No Deduction for Employee Who Failed to Submit Expenses for Reimbursement by Employer

Taxpayers who seek deductions for employee business expenses will find the deduction barred if the taxpayer cannot show that he/she was not entitled to reimbursement from his/her employer for the expenses shown on the Form 2106.  This was the issue that tripped up the taxpayer in the case of Howard v. Commissioner, T.C. Summ. Op. 2017-65.

Employees are considered to be in a trade or business and thus are allowed a deduction for expenses incurred in pursuit of that trade or business if the expenses are “ordinary and necessary” expenses.[1]  However, if the employer offers to reimburse the expenses (such as via an expense reimbursement policy), but the employee does not take the employer up on the offer no deduction is allowed.  The expense in that case would not be “necessary” as the taxpayer had a source of reimbursement.

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Employee Could Not Deduct Commissions Paid on Same Day Sale from Stock Option Exercise as Ordinary Loss

In the case of Hann v. United States, Court of Federal Claims Case No. 15-20T, the taxpayer in question was seeking to claim an ordinary loss from aportion of the underwriting commissions paid when he elected to participate an initial public offering (IPO) of his employer’s stock. 

Under the terms of participation, Mr. Hann had to agree to dispose of the same proportion of all stock and stock rights he held as the primary shareholders were selling, which required him to exercise his vested and exercisable stock options to comply with that requirement if he wanted to participate. 

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Moneylending Was a Business for Taxpayer, So Debt Was a Business Bad Debt

In the case of Owens v. Commissioner, TC Memo 2017-157, the issue to be decided involved a $9.5 million bad deduction claimed as a business bad debt an individual who took the position he was in the trade or business of lending money.  The IRS argued that he wasn’t in the business of lending money, that the debts in question were not actually debts and, even if they were, the loan did not become worthless in the year he claimed the loss.

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IRS Announces Will Not Acquiesce in Like Kind Exchange Decision

The IRS has announced that it will not acquiesce with regard to a Tax Court decision that dealt with reverse like-kind exchanges under Section 1031 in Action on Decision AOD 2017-06.

The decision in question involved the issue of whether the benefits and burdens test was appropriate to be applied to a Section 1031 exchange.  The case, Estate of George H. Bartell Jr. et al. v. Commissioner, 147 TC No. 5 was previously discussed on this site in an article dated August 11, 2016.

Benefits and Burdens Test Does Not Apply in Case of Reverse §1031 Exchange

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Minority Shareholder Subject to Transferee Liability Repayment Even Though Not Aware of Fraudulent Nature of Payments

The Eleventh Circuit panel hearing the appeal in the case of Kardash, Sr. v. Commissioner, Case No. 16-14254, CA11 agreed that Mr. Kardash was not a villain and, in many ways, was a victim along with the IRS of a “the fraud conducted by his friends and coworkers at FECP, Ralph Hughes and John Stanton.”

But the Court found that, ultimately, Mr. Kardash ended up with funds that rightly belonged to the IRS and that IRC §6109, relying on applicable Florida state law, required him to pay those funds over to the IRS under the law of transferee liability.

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Proceeds from Sale of Land Used for Farming Is Not Income From Farming or Ranching for Purpose of Expanded Conservation Easement Deduction

In the case of Rutkoske, Sr. et al v. Commissioner, 149 TC No. 6, the Tax Court was asked to consider what types of income counted as “gross income from the trade or business of farming” for purposes of gaining access to the increased deduction for qualified conservation easements of property used in agriculture or livestock production under IRC §170(b)(1)(E)(iv).

Normally a deduction for a qualified conservation easement is limited to 50% of the taxpayer’s income after reduction for other charitable contributions.[1]  However, that limit rise to 100% for the contribution of property used in agriculture or livestock production by a qualified farmer or rancher.[2]

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Another Phishing Scam Makes the Rounds Attacking Tax Professionals

The IRS posted a Security Summit Alert in News Release IR-2017-126 regarding a new phishing scheme that has been reported to the agency that attempts to get usernames and passwords from tax professionals for their tax software provider accounts.  Unfortunately, one of the IRS’s suggestion to keep from getting caught arguably misses the mark and may make users more likely to fall for such scams.

