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

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

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

There is no Place Like Home (or is There?)

Have you ever said something like “I can’t wait to go home?”  If so, you may not know what the term “home” means.  According to the IRS, the term “home” means the taxpayer’s “principal place of business.”  I am guessing that very few (if any) taxpayers consider their place of business their home. Our federal Tax Code…Continue readingThere is no Place Like Home (or is There?)

Real Estate Purchase Price Reduction

The term “income” is broad. It includes just about any money or gain that a person receives. There are exceptions, however. Take the purchase price reduction. Assume Party A sells property to Party B for $100. Party A will likely have a gain on the sale. The gain is income and may trigger income tax.…Continue readingReal Estate Purchase Price Reduction

Can One Spouse Cause IRS to void Other’s Alimony Deduction?

If a divorce decree says that a payment to an ex-spouse, does that mean that it is alimony the ex-spouse has to report as income for Federal income tax purposes?  And if not, can the ex-spouse who receives the payment request a ruling from the IRS to say that the payment was not taxable to…Continue readingCan One Spouse Cause IRS to void Other’s Alimony Deduction?

Non-Profit No More

The IRS Can Sometimes Take A Hardline With Taxpayers For example, the IRS often takes a hard line with taxpayers in instances where the taxpayer is a non-profit and it fails to timely file a tax return. In these cases the IRS will has the power to revoke the taxpayer’s non-profit status, but in many…Continue readingNon-Profit No More

Taxation of Employee Donated Sick Leave

Employees often want to donate paid sick-leave time to deserving co-workers who find themselves in a pinch. The IRS recently released another ruling, PLR 200720017, that identifies a few of the planning considerations in donating sick-leave to co-workers. The federal tax consequences of donating paid sick-leave depends on whether the donation is made through the…Continue readingTaxation of Employee Donated Sick Leave

Prepayment: to Deduct in Year 1 or Year 2?

Say you are an accrual method taxpayer and you hire someone to provide a service to you in year one, the service is to be provided to you over a twelve month period, and you prepay the person for this yet to be provided service. When can you claim a deduction for this prepayment? The…Continue readingPrepayment: to Deduct in Year 1 or Year 2?

Bankruptcy Filing Does Not Prevent Innocent Spouse Relief

Can one spouse prevent the other spouse from  obtaining innocent spouse relief by filing bankruptcy?  The court addressed this question in Kovitch v. Commissioner, 128 T.C. 9 (2007). The Facts & Procedural History The Kovitch’s were divorced. The IRS then issued a notice of deficiency to both spouses for their joint tax liability. Only the wife…Continue readingBankruptcy Filing Does Not Prevent Innocent Spouse Relief

IRS Says When a Grape is No Longer a Grape

We all know that (most) wines come from grapes, but many of us might not know exactly when grapes turn into wine for federal income tax purposes. According to the IRS (in Chief Counsel Advice Memorandum 200713023), grapes turn into wine when a taxpayer begins crushing the grapes. This IRS Memorandum highlights a few of…Continue readingIRS Says When a Grape is No Longer a Grape

Yet Another Lottery-Related Tax Question

Here is yet another lottery-related tax question: Does a state lottery have to withhold tax from lotto winnings if a single taxpayer wins more than one lottery prize from the same lotto ticket where the total winnings exceed $5,000, but the individual winnings do not exceed $5,000? In PLR 132947-06-2007, the IRS recently held that…Continue readingYet Another Lottery-Related Tax Question

Sale of Lottery Payments, Capital or Ordinary?

While lottery winnings may be subject to tax at ordinary tax rates, what about the sale of the right to receive annual lottery payouts?  The court addressed this in Prebola v. Commissioner, T.C. Memo 2006-240. Facts & Procedural History The taxpayer won $17.5 million from the lottery.  She selected the annual installment option, which would pay out…Continue readingSale of Lottery Payments, Capital or Ordinary?

