How to Substantiate Gambling Tax Losses

There are several types of tax disputes that are frequently litigated. Gambling losses are an example. Taxpayers who gamble often incur significant losses. If the taxpayer is found to be a professional gambler, these losses can be counted for income tax purposes and used to offset the taxpayer’s other income. These tax losses can reduce…Continue readingHow to Substantiate Gambling Tax Losses

IRS Expands Sec. 9100 Relief for Late Forms 3115

As innocuous as it sounds, the Form 3115 is a tax form like no other. A Form 3115 that is inadvertently omitted from a tax return filing can result in sizable differences in tax and trigger significant tax penalties and interest. Given the amounts that are often reported on the Form 3115, errors could cost…Continue readingIRS Expands Sec. 9100 Relief for Late Forms 3115

Converting Home to Rental to Get Tax Loss Deduction

If you move out of a house and rent it to a friend for less than fair market value rent, can you then take a tax loss on the subsequent sale of the house? If the home is not converted to a rental property, the loss is disallowed as a personal tax loss. If the…Continue readingConverting Home to Rental to Get Tax Loss Deduction

Meal & Entertainment: The IRS Auditors “Bread & Butter”

I once worked with an IRS agent who would only make two types of adjustments. He would make UNICAP/inventory adjustments and meal and entertainment adjustments. If either of these items could be adjusted for a tax return, he would adjust them. It didn’t matter what else was listed on the tax return. It did not…Continue readingMeal & Entertainment: The IRS Auditors “Bread & Butter”

Tax on Virtual Currency Received for Microtasks

Our Federal income tax laws take a broad view of what counts as income and gain. The tax law then imposes a ridged framework for classifying and computing tax on income or gain. By casting the net wide, the tax law is able to capture just about every type of transaction that one could dream…Continue readingTax on Virtual Currency Received for Microtasks

What is a Rental Activity?

The ability to generate current year tax losses is a strong incentive for high-income taxpayers to own real estate. Real estate often produces tax losses, but not economic losses. This happens because the current operating expenses plus tax depreciation result in a current year loss. At the same time, the property likely increased in value…Continue readingWhat is a Rental Activity?

Divorce Payments & Tax Basis in Business

Our Federal income tax laws often build upon the presumption that seemingly adverse parties are actually adverse. Our tax laws do not always account for instances where the parties are actively working in concert to reduce the IRS’s cut. Transfers and payments made in relation to divorce are an example. With our tax laws, it…Continue readingDivorce Payments & Tax Basis in Business

When is Rental Real Estate a Business?

Our tax laws are not perfect. There are grey areas. Most of these grey areas are of little consequence as they do not have a significant impact on the amount of tax that is due. There are other grey areas that can significantly impact the amount of tax due. These tax disputes are frequently litigated.…Continue readingWhen is Rental Real Estate a Business?

Avoiding Tax on Discharge of a Mortgage

There are times in life when you may feel that you can’t get ahead. One step forward, two steps back–as they say. Paying income tax on debt that you avoid is an example. You negotiate with the lender or creditor and they agree to settle the balance for less. One step forward. Then a few…Continue readingAvoiding Tax on Discharge of a Mortgage

Avoiding the 60-Day IRA Rollover Requirement

If a taxpayer takes money out of their retirement account, they generally have to pay income tax on the amount distributed. What if the taxpayer wants to put the money back into the account? There have been several examples where Congress has allowed taxpayers to put money back into their accounts. The recent CARES Act…Continue readingAvoiding the 60-Day IRA Rollover Requirement

Avoid Tax by Returning Pay

There are times when a business structure or transaction no longer makes sense. This may be due to a change in the business environment, such as swings in the economy or unexpected gains or losses. It can also arise due to a change in the owners’ personal circumstances, such as a divorce or death of…Continue readingAvoid Tax by Returning Pay

Deducting Interest for More than One Home

The mortgage interest deduction seems simple enough. The Code provides a deduction for mortgage interest that is paid during the year. It starts with a broad grant: There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. Then these 18 words in a single sentence are followed…Continue readingDeducting Interest for More than One Home

Tax Planning for Contingent Loans

Tax is often about timing. Timing issues are those where the taxpayer defers the requirement to pay taxes to a later date. Preferably a later date that is many, many years in the future. The hope is that the taxpayer can retain the amounts that would have been paid in tax today and use the…Continue readingTax Planning for Contingent Loans

Tax Court Clarifies Employee Tool Plans

Prior to the Tax Cuts and Jobs Act (“TCJA”) of 2018, it was common for employers to simply pay employees more and leave it to the employees to deduct their employee business expenses on their personal income tax returns. The TCJA limited the employee’s ability to deduct employee business expenses. Many employers responded by adopting…Continue readingTax Court Clarifies Employee Tool Plans

The Late Mark-to-Market Election

Those who trade stocks can take advantage of the mark-to-market election to convert capital losses into ordinary losses. This election is only available to “traders.” There are often questions as to when a taxpayers trading activities are sufficient to warrant being treated as a “trader” for tax purposes. By the time the taxpayer discovers that…Continue readingThe Late Mark-to-Market Election

Tax Loss Planning: The At-Risk Rules

Are you purchasing a business or real estate that involves financing a business or investment that is likely to produce tax losses in the future? Or have you already made the purchase? If so, there may be ways to ensure that you can take the loss in the future. To do so, you have to…Continue readingTax Loss Planning: The At-Risk Rules

Can “Business Synergies” be an Asset that Increases a Tax Loss?

