2017 Regional Forums - Individual Developments

New Laws

21st Century Cures Act Establishes Small Employer HRAs

Sec. 18001 (Exception From Group Health Plan Requirements for Qualified Small Employer HealthReimbursement Arrangements) of H.R. 34, the 21st Century Cures Act

On December 13, 2016, President Obama signed into law the “21st Century Cures Act” (the Act). In addition toproviding a medical innovation package that funds medical research, accelerates cutting-edge treatments forrare diseases, and makes significant reforms to the mental health system, the Act also allows small employers toprovide Health Reimbursement Arrangements (HRAs) to their employees without facing penalties for failing tosatisfy certain Affordable Care Act (ACA) requirements. The Act also extends relief previously granted underNotice 2015-17, to apply to plan years beginning on or before Dec. 31, 2016.

Updated Regulations

Final regs eliminate need to file copy of Code Sec. 83(b) election with returnT.D. 9779, 07/25/2016, Reg. § 1.83-2

Final regs, which adopt 2015 proposed reliance regs without change, eliminate the requirement that taxpayerssubmit a copy of a Code Sec. 83(b) election with their tax returns for the year in which the property subject tothe election was transferred. Under this election, taxpayers can choose to report income in the year nonvestedproperty is received in connection with the performance of services rather than when the property issubstantially vested under the Code Sec. 83 rules.

Cases and Rulings

Taxpayer had COD income but was entitled to exclude it under insolvency exceptionNewman, TC Memo 2016-125

The Tax Court has ruled that a taxpayer who overdrew from his checking account and failed to reimburse thebank had cancellation of debt (COD) income to the extent of the unrepaid funds. However, the Court found thatthe taxpayer was not required to include the amount in gross income because he had outstanding student loansthat rendered him insolvent in the year that the debt was cancelled.

IRS OKs alternative basis recovery for contingent payment stock salePLR 201626009; PLR 201626010; PLR 201626011; PLR 201626012

Four nearly identical private rulings deal with a merger where shareholders of the target corporation were to bepaid in installments tied to the acquiring corporation's stock price, but watched the acquiring corporation'sshares drop in value, probably precipitously, after the sale. In each case, IRS allowed the use of an alternativebasis recovery method for the shareholder's contingent installment payment sale because the original method,combined with the drop in the acquiring corporation's stock price, would substantially and inappropriately deferrecovery of their basis.

page 1

Taxpayers not entitled to unsubstantiated noncash charitable contribution deductionsPayne, TC Summary Opinion 2016-30

The Tax Court has upheld IRS's denial of the vast majority of $169,000 worth of noncash charitablecontribution deductions claimed by married taxpayers. In addition to the taxpayers' failure to meet theapplicable substantiation requirements, the Court generally found their claims as to the quantity and value of thepurportedly contributed goods—which included over $110,000 for used clothing—to be wholly unrealistic. TheCourt also upheld IRS's imposition of accuracy-related penalties.

Taxpayers didn't have profit objective for their part-time Amway businessHess, TC Summary Opinion 2016-27

In a Summary Opinion, the Tax Court has held that a married couple's part-time Amway business, which hadlosses for all seven of the years at issue and for which the couple kept only tax-related records, was not engagedin for profit. As a result, the couple couldn't deduct the Amway business losses.

IRS examines tax treatment of crowdfundingInformation Letter 2016-0036

In an Information Letter, IRS explained the tax treatment of crowdfunding by looking to general principles ofincome inclusion.

IRS's answers. In the Information Letter, IRS concluded that generally, money received without an offsettingliability (such as a repayment obligation), that is neither a capital contribution to an entity in exchange for acapital interest in the entity nor a gift, is includible in income. The facts and circumstances of a particularsituation must be considered to determine whether the money received in that situation is income.

What that means is that crowdfunding revenues generally are includible in income if they are not:

(1) loans that must be repaid;

(2) capital contributed to an entity in exchange for an equity interest in the entity; or

(3) gifts made out of detached generosity and without any “quid pro quo.” However, a voluntary transferwithout a “quid pro quo” isn't necessarily a gift for federal income tax purposes.

In addition, crowdfunding revenues must generally be included in income to the extent they are received forservices rendered or are gains from the sale of property.

Audit instructions cover foreign housing cost exclusion, including for partial yearsLB&I International Practice Service Process Unit – Audit JTO/9431.06_16 (2016)

In an International Practice Unit (IPU), IRS's Large Business and International (LB&I) division has providedguidance to its auditors who examine taxpayers who take the foreign housing cost exclusion, includingexamples involving taxpayers who only qualify for the exclusion for only part of their tax year.

No mortgage interest deduction for cohabiting boyfriend with no equitable interest inhome Jackson, TC Summary Opinion 2016-33

In a Summary Opinion, the Tax Court has held that where an unmarried couple lived together in a residencethat was owned and financed solely by the woman because the man couldn't qualify for a mortgage, the man didnot show that he had the benefits and burdens of ownership and thus could not deduct amounts that he paid thewoman as his share of the mortgage interest.

page 2

Taxpayers who sold condo after having second child qualify for reduced gain exclusionPLR 201628002

In a private letter ruling (PLR), IRS has determined that a married couple who had a daughter at the time theybought their 2-bedroom condo, then later had a son, qualified for the reduced maximum exclusion of gain fromthe sale of their home. IRS determined that the that the suitability of the condo as their principal residencematerially changed as a result of the occurrence of unforeseen circumstances and was the primary reason for thesale.

Taxpayer didn't make honest attempt to follow law, so tax debt not discharged inbankruptcy Smith, (CA 9 7/13/2016) 118 AFTR 2d ¶ 2016-5032

The Court of Appeals for the Ninth Circuit, affirming a district court opinion, has ruled that a taxpayer whofailed to make a tax filing until seven years after his return was due and three years after IRS assessed hisdeficiency did not make “an honest and reasonable attempt” to follow the law and thus his tax liability withrespect to that return was not discharged in bankruptcy.

Damage to retaining wall wasn't caused by casualty; no loss deductionAlphonso, TC Memo 2016-130

On remand from the Court of Appeals for the Second Circuit, the Tax Court has held that a stockholder in aresidential cooperative housing corporation failed to show that the damage from a collapsed retaining wall onthe co-op's premises was a deductible casualty loss and not a nondeductible loss caused by gradualdeterioration.

IRS acquiesces to per-taxpayer interpretation of mortgage interest deduction limitsAOD 2016-02,8/3/2016 Acquiescence to Voss (IRB 2016-31, p. 193)

IRS has announced its acquiescence with a decision of the Court of Appeals for the Ninth Circuit that the CodeSec. 163(h)(3) limitations ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness)are applied on a per-individual basis, and not a per-residence basis. Under this interpretation, unmarriedco-owners are collectively limited to a deduction for interest paid on a maximum of $2.2 million, rather than$1.1 million, of acquisition and home equity indebtedness.

CA 9: online poker accounts weren't subject to FBAR, but payment processing accountwas U.S. v. Hom, (CA 9 7/26/2016), 118 AFTR 2d ¶ 2016-5057

The Court of Appeals for the Ninth Circuit, affirming in part and reversing in part a district court decision, hasfound that one of three accounts a taxpayer maintained to facilitate online poker was with a financial companyand had to be reported on a Foreign Bank and Financial Accounts Report (FBAR). However, the two onlinepoker services, which created accounts for him in foreign countries, weren't financial companies subject toFBAR reporting.

New procedures for obtaining or renewing Individual Taxpayer Identification Numbers(ITINs) Notice 2016-48, 2016-33 IRB; IR 2016-100

In a notice and a news release, IRS has explained how it will implement the changes made by 2015 legislationto the Individual Taxpayer Identification Number (ITIN) program and the potential consequences to taxpayerswho do not renew an ITIN when required. An ITIN is a number issued to individuals who are not eligible to beissued a Social Security Number (SSN) but who still have a federal tax filing obligation.

page 3

IRS is accepting renewal applications for ITINs expiring by the end of 2017IR 2017-109 (June 2017)

In a News Release, IRS announced that it is now accepting renewal applications for the Individual TaxpayerIdentification Numbers (ITINs) set to expire at the end of 2017. IRS urged taxpayers affected by changes to theITIN program to submit their renewal applications as soon as possible to avoid an anticipated rush.

