Current developments in taxation of individuals

By David R. Baldwin, CPA; Katie Bowles, CPA; Christina Figueroa, CPA; Mary Kay Foss, CPA; Shannon Hudson, CPA; David H. Kirk, CPA/PFS; Michael Levy, CPA; Dana McCartney, CPA; Darren Neuschwander, CPA; and Robert Tobey, CPA



  • Among other notable developments in individual taxation in the six months ending December 2021, courts in several cases again were required to determine if taxpayers claiming a theft loss met the requirements of Sec. 165, including whether a theft occurred under state law.
  • With respect to the exclusion of 2020 unemployment compensation benefits from income, the IRS issued guidance addressing when taxpayers should file an amended return because the excluded amounts make them eligible for deductions or credits that were not claimed on their original return.
  • The IRS released an updated audit guide relating to hobby losses.
  • In a case involving retirement funds invested in gold and silver coins, the Tax Court held that a taxable distribution occurred when the IRA owner took physical possession of the coins.
  • The Tax Court ruled that settlement proceeds a taxpayer received from a malpractice lawsuit against a divorce attorney were gross income, rejecting the taxpayer's argument that these were a nontaxable return of marital estate property.
  • Other recent cases dealt with the earned income tax credit, cancellation-of-debt income, the alimony deduction, rollovers of IRAs, and the advance premium tax credit, among other matters.

This semiannual update surveys recent federal tax developments involving individuals. It summarizes notable cases, rulings, and guidance on a variety of topics issued during the six months ending December 2021. The update was written by members of the AICPA Individual & Self-Employed Tax Technical Resource Panel. The items are arranged in Code section order.

Sec. 24: Child tax credit

The IRS updated its frequently asked questions (FAQs) regarding the child tax credit,1 listing all prior FAQs by date issued as well as adding new ones dated Oct. 4, 2021, and Nov. 8, 2021. The IRS explained that FAQs will not be relied on by the IRS to resolve a case because they are not published in the Internal Revenue Bulletin, but a taxpayer who reasonably relies on the FAQs will have a defense to penalties. One of the latest FAQs as of this writing is Q-A17, which explains the procedure for updating the IRS when 2021 income will be significantly different from 2020's.

Sec. 32: Earned income tax credit

In Griffin,2the Tax Court allowed an aunt to claim the earned income tax credit (EITC) for her niece and two nephews. The court went through the requirements for dependency and determined that each of the children was a qualifying child, then looked at the tests for the child tax credit and the EITC. The IRS had disallowed the credits because the children resided at times with their father and the aunt did not meet the residency requirement. The court found that the evidence, including the testimony of the aunt, showed the children stayed with the aunt at her home more than half of the tax year.

Sec. 36B: Refundable credit for coverage under a qualified health plan

Household income for advance premium tax credit (APTC): In Knox,3the taxpayers omitted Form 8962, Premium Tax Credit, to reconcile payments of the APTC. Their income included lump-sum Social Security benefits from two prior years, and they elected under Sec. 86(e) to limit the amount they included in gross income to the sum of the increases in gross income that would have resulted if the income had been taken into account in the prior tax years to which it was attributable. The Tax Court, following its decisions in Johnson4 and other prior cases, found that the Sec. 86(e) election does not reduce modified adjusted gross income (MAGI) for the APTC. In the taxpayers' case, including the lump-sum Social Security payments attributable in the prior years put them over 400% of the federal poverty line, and thus the taxpayers were required to repay the excess credits they received.

Constitutionality: In Amburgey,5the taxpayers were relying on the Texas6 case that held the Patient Protection and Affordable Care Act7 unconstitutional, to excuse them from having to pay back the APTC they had received. The Tax Court found that the Fifth Circuit's reasoning in Texas did not apply in the taxpayer's case and further that the judgment of the Fifth Circuit in that case was vacated by the U.S. Supreme Court in June 2021.8 Thus, because their adjusted gross income (AGI) was more than 400% of the federal poverty line, the taxpayers had to pay back the APTC of over $15,000.

Failure to maintain essential health care coverage:An attorney sued both the Treasury Department and Treasury Secretary Janet Yellen on the basis that the government does not have the power to require citizens to pay a tax if they do not have essential health care coverage. The Second Circuit affirmed a New York district court in saying that the plaintiff lacked standing to sue. He failed to demonstrate that he had suffered a legal injury because he actually had essential health care coverage and failed to show how he would be penalized for failing to disclose the coverage to the IRS on his return.9

Sec. 61: Gross income defined

2020 unemployment benefits exclusion: After announcing the plan in a June 2021 news release,10 the IRS sent more than 8.7 million refunds to identified taxpayers who had paid taxes on unemployment compensation that, under the American Rescue Plan Act (ARPA),11 was excluded from income.

