Document summaries for the week of Oct. 23, 2017
IRS revises factor for adjusting defined benefit plan compensation limitation
The IRS revised the factor for adjusting a defined benefit plan participant's high-three compensation limitation under Sec. 415(b)(1)(B) for plan years beginning on or after Jan. 1, 2018. According to the IRS, the revised factor of 1.0197 is necessary due to the Bureau of Labor Statistics’ (BLS) adjustment of the consumer price index for the months of July and August 2016. Notice 2017-64 (revised 10/27/17).
Taxpayer is not entitled to tax benefits for boyfriend’s grandchildren
The Tax Court held that the two biological grandchildren of a taxpayer’s live-in boyfriend were not the taxpayer’s qualifying children for purposes of (1) taking a dependency deduction; (2) taking the earned income tax credit; (3) taking a child tax credit; and (4) using the head-of-household filing status. The court rejected the taxpayer’s reasoning that her boyfriend was her common law husband because California law does not recognize that status and, thus, the court rejected the taxpayer’s claim that his son was her stepson and each of his two children were his descendants during that year. As a result, the taxpayer did not satisfy the relationship requirement entitling the taxpayer to the tax benefits at issue. Sharp, T.C. Memo. 2017-208 (10/23/17).
IRS properly disallowed deductions for a medical marijuana business
The Tax Court held that, because a married couple could not substantiate an amount of costs of goods sold for their medical marijuana greater than the amount the IRS allowed, no additional amounts were deductible. The court also explained that it need not determine whether the IRS properly disallowed business expense deductions under Sec. 280E because the taxpayers did not substantiate any of their expenses. Feinberg, T.C. Memo. 2017-211 (10/23/17).
EBay coin dealer liable for taxes and penalties for unsubstantiated deductions
The Tax Court held that a coin dealer had only partially substantiated cost of goods sold and expense deductions for coins he sold on eBay.com. To the extent he did not substantiate his deductions, his basis in the coins he sold, or the court could not estimate his expenses, he was liable for the tax deficiency that resulted. Once his deficiency was recalculated, he would be subject to an accuracy-related penalty if his deficiency was a substantial understatement of tax. Huzella, T.C. Memo. 2017-210 (10/23/17).
Handyman had unreported income and was liable for penalties
The Tax Court held that a self-employed handyman had unreported self-employment income of $42,918 and was liable for the income tax and self-employment tax on that amount. The court also held that the taxpayer was liable for penalties of approximately $4,000 under Sec. 6651 for failure to file and failure to pay tax and Sec. 6654 for failure to make estimated tax payments, as well as a $2,000 penalty under Sec. 6673 for taking frivolous positions and wasting the court’s and the IRS’s time. Rader, T.C. Memo. 2017-209 (10/23/17).
Couple can partially deduct theft loss, are liable for underpayment penalties
The Tax Court held that, of the $29,979 theft loss deducted by a couple on their 2012 tax return, only $9,194 was properly substantiated and thus deductible. Although the couple sought advice about how to report the theft loss, they did not show the specific source of the advice and whether it was reasonable for them to rely on the advice received. Thus, the court held them liable for a Sec. 6662(a) accuracy-related penalty with respect to the related tax underpayment. Partyka, T.C. Summ. 2017-79 (10/25/17).
Court will not vacate or revise decision that a retired firefighter’s pension payments were taxable
The Tax Court rejected a retired firefighter’s motion to vacate or revise its decision in Taylor, T.C. Memo. 2017-132, in which the court held that distributions to the taxpayer by a state retirement plan and pension fund were not excludable from gross income as amounts received under workmen’s compensation acts for injuries or sickness. According to the court, the motion was not filed timely, and the taxpayer failed to argue or show any unusual circumstances or substantial error justifying revisiting the decision. Taylor, T.C. Memo. 2017-212 (10/25/17).
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.