The tax consequence of a transaction often depends on how one characterizes or describes the transaction. Business synergies are often cited as the rationale for merger and acquisition deals. In a M&A deal, are “business synergies” a separate asset for tax purposes? Can you list “business synergies” as a separate asset and then take a…Continue readingCan “Business Synergies” be an Asset that Increases a Tax Loss?

Big Tax Savings With ESOP, But Requires Work

An employee stock ownership plan (ESOP) can produce significant income tax savings. This tax savings isn’t exactly free. One has to keep up with the ESOP and the relevant rules to ensure that the tax savings are achieved. This compliance work is required and failure to comply can be costly. The recent Ed Thielking v.…Continue readingBig Tax Savings With ESOP, But Requires Work

Tax Planning for the Start-up Limitation Rules

Our tax laws include start-up rules that limit the ability to deduct certain business and investment expenses. For business owners and investors with other sources of income, this can result in funds being sent to the IRS to pay taxes at a time when the capital is needed to fund the business or investment growth.…Continue readingTax Planning for the Start-up Limitation Rules

Loan to an S Corporation to Allow Tax Loss

Tax basis can limit a shareholder’s loss from an S corporation. If an S corporation has a tax loss but the shareholder doesn’t have sufficient tax basis to take the loss, the shareholder will typically have to loan money to the S corporation. This tax debt basis makes the loss allowable in the current year.…Continue readingLoan to an S Corporation to Allow Tax Loss

Tax on Payment for Being Born With Medical Condition

We can do some amazing things given the state of our science and technology. These advances lead to some interesting tax questions. The IRS recently addressed such a question in PLR 201950004. It considers whether damages paid by a fertility clinic for failing to perform a genetic test are excluded from the recipient’s income as…Continue readingTax on Payment for Being Born With Medical Condition

Sale of Trailers Doesn’t Qualify for Installment Sale Treatment

If you buy, subdivide and sell real estate, can you seller-finance the sales and report the gain over a long period of time? The answer is generally yes, but advance planning is needed. The court addresses this in Joyner Family Limited Partnership v. Commissioner, T.C. Memo. 2019-159. Facts & Procedural History The taxpayers purchased land…Continue readingSale of Trailers Doesn’t Qualify for Installment Sale Treatment

Bad Debt Tax Deduction for Guarantee Payment?

If you guarantee a loan for a third party and have to make payments due to the guarantee, do you get to deduct the payment as a bad debt for tax purposes? The court addresses this in Baker Hughes, Inc. v. United States, No. 18-20585 (5th Cir. 2019) in the context of a payment made…Continue readingBad Debt Tax Deduction for Guarantee Payment?

Sale of Long-Term Service Contracts: Capital or Ordinary Gain?

If a taxpayer sells a business that owns long-term service contracts, is the gain attributable to the contracts subject to tax at ordinary or capital gains rates? The IRS’s recent action on decision for the Greenteam Materials Recovery Facility PN v. Commissioner, T.C. Memo. 2017-122 court case deals with this in the context of a…Continue readingSale of Long-Term Service Contracts: Capital or Ordinary Gain?

Travel Expenses Allowed for Repetitive Pattern of Travel

The IRS frequently challenges travel expenses.  These expenses have a higher substantiation requirement, which the IRS uses to disallow every expense no matter how reasonable or how certain it is that the expense was incurred.  But what if it was exceedingly certain that the expense was incurred and there is a method for computing the…Continue readingTravel Expenses Allowed for Repetitive Pattern of Travel

Records Needed for Partial Asset Dispositions

Taxpayers often overlook “partial asset dispositions.” Their tax advisers do too. This may be due to it being a depreciation issue that seems unimportant. It may also be that the partial asset disposition is a relatively new concept. Regardless, partial asset dispositions can save taxpayers quite a bit in taxes (it is a timing issue,…Continue readingRecords Needed for Partial Asset Dispositions

M&A Finders Fee Not Deductible for Acquirer

If a company acquires another company and pays a finders fee to the party who connected the two for the sale, is the finders fee deductible by the acquirer? This question touches on whether an expense is deductible if the real benefit is to another company. The court addresses this in Plano Holding LLC v.…Continue readingM&A Finders Fee Not Deductible for Acquirer

Avoiding State Income Tax on Part-Time Residents

Sometimes you can’t avoid paying state income taxes. This is true for those who have no ties to any state other than a state that has an income tax. But for those who have ties to multiple states, they can often structure their affairs to avoid the state income tax. This can be difficult to…Continue readingAvoiding State Income Tax on Part-Time Residents