In addition to screening returns to identify those eligible to exclude up to $10,200 of unemployment compensation benefits, the IRS also identified and corrected returns that would be eligible for the EITC, premium tax credit, and recovery rebate credit based upon excluding up to $10,200 of the allotted unemployment income. For further discussion of this topic, see Sec. 85, below.

Unreported income — settlements of attorney malpractice: In Holliday12 (also discussed below under Sec. 1041), the Tax Court upheld the IRS's determination that the petitioner failed to report income received from a lawsuit settlement, which, in fact, was related to a second lawsuit. One of the petitioner's two lawsuits was related to her divorce and the other was a malpractice lawsuit against her divorce attorney.

The petitioner's former spouse filed for divorce in March 2010. As part of the divorce proceedings, the petitioner participated in, and settled through, a mediation process. During the mediation process, the petitioner objected to the mediated settlement agreement; however, her objections were not sustained by the divorce court. In May 2012, following the agreed final decree that was entered in April 2012, the taxpayer's attorney filed for a new trial requesting an additional settlement, stating that she received less than her equal share. The motion for a new trial was denied, and the taxpayer's attorney was supposed to file for an appeal but failed to do so.

In October 2013, the taxpayer filed a malpractice lawsuit against her divorce attorney, accusing him of negligence and gross negligence and seeking, among other things, damages for "pecuniary and compensatory losses," including "damages for the past and future mental anguish, suffering, stress, anxiety, humiliation, and loss of ability to enjoy life." In October 2014, the defendant and her divorce lawyer entered into a settlement agreement of $175,000. Of this amount, the taxpayer's malpractice attorney scooped up $73,500.

Upon filing her 2014 Form 1040, U.S. Individual Income Tax Return, the taxpayer reported no "Other income" on line 21. In a "Line 21 statement" she listed the $101,500 of settlement income from the malpractice suit but offset the income by subtracting the same amount with the description "Misclassification of lawsuit recovery of marital assets." The IRS issued a notice of deficiency for tax on $101,500 but later amended the claim for tax on the entire $175,000.

The taxpayer argued that the settlement proceeds were a nontaxable return of capital because they compensated her for the portion of her marital estate that she "was rightfully and legally entitled to, but did not receive, due to the legal malpractice of" her divorce attorney. The IRS argued and the Tax Court agreed that the settlement proceeds were clearly from a settlement agreement in lieu of damages for legal malpractice and were, therefore, taxable. In addition, the income to be included was to be grossed up by the legal fee that her malpractice attorney was paid, and such legal fee was to be deducted on Schedule A, Itemized Deductions, not netted against the settlement proceeds received.

Wages — frivolous claims sanctions: In Muhammad,13 the Tax Court upheld the IRS's determination that the petitioner incorrectly and frivolously excluded her wages from her Form 1040.

During 2016, the petitioner was employed by a university and earned wages in the amount of $48,535. In addition to her wages, she had a federal income tax of $1,770, Social Security tax of $3,009, and Medicare tax of $703. The wages and all withholdings were reported on Form W-2, Wage and Tax Statement.

The petitioner filed a Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents, for the 2016 tax year, at which point she did not include the Form W-2 with her return and instead filed a Form 4852, Substitute for Form W-2, Wage and Tax Statement, reporting $0 wages and all the listed withholding, ultimately resulting in a refund of all withholding, less the $2 tax liability she reported on her tax return.

The petitioner received a deficiency notice in which the IRS adjusted her income to include all of her wage income, resulting in a tax deficiency, and imposed an accuracy-related penalty. The taxpayer challenged the IRS's determinations in Tax Court arguing that the income she received was not categorized or taxed as "wages" since she did not engage in the "exercise of Federal privileges."

Noting that this was a timeworn tax protester argument relying on a misreading of Sec. 3401(c), which no court had ever accepted, the court upheld the IRS's determinations. Because the argument was frivolous, and the court had repeatedly informed the taxpayer that it was, the Tax Court concluded that a Sec. 6673 frivolous position penalty was appropriate. However, because the taxpayer testified that she was unemployed and the Sec. 6673 penalty would cause her hardship, the Tax Court imposed a penalty of only $250.

