Document summaries for the week of Nov. 27, 2017

EXEMPT ORGANIZATIONS

Organization files declaratory judgment suit

The IRS served notice to potential donors that the Korean-American Senior Mutual Association Inc. has recently filed a declaratory judgment suit under Sec. 7428 challenging the revocation of its status as an eligible donee under Sec. 170(c)(2). Announcement 2017-18 (11/27/17).

 

INDIVIDUALS

Collection action sustained; IRS did not violate automatic stay

The Tax Court granted an IRS motion for summary judgment and sustained a proposed collection action by the IRS against a taxpayer who overstated his federal income tax withholdings for 2009. The court also concluded that, by proceeding with the collection action, the IRS had not violated an automatic stay. Ashmore, T.C. Memo. 2017-233 (11/27/17).

Legal expenses incurred in attempt to recoup alimony are not deductible

The Tax Court held that a couple were not entitled to deduct legal expenses incurred in a breach-of-contract action that the husband brought in an attempt to recoup alimony he allegedly overpaid his ex-wife. The court concluded that the legal expenses were not business-connected and arose from, and related entirely to, his marital relationship. Barry, T.C. Memo. 2017-237 (11/28/17).

Couple understated flowthrough income from medical marijuana business

The Tax Court held that a couple failed to show that flowthrough income from their interest in a limited liability corporation, which sold medical marijuana, was less than that reported on the basis of an IRS audit. Further, because the couple had no reasonable cause for filing their tax returns late and because they omitted certain income from those returns, they were liable for penalties under Secs. 6651(a)(1) and 6662(a). Jabari, T.C. Memo. 2017-238 (11/28/17).

Alimony obligation does not terminate at death by operation of Texas law

The Tax Court held that a taxpayer was not entitled to an alimony deduction for payments made to his ex-wife in 2010 because a marital settlement agreement they had signed did not contain an unambiguous provision terminating the taxpayer’s obligation to pay his ex-wife in the event of her death, and the obligation would not have so terminated by operation of Texas law. The court also concluded that the taxpayer was thus liable for an accuracy-related penalty because he failed to carry his burden of establishing that there was reasonable cause for the related tax underpayment. Logue, T.C. Memo. 2017-234 (11/27/17).

Life insurance taken out on ex-husband does not indicate that alimony payments would terminate on ex-wife’s death

The Tax Court held that a taxpayer was not entitled to an alimony deduction for payments to his ex-wife where nothing in the couple’s divorce order or operation of English law indicated that the payments would terminate on his ex-wife’s death The court concluded that the taxpayer’s agreement to cooperate with his ex-wife in obtaining insurance on his life to secure the payments did not indicate that the payments would terminate on her death. Wolens, T.C. Memo. 2017-236 (11/27/17).

Because taxpayer’s photography business was legitimate, $5,000 of start-up expenses were deductible

The Tax Court held that a couple had established that the wife’s photography business became an active trade or business in 2012 and that she undertook the photography activity with the intention of earning a profit. The court concluded that $5,000 of photography expenses were deductible startup expenditures in 2012 and the remaining expenses incurred that year were amortizable over the 180-month period beginning with the month in which the photography business began. All of the other deductions the IRS disallowed were sustained by the court, however. Baham, T.C. Summ. 2017-85 (11/29/17).

Filmmaker cannot deduct son’s tuition for film classes

The Tax Court held that a film producer’s payment of his son’s college tuition, where the son was taking film classes while also helping his father in the filmmaking business, was not a deductible business expense. However, because the taxpayer was self-employed and had to travel for his business, he was entitled to deduct from gross income an amount based on the federal meals and incidental expenses (M&IE) rates for localities he visited for his job as a producer. Cristo, T.C. Memo. 2017-239 (11/29/17).

Russian student cannot exclude university payments from income under Russia–U.S. tax treaty

The Tax Court held that payments received by a taxpayer, who is a citizen of the Russian Federation and who held an F-1 student visa, from Indiana University-Purdue University Indianapolis totaling $18,917 during 2009 and $19,708 during 2010 were not exempt from federal income tax under the Russia–U.S. tax treaty because the taxpayer failed to prove that he was the recipient of a grant, allowance, or other similar tax-exempt payment. Dovzhenok, T.C. Summ. 2017-86 (11/30/17).

No deduction allowed for disgorgement payments made for violating securities law

The Office of Chief Counsel advised that Sec. 162(f) prohibits a deduction under Sec. 162(a) for disgorgement payments made for violating a federal securities law. In reaching its conclusion, the Chief Counsel’s Office cited the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), which held that because disgorgement payments are penalties and are not compensatory, a deduction is prohibited. CCA 201748008 (12/1/17). 

 

IRS PROCEDURE

Couple had no material change in circumstances warranting reconsideration

The Tax Court held that an IRS settlement officer who conducted a couple’s collection due process (CDP) hearing did not abuse her discretion in sustaining a notice of federal tax lien filing and a proposed levy. The court further concluded that the couple did not have any material change in circumstances between the CDP hearing and subsequent trial that warranted a reconsideration by IRS Appeals. Bero, T.C. Memo. 2017-235 (11/27/17). 

Court petition bearing a Stamps.com postage label was timely mailed and timely filed

With respect to a couple’s mailing of a Tax Court petition, the Tax Court held that the petition was timely mailed and timely filed under Regs. Sec. 301.7502-1(c)(1)(iii)(B). The court also concluded that a date shown on the Stamps.com postage label was a postmark not made by the U.S. Postal Service within the meaning of Sec. 7502(b), and data retrieved from the USPS tracking system for certified mail is a postmark not made by the U.S. Postal Service within the meaning of Regs. Sec. 301.7502-1(c)(1)(iii)(B)(3). Pearson, 149 T.C. No. 20 (11/29/17).

Chief Counsel’s Office responds to question regarding technical application of Sec. 7508

The Office of Chief Counsel responded to a question regarding the technical application of Sec. 7508 to the computation of interest and other additions to tax based on the date of a return. The Chief Counsel’s Office stated that the date that matters for determining how many remaining filing season days are included in a disregarded count is the entry date, and IRS guidance states that the disregarded days include the filing season days remaining “at the time the taxpayer began serving in the combat zone.”  CCA 201748009 (12/1/17). 

 

PARTNERSHIPS

IRS to abate all penalties for partnerships and other entities from the change in partnership due dates

The IRS issued guidance providing that any act performed for the 2016 tax year of a partnership, real estate mortgage investment conduit (REMIC), or certain other entities will be treated as timely for all purposes under the Code, except with respect to interest, if the act would have been timely if the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, had not changed the due date for partnership returns. According to the IRS, an entity that has already been assessed a penalty for failure to timely file a return that is deemed timely filed under this guidance can expect to receive a letter within the next several months notifying it that the penalty has been abated. Any taxpayer that does not receive an abatement letter by Feb. 28, 2018, should take the actions outlined in the notice. Notice 2017-71 (11/30/17). 

Newsletter Articles

PRACTICE MANAGEMENT

Tax software survey

Our annual survey offers a look at how CPAs judged their tax preparation software in a wide range of types of practices.

NEWS

Congress enacts tax reform

Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted.