Stock Compensation

Bad Debt Deduction for Cease-and-Desist Order

With tax losses, one challenge is to determine what tax year the loss is allowable.  The loss year is usually identified by a triggering event.  Is a cease-and-desist order from the state regulator a triggering event that establishes that a start-up company is worthless in the year the order was received?  The court addressed this in Sensenig…Continue readingBad Debt Deduction for Cease-and-Desist Order

S Corporation Owner Subject to Self-Employment Tax

Taxpayers often establish Subchapter S corporations to avoid Social Security and Medicare taxes on a portion of their earnings. This is a very common arrangement.  The Fleischer v. Commissioner, T.C. Memo. 2016-238, court case provides an example of how the Subchapter S corporation must be structured to avoid these taxes. Facts & Procedural History In Fleisher, the…Continue readingS Corporation Owner Subject to Self-Employment Tax

Using IRA Funds to Settle a Probate Dispute

Inherited IRAs can present a number of challenges. In Ozimkoski v. Commissioner, T.C. Memo. 2016-228, the court considered the tax implications of a withdraw from an inherited IRA that was used to settle a probate dispute with the couple’s son. The case shows what not to do when using IRA funds to settle a probate…Continue readingUsing IRA Funds to Settle a Probate Dispute

Tax Benefit Rule & Transfers at Death

A sole proprietor incurred a business expense. He dies in the same year. The business expense was for property that would last more than one year. Does the business owner’s estate have to report the amount of the deduction as income? This question is answered by considering the tax benefit rule. The court addressed this…Continue readingTax Benefit Rule & Transfers at Death

Tax Court Expands Innocent Spouse Relief for Divorced Taxpayers

Innocent spouse relief can allow a taxpayer to avoid joint liability for taxes that arose during the marriage. There is an exception for the would-be innocent spouse if they had actual knowledge of the item that resulted in the tax. The U.S. Tax Court addressed this limitation in McDonald v. Commissioner, T.C. Summary Opinion 2016-79,…Continue readingTax Court Expands Innocent Spouse Relief for Divorced Taxpayers

Court Considers Whether Moneygram is a Bank that Makes Loans

There are tax laws that provide significant tax advantages to banks. One of these laws allows banks to deduct capital losses against ordinary income. This allows banks to deduct losses immediately when others might have to carryover the loss to other tax years. There are other tax laws that are specific to banks. These laws…Continue readingCourt Considers Whether Moneygram is a Bank that Makes Loans

TIGTA Suggests IRS Follow Transfer Pricing Roadmap

Transfer pricing is and has been the most significant and difficult issue the IRS audits. The audits are typically closed with the IRS agents proposing unreasonably large adjustments and IRS appeals sustaining a very low percentage of the adjustments. The IRS has not been very successful in litigating transfer pricing cases either. As a result,…Continue readingTIGTA Suggests IRS Follow Transfer Pricing Roadmap

Does Changing Roof Mean No Facade Easement Deduction?

Donating the rights to change the facade of a building can qualify for a charitable deduction.  The donation helps ensure that the historical significance of the building is not compromised.  But what if you retain the right to change the roof to the building?  Can you still qualify for a facade easement deduction?  The court…Continue readingDoes Changing Roof Mean No Facade Easement Deduction?

Can Lump Sum Cash Payment Qualify as Alimony?

For taxpayers who pay alimony to an ex-spouse, the tax deduction for the alimony payment is usually quite large.  It can significantly reduce their tax.  But can a lump sum payment made in cash qualify for tax-deductible alimony?   The court addressed this in Muñiz v. Commissioner, No. 15-14478 (11th Cir. 2016). Facts & Procedural History Muñiz…Continue readingCan Lump Sum Cash Payment Qualify as Alimony?