Secs. 67 and 212: 2% floor on miscellaneous itemized deductions

In Monroe,14 the court dealt with an unusual situation where the taxpayer, who worked in car sales, received W-2 commissions from his employer for the sale of automobiles and additionally received incentive payments from the car manufacturer. The manufacturer issued a Form 1099-MISC, Miscellaneous Income, for the incentive payments. The taxpayer reported the 2014 and 2015 incentive payments on Schedule C, Profit or Loss From Business, and deducted related expenses incurred related to marketing to increase his car sales.

The IRS contended that the incentive payments were not self-employment income and that any related expenses were miscellaneous itemized expenses deductible on Schedule A. The court agreed with the Service, based upon Groetzinger,15 that not every income-producing or profit-making endeavor constitutes a trade or business. Here, the incentive payments were not trade or business income but rather were reportable as "other income" not subject to self-employment tax, since the IRS stipulated that the income was not self-employment income.

Since the income was not Schedule C income, the expenses incurred were unreimbursed employment-related expenses and/or expenses incurred in the production or collection of income and thus were deductible as miscellaneous itemized deductions on Schedule A to the extent that the expenses were substantiated.

Notable on the substantiation issue was that the taxpayer used a phone app for tracking mileage that allowed him to generate a mileage log that included: (1) the date; (2) the time the travel was initiated; (3) a description of the activity, such as delivering flyers; (4) a purpose, which was listed as a business; (5) "from," which was always home; (6) "to," which was a generic description of the locations where he placed the flyers; (7) a beginning odometer reading; (8) an ending odometer reading; and (9) a mileage calculation. The court accepted the reports from the app as contemporaneous mileage logs.

Sec. 85: Unemployment compensation

Unemployment benefits — special rule for 2020: In 2021, the IRS sent millions of refunds to identified taxpayers who had paid taxes on unemployment compensation benefits that, under ARPA, were excluded from income. The situation arose because, by the time ARPA was enacted in March 2021, some taxpayers had already filed 2020 tax returns including the unemployment benefits, or else did so afterward.

Under ARPA, taxpayers who earned less than $150,000 in MAGI were permitted to exclude from 2020 income unemployment compensation up to $20,400 (for married taxpayers filing jointly) and $10,200 for all other taxpayers. In a July 2021 news release,16 the IRS specified that while the refunds are automatic, there are several scenarios where taxpayers might need to file amended returns because they would now be eligible for deductions or credits that were not claimed on their original return.

Situations in which taxpayers should file an amended return because they are now eligible after the unemployment compensation exclusion include:

  • They did not submit a Schedule 8812, Additional Child Tax Credit, with the original return to claim the additional child tax credit and are now eligible for the credit after the unemployment compensation exclusion; and
  • They did not submit a Schedule EIC, Earned Income Credit, with the original return to claim the EITC (with qualifying dependents) and are now eligible for the credit after the unemployment compensation exclusion.
Sec. 108: Income from discharge of indebtedness

In Hussey,17 the Tax Court considered a situation where the discharge of qualified real property business indebtedness (QRPBI) applied to reduce the basis of depreciable real property in the same year that certain properties were sold. In 2012, the taxpayer sold 16 investment properties (selling 15 of them short) and received from the mortgage lender a discharge of indebtedness totaling $754,054 for 15 of those properties. In 2013, the taxpayer short sold another seven investment properties but did not receive from the lender a discharge of indebtedness relating to those sales. The taxpayer and the IRS disputed how provisions relating to the timing of the basis adjustment for discharge of QRPBI in Secs. 108 and 1017 apply; whether the lending bank discharged any of the taxpayer's debt in 2013; and whether the taxpayer was liable for accuracy-related penalties.

The court held that, although the basis reduction generally occurs in the year following the discharge of indebtedness, under an exception to the rule in Sec. 1017(b)(3)(F)(iii), the basis reduction for discharge of QRPBI occurs in the same year as the sale for "property taken into account under Sec. 108(c)(2)(B)." The Tax Court found that this rule applied to the properties the taxpayer short sold in 2012, and thus the basis in those 15 properties sold must be reduced in 2012. The court, however, also found that the taxpayer had no additional debt discharge in 2013. It further held that he was not liable for accuracy-related penalties because he relied in good faith on professional tax advice in preparing his returns for those years.

In Kelly,18 one of the issues in the case was whether the taxpayer had taxable cancellation-of-debt (COD) income or if he was insolvent such that the discharge of indebtedness was not includible in his gross income under Sec. 108(a)(1)(B). The court held that the taxpayer's insolvency computation required the elimination of loans to him from his closely held companies. As a result, the court found that his COD income was overstated and the parties were to recompute the insolvency amount.

