Document summaries for the week of Aug. 7, 2017
Individuals who conveyed conservation easement to charity were not qualified farmers
The Tax Court held that members of a limited liability company who conveyed a conservation easement to a public charity were not “qualified farmers” under Sec. 170(b)(1)(E) because they did not receive more than 50% of their gross income from farming in the year the easement was donated. As a result, the members were limited to a charitable contribution deduction of 50% of their bases in the easement, rather than the 100% that is permitted for qualified farmers. Rutkoske, 149 T.C. No. 6 (8/7/17).
Wealthy corporate executives are not entitled to billions of losses generated by sham partnership
The Tax Court held that a purported partnership that used almost perfectly offsetting bets on foreign currency to pass over $3.3 billion of tax losses through to its partners, very wealthy corporate executives who contributed only $16.5 million to the partnership, was not a partnership for tax purposes. Disregarding the partnership meant that the partners recognized gain or loss on the purchases and sales of the foreign currency themselves. BCP Trading and Investments, LLC, T.C. Memo. 2017-151 (8/7/17).
Taxpayer previously warned by court is fined $10,000 for making frivolous arguments
The Tax Court held that a taxpayer who failed to file tax returns for 2009 and 2011, or pay amounts shown on 2009 and 2011 returns prepared by the IRS, was liable for IRS-assessed tax deficiencies for those years. In addition, because the taxpayer had been previously warned by the court to avoid frivolous arguments relating to his tax liability, the court upheld IRS penalties of $5,000 for each of the two years. Blair, T.C. Memo. 2017-153 (8/7/17).
Penalties assessed on psychiatrist who failed to substantiate deductions
The Tax Court held that a psychiatrist was liable for tax deficiencies assessed by the IRS because she failed substantiate most of the expenses she deducted on her Schedule C, Profit or Loss From Business, and Schedule A, Itemized Deductions. The court also held the taxpayer liable for the fraud penalty, accuracy-related penalties under Sec. 6662(a), and penalties under Sec. 6651(a)(1) for failing to file her tax return on time. Knowles, T.C. Memo. 2017-152 (8/7/17).
CPA who did not want to spend time allocating expenses between business and personal use was liable for penalties
The Tax Court held that a retired CPA who operated a financial services business did not properly substantiate many of the business expenses he deducted on his returns, such as vehicle expenses and home office expenses, and was thus not entitled to those deductions. The court also held that, because the taxpayer failed to substantiate the vehicle expenses underlying disallowed Schedule C, Profit or Loss From Business, deductions for his financial services business beyond an uncorroborated statement that his computer hard drive crashed (for which he did not provide any documentary proof) and who testified that allocating some of the expenses between his personal and business use required more time than he was willing to spend, had not proved he had reasonable cause and was thus liable for the Sec. 6662(a) accuracy-related penalty. Levine, T.C. Summ. 2017-60 (8/7/17).
Electing standard deduction precludes couple from taking itemized deduction for gambling losses
The Tax Court held that a couple could not take an itemized deduction for their gambling losses to offset their gambling winnings because they elected to take the standard deduction. The court noted that, while the couple’s gambling losses exceeded their gambling winnings, they were not engaged in the trade or business of gambling, which would have allowed them to deduct their gambling losses on a Schedule C, Profit or Loss From Business. Therefore, they would have to forgo the standard deduction to deduct their gambling losses as an itemized deduction and their standard deduction resulted in a larger deduction than if they had taken the itemized deduction for the gambling losses. Bon Viso, T.C. Memo. 2017-154 (8/8/17).
Tax Court sustained levy against taxpayer and assessed $5,000 penalty
The Tax Court held that an IRS settlement officer satisfied the verification requirements of Sec. 6330 and did not abuse his discretion in sustaining a notice of intent to levy against the taxpayer. The court also imposed a penalty of $5,000 under Sec. 6673 on the taxpayer for maintaining frivolous and groundless positions and using court proceedings for delay tactics. Fleming, T.C. Memo. 2017-155 (8/8/17).
Court sustains collection action against taxpayer
The Tax Court held that, notwithstanding certain harmless errors made by an IRS settlement officer (SO) in his rejection of a taxpayer’s offer in compromise, the SO satisfied the verification requirements of Sec. 6330. The court thus sustained the IRS’s collection action against the taxpayer, with appropriate reductions to the taxpayer’s tax liabilities for 2005 and 2011. Dykstra, T.C. Memo. 2017-156 (8/8/17).
IRS misapplied taxpayer’s payment and abused its discretion in pursuing the taxpayer
The Tax Court held that the IRS misapplied a taxpayer’s payment of $2,900 to liabilities previously settled and satisfied, and that the payment exceeded the outstanding balance of the tax liability for which collection was being pursued by the IRS. The court agreed with the taxpayer that his payments covered the amount due for 2011 and that the IRS abused its discretion in pursuing collection. Fagan, T.C. Summ. 2017-61 (8/9/17).
Taxpayer entitled to bad-debt deduction for business and personal loans that became worthless
The Tax Court held that a taxpayer was involved in the trade or business of lending money during the years at issue, when his advances of money, both personally and through his business, to a company constituted bona fide debt that became wholly worthless in 2008. As a result, the court concluded, the taxpayer was entitled to the bad-debt deduction he claimed on his 2008 tax return. Owens, T.C. Memo. 2017-157 (8/10/17).
Couple not entitled to dependency exemption deductions and child tax credits but escape penalties
The Tax Court held that a couple’s 38-year-old daughter, who had filed a joint return for the same tax year, was not a qualifying relative with respect to the couple and, under the tiebreaker rule of Sec. 152(c)(1)(A), the daughter’s children were not qualifying children of the couple. As a result, the court said, the couple was (1) not entitled to dependency exemption deductions for their daughter and grandchildren, (2) not entitled to child tax credits for the grandchildren, and (3) not liable for penalties assessed by the IRS because they proved reasonable cause and good faith. Woolsey, T.C. Summ. 2017-62 (8/10/17).
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.