Phishing is the attempt to get users to disclose various types of confidential information by using an email that appears to be legitimate.  The technique works around users who believe problems only occur if they open emails from “unknown” senders or who are simply harried and see what, on the surface, appears to be a reasonable request.

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Legal Memorandum Outlines How to Apply Research Credit Against Specific Payroll Tax Deposit Liabilities

One of the modifications to the research credit that was made as part of the Protecting Americans Against Tax Hikes Act of 2015 was to allow certain qualified small businesses to elect to claim the credit against employer social security, rather than income taxes.  In Legal Advice Issued by IRS Chief Counsel AM 2017-003 the IRS outlined issues related to when the elected credit would be used to offset employer social security tax deposit liabilities and the extent of the offset.

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Colorado Publishes Rules for Sellers to Comply with Tattletale Use Tax Reporting

The Colorado Department of Revenue has published an emergency rule (Rule 39-21-112(3.5)) to implement Colorado’s “tattletale” use tax reporting requirement for sellers who have more than $100,000 of sales into Colorado and do not collect Colorado sales tax.  The law in question is the one that was upheld by the Tenth Circuit Court of Appeals in the case of Direct Marketing Association v. Brohl, CA10, Case No. 12-1175, 2/22/16, cert denied.

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Structure Used By Shareholder to Hold S Shares Terminated S Status Instantly Upon Shareholder's Death

In Private Letter Ruling 201730002 we find a situation where a taxpayer’s death instantly terminated the S corporation in which he owned a 100% interest.  The structure he created to hold the S corporation stock set up a situation in which the S election’s validity continued only so long as the shareholder remained alive.

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Congressional and Administration Officials Release Statement on Tax Reform

A Joint Statement on Tax Reform was released on July 27, 2017 by House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX).  The statement provides a very basic outline of the basic ideas that the “Big 6” (a reference to the above group that has cropped up in the tax press) have determined to attempt to include in the tax reform bill that Congress expects to begin work on shortly.

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IRS Outlines Steps to Be Taken to Battle Increase in Business Related Tax Identity Theft

The IRS has issued a news release (IR-2017-123) updating what is happening with both individual and business related identity theft, as well as a fact sheet (FS-2017-10) outlining steps to be taken to combat an increase the agency has noted in identity theft from businesses and estates.

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Deemed Distribution Took Place on Last Day of Prior Year, Not Date Plan Administrator Sent Letter of Distribution to Participant

There was no question that the taxpayer in the case of Gowen v. Commissioner, TC Summ. Op. 2017-57 had defaulted on the loan he received from his former employer’s 401(k) plan and, as well, that he did not correct the default prior to the cure period allowed under the plan.  But the taxpayer argued that the actual deemed distribution did not take place in 2012, the year the deemed distribution was reported by the plan custodian on a Form 1099R, but rather at some point in 2013.

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Taxpayer Failed to Establish Work Location Outside Metropolitan Area or That He Was Away from Home

Even though it may appear to taxpayers that mileage and meals are clearly related to their job, only in limited circumstances may deductions be claimed for such items.  In the case of Wooten v. Commissioner, TC Summ. Op. 2017-58, the taxpayers discovered that none of the expenses they had claimed met the requirements to be deductible.

In this case the taxpayer was employed as a plumber/pipefitter for a contractor.  In his job he had to work at various locations, some in Gulfport or Biloxi, Mississippi, which were 20-25 miles from his home and two in Hattiesburg, Mississippi which was about 56 miles from his home.  Mr. Wooten kept logs of his travel to/from his home to these locations.  He claimed a deduction for this mileage, along with a deduction for meals he consumed at these locations.