The Broad Reach of the Economic Substance Doctrine

Congress provides tax incentives to change taxpayer behavior. If a taxpayer changes their behavior to take advantage of the incentive, they have to do so carefully. The IRS and the courts can apply the economic substance doctrine to take away the tax benefit. This doctrine can apply to more transactions than what one would consider…Continue readingThe Broad Reach of the Economic Substance Doctrine

Documenting the Sec. 199a Rental Real Estate Safe Harbor

We have previously considered the “trade or business” requirement for the Section 199a deduction. The government recently issued guidance to clarify when rental real estate activities can qualify for the deduction. While the guidance is needed, it adopts a record keeping requirement that effectively prevents most rental real estate activities from ever qualifying for the…Continue readingDocumenting the Sec. 199a Rental Real Estate Safe Harbor

Avoiding Hobby Loss Limits for Long-Term Projects

Long-term projects often lose money. They often do so for several years. This is the result of a project that needs capital to build infrastructure or to develop a new market or to capture market share. Taxpayers may be disappointed to learn that the tax losses coming from these long-term projects in the early years…Continue readingAvoiding Hobby Loss Limits for Long-Term Projects

Bad Debt Deduction for Real Estate Lender for Non-Real Estate Loan

If a taxpayer regularly makes real estate loans from their personal accounts, they would be entitled to a bad debt deduction for loans that are not repaid. But what if they venture beyond real estate loans and make a single non-real estate loan? If the non-real estate loan goes bad, can they deduct the bad…Continue readingBad Debt Deduction for Real Estate Lender for Non-Real Estate Loan

Court Addresses Tax Losses from Short-Term Rentals

Short-term rental properties are more popular than ever. Online services like Airbnb have made this possible. But how are tax losses from short-term rentals handled? Can the taxpayer use the rental losses to offset their non-rental income for tax purposes? The court addresses one aspect of these rules in Eger v. United States, 18-cv-00199-DMR (N.D.…Continue readingCourt Addresses Tax Losses from Short-Term Rentals

Court’s Take on How to Avoid the Interest Expense Limitation

Interest one pays is generally deductible for income tax purposes. For real estate owners who borrow against the value of their properties, the interest expense deduction is often one of their largest tax deductions. This tax deduction can be limited. The court in Lipnick v. Commissioner, 153 T.C. 1 highlights how one might avoid this…Continue readingCourt’s Take on How to Avoid the Interest Expense Limitation

Taxpayer Cannot Recoup Attorney Travel Costs

If the IRS wrongfully denies your refund claim and you are successful in litigating the matter in court, you are entitled to recoup some of your court costs. But what about the taxpayer’s tax attorney’s travel costs? And what if the travel costs were necessary as the tax issue was complex and a tax attorney…Continue readingTaxpayer Cannot Recoup Attorney Travel Costs

Reporting Debt Discharged in a Court Settlement to the IRS

There are some circumstances where information has to be reported to the IRS, even though the information does not trigger a tax. But the potential problem can be that the information reporting triggers an IRS audit or other consequences. The Form 1099-C, Cancellation of Debt, form can have this effect. In PLR 201927005 the IRS…Continue readingReporting Debt Discharged in a Court Settlement to the IRS

Voluntary Sale In Advance of Forced Auction an Involuntary Conversion?

A taxpayer can generally avoid paying income tax on gain from the sale of property if the sale is an involuntary conversion. This typically involves a government act that takes or destroys the taxpayer’s property. There are a number of different types of property and takings that can qualify? But what about a local TV…Continue readingVoluntary Sale In Advance of Forced Auction an Involuntary Conversion?

Recouping Tax on Marital Wages Repaid to Employer After Divorce

If a couple files a joint return and pays tax on the income they earn, but after they divorce it turns out that one of the spouses has to repay monies received in error, can the other spouse recoup their portion of the prior tax paid on the income? The claim of right doctrine may…Continue readingRecouping Tax on Marital Wages Repaid to Employer After Divorce

Non-Taxable Subsidy or Taxable Benefit?

Some payments are not subject to Federal income tax. State subsidies are an example. But what is the difference between a non-taxable subsidy and a taxable benefit? The court addresses this in Ginsberg v. United States, No. 2018-1788 (Fed. Cir. 2019), in the context of the New York state brownfield tax credit. Facts & Procedural…Continue readingNon-Taxable Subsidy or Taxable Benefit?

IRS Not Limited in Collecting Restitution Assessments

The IRS is authorized to assess criminal restitution for certain tax crimes. This process allows the IRS to collect the criminal restitution as if it was a tax. The law authorizing these collections is relatively new and evolving. The recent Carpenter v. United States, 152 T.C. 12, case highlights why it is important for those…Continue readingIRS Not Limited in Collecting Restitution Assessments

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 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

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

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

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?

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

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

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

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

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

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

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

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

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

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

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

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

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 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

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

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

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

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

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 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

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