DC Circuit: Tax Court didn't consider laws of both countries in construing internationalpact Eshel, (CA Dist Col 08/05/2016) 118 AFTR 2d ¶2016-5093

The Court of Appeals for the District of Columbia Circuit has reversed and remanded a Tax Court decision thatU.S. citizens weren't allowed a foreign tax credit under Code Sec. 901 for social security taxes paid to Francewhile the taxpayers were working there for a non-American employer. The DC Circuit Court found that the TaxCourt failed to adequately consider the U.S.-France agreement under the laws of both countries.

Despite poor records, taxpayer satisfied passive activity real estate professional testHailstock, TC Memo 2016-146

The Tax Court has held that a taxpayer who kept particularly poor records nonetheless provided sufficientevidence to support the fact that she was a real estate professional for purposes of the passive activity loss rules.

Real estate professional status didn't make rental losses automatically deductibleGragg vs. U.S., (CA 9 8/4/2016) 118 AFTR 2d ¶ 2016-5091

The Court of Appeals for the Ninth Circuit, affirming the district court, has held that for purposes of the passiveactivity loss (PAL) rules, the taxpayer's status as a real estate professional under Code Sec. 469(c)(7) did notmake her rental losses automatically nonpassive. She still had to prove material participation in her real estaterental activities in order to deduct those losses from her nonpassive income.

Professor and librarian can't deduct expenses associated with increasing “generalknowledge” Tanzi, TC Memo 2016-148

The Tax Court has held that a married couple, a college professor and librarian, couldn't deduct asunreimbursed employee expenses the costs of their home Internet access, satellite television, computers, andother various other items associated with increasing their “general knowledge.” The Court rejected thehusband's claim that, as a professor and an individual holding a doctorate, he was professionally charged with“self-educating” and entitled to deduct associated costs.

Hotel controller could deduct cost of executive MBAKopaigora, TC Summary Opinion 2016-35

In a Summary Opinion, the Tax Court has held that a taxpayer engaged as a controller for a major hotel coulddeduct the cost of his executive MBA education as an unreimbursed employee business expense.

District court approves sale of marital home to satisfy one spouse's tax liabilityTannenbaum, (DC NY 8/11/2016) 117 AFTR 2d ¶ 2016-5120

A district court has concluded that IRS could enforce its tax lien and sell the primary residence owned by atax-delinquent husband and a non-delinquent wife. It also held that Code Sec. 6323(b)(8)'s superpriority forattorney's liens didn't apply to a third party creditor of the husband.

page 4

Pilot couldn't deduct aviation expenses because activity wasn't a trade or businessTizard, TC Summary Opinion 2016-42

The Tax Court has upheld IRS's disallowance of a commercial pilot's business deductions for expensesassociated with her side aviation activity. The Court concluded that, although the taxpayer intended toultimately enter into an aviation business for profit, the activity did not rise to the level of an active trade orbusiness during the year at issue.

Doctor's interests in medical practices and surgery center can be separate for PALpurposes PLR 201634022

A Technical Advice Memorandum (TAM) has concluded that IRS lacked the authority to “re-group,” forpurposes of the passive activity loss (PAL) rules, a doctor's interests in two medical practices at which he wasan employee and his indirect interest in an outpatient surgery center. The doctor's treatment of his interests asseparate activities wasn't inappropriate in light of the overall facts of the case, including his lack of control overthe operations of the surgery center.

S corp's payment of sole shareholder/employee's personal expenses wasn't compensationScott Singer Installations, Inc., TC Memo 2016-161

The Tax Court has concluded that an S corporation's payment of personal expenses on behalf of its soleshareholder/officer should not be characterized as wages subject to federal employment taxes. Instead, theCourt found that they were repayments of loans made to the S corporation.

IRS agrees that corp's payments of shareholder/employee's personal expenses were loanrepayments IRB 2017-15

Background. The proper characterization of transfers by shareholders to corporations, as either loans or capitalcontributions, is made by reference to all the evidence, and the burden of proving that a transfer is a loan fallson the taxpayer. (Dixie Dairies Corp., (1980) 74 TC 476)

IRS acquiesces. IRS has now announced its acquiescence in result only as to whether the corporation's paymentof personal expenses on behalf of its sole shareholder-corporate officer constitutes wages subject to Federalemployment.

S corp owner not entitled to unsubstantiated NOL carryforwards; liable for penaltiesJasperson v. Comm., (CA 11 08/31/2016) 118 AFTR 2d ¶2016-5173

The Court of Appeals for the Eleventh Circuit, affirming the Tax Court, has held that an S corporation ownerwasn't entitled to carry forward net operating losses (NOLs) where he didn't prove the existence of the losses,whether he first carried the NOLs back, or whether he elected to not use the carryback period. The EleventhCircuit also upheld the imposition of accuracy-related penalties against the taxpayer.

No relief from excess contribution tax where withdrawal occurred in different tax yearWu v. U.S., (CA 7 08/29/2016) 118 AFTR 2d ¶2016-5154

The Court of Appeals for the Seventh Circuit, affirming a district court, has held that taxpayers who madeexcess contributions to their IRAs in 2007, then withdrew the excess contributions and their correspondingearnings in March of 2010 upon realizing the mistake, couldn't avoid the tax on excess contributions for the2009 tax year. The 7th Circuit agreed with the government that Code Sec. 408(d)(4) only applies to excesscontributions that are paid into an IRA during a tax year and distributed by the filing deadline for that same taxyear.

page 5

Imperfect appraisal of charitable contribution nonetheless was a qualified appraisalCave Buttes, LLC, (2016) 147 TC No. 10

The Tax Court has held that, although several elements of an appraisal of real property contributed to a stateagency were not in strict conformity with the relevant regs, the appraisal met the requirements of a qualifiedappraisal. It also agreed with the property valuation determined by the taxpayer's expert.

Taxpayer had ordinary income from bulk sale of land that he had begun to developBoree, (CA 11 9/12/2016) 118 AFTR 2d ¶ 2016-5207

The Court of Appeals for the Eleventh Circuit, affirming the Tax Court, has held that a taxpayer that purchased1,892 acres of land, took various steps to develop it for sale in the form of 10-acre lots, sold several of thoselots, but then sold the bulk of the land to another developer after the local municipality enacted land useprovisions that made his initial plans economically untenable, had ordinary income and not capital gains fromthe sale to the other developer.

Tax Court rules on alimony and theft loss deductionLeslie, TC Memo 2016-171

The Tax Court has concluded that payments by one spouse to another were alimony, deductible by the payorand includible in the recipient's income. However, the Court also concluded that the payments weren'tincludible in the taxpayer's income in the year deposited into her account where she was denied access to themoney; there wasn't constructive receipt of this amounts. In addition, the Court found that the taxpayer had adeductible theft loss from her “investment” in an African diamond scheme.

Chemist couldn't assign income to nontaxable org that he couldn't prove actually existedGeorge, Jr. v. Comm., (CA 1 09/13/2016) 118 AFTR 2d ¶2016-5209

The Court of Appeals for the First Circuit, affirming the Tax Court, has concluded that an individual whocreated and sold health supplements couldn't retroactively assign income to his purported Code Sec. 501(c)(4)social welfare organization. The First Circuit agreed with the Tax Court that the overall facts of the case,including that the organization wasn't incorporated until after the years at issue, established that there was noorganization distinct from the individual during the relevant time period.

Payments to pastor were includible in income as self-employment incomeWhite, TC Memo 2016-167

The Tax Court has held that the payments from his church that a pastor who executed a vow of poverty receivedfor his well-being were includible in income and subject to the self-employment tax.

Defaulted qualified retirement plan loan was includible in incomeMartinez, TC Memo 2016-182

The Tax Court has determined that a taxpayer who failed to repay a loan from her Code Sec. 403(b) qualifiedemployer retirement plan received a deemed taxable distribution of that loan. As a result, the unpaid loanamount was includible in income and subject to the Code Sec. 72(t) additional tax.

How to elect & revoke the election to deduct disaster losses in the preceding yearRev Proc 2016-53, 2016-44 IRB

In a Revenue Procedure that is being issued contemporaneously with the issuance of temporary and proposedregs, IRS has provided the procedures and requirements for making and revoking a Code Sec. 165(i) election todeduct a disaster loss for the tax year immediately preceding the tax year in which the disaster occurred.

page 6

IRS advises non-spouse Roth IRA beneficiary on RMD rulesInformation Letter 2016-0071

In an Information Letter, IRS has advised an individual on the consequences of a Roth IRA non-spousebeneficiary's failure to timely begin taking the required minimum distributions (RMDs) under Code Sec.401(a)(9)'s “life expectancy rule.” The individual asked whether a non-spouse beneficiary's failure to beginsuch distributions within one year of the Roth IRA owner's death made the life expectancy rule inapplicable andrequired that distributions be made under Code Sec. 401(a)(9)'s “five year rule.”

Larceny conviction precluded taxpayer from contesting inclusion of stolen funds inincome Tax Court order, Mark H. Swartz, Docket No. 3583-10.

The Tax Court has issued an order in which it determined that a taxpayer's criminal conviction for stealing$12.5 million from his employer precludes him from arguing that he did not receive taxable income in thatamount. The Court, however, didn't decide the tax consequences of his later-year repayment.

Final regs: 36 months of nonpayment is no longer a debt discharge reporting eventT.D. 9793, 11/09/2016; Reg. § 1.6050P-1

IRS has issued final regs that eliminate a rule under which, subject to exceptions, a creditor had to furnish Form1099-C, Cancellation of Debt, if there was a 36-month period during which the creditor hadn't received anypayment on its indebtedness. This provision has been criticized for confusing taxpayers as to whether and whenan actual debt discharge has occurred.

Business owner's wife wasn't responsible person despite bank signatory authorityFitzpatrick, TC Memo 2016-199

The Tax Court has concluded that a spouse of one of a business's owners who had signatory authority over thecompany's checking account wasn't a “responsible person” for purposes of the Code Sec. 6672 trust fundrecovery penalty. Her position in the company was largely ministerial and she lacked the authority to controlthe financial affairs of the business or exercise any significant authority over the disbursement of the company'sfunds.

IRS was wrong regarding S corporation dividend to owner, owner's basis and penaltyFranklin, TC Memo 2016-207

The Tax Court has held that IRS was wrong in: a) considering an amount as a taxable dividend from an Scorporation to its sole shareholder; b) determining that the shareholder didn't have sufficient basis in the Scorporation to deduct S corporation losses on his individual income tax return; and c) assessing a failure-to-paypenalty on the shareholder.

Payment received by mortgagor increased his deed-in-lieu-of-foreclosure proceedsBobo, TC Summary Opinion 2016-74

In a Summary Opinion, the Tax Court has held that, where at the same time that a mortgage company enteredinto a deed in lieu of foreclosure agreement with a delinquent mortgagor, it paid the mortgagor $20,500 formeeting various requirements including leaving the property promptly, the $20,500 was additional proceedsfrom the deemed sale of the property to the mortgage company and not ordinary income.

page 7

Gamblers couldn't deduct losses under Cohan rulePeter Phuong K. Pham, TC Summary Opinion 2016-73

In a Summary Opinion, the Tax Court has denied “house players'” gambling losses for lack of substantiation.The taxpayers, who failed to maintain the required tax records, didn't provide the Court with a basis upon whichtheir gambling losses for the year at issue could be estimated under the Cohan rule.

Spousal support payments weren't alimony despite State law saving provisionPLR 201648001

In a redacted Private Letter Ruling (PLR), IRS has concluded that payments of spousal support weren't alimonypayments under Code Sec. 71(b) because the payments didn't terminate on the death of the payee spouse. Thesupport agreement wasn't saved by a State law (Minnesota) provision which generally provided that, unlessotherwise agreed in writing or expressly provided in the decree, the obligation to pay future maintenanceterminated upon the death of either party or the remarriage of the party receiving maintenance.

Foreclosure can proceed against property held by trust as delinquent taxpayer's nomineeU.S. v. Peeler, et al, (DC MI 11/28/2016) 118 AFTR 2d ¶2016-5541

A district court has granted default judgment in favor of the government allowing it to foreclose its tax liensagainst real property, title to which is held by a trust of which the delinquent taxpayer is trustee. In so holding,the court concluded that the trust holds title to a parcel of real property as the taxpayer's nominee, citing factsincluding the close relationship between the taxpayer and trust and that the taxpayer resides at the property andotherwise treats it as his own.

Manager/analyst could deduct MBA costs that didn't qualify him for new trade orbusiness Long, TC Summary Opinion 2016-88

In a Summary Opinion, the Tax Court has determined that a taxpayer could deduct the costs of obtaining amaster of business administration (MBA) as unreimbursed employee expenses. The Court found that the MBAdidn't qualify him for a new profession but rather refined his existing business and investment skills that he usedin his former managerial position, and it further concluded that the taxpayer remained in the same trade orbusiness before and after attaining the degree.

No deduction where software engineer's executive MBA qualified her for new trade orbusiness Creigh, TC Summary Opinion 2017-26

In a Summary Opinion, the Tax Court has determined that a software engineer couldn't deduct the costs ofobtaining an executive master of business administration (EMBA) because the degree qualified her for a newprofession, rather than refined her existing business skills.

Losses disallowed; evidence insufficient to show S corp and LLC indebtedness totaxpayers Hargis, TC Memo 2016-232

The Tax Court has held that where a husband was the co-borrower and/or guarantor of loans made by thirdparties to his S corporations, and the wife was a guarantor of loans to limited liability companies (LLCs) inwhich she was a member, there was insufficient evidence that those transactions resulted in an increase in thetaxpayers' bases in the S corporations and LLCs. As a result, the taxpayers' losses from those entities were notdeductible.

page 8

Tax Court finds income was reportable by financial consultant rather than his Scorporation Fleischer, TC Memo 2016-238

The Tax Court has concluded that a financial consultant, rather than his S corporation, should have reported theincome earned in his individual capacity under a representative agreement and broker contract for the years inissue.

Direct sellers of intangible goods may qualify as independent contractorsChief Counsel Advice 201652020

In an email Chief Counsel Advice (CCA), IRS has concluded that there is no distinction between tangible andintangible consumer products in determining whether workers who qualify as direct sellers may be treated asindependent contractors, even though there is a proposed federal reg that makes such a distinction.

Post-retirement payments were subject to self-employment taxInformation Letter 2016-0081

In a recently issued Information Letter, IRS has determined that post-retirement payments that an individualreceived from his company were subject to self-employment tax because the payments resulted from his 34years of services on behalf of the company.

Court approves IRS lien foreclosure/sale of property partially owned by innocent partyDavis, (DC LA 1/5/017 119 AFTR 2d ¶ 2017-309

Where a law firm owed back taxes, a district court has allowed IRS to foreclose its liens on and sell a propertyco-owned by three persons, two of which owned the law firm. The Court found that IRS met all of the standardsset by the Supreme Court in Rodgers with respect to the innocent third owner's interest and that a purchase oftax sale title on the property by an unrelated party had no effect on IRS's lien.

Taxpayers failed to show they were real estate professionals under PAL rulesMakhlouf, TC Summary Opinion 2017-1

The Tax Court has concluded that taxpayers weren't real estate professionals for purposes of the passive activityloss (PAL) rules. They failed to show that they performed more than 750 hours of services during the tax yearin real property trades or businesses in which they materially participated.