IRS Will Not Follow Court’s Holding for Customer Rewards Program

The IRS issued AOD 2016-03 to indicate that it will not follow the Third Circuit Court of Appeals decision in Giant Eagle, Inc. v. Commissioner, 822 F.3d 666 (3rd Cir. 2016), rev’g T.C. Memo 2014-146. The issue is whether costs for a rewards program are deductible in the year the rewards are earned by the…Continue readingIRS Will Not Follow Court’s Holding for Customer Rewards Program

Is a Lawsuit Award Payment Taxable?

If you receive payments from a lawsuit settlement award, are the payments excluded from Federal income tax?  What if the payments are for claims of emotional distress or physical sickness?  The Tishkoff v. Commissioner, T.C. Summary Opinion 2016-65, case provides an opportunity to consider these rules. Facts & Procedural History The taxpayer worked for Wells Fargo…Continue readingIs a Lawsuit Award Payment Taxable?

The Impact of Filing a CPA Malpractice Case

The YA Global Investments, L.P. v. RSM McGladrey, Inc.Docket No. A-2152-15T3 (2016), case addresses the difficult situation whereby a taxpayer sues their CPA firm in state court for incorrect tax advice, while at the same time arguing that the tax advice and position is correct in the U.S. Tax Court. This situation arises given the…Continue readingThe Impact of Filing a CPA Malpractice Case

Payments Were Alimony Despite Missing Language Agreement

Payments Made to Ex-Spouse Were Alimony Despite Missing Language in Divorce Agreement Tax issues are often the last thing that spouses consider when going through a divorce. In other cases, one spouse plans for the tax issues and the other does not. This appears to have been the situation in Leslie v. Commissioner, T.C. Memo.…Continue readingPayments Were Alimony Despite Missing Language Agreement

Payment for Failed Real Estate Deal, Capital or Ordinary Gain?

How is a termination payment for a failed real estate deal taxed?  Does it trigger capital or ordinary gain?  The court recently addressed this in CRI-Leslie, LLC v. Commissioner, 147 T.C. 8. Facts & Procedural History The taxpayer owned a Radison-branded hotel in Florida.  It entered into a contract to sell the hotel to a third…Continue readingPayment for Failed Real Estate Deal, Capital or Ordinary Gain?

Evidence for Excluding Settlement Award from Income

Settlement payments paid to compensate a taxpayer for his physical sickness or injury are not taxable. Can you prove physical sickness or injury by showing that the payments were not for an economic harm? The court addressed this in George v. Commissioner, T.C. Memo. 2016-156. Facts & Procedural History The taxpayer was a car salesman in…Continue readingEvidence for Excluding Settlement Award from Income

Grouping Nonpassive Activities Under the PAL Rules

Taxpayers are often surprised to learn that some losses may not be netted against gains in the current tax year. This is often due to the passive activity loss and material participation rules. The IRS National Office addressed these rules in TAM 201634022, in the context of whether two businesses should be grouped together and…Continue readingGrouping Nonpassive Activities Under the PAL Rules

IRS Audit Adjustments That Change Accounting Methods

Given the potential for the adjustments to trigger extremely large tax liabilities, accounting method changes made by the IRS on audit can be doomsday scenarios for unwary taxpayers. In Nebeker v. Commissioner, T.C. Memo. 2016-155, the court addressed a common situation where the IRS makes an adjustment on audit that is an accounting method, but…Continue readingIRS Audit Adjustments That Change Accounting Methods

Start-Up Expense Limitation

The Start-Up Expense Limitation: Starting a Business in Retirement There are several occupations where highly skilled individuals are forced to retire due to mandatory retirement provisions. These individuals often use their skills to start new businesses during retirement. The court addressed this situation in Tizard v. Commissioner, T.C. Summary 2016-42. The case provides an example…Continue readingStart-Up Expense Limitation

Unmarried Taxpayers Can Claim Mortgage Interest Deduction

Mortgage Interest Deductions for Unmarried Couples In Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), the court addressed the rule that limits the deductibility of interest on home mortgages and home equity loans. This rule limits the amount of interest that can be deducted on mortgages in excess of $1 million and home equity…Continue readingUnmarried Taxpayers Can Claim Mortgage Interest Deduction

