Original Return Amounts, Rather Than Those on Amended Return, Used to Compute Fraud Penalty

In the case of Gaskin v. Commissioner, TC Memo 2018-89, a taxpayer was fighting the imposition of the fraud penalty by the IRS on its assessment of taxes.  The taxpayer admitted that he had originally filed a fraudulent return that lead to an IRS criminal investigation, indictment and plea agreement.  However, he had filed amended returns during that process that reported virtually all the income he had fraudulently omitted—but the still computed the 75% penalty under IRC §6663 based on amounts reported on the originally filed returns and not based on the amended returns he later filed.

IRC §6663 provides the following:

(a) Imposition of penalty

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

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IRS Releases List of Designated Qualified Opportunity Zones

The IRS has released the list of designated qualified opportunity zones under IRC §1400Z-1 in Notice 2018-48.  The 383 page list defines areas for investment that can be used for qualified investments under IRC §1400Z-2 added by the Tax Cuts and Jobs Act.

The purpose of IRC §§1400Z-1 and 1400Z-2 was to offer significant tax incentives to encourage investment in certain disadvantaged areas identified by state and local officials.  The designated areas are submitted to the IRS for listing.

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Supreme Court Strikes Down Quill Physical Presence Rule

In a 5-4 decision, the United States Supreme Court eliminated the physical presence test that determined if a state can force a seller to collect its sales and/or use tax  In the case of South Dakota v. Wayfair, USSC Case No. 17-494 all of the Justices agreed that the physical presence test applied previously in the cases of National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, and Quill Corp. v. North Dakota, 504 U. S. 298 was inappropriate.  However, the four Justices making up the minority in the dissenting opinion argued that the physical presence rule should have remained in place due to the fact that entities have acted for years in reliance on that standard.

The Court had limited states to imposing sales and use tax collection responsibilities only on sellers that had a physical presence in the state in the National Bella Hess case.  Twenty five years after that case, the Court again agreed that physical presence was necessary in the Quill case.  Now, 26 years later, the Court, visiting the issue for the third time has reversed that position –and two of the five Justices in the majority had previously ruled for the opposite result in the Quill case.

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S Corporation Shareholder Could Not Unilaterally Elect for Corporation to Claim FICA Credit

In the case of Caselli v. Commissioner, T.C. Memo. 2018-81, a taxpayer wanted to claim a tax credit related to an S corporation in which he had an interest.  Unfortunately, the S corporation in question had not made the election to claim the credit in lieu of a full deduction for payroll taxes on its tax return.

The credit in question is found at IRC §45B related to employer social security taxes paid with respect to employee cash tips.  Under IRC §45B(c), a taxpayer claiming this credit must reduce the deduction for taxes paid by the taxes for which the credit is given.  Under IRC §45B(d) a taxpayer may elect not to claim the credit for a taxable year, thus preserving the deduction for such tips.

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Social Security Disability Benefits Are Incluable in Taxpayer's Income

The taxpayer in the case of Palsgaard and Kelley v. Commissioner, TC Memo 2018-82 argued that his social security disability insurance (SSDI) benefits should not taxable under IRC §104.  But the Tax Court did not agree with the taxpayer.

The opinion noted that the taxpayer had been disabled by a physical injury:

Petitioner had a successful medical practice in California until March 2009, when she suffered a physical injury that left her disabled within the meaning of section 72(m)(7). This injury resulted in a long-lasting physical impairment of indefinite [*3] duration that substantially interfered with her ability to engage in gainful employment. She retired from the practice of medicine shortly thereafter.

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Tax Petition Filed Late and Case Dismissed, Despite IRS Giving Taxpayer Erroneous Deadline Date

The Fourth Circuit Court of Appeals affirmed the Tax Court’s determination that an individual who filed her Tax Court petition on the date IRS representatives twice told her was the final day to file had missed the deadline and the case could not be heard.  The case in question is Nauflett v. Commissioner, CA4, Case No. 17-1986.

The matter that Shari wanted to be heard by the Tax Court is described by the Circuit Court panel as follows:

The IRS charged Shari and Derek Nauflett, wife and husband and joint income tax filers, as jointly and severally liable for unpaid taxes, interest, and penalties for tax years 2002–04 and 2008.1 Nauflett requested relief under the innocent spouse doctrine. The letters of final determination from the IRS denying Nauflett's request were dated June 17, 2015, and contained the following statement: “If you disagree with our decision, you can file a petition with the United States Tax Court to review our denial. You must file your petition within 90 days from the date of this letter. . . . [T]he IRS cannot change the time period.” E.g., J.A. 15.

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Business Consisted Solely of Selling Controlled Substances, No Deductions Other Than Cost of Sales Allowed

As marijuana has become, at the state level in certain states, legal to sell in some form (medical or recreational) those looking to enter that market find that federal law does not condone this business.  In addition to still being treated as an illegal substance under federal law, the Internal Code has a nasty treatment for any such business found at IRC §280E.  The taxpayer in the case of Alterman v. Commissioner, TC Memo 2018-83, discovered just how harsh the federal tax law is in this area.

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Court, Relying Primarily on Taxpayer's Testimony, Finds Child Resided with Him Over One-Half of the Year

Ultimately the case of Engesser v. Commissioner, TC Summary Opinion 2018-29, turned on the question of whether the taxpayer’s testimony regarding where his child lived in the year in question would be believed by the Court.  And, in this case, the Tax Court found the taxpayer’s testimony believable.

The issue of where H.E. (the child in this case) lived was complicated by the fact that when the child’s mother moved out of Mr. Engesser’s apartment in early 2014, she moved to a nearby apartment.  Both Mr. Engesser and the mother claimed the child as a dependent on their 2014 income tax returns.  Neither parent attached a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, with their individual tax return.