CA 7 reverses; USPS tracking system entry not relevant under timely filing rulesTilden, (CA 7 1/13/2017) 119 AFTR 2d ¶ 2017-359

The Court of Appeals for the Seventh Circuit, reversing the Tax Court, has held that the date of the UnitedStates Postal Service (USPS)'s entry of taxpayer's envelope into its tracking system is not the equivalent of apostmark date and thus is irrelevant for purposes of the timely-mailing-as-timely-filing rule of Code Sec. 7502.The Court also affirmed previous precedent that the 90-day deadline for filing a Tax Court petition isjurisdictional.

Surgeon's interest in surgical center was separate from his practice under passive lossrules Hardy, TC Memo 2017-16

The Tax Court has made a number of holdings with respect to a surgeon who operated his practice as a solepractitioner and also held a minority interest in a limited liability company (LLC) that ran a surgical center atwhich he sometimes performed surgery. Among those holdings was the conclusion that IRS could not group hisincome from the LLC with his sole practitioner income for purposes of the passive activity loss (PAL) rules.

page 9

Legal fees were only deductible as miscellaneous itemized deductionsEllen Sas, TC Summary Opinion 2017-2

The Tax Court has held that taxpayers must deduct legal fees that they incurred as miscellaneous itemizeddeductions subject to the 2% limitation in Code Sec. 67(a), rather than as either legal fees paid in connectionwith an action involving a claim of unlawful discrimination under Code Sec. 62(a)(20) or as ordinary andnecessary business expenses under Code Sec. 162.

Separation agreement with conflicting clauses yielded no alimony deductionQuintal, TC Summary Opinion 2017-3

The Tax Court has held that where, in a badly drafted separation agreement, two clauses regarding paymentsfrom the husband to the wife conflicted with each other, the clause that disqualified the payments from beingconsidered alimony was more definitive and thus prevailed, with the result that the husband got no alimonydeduction.

Court change to beneficiary of decedent's IRA didn't result in inherited IRAPLR 201706004

In a private letter ruling, IRS has held that, where an IRA owner died before receiving any IRA distributions,his IRA provided that a trust that he purportedly created was the IRA beneficiary, there was no evidence that heactually created the trust, and a state court approved a change in the beneficiary designation so that his widowwas the beneficiary, the result was that the IRA was not an inherited IRA.

Grandmother who supported son and grandchildren couldn't claim tax benefitsSmyth, TC Memo 2017-29

The Tax Court, reaching a result that it said was impossible to describe as “in any way just,” held that ataxpayer's grandchildren were not “qualifying children” for tax purposes, despite the facts that she provided allof their financial support and had initially been told by her son that she should claim them as her dependents.The Court found that the son actually claimed the children on his return as dependents in order to fund his drughabit and that, although he later prepared an amended return attempting to relinquish that claim and delivered itto IRS counsel, the attempt was ineffective because the return was never filed.

Husband couldn't file joint return on behalf of allegedly delusional spouseMoss, TC Memo 2017-30

The Tax Court has concluded that a husband who alleged that his wife's mental illness led her to the delusionthat she suffered a loss in the “Madoff fraud” wasn't entitled to file his return with a married filing jointly status.The husband had no formal power of attorney or similar authorization and couldn't claim that he properly filed ajoint return with his wife as her agent. The wife, who refused to sign the joint return, filed a return as marriedfiling separately.

IRS permits spousal IRA rollovers from a trust the spouse controlledPLR 201707001

IRS has privately ruled that a surviving spouse could roll over her deceased spouse's Roth IRAs and regularIRA, payable to a trust of which she was sole trustee and beneficiary, into her own Roth IRA and regular IRA.By making the rollovers, the spouse avoided having to take lifetime required minimum distributions (RMDs)from the Roth IRAs and was treated as the owner of the regular IRA for purposes of computing lifetime RMDsfrom that account.

page 10

Guarantee of S corp loan didn't create basis to claim lossTinsley, TC Summary Opinion 2017-9

The Tax Court has held that a shareholder's guarantee of a loan to his S corporation didn't give him basis in theentity and as a result he couldn't deduct his distributive share of the entity's losses. The shareholder couldn'testablish that the lender looked primarily to him, rather than to the S corporation, for repayment, and couldn'testablish that he made an economic outlay with respect to the loan.

Judgments and liens against shareholder-guarantors of S corp loan didn't create basis toclaim loss Phillips, TC Memo 2017-61

The Tax Court has held that a shareholder's guarantee of a loan to her S corporation didn't give her basis in theentity even where the lenders sued her on her guarantee and recovered deficiency judgments against her,resulting in liens against her real and personal property. As a result, she couldn't deduct her distributive share ofthe entity's losses.

No deduction for donated aircraft without contemporaneous written acknowledgementJoe Alfred Izen, Jr., (2017) 148 TC No. 5

The Tax Court has held that a taxpayer wasn't entitled to a charitable deduction for his alleged gift to acharitable organization of his interest in an aircraft. He didn't claim the deduction on his original return butrather on an amended return filed nearly six years after the contribution, and the documentation that he attachedto his amended return wasn't a “contemporaneous written acknowledgement” (CWA) as required under CodeSec. 170(f)(12) and didn't otherwise satisfy the statute's strict substantiation requirements.

Tax shelter participant reasonably relied on advisors so wasn't liable for penaltyMcNeill v. U.S., (DC WY 2/24/2017) 119 AFTR 2d ¶2017-483

On remand from the Tenth Circuit, a district court has held that a taxpayer who participated in a distressed assetdebt (DAD) tax shelter wasn't liable for accuracy-related penalties. The court concluded that the overall facts ofthe case, including the taxpayer's knowledge of tax law, efforts to assess the proper tax liability, and reliance ontax advice of qualified professionals, showed that he acted reasonably and in good faith within the meaning ofCode Sec. 6664(c).

No foreign earned income exclusion for security contractor; innocent spouse relief for hisex Lock, TC Summary Opinion 2017-10

In a Summary Opinion, the Tax Court has held that a taxpayer who worked in Iraq providing security forvisiting dignitaries wasn't entitled to the Code Sec. 911 foreign earned income exclusion because his place ofabode was the U.S. Additionally, the Court held that his former spouse was entitled to innocent spouse reliefunder Code Sec. 6015(c), leaving him on the hook for all the deficiencies relating to the improperly excludedforeign earned income.

Tax Court allows medical deduction for alternative medical careVictoria Malev v. Comm, Docket No. 1282-16S

In an oral finding of fact and opinion (Bench Opinion), the Tax Court has concluded in a small tax case underCode Sec. 7463 that a taxpayer could deduct her expenses for integrative medical care as a medical expenseunder Code Sec. 213.

page 11

Foreign students participating in work-travel exchange program couldn't deduct travelcosts Liljeberg, et al, (2017) 148 TC No. 6

The Tax Court has held that nonresident aliens who were full-time students at foreign universities and whoparticipated in a summer work-travel exchange program weren't “away from home in pursuit of a trade orbusiness” and thus couldn't deduct their travel and living expenses under Code Sec. 162(a). However, the Courtheld that their travel insurance costs may be deductible under Code Sec. 213(a).

Tax Court finds cosmetologist didn't prove amount of earned income so couldn't claimfull EITC Lopez, TC Summary Opinion 2017-16

The Tax Court, rejecting IRS's full disallowance of a taxpayer's claimed Schedule C gross receipts andcorresponding reduction or disallowance of the earned income tax credit (EITC) and additional child tax credit,has held that a taxpayer was engaged in a cosmetology business and received some income from it. However,taking into account the overall facts of the case, including the taxpayer's failure to maintain adequate records,the Court concluded that she received gross receipts in a lesser amount that she reported, and the amount ofEITC and additional child tax credit that she claimed were accordingly reduced.

Purported return omitting income was invalid even though IRS was aware of missingitems Kiselis, (Ct Fed Cl 3/20/2017) 119 AFTR 2d ¶ 2017-551

The Court of Federal Claims has held that a return that omitted large numbers of income items that IRS wasaware that taxpayer earned, and that taxpayer knew that IRS was aware of, was not a return that qualified as arefund claim.

