Document summaries for the week of March 19, 2018
Litigation consultant’s activities did not qualify for research expense deduction
The Tax Court held that a taxpayer was not entitled to a deduction for research expenses related to his litigation consulting business because the activities he engaged in did not meet the requirements of Sec. 174. Even if the activities met the threshold requirement of being research or experimental, the court said, the value of the taxpayer’s time performing them did not qualify as a deductible expense under Sec. 174. Bradley, T.C. Summ. 2018-13 (3/19/18).
Court denies deduction for job-related travel expenses
The Tax Court held that a couple were not entitled to a deduction for unreimbursed employee business expenses of $44,867 for 2013 that the husband incurred, because his tax home was Oklahoma City, and not Lake Forest, Calif., where he shared a home with his wife. The court concluded that the husband’s travel and living expenses were not incurred while traveling away from home and thus were not deductible. Jahangirian, T.C. Summ. 2018-14 (3/20/18).
Lawyer’s vague testimony does not persuade court to drop underpayment penalties
The Tax Court held that a practicing lawyer was liable for penalties on underpayments attributable to a substantial understatement of income tax. The court rejected the taxpayer’s argument that he was not liable because he relied on a CPA to prepare his returns, concluding, in part, that the lawyer’s vague testimony suggested that he did not provide complete information to the CPA. Larson, T.C. Memo. 2018-30 (3/19/18).
C corporation owner liable for additional taxes and penalties on unreported income
The Tax Court held that a taxpayer who was the sole owner and president of a residential construction business operated as a C corporation (1) had taxable wages and constructive dividends as a result of payments from the corporation, (2) was not entitled to a charitable contribution deduction for the donation of building parts to a tax-exempt organization, and (3) was liable for penalties relating to the late filing of tax returns. The court also found that the taxpayer was barred by the doctrine of collateral estoppel from denying that he committed tax fraud with respect to a capital loss claimed in 1999 because he had been convicted of fraud. Thus, he could not challenge the IRS’s denial of carryforwards of that loss to 2000 and 2001. Platts, T.C. Memo. 2018-31 (3/19/18).
Taxpayer’s basis in unreported IRA distribution is equal to initial nondeductible contribution
With respect to an individual retirement account (IRA) distribution that a taxpayer conceded he received but did not report on his tax return, the Tax Court held that the taxpayer had established basis for a portion of the distribution but that the IRS correctly determined the bulk of it to be taxable. The court determined that the taxpayer’s basis was equal to his initial IRA investments of $4,760, which consisted of nondeductible contributions. Shank, T.C. Memo. 2018-33 (3/20/18).
To prevail on passive activity loss issue, taxpayer only needed a lawyer with generalized tax and litigation experience
The Tax Court held that a taxpayer who substantially prevailed in a case brought by the IRS regarding the deductibility of expenses incurred in the taxpayer’s thoroughbred horse activity, which the IRS had labeled as a passive activity, was not entitled to recover attorneys’ fees above the $180 per hour statutory rate. With respect to the taxpayer’s argument that he needed a lawyer with specialized skill, the court said that to prevail on the passive activity loss issue, the taxpayer had to prove the extent of his participation in the thoroughbred activity, and this required only generalized tax and litigation expertise. Tolin, T.C. Memo. 2018-29 (3/19/18).
Tax Court rejects whistleblower's claim
The Tax Court held that the IRS was entitled to summary judgment with respect to a whistleblower action because the IRS did not initiate any administrative or judicial action or collect any proceeds on the basis of the information the whistleblower supplied. The court noted that, if the taxpayer believed that the IRS might have proceeded with an administrative or judicial action against the target and collected proceeds subsequent to a litigation cut-off date, the whistleblower could file with the Whistleblower Office a new Form 211, Application for Award for Original Information, advancing that claim. Whistleblower 23711-15W, T.C. Memo. 2018-34 (3/20/18).
IRS issues 2018 ‘Dirty Dozen’ list
The IRS issued its annual list of the “Dirty Dozen” tax scams. IRS website (3/20/18) (see related news story).
Conviction for obstruction of tax administration requires knowledge of proceeding
The U.S. Supreme Court held that to convict a defendant for corruptly obstructing or impeding the due administration of the Internal Revenue Code under the Omnibus Clause of Sec. 7212(a), the government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence. Marinello, No. 16-1144 (U.S. 3/21/18) (see related news story).
Late issuance of FPAA precludes partnership audit adjustments
The Tax Court held that, because any omission from a partnership’s gross income for 2001 was less than 25% of its reported gross income for that year, Sec. 6229(c)(2) did not extend the statute of limitation period described in Sec. 6229(a). Instead, the period expired three years after the partnership filed its return and, because the IRS did not issue its final partnership administrative adjustment (FPAA) until several years later, it would be unable to assess any tax resulting from the Tax Court’s acceptance of the FPAA adjustments or penalty determinations. DTDV, LLC, T.C. Memo. 2018-32 (3/20/18).
LLC liable for partnership late-filing penalty
The Tax Court held that a limited liability company (LLC) that was owned by a husband and wife and that represented itself to be a partnership was liable for the penalty under Sec. 6698 for the late filing of its partnership tax return. The court said that the entity could not represent itself as a partnership on its tax returns and then argue it was really a single-member LLC that could not be subject to a partnership late-filing penalty. Argosy Technologies, LLC, T.C. Memo. 2018-35 (3/22/18).
TQA issued on partnership accounting when IRS collects underpayments
The AICPA issued a technical question and answer (TQA) to help financial statement preparers account for the amount a partnership pays the IRS for previous underpayments of tax, interest, and penalties. TQA 7200.09, Tax Accounting Considerations Under Partnership Audit Regime (3/22/18) (see related news story).
Appropriations act amends partnership audit regime
The Consolidated Appropriations Act, 2018, amended the centralized partnership audit regime and made changes to the Sec. 199A deduction for farmers who sell grain to agricultural cooperatives, as well as making various technical corrections to recent tax legislation. H.R. 1625 (3/23/18) (see related news story).
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.