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IRS Announces Relief on Certain 965 Transition Tax Issues

The IRS continues to revise its guidance with regard to the Section 965 transition tax adopted as part of the Tax Cuts and Jobs Act.  In News Release IR-2018-131 the IRS announced waivers of certain penalties impacted by that tax and revisions to its frequently asked questions regarding the tax maintained on the IRS web site.

The IRS has added three new questions and answers to the 965 tax frequently asked questions (FAQs) page on its website (Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns).

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Email Explains Difference Between Filing a Claim and an Adjusted Return on Payroll Withholding Issues

The problems of attempting to develop summary explanations for training purposes (like this article) of tax material was discussed in Chief Counsel Email 201822028.  A person inside the IRS was raising questions about IRS training materials related to the question of when an employer may “claim” an “adjustment” for income tax withholding and additional Medicare tax.

Specifically, the email begins by noting the matter that had led to the request for clarification:

Your initial inquiry was whether certain training materials were correct in stating that “[a]n employer CANNOT claim an adjustment for [Income Tax Withholding] and additional Medicare taxes after the close of the calendar year for the employee.” The training materials cite to § 31.6413(a)-2(c)(2).

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Taxpayer Was a Statutory Employee, Expenses Deductible on Schedule C

One of the issues in the case of Fiedziuszko v. Commissioner, TC Memo 2018-75, was whether the taxpayer, who received a Form W-2 for his work for 2012, was a “statutory employee.”

The statutory employee definition is found at IRC §3121(d)(3).  The first requirement to be a statutory employee is that the individual not be a common-law employee of the service recipient.  Next, the taxpayer must perform services for pay in one of the following four categories:

  • As an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal;

  • As a full-time life insurance salesman;

  • As a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or

  • As a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations.

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Fact Sheet Outlines Steps IRS Takes to Contact Taxpayers

Clients who get scam phone calls from parties claiming to be the IRS demanding immediate payment are often calling advisers in a panic after such a call.  While we will assure them that the IRS doesn’t handle these issues the way the caller they talked to is suggesting, we can now also point them to an IRS document regarding what the IRS will and will not with regard to a tax issue.

In Fact Sheet FS-2018-12 the IRS describes how the agency does and does not contact taxpayers.

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IRS Issues Ruling Providing for Withholding on Transfer of IRA Funds to State Unclaimed Property Funds and Filing of Forms 1099R

The various states have laws on their books that require an entity holding “unclaimed property” to turn that property over to the state.  Generally, this transfer takes place when the account owner fails to take any action with regard to the property and the holder of the property is unable to locate that owner.

Such property can include individual retirement accounts.  In Revenue Ruling 2018-77 the IRS rules on circumstances when the payor will or will not be required to withhold taxes from the transfer to the state as well as the reporting requirements on a Form 1099R when such a distribution takes place.

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No Deductions Allowed to Taxpayer Since Business Had Not Yet Commenced

While the tax law allows deductions for expenses incurred in a trade or business, it does not allow a taxpayer to claim a current deduction while the taxpayer is merely investigating the possibility of entering into a trade or business.  In the case of Samadi v. Commissioner, TC Summary Opinion 2018-27 the Tax Court determined the taxpayer was in just such an investigatory stage and not actually conducting a trade or business.

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IRS to Issue Guidance on SALT Workarounds, Raises Issue of Substance over Form

The IRS has now fired its first salvo in the SALT workaround controversy.  Notice 2018-54 announces the IRS’s intention to propose regulations to deal with some types of SALT workarounds.

In one sense this notice gives us little information about exactly what can and cannot pass muster when taxpayers make charitable contributions that reduce their state income taxes in an effort to shift from a nondeductible expense (state and local taxes in excess of $10,000) to fully deductible items (charitable contributions). But it does indicate that the IRS does not plan to sit by quietly and not issue guidance in this area.

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Agreeing with the Ninth Circuit, DC Circuit Upholds IRS Position that SMLLC Partner Renders a Partnership Subject to TEFRA Procedures

In a TEFRA case that may have continuing implications under the new Centralized Partnership Audit Regime (CPAR) taking effect for partnership tax years beginning in 2018, the DC Circuit, following suit with a similar opinion last year from the Ninth Circuit, found that having a disregarded entity as a partner meant a partnership could not avoid being examined under the TEFRA partnership examination provisions.

The case, Mellow Partners v. Commissioner, Case No. 16-1454, CA DC appealed the Tax Court’s holding that the TEFRA audit provisions applied to a partnership where each partner held his interest in a single member LLC.

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Penalty Limited to Maximum Amount Stated in Regulation Not Updated for Later Increase in Maximum Penalty

A U.S. District Court in the case of United States v. Colliot, Case No. 1:16-cv-01281, Western District of Texas, found that Treasury failure to update a regulation served the limit the amount of penalty the IRS could assess against an individual who willfully failed to report accounts on FBAR reports.

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IRS Updates Procedure for Obtaining Information on Deductible Contribution Status for Organizations

Revenue Procedure 2018-32 has been issued by the IRS to provide consolidated guidance for taxpayers to gain assurance that an organization they are making a charitable contribution to qualifies to receive tax deductible contributions.  This ruling consolidates and updates prior guidance found in several prior procedures.

The prior procedures that have been modified and superseded are:

  • Rev. Proc. 81-6, 1981-1 C.B. 620;

  • Rev. Proc. 81-7, 1981-1 C.B. 621;

  • Rev. Proc. 89-23, 1989-1 C.B. 844; and

  • Rev. Proc. 2011-25 I.R.B. 887

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