Dawn Hampsey, CPA

2022

Taxpayer met the vehicle substantiation requirements – got deduction

Taxpayer had a side business in southern California.  She lived about 400 miles away where she had her day job.  She claimed large mileage deduction to this side business a number of times during the year.  Tax Court agreed that her substantiation of the vehicle expenses met the requirement.  She was allowed the deduction (Gonzalez TC Summ Op 2022-13)

Missing Income on return generated a 20% penalty from IRS

Taxpayer omitted a IRA distribution from their tax return.  IRS sent them a notice which they agreed with.  IRS also gave them a 20% fine for substantial understatement of income.  Taxpayer stated that they did not receive a 1099-r with the IRA distribution.  Tax court agreed with penalty stating that non-receipt of forms didn’t change their obligation to report.  (Larochelle, TC Summ Op 2022-12)

Donation write-off denied without proper documentation

Taxpayer donated a airplane to a non-profit and took a write-off on his taxes.  The documentation attached to his return was missing his social security number.  Courts determined that the taxper did not meet the substantiation rules for documentation to back up the donation.  (Izen, 5^th Cir)

Write off of business clothing

Taxpayer was a nurse with a employer that required her to dress in way that reflected her job.  She purchased scrubs at a department store and wrote off on her taxes.  Tax court agreed that the clothing was not adaptable to personal use outside the workplace.  (Romana TC Summ Op 2022-9)

Vehicle Expenses Denied

Taxpayer had a fleet of over 10 vehicles used in his business.  Vehicle expenses have strict substantiation rules.  Taxpayer didn’t have documentation to substantiate the deduction.  IRS allowed 75k of a 242k deduction.  (Spencer TC Summ Op 2022-8)

Donation to Charity lost when substantiation rules not followed

Taxpayer donated items (not money) to a museum.  The parties involved signed a deed of gift.  She attached it to her tax return.  IRS nixed the donation as the deed of gift did not contain all the elements of acknowledgement required.  It did not say that the museum did not provide any goods or services in exchange for the donation. (Albrecht, TC Memo 2022-35)

S Corporation owner was nonpassive for whole business

Taxpayer owned and operated a S corporation as non-passive.  In later years, he split the business into two companies and considered part of it creating a loss as non-passive and the income as passive.   Having the passive income net with the passive loss carryforward.  He materially participated in both companies.  They were both nonpassive.  (Rogerson, TC Memo 2022-49)

Year-end payments to C Corporation owner – nondeductible

C corporation paid its owners year end “management fees”.  Fees were in percentage of ownership.  Fees did not correspond to value of services.  Company had no history of dividend payments.  (Sherwin Communtiy Painters, TC Memo 2022-19)

Excess IRA Contribution cost taxpayer bankruptcy exemption

Taxpayer inherited funds and put them into her IRA.  It was improper because the deposit was over the contribution limit.  Taxpayer later filed bankruptcy and claimed the IRA was exempt.  Because of the excess contribution, she lost the bankruptcy exemption (Farber D.C. PA)

Retired Pilot and free airline tickets

Retired pilot was provided the benefit of free airline tickets for himself and his family.  When tickets are issued for his non-dependent family members, it’s taxable to him.  (Mihalik, TC Memo 2022-36)

Tax Home-

Taxpayer owned home in US and owned company outside US. He deducted his travel from GA to company as business travel with US home being his tax home.  Courts did not agree.  His tax home was where his company was.  (Deeb, D.C. Fla)

2021

Joint owned investment account – dividing the income

Taxpayer owned an investment account with his son.  When it came to tax time, the son reported the income and the taxpayer report the credit that was issued and withheld on foreign income.  IRS denied the credit as the credit is available to the extent taxes accrued or paid of Non US income.  Taxpayer did not report the foreign(non-US) income on his return. (Bassily, TC Summ Op 2021-20)

Nonprofit denied tax exemption

Non-profit was a successor to a failed for-profit business.  The organization develops, manufactures and tests a product that that helps reduce the cost of infrastructure projects.  Patent, Copyrights and processes were to stay in the control of former business owners and not the non-profit.  IRS considered this organization not for the public benefit and denied tax exempt status.  (New World Infrastructure Organization TC Memo 2021-91)

Personal use of charity funds by insiders generates huge penalties

A charity founder’s wife and the treasurer received payments from the charity.  She claimed they were compensation.  Tax Court determined they didn’t perform services for the organization to get paid for.  They were hit with the 25% excess benefit penalty plus the 200% excise tax because they didn’t return the funds in a reasonable amount of time.  (Ononuju, TC Memo 2021-94)

S Corporation officer treated as contractor

Taxpayer (a couple) were S Corporation officers and received $200,000 as a contractor instead of a employee.  Tax Court determined that they should have been employees as they did substantial management, supervisory and day to day operations for the company.  They had to pay back employment taxes and penalties.  (Blossom Day Care Centers, TC Memo 2021-86)

IRS audits back more than 3 years

IRS can audit back more than 3 years if more than 25% of their gross income is omitted from the return.  Then the IRS has 6 years to assess the tax.  Taxpayer reported 1.5 million of gains instead of 4.9 million. IRS sent notice after 3 years but before the 6 years.  Taxpayer argued that the 6 years didn’t apply.  Tax court disagreed (Pragias, TC Memo 2021-82)

Penalty relief on relying on good faith advice

Taxpayer was assessed penalties for his understatement of tax.  He claimed that he relied on advice from an experienced attorney.  The Tax Court found that he took extensive steps to try and ensure he was receiving adequate tax advice.  (Hussey, 156 TC No 12)

Settlement Proceeds and attorney fees in malpractice suit

Taxpayer sued her divorce attorney, considering him negligent in representing her.  They settled on $175,000.  She claimed the settlement was not taxable.  If would have been tax free in the divorce settlement.  Tax Court disagreed.  Settlement was based on her claim for malpractice.  (Holliday TC Memo 2021-69)

Of the $175,000 settlement, her new attorney kept $73,500 and gave her the remainder.  What was taxable was the full $175,000.  We used to have the $73,500 deducted on Schedule A Miscellaneous itemized deduction but this deduction was eliminated in the 2017 tax law change.

Start up Expenses of new business

Taxpayer started a company to develop and manufacture a device used in TV Viewing.  He wrote off his expenses while still developing the device.  11^th Circuit court confirms, business wasn’t started yet as taxpayer wasn’t manufacturing product yet, so deductions weren’t allowed until business starts.  (Provitola, 11^th Cir)

Inherited 401k not subject to bankruptcy

Taxpayer inherited a friends 401k and soon after filed for bankruptcy.  Bankruptcy trustee wanted the inherited 401k funds applied toward the taxpayers debts.  In 2014, the Supreme Court ruled that Inherited IRA’s is not exempt from a bankruptcy filing.  Bankruptcy court disagreed stating 401k has restrictions under federal pension and retirement law.  Taxpayer cannot pledge or assign the 401k.  (Dockins, Bankruptcy Court WD NC)

10% penalty exception for 401k withdrawals

Taxpayer was laid off from her job and took a distribution out of her 401k.  She thought she should get a early distribution exception for the 10% penalty because she separated from service after 55.  Tax Court says there is no hardship distribution from 401k.  (Woll, TC Oral Order)

Form 1099-K reporting sales

Taxpayer purchased items online and turn around and sell them on Amazon.  Amazon sent him a 1099-k for the sales.  He did not report this on his tax return.  In addition to not reporting the income, IRS disallowed the purchases as he could not substantiate the purchases.  (Legoski, TC Summ Op 2021-15)

Installment Plan for payment of taxes rejected

Limo company proposed to pay IRS $2000 a month on the installment method for it’s tax debt.  IRS figured they could pay $23,000 a month.  Company decided to increase their fleet of limo’s with their free cash.  IRS thought they could use that money to pay it’s debt.  Tax court agreed that the rejection of the installment agreement was proper.  (American Limousines TC Memo 2021-36)

Recovering Legal Costs from IRS

IRS challenged expenses of taxpayer.  After years of negotiations, IRS Appeals conceded the case.  Taxpayer sued IRS to get their legal fees reimbursed.  Tax Court didn’t agree.  They found that the IRS challenge was reasonable and justified. (Jacobs TC Memo 2021-51)

Cost of Goods Sold when you don’t have and Sales

Taxpayer, in the oil and gas field, had obligation to drill and therefore, deducted the costs.  IRS came back that you cannot deduct costs of goods sold if you don’t have any sales.  Tax Court Agreed.  (BRC Operating LLC TC Memo 2021-56)

Related Party Transactions

Corporation paid the business owner $192,000 in building rent payments.  The IRS came back and said the fair market value of the space was $60,000.  Tax court came in with $171,000.  The difference is a non-deductible dividend.  (Plentywood Drug TC Memo 2021-45)

Tax Exempt Organizations must serve the public interest

Organization formed in 1999 to display art through exhibits.  Years later IRS revoked and Tax Court agreed.  Organization only had one exhibit in 20 years.  It didn’t serve the public good but rather the interests of the owner of the art.  The art was never transferred to the organization.  (Tikar TC Memo 2021-53)

Michael Jackson Estate

One of the most difficult and contested issues around estates, is valuation of assets.  Especially if they are not easily marketable.  Here’s an example for you.  Michael Jackson’s estate valued his name and likeness at his death to be $3 Million.  The IRS came back and considered the value to be $434 Million.  Tax Court came in at $4.15 Million.  (Estate of Jackson TC Memo 2021-48)

1099-C issued for cancellation of debt – doesn’t void the liability or judgement.

