August 1st, 2023
July Federal Tax Update
In Gomas v. United States, 132 AFTR2d 2023-________, a Florida Federal District Court determined that the victim of a scam in which she withdrew funds from retirement plans in a fraudulent scheme in which her daughter participated still had to report the stolen monies as income inasmuch as she did the withdrawal personally; the Court noted without analysis that a theft deduction was not available for 2019 as the result of the abolition of personal theft losses in the 2017 legislation (the argument to the contrary that retirement plans are in an investment account apparently was not made).
In Ponce v. Commissioner, TC Summary Opinion 2023-23, the Tax Court concluded that a lead plaintiff in a class action who received a “service award” for his role could not exclude the payment from income as a recovery of capital despite lost time from work, the incurring of expenses and the taking of risks.
In Saccato v. Commissioner, TC Memo 2023-96, the Tax Court required an individual to report net rental income as well as gain from the sale of real property despite his arguments that he was not subject to federal income tax as a citizen of the state of Oregon, while also rejecting his claim that the income was reportable by a trust; he could not produce a trust document and was unable to explain at trial who were the trustees and beneficiaries.
In Braen v. Commissioner, TC Memo 2023-85, the Tax Court agreed with the denial of a charitable contribution for property sold to a town for less than fair market value where a portion of the consideration not taken into account was a settlement of longstanding zoning litigation including the right to subdivide.
In Cardulla v. Commissioner, TC Memo 2023-89, the Tax Court limited significantly a deduction for interest paid on raw land which was fully deducted by an attorney but found by the Court to constitute investment interest; the Court denied numerous other deductions for real estate related expenses.
RETIREMENT AND ESTATE PLANNING
In Estate of Demuth v. Commissioner, 132 AFTR2d 2023-5122, the Third Circuit Court of Appeals agreed with the Tax Court that seven uncashed checks that were gifts by the decedent through his power of attorney but uncashed at death were includable in the decedent’s estate as they were not completed gifts under Pennsylvania law; the Court rejected two state law arguments that would have resulted in a completed gift, first that it was not in contemplation of death as annual gifts had previously been made and, second, it did not zero out any account which would have caused the transfers to be treated as an assignment.
In In Re: Langston, 132 AFTR2d 2023-________, a Texas Federal District Court found that a debtor had engaged in a number of prohibited transactions which caused his IRAs to lose exempt status and to become reachable by creditors.
In Notice 2023-54, IRS announced relief in the case of distributions between January 1, 2023 and July 31, 2023 inclusive in the case of a retirement plan participant or account holder born in 1951 or whose surviving spouse and would have had a required minimum distribution except for the change in the Required Beginning Date from age 72 to age 73 including an extension until September 30, 2023 to make a rollover and irrespective of the “once per year” rule in the case of an IRA.
In Ninke v. Commissioner, TC Memo 2023-88, the Tax Court rejected a defense of an individual owning several companies and also working as a driver that his unreported income was attributable to an excludable source as he presented no evidence beyond his testimony (in fact, he presented new evidence at trial of withdrawals from bank accounts not previously known to IRS; in Gobran v. Commissioner, TC Summary Opinion 2023-24, the Tax Court accepted the IRS reconstruction of the income of a sole proprietor tennis instructor who kept no records and was unable to prove errors in the Revenue Agent’s reconstruction.
In Tucker v. Commissioner, TC Memo 2023-87, the Tax Court held that supplies purchased three years before their first usage must be capitalized rather than deducted.
In Maylan, Inc. v. Commissioner, 132 AFTR2d 2023-________, the Third Circuit Court of Appeals agreed with the Tax Court that legal fees incurred in defending against a patent infringement claim may be deducted rather than capitalized even if proximate in time to regulatory approval.
In Allen v. Commissioner, TC Memo 2023-86, the Tax Court concluded that unsecured advances between affiliated companies were not bona fide debts which would have allowed a deduction to the “lender” but rather were loans as there was no serious expectation of repayment.
In Citigroup v. United States, 132 AFTR2d 2023-2228, the US Court of Federal Claims allowed a deduction for worthless intangibles by showing the value of other intangibles acquired in the same transaction and backing out their value.
In Betz v. Commissioner, TC Memo 2023-84, the Tax Court decided that a company engaged in designing and supplying air pollution control systems was not eligible for a research credit in excess of $500,000 as the projects were not representations or models as a whole.
In Chief Counsel Memorandum 2023-5, IRS gave five examples of what constitutes a partial suspension of the operation of a business due to a COVID-related supply chain disruption, allowing the Employee Retention Credit to be claimed only in a portion of one example where business operations of both the subject company and its supplier were suspended.
In Rock Cliff Reserve, LLC v. Commissioner, 161 TC No. ________, the Tax Court concluded that required supervisory approval of penalties was timely obtained where there was no pdf-generated timestamp on the approval forms but no evidence to the contrary and only speculation that the electronic signing was untimely.
In Culp v. Commissioner, 132 AFTR2d 2023-________, the Third Circuit Court of Appeals reversed the Tax Court and determined that the 90-day period for filing a Petition in a deficiency is not jurisdictional and is subject to tolling, meaning good cause exceptions; the decision is only binding on the Tax Court in Pennsylvania, New Jersey and Delaware unless the Tax Court reverses itself.
In Keene-Stevens v. Commissioner, 132 AFTR2d 2023-5042, the Ninth Circuit Court of Appeals reversed the Tax Court and determined that a couple’s failure to file tax returns for two years in which they had flowthrough losses from a TEFRA partnership barred the couple from using the losses to offset a deficiency that was unrelated to the partnership items.
In United States v. Sharpe, 132 AFTR2d 2023-________, the Third Circuit Court of Appeals agreed with a Pennsylvania Federal District Court that service of a suit was proper although the papers were left with a 17 year old son, the Court noting that as long a party received sufficient notice the Rule upholding service is to be liberally construed.
In Goldberg v. Commissioner, 132 AFTR2d 2023-5140, the Seventh Circuit Court of Appeals agreed with the Tax Court that substantive tax issues could not be brought up at a CDP hearing as the taxpayer had the opportunity during TEFRA proceedings to bring up these issues.
In Revenue Procedure 2023-26, IRS stated that taxpayers can request expedited service for their Letter Rulings if they explain their need and the review time that they are seeking as opposed to the standard 12-week period.
In News Release 2023-133, IRS announced that it will end most surprise visits to taxpayers by Revenue (Collection) Officers for safety purposes; the policy change does not extend to the Criminal Investigation Division.
In News Release 2023-135, IRS once again decried the number of questionable claims for the Employee Retention Credit and indicated that it is intensifying compliance work including criminal investigation.