Real Estate Professionals Subject to Material Participation Rules

But can you be a real estate professional for the passive activity loss rules and then have your passive losses denied under the material participation rules?  The Gragg v. United States, No. 14-16053 (9th Cir. 2016) case presents an opportunity to consider this fact pattern. The Facts & Procedural History The taxpayer was a real…Continue readingReal Estate Professionals Subject to Material Participation Rules

Seismic Surveyor Entitled to G&G Expense Deductions

In CGG Americas, Inc. v. Commissioner, 147 T.C. 2, the U.S. Tax Court concluded that a seismic surveyor is entitled to geological and geophysical (G&G) expenses deductions even though they merely gathered data for license to third parties and did not engage in exploration or development work. Facts & Procedural History The taxpayer was in…Continue readingSeismic Surveyor Entitled to G&G Expense Deductions

IRS Allowed Interest for Unpaid Taxes Despite Waiver

The IRS often does not act to collect unpaid taxes. When it does, it usually does so after several years have passed since the tax was due. Even though interest rates remain at historically low levels, it is not unheard of for the interest incurred on unpaid taxes to be more than the original tax…Continue readingIRS Allowed Interest for Unpaid Taxes Despite Waiver

Tax Deductions for Hobby Survives IRS Scrutiny

There are quite a few cases where the IRS disallowed loss deductions for “hobbies.” There are also quite a few cases where the courts have upheld the IRS’s position. These cases are decided based on the facts and how the courts interpret these facts. The facts in Main v. Commissioner, T.C. Memo. 2016-127, provide a…Continue readingTax Deductions for Hobby Survives IRS Scrutiny

Fines or Sanctions Paid to FINRA Are Not Deductible

In CCA 201623006 the IRS concluded that the payment of a fine or similar penalty to the Financial Industry Regulatory Authority (FINRA), a non-government entity, is not deductible as an ordinary and necessary business expense. Fines & Penalties Non-Deductible ..WHY?? The law is clear that fines and penalties paid to government entities for violation of…Continue readingFines or Sanctions Paid to FINRA Are Not Deductible

Delayed Sale to Former Spouse Not Taxable

Divorce can present tax savings opportunities.  Many of the tax savings strategies involve transferring property and income therefrom to the spouse who is in the low- or no-tax tax bracket.  The recent Belot v. Commissioner, T.C. Memo. 2016-113, case addresses the tax free transfer of property following a divorce. Facts & Procedural History Mr. and Ms.…Continue readingDelayed Sale to Former Spouse Not Taxable

Payment from Accounting Firm to Settle Claim Excluded From Income

The IRS released Action on Decision 2016-01 to disagree with a court case that held that a payment from an accounting firm to settle a claim against the firm for selling an abusive tax shelter was not taxable to the recipient. Facts & Procedural History The case is Cosentino v. Commissioner, T.C. Memo. 2014-186. In…Continue readingPayment from Accounting Firm to Settle Claim Excluded From Income

TV Commercial Set Designer Was an Independent Contractor

In Quintanilla v. Commissioner, T.C. Memo. 2016-5, the U.S. Tax Court concluded that a set designer for TV commercials was an independent contractor and not an employee for tax purposes.  This case provides a good example of factors that show that a worker is in fact an independent contractor. Facts & Procedural History Mr. Quintanilla…Continue readingTV Commercial Set Designer Was an Independent Contractor

R&D Credit Made Permanent & Enhanced

Congress made the research tax credit permanent and enhanced the credit. The changes are retroactive back to January 1, 2015. Temporary Nature of the R&D Credit The permanent research tax credit solves one of the ongoing problems with the credit. As critics of the credit have noted, the credit cannot provide much of an incentive…Continue readingR&D Credit Made Permanent & Enhanced

LLC Owned by Self-Directed IRA Cannot Pay Wages

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed Ellis v. Commissioner, which held that the payment of wages for services to a self-directed IRA owner for his services rendered to an LLC owned by a self-directed IRA was a prohibited transaction. This case provides yet another example of how not to handle…Continue readingLLC Owned by Self-Directed IRA Cannot Pay Wages

How are Employer Loans in Lieu of Wages Taxed?