After attempts to collect on consumer debt, bank won a court judgement against taxpayers.  Bank sent taxpayer a 1099-C, form reporting cancellation of debt income.  Taxpayer considered the debt forgiven.  Courts did not agree.  Bank was required to send the 1099-C,  this did not actually discharge the debt. (Gericke V Truist DC NJ)

Taxpayer keeps tax debt after bankruptcy

Taxpayer didn’t pay his taxes for a number of years.  Filed for bankruptcy and asked to be relieved of the debt.  6^th Circuit disagreed.  Taxpayer willfully didn’t pay his taxes.  He also had a lavish lifestyle.  (Helton, 6^th Cir)

Life Insurance Benefit to shareholder – employee compensation

Company used life insurance to provide death benefits to the sole shareholders wife as well as 4 of the other employees. Tax court considered this compensation.  A compensation benefit for being a employee not necessarily a shareholder (De Los Santos 156 TC No9)

Horse Business/Hobby

Once again, taxpayer who had another business that provided him funds to live on, used those funds to support a horse business.  Even though taxpayer spent a good amount of time on this business, tax court and IRS considered it a hobby.  See “additional updates” section about the 9 factors used to determine hobby vs business.  (Gallegos TC Memo 2021-25)

Lose Passport for back tax debt

Taxpayer owed IRS almost $500k for back taxes spanning multiple years.  Since 2015, IRS has been allowed to certify the tax debt and inform the US Department of State, who can deny or revoke someone’s passport.  (Rowen, 156 TC No8)

S Corporation tried to write off hobby in business

Taxpayer and his son operated a construction business.  Son liked car racing, so company purchased car racing car and parts.  Totaled over $120,000.  IRS disagreed with the deduction.  Taxpayer claimed they were for advertising.  IRS point was that:

• Racing wasn’t conducted under firm name
• Company logo was not visible on the car
• Could not prove that activity led to business
• They buried the expenses in their construction expenses

(Berry, TC Memo 2021-42)

Bad Recordkeeping on Mileage

Taxpayer used her personal vehicle for business.  She deducted the standard mileage allowance.  Over 34,000 miles.  Tax Court found that her mileage log had a lot of holes in it and found it unreliable.  Deduction was denied.  (Brown TC Oral Order)

Credit Card Rewards

In today’s world, it is common to have some sort of reward attached to your credit card.  This can be either points or cash back rewards.  This reward isn’t taxable but it does reduce the cost of the purchase. In a tax court case, taxpayer used the credit card to purchase visa gift cards and used the gift cards to purchase money orders which were deposited into his bank account.  Rewards earned on the purchase of visa card was tax free but the rewards earned  on money orders and reloadable debit cards are taxable. (Anikeev, TC Memo 2021-23)

Partners Loan?  Or Contribution of Capital?

One of the partners in a partnership loaned funds to the business and treated it like a loan.  All partners treated it as a loan.  The partnership went out of business and they considered the loan a contribution of capital.  IRS said, not they had discharge of indebtedness income.  Tax Court agreed with IRS.  Partnership treaded the cash infusion as a loan.  The partnership was not going to pay it back.  Partners and partnership had discharge of debt income.  (Hohl, TC Memo 2021-5)

Tax Home

Is it where you live or where you work?  Generally, it’s where your principal place of business is.  For many of us that’s the same place.  In this case, taxpayer had two offices, Minnesota and Washington DC.  His residence was in MN and when he was in DC, he stayed at hotel or a temporary apartment. Tax court nixed the deduction for lodging.  In determining this, Tax Court determined that taxpayer spent more time in DC, had greater income in DC and the business in DC was not temporary or indeterminate.  (Soboyede, TC Summ Op 2021-3)

Wages paid to corporation owner reclassed as dividend

C Corporation paid their 3 shareholders management fees.  Tax Court disallowed the deduction.  Corporation always paid the management fees at year end.  After the fees, they had very little net income.  The corporation had no history of paying dividends.  The corporation had made the payments without quantifying the services performed. The payments were in line with their ownership percentage.  Tax Court considered it a disguised dividend and disallowed the deduction.  (Aspro,Inc TC Memo 2021-8)

House Salvage as a charitable write-off

Taxpayer purchased a house and wanted to demolish it to build a new house on the site.  They conveyed the building to a non-profit and hired disadvantaged individuals to deconstruct the house with salvaging the parts.  No recording was done with the state on this transaction. Taxpayer took charitable deduction for the full price of the house.  District court said they didn’t make a complete transfer of the property as required to get a charitable deduction.  Appeals court agreed with circuit court.  (Mann, 4^th Cir)

Statue of Limitations

Self-employed taxpayer filed 1099 forms without the payee’s ID numbers.  IRS assessed penalty for no backup withholding.  Taxpayer claimed that the 3 year statue of limitations was up and they could not assess the penalty.  IRS said the statue of limitations starts with the filing of Form 945 reporting the backup withholding.  5^th Circuit agreed with taxpayer (Quezada, 5^th cir)

2020

Underreporting income

Taxpayer was issued a 1099-K for income generated through pay pal.  Taxpayer reported substantially less than the number reported on the 1099-K.  IRS audited. Taxpayer claimed the differences were customer refunds.  Tax Court didn’t believe (Lakew TC Summ Op 2020-27)

Large IRA distribution not reported on tax return

Taxpayer withdrew over 200k from his IRA, had it deposited into the bank of his wholly owned LLC.  The LLC loaned the funds to another company,  who repaid the loan the next year.  Taxpayer returned the funds to the IRA in that next year.  Taxpayer was taxed on the funds (Ball, TC Memo 2020-152)

Passive Losses and Rentals

Taxpayer had a short-term rental property a few hours away from his personal residence.  Hired a management company to do the day to day rentals, cleaning in between tenants and minor repairs.  When taxpayer filed his tax return, he claimed he was activity involved in managing the property and the rental losses were not subject to the passive activity rules.  IRS inquired on his active participation and requested a log of time spent on the property.  Courts didn’t believe the log and considered time spent unrealistic.  Loss was denied (Lucero, TC Memo 2020-136)

Church Clergy must pay their own Self Employment Taxes

Taxpayer, a retired minister, applied for social security benefits.  He was told he did not qualify for them as the church he worked for did not withhold FICA taxes.  He sued the church.  Court tossed the suit as churches are not required to withhold FICA but clergy should pay self-employment tax on their earnings unless granted an exemption.  ( Kuma vs Greater NY Conference of Seventh-day Adventist Church D.C. NY)

Trust Cannot plead the Fifth

Taxpayer was a trust who was issued summons to produce records.  IRS was looking for foreign income not being reported.  Trustee plead the fifth.  2nd Circuit court ruled that this privilege didn’t apply to entities but only natural persons.  (Fridman, 2nd Cir)

Charity gets charitable tax exemption revoked

A charitable organization had members 55+ in age.  Each year they paid dues.  When member passed away, the organization would make a payment to the funeral home to help cover the funeral cost.  The amount was based on years of being a member vs members need.  IRS revoked their exemption as they were not operating for a charitable purpose.  (Korean-American Seniro Mutual Assn TC Memo 2020-129)

IRS Garnishs IRA

Taxpayer pled guilty to some white collar crimes.  His sentence included jail time and monetary restitution. IRS garnished his IRA.  Taxpayer objected that he needed the IRA to pay child support.  Appeals court said he had enough other income to pay his child support.  (Dominquez 5th Cir)

Penalties

Taxpayer, a tax attorney, was issued a substantial understatement penalty by IRS.  Taxpayer argued that he relied on advice from a qualified tax professional.  Tax Court did not agree.  Taxpayer had plenty tax experience (Babu, TC Memo 2020-121)

Tax Lien on property sold

Taxpayer purchased a piece of property in a foreclosure sale.  It had a lien on it from the IRS for back taxes.  IRS can enforce the lien (LN Management LLC Services 7241 Brook Crest D.C. Nev)

Big side business loss when taxpayer has other sources of income

Taxpayer had a side business and created a 40k loss.  His day job provided him with 176k of wages.  40k loss was a red flag.  IRS disallowed deductions as taxpayer could not substantiate them.  (Pilyavsky, TC Summ  Op 2020-20)

Taxpayer Debt to son

Taxpayer’s company made loans to taxpayers son.  They had loan agreements with payment schedules. The son did not make any of the payment and the company kept loaning son money.  Company wrote off the debt as a bad debt and took a deduction.  IRS challenged this and Tax Court agreed with IRS.  The debt was not bona fide debt so  no deduction.  (VHC, 7^th Cir)

Claiming the children after a divorce

Taxpayer claimed daughter on tax return.  Daughter actually lived with her mother and mother claimed her as well.  Taxpayers who are non-custodial parents of children need to attach IRS form 8332 signed by the custodial parent to claim the child as a dependent.  Taxpayer did not (Bidzimou, TC Memo 2020-85)