Sec. 121: Exclusion of gain from sale of principal residence

In Forte,19 the U.S. district court in Utah denied the taxpayers' motions for summary judgment relating to their sales of residences in 2005 and 2007. The issues before the court in these motions were: (1) whether the Fortes were entitled to exclude from their gross income part of the gain from the 2007 sale of their home; and (2) whether the Fortes were entitled to reduce the amount of taxable gain realized on the 2005 sale of a different home by the amount paid for furnishings that were sold with the home. The court denied the motion on the first issue because it found that there were genuine issues of material fact regarding whether the couple's sale of their home was due to unforeseen circumstances, which would entitle them to a partial exclusion from income from the sale, and denied the second motion because it found that they had failed to cite any authority that they were entitled to reduce the gain on the sale of another home for furniture sold with the home.

Sec. 130: Certain personal injury liability assignments

In IRS Letter Ruling 202127039, the IRS was asked to rule on (1) whether a specific assignment agreement relating to periodic payments of damages to an injured individual due to medical malpractice at birth is a qualified assignment under Sec. 130(c); and (2) whether an annuity used to fund it was a qualified funding asset under Sec. 130(d). The IRS ruled that the structured settlement is a qualified assignment under Sec. 130(c) because the payments are fixed and determinable and that an annuity purchased to fund the payments is a qualified funding asset.

Sec. 165: Losses

Theft losses: The courts in several cases again were required to determine if taxpayers claiming a theft loss met the requirements of Sec. 165, including whether a theft occurred under state law.

In Smith,20 the taxpayers claimed a theft loss for an investment in a mortgage company. The taxpayers relied on Rev. Proc. 2009-20, which generally applies to Ponzi schemes, but the court found that the revenue procedure did not apply because the mortgage company was not a Ponzi scheme, the CEO of the company was not charged with fraud, and the taxpayers had not invested directly in the company. The taxpayers continued to invest even though financial records showed that the company was losing money. Also, the taxpayers did not establish that the transaction would be considered theft under Illinois law, the state where it occurred, in addition to meeting the requirements of Sec. 165. The investment was made through corporate entities, and they could not show that any loss was theirs to claim. The IRS was granted summary judgment.

A small partial victory occurred in the Vennes case.21 Frank E. Vennes Jr., a former felon, met Thomas Petters, a well-known businessperson. Although Vennes was not wealthy, he loaned Petters $300,000 and assisted him with a business venture by finding additional investors for PCI, Petter's company. The investors would invest in notes with PCI and receive above-market interest payments. Vennes created an S corporation to invest in PCI. He interested another pair of individuals in PCI. They created two limited partnerships to invest in PCI, and the Vennes S corporation invested in PCI as a limited partner in those partnerships as well.

In 2008, it came out that Petters was running a Ponzi scheme through PCI. The S corporation was owed $130 million by PCI at that time. The taxpayer computed his tax loss relying on Rev. Proc. 2009-20, which provides an optional safe harbor that qualified investors can use to deduct qualified theft losses from a specified fraudulent arrangement. Although the Tax Court indicated that it is not bound by revenue procedures, it applied Rev. Proc. 2009-20. It found that the taxpayer did not meet all the requirements of Rev. Proc. 2009-20 with respect to the S corporation (failing to meet the qualified investor and qualified investment requirements) but did meet all of its requirements with respect to the partnerships. Thus, under the revenue procedure, the taxpayer could deduct the losses passed through by the partnerships but not the losses passed through by the S corporation.

Demolition loss: In Parker,22 the Tax Court held that taxpayers could not deduct a loss under Sec. 165 for demolition of a building. The loss was originally claimed on Schedule E, Supplemental Income and Loss, as repairs in 2015. Vandals lit a fire in 2014 in a building acquired by the taxpayers. The building was never rented, and the taxpayers paid to have it demolished in 2015. The court held that Sec. 165 did not apply and that Sec. 280B required the cost of demolition to be added to the basis of the land.

Loss of income: Another taxpayer tried to stretch the scope of Sec. 165 even further.23 Mark Staples retired as a federal employee due to disability. In addition to his federal disability pension, he qualified for Social Security disability. His federal disability pension was reduced by a large portion of the Social Security disability payments. Because a loss of income does not seem to qualify as a Sec. 165 loss, Staples likened it to a gambling loss, which is deductible under Sec. 165. The Tax Court denied his theory in 2020, and the Tenth Circuit affirmed in 2021.