Can you avoid paying Federal income tax by having your employer make loans to you in lieu of wages, and then have the employer forgive the loans over time?  The court addressed this in Wyatt v. Commissioner, T.C. Summary Opinion 2015-31. Facts & Procedural History Dr. Wyatt was a gynecologist.  He recruited to practice in Putnam…Continue readingHow are Employer Loans in Lieu of Wages Taxed?

Truck Stop Electrification Expenses Deductible, But Travel Expenses and Traffic Ticket Are Not

In Howard v. Commissioner, T.C. Memo. 2015-38, the U.S. Tax Court concluded that truck stop electrification expenses were deductible, but travel expenses and a traffic ticket were not deductible. Facts & Procedural History Mr. Howard was a long-distance truck driver for a Nebraska trucking company in 2009. He logged business travel for 358 days out…Continue readingTruck Stop Electrification Expenses Deductible, But Travel Expenses and Traffic Ticket Are Not

Opting Out of Gaming Industry Tip Compliance

The IRS often challenges the amount of income received by workers who are paid tips.  The IRS’s Gaming Industry Tip Compliance Agreement Program (“GITCA Program”) provides a method for avoiding these disputes.  But what happens if you opt out of the tip program?  The Sabolic v. Commissioner, T.C. Memo. 2015-32, case provides the answer. The Facts &…Continue readingOpting Out of Gaming Industry Tip Compliance

Over-the-Road Truck Driver Not Entitled to Deduct Travel Expenses

In Jacobs v. Commissioner, T.C. Summary Opinion 2015-3, the U.S. Tax Court concluded that an over-the-road truck driver was not entitled to deduct travel expenses for traveling away from home since he lived in his truck. Facts & Procedural History Mr. Jacobs is a truck driver. He operated his own truck prior to 2006, worked…Continue readingOver-the-Road Truck Driver Not Entitled to Deduct Travel Expenses

Research Was Not Routine, But Compensation Was Excessive

For the research tax credit, when is research so routine that it does not qualify for the tax credit?  And what if the founder of the company is paid an unreasonably high wage–can the high wage be considered as an expense for computing the credit?  The court addressed these issues in Suder v. Commissioner, T.C. Memo.…Continue readingResearch Was Not Routine, But Compensation Was Excessive

Bad Debt Deduction Not Allowed Until Business Fails

If you lend money to a failing business and the business eventually fails, can you take a bad debt deduction?  And if so, when?  The U.S. Tax Court addressed this in Cooper v. Commissioner, 143 T.C. 10, which provides an opportunity to consider the question. Facts & Procedural History The Coopers started Pixel in 1983.  Pixel…Continue readingBad Debt Deduction Not Allowed Until Business Fails

Self-Directed IRA Purchase of Real Estate is Taxable

Self-directed IRAs present a number of opportunities.  But what if the self-directed IRA custodian chooses to limit the account holder’s options?  Can the IRA account holder go around the custodian’s wishes?  The recent Dabney v. Commissioner, Docket No. 14566-12, provides an example where the purchase real estate by a self-directed IRA was a taxable distribution from…Continue readingSelf-Directed IRA Purchase of Real Estate is Taxable

Self-Directed IRA can Flip Houses & Share Ownership of Property

In In re Cherwenka, the U.S. Bankruptcy Court for the Northern District of Georgia concluded that house flipping activities in a self-directed IRA and shared ownership of property with the IRA and the account holder were not prohibited transactions. Facts & Procedural History Mr. Cherwenka was in the business of flipping houses. Mr. Cherwenka established…Continue readingSelf-Directed IRA can Flip Houses & Share Ownership of Property