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Appeals to Begin Offering Web-Based Conferences in Pilot Program

The IRS Office of Appeals announced in News Release IR-2017-122 that will begin a pilot program using web-based conferencing software to offer a virtual conference option for taxpayers and representatives.  This option will be in addition to the current conferencing options.

Currently taxpayers and representatives can meet with an Appeals Officer:

  • In person;
  • By phone; or
  • Through a video conference system located at a limited number of local IRS offices.

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Taxpayer Could Not Prove He Had Informed Broker to Use Other Than FIFO Cost Basis for Shares Sold

When a taxpayer acquires multiple blocks of the same security, under Reg. §1.1012-1(c)(1) the taxpayer is deemed to first sell the first shares purchased—or, to put it simply, the taxpayer is put on the first-in, first-out (FIFO) basis.  However, a taxpayer with the stocks held by a broker can specifically identify the shares to be sold if the taxpayer adequately advises the broker prior to the sale of the shares he/she wishes to sell.  [Reg. §1.1012-1(c)(2) and (3)]

In the case of Turan v. Commissioner, TC Memo 2017-141 the question was whether Mr. Turan had made that adequate identification of shares sold.

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Taxpayer Had to Report Unemployment Benefit Income Even Though He Later Repaid the Benefits

The concept of a “claim-of-right” can be confusing for both taxpayers and tax professionals.  In the case of Yoklic v. Commissioner, TC Memo. 2017-143, a taxpayer did not include unemployment benefits received in 2012 in income because the state agency administering the benefits (Arizona’s Department of Economic Security (DES)) had determined he was not entitled to the benefits, and Mr. Yoklic repaid those benefits in 2013.

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Executive Order Does Not Relieve Taxpayers of Shared Responsibility Penalties for 2016

On January 20, 2017, newly inaugurated President Donald Trump signed Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, directing agencies to exercise the authority and discretion permitted to them by law to reduce burdens imposed by the Affordable Care Act.  As well, shortly thereafter the IRS announced that it would accept tax returns where taxpayers did not indicate whether they had qualifying health insurance. 

Many clients took this to mean that the penalties for failure to maintain health insurance that provided minimum essential coverage by individuals and the shared responsibility payments that are imposed on applicable large employers (ALEs) who fail to provide affordable minimum essential coverage to their employees would not apply for 2016.  However, in information letters INFO 2017-10, INFO 2017-0013, and INFO 2017-0017 the IRS noted that the order did not actually change the law, and that the penalties will still apply to those taxpayers unless they meet another exception.

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IRS for the Third Time Extends Safe Harbor Method for Recipients of Hardest Hit Fund Relief Through 2021

The IRS in Notice 2017-40 again extended the time period, this time through 2021, that taxpayers may use the safe harbor method of reporting HFA mortgage relief originally granted in Notice 2011-14.  Notice 2015-77 had extended until the 2017 tax year the safe harbor method originally provided for in Notice 2013-7 of reporting payments made on a home mortgage that had received relief from a state housing agency from the Hardest Hit Fund (HFA Hardest Hit Fund). 

The new notice also extends relief from penalties related to information returns for mortgage services and state housing agencies due to payments made under the program.

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IRS Email Explains Limits to Use of Form 941-X for Prior Year Errors in Federal Income Tax Withholding

In emailed advice (Chief Counsel Email 201727008), the IRS Chief Counsel’s office discussed the limitation on the use of Form 941-X, specifically looking at what qualifies as “administrative error” for which the Form 941-X can be used to address issues on prior year’s payroll tax reports related to federal income tax withheld.

People do make mistakes, and at time those errors involve payroll tax issues, including tax withholding.  Form 941-X was created to allow employers to deal with some errors—but the form has very specific limitations on its use.  As a practical matter, once a year has ended and the employee has been given a W-2, the consequences of, say, overwithholding or underwitholding federal income taxes gets “passed on” to the employee since that number is claimed as a credit on the employee’s own income tax return.

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