50% owner liable for trust fund penalty despite not having primary responsibility overtaxes U.S. v. Commander, (DC NJ 4/3/2017) 119 AFTR 2d ¶2017-620

A district court has determined on summary judgment that a 50% owner of a member-managed company, whowas required to sign off on all significant decisions and actions relating to the company, was liable for the trustfund recovery penalty under Code Sec. 6672. The court found that his role in the company established that hewas a responsible person, regardless of whether the other owner had primary responsibility for the company'staxes; and he was found to have acted willfully where he knew (or should have known) that the taxes wereunpaid but continued to pay other creditors instead.

Fifth Circuit upholds penalties for fraudulent failure to file and pay taxCrummey v. Comm., (CA 5 4/4/2017) 119 AFTR 2d ¶ 2017-624

The Court of Appeals for the Fifth Circuit, affirming the Tax Court, has concluded that the penalty under CodeSec. 6651(a)(1) for failure to file a valid return, as increased under Code Sec. 6651(f) for filing a fraudulentreturn, and the penalty under Code Sec. 6651(a)(2) for failure to pay the tax shown on the return, were correctlyimposed on a taxpayer improperly filing as a trust rather than an individual.

Tax Court rejects taxpayers' claim that advances from family business were loansCaiping Zang and Tao Liu, TC Memo 2017-55

The Tax Court has upheld IRS's determination that married taxpayers had unreported income for three years,including wages, rental income, gambling income, and significant advances from a company of which theywere sole officers that was largely controlled by the husband's father. The Court rejected their claim that theadvances were loans, finding that there were no indications at the time the funds were advanced that the partiesintended to create a bona fide debtor-lender relationship.

page 12

Innocent spouse relief granted; IRS didn't show spouse knew of erroneous deductionHarris, TC Summary Opinion 2017-21

In a Summary Opinion, the Tax Court has held that a divorced woman was entitled to innocent spouse reliefwith respect to a tax deficiency caused by erroneous deductions on her joint return that she filed with herex-husband; she met the elements of Code Sec. 6015(c), and IRS didn't demonstrate that she had actualknowledge that the deductions were erroneous.

Abused wife filed a joint return under the “tacit consent rule”Okorogu, TC Memo 2017-53

The Tax Court has held that a wife who was physically and mentally abused by her husband filed a joint returnwith him under the “tacit consent rule.” The Court also granted her action for innocent spouse relief under CodeSec. 6015(f).

Employer's parking reimbursement plan didn't qualify for tax-free treatmentInformation Letter 2017-0007

In an Information Letter, IRS has advised that an arrangement where an employer purchased parking spots froma parking vendor, and then allowed employees who wished to use the parking spots to pay the employer for theparking spots using the employees' own after-tax compensation, would not qualify for tax-free treatment.

Taxpayer failed to substantiate sufficient hours to be a real estate professionalPenley, TC Memo 2017-65

A taxpayer's attempt to substantiate the number of hours he spent in his real estate business did not convince theTax Court that he spent enough hours to be considered a real estate professional for purposes of the passiveactivity loss (PAL) rules.

Disbarred lawyer taxed on payments received for helping licensed attorney with casesAlexander, TC Summary Opinion 2017-23

The Tax Court, in a summary opinion, has held that a disbarred attorney had to treat as taxable nonemployeecompensation amounts he received for assisting a licensed attorney with his cases. The amounts were paid forservices rendered rather than gifts made from a detached and disinterested generosity.

Stock broker qualified as a real estate professional under passive loss rulesWindham, TC Memo 2017-68

The Tax Court has rejected a stock broker's argument that she, in effect, made an election to treat all of herrental activities as one activity. But the Court nonetheless found that she was a real estate professional and thattherefore her rental real estate activities were not passive activities.

Taxpayer's activities weren't repairs, so residence-related deductions were disallowedCooke, TC Memo 2017-74

The Tax Court has held that a bed and breakfast owner who stayed at the facility himself for many days duringthe years at issue was subject to the Code Sec. 280A rule that disallows deductions with respect to propertiesthat are used as a personal residence. The Court found that the taxpayer failed to establish the amount of timethat he engaged in repairs and maintenance of the property and thus couldn't rely on the exception in Code Sec.280A(d)(2).

page 13

Another circuit holds tax debt on late-filed return is rarely dischargeable in bankruptcyIn re Giacchi, (CA 3 5/5/2017) 119 AFTR 2d ¶ 2017-733

The Court of Appeals for the Third Circuit has held that, except with respect to returns prepared with theassistance of IRS under Code Sec. 6020(a), debts for unpaid taxes from late-filed tax returns are notdischargeable in bankruptcy. In so doing, it affirmed district court and bankruptcy court decisions and alsocame to the same conclusion as the Appeals Courts in eight other circuits.

Federal Circuit disagrees with lower court's interpretation of theft loss timing regAdkins, (CA FC 5/8/2017) 119 AFTR 2d ¶ 2017-737

The Court of Appeals for the Federal Circuit has held that the Court of Federal Claims misinterpreted twoportions of Reg. § 1.165-1(d), the reg that provides that a theft loss is not sustained if, in the year the loss isdiscovered, there exists a claim for reimbursement with respect to which there is a reasonable prospect ofrecovery. As a result, the Appeals Court vacated and remanded the lower court's holding that the taxpayers' losswasn't deductible in the year in which they claimed it.

Tax Court denies taxpayer's deductions & rejects TurboTax penalty defenseBulakites, TC Memo 2017-79

The Tax Court has denied most of a taxpayer's deductions for alimony, interest expenses, and net operating loss(NOL) carryovers and rejected his attempt to avoid accuracy-related penalties by blaming these improperdeductions on his TurboTax return preparation software.

CA-5 upholds disallowance of taxpayer's deduction for costs of investigating father'sdeath Vest v. Comm., (CA 5 06/02/2017) 119 AFTR 2d ¶2017-813

The Court of Appeals for the Fifth Circuit, affirming the Tax Court, has found that a taxpayer couldn't deductthe costs of investigating his father's death because the investigation wasn't motivated by profit. The FifthCircuit also found that a sale of computer and intangible assets from one partnership controlled by the taxpayerto another didn't qualify for the installment method because it was motivated by tax avoidance.

Husband can't claim alimony deduction for splitting bonus with wife before divorceMudrich, TC Memo 2017-101

The Tax Court has held that a husband's payment to his soon-to-be ex-wife of half of his bonus wasn'tdeductible as alimony. Although the couple entered an agreement to split the bonus, it wasn't a “divorce orseparation instrument”; and the Court rejected the husband's argument that the payment was made pursuant to asupport order, finding that the payment predated the support order and that the amount of the payment wasn'tconsistent with the formula provided in the order.

Taxpayer had 20 years of experience but didn't have profit motive for car racing businessStettner, TC Memo 2017-113

The Tax Court has held a taxpayer, who had been racing cars for 20 years and had previously attempted to be inthe racing business, didn't have a profit motive for his new attempt at the business and thus could not deduct hislosses.

Insurance salesman couldn't exclude compensation from self-employment incomeGeneser, TC Memo 2017-110

The Tax Court has held that nonemployee compensation of a former insurance salesman from renewalcommissions, which the salesman had pledged as collateral for a loan and which was paid directly to the lender,

page 14

was subject to self-employment tax. The Court found that the compensation didn't qualify for exclusion fromself-employment income under Code Sec. 1402(k) because it was dependent on his length of service with theinsurance company. The Court also held that the salesman wasn't entitled to an interest expense deduction withrespect to the loan because he failed to establish that it was business-related.

Effect of taxpayer preparing return after receiving deficiency notice based onIRS-prepared return Riggins, TC Memo 2017-106

The Tax Court has held that IRS's processing of a taxpayer's return, after it issued a notice of deficiency basedon an IRS-prepared substitute for return (SFR) and after the taxpayer filed her petition seeking the Court'sredetermination of her tax liability, did not limit IRS's authority to rely upon that notice of deficiency. It alsoruled on an aspect of the imposition of the failure-to-pay penalty where there is an SFR.