Promissory Notes Distributed by Self-Directed IRA Were Not Worthless

Self-directed IRAs are usually profitable.  But there are times when they lose money.  In Berks v. Commissioner, Docket No. 26883-11S, the U.S. Tax Court addressed a situation where the IRAs held promissory notes that may have been worthless. Facts & Procedural History The Berks rolled over money from pre-existing IRAs to self-directed IRAs, with the…Continue readingPromissory Notes Distributed by Self-Directed IRA Were Not Worthless

Car and Truck Expenses Allowed Based on Mileage Not Actual Costs, Absent Records

In Aivatzidis v. Commissioner, T.C. Summary Opinion 2013-105, the U.S. Tax Court concluded that a professional driver could deduct expenses based on mileage, but not for actual expenses. This case provides an example of why drivers should compute car and truck expenses based on mileage if they do not have sufficient records. Facts & Procedural…Continue readingCar and Truck Expenses Allowed Based on Mileage Not Actual Costs, Absent Records

Insurance Agent Denied Depreciation Deduction For Airplane

In Brown v. Commissioner, T.C. Memo. 2013-275, the U.S. Tax Court denied an insurance salesman’s bonus depreciation deduction for his private jet as it was not placed in service in the tax year. The case highlights the highly factual nature of determining when an asset is deemed to have been placed in service for tax…Continue readingInsurance Agent Denied Depreciation Deduction For Airplane

Fashion Retailers Business Expenses Disallowed as Routine Substantiation Case

In Heinbockel v. Commissioner, T.C. Memo. 2013-125, the U.S. Tax Court considered a routine substantiation case and disallowed business expense deductions for a fashion clothing retailer. This case presents an opportunity to consider how to present routine substantiation cases to the IRS and to the courts. Facts & Procedural History Mrs. Heinbockel was in the…Continue readingFashion Retailers Business Expenses Disallowed as Routine Substantiation Case

Personal Guarantees for Self-Directed IRAs Are Prohibited Transactions

If you have a self-directed IRA, the IRA invests in LLCs, can you personally guarantee a loan for the LLC?  The court addressed this in Peek v. Commissioner, 140 T.C. 12. Facts & Procedural History Mr. Fleck identified a business opportunity that he intended to invest in.  Mr. Peek, Mr. Fleck’s lawyer, approached Mr. Fleck about…Continue readingPersonal Guarantees for Self-Directed IRAs Are Prohibited Transactions

IRS Concludes Open-Air Parking Garages are Buildings

In recent Chief Counsel Memo #20125201F, the IRS concludes that open-air parking garages are considered buildings rather than land improvements for tax purposes and that a taxpayer’s conclusion to the contrary warrants the assessment of a negligence penalty. Classification as a building or land improvement presents a timing issue. A building generally has a 39-year…Continue readingIRS Concludes Open-Air Parking Garages are Buildings

What Gross Receipts are Used in R&D Credit?

For the research tax credit, what gross receipts do you include in computing its tax credit?  Despite the credit being on the books for several decades, this is an open question.  The court addressed this in Hewlett-Packard Co. v. Commissioner, 139 T.C. 8. Facts & Procedural History Hewlett-Packard Co. (“Hewlett-Packard”) is a global technology and service…Continue readingWhat Gross Receipts are Used in R&D Credit?

Does Work to Validate Prior Research Qualify for the R&D Tax Credit?

For the research tax credit, does work to validate prior research count as a qualified research expense?  The court recently addressed this in United States v. Davenport, No. 3:09-cv-02455-L (N.D. Tex. 2012). Facts & Procedural History Morris and David Davenport (collectively, “Davenports”) were fifty percent owners of Burly Corporation (“Burly”).  Burly manufactures residential metal roofing and…Continue readingDoes Work to Validate Prior Research Qualify for the R&D Tax Credit?

