Articles

March 1st, 2024

February Federal Tax Updates

Posted in: Tax Law    Tagged: David S. De Jong

INDIVIDUALS

In Turner v. Commissioner, TC Memo 2024-20, the Tax Court held that a grandparent was not eligible to claim head of household status or to receive the earned income credit despite year-round support inasmuch as the grandchild lived with the taxpayer for only two months of the year rather than the required more than one-half of the year.

In Aldridge v. Commissioner, TC Memo 2024-24, the Tax Court concluded that “trust counselors”, convicted of multiple tax crimes, had created a series of trusts that were shams lacking economic substance and, as such, should be disregarded, the Court noting that not a thing changed after creation of the trusts.

In Ecret v. Commissioner, TC Memo 2024-23, the Tax Court agreed with IRS that gross social security benefits had to be reported notwithstanding that a majority were not actually paid due to an offset by worker’s compensation.

In Rojas v. Commissioner, 133 AFTR2d 2024-________, the Ninth Circuit Court of Appeals agreed with the Tax Court that pre-2019 family support payments were not deducible as alimony where the payments terminated upon emancipation of the children notwithstanding that there was no current child support order at the time; in Martino v. Commissioner, TC Memo 2024-18, the Tax Court concluded that pre-2019 payments to a former spouse were not deductible as alimony where a $3 million lump sum obligation was subsequently converted by the court into monthly payments (the instrument plainly specified that payment was for a property settlement and other parts of the agreement provided for alimony).

In Oconee Landing Property LLC v. Commissioner, TC Memo 2024-25, the Tax Court disallowed a deduction for a conservation easement in excess of $20 million where the partnership failed to attach a qualified appraisal to the return, a requirement where the alleged value of donated property exceeds $500,000.

RETIREMENT AND ESTATE PLANNING

In Couturier v. Commissioner, 162 TC No. 4, a divided Tax Court ruled that the 2022 legislation setting a six-year limitations period on imposition of  the penalty for excess contributions to an IRA was not retroactive allowing IRS to assess almost $8.5 million in excise taxes.

In Hubbard v. Commissioner, TC Memo 2024-16, the Tax Court determined that a pharmacist serving a 30-year prison term for distribution of controlled substances was taxable on a forfeiture of his IRA of more than $400,000 notwithstanding that the seizure was involuntary.

BUSINESS

In ACQUIS Technology v. Commissioner, TC Memo 2024-21, the Tax Court agreed with IRS that payments received by a hardware developing and licensing business for settlement of patent infringement were includable in gross income and that an allocation to a purported capital contribution with a reduced settlement amount was a sham despite increased equity reported on the balance sheet, the Court finding no economic substance to the arrangement.

In Thompson v. Commissioner, TC Memo 2024-14, the Tax Court determined that a couple who earned income from both farming and tax preparation had unreported income from both businesses and unprovable deductions for such items as insurance, chicken feed and contract labor. 

In Swift v. Commissioner, TC Memo 2024-13, the Tax Court found that a physician whose entities deducted more than $1 million in premiums and related fees over four years could not deduct payments to captive insurance companies because their premiums were found to be “nonsense…engineered to suit the tax needs of the moment, not to account for any risk”; the premiums were typically 50 times greater than similar commercial policies. 

In Huffman v. Commissioner, TC Memo 2024-12, the Tax Court threw out an option price for stock established between parents and their son as lacking the criteria of being bona fide, not a device and comparable to similar arrangements, finding there was a gift causing in excess of $14 million in tax liability; the Court also determined that an allocation of $21.8 million to personal goodwill on a subsequent sale was overstated (the Government originally said no personal goodwill and at trial conceded that there was $3.9 million as such), making adjustments to the taxpayer’s computations resulting in more liability at the corporate level and a dividend to the owner.

In Generic Legal Advice Memorandum 2024-1, IRS stated that third-party payers who provide and pay employees for other businesses are liable with their client for false claims of the Employee Retention Credit.

PROCEDURE

FinCEN Proposed Regulations would require special record retention and submission of information on most non-financed transfers of residential real property other than to individuals for the purpose of assisting in identifying money laundering.

In United States v. Kelly, 133 AFTR2d 2024-710, the Sixth Circuit Court of Appeals agreed with a Michigan Federal District Court that an anesthesiologist’s failure to file the FBAR report was willful in that he sought no professional advice prior to closing all of his domestic bank accounts and opening one in Switzerland; in United States v. Harrington, 133 AFTR2d 2024-________, a Colorado Federal District Court found that a decedent had willfully failed to file FBARs for four years, holding that reckless failure to file and not just knowing failure to file constitutes willfulness.

In United States v. Gaynor, 133 AFTR2d 2024-716, a Florida Federal District Court jury concluded that a deceased heiress to the Texaco fortune did not willfully evade FBAR reporting for three years where she answered to the negative on Schedule B regarding foreign accounts despite $31 million in a Swiss account and attempted to file back returns and FBARs through a “silent disclosure”.

In United States v. Wolin, 133 AFTR2d 2024-________, a New York Federal District Court determined that it had jurisdiction to enforce collection of the FBAR penalty against a US citizen living in Israel involving distribution of assets to her and a sister without payment of the FBAR assessed against her late father. 

In United States v. Hovnanian, 133 AFTR2d 2024-673, the Third Circuit Court of Appeals agreed with a New Jersey Federal District Court that an individual was equitable owner of a part interest in property where a trust was shown as the legal owner, the decision allowing sale of the property to apply the applicable portion of the proceeds against the outstanding liabilities; in Society of Apostolic Church Ministries v. United States, an Arizona Federal District Court permitted a levy on a bank account owned by a purported religious organization to satisfy the tax liability of an individual where the entity was found to be a nominee of the individual who had transferred the property among a number of entities and enjoyed the benefits of the funds.

In American Guardian Holdings v. United States, 133 AFTR2d 2024-701, an Illinois Federal District Court threw out a $1.2 million claim for refund as being filed late; the taxpayer corporation argued that it was amending a timely claim to correct defects but the Court found that a new issue was raised (the Court noted that IRS could continue to consider the claim but only based on the earlier amended return).

In Kraszewska v. Commissioner, TC Memo 2024-26, the Tax Court found that a former wife had no knowledge of her husband’s overstatement of deductions where he controlled the finances and she was given no opportunity to review the returns prior to signing (the Government had agreed but the former husband “intervened” necessitating a trial); in Hohnstein v. Commissioner, the Tax Court in a bench opinion gave equitable innocent spouse relief to a former wife with limited income and raising two children although she had prepared the joint tax return but was given only two of three W-2s by her husband and did not know that there was a third.

In Cloar v. Commissioner, TC Memo 2024-17, the Tax Court found that IRS was within its discretion in rejecting an Offer in Compromise of $25 against liability of $107,410 where the taxpayer had no real assets but, if he obtained employment similar to prior, he would have a positive monthly cash flow.

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