Section 104 Survives Non-Murphy Constitutional Challenge

The now famous Murphy decision has left some uncertainties with regard to whether compensation for a personal injuries that are unrelated to lost wages or earnings are taxable. There can be little doubt that the IRS will ask the Supreme Court to settle the issue if the IRS is not successful in the coming Murphy…Continue readingSection 104 Survives Non-Murphy Constitutional Challenge

Civil Restitution Tax Assessment Satisfied by Criminal Restitution Payment

According to the IRS’ tax attorneys, the “The court misconstrued the facts of the case.” That is the conclusion reached by the IRS Office of Chief Counsel in Chief Counsel Notice 2007-008. The case that the IRS attorney refers to is Creel v. Commissioner, 419 F.3d 1135 (2005). The Creel Case In the Creel case…Continue readingCivil Restitution Tax Assessment Satisfied by Criminal Restitution Payment

Referrals/Leads Group is Not a Tax Exempt Entity

In Private Letter Ruling 200709070 the IRS recently held that Exceptional Organizations, a standard referrals/leads group, did not qualify as a tax exempt “business league.” This ruling presents a good opportunity to review a few of the requirements to qualify as a tax-exempt “business league.” A “business league” is an association of persons having a…Continue readingReferrals/Leads Group is Not a Tax Exempt Entity

Health Reimbursement Arrangements: Employer-Provided Medical Coverage

The business enterprise presents taxpayers with numerous tax planning opportunities. Many of these tax planning opportunities include pulling money out of the entity in a way that benefits both the business and its owners and employees on an after-tax basis. As with employer-provided education benefits, employers may be able to minimize their tax obligations by…Continue readingHealth Reimbursement Arrangements: Employer-Provided Medical Coverage

Tournament Poker Accorded Same Tax Treatment as Live-Action Poker

Today, in Tschetschot v. Commissioner, the tax court ruled that taxpayers where not entitled to treat tax losses from tournament poker different than tax losses from live-action poker. Facts & Procedural History In Tschetschot, the taxpayer had earned $49 thousand dollars from her day job and $11 thousand dollars from gambling. The taxpayer claimed a…Continue readingTournament Poker Accorded Same Tax Treatment as Live-Action Poker

The Hobby Loss Rules: Planning for Unprofitable Businesses

Ordinary and necessary expenses incurred in operating a business are deductible against Federal income tax.  This is even true for side gigs or moonlighting work.  The IRS frequently challenges these deductions if the activity does not produce a profit.  The recent Jones v. Commissioner, T.C. Summary Opinion 2007-21, court case provides an opportunity to consider these rules.…Continue readingThe Hobby Loss Rules: Planning for Unprofitable Businesses

Tax Basis Planning for Inherited Property

The gain from the sale property is subject to income tax.  Gain is generally the sales price minus tax basis, and tax basis is generally the cost or investment into the property.  When a person owns property at death and the property passes to the heirs, the heirs get a tax basis equal to the…Continue readingTax Basis Planning for Inherited Property

Reconsidering Murphy: Restorative Payments vs. Return of Human Capital

Last year’s Murphy v. United States decision was one of the most controversial tax cases in recent history. Unlike many other tax attorneys, I am not sure that I agree that the Murphy case was wrongly decided. One reason for this is that, in thinking about Murphy, I find it difficult to reconcile why “restorative…Continue readingReconsidering Murphy: Restorative Payments vs. Return of Human Capital

IRS Clarifies Real Estate Broker Filing Requirement – Again

The IRS has released Revenue Procedure 2007-12, which clarifies what “assurances” real estate brokers must obtain from persons who sell their principal residence. Real estate brokers are generally required to provide a Form 1099-S to a person selling or exchanging real estate. This form helps the IRS track the seller’s proceeds from the sale, to…Continue readingIRS Clarifies Real Estate Broker Filing Requirement – Again

Tax Free IRA Rollovers as Short-Term Loans: Two Examples of What Not to Do

Taxpayers often withdraw funds from their IRAs to cover short-term expenses with the hope that they can put the funds back in their IRA within the 60 day window for making a tax-free IRA rollover. When taxpayers miss this 60 day window, they are forced to ask the IRS to waive the 60 day time…Continue readingTax Free IRA Rollovers as Short-Term Loans: Two Examples of What Not to Do

What is a “Foreign Country” for Income Tax Purposes?