Sale of property where taxpayer still owes on loan

Taxpayer converted a property they owned to rental property.  On sale of the property, the mortgage was larger than what the sale provided.  The loan was non-recourse meaning taxpayer was not obligated to pay the difference to the lending institution.  Lending institution forgave the debt.  When taxpayer prepared their taxes, they recorded the loss on sale of rental but did not include the debt forgiveness.  Tax court disallowed the loss. First, they couldn’t prove their cost basis of the property.  Second, since the loan was non-recourse, the debt forgiveness is part of the sale price and should have been included in income.  (Duffy TC Memo 2020-108)

Rental Property that was not rented

Taxpayer purchased a residential property and rehabbed it.  Took 6 years.  Taxpayer never lived in property and neither did anyone else.  Taxpayer sold property at a loss and deducted it like the property was rental property.  Courts found that taxpayer never engaged in any activity that would constitute a rental property.  Deduction was reclassed to capital loss (Keefe, 2^nd Cir)

Insolvency exclusion lost

Taxpayers can exclude cancellation of debt income if the debts are greater than their assets.  Taxpayers in this case transferred $300,000 to their son’s bank account but kept using it like it was their own money.  With this $300,000 considered their income, they were solvent and any debt cancelled was taxable (Hamilton 10^th Cir)

Accountant pay was wages

Accountant (taxpayer) worked tax season was paid his billable rate.  He claimed he was co-owner (partner) in the firm.  No partnership return was filed, no withholding was done on his payments and he wasn’t provided any leave time.  Taxpayer reported the earnings on schedule C as self-employed.  IRS said it was wages.  Tax Court agreed with IRS (Thoma, TC Memo 2020-67)

Cleaning service workers were independent contractors and not employees

Taxpayer, a cleaning service, had contracts to clean apartment complexes.  She hired workers who had cleaning experience, didn’t train them, provide benefits or leave pay.  They used their own transportation to get to the jobs, paid for supplies, worked as little or as much as they liked.  Taxpayer did not inspect or supervise jobs.  They were treated as independent contractors (Santos, TC Memo 2020-88)

Mom’s cash advances to son – not loans

Mom made cash payments of over 1 million to son during the years from 1985 to 2007.  He repaid some of it but stopped in 1989.  IRS says they were gifts over the annual exclusion so the gifts were included in the estate tax return.  Estate said they were loans.  Tax court disagreed,  there was little evidence of indebtedness (Estate of Bolles, TC Memo 2020-71)

Litigation Support Payments

Taxpayer, an attorney, worked on a contingent fee basis.  His clients would front the cost of the litigation.  If the attorney was unsuccessful, he was under no obligation to return the payments to the client.  He recorded the payments as a loan.  Tax Court disagreed, it wasn’t debt as the taxpayer had no obligation to pay back the funds.  (Novoselsky, TC Memo 2020-68)

PayPal 1099-k

Taxpayer was officer for a charity.  He set up a PayPal account using his own name to receive payments for the charity.  PayPal sent a 1099-k to the taxpayer for payments to that account.  He did not report the 1099 on his tax return.  IRS audited his return.  Tax court agreed that the funds did not belong to him but to the charity.  (Keels, TC Memo 2020-25)

Tax Home for travel expenses

Taxpayer lived in Georgia as self-employed.  However, he worked at his one client’s office in NJ 4 days out of every week.  Taxpayer deducted travel expenses from GA to NJ.  They were denied.  Work was indefinite and not temporary.  His tax home was NJ not GA.  His business was in NJ not GA. (Brown, 11^th Cir)

IRS garnishes IRA of husband for wife’s debt

Wife of taxpayer stole money from employer, pleaded guilty and agreed to restitution.  The Government garnished her IRA but also the IRA of her husband.  They argued that the government had not right to husband’s IRA.  Appeals court disagreed (Berry, 5^th Cir)

10% penalty on early distributions from IRA

Taxpayer withdrew funds from his IRA before reaching the age of 59 ½.  He claimed that the 10% early distribution penalty was not applicable as his wife was disabled.  IRS says disabled exception applies only to account holder and not the spouse.  Tax court agreed (Merrell, TC Summ Op. 2020-5)

IRS CP2000 notice is not an audit or exam

Taxpayer failed to report IRA income on his return and received a CP2000 notice from the IRS.  Taxpayer also was under audit for various business expenses on his return.  Taxpayer claimed that he was audited twice for the same year and the tax statue protected him from unnecessary audits or investigations.  Tax court agreed with IRS that CP2000 notice is not an audit or exam it was just a matching of informational return to the 1040’s filed.  (Essner TC Memo 2020-23)

Retirement funds and Bankruptcy

In a divorce taxpayer received half of his wife’s 401(k) and all of her IRA.  He later filed bankruptcy and claimed these accounts were not available to his creditors.  This exemption applies to the person who created and funded the account.  (Lerbakken, 8^th Cir)

Mary Kay Consultant owe Self Employment tax on deferred pay

Taxpayer retired from Mary Kay as an independent contractor where she was paid with Commissions.  The payments she received after retirement were a percentage of sales she helped develop.  She claimed the payments were from the sale of her business.  Tax court says it’s Self Employment income.  This particular issue was in the courts a few years ago.  With the same result (Dunlap, TC Summ Op 2020-10)

2019

Failure to substantiate charitable deduction costs write-off

Taxpayer donated $236,000 of items to a charity. They attached Form 8283 to their return, however, they did not get a qualified written appraisal by the due date of their return. (Presley, 10^th Cir)

12 years of losses – allowed

Partnership owns a golf club and had losses for 12 straight years.  IRS disallowed the losses.  Tax Court allows them.  Stating that the business operated in a business like manner, employed qualified people and that the finances have recently improved.  (WP Realty, TC Memo 2019-20)

Foreign Documents to substantiate US Tax Break

US Taxpayer sold property in Canada.  They disputed the cost basis used in calculating the taxable gain.  Taxpayers submitted 5 documents to court as evidence.  However, the five documents were written in French without any translations.  Court ruled the documents inadmissible (Nsame, TC Summ Op 2019-26)

IRA in Divorce

Divorce agreement stated that ex-wife to transfer $10,000 from her IRA to her ex-husband.  An IRA for him was opened and the funds transferred.  He then proceeded to withdraw the funds and closed the account.  the $10,000 was taxable with the 10% penalty for being under 59 ½. (Rosenberg, TC Memo 2019-124)

Winning a car – taxable

Car dealership has competition and gives away a car to a high school student.  This is taxable income and student did not report it.  (Conyers, TC)

Bad Record Keeping - Business loses vehicle expense deduction

Vehicle expense deduction has strict substantiation rules.  Taxpayer didn’t keep contemporaneous mileage log and lost the deduction (Hatte, TC Memo Op 2019-109)

Firm created charity to get around telemarketing rules

Business taxpayer could not solicit business because of the do-not-call registry.  They got the idea of combining the sales calls with charitable giving.  They created a charity and told potential customers that if they allowed a salesman to come to their house, they would donate to the charity.  This didn’t fly.  (Giving Hearts, TC Memo 2019-94)

Horse Breeder business didn’t own a horse

Taxpayer used to own horses but they were all sold.  Taxpayer kept writing off expenses for a business as she claimed she was in the market for another horse and went to riding events.  Tax Court disallowed saying the activity didn’t reach the level of a business (McMillan, TC Memo 219-108)

Cocoa Farmer in Africa– not a trade or business

US Taxpayer living in California invested in cocoa farms in Ghana.  He deducted his investments and other costs on Schedule C.  Tax Court denied the write offs citing the farms were across the world from his home and job.  (Wegener, TC memo 2019-98)

Issuers of intentionally false 1099’s

Taxpayer received 1099-Misc and claimed they should have been a W-2 employee.  She sued her employer and won. (Vanderbilt v Boat bottom Express, DC Fla)

Noncustodial parents need 8332 to claim children as dependents

Regardless of what the divorce agreement says,  any noncustodial parent needs the custodial parent to sign form 8332 releasing the child dependency to the noncustodial parent.  This needs to be attached to the return.  IRS audited the noncustodial parent who did not have form 8332.  The credits were disallowed.  Custodial parent did sign form after the fact but also claimed the same child on their return without amending.  (Demar, TC Memo 2019-91)

IRS to help Canadian Tax Authority collect

Canadian Citizen who later became a US Citizen owed taxes in Canada.  Appeals court said the IRS could collect for Canada and was authorized by the Canada-US Tax treaty.  (Retfalvi, 4^th Cir)

Gambling as your trade or business

Taxpayer had a passion for playing poker and spent quite a bit of time playing.  He also had a full-time job.  Tax Court concluded the poker playing was a hobby citing losses and substantial wages form his full time job. (Zalesiak, TC Summ Op 2019-16)

IRA lost in Bankruptcy

IRA funds are generally protected from creditors.  Taxpayer used IRA funds to purchase a vacation home and two cars.  These transactions are considered prohibited transactions and opened the whole IRA to creditors.  (Yerian, 11^th Cir)

IRA Rollover within 60 Days

Taxpayer borrowed funds from IRA to help with cash flow on buying a house and waiting for another to close.  She sent check to refund IRA and it arrived at the bank on day 58 but not deposited until day 62.  IRS said it was late subject to tax and penalties.  Tax Court disagreed (Burack, TC Memo. 2019-83)