Casualty losses after TCJA: The Treasury Inspector General for Tax Administration (TIGTA) examined IRS procedures for casualty losses after Sec. 165 amendments by the 2017 law known as the Tax Cuts and Jobs Act (TCJA).24 The TCJA limited personal casualty and theft losses for 2018—2025 to those arising from a federally declared disaster. Affected taxpayers were to enter their Federal Emergency Management Agency (FEMA) number on the Form 4684, Casualties and Thefts, attached to their return to claim the loss. A TIGTA examination25 showed that IRS procedures in connection with these losses were not adequate to find errors. A review of 2019 returns claiming casualty losses indicated that 35% gave no FEMA number or an incorrect FEMA number. Those returns claimed $309 million in casualty losses that TIGTA indicates resulted in over $40 million of underpaid tax. Existing IRS procedure indicates that only 2.4% of those returns are likely to be examined. The IRS did not agree with all of the TIGTA recommendations but did agree to review 12,075 of the returns that TIGTA identified.

Sec. 183: Hobby loss

On Sept. 7, 2021, the IRS released an updated audit guide relating to hobby losses: Publication 5558, IRS Audit Technique Guide: Activities Not Engaged in for Profit — Internal Revenue Code Section 183. The publication was last revised in 2009.

Sec. 212: Expenses for production of income

In Ray,26 the Tax Court determined that the taxpayer was entitled to deduct certain legal fees he incurred in lawsuits to recover losses under a commodities trading agreement that he had entered into with his ex-wife, who was a finance professional. Under the agreement, she had agreed to manage his trading account. The Fifth Circuit upheld the Tax Court's determination, finding that under the origin-of-the-claim doctrine the deductions did not relate to the taxpayer's engagement in a trade or business for purposes of Sec. 162.

Sec. 213: Medical, dental, and other expenses

In separate IRS news releases, IR-2021-66 (March 26, 2021) and IR-2021-181 (Sept. 10, 2021), the Service ruled that expenses incurred when purchasing personal protective equipment to prevent the spread of COVID-19 and expenses incurred for home testing are considered medical expenses and are deductible if the taxpayer's qualified medical expenses exceed 7.5% of AGI. As qualified medical expenses, these are also eligible to be paid or reimbursed under various flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and health spending accounts (HSAs).

According to IRS Letter Ruling 202114001, a male same-sex couple's medical costs and fees related to egg donation, in vitro fertilization procedures, and gestational surrogacy did not qualify as deductible medical expenses. However, medical costs and fees directly attributable to the taxpayers, including sperm donation and freezing, were deductible.

Sec. 215: Alimony

In Leyh,27 the taxpayer was entitled to an alimony deduction for amounts paid, via payroll deductions, from wages through the employer's cafeteria plan, to pay for his then-spouse's health insurance pursuant to a pre-2019 separation agreement. The Tax Court found that allowing the husband an alimony deduction, when he and his spouse filed married filing separately, did not result in an impermissible double deduction under the matching design of the alimony regime. The taxpayer's alimony deduction should be properly viewed as being matched against his former spouse's alimony income, not against his excluded wage income.

Secs. 262 and Sec. 280F: Personal, living, and family expenses

In Warque,28 the Tax Court denied an IRS agent's deductions for unreimbursed employee business expenses. Paul Warque lived in Nevada but worked in the Laguna Niguel, Calif., IRS examination office. He deducted his travel expenses as unreimbursed employee business expenses. Travel expenses may be deducted under Sec. 162(a)(2) (including the use of "listed property" as defined in Sec. 280F(d)(4) and including passenger automobiles) if they are ordinary and necessary and if incurred while away from home and in the pursuit of a trade or business. The key issue here was the location of his "home." The Tax Court found that the taxpayer's tax home was in Laguna Niguel, noting that he rented a room near there and that his position was not temporary. The court concluded that his commuting expenses for travel between his rented room and his place of business were nondeductible under Sec. 262. Other employee business expense deductions related to clothing and personal care items were also determined to be personal expenses and not deductible under Sec. 262(a).

Sec. 401: Qualified pension, profit-sharing, and stock bonus plans

Transfer of IRA assets to trust: The IRS issued a private letter ruling to family members with complicated IRA assets. In IRS Letter Ruling 202140011, the decedent named his trust as the beneficiary of his personal IRA and the IRA he inherited from his brother. The beneficiary trust was allowed to use trustee-to-trustee transfers so that each child of the decedent received interest in two trusts. One trust would list the name of the father's trust and the name of the trust for that particular child; required minimum distributions (RMDs) would be based upon the life expectancy of the oldest of the decedent's children. The other trust would list the uncle's name and the name of the trust for that particular child; RMDs would be based on the decedent's remaining life expectancy as determined when he inherited his brother's IRA. The ruling made clear that this result was not affected by the change to inherited IRAs enacted in the SECURE Act29 because the death occurred before 2020, before the applicability date of the SECURE Act amendments.

