Document summaries for the week of July 2, 2018
ESTATES, TRUSTS & GIFTS
Decedent qualified as a USVI resident for two of three years at issue
The Tax Court, after examining the factors for determining whether a taxpayer is a bona fide resident of the U.S. Virgin Islands (USVI), held that the decedent was not a bona fide USVI resident in 2002, but was in 2003 and 2004. Previously, in Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016), vacating and remanding 144 T.C. 63 (2015), the Eleventh Circuit held that the statute of limitation under Sec. 6501(a) was triggered only if the decedent was a bona fide resident of the USVI and remanded the instant case back to the Tax Court to make factual findings regarding the amount of time the decedent spent in the USVI. Estate of Sanders, T.C. Memo. 2018-104 (6/5/18).
Tenth Circuit affirms denial of marijuana grower’s deductions
The Tenth Circuit affirmed a lower court’s dismissal of a marijuana grower’s refund suit, finding it failed to state a claim upon which relief could be granted. The taxpayer argued that the IRS exceeded its statutory and constitutional authority by denying the taxpayer’s business deductions under Sec. 280E, but the appeals court rejected this argument. Alpenglow Botanicals, LLC, No. 17-1223 (10th Cir. 7/3/18).
Taxpayer cannot take home office deduction for garage used to store business records
The Tax Court held that a business owner’s use of his garage to store his business records did not qualify as a deductible home office expense under Sec. 280A(c)(2) because the taxpayer was not in the trade or business of selling products at retail or wholesale and the records were not inventory. In addition, while the taxpayer credibly testified that four deposits to his bank account were not income, he produced no evidence showing that the remaining deposits, which the IRS identified as income, were nontaxable. Najafpir, T.C. Memo. 2018-103 (7/3/18).
Tax Court’s ability to impose penalty is not subject to IRS approval
The Tax Court held that a taxpayer who did not file a tax return for 2012 was liable for the taxes and penalties the IRS assessed for that year. In addition, the court concluded that its authority to impose a $2,000 penalty under Sec. 6673(a)(1) for advancing frivolous arguments was not subject to the IRS supervisory approval requirement of Sec. 6751(b)(1). Williams, 151 T.C. No. 1 (2018).
CARDS transaction lacked economic substance; taxpayers liable for $1.1 million in taxes and penalties
The Tax Court held that a couple were not entitled to loss deductions from a custom adjustable rate debt structure (CARDS) transaction and, as a result, they were liable for over $1.1 million in taxes and penalties relating to their 2000 tax return. The court concluded that the CARDS transaction did not have any practical economic effects beyond creating tax benefits and, therefore, it lacked economic substance. Hahn, T.C. Memo. 2018-100 (7/2/18).
Third-party information reports are not IRS notification of a taxpayer’s change of address
The Tax Court sustained a proposed levy on a taxpayer who failed to file tax returns from 1999 to 2013. In rejecting the taxpayer’s argument that IRS deficiency notices were invalid since they were not mailed to his correct address, the court noted that the taxpayer had not updated his last-known address with the IRS and that documents such as information reports provided to the IRS by third parties did not constitute clear and concise notification to the IRS of a new address. Morgan, T.C. Memo. 2018-98 (7/2/18).
Couple liable for more than $225,000 in income taxes and trust fund recovery penalties
The IRS granted summary judgment for a collection action against a couple for income tax liabilities of more than $200,000 for tax years 2008, 2009, and 2012–2015, and for unpaid trust fund recovery penalties of more than $25,000. The court also concluded that the IRS settlement officer did not abuse her discretion and had properly discharged her responsibilities under Sec. 6330(c)(3). Rosendale, T.C. Memo. 2018-99 (7/2/18).
Payment to settle hostile work environment claims is not excludable from income
The Tax Court held that a settlement payment of $20,000 a taxpayer received in 2013 was not excludable from income under Sec. 104(a)(2). The court concluded that the payment was for the resolution and withdrawal of the taxpayer’s claims of discrimination and a hostile work environment and not on account of personal physical injuries or physical sickness. Zinger, T.C. Summ. 2018-33 (7/2/18).
Court denies most loss deductions couple claimed on investments
The Tax Court held that most of a couple’s claims of theft losses relating to investments could not be substantiated and thus were not deductible and that many of the investments were made to avoid federal income tax. The court also concluded that the couple were liable for accuracy-related penalties after finding that they failed to exercise reasonable business care and prudence in their reliance on the advice of a professional. Raifman, T.C. Memo. 2018-101 (7/3/18).
Couple had unreported gross receipts from mortgage lending and real estate transaction business
The Tax Court held that a couple’s mortgage lending and real estate transaction business did not constitute a partnership for tax purposes and the couple had unreported gross receipts for 2011 and 2012 of approximately $164,000. However, the court did allow the couple to take Schedule C deductions for advertising and rent expenses that they properly substantiated. White, T.C. Memo. 2018-102 (7/3/18).
IRS proposes new definition for Sec. 148 investment-type property
The IRS issued proposed regulations that would amend the definition of investment-type property for purposes of tax-advantaged bonds and the arbitrage investment yield restrictions under Sec. 148 that apply to those bonds. REG-106977-18 (7/2/18).
Six-year statute of limitation applies to underreporting of S corp. income where no Forms 1099 were filed
The Tax Court held that notices of deficiency for tax years 2006–2008 that were issued to a couple, and which related to the nonreporting of distributive shares of income from an S corporation wholly owned by the husband, were timely. Because no Forms 1099 were filed with the IRS reporting the distributive shares, the court found that the IRS did not receive adequate disclosure and thus the six-year limitation period applied. Manashi, T.C. Memo. 2018-106 (7/5/18).
Judicial approval is needed before a levy can be put on a principal residence
In a question involving a Sec. 6334 levy on a "personal" residence, the Office of Chief Counsel advised that judicial approval is needed prior to a levy of property that the taxpayer owns and is used as the principal residence of the taxpayer, the taxpayer's spouse, the taxpayer's former spouse, or the taxpayer's minor child. The Chief Counsel's Office noted that Sec. 6334(e) does not specifically say "personal residence," but instead says "principal residence," which is a condensed version of "principal residence of the taxpayer" used in Sec. 6334(a)(13)(B). CCA 201827012 (7/6/18).
Taxpayer's short positions in swaps were substantially similar or related property
The Office of Chief Counsel advised that a taxpayer's short positions in swaps reflecting the value of a stock index are substantially similar or related property (SSRP) within the meaning of Sec. 246 with respect to shares of an exchange-traded fund (ETF) that tracks the performance of the same index. According to the Chief Counsel's Office, the swaps are positions in SSRP with respect to each entity's corresponding ETF trust shares under both Regs. Sec. 1.246-5(b)(1) and Regs. Sec. 1.246-5(c)(6), resulting in a reduction in each entity's holding period with respect to the ETF trust shares and the disallowance of the dividend-received deduction claimed by each entity for dividends it received on the ETF trust shares. CCA 201827011 (7/6/18).
S corporation owned by two brothers did not terminate when one brother withdrew large sums without the other brother's knowledge
The Tax Court held that an S corporation equally owned by two brothers did not terminate as a result of a violation of the one-class-of-stock rule and the rule against disproportionate distributions when one brother withdrew large sums of money from the corporation without the other brother's knowledge. In determining whether a corporation has more than one class of stock, the Tax Court said that the rights granted to shareholders in the corporation's organizational documents and other binding agreements between shareholders must be considered and evidence of distributions paid to one shareholder and not paid to others over the course of multiple years is insufficient on its own to establish that a separate class of stock was created. Mowry, T.C. Memo. 2018-105 (7/5/18).
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.