Ex-spouse deducts payment to ex

Ex-husband was sued by a co-owner of his business for paying himself too much.  Taxpayer, in the divorce settlement, agreed to pay half of the damages once the case was settled.  It was eventually settled for $600,000 and ex-husband paid it.  Ex-wife reimbursed her ex-husband per agreement and deducted the $300,000 on her tax return.  District Court disallowed the deduction.  Appeals Court agreed with taxpayer.  If they paid tax on the funds initially, they get to deduct the repayment of it. (Mehelick, 11^th Cir)

Author claims her brand is investment income not self-employment income

Taxpayer, an author, claimed that a portion of the income she received from the publishers were for the use of her name and likeness.  She reported it as investment income instead of earnings from self-employment.  Tax Court disagreed.  Her brand was part of her business.  (Slaughter TC Memo 2019-65)

Contractor paid settlement on S Corporations behalf

Taxpayer had a home building business through multiple entities.  Homebuyer sued the contractor personally and the entities for shoddy stonework.  They settled and the taxpayer paid with his own personal funds.  Tax court allowed 50% of the payment as a capital contribution to the S corporation and the other 50% as an employee business expense.  2019 tax reform discontinued employee business expense deduction.  (Ferguson TC Memo 2019-40)

IRA and Bankruptcy

Taxpayer withdrew $50,000 out of his IRA and purchased $30,000 of lottery tickets.  Within the 60 day rollover period, he put the extra $20,000 back into his IRA.  He then filed for bankruptcy.  Bankruptcy trustee said the rollover cost the taxpayer the bankruptcy exemption for his IRA.  Tax court disagreed.  The $20,000 was in the IRA on the date of bankruptcy.  (Jones DC Ill)

California corporation license suspended

Corporation did not pay its taxes so California suspended its corporation privileges.  With their privileges suspended, they could not file lawsuits.  Privileges were reinstated but not before the 90 day filing period lapsed.  (Timbron International Corp TC Memo 2019-31)

Tax Home?

Taxpayer lived in Georgia and traveled to his client in NJ each week.  Worked in client’s office four days a week.  Taxpayer was a consultant and reported his income and expense on Schedule C of his tax return.  Since he was a consultant, he deducted his travel expenses from GA to NJ.  Tax Court disagreed saying his tax home was NJ not GA.  All his business income was generated from the NJ client.

Schedule C – Hobby Loss

Taxpayer was a pilot with substantial wages.  He purchased an antique fighter jet and spent a large amount of funds restoring it.  Taxpayer then flew it at airshows and treated it as a business by filing the activities income and expenses on Schedule C.  Tax Court nixed the deduction claiming he did not intend to turn a profit.  He didn’t run the business in a business-like manner;   he didn’t follow expert advice; and reported losses that grew bigger each year. (Kurdziel, TC Memo 2019-20)

IRA and Bankruptcy

Taxpayer self-directed IRA held assets that he directly or indirectly owned a greater than 50% interest.  As a prohibited transaction, the whole IRA was voided and opened to taxpayers creditors. (Correra, DC, Texas)

Insurance Proceeds for emotional distress

Taxpayer sued employer for wrongful termination.  In the settlement, taxpayer received damages for “emotional distress”.  Lawsuit proceeds for medical, physical injuries and physical sickness are not taxable but emotional distress is even if there were physical consequences of the emotional distress. (Doyle, TC Memo.  2019-8)

2018

Charitable Deduction scheme backfires

Taxpayer bought heavily discounted clothes which she immediately gave to charity.  She took as a deduction the original price of the clothing, not what was paid.   Over  3 years it amounted to $85,000.  Tax Deduction is limited to the Fair Market Value of the items at time of donation.  (Grainger, TC Memo 2018-117)

Yacht Business Deduction

Taxpayer in the real estate business deducted the cost of his yacht as a business expense.  Claiming it was a marketing tool to gain potential buyers for his real estate ventures.  Court didn’t agree (Becnel, TC Memo 2018-120)

Taxpayer criminally convicted of fraud walks away from the fraud penalty.

Taxpayer was convicted of filing fraudulent tax returns which allows IRS to collect taxes for years beyond the statute of limitations.  When assessing the fraud penalty, the IRS agent failed to get prior written approval from their immediate supervisor.  Taxpayer does not have to pay the penalty (Guess, TC Memo 2018-97)

General Tax Language on Debt Collection Letter

Taxpayer was insolvent and received a letter from a collection agency offering to settle her bank debt at a discount.  The letter had a statement on it “this settlement may have tax consequences.”  Taxpayer sued saying the statement was misleading and violated a federal debt collection law.  An Appeals court said the statement was basically true and threw out the lawsuit.  (Dunbar v Kohn Law Firm, 7^th Cir)

Writing off part of your home to store inventory

Taxpayer was a self-employed mechanic without enough storage at the garage, so he stored paperwork at his house.  IRS disallowed.  Tax Court agreed.  He could store inventory at his house and write off part of his house but paperwork does not qualify.  (Najafpir, TC Memo 2018-103)

IRS Foreclosed on jointly owned home

Husband held legal title to SD home and had the tax debt.  IRS took, sold and did not give any of the proceeds to innocent spouse.  SD had law that gave innocent spouse a possessory homestead interest.   Court agreed that spouse needs to be compensated for her loss.  (Nelson D.C. S.D)

Taxable Tuition Waiver

Taxpayer was laid off from his job at a private university with a very generous severance package.  The package included an extended tuition waiver.  Taxpayer took advantage of the tuition waiver 20 years later.  The waived tuition was taxable to him.  (Voigt, TC Summ OP 2018-25)

Penalty for willful failure to report foreign bank accounts

Supreme court denied  to hear a case where taxpayer wanted the 1.1 million penalty vacated based on the 8^th Amendment prohibition on excessive fines.  Penalty stands.

Transferring of assets to relative put a wrinkle in insolvency calculation

Couple transferred 300k into son’s name.  They were also had student loan debt discharged. In the calculation to determine if the couple was insolvent and whether the  debt discharge was taxable, they had to include the 300k transferred to their son.  (Hamilton, TC Memo 2018-62)

Defense of Hedge Fund in Divorce not deductible as a business expense.

Taxpayer and his wife were divorcing.  The biggest issue was the hedge fund asset and the distribution it made annually.  Millions in legal fees were spent in divorce negotiations but were not deductible as the legal fees were to contest wife’s claim and not business related.  (Lucas, TC Memo 2018-80)

Father & Son Businesses denied deduction to son for work performed

A father and son had separate businesses but worked for the same projects.  Son did not have a contractor’s license but did negotiate his own fees with the homeowners.  Since son did not have a contractor’s license, payments were made by the homeowner to the fathers business and father paid the son.  The deduction for the payments to the son from the father was denied.  He wasn’t a subcontractor of the fathers business.  (Gaunt, TC Memo 2018-78)

Deducting Charitable Mileage

Taxpayer drove for her church delivering meals and transporting gifts.  She did not keep a log or have other evidence to substantiate her mileage.  Deduction was denied (Farolan, TC Summ Op 2018-28)

IRS has to get in line for judgement on property

IRS put a lien on property of a taxpayer owing back taxes.  However, a law firm also put a lien on the same property but before the IRS did.  Law firm lien has priority over IRS.  (Pierson, DC NJ)

Taxpayer gifted property to keep IRS from seizing

Taxpayer owed IRS 2 million in taxes.  She conveyed property worth $400,000 to her grandson.  IRS asked court to set aside the conveyance.  They did.  (Wight, DC Wash)

Farming Lost Millions – considered hobby – losses not deductible

Taxpayer had day job, spent about 8 hours a week on farm.  Deducted 1.6 million in losses over time.  IRS challenged and considered a hobby.  Tax Court upheld.  Taxpayer had no farming experience and did not consult experts.  He had no profit motive. (Williams, TC Memo 2018-48)

Keep Forms 8606

Taxpayer made non-deductible contributions into his IRA but didn’t keep copies of his tax return.  When he liquidated the IRA, IRS wanted taxes on the full amount of liquidation.  Where taxpayer did not have copies of prior reported Form 8606, he did have bank statements showing he had basis.  (Shank, TC Memo 2018-33

IRS Levy Disability Benefits

Taxpayer owed back taxes and was on disability.  Disability was deposited directly into his bank account.  Where the IRS cannot levy the disability benefits directly, it can levy the bank account they are deposited into.  (Maehr, D.C. Colo)

Short Sale of Home with nonrecourse loan

Taxpayer converted their residence into a rental but sold it a year later in a short sale.  The mortgage company applied the proceeds to the loan and forgave the remaining debt.  Taxpayers received a 1099 for the sale and another 1099 for the debt forgiveness.  Taxpayers reported a loss from the sale of the rental and excluded the income from forgiveness of debt.  Tax court disagreed.  Nonrecourse debt forgiveness is included in amount realized on sale.  (Simonsen, 150 TC No 8)

Real Estate pros and passive activity loss rules

Architect deducted losses from his rental properties.  If real estate pros can prove they spend over ½ of their working hours and over 750 hours on rental property, they can be considered active vs passive and deduct the losses.  Taxpayer had a detailed activity log of his time spent on the properties which was more time than what was spent being a architect.  (Franco, TC Summ Op 2018-9)

Division of IRA in Divorce

Divorce court ordered taxpayer to pay $100k to his wife in a divorce settlement.  He took the 100k out of his IRA, put it in his bank account and gave his ex the cash.  He got a tax bill.  This was not a tax free transfer incident to divorce (Kirkpatrick, TC Memo 2018-20)

Misappropriating a friends money

Taxpayer took a friend’s $20 million to invest where he and his friend would split the profits.  Instead, taxpayer spent the money on paying his own personal bills and purchases.  Tax Court said the $20 million was not income but held in trust for his friend.  However, when he diverted the funds to pay his personal expenses, it became income.  (Sun 5^th Cir.)