Our tax laws allow individual taxpayers to exclude income earned in certain foreign countries.  This begs the question as to whether a taxpayer working outside of the U.S. is in a foreign country if he is working in an area that is not governed by the equivalent of what we think of as a government. …Continue readingWhat is a “Foreign Country” for Income Tax Purposes?

Taxation of Employer Provided Education: A Look At Section 127 Plans

During a recent conversation that I had with another tax blogger, I commented about how many taxpayers fail to take advantage of Section 127 plans. This comment came up in a very brief mention of how Congress recently frustrated the tax plan of many parents who are saving for their children’s college education, by extending…Continue readingTaxation of Employer Provided Education: A Look At Section 127 Plans

Taxing Online Video Game Earnings

I came across this very interesting article about taxing online video game transactions. This type of issue does show the flaw or challenge presented by a tax system that is dependent upon the concept of “income” and the problem is likely to become a much more serious problem for the US Treasury. It is now…Continue readingTaxing Online Video Game Earnings

Planning for and Documenting Covenant Not To Compete Allocation

The recent Becker v. Commissioner, 92 T.C.M. 481 (2006), case shows why it is important for taxpayers to plan and document transactions at or near the time that the transactions take place. This is particularly true for larger dollar transactions. The transaction in the Becker case involved the sale of a family-owned business and a…Continue readingPlanning for and Documenting Covenant Not To Compete Allocation

Should the IRS be Able to Rewrite Tax Laws that it Doesn’t Agree With?

Estate of Gerson shows how the IRS uses its ability to promulgate regulations and how the IRS positions cases for litigation in an effort to create pro-IRS tax laws. Facts & Procedural On Gerson’s Case Gerson is a generation skipping transfer tax case. Mr. Gerson created a revocable trust that became irrevocable upon his demise.…Continue readingShould the IRS be Able to Rewrite Tax Laws that it Doesn’t Agree With?

The Section 44 Small Business Disabled Access Credit

The Section 44 small business disabled individuals tax credit provides a tax incentive to comply with the Americans With Disability Act of 1990 (“ADA”).  There is very little guidance for the tax credit.  The recent Arevalo v. Commissioner, No.?05-61129 (5th Cir. 2006), case provides an opportunity to consider this tax credit. Facts & Procedural History Arevalo “invested”…Continue readingThe Section 44 Small Business Disabled Access Credit

An Example of How Our Tax Laws Favor the Wealthy

In my tax practice, I have noticed that the tax laws for issues that face my wealthy clients are often much more friendly than the tax laws for issues that face my not so wealthy clients. The most recent Vines v. Commissioner case and the Cowan v. Commissioner cases provide examples. Facts & Procedural On…Continue readingAn Example of How Our Tax Laws Favor the Wealthy

Part-Time Employee Not Entitled to Deduction for IRA Contribution

Taxpayers who participate in their employer’s retirement plan are not able to deduct contributions the taxpayer makes to their IRA retirement account. This is also true for taxpayers who are entitled to participate in their employer’s retirement plan, but choose not do so. In Colombell v. Commissioner, T.C. 2006-184, the court considered whether an employee…Continue readingPart-Time Employee Not Entitled to Deduction for IRA Contribution

French Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

It is always interesting to hear about how other countries address tax issues. Like the United States, the French government collected higher than expected tax revenues last year. Where the United States government opted to keep the tax revenues, the French government has proposed to use the tax revenues to exempt minimum wage employees who…Continue readingFrench Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

Deducting Investment Advisor Fees Paid by Trusts

There has been a split in the various circuit courts of appeals regarding the deductibility of investment advisor fees paid by trusts. The Second Circuit Court of Appeals, in William Rudkin Testamentary Trust v. Commissioner of Internal Revenue, recently held that investment advisor fees paid by trusts are limited by the Section 67 two percent…Continue readingDeducting Investment Advisor Fees Paid by Trusts