Pro hockey team's away game team meals were a de minimis fringeJacobs, (2017) 148 TC No. 24

The Tax Court has held that the Boston Bruins hockey team's provision of pregame meals to Bruins' players andpersonnel at away city hotels qualifies as a de minimis fringe under Code Sec. 274(n)(2)(B) and that thereforethe cost of such meals is not subject to the 50% limitation of Code Sec. 274(n)(1).

Taxpayer's deductions from film festival activity disallowed under hobby loss rulesZudak, TC Summary Opinion 2017-41

The Tax Court has held that a taxpayer who organized film festivals wasn't entitled to deduct losses from thatactivity, concluding that the deduction was barred by Code Sec. 183's hobby loss rules. The Court found that,while the taxpayer devoted a significant amount of time to the activity, the overall facts and circumstances,including that the film festival activity never generated a profit and that he didn't conduct it in a businesslikemanner, showed that he lacked the requisite profit motive.

No expense deduction for minister without profit motiveLewis, TC Memo 2017-117

The Tax Court has concluded that a minister and author wasn't entitled to deduct his expenses under Code Sec.162 because he wasn't engaged in a trade or business for profit. In addition, he wasn't allowed any deductionsunder the Code Sec. 183 hobby loss rules because he had no gross income from the activities for the year atissue.

IRS disagrees with holding that a married person filing separately may claim the EITCNonacquiescence to Yosef A. Tsehay, TC Memo 2016-200.

IRS has nonacquiesced to a Tax Court decision that a taxpayer with a filing status of married filing separatelymay claim the earned income tax credit under Code Sec. 32.

IRS won't follow decision that married person filing separately can claim the EITCAOD 2017-05,07/10/2017

IRS has issued an Action on Decision (AOD) announcing its nonacquiescence with a Tax Court decision that ataxpayer with a filing status of married filing separately may claim the earned income tax credit under CodeSec. 32.

page 15

CA-8: no conservation contribution deduction without proof mortgage was subordinateRP Golf v. Comm., (CA 8 06/26/2017) 119 AFTR 2d ¶2017-899

The Court of Appeals for the Eighth Circuit, affirming the Tax Court, has denied a taxpayer a qualifiedconservation contribution deduction for property subject to two mortgages. The taxpayer claimed that it hadentered into an oral agreement with the mortgagees to subordinate their rights to the property, but the Courtfound that there was insufficient evidence to show that such an agreement existed and that the contributiontherefore wasn't “protected in perpetuity.”

Early distribution penalty applied when taxpayer split IRA with ex-wife before courtorder Summers, TC Memo 2017-125

The Tax Court has held that, where a young couple negotiated divorce terms without being represented bycounsel, and the husband took a distribution from his IRA and gave half of it to the wife before the divorce wasfinalized—which resulted in the divorce decree providing that neither party had an IRA—the husband wasliable for the penalty for an early distribution from a retirement plan, with respect to both his and his wife'sshares of the IRA distribution.

Payment to settle employment discrimination claim didn't qualify for exclusionRajcoomar, TC Memo 2017-129

The Tax Court has held that a payment received by a taxpayer to settle his disability-based discriminationclaims against his former employer wasn't received on account of any physical injury and thus didn't qualify forexclusion under Code Sec. 104(a)(2). Although the taxpayer's disability resulted from an injury, that injury wasunrelated to his employment, and the claims against his employer related solely to the employer's failure toaccommodate his resulting disability.

Doctor's partial repayment of loan was not deductibleSalloum, TC Memo 2017-127

The Tax Court has held that a doctor's partial repayment of an amount advanced to him in connection with arecruiting agreement could not be deducted as an expense on Schedule C, Form 1040. The amount advanced tohim was a bona fide loan.

Teaching hospital's payments to research fellow were taxable under U.S.-Poland treatyKlubo-Gwiezdzinska, TC Summary Opinion 2017-45

In a Summary Opinion, the Tax Court has held that payments to a Polish research fellow from the U.S. hospitalfor whom she performed services were not exempt from U.S. tax under the Polish treaty both because thepayments were not a “grant, allowance, or award” and because the hospital was not a “recognized educationalinstitution.”

Claimed sale to newly incorporated former proprietorship was capital contributionBell, (CA9, 7/10/2017) 120 AFTR 2d ¶ 2017-5043

In an unpublished opinion, the Court of Appeals for the Ninth Circuit has affirmed the Tax Court's holding thata couple's transfer of the assets of their sole proprietorship real estate brokerage to a newly formed corporationof which they owned all of the stock was a capital contribution to the corporation, not a sale of assets.

page 16

401(k) plan loan is taxable distribution because repayments didn't begin on timeFrias, TC Memo 2017-139

The Tax Court has held that a 401(k) plan loan taken out by a taxpayer before she went on leave was a taxableplan distribution subject to the premature withdrawal penalty because she failed to begin making repayments asrequired by the loan agreement and her repayments weren't made in substantially level amounts. It didn't matterthat the taxpayer's employer disregarded her instructions and failed to deduct loan payments from her payduring the leave period, or that she eventually did repay the loan. However, the Tax Court declined to apply theCode Sec. 6662 accuracy-related penalty because she had reasonable cause for her mistake.

Disabled fireman's retirement allowance not excludableTaylor, TC Memo 2017-132

The Tax Court has held that a fireman who retired on disability could not exclude his retirement allowance. Theallowance payments were computed with reference to his age, length of service, and average final compensationand thus weren't excludable under Code Sec. 104(a)(1).

Despite IRS concession, taxpayer wasn't entitled to costs of litigating innocent spouseclaim Kazazian, TC Memo 2017-135

The Tax Court has determined that a taxpayer wasn't entitled to recover administrative and litigation costsrelating to her claim for innocent spouse relief, where IRS initially denied that claim, then ultimately concededit. The Court concluded that she wasn't a “prevailing party” under Code Sec. 7430, and that even if she were,she didn't show that she actually incurred any costs litigating her claim.

IRA payout from failed financial institution not subject to one-rollover-per-year limitInformation Letter 2017-0018

In an Information Letter (IL), IRS concludes that an IRA distribution from a failed financial institution, that wasactually made by the Federal Deposit Insurance Corporation (FDIC) as receiver, wasn't subject to theone-rollover-per-year limit on nontaxable IRA rollovers.

NOL carrybacks denied where taxpayer didn't file proper refund claim or maintainrecords Silipigno, (DC NY 7/13/2017) 120 AFTR 2d ¶ 2017-5046

A district court has disallowed two separate net operating loss (NOL) carrybacks (CBs) of a taxpayer. In thecase of the first NOL CB, the taxpayer was deemed to have failed to have filed a refund claim, and, as a result,the court didn't have jurisdiction to hear the NOL CB issue. The other NOL CB was disallowed because thetaxpayer provided insufficient documentation of expenses in both the loss year and the carryback year.

Settlement of emotional distress claim not excludable under Sec. 104(a)(2)Maciujec, TC Summary Opinion 2017-49

The Tax Court has held that a former employee of Home Depot couldn't exclude under Code Sec. 104(a)(2) anamount she received from the company to settle a suit alleging discrimination and other actions that she saidcaused emotional distress. She didn't receive damages for emotional distress attributable to a physical injury orsickness and thus the settlement payment wasn't excludable.

Joint return filed during divorce proceedings without wife's consent was invalidEdwards, TC Summary Opinion 2017-52

In a Summary Opinion, the Tax Court has concluded that a purported joint return filed by a taxpayer for himselfand his soon-to-be ex-wife was invalid because it was filed without her consent, and that the taxpayer's proper

page 17

filing status was married-filing-separate. Although the taxpayer and his wife had discussed filing a joint returnand had done so in the past, there was no actual agreement to file jointly, and the wife's actions indicated thatshe didn't know that a joint return had been filed on her behalf. However, the Court declined to imposeaccuracy-related penalties, finding that the taxpayer acted reasonably and in good faith at the time the returnwas filed.