Side Business Expenses disallowed

Taxpayer had a side business as a musician.  He deducted a slew of expenses IRS categorized as personal expenses:  Meals and recreational equipment with his kids.  He tried to justify writing off the expenses as business expenses by saying he’s most productive as a musician when he is happy and spending time with his kids, doing recreational activities and traveling.  Tax Court did not buy this (Nicholson, TC Summ Op 2018-24)

E-filing Error – Still owe IRS Penalties

Taxpayers filed their return with TurboTax.  He input a wrong social security number, so the return was rejected.  They were sent an email to this fact.  However, they did not check their email for 18 months.  Once they did check email, they filed the return on paper and paid the tax.  Court upheld the IRS assessment of the penalties.  (Spottiswood, DC Calif)

2017

Ranch lost millions – not a hobby

Taxpayer had a full-time job and also ran a ranch.  Over years, the ranch lost millions.  IRS Challenged it as a hobby.  Tax Court disagreed and found that taxpayer acted in a business like manner, hired a ranch manager and consulted experts in his attempt to increase profits.  Loss was deductible (Welch TC Memo 2017-229)

In a similar case, losses were not considered hobby losses but it was considered passive because the taxpayers could not prove enough time spent on the business to be active (Robinson, TC Memo 2018-81)

Foreign Income Exclusion

US Citizens working abroad can exclude a certain amount of wages from income if they meet certain criteria.  Taxpayer worked in Iraq as a helicopter pilot.  His home where is wife lived, was Alabama and he returned there every couple months. In Iraq, he lived in company owned housing.  In off hours he spent his free time socializing, going out to eat and updating his living quarters.  Tax Court says his tax home was Iraq not the US.  (Linde, TC Memo 2017-180)

State Unemployment Benefits – Taxed in US

Taxpayer lived and worked in Ohio.  After her work contract ended, she moved back to Canada.  She received unemployment from Ohio.  She reported it on her Canadian taxes and considered it non-taxable to the US and used the US Canadian tax treaty as her authority.  Tax Court did not agree.  (Guo, 149 TC No 14)

Nonprofit Loses it’s Tax Exempt Status

A credit counseling company filed 990’s since 2002. In 2012 they got audited by the IRS and had their tax exempt status revoked back to 2002.  They were charged interest back from when their 2002 tax return was due – 2003.  Group wanted the interest to be charged from the date their exemption was revoked.  Tax Court disagreed.  (CreditGuard of America Inc, 149 TC No 17)

Clergy Housing Allowance

Federal Court says the housing allowance exclusion is unconstitutional because it’s like the federal government supporting religion.  Only members of the clergy are allowed the tax benefits of the housing allowance. (Gaylor, D.C. Wis)

Rental of farmland and self-employment tax

Taxpayers rented their own farmland to their farm corporation.  Rent was at fair rental value.  Taxpayers also took salaries equivalent to industry standards. The company contracted with a poultry producer to raise chickens on the land.  Relying on the 8^th US Circuit Court of Appeals, Tax Court said that the rental income was not subject to self-employment tax (Martin, 149 TC No12)

Same Sex Couple denied medical expense for in vitro fertilization costs

Taxpayer and his partner wanted kids.  He had donor eggs fertilized with his sperm and implanted in surrogate mother.  He then deducted the costs of what he paid to have this done and paid to the surrogate as a medical expense.  His deduction was denied as it was not his medical expense.   He could deduct his cost of his bloodwork and sperm collection but the other costs were not medical expenses incurred for the care of him, his spouse or dependent.  (Morrissey, 11^th Cir)

Hobby Loss – Collecting Law Enforcement Patches

Taxpayer retired and spent quite a bit of time collecting, tradeing and going to trade shows for his collection of law enforcement patches.  He started this collection as a kid.  This activity was never profitable and he kept shoddy records.  Losses disallowed. (Graco, TC Summ Op 2017-67)

Form 8332 needed to claim non-custodial children

Daughter lived with taxpayer’s ex-wife after the divorce.  He did not have his ex-wife sign form 8332 to release dependency exemption for his daughter.  Failure to do this cost taxpayer, head of household status, dependency exemption and child tax credit.  (Seeliger, TC Memo 2017-175)

IRS Nixes another large donation to charity

A big game hunter donated animal hides, skulls, horns and other hunting items to a charity with a1.45 million write off.  Taxpayer claimed the donations were museum quality and should be valued at their replacement cost.  IRS disagreed saying they were commodities and valued at current market price.  Court agreed and allowed $163,000 deduction (Gardner, TC Memo 2017-165)

Transfer of house – part gift – part sale

Taxpayer was behind on his mortgage payments and sold his home to his parents.  At the sale, the mortgage left on the property was $664,000 and the FMV was $975,000.  $975,000 was reported on 1099-S but parents only paid off the mortgage.  No other consideration was paid. IRS considered amount realized on sale was $975,000.  Court disagreed.  Amount realized was $664,000.  The remainder was a gift.  (Fiscalini, TC Memo 2017-163)

Beauty Pagent costs for child – non deductible by parents

Taxpayer’s child enters pageants as a child and won prize money.  Parents reported their childs income on their return and took a deduction for the travel, costumes and other expenses.   Income and expenses needed to be included on the child’s return not the parents.  (Lopez, TC Memo 2017-171)

Per diems and nonaccountable plans – taxable to employee

Taxpayer had $42,000 of travel per diem in his W-2.  He then deducted most of this as an unreimbursed employee business expense.  Deduction denied – per diem were paid regardless of substantiating the expense. (Johnson, TC Summ Op 2017-71)

Restricting ESOP plan to executives

Taxpayer is sole owner and employee of Corporation with an ESOP plan.  Taxpayer also owns another corporation with several employees.  ESOP plan testing needs to include both corporations and cover 70% of the employees of both corporations.  ESOP is considered non-qualified.  (Paza Staffing Services, Inc. Tax Court Docket 6881-12R)

10% penalty on early withdrawal from IRA

Taxpayer birth certificate from Kenya shows he was age 60 at the time of distribution.  However, many other documents (Certificate of Naturalization, Drivers License and College transcript) had him at 58 yrs old.  Court agreed to the 10% penalty (Omoloh, TC Summ Op 2017-64)

Trust did not save house from IRS tax lien

Taxpayer, owing tax debt and other liabilities, transferred the title of their house to a trust.  They still lived there paying the household expenses out of a trust bank account.  Taxpayers controlled the trust.  Courts and IRS said the trust is a nominee for the taxpayer and IRS could foreclose on the property. (Balice, DC NJ)

Employee Business Expenses Write-off Denied

Taxpayer paid for employee business expenses and did not see reimbursement from employer.  Failure to see reimbursement costs him the writeoff (Howard, TC Summ Op 2017-65)

Costs before business commences are not deductible

Engineer deducted $50,000 of research costs for a startup venture.  Business had not begun, no sales, no clients and no marketing – no deduction.  Once business begins, costs can be deducted under the start-up rules.  (Carrick TC Summ Op 2017-56)

Barter of Services – Handyman Services

Handyman traded his services for reduced rent.  Handyman has taxable income (Welemin, TC Summ Op 2017-54)

Minority Shareholder

Company owners were cooking the books and paying big dividends.  IRS audited the company and sent a big tax bill.  IRS also looked to the Shareholders with those big dividends to pay the tax bill.  Even though the minority shareholder was not in on the scheme,  they still liable.  (Kardash, 11^th Cir)

Farmers get an extra tax break

Donations of easements by farmers can get them an extra tax break.  Farmers can offset 100% of their AGI with the donation.  The rest of us can only offset 50% of our AGI.

