April 1st, 2023
March Federal Tax Update
In Ahaiwe v. Commissioner, TC Summary Opinion 2023-7, the Tax Court found that the insolvency exception to reporting relief from indebtedness income did not apply when the taxpayer provided only a worksheet with “numbers on a page” and neither testimony nor documentation as to how assets were valued and without independent evidence of the balance of liabilities.
In Herrmann v. Commissioner, in a Bench Opinion, the Tax Court found that an $18,000 payment from Bank of America to the taxpayers was for breach of care as alleged in their Complaint rather than to compensate them for loss of property value and, as such, was taxable to them.
In Roman v. United States, 131 AFTR2d 2023-978, the Federal Circuit Court of Appeals reversed the Court of Federal Claims for jurisdictional reasons and threw out a former husband’s claim for refund of taxes paid on behalf of his ex-wife neither of whom knew that the transfer of an interest in real property for cash pursuant to a marital termination was normally tax free.
In Bass v. Commissioner, TC Memo 2023-41, the Tax Court denied a charitable deduction for clothing by an individual who claimed he made 173 separate trips to Goodwill and the Salvation Army and received a donation acknowledgement receipt for each trip; however, inasmuch as aggregated donations exceeded $5,000, he failed to meet the appraisal requirements for the clothing donations.
In Richey v. Commissioner, TC Memo 2023-43, the Tax Court denied a couple a pre-2018 casualty loss deduction for a vacation home and boat where they failed to prove the damage to either, the value of their losses and the basis in the boat; they also filed no insurance claims related to the losses.
In Phillips v. Commissioner, TC Summary Opinion 2023-10, the Tax Court allowed $878 of employee business expenses out of more than $38,000 claimed for a pre-2018 year where the couple, a minister and a teacher, lacked adequate substantiation.
In Information Release 2023-47, IRS answered “frequently asked questions” regarding preventative health care, maintaining its position that tests and programs for diagnosis and/treatment of a specific disease including obesity are deductible and subject to reimbursement by various programs; the FAQ states that insulin is the only nonprescription drug that is deductible on Schedule A but over the counter drugs and menstrual care products can be reimbursed by a health savings account, medical savings account, medical reimbursement plan or cafeteria plan.
In Letter Ruling 202311001, IRS stated that baby formula available over the counter and by mail that is specifically marketed to protect against a particular illness is not deductible where the baby does not have the illness.
RETIREMENT AND ESTATE PLANNING
In Estate of Block v. Commissioner, TC Memo 2023-30, the Tax Court ruled that steps to reform a trust into a charitable remainder trust in order that the remainder interest be subtracted from gross value failed inasmuch as a reformation with court approval was not executed within the 90-day period following the due date of the estate tax return.
In Estate of MacElhenny v. Commissioner, TC Memo 2023-33, the Tax Court found that an estate could not deduct the value of claims against a decedent when they were actually settled prior to death by his two children who were co-executors, finding that the pair actually received taxable gifts prior to death from discounted purchases of property.
In Revenue Ruling 2023-2, IRS confirmed that assets in a grantor trust are not eligible for a step up in basis at death despite income continuing to be reported by the decedent following the transfer to the trust.
In Amundsen v. Commissioner, TC Memo 2023-26, the Tax Court denied numerous claimed business expenses of a CPA reporting on a Schedule C for lack of adequate substantiation; in McPherson v. Commissioner, in a Bench Opinion, the Tax Court reached the same result in the case of an attorney filing a Schedule C who conceded that he did not keep good records.
In Rowe v. Commissioner, 131 AFTR2d 2023-1093, the Ninth Circuit Court of Appeals agreed with the Tax Court that a taxpayer failed to substantiate and justify alleged business expenses over a two-year period.
In Barrios v. Commissioner, TC Memo 2023-32, the Tax Court denied significant deductions claimed by a welder who provided “scant evidence” of expenses, offering testimony of his accountant and reconstructed books; in Mitchell v. Commissioner, TC Summary Opinion 2023-9, the Tax Court denied mileage deductions due to inconsistencies, alternations and false claims of business travel when they were related to leisure.
In Greatest Common Factor v. Commissioner, TC Memo 2023-39, the Tax Court denied numerous business deductions of a C corporation for lack of substantiation including use of a home office where there was no rental agreement and, in any event, the taxpayer was doing classified work and was not permitted access at home.