Earned income: A 2021 case looked at the definition of earned income for purposes of making a contribution to a retirement plan.30 Gayle Gaston was receiving deferred compensation as a successful representative of Mary Kay Inc. after her mandatory retirement age. The income was subject to self-employment tax. In addition, she operated businesses selling products and acting. The IRS treated the retail businesses as not engaged in for profit under Sec. 183 and treated the deferred compensation as retirement income.

To deduct a retirement contribution, a self-employed person must have income from personal services. The Tax Court held that the retirement contribution deductions were not allowed because they were not based on current services. The acting activity was held to be a business, but it was not generating income to sustain a retirement contribution.

Sec. 408: Individual retirement accounts

Reporting UBTI from retirement account: The IRS responded to a letter from a taxpayer disputing the method his IRA custodian was using to report certain income. The income was unrelated business taxable income (UBTI) from the master limited partnerships that his self-directed IRA was invested in. In INFO 2021-0020, the IRS directed the taxpayer to IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.

Coins held by owner as taxable distributions: In McNulty,31 a case involving a married couple who invested retirement funds in gold and silver coins, the Tax Court held that a taxable distribution occurred when the IRA owner took physical possession of the coins.

Donna McNulty caused a single-member LLC to be created by her self-directed IRA by using the services of Check Book IRA LLC, which advertised on a website that an IRA could invest in American Eagle coins if the coins were titled in a limited liability company (LLC). Kingdom Trust was the IRA custodian and requested the value of the IRA each year in order to complete Form 5498, IRA Contribution Information, for the IRA. Gold and silver coins were purchased by the IRA's LLC at three different dates. The coins were delivered to the McNulty residence either addressed to the LLC or to Donna McNulty. The coins were kept in a safe along with coins owned by husband Andrew McNulty's IRA and personally owned coins.

Sec. 408 requires that each IRA have a trustee that is a bank or other person that meets requirements set out in the regulations. The trustee is required to keep adequate records and, if assets need safekeeping, they must be deposited in an "adequate vault." The IRS contended that Mrs. McNulty's receipt of the coins was a taxable distribution to her, but she contended that they were the property of the LLC (that she managed) and not a personal asset. She also contended that only bullion, not coins, need to be in the physical possession of a trustee, citing Sec. 408(m)(3).

The Tax Court rejected McNulty's arguments and held that she had received a taxable distribution from her IRA when she received the coins. The court also upheld the IRS's imposition of accuracy-related penalties. McNulty contended she had reasonable cause for her position because she had relied on the information provided on Check Book IRA's website. The court found that she did not have reasonable cause because the website's claims that the coins could be handled the way she did should have been interpreted as advertising and not as a professional opinion.

Rollover allowed after 60 days: The flood of ruling requests to waive the 60-day rollover requirement has pretty much stopped since the IRS issued Rev. Proc. 2016-47 (updated by Rev. Proc. 2020-46), which allows a taxpayer to certify that the rollover delay was due to a valid reason. A situation not contemplated in the revenue procedures occurred in IRS Letter Ruling 202134019. The taxpayer relied on her investment adviser to open an IRA specifically to invest in one company's stock. The investment was accomplished, but 11 days later the IRA custodian resigned and threatened to distribute the shares of stock if another custodian was not found within 30 days. The taxpayer found another financial institution to serve as custodian of an IRA that would hold the stock and completed the paperwork to open the new IRA before the 30 days had elapsed. She expected that the investment adviser would handle the transfer of shares from the old IRA to the new IRA. About six months later she was notified by the custodian of the new IRA that the shares had not arrived, and they were unsuccessful in several attempts to reach the investment adviser. The ruling allowed an additional 60 days to transfer the stock to the new custodian tax-free.

Sec. 408A: Roth IRAs

Tax Court reversed: In 2018, the full Tax Court had agreed with the IRS that three members of the Mazzei family owed excise taxes for excess contributions to Roth IRAs made using a foreign sales corporation (FSC) that dealt with their family business.32 The individuals caused their Roth IRAs to invest in FSCs that received commissions from their business and then paid dividends to the Roth IRAs. Although the FSC legislation has now been repealed, it was similar to domestic international sales corporation (DISC) legislation that other taxpayers had used to enlarge their Roth IRAs by untaxed corporate profits.

