December 1st, 2023
November Federal Tax Updates
In Roman v. Commissioner, TC Memo 2023-142, the Tax Court concluded that $700,000 paid by a landlord to a formerly married couple still living together for vacating their shared apartment was not paid for physical injury despite the poor medical condition of the former husband and that each should be taxed on $350,000 despite the former wife by agreement receiving the entire amount; the Court found that the former wife was not subject to further tax on the added $350,000 that was waived by her former husband, the IRS arguing unsuccessfully that the payment was for her being a caregiver to him after termination of the marriage but she, in fact, was being paid separately by California for providing care.
In Davison v. Commissioner, TC Memo 2023-139, the Tax Court denied a net operating loss carryforward to a couple who failed to be able to prove basis in 15 passthrough entities for which losses had been claimed.
In Carter v. Commissioner, TC Memo 2023-133, the Tax Court concluded that a conservation easement on 500 acres of land in Georgia was worth $1 million and not the $14.1 million claimed, the Court imposing the 40 percent penalty for a gross valuation misstatement.
In Cristea v. Commissioner, in a Bench Opinion, the Tax Court stressed that employee business expenses (in this case, pre-2018) cannot be claimed during periods of unemployment; the Court also disallowed Schedule C and Schedule E expenses related to real estate for a lack of substantiation (IRS failed to make the argument that the taxpayer was not a real estate professional as she did not buy her first property until a subsequent year).
RETIREMENT AND ESTATE PLANNING
In Jadhav v. Commissioner, TC Memo 2023-140, the Tax Court concluded that two sons of a couple owning a business were employees in a year in which they received no W-2s for their research work, the W-2s commencing in the succeeding year, and permitted retirement plan contributions for the sons to be deducted, the Court noting that IRS apparently missed the fact that contributions are tied to paid compensation.
Proposed Regulations under Code Section 170 would create reporting requirements for partners and S corporation shareholders who receive a distributive share of any noncash charitable contributions made by the entity; deductions would be denied if they exceed two and a half times the outside basis of a partner or S corporation shareholder.
Proposed Regulations under Code Sections 267 and 707 conform regulations to changing laws back to 1958 dealing with transactions between partnerships and related persons.
In WY Global Investments LP v. Commissioner, 161 TC No. 11, the Tax Court concluded that a business based in the Cayman Islands was engaged in a US trade or business because its investment manager was in the United States and was the agent for the taxpayer.
In Kouza v. United States, 132 AFTR2d 2023-6360, a Michigan Federal District Court threw out substantial business expenses due to lack of support for expenses shown on a P&L statement, the Court finding no basis for using estimates under the Cohan rule.
In Gao v. Commissioner, in a Bench Opinion, the Tax Court allowed an individual in business to deduct expenses paid personally during the portion of the year that she operated the business as a sole proprietorship but disallowed like expenses following incorporation as they became employee business expenses.
In United States v. Grigsby, 132 AFTR2d 2023-6481, the Fifth Circuit Court of Appeals agreed with a Louisiana Federal District Court that a construction company did not qualify for the research tax credit because it did not create new products or processes and, in any event, the projects were funded and could not qualify.
In Dillon Trust Company LLC v. United States, 132 AFTR2d 2023-6368, the Court of Federal Claims found sellers of stock liable for unpaid corporate taxes as “transferees” where the buyer immediately thereafter sold corporate assets without paying the tax, the Court determining that the sellers had constructive knowledge of the buyer’s fraud.
In Soroban Capital Partners LP v. Commissioner, 161 TC No. 12, the Tax Court interpreted the statutory exception to imposing self-employment tax on a partner which language excludes from SE tax “the distributive share of any item of income or loss of a limited partner, as such”; the Court found the term “as such” to require analysis beyond the nomenclature and to look at the role performed by the individual (in this case three partners received significant guaranteed payments for services on which self-employment tax was reported but the SE tax was not applied to their flow-through income).
In Shapiro v. Commissioner, TC Memo 2023-144, the Tax Court determined that the disability of an orthopedic surgeon resulting in cessation of his practice coupled with a divorce were insufficient grounds for failure to pay taxes when he had the funds and was holding them as a reserve in anticipation of diminished income.
In United States v. Burga, 132 AFTR2d 2023-________, a California Federal District Court concluded that a widow had become aware of most foreign bank accounts established by her late husband and could no longer use his influence or abuse as a defense to willfulness.
In Sall v. Commissioner, 161 TC No. 13, the Tax Court held that, when the last day for filing a petition was shown as the day after Thanksgiving, there was a 14-day extension due to inaccessibility rather than an extension to just the next business day on account of a legal holiday.
In Sanders v. Commissioner, 161 TC No. 8, the Tax Court again unanimously held that the 90-day deadline for filing a petition following a Notice of Deficiency is absolute (outside of the Third Circuit which has disagreed), unlike the 30-day period for CDP appeals where exceptions may lie for good cause.
In Notice 2023-74, IRS postponed for two years the required reporting by e-commerce platform customers with business transactions of more than $600; the current $20,000 in gross payments / 200 transactions remains in effect for 2024 and a $5,000 threshold applies for 2025.
In IRS Policy Statement 8-47, IRS set forth the guidelines under which Appeals can settle a case; the guidelines specifically prevent Appeals from disposing of a case based on the “nuisance value” to either party.
In Beneficial Ownership Information Reporting FAQs, IRS provided an updated 28-page Q&A on questions related to beneficial ownership for purpose of the new FinCen rules taking effect in 2024.