Roth IRA

Taxpayer/Inventor had a long standing corporation but created a new LLC.  This new LLC was owned by his Roth IRA and his Family’s Roth IRAs.  He transferred his patent’s to the new LLC and licensed them to his corporation.  IRS considered this a illegal transfer into their Roth IRAs and issued the 6% penalty on excess pay ins.  Tax Court agreed (Block Developers, TC Memo 2017-142)

Donation of Real Estate – Denied

Taxpayer wanted to donate a run-down movie theatre in a bargain sale to a new non-profit.  However, the non-profit did not get the exemption yet.  Taxpayer entered into an agreement with another non-profit and required them to transfer the property to the new non-profit when they received their exemption.  Tax Court denied the deduction because taxpayer did not relinquish control over the property. (Fakiris, TC Memo 2017-126)

Large Charitable Donation

Taxpayer charitable property donations to Goodwill totaled $145,250.  They couldn’t prove the value so the Tax Court disallowed all but $250 of the donation.  Because the deduction was so large, IRS also slapped them with a 20% negligence penalty.  (Ohde, TC  Memo 2017-137)

Doctors loan payments

Doctor was given a loan to practice in a certain community.  Loan charged interest and was backed up by a promissory note.  If doctor stayed in the community a given period of time, the loan would be forgiven.  Doctor left after 2 years and paid back part of the loan per the agreement.  He wrote off the payments as a business expense.  Court and IRS said no.  (Salloum, TC Memo 2017-127)

Alimony

Divorce court order taxpayer to pay his ex-wife $10,000 up front and $500 a month as spousal maintenance.  Taxpayer deducted it as alimony.  IRS disagreed saying the $10,000 was a division of assets and non-taxable/non-deductible. Tax Court disagreed.  Taxpayer had no obligation to pay the funds in the event of his ex-wife’s death.  (McIntee, TC Summ Op 2017-48)

Selling Stock – FIFO method or Specific Identification

Taxpayer did not instruct the broker to sell specific shares.  So broker used the default FIFO (first in first out) method and selling the oldest shares first.  (Turan, TC Memo 2017-141)

401k Loans

Taxpayer took 401k loan out just before leaving on maternity leave.  During her leave she did not make payments on the loan or in other words, her employer did not take the payments out of her maternity leave.  The 401K Administrator issued a 1099-R for the loan, considering it defaulted.  Taxpayer did repay it all by the due date.  IRS and Tax Court agreed that she defaulted on the loan by not making payment in the 3 months of maternity leave. (Frias, TC memo. 2017-139)

Boston Bruins - Hockey Team deducts full cost of meals on the road

Meals are generally 50% deductible.  However, meals provided on employers operated facility can be fully deductible as a de minimis fringe.  IRS claimed the meals provided by the Boston Bruins to players and staff while at away games were 50% deductible.  Tax Court disagreed.  Hotels were part of the teams business premises while on the road.  Hockey business was conducted at the hotel while on the road. Thus meals are 100% deductible while on the road (Jacobs, 148 TC No 24)

IRA distribution to cover medical expenses – subject to 10% penalty

Taxpayer withdrew IRA funds to cover medical expenses after her husband job loss.  This purpose is one of the penalty exceptions, however, the expenses need to be over 10% of AGI to qualify for this exception. It also need to be made in the year of the expenses.  (Fann, TC Summ Op 2017-43)

Dividing IRA in a divorce – ther is a right way and the wrong way

Taxpayer, before divorce was final, emptied out his IRA, gave his soon to be ex-spouse half.  He report it as income on his return.  However, division of IRA’s due to divorce needs to be done pursuant to a QDRO (Qualified Domestic Relations Order) to be penalty free.  Taxpayer not only owed income tax on the distribution but the 10% penalty. (Summers, TC memo 2017-125)

Retired Insurance Agent Commissions subject to Self-Employment Tax

Taxpayer retired but continued to receive commissions on policies sold during pre-retirement years.  Tax Court agrees that the commissions are subject to self-employement tax because the amounts he received were dependent on years of service. (Geneser, TC Memo 2017-110)

Failure to record easement costs taxpayer charitable donation

Taxpayer donated façade easement to a charitable group.  The charity did not record it for 2 years.  Under NY law, the easement is not in effect until recorded.  Write off isn’t allowed before recording. (Ten Twenty Six Investors, TC Memo 2017-115)

Hedge Fund Manager bonus was not partnership distribution

Taxpayer was transferred from her companies  NYC office to their London office.  Duties were the same, pay rate was the same and pay came from NYC office.  She received a bonus of 18 million which she reported as a bonus and used the foreign tax credit against.  IRS considered it partnership wages.  Courts disagreed and considered it a bonus.  Bonus was not in proportion to her partnership interest.  (Herrmann, Ct of Fed. Claims)

Sale of Franchise Contract are capital gains

Taxpayer sold all their business assets including 3 contracts with municipalities.  Taxpayer treated the 3 contract sales as capital gains.  IRS did not agree.  Tax court, however, agreed with taxpayer. (Greenteam Materials Recovery Facility, TC Memo. 2017-122)

Hobby – Book Writing – future plans

Taxpayer hired private investigator to determine if his father died of murder or committed suicide.  Plan was to write a book or movie about it.  Courts agreed with IRS it was a hobby.  Taxpayer has spent millions on investigators over a 10 year period and did not generate a profit. (Vest, 5^th Cir)

Fraudsters cannot deduct repayments of previous reported income.

Taxpayers with a many for profit and non-profit companies received fees from helping financially strapped people manage their finances were sued for fraud.  Taxpayers were forced to return funds fraudulently received from their clients.  They previously included the funds in income and were denied a deduction for the repayment.  (Robb Evans & Assoc., 1^st Cir)

Corporate Scheme to avoid paying taxes backfires

Taxpayer was president and 40% owner of a corporation that owed back payroll taxes.  Taxpayer closed corporation, started a new one with the same line of business and same employees.  Wife owned new corporation but was not active in the business or possessed any industry experience.  IRS considered the new corporation a continuation of the old and levied its bank accounts.  Federal Appeals Court agreed (Eriem Surgical, 7^th Cir)

Large Bad Debt – leads to IRS Scrutiny

Through taxpayers S corporation, he transferred funds to various small companies for financial control and a minority equity interest.  The S Corporation later took a bad debt deduction of $10 Million.  IRS said it wasn’t a loan but an equity interest.  Tax Court agreed (Sensenig, TC Memo 2017-1)

Foreign Earned Income Exclusion

In two cases, taxpayer was denied the deduction of Foreign Income Exclusion:

1.  Taxpayer worked abroad as a civilian for the US Army.  Deduction doesn’t apply if you work for the US Government or any of it’s agencies (Owens, TC Summ Op 2016-83)
2. Taxpayer worked in Afghanistan but wife, kids, house and bank accounts were kept here in the states.  US is his tax home. (Qunell, TC Summ Op 2016-86)

    

   Partner in Partnership did not report his share of Partnership Income.

   Taxpayer received a K-1 reporting his share of partnership income but did not report it on his income tax return.  Taxpayer claimed that he did not receive the funds but the funds were put back into the business for growth. (he agreed to this allocation of funds).  Tax Court disagreed.  Taxpayer was charge tax on his share of income plus added the accuracy related penalty.  (Mack, TC Memo 2016-229

    

   Attribute Income to S Corporation

   Taxpayer entered into a contract with two separate companies to perform brokerage services.  At year end, they each sent him a 1099-Misc.  Taxpayer also set up a S corporation which he also used to perform services and received a salary.  He reported the 1099-Misc income on the S Corp return.  Tax Court disagreed and taxed him personally on the income.  He provided the services not the S Corporation.  (Fleischer, TC Memo 2016-238)

Estate loss of Bernie Madoff assets

After taxpayers death, estate discovered that large assets held by Bernie Madoff was worthless.  Estate took a theft loss for the worthless investment.  IRS disagreed saying the loss was incurred by the LLC who owned the assets not the estate.  Tax Court disagreed.  (Est of Heller, 147 TC No11)

Developer sale of land – ordinary income

Developer subdivided land, built access road and sold various lots.  They reported the losses as ordinary.  After changes in county regulations made it more expensive to develop, sold the remaining lots.  Court said they held the sales in ordinary course of business and considered ordinary income (Boree, 11^th Cir)

Deposit kept on a cancelled sale of business property – Ordinary income

Sellers deal to sell hotel fell through.  They kept the 10 million deposit per agreement terms and reported it as a capital gain.  Tax court disagreed, saying the underlying asset would have to be a capital asset and the hotel did not qualify as such.  Option payment gain was ordinary (CRI-Leslie, LLC, 147 TC No 8)

Pastor’s vow of poverty doesn’t make his income exempt from tax.

Church paid the pastors personal expenses after he gave all his assets to the church .  IRS considered the payment of personal expenses income subject to income tax and SECA tax.  Tax Court agreed (White, TC Memo 2016-167)

Shareholder advances to wholly owned corporation

Shareholder advanced money to his wholly owned corporations.   He had no loan agreement, promissory note, interest calculation or repayment date.  Corporation also paid his mortgage and car payments and did not pay him a salary.  Shareholder performed substantial services for the corporation.  IRS recharacterized payments as salary.  Tax Court disagreed (Scott Singer Installations, TC Memo 2016-161)

Celebrity Estate Tax Cases

Valuation of estate assets create an opportunity for IRS to challenge the valuation.  Both Michael Jackson estate and the Whitney Houston estate.  For the Michael Jackson estate, the issue is the value of his name and image at his death.  For the Whitney Houston estate, the issue is the value of her record and performance royalties.

IRS Rejects taxpayers offer to settle tax debt

Taxpayer failed to file returns and pay taxes for 5 years.  Owed 15.5 million.  Offered IRS $500,000 to settle debt.  IRS said no,  he had a history of egregious noncompliance with the federal laws.  Appeals court agreed (Hauptman, 8^th Cir)

Over contributing to IRA creates fines

Taxpayer sold their house and each contributed $200,000 into their IRAs.  A few years later, they discovered this error, notified the IRS and withdrew the excess contributions.  They agreed they owed a 6% fine on the excess for 2 of the 3 years claiming that they withdrew the excess before the tax return for the 3^rd year was due.  Appeals court disagreed (Wu, 7^th Cir.)