In 2021, the Ninth Circuit reversed the Tax Court to hold that the FSC arrangement did not result in excess contributions to the Roth IRAs of the family members.33 The court found support for its decision in Summa Holdings34 and Benenson.35 The court indicated that this outcome was "the inescapable logical consequence of what Congress has plainly authorized."36

Spousal rollover of Roth IRA: If a spousal rollover is desired, the spouse should be named as a beneficiary, but that does not always happen. Relief was given in IRS Letter Ruling 202136004 where a trust was named as beneficiary of the decedent's Roth IRA. The surviving spouse was the trustee of the beneficiary trust and sole beneficiary. She requested a ruling that she be allowed to roll over the Roth IRA into one in her own name. A Roth IRA normally has no RMDs except at the death of the owner. The spouse also requested that no RMDs be required from the decedent's Roth in connection with the rollover and that no further RMDs be required during her lifetime. A favorable letter ruling was issued.

Sec. 469: Substantiation of material participation requirements

In Ryder,37 the court upheld the IRS's findings that the taxpayers had losses in the years 2002—2011 that were not deductible against other income of the taxpayer related to their ranching businesses. The taxpayers had a large complex business structure incorporating multiple S corporations, employee stock ownership plans, and LLCs, which generated operating losses. Their business also marketed various tax strategies, which the court detailed in its 190-page opinion. The losses from the ranching LLCs were disallowed because of their failure to provide adequate substantiation of material participation.

Sec. 1041: Transfers of property between spouses or incident to divorce

The Tax Court in Holliday38 (also discussed above under Sec. 61), held that the taxpayer's $175,000 malpractice settlement from her divorce attorney was gross income. In 2014, the taxpayer and her divorce attorney settled for $175,000 her claims that he committed malpractice by, among other things, telling her he would file an appeal but failing to do so. The taxpayer's malpractice attorney, who received the $175,000 settlement payment, deducted his $73,500 fee, remitted to the taxpayer $101,500, and reported this amount on a Form 1099-MISC. The taxpayer reported the $101,500 as income on her 2014 Form 1040, along with a corresponding subtraction on line 21, described as "misclassification of lawsuit recovery of marital assets." The IRS issued a notice of deficiency for tax on $101,500 but later amended the claim for tax on the entire $175,000.

The taxpayer argued that the settlement proceeds were a nontaxable return of capital because they compensated her for the portion of her marital estate that she "was rightfully and legally entitled to, but did not receive, due to the legal malpractice of" her divorce attorney. The IRS argued and the Tax Court agreed that the settlement proceeds were clearly from a settlement agreement in lieu of damages for legal malpractice and were, therefore, taxable. In addition, the income to be included was to be grossed up by the legal fee that her malpractice attorney was paid.

Sec. 1235: Sale or exchange of patents

In Filler,39 the Tax Court determined $100,000 of income reported as a long-term capital gain was ordinary income. The taxpayer received $100,000 from a corporation he controlled in exchange for substantially all the rights in a patent he held. The taxpayer took numerous routes in arguing that this income should be treated as a long-term capital gain. None were successful.

The court found that the taxpayer transferred the patent to a related party. Therefore, gain on the sale of the patent is not eligible for capital gain treatment under Sec. 1235(d). As the gain is not long-term capital gain under this section, whether it is such is addressed in Secs. 1222(3) and 1231(b).

After reviewing how the taxpayer acquired the patent, what rights in it he possessed, and how long he held it, the court determined the income from his exchanging the rights to it to a corporation he controlled was not entitled to Sec. 1235 treatment, nor was it eligible for capital gain treatment under Sec. 1222(3) or Sec. 1231(b)(1).

Sec. 1401: Self-employment tax

Social Security wage cap and benefit amounts increase: The Social Security wage base for 2022 is $147,000. Social Security and Supplemental Security Income (SSI) benefits were increased by 5.9%.