Taxpayer Use of Estimates for Deductions

Can you use publicly available sources of statistical information when you have no records to support the amount of your expenses?  The court addressed this in Murray v. Commissioner, T.C. Summary Opinion 2012-66, which involved the IRS’s use of third party statics. Facts & Procedural History Mr. Murray worked as a truck driver for National Freight,…Continue readingTaxpayer Use of Estimates for Deductions

Moving Truck Driver Allowed to Estimate Contract Expense Deduction

In Bauer v. Commissioner, T.C. Memo. 2012-156, the U.S. Tax Court held that a moving truck driver was entitled to deduct expenses to hire contractors to load and unload his truck by estimating the amount of the expenses. Facts & Procedural History  Mr. Bauer was a moving truck driver. He was hired by clients as…Continue readingMoving Truck Driver Allowed to Estimate Contract Expense Deduction

Court Determines What Truck Driving Expenses Are Deductible

In Nolder v. Commissioner, T.C. Summary Opinion 2012-50, the U.S. Tax Court examined a number of different expenses incurred by a truck driver to determine which expenses were deductible. This case provides a good overview of the typical expenses truck drivers incur that are and are not deductible. Facts & Procedural History Mr. Nolder was…Continue readingCourt Determines What Truck Driving Expenses Are Deductible

Wages for Research Were Not Reasonable

The research tax credit provides a significant incentive to perform research.  The credit is calculated by factoring in wages paid by the business and income from the business subject to self-employment.  Given this, can a business owner pay himself an unreasonably large salary and thereby increase the amount of the credit?  The court recently addressed…Continue readingWages for Research Were Not Reasonable

Tax on Nonresident Alien Gambling Winnings

Are non-resident aliens who receive gambling winnings while visiting the U.S. able to deduct the gambling expenses incurred in earning the gambling winnings? And can they avoid the withholding tax on their gambling winnings? The court addresses these issues in Park v. Commissioner, 136 T.C. 569 (T.C. 2011). Facts & Procedural History The taxpayers are…Continue readingTax on Nonresident Alien Gambling Winnings

The IRS’s Reach in a Research Tax Credit Audit

The IRS has a track record of taking aggressive stances when auditing research tax credits.  But its position in the Bayer Corp. & Subs v. United States, Civil Action Nos. 08-693, 09-351 (W.D. PA 2010), raises the question whether a taxpayer claiming a research tax credit is signing up to disclose their confidential information.   Facts &…Continue readingThe IRS’s Reach in a Research Tax Credit Audit

What is a Project for the Research Tax Credit?

It can be difficult to separate qualified and nonqualified research in computing the research tax credit.  The research tax credit rules are generally applied to the “project,” but the term “project” is not even mentioned in the Code.  The Trinity Industries, Inc. v. United States, 691 F. Supp. 2d 688, (N.D. Tex. 2010), case provides guidance…Continue readingWhat is a Project for the Research Tax Credit?

Research Tax Credit: Taking Expenses for Depreciable Property

The IRS exam function often raises a number of questions about the rules for claiming expenses for depreciable property for the research tax credit.  The recent TG Missouri Corporation v. Commissioner, 133 T.C. 13, provides much needed clarity in how to apply these rules.  Facts & Procedural History TG Misouri is in the trade or…Continue readingResearch Tax Credit: Taking Expenses for Depreciable Property

Payment to Terminate Agent Agreement Ordinary Income for Insurance Agent

In Lendard v. Commissioner, T.C. Summary Opinion 2009-165, the U.S. Tax Court concluded that contract payment to an independent insurance agent to terminate his agent contract was ordinary income to the agent. This case is an example of how advanced tax planning could have produced a more favorable outcome. Facts & Procedural History Mr. Lendard…Continue readingPayment to Terminate Agent Agreement Ordinary Income for Insurance Agent

Deere & Company v. Commissioner: Foreign Branch Income is Gross Receipts for Research Tax Credit

In Deere & Company v. Commissioner, 133 T.C. No. 11, the U.S. Tax Court concluded that income from foreign branches must be included in the gross receipts in computing the research tax credit. Facts & Procedural History Deere & Company (“Deere”) was in the business of manufacturing, distributing, and financing a full line of agricultural…Continue readingDeere & Company v. Commissioner: Foreign Branch Income is Gross Receipts for Research Tax Credit