Ex-Spouse’s Defense for Tax Discharged in Bankruptcy

What if an ex-spouse who is jointly liable for the tax waits until after the other ex-spouse’s bankruptcy discharge and argues that the taxes were not discharged in bankruptcy as the tax return was invalid?  The court addressed this in Kuhl v. United States, No.?05-6570-BK (2nd. Cir. 2006).   Facts & Procedural History Ms. Kuhl owed the IRS…Continue readingEx-Spouse’s Defense for Tax Discharged in Bankruptcy

Compensatory Damages May Not be Taxable: Let the Tax Refunds Begin

This is one of those fascinating cases. Despite the long line of case law, the US Court of Appeals for the District Circuit, in Murphy v. Internal Revenue Service, has held that Section 104(a)(2) is unconstitutional. Facts & Procedural In Muphy’s Case Murphy was awarded compensatory damages for emotional distress and loss of reputation. Murphy…Continue readingCompensatory Damages May Not be Taxable: Let the Tax Refunds Begin

More on IRA Beneficary Designation Planning Opportunities

It is probably safe to say that most IRA owners really don’t put much thought into who they designate as their IRA beneficiary, but even IRA owners who do may very well have not done their planning correctly. This is especially true in that the IRA beneficiary designation rules are so complex. With traditional IRAs…Continue readingMore on IRA Beneficary Designation Planning Opportunities

Tax on Military Benefits for Disabled Soldiers

Few would argue that soldiers and military personnel, especially veterans, should be afforded certain privileges. In American society as of late these benefits have included free or reduced cost education, health benefits, and in some cases, retirement benefits. Yet, the courts, and ultimately Congress, have been less giving with regard to the tax treatment of…Continue readingTax on Military Benefits for Disabled Soldiers

Tax Treatment of Settlement Agreements (Again)

The classification of settlement payments for purposes of federal income taxes continues to be a problem for taxpayers and for their legal advisers. The Ninth Circuit, in Rivera v. Baker West, Inc., recently upheld a lower court’s determination that an employer correctly withheld federal taxes from a settlement agreement paid to a former employee. FACTS…Continue readingTax Treatment of Settlement Agreements (Again)

Entrepreneur Rollover Stock Purchase Plans

Financing a business start-up can be a challenge. Most traditional lenders require that a business be operational for at least a year before they will provide small business loans. Moreover, venture capitalists are quick to reject most start-up proposals and if the venture capitalist is willing to fund the start-up they typically demand a significant…Continue readingEntrepreneur Rollover Stock Purchase Plans

Sometimes It is Best Not to NIMCRUT

The best laid tax plans often go awry as tax laws and life circumstances change. In other cases tax plans go awry because they were improperly conceived. I have been encountering a number of NIMCRUTs that should not have been undertaken. The NIMCRUT, otherwise known as the net income with makeup charitable remainder unitrust, is…Continue readingSometimes It is Best Not to NIMCRUT

Taxes & Gay and Lesbian Marital Rights

Various states have enacted laws to stop recent attempts by gay and lesbian groups to achieve full marital equality.  While these laws address marital rights, they do not address rights when it comes to fair treatment for Federal income tax purposes.   The Dispute: Filing Status What would a challenge to fair treatment for Federal income…Continue readingTaxes & Gay and Lesbian Marital Rights

Trust as the IRA Beneficiary

I continue to hear a number of financial planners, accountants and even attorneys say, “Don’t name a trust as the beneficiary of an IRA. ” The rationale is that naming individuals as the IRA beneficiary is preferable because the individual can take the IRA distributions over the course of the beneficiaries lifetime; whereas, a trust…Continue readingTrust as the IRA Beneficiary

The (D)Evolution of our Tax Law

Our tax laws seem to evolve (devolve?) over time. This evolution seems to follow a pretty predictable pattern. I will use Action on Decision 2005-001, which is an interesting decision in and of itself, to describe this process. In this AOD the IRS announces that it will not follow the Ninth Circuit Court of Appeal…Continue readingThe (D)Evolution of our Tax Law