Unemployment benefits were taxable in year received despite repayment in next yearYoklic, TC Memo 2017-143

The Tax Court has held that a taxpayer who received unemployment benefits in Year 1, later in Year 1 receiveda notice from the state that he actually didn't qualify for the benefits, and repaid the benefits in Year 2, had toinclude the amount of the unemployment benefits in his Year 1 taxable income.

Honest mistake doesn't excuse incorrectly claimed advance premium tax creditWalker, TC Summary Opinion 2017-50

In what appears to be a case of first impression, the Tax Court ruled that taxpayers who didn't qualify for thepremium tax credit (PTC) because their modified adjusted gross income (MAGI) exceeded 400% of the federalpoverty level (FPL) must repay all the advance premium tax credit (APTC) paid on their behalf to their insurer.The fact that the taxpayers mistakenly claimed the APTC, apparently on the advice of their state healthinsurance Marketplace, didn't matter.

CPA taxed on defaulted 401(k) plan loan in year that plan's cure period expiredGowen, TC Summary Opinion 2017-57

The Tax Court has held that a CPA who defaulted on his 401(k) plan loan must include the resultant deemeddistribution in gross income in the year that the plan's cure period for repayment expired. The regs didn't entitlehim to a 6-month cure period. He also owed the 10% premature withdrawal penalty tax as there is no exceptionto that tax for financial hardship. Finally, the Tax Court upheld IRS's imposition of the Code Sec. 6662(a)accuracy-related penalty.

Taxpayer couldn't shift trust fund liabilities to company's co-ownerU.S. v. Hartman, (DC MI 7/26/2017) 120 AFTR 2d ¶ 2017-5091

A district court, granting IRS summary judgment, has concluded that the taxpayer, a 50% co-owner and chiefexecutive officer (CEO) of a company, was liable for the Code Sec. 6672 penalty, finding that there was nolegitimate factual disputes as to whether he was a responsible person and as to whether he acted recklessly infailing to pay the trust fund taxes.

Court's revised opinion again finds company's co-owner liable for trust fund penaltyU.S. v. Hartman, (DC MI 8/16/2017) 120 AFTR 2d ¶ 2017-5158

Vacating its original opinion in light of the recent decision by the Sixth Circuit in Byrne, a district court againconcluded that the taxpayer, a 50% co-owner and chief executive officer (CEO) of the company, was liable forthe Code Sec. 6672 trust fund recovery penalty. In the recent decision, the Sixth Circuit adopted a“reasonable-cause exception” to the reckless-disregard determination, under which a responsible person'sfailure to cause the withholding taxes to be paid was not willful if he believed that the taxes were in fact beingpaid, so long as that belief was reasonable under the circumstances.

page 18

CPA mischaracterized severance-related legal fees, but accuracy penalty didn't applyDulik, TC Summary Opinion 2017-51

The Tax Court has ruled that a CPA's legal expenses were paid in connection with negotiating the terms of hisseverance agreement with a former employer rather than in connection with his activity as the sole shareholderof an S corporation formed after his dismissal, and thus weren't deductible as ordinary and necessary businessexpenses but could be claimed only as miscellaneous itemized deductions. But the Tax Court declined to hithim with an accuracy-related penalty.

CA 11 affirms; transferee liability applied to dividends paid to minority shareholderKardash, (CA 11 8/4/2017) 119 AFTR 2d ¶ 2017-5119

The Court of Appeals for the Eleventh Circuit, affirming a Tax Court decision, has held that a taxpayer, whowas both a minority shareholder and a high-level employee of a corporation from which the majorityshareholders siphoned substantially all the cash without paying the corporation's income taxes, was liable forthose taxes as a transferee with respect to money the taxpayer received from the corporation as dividends.

Independent contractor denied unsubstantiated business deductionsDrah, TC Memo 2017-149

The Tax Court has held that an independent contractor for FedEx, who also received wages from his whollyowned C corporation that contracted to provide services for FedEx, was not entitled to business deductions forcontract labor expenses, depreciation and section 179 expense, and repair and maintenance expenses. Thetaxpayer generally failed to substantiate the amount and/or business purpose of many of the expenses; andcertain other expenses, including those related to a vehicle leased by the C corporation, were properlydeductible by the C corporation and not the taxpayer himself.

No innocent spouse relief for wife who knew husband was financially unreliableRyke, TC Memo 2017-144

The Tax Court has held that innocent spouse relief didn't apply to a wife who either knew or had reason toknow that the liabilities shown on the joint returns she filed with her husband would not be paid. Beforemarrying, she was aware that her spouse had poor credit and tended not to pay his debts.

Individual's personal loans qualified for bad debt deductionOwens, TC Memo 2017-157

The Tax Court has concluded that, during the years at issue, an individual was involved in the trade or businessof lending money and his advances to a company during those years constituted bona fide debt that becameworthless in 2008. Accordingly, the taxpayer was entitled to his claimed bad debt deduction under Code Sec.166.

Casual gambler couldn't reduce winnings by amounts of bets placed or by gambling lossesBon Viso, TC Memo 2017-154

The Tax Court has held that an individual had to include in his gross income the full amount of his gamblingwinnings, as reflected on his Forms W-2G (Certain Gambling Winnings), without any reduction for the amounthe bet to achieve those winnings. Further, the individual, who was not engaged in the trade or business ofgambling, could only deduct his gambling losses as a miscellaneous itemized deduction if he chose to forgo thestandard deduction.

page 19

Psychiatrist hit with fraud penalty for 2 out of 5 years in which she had underpayments Knowles, TC Memo 2017-152

The Tax Court found that a psychiatrist, who filed late individual returns for some years, failed to substantiatedeductions, under-reported income, claimed an incorrect filing status, made intentional misstatements andproffered misleading forged documents to IRS, was liable for the fraud penalty for two out of the five years forwhich it sustained deficiencies. The Court also imposed other penalties, including failure-to-file andaccuracy-related penalties, for some years.

IRS explains treatment of payments to remediate homes from petroleum contamination(CA-2017-001, Aug. 17, 2017)

IRS has explained the tax treatment of settlement payments made to homeowners in the Carousel Tract that is inCarson, California, by the Shell Oil Company to remediate their homes from petroleum contamination.

CA 5 upholds conservation easement deduction despite boundary modification provisionsBC Ranch II, L.P. v. Comm., (CA 5 08/11/2017) 120 AFTR 2d ¶2017-5143

The Court of Appeals for the Fifth Circuit, vacating and remanding the Tax Court, has held that a taxpayer'slimited right to modify a property's boundaries was an insufficient basis to deny a conservation easementdeduction. The Court also found that documentation submitted by the taxpayer to the donee organization wassufficient to satisfy Reg. § 1.170A-14(g)(5)(i)'s “baseline document” requirement.

Home sale to parents was part sale, part giftFiscalini, TC Memo 2017-163

The Tax Court has held that a taxpayer's sale of his residence to his parents was in part a sale and in part a gift.Additionally, it held that his basis in the home, which he had purchased together with his parents, included theparents' interest that they gifted to him after the purchase. Because the taxpayer failed to timely file a return forthe year of sale, and didn't report the sale, the taxpayer owed a Code Sec. 6651(a)(1) failure-to-file penalty, anda Code Sec. 6662(a) accuracy-related penalty.

Deed of easement satisfied the contemporaneous written acknowledgment requirement310 Retail, LLC, TC Memo 2017-164

The Tax Court has concluded that a deed of easement executed contemporaneously with the gift of aconservation easement satisfied the Code Sec. 170(f)(8)(B) “contemporaneous written acknowledgment”requirement for the taxpayer's charitable contribution deduction.

Mortgage broker didn't qualify as real estate professional under passive loss rulesHickam, TC Summary Opinion 2017-66

The Tax Court has concluded that a taxpayer, who brokered real estate mortgages and other loans, failed toshow that he was a real estate professional for purposes of the passive activity loss (PAL) rules. Accordingly,his rental real estate loss deductions for the years at issue were limited by the Code Sec. 469 PAL rules.However, the Court found that he was not liable for an accuracy-related penalty under Code Sec. 6662(a).