Paying someone else’s mortgage doesn’t get you an interest  tax deduction

Boyfriend paid cash to his girlfriend (who he lived with).  He claimed that it was so she could pay her mortgage and then took a deduction for mortgage interest on his tax return.  Tax Court denied the deduction.  He was not liable for the mortgage, he was not on title to the property and bore no benefits of homeownership. (Jackson, TC Summ. Op. 2016-33)

Suing your employer for sending you a 1099-Misc instead of W-2

Employee sued former employer for fraudulently sending him a 1099-Misc and not a W-2.  He said his employer willfully misrepresented his worker status.  District court through the case out saying that even if the employer intentionally filed the wrong form, the form showed the correct amount paid to the worker. (Liverett v Torres Advanced Enterprise Solutions LLC, DC Va)

Paying Bonus to your kids

Couple with many businesses hired their children (ages 8-13 yrs)  to do various office tasks.  They were paid small wages during the year and a large bonus at year end.  The bonuses were based on year end profits and in one year reached $20k for each kid.  Tax court allowed wages through the year but disallowed bonus.  (Embroidery Express, TC Memo 2016-136)

Retired Mary Kay Consultant

Mary Kay consultant was previously paid on a 1099-Misc for their commissions.  On retirement, the pension benefit was calculated based on commissions made during her working career.  The plan was also a non-qualified plan.  Taxpayer says the payments were for ending her business.  Appeals Court says it’s deferred compensation and subject to self-employment tax.  (Peterson, 11^th Circuit)

Caregiver Fraud

As the 91 year old doctor aged he hired home health care provider to take care of him full-time.  This person took advantage of clients age and dementia to have him pay her over 1 million dollars over a two year period.  On IRS audit, she claimed they were non-taxable gifts.  Tax Court says she exercised undue influence which negated any intent.  Income was taxable and she owed self-employment tax on it as well. (Alhadi, TC Memo. 2016-74)

Write off of Work Clothes – again

Ralph Lauren salesperson was required to wear their clothing at work.  Tax Court says personal expense -  non-deductible (Barnes, TC Memo 2016-79)

Selling Scrap Metal

Sale of scrap metal may not be subject to self-employment tax. ( Ryther TC Memo 2016-56)

Missing K-1 no excuse to not report partnership income

Taxpayer entered into partnership arrangement with individual who managed the business.  The business filed its tax return late.  Taxpayer filed their tax return and did not include the partnership income on his return.  Claimed he had no knowledge of it.  Income is still taxable however the penalty may be waived when taxpayer acted in good faith. (Lamas-Ritchie, TC Memo 2016-63)

Attorney’s failure to honor clients IRS levy notice proves costly

Attorney for a client held lawsuit proceeds in their trust account.  IRS served attorney a levy on attorney’s client for the funds.  Attorney then diverted the funds to his client.  District court says the attorney is personally liable to IRS for clients tax bill plus a 50% penalty for not having a valid reason to no honor the levy. (Huckaby, DC, Calif)

Real Estate Broker fee for buying his own house

A real estate broker was paid a fee when he purchased his own house.  That fee is taxable but not subject to Self Employment tax – per Tax court (Guarino, TC Summ Op 2016-12)

Paying Wages to your kids

Taxpayer paid wages to her young kids.  Her kids were all under the age of 9.  They helped with miscellaneous office duties, shredding, mailings, copying.  Taxpayer took a 10k deduction.  Tax Court found it excessive and denied the deduction.  Taxpayer didn’t keep records of their time spent working.  She didn’t have timecards or  issue W-2’s.  She considered it a cash gift to their 529 Plans.   The court limited her deduction to $250 per child (Fisher, TC Summ Op 2016-10)

Using IRA to invest in Business

Another court appearance for the misuse of IRA Funds.  Taxpayer rolled IRA money over into another IRA and had the Custodian purchase the stock in a new business just being formed by taxpayers.  The new business then purchased another business for cash and a note that was guaranteed by IRA owners.  The personal guarantee by IRA owners was a prohibited transaction and IRA was terminated.  Taxpayer had to pay tax on the full amount. (Thiessen, 146 TC no7)

IRS can force sale of jointly owned residence

Taxpayer owed tax debts from his business.  IRS was going to sell the personal residence that was jointly owned by taxpayer and his wife and give ½ of the proceeds to the wife.  Wife claimed she had a higher interest in the property because she was younger and had a longer life expectancy.  Courts didn’t agree and allowed the sale to go through.  (Davis 6^th Cir)

Exotic Dancer failed to report all her income

Taxpayer received wages, tips and extra money from offering private dancer and other services.  On Audit, IRS discovered the extra money and taxpayer claimed it was a gift from her clients for delivering free services.  She was found guilty of filing false tax returns and sentenced to 33 months in jail.  Appeals court just affirmed her conviction (Fairchild, 8^th Cir)

C Corporation paid bonuses to owners at year end

IRS and Tax Court agreed that the bonuses were really dividends and the deduction was disallowed.  Taxpayer received a 20% penalty on top of the tax liability.  (Brinks, Gilson & Lione, TC Memo 2016-20)

Write off of work clothes

Bartender wrote off his work clothes.  IRS disagreed.  Taxpayer was expected to dress all in black.  Clothing was high end and could be worn outside of work.  Deduction disallowed.  Tax Court agreed (Belifa, TC Summ Op 2016-8)

Fixing Charitable Deduction

Family owned a corporation and a partnership.  They mistakenly wrote a check out of the corporation to a charity instead of the partnership.  When they discovered the mistake, they immediately took steps to address it including contacting the donee and correcting the financial statements.   IRS denied the deduction but district court allowed the tax write off.  (Green DC Okla)

Trust Distributions

Trustee made distributions to beneficiaries of a trust leaving the trust with insufficient funds to pay its tax liability. Trustee was made personally liable for the tax debt, including penalties and interest.   (Read DC Conn)

Divorce disqualifies ESOP

Couple both work in a chiropractic office and are the sole participants in the company ESOP.  The couple divorced with the divorce agreement allocating 50% of the business to each of them.  The divorce document was silent on the allocation of the ESOP.  Exwife later relinquished her ESOP shares to ex-husband. Tax court said the transfer violated the ESOP rules and disqualified the ESOP. (Family Chiropractic Sports Injury, TC Memo 2016-10)

Moving Expenses

Taxpayer kept his household goods in storage in the area of his new job for 9 months.  Tax court only allowed 30 days. (Parmeter, TC Summ Op 2015-75)

Selling your house and taking the primary residence exemption

Taxpayer sold house and took an installment note for part of the debt.  When he filed his taxes, he took the $500k primary residence exemption.  A few years later, buyer defaulted and taxpayer reacquired the house.  Taxpayer had to pay gains tax on all payments, even the initial 500k exemption. (8^th Circuit, DeBough)

Cancellation of Debt

Taxpayer had their car repossessed.  Several years later, she received a 1099-C reporting cancellation of debt. (car was sold for less than the loan).  IRS said she had income.  Tax Court disagreed saying the debt was discharged 36 months after she paid her last payment. (TC Memo 2015-175, Clark)

Loss on sale of Vacation Home not Deductible

Couple had a second home they used with their daughter.  Daughter died and the couple couldn’t use the property anymore, so they decided to rent it.  They signed a rental agreement with an agent however; the house was never actually rented.  Tax Court denied deduction for loss on sale with the view that there was not enough activity to call this a rental. (Redisch, TC Memo 2015-95)

Self-Directed IRA owned company

The company owned by taxpayers Self-Directed IRA paid taxpayer a salary for managing the company.  This salary was a prohibited transaction making the IRA fully taxable.

Renting property to a relative

Couple rented their house to their daughter for $2000 per month.  FMV of the rental was $6000 per month.  Tax Court denied rental deductions considering this bargain rent as personal use. (TC Memo 2015-181, Okonkwo)

IRA’s

White collar criminal convicted of money laundering, courts took IRA to cover restitution and fines.  He gets to pay the tax on the distribution. 

In another case, taxpayer directed his IRA to invest in a real estate venture where taxpayer owned 50%.  This was a prohibited transaction and opened up IRA to creditors. 

Mortgage limits – per house or per individual?

There is a mortgage limit of 1 million that is deductible on Schedule A.   The question that came up is that per house or per individual (say two unmarried individuals own a house).   Well,  per the 9^th Circuit court in Voss, it applies per individual and not per house.  So two unmarried individuals can own a house and have 2 million in debt (1 million each) and have it deductible.

Living at the Casino – still not professional gambler

Taxpayer had a full time job as a NJ Tunnel Agent, he had no permanent address and spent his off duty time at the casino and staying in their rooms.  Taxpayer deducted his meal and other gambling costs on Schedule C.  Tax Court says not a professional gambler.  He did not conduct his business in a business like manner.  (TC Memo 2015-128, Boneparte)

Fbar Filings

A couple pleaded the 5^th when asked about their foreign bank accounts.  A few different Circuit courts said no to this.