In Gross v. United States, 131 AFTR2d 2023-________, the Fifth Circuit Court of Appeals agreed with a Texas Federal District Court that a psychiatrist who fraudulently obtained income from Medicare and pled guilty could not claim a deduction for restitution under any theory as it constituted a penalty paid to the government for a violation of law.
In Anderson v. Commissioner, TC Memo 2023-42, the Tax Court ruled that a physician could not deduct legal fees as a business expense when they related to an arrest for the alleged abuse of a minor.
In Keeton v. Commissioner, TC Memo 2023-35, the Tax Court disallowed flowthrough losses from a partnership for an alleged bad debt found to constitute capital contributions to the “debtor” entity.
In Skolnick v. Commissioner, 131 AFTR2d 2023-________, the Third Circuit Court of Appeals agreed with the Tax Court that a horse farm company that lost more than $3.5 million in four years despite development of multiple business plans was not engaged in the activity for profit when it had been in operation for 12 years.
In Information Release 2023-40, IRS issued a renewed warning as to claiming the Employee Retention Credit and advised that it is auditing and conducting criminal investigations related to false claims.
In Information Release 2023-49, IRS listed mass marketing of the Employee Retention Credit as a “tax scam.”
In Action on Decision 2023-2, IRS announced its nonacquiescence in Complex Media v. Commissioner, at TC Memo 2021-14, which had held that a party to a transaction is bound by the form of a transaction and cannot turn to substance unlike the IRS.
In Letter Ruling 202309007, IRS ruled that water rights held for use in a business or for investment may be swapped in a Section 1031 exchange for a fee interest in real property.
In Chief Counsel Advice 202309015, IRS stated that a taxpayer’s gain on sales of interests in partnerships holding land primarily for sale to customers in the ordinary course of business is ordinary rather than capital in nature.
In Govig & Associates, Inc. v. United States, 131 AFTR2d 2023-________, an Arizona Federal District Court disagreed with the Sixth Circuit Court of Appeals which had held that IRS failed to follow the notice and comment procedures of the Administrative Procedure Act in requiring taxpayers to disclose “listed transactions”, noting that an earlier decision did not apply nationwide.
In Seaview Trading, LLC v. Commissioner, 131 AFTR2d 2023-988, a divided Ninth Circuit Court of Appeals agreed with the Tax Court that filing a return with a Revenue Agent does not constitute a proper filing as the return must be sent to the required destination or must actually end up at that location.
In Libitzky v. United States, 131 AFTR2d 2023-874, a California Federal District Court ruled that a letter from a tax preparer to IRS could not be considered a claim for refund when it made no mention of the applicable year other than setting forth the amount of estimated payments applied from that year to the following year; although informality may be permitted, the Court found that IRS was not fairly advised of the amount of refund or credit claim.
In Prosper v. United States, 131 AFTR2d 2023-________, an Indiana Federal District Court denied a refund to a taxpayer whose preparer stole her refund by diverting it on the instructions to a false account, the Court noting that the taxpayer was apparently cheated but not by the IRS.
In Delgado v. Commissioner, TC Summary Opinion 2023-8, the Tax Court held that a Notice of Deficiency with obvious errors was still a valid notice.
In Techtron Holdings, Inc. v. Commissioner, TC Memo 2023-29, the Tax Court again threw out a Tax Court petition from a corporation which was not in good standing under state law.
In Schwarzbaum v. United States, 131 AFTR2d 2023-________, a Florida Federal District Court on remand from the Eleventh Circuit Court of Appeals ordered an FBAR violator to repatriate assets abroad to satisfy a $17 million liability.
In Summerlin v. Turnage, 131 AFTR2d 2023-1080, a North Carolina Federal District Court agreed with the Bankruptcy Court that North Carolina’s homestead exemption precludes selling a principal residence of a tax debtor, noting the disagreement among the courts; irrespective, the Court had discretion under federal law to prevent sale.
In Mohamed v. Commissioner, TC Summary Opinion 2023-6, the Tax Court denied equitable innocent spouse relief to a former husband who had knowledge of unreported income items of the former wife.
In Program Manager Technical Advice 2023-1, IRS indicated that a nominal claim for refund (such as seeking $1) during the limitations period does not constitute a timely claim for refund as it gives no notice of the amount or nature of the claim.