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, 4th 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, 11th 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, 11th 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)
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)
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, 7th 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 8th 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 5th 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)
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 8th 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, 11th 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)
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, 11th 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.
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)
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)
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, 5th 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., 1st 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, 7th 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:
- 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)
- 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, 11th 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, 8th 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 3rd year was due. Appeals court disagreed (Wu, 7th 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, 11th Circuit)
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 6th 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, 8th 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)
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)
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. (8th 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)
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 9th 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)
A couple pleaded the 5th 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.