Document summaries for the week of July 19, 2021
Tax document summaries for the week of July 19–23, 2021, covering individuals, IRS procedure, and more.
ESTATES, TRUSTS & GIFTS
IRS properly considered potential collectibility of estate taxes from executor
The Tax Court held that a determination by the IRS to uphold the filing of a Notice of Federal Tax Lien and to sustain a proposed collection action with respect to an estate’s tax deficiency was proper as a matter of law. The court also concluded that the IRS settlement officer properly considered the potential collectibility from the estate’s executor in determining the estate’s reasonable collection potential because the executor was potentially liable by reason of distributing estate assets before settling the estate’s outstanding tax liability. Estate of Lee, T.C. Memo. 2021-92 (7/20/21).
Foreign tax credit is disallowed where no foreign-source income is reported
The Tax Court held that, on their 2016 tax return, a married couple (1) received and failed to report taxable retirement income of $479, (2) received and failed to report payments in lieu of dividends of $112, and (3) could not claim a foreign tax credit of $3,550. The court concluded that, because the couple did not report any foreign-source taxable income on their 2016 tax return, their ratio of foreign taxable income to their total taxable income for 2016 was zero, and due to the foreign tax credit limitation in Sec. 904(a), their foreign tax credit was also zero. Bassily, T.C. Summ. 2021-20 (7/19/21).
Couple fails to substantiate expenses passed through from S corporation
The Tax Court held that a married couple were not entitled to a nonpassive loss deduction claimed on Schedule E, Supplemental Income and Loss, of their 2015 tax return. The court found that the couple did not provide sufficient substantiation regarding expenses incurred by an S corporation, which was 50% owned by the husband, and thus were not entitled to deduct passthrough losses from the S corporation in excess of those already allowed. Fagenboym, T.C. Summ. 2021-19 (7/19/21).
Couple who received separate certification notices for same liability may file joint petition
Where the IRS separately certified that a husband and wife each had a seriously delinquent tax debt (potentially resulting in revocation or denial of a passport) under Sec. 7345(b), the Tax Court held that married taxpayers who receive separate but substantially identical notices of certification arising from the same tax liability may file a joint Tax Court petition in the same manner as in a deficiency case under Tax Court Rule 34(a)(1). The court also held that (1) it lacked authority under Sec. 7345(e) to address the merits of an offer in compromise the couple had submitted to the IRS, and (2) because the IRS reversed its certifications as erroneous and so notified the Secretary of State, the couple’s challenge in that respect was moot. Garcia, 157 T.C. No. 1 (7/19/21).
Court allows couple to partially deduct losses from Ponzi scheme
The Tax Court held that a couple were entitled to certain passthrough theft loss deductions under Rev. Proc. 2009-20 due to losses incurred in 2008 as a result of a Ponzi scheme. However, the court found that other passthrough losses deducted by the couple did not qualify as theft losses under Sec. 165 and the couple were not “qualified investors” as described in the revenue procedure with respect to them. Vennes, T.C. Memo. 2021-93 (7/20/21).
Passport revocation for tax debt is constitutional
In a case of first impression, the Tenth Circuit held that provisions under Sec. 7345 and 22 U.S.C. Section 2714a(e) that allow the government to revoke the passports of individuals with significant tax debts are constitutional. The taxpayer had argued that the Privileges and Immunities Clause of the Fourteenth Amendment limited the federal government’s ability to restrict international travel, but the court disagreed. Maehr v. State Department, No. 20-1124 (10th Cir. 7/20/21).
Appeals court allows enforcement of IRS summonses
The Sixth Circuit affirmed a district court decision ordering enforcement of IRS summonses issued during an investigation of the taxpayers’ tax liabilities. The court held that investigatory summonses may seek records from dates outside the specific tax period under investigation. Gaetano, No. 20-2182 (6th Cir. 7/16/21).
Entity owned and controlled by couple did not qualify as a 501(c)(3) organization
The Tax Court held that an entity owned and controlled exclusively by a married couple did not qualify for exempt status under Sec. 501(a) and thus did not qualify as an exempt organization for purposes of Sec. 501(c)(3). The court noted that, because the entity was owned and controlled exclusively by the couple, the benefits relating to the entity would inure to the couple, and the entity would not be operated for the benefit of the public. New World Infrastructure Organization, T.C. Memo. 2021-91 (7/20/21).