International Flight Attendant – earnings in international air space

District Court decided that wages for flights in international air space don’t qualify for the foreign earned income exclusion.  However, pay for flights over foreign countries airspace does qualify.

Start-up Expenses aren’t deductible until business is operating as a going concern

Taxpayer had fulltime job and spent off hours visiting construction sites, handing out cards.  He had a website but no clients or income.  He didn’t bid on jobs.  Tax Court says he cannot deduct his expenses because the business was not a going concern.   (TC Memo 2015-28, Tarighi)

Alimony – Homeschooling

Taxpayers divorce agreement stated that Alimony would be reduced if wife stopped homeschooling children and got a job.  IRS denied the deduction as the payment was tied to a child contingency.  Tax Courts disagreed and said the payment was tied to the ex-spouse’s return to work.  (Wish TC Summ OP 2015-25)

Paying Someone Else’s  Expenses

Taxpayer transferred funds to brothers business and paid expenses on behalf of his brothers business.  He also took a deduction for them on his Schedule C.  Tax Court denied expenses.  (Espaillat, TC Memo 2015-202)

Loans to Friends

Tax Court Memo 2015-191 says that taxpayer who loans money sporadically to friends is not in the lending business.  He only made 12 loans in 5 years and did not conduct proper due diligence or keep proper records.

Foundation benefits single family – not a tax-exempt charity

Taxpayer died and executors of his estate set up a organization to award scholarships in the performing arts to students of Hungarian descent.  IRS later learned that the organization provided scholarships to only nieces and nephews of the decedent.  Their tax exempt exemption was revoked.

Charitable Donation of Property – denied by Tax Court

Veterinarian donated fossils to a charity.  He received an acknowledgement letter but it did not contain all the correct verbiage.  He also did not get a appraisal of the items.  He valued them $100,000.  Donations of stuff $5,000 and more must have an independent appraisal.  Tax court denied the deduction (Isaacs, TC Memo 2015-121)

Charitable Donation of Property – Denied by Tax Court

Couple donated $37,000 worth of property to four charities.  Did not receive contemporaneous written ackowledgments or an appraisal for the donation valued over $5,000. Tax Court denied their write off and slapped them with a 20% negligence penalty. (Kunkel, TC Memo 2015-71)

Stock worthless because of Corporate Fraud

Taxpayers purchased millions of share of a public company in the open market.  The stock later became totally worthless due to fraud committed by company executives.   Taxpayers though they should be able to consider the stock loss a theft loss.  Tax Court said if they purchased the stock from the frauster, then it could be a theft loss, but they purchased in the open market. (Greenberger DC Ohio)

Year End Bonuses
Taxpayer paid themselves a year-end bonus of$ 815,000.  The business didn’t have enough in the bank account to cover the cashing of this check so the owner just endorsed it over and it was recorded as a loan to the company.  Tax Court denied the write-off because it wasn’t a cashable check when the owner received it. 

Good Deeds
Taxpayer’s used life insurance proceeds from their son death to fund a non-exempt irrevocable trust to give scholarships in his honor.  When the trust gave out scholarships, the taxpayers took a charitable deduction.  Tax Court denied the deduction because the trust made the payments and the taxpayers didn’t own the trust.

Disability Taxable
Taxpayer was hurt and collected disability.  Insurance company gave him a W-2.  He claimed it was tax-free.  Company paid the disability insurance policy not the employee – distributions were taxable to the employee.

Airline Ticket for opening up an account – is taxable
Taxpayer received an airline ticket for opening up a bank account.  The bank gave him a 1099-Misc for the value of the ticket and treated the ticket value as interest.  Tax court agreed.  However, note that mileage earned and points earned on credit card purchases are still not taxable.

Online Charity – a Sorority
A group organized a charity to operate a nationwide virtual sorority for students.  The majority of their events and activity took place over the internet.  IRS says – not an exempt organization because of the lack of face-to-face interaction among its members.

Hardship distributions from retirement plans before Age 59 ½.
Taxpayer lost his job and took distributions from his retirement plan to pay the mortgage and support his family.  There is a list of exceptions to the 10% penalty of taking a early distribution from your retirement.  Hardship is not one of them.  Tax Court has sided with IRS on this.  IRS has a chart of what does qualify for penalty exception.

IRS challenged taxpayer who paid her employees (her kids – Aged 7, 8, 12) with pizza.  The kids would come into the office after school and do various office tasks.  She filled out W-2’s and other payroll reports, however never really issued the kids a paycheck.  Court sided with IRS and disallowed the pizza payments disguised as wages.

Profit Motive
Taxpayer claimed business expenses on their return for Vehicle Expenses, travel, meals, entertainment and rent totaling over $28,000.  Taxpayer was a sole-proprietor but did not have any income from this activity.  Tax court found that taxpayer did not carry on the activity in a businesslike manner and denied all the deductions.  What are some things the Courts noticed that taxpayer did not do?  Hire a coach to improve performance or enter tournaments. 

Medical Expenses
 Medicare taxes paid or withheld from your paycheck are not considered a medical expense.

 To deduct gym memberships, health foods and supplements as medical expenses, taxpayer must prove that they spent more than they would normally have spent for a verifiable and credible medical reason.  IRS can expect you to provide statements, invoices, and other documentation to substantiate your expenses. 

 The penalty on early distributions from a qualified retirement plan can be offset by medical expenses.  (The penalty not the tax)

 Taxpayer could not substantiate the medical expenses and were not only issued the 10% early distribution penalty but also the 20% accuracy related penalty.

Travel & Business Use of Home Expenses
Taxpayer had a business and worked out of her home.  She tried to deduct her vacation because she needed to get away from the business and considered it a business expense.  The deduction was denied and considered a personal expense.

Business use of Home and Vacation Home Rental
Taxpayer used the 1st floor of their home on a regular basis for their business.  They couldn’t substantiate the use as regular and exclusive and had their deduction denied. 

A different taxpayer had a motor home used for both personal and business.  However, they could not substantiate the business use.  They needed to prove the “exclusively and regularly” elements of business use and could not.  The motor home qualified as a 2nd home,  however they had more than 14 days of personal use.  Therefore, deduction was denied.

Automobile Expenses
Taxpayer used a number of vehicles that he owned in his real estate business.  He reported that they were all 100% business use.  One of the vehicles was a Hummer which taxpayer elected to expense with a Section 179 election.  He considered the Hummer to be used primarily for advertising but actually driven for business minimally.  When an asset is used for business has the business use of the asset drop below 50%, depreciation and Section 179 may need to be recaptures to reflect the change in business use.  Taxpayer could not provide the records to support business use and lost deduction.

Real Estate – Rental
Taxpayer with numerous rental properties elected to combine them for reporting purposes, thereby being able to deduct the losses generated by them.  However, to make this election, taxpayer needed to spend 750 hours or more on the properties.  They did not keep a log to substantiate their claim and when they tried to recreate it, the hours did not meet the 750 hour requirement.  Taxpayer lost the deduction on their return.

In another case, taxpayer had numerous properties but did not elect to group them and consider them a business.  However, they tried to deduct expenses for these properties as trade or business expenses but because they did not group them, they had to meet the 750 hour rule on each property. They did not and lost the rental deduction.

Mortgage Foreclosure
Taxpayers’ mortgage on her property was greater than the fair market value of it.  Tried to rent it but ended up walking away and letting the bank foreclose on it.  She took an ordinary loss for this property on her return.  However, a foreclosure is considered a sale and she needed to report income as the difference between the foreclosure amount and her basis.  She ended up reporting a capital gain instead of a loss on this property.

Basis of Stock Sales
Taxpayer had about 20 different stock sales and had to substantiate his cost.  He tried to use the “aggregate basis theory” however the courts didn’t allow and sided with IRS that basis for the stocks was zero.

Lawsuit Proceeds
Taxpayer received a payment from a lawsuit involving his attempt to acquire property and build a condominium on it.  Tax Court found that the income was ordinary and not capital gain based on the taxpayer's everyday business of property development.

Personal Goodwill
Taxpayer owned a company created from nothing by his son.  His son cultivated all the relationships for the business but did not have an employment contract.  When the father passed away, IRS and father's estate had a disagreement over the value of the company. IRS had a larger value on it where estate had a lower value.  Since the son did not have an employment contract with the company,  he could take the business to a competitor.  IRS lost their higher valuation.

Non-Profit Beauty Pageant
A non-profit organized a local beauty pageant (not in Rochester ) and awarded a scholarship to the winner.  The winner had to sign a contract  and perform services for this non-profit after winning.  This made the scholarship taxable income. 

Non-profit also lost its tax exempt status because organizing and operating pageants was not a valid 501C3 purpose.

Home Office Deduction
One of the qualifications for having a home office deduction is that the home office needs to be used exclusively for the business.  Taxpayer had a home office in a small studio apartment and had to walk through the office to reach the bedroom.  This small amount of personal use did not exclude the home office deduction  per Tax Court.

Bernie Madoff
Taxpayer passed away with part of his estate including an investment with Bernie Madoff (before the scam was found out).  Once the scam came to light, the estate applied for a refund by amending the estate  return, removing the Bernie Madoff investments.  IRS disagreed saying at the time of death and estate return valuation, the scam was not discovered yet.  Tax Court is still deciding.