Guidance on reporting qualified wages: The IRS and Treasury require certain employers to report to employees the amount of qualified leave wages paid to the employees for leave provided during the period from Jan. 1, 2021, to Sept. 30, 2021. Those employers should report the amount of qualified leave wages to employees either on Form W-2, box 14, "Other," or in a separate statement provided with Form W-2.40

Sec. 1411: Net investment income tax and foreign tax credits

InToulouse,41 the taxpayer offset net investment income tax of $63,632 under Sec. 1411 by foreign tax credits on her 2013 individual tax return. The taxpayer was a U.S. citizen residing overseas and had large foreign tax credit carryovers from France and Italy. The taxpayer argued provisions in the United States—France (Article 24(2)(a)) and United States—Italy (Article 23(2)(a)) income tax treaties entitled her to a foreign tax credit. She disclosed this by attaching to her tax return Form 8833, Treaty-Based Return Position Disclosure, and Form 8275, Disclosure Statement. The taxpayer's position was that the treaties with the two countries have provisions for the avoidance of double taxation. The Tax Court granted summary judgment upholding the IRS's position, finding that the treaties provide general protection but not absolute protection from double taxation. In the situation here, the foreign tax credit applies to income tax under Chapter 1, not the investment income tax of Sec. 1411 under Chapter 2. She could not use foreign tax credits to offset her net investment income tax.


12021 Child Tax Credit and Advance Child Tax Credit Payments Frequently Asked Questions.

2Griffin, T.C. Summ. 2021-26.

3Knox, T.C. Memo. 2021-126.

4Johnson, 152 T.C. 121 (2019).

5Amburgey, T.C. Memo. 2021-124.

6Texas, 945 F.3d 355 (5th Cir. 2019).

7Patient Protection and Affordable Care Act, P.L. 111-148.

8California v. Texas, No. 19-840 (U.S. 6/17/21).

9Bank, No. 19-3977 (2d Cir. 10/29/21).

10IR-2021-123 (June 4, 2021); see also IR-2021-159 (July 28, 2021).

11American Rescue Plan Act, P.L. 117-2.

12Holliday, T.C. Memo. 2021-69.

13Muhammad, T.C. Memo. 2021-77.

14Monroe, T.C. Summ. 2021-24.

15Groetzinger, 480 U.S. 23, 35 (1987).

16IR-2021-159 (July 28, 2021).

17Hussey, 156 T.C. 170 (2021).

18Kelly, T.C. Memo. 2021-76.

19Forte, No. 2:18-cv-00200 (D. Utah 6/21/21).

20Smith, No. 19-14222 (S.D. Fla. 10/14/21).

21Vennes, T.C. Memo. 2021-93.

22Parker, T.C. Memo. 2021-111.

23Staples, No. 20-9006 (10th Cir. 6/15/21), aff'g T.C. Memo. 2020-34.

24P.L. 115-97.

25TIGTA Rep't No. 2021-40-045 (7/14/21).

26Ray, 13 F.4th 467 (5th Cir. 2021).

27Leyh, 157 T.C. No. 7 (2021).

28Warque, T.C. Summ. 2021-18.

29Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Division O of P.L. 116-94. Under the SECURE Act, most beneficiaries of IRAs and qualified plans must withdraw all money from inherited accounts within 10 years.

30Gaston, T.C. Memo. 2021-107.

31McNulty, 157 T.C. No. 10 (2021).

32Mazzei, 150 T.C. 138 (2018).

33Mazzei, 998 F.3d 1041 (9th Cir. 2021).

34Summa Holdings Inc., 848 F.3d 779 (6th Cir. 2017), rev'g T.C. Memo. 2015-119.

35Benenson, 887 F.3d 511 (1st Cir. 2018).

36Mazzei, 998 F.3d at 1061.

37Ryder, T.C. Memo. 2021-88

38Holliday, T.C. Memo. 2021-69.

39Filler, T.C. Memo. 2021-6.

40Notice 2021-53.

41Toulouse, 157 T.C. 49 (2021).



David R. Baldwin, CPA, is a partner with Baldwin & Baldwin PLLC in Phoenix. Katie Bowles, CPA, is a tax senior manager at Deloitte & Touche LLP in Costa Mesa, Calif. Christina Figueroa, CPA, is a partner with PwC LLP in Los Angeles. Mary Kay Foss is a CPA in Walnut Creek, Calif. Shannon Hudson, CPA, MST, is a founding partner of Altair Group PLLC in Bedford, N.H. David H. Kirk, CPA/PFS, is a partner with Ernst & Young in Washington, D.C. Michael Levy, CPA, is a partner with Crowe LLP in New York City. Dana McCartney, CPA, is a partner with Maxwell Locke & Ritter LLP in Austin, Texas. Darren Neuschwander, CPA, is a managing member with Green, Neuschwander & Manning LLC, a virtual CPA firm with members across the country. Robert Tobey, CPA, is a partner with Grassi Advisors & Accountants in New York City. Mr. Neuschwander is the chair, Mr. Baldwin is the immediate past chair, and the other authors are members of the AICPA Individual & Self-Employed Tax Technical Resource Panel. For more information about this article, contact


Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.