Pilot Escort Driver Able to Deduct Mileage but Not Meals

Truck drivers are frequently targeted by IRS auditors. It’s not that the IRS has anything against truck drivers per se; rather, truck drivers often earn an above-average pay. It may also be due to truck drivers qualifying for some of the tax deductions that are harder to substantiate. Some truck drivers are bad at keeping…Continue readingPilot Escort Driver Able to Deduct Mileage but Not Meals

FedEx Corporation v. United States: Taxpayer Can Pick & Choose Between Regulations

In FedEx Corporation v. United States, Dkt. No. 08-2423, the U.S. District Court for the Western District of Tennessee concluded that FedEx could rely on the internal use software provisions in the 2001 Final Regulations and the taxpayer-favorable discovery test in the 2003 Final Regulations in computing its research tax credit. The taxpayer did not…Continue readingFedEx Corporation v. United States: Taxpayer Can Pick & Choose Between Regulations

Standard for Research Activities for the R&D Tax Credit

In United States v. McFerrin, 570 F.3d 672, the Fifth Circuit Court of Appeals concluded that the trial court applied the wrong standard for determining what research is qualified and failed to estimate the amount of research expenses for the research tax credit. Facts & Procedural History Arthur R. McFerrin (“McFerrin”) is a prominent chemical…Continue readingStandard for Research Activities for the R&D Tax Credit

Innocent Spouse Relief Granted Despite Knowledge of Error on Return

Innocent spouse tax relief can provide a remedy for spouses who are liable for taxes reported on a jointly filed income tax return.  It is an equitable remedy.  But is it available if the tax is due to an obvious error on the tax returns that the spouses both signed?  The court addressed this in Denton…Continue readingInnocent Spouse Relief Granted Despite Knowledge of Error on Return

Truck Driver Not Entitled to Deduct Meal and Supply Expenses

In Elsayed v. Commissioner, T.C. Summary Opinion 2009-81, the U.S. Tax Court reviewed meal and unreimbursed expenses incurred by a truck driver. This is a common tax problem for truck drivers. This case shows the difficulties truck drivers have in capturing and substantiating their expenses for tax purposes. Facts & Procedural History  Elsayed was employed…Continue readingTruck Driver Not Entitled to Deduct Meal and Supply Expenses

Rental Losses for Real Estate Agents

Is a real estate agent a real estate professional? This is an important question if the real estate agent also owns rental real estate that throws off tax losses. The answer dictates whether real estate agents are able to deduct rental losses against non-rental income. The court addresses this question in Agarwal v. Commissioner, T.C.…Continue readingRental Losses for Real Estate Agents

Using a Subchapter S Corporation to Reduce Payroll Taxes for a Sole Proprietorship or Partnership?

Sole proprietors and partners who provide services to their partnership business have to pay self-employment taxes on the income they earn from the business. Self-employment taxes include Social Security and Medicare taxes. The owner of the sole proprietorship is then able to deduct one half of this amount in determining his federal income tax liability.…Continue readingUsing a Subchapter S Corporation to Reduce Payroll Taxes for a Sole Proprietorship or Partnership?

Refunds After Innocent Spouse Relief Granted

If a taxpayer pays the couple’s income taxes and is then granted innocent spouse relief for the liability, is the innocent spouse entitled to a refund of the amount paid?  The 9th Circuit Court of Appeals addressed this in Orlock v. Commissioner. Facts & Procedural History The IRS granted the wife innocent spouse relief. Prior to…Continue readingRefunds After Innocent Spouse Relief Granted

Qui Tam Settlements and the Tax Benefit Rule

What Is A Qui Tam ? A qui tam claim involves a lawsuit where a private citizen helps the government prosecute fraud perpetrated against the government. These claims are often filed by employees or former employees who know of wrongdoing by an employer. These are often whistleblower claims. In exchange for helping to prosecute the…Continue readingQui Tam Settlements and the Tax Benefit Rule