Tax Court rejects taxpayer's attempt to show he was over age 59-1/2 at time ofdistribution Omoloh, TC Summary Opinion 2017-64

The Tax Court has upheld IRS's imposition of the early withdrawal tax under Code Sec. 72(t) against a taxpayerwho received distributions from his IRA, finding that he failed to show that he was at least age 59-1/2 at thetime the distributions were made. Although the taxpayer obtained a birth certificate from Kenya during the

page 20

course of the trial, the Court questioned its accuracy, noting that the birth certificate was contrary to all otherdocumentation, including his driver's license and certificate of naturalization, as well as his own representationsmade before trial. The Court also upheld IRS's imposition of an accuracy-related penalty.

Hunting specimens weren't unique, so comparable sales method applied to value themGardner, TC Memo 2017-165

The Tax Court has held that a taxpayer's charitable contribution of hunting specimens—e.g., animal hides andskulls—should be valued using the comparable sales method and not the replacement cost method that thetaxpayer argued for.

Commercial pilot stationed in Korea didn't qualify for foreign earned income exclusionAcone, TC Memo 2017-162

The Tax Court has held that a commercial airline pilot failed both the “tax home” test and the “bona fideresidence” test, despite the fact that he was stationed in South Korea, and that therefore he did not qualify forthe foreign earned income exclusion.

Tax Court denies bad debt deduction for advances that scientist made to biotech firmRutter, TC Memo 2017-174

The Tax Court has concluded that a scientist who made numerous advances to a biotech company wasn'tentitled to take a business bad debt deduction under Code Sec. 166(a).

Taxpayer didn't prove pension rollover or that employee expenses weren't reimbursableCates, TC Memo 2017-178

The Tax Court has held that a taxpayer did not prove that she properly rolled over a pension distribution, thatthe pension distribution was used for qualified higher education expenses, or that the employee businessexpenses that she incurred were not subject to reimbursement by her employer.

Financial services CEO was successful in reasonable cause/good faith defense to penaltiesTucker, TC Memo 2017-183

The Tax Court, while denying a loss for offsetting foreign currency options because the underlying optiontransactions lacked economic substance, has concluded that the taxpayer, the CEO of a financial services firm,wasn't liable for an accuracy-related penalty because there was reasonable cause and the taxpayer acted in goodfaith.

District court finds reporting failure wasn't willful so maximum FBAR penalty didn'tapply Bedrosian v. U.S., (DC PA 9/20/2017) 120 AFTR 2d ¶ 2017-5253

A district court has concluded that the taxpayer didn't act wilfully in a case in which IRS attempted to imposedthe maximum 50% penalty on the taxpayer for failing to file a Report of Foreign Bank and Foreign Accounts(FBAR) with regard to his Swiss bank account. Further, the court held that the amount that the taxpayer paid inpartial satisfaction of his allegedly willful FBAR violation was illegally exacted from him, and, accordingly,IRS owed him that amount as a refund.

IRS largely disallows losses claimed by CEO & hedge fund from transferred securitiesPLR 201737011 (TAM)

In a Technical Advice Memorandum (TAM), IRS has determined that the CEO of a self-clearing broker-dealerdidn't realize losses upon the transfer of securities from his personal brokerage accounts to a proprietary trading

page 21

account because the CEO retained the benefits and burdens of ownership of the securities. IRS also determinedthat a partnership/hedge fund of which the CEO served as investment adviser did realize a loss upon the transferof securities to the proprietary trading account because the CEO was not the hedge fund's owner, but theselosses were disallowed in part under the Code Sec. 707(b) controlled partnership loss disallowance rules.

Helicopter pilot in Iraq qualified for foreign earned income exclusionLinde, TC Memo 2017-180

The Tax Court has concluded that a helicopter pilot who was employed in Iraq was entitled to the foreignearned income exclusion for the years at issue. The taxpayer's tax home was in Iraq: his ties to Iraq werestronger than his ties to the U.S., and his acceptance of a long-term assignment in Iraq and his sustainedphysical presence there showed that he was a bona fide resident of Iraq.

IRS failed to show taxpayer exercised nonqualified stock options in year at issuePowers, TC Memo 2017-179

The Tax Court has concluded that a taxpayer did not exercise nonqualified stock options in the year that IRScontended that he did. Accordingly, the taxpayer did not have unreported income in that year from the exerciseof those options.

IRS loses; taxpayer's transferee was not his nominee, fraudulent transferee or alter egoHolland, (DC MI 9/12/2017) 119 AFTR 2d 2017-5771

A district court has ruled against IRS's claim that it had a superior right to interpleaded funds because the courtdid not accept IRS's nominee, fraudulent conveyance, or alter ego theories with respect to the taxpayer's transferof funds to an entity of which he was a 100% owner.

Amount taxpayers received from their corporation was rent and thus not subject to SEtax Martin, (2017) 149 TC No. 12

The Tax Court, reversing its holding in previous similar cases and following the reasoning of the Court ofAppeals for the Eighth Circuit, has held that where a corporation paid its sole shareholders both rent forfarmland and wages for work the shareholders performed on the farmland, the rent was not subject toself-employment tax. A dissenting opinion held that the majority misinterpreted the holding of the EighthCircuit.

Single return isn't a “separate return” for “joint return after separate return” rulesCamara, (2017) 149 TC No. 13

The Tax Court, reversing its holding in previous similar cases and following the reasoning of two CircuitCourts, has held that where a married person files a return with a single filing status, he hasn't filed a “separatereturn” for purposes of Code Sec. 6013(b). That provision allows the filing of a joint return for a tax year afterthe initial filing of a separate return for that year only if certain requirements are met.

Taxpayer's residence was his tax home despite long-standing frequent travel to otherlocation Barrett, TC Memo 2017-195

The Tax Court has held that a self-employed taxpayer's tax home was in Las Vegas because he did most of hisself-employment work from his Las Vegas home and had rental properties in the Las Vegas area, and despitethe fact that he regularly had to go to Washington, DC for his work and rented an apartment there.

page 22

Payments made by divorce attorney to client's ex-spouse weren't deductibleSmiling, TC Memo 2017-196

The Tax Court has held that, where a divorce attorney engaged in a series of transactions with his client that thedivorce court deemed to be attempts to hide some of the client's assets, and the divorce court awarded theclient's husband a claim of right against the attorney, payments made by the attorney to the husband were notdeductible business expenses. The Court also made rulings with respect to the application of the negligencepenalty to those payments and to other deductions taken by the attorney.

District court holds parsonage allowance exclusion unconstitutionalGaylor v. Mnuchin, (DC WI 10/6/2017) 120 AFTR 2d ¶ 2017-5355

A district court has held that the Code Sec. 107(2) exclusion for clergy housing (“parsonage”) allowance isunconstitutional because it violates the Establishment Clause of the U.S. Constitution.

IRA losses are not deductible by IRA ownerFish, (CA 9 10/19/2017) 119 AFTR 2d ¶ 2017-5412

The Court of Appeals for the Ninth Circuit, affirming the Tax Court, has held that losses incurred by apartnership in which the taxpayer's IRA was a partner were not deductible by the taxpayer.

Payment to ex-husband under divorce agreement wasn't a deductible lossMihelick, (DC FL 10/11/2017) 119 AFTR 2d ¶ 2017-5358

A district court has held that a payment a taxpayer made to her ex-husband pursuant to their divorce agreementdid not qualify as a loss under Code Sec. 165(c)(2) and therefore did not qualify for treatment under the claimof right doctrine.

Claims court: costs of getting a PhD can't qualify for education expense deductionCzarnecki, (Ct Fed Cl 10/13/2017) 119 AFTR 2d ¶ 2017-5372

The Court of Federal Claims has held that costs of participating in a PhD program could not qualify for theeducation expense deduction because PhD studies would lead the student to qualify for a new career, i.e., acareer as a university professor. The court also held that the taxpayer failed to show that his PhD studiesmaintained and improved required skills or were required by law.

page 23