IRS Details the Federal Income Tax Consequences of Gift Cards

If an accrual method taxpayer issues a gift card, does the taxpayer have to recognize taxable income at the time that the card is sold or when the card is redeemed? The IRS Office of Chief Counsel recently issued a legal memorandum that addresses this question. According to the IRS attorneys, taxpayers who issue gift…Continue readingIRS Details the Federal Income Tax Consequences of Gift Cards

Tax Disputes Involving Alimony Payments

If payments qualify as alimony pursuant to federal tax law, the payments may be tax deductible by the payor spouse and included in gross income to the payee spouse.  The opposite is true if the amounts are not alimony for federal tax law.  Whether an expense counts as alimony is frequently the subject of disputes…Continue readingTax Disputes Involving Alimony Payments

IRS Recognizes Employee Tool and Equipment Plans

The IRS recently issued a Coordinated Issue Paper that sets out its view of what constitutes an acceptable Employee Tool and Equipment Plan. What Is Employee Tool & Equipment Plan ? An Employee Tool and Equipment Plan is an agreement between an employer and one or more of its employees to reimburse the employee for the…Continue readingIRS Recognizes Employee Tool and Equipment Plans

The Private Trust Company

The IRS recently released Notice 2008-63 in advance of a formal Revenue Ruling. This Notice provides guidance on the federal tax implications of private trust companies and similar trust arrangements. Notice 2008-63 confirms that private trust companies generally do not result in any estate, gift, or generation skipping tax benefits that could not be realized…Continue readingThe Private Trust Company

The Disqualified Employment Tax Levy

The IRS is generally required to give taxpayers notice of its intent to levy (or take) their property prior to it actually levying on the property.  Congress recently amended the Code to provide the IRS with a new type of tax levy.  This new levy is referred to as a “disqualified employment tax levy” and…Continue readingThe Disqualified Employment Tax Levy

Tax Issues Faced by Pilots & Transportation Employees

Where a taxpayer is located when he incurs expenses and receives income can have significant tax implications. This can raise a number of difficult tax issues. This is especially true for pilots and other interstate transportation employees. The recent tax court case, Tucker v. Commissioner, T.C. Summary Opinion 2008-78, highlights a few of these difficulties.…Continue readingTax Issues Faced by Pilots & Transportation Employees

Innocent Spouse Relief for Ex-Spouse’s Income

Innocent spouse relief can provide a much needed remedy for divorced or separated taxpayers who filed a joint income tax return.  This relief is commonly granted where the income that gave rise to the tax liability was earned by one spouse.  The recent Mapp v. Commissioner, T.C. Summary Opinion 2008-76, case provides an opportunity to consider…Continue readingInnocent Spouse Relief for Ex-Spouse’s Income

A Smattering of Tax Measure Legislation

It is always interesting to review what tax measures the Legislature is or has been considering.  Here are a few of the tax measures that are or were being considered: Lifetime learning accounts.  Amends the Internal Revenue Code to: (1) establish a tax-exempt lifelong learning account for the payment of certain employee higher education and training expenses;…Continue readingA Smattering of Tax Measure Legislation

Is an Insurance Agents Repayment of Advanced Commissions Cancellation of Debt Income?

If an insurance company makes loans to its life insurance agents in lieu of wages and the insurance agents use a portion of those funds to repay costs to the insurance company, how is that taxed?  The court addressed this in Harper v. Commissioner, T.C. Summary Opinion 2007-133. Facts & Procedural History Mrs. Harper was in the…Continue readingIs an Insurance Agents Repayment of Advanced Commissions Cancellation of Debt Income?

Truck Driver Not Entitled to Deductions When Records Destroyed

In Clark v. Commissioner, T.C. Memo. 2007-172, the U.S. Tax Court held that a truck driver who did not file tax returns was not entitled to deduct expenses where his records were destroyed in a fire. Facts & Procedural History  Mr. Clark was a truck driver. He was employed by Jimmy Harris Trucking, Inc., Vandy…Continue readingTruck Driver Not Entitled to Deductions When Records Destroyed