In order to claim a deduction for interest paid that is otherwise deductible, generally a cash basis taxpayer must both actually pay the interest in question (since that controls the timing of deductions in that case) and be liable on the debt (since only a taxpayer’s own expenses are going to generally be deductible). However even if one is not directly liable on a mortgage on a principal residence, if the taxpayer is the legal or equitable owner of the property in question the taxpayer can still claim a deduction on that debt. [Treasury Reg. §1.163-1(b)]

In the case of Jackson v. Commissioner, TC Summary Opinion 2016-33, the taxpayer claimed to be the equitable owner of a residence he shared with his girlfriend in which they both lived and that he had paid amounts towards the mortgage that should enable him to claim interest deductions despite the fact that the Form 1098 was issued in his girlfriend’s name and he was not listed either on the deed for the property nor as liable on the debt.

A taxpayer’s liability for self-employment tax related to income from working interests in oil and gas wells was the issue in the case of Methvin v. Commissioner, T.C. Memo 2015-81, affd CA10, Case No. 15-9005, AFTR 2d ¶2016-809.

This is a case we first visited back in April of 2015 when the taxpayer lost in Tax Court. But now we have the results of the taxpayer’s appeal to the Tenth Circuit.

The concept of “crowdfunding” has becoming a increasingly important way of getting access to funds for certain projects. In fact, a June 2015 post on Forbes (http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/#bce560444b52) indicated that crowdfunding is expected to grow to over $34 billion in 2016, surpassing amounts invested by the venture capital industry.

But what is not terribly clear to many is what the tax treatment of a crowdsourcing program should be, especially given the wide variety in structures and conditions involved in such programs. In Information Letter 2016-0036 the IRS, while not giving a hard and fast answer to the question, did indicate what issues should be considered in determining the tax effects.

The Federal Circuit wasn’t willing to go quite as far as the Court of Federal Claims in the case of Wells Fargo & Co. vs. United States, CA FC, No. 2015-5059, 2016 TNT 126-15 in allowing a corporation to allowing interest netting for overpayments and underpayments arising from prior years involving entities that later were acquired and merged into the entity.

In the original case (Wells Fargo & Company v. United States, Court of Federal Claims, No. 11-808T, 2014 TNT 125-13, 6/27/14) the Court of Federal Claims had adopted Wells Fargo’s position allowing that following mergers the corporation was in all cases the “same” corporation as any of the pre-merger predecessors.

In the case of Newman v. Commissioner, TC Memo 2016-125 the Tax Court looked at two questions—did Mr. Newman have cancellation of debt income in 2011 from an overdraft on a bank account he never paid back and, if so, was he insolvent at the time the debt was discharged.

If a statute allows a court to consider an issue, does that mean the court only has the right to accept the position being posited, but must remain mute if the court decides in the alternative? That was the position being advanced by the taxpayer in the case MK Hillside Partners, et al v. Commissioner, No. 14-71504, CA9, 2016 TNT 122-8.

Some tax related mistakes are not able to be corrected by asking for forgiveness, as the taxpayer discovered in Private Letter Ruling 201625001. In this case the issue was a taxpayer who inherited a private annuity and wished to roll the annuity over in a tax free §1035 exchange.

Inherited annuities are eligible to be rolled by the beneficiary under IRC §1035 (see PLR 201330016). And advisers are aware that the IRS has the authority under IRC §408(d)(3)(I) to waive late rollovers for IRAs. So it may not be surprising that when an error occurred in attempting to rollover an annuity under IRC §1035 that the taxpayer asked the IRS for a waiver.

Another couple discovered that the documentation rules for charitable contributions are very strict in the case of Haag v. Commissioner, TC Summary Opinion 2016-29. This case dealt with both cash and noncash contributions, along with other deduction items the IRS disputed. But our key matter of interest will be for the charitable contributions, since the strict documentation rules are very difficult for taxpayers to comply with, but the Courts feel compelled to enforce those rules since Congress passed them.

The issue involved both cash and noncash contributions. The cash contributions related to the standard situation clients often assert in making a certain amount of weekly contributions to a church. Though we are not told so in this case, quite often the taxpayer will claim they put cash into an offering plate.

The IRS has issued proposed regulations dealing with deferred compensation arrangements of state and local governments or tax exempt organizations subject to IRC §457 in REG-147196-07. The regulations deal with numerous issues related to such programs, but most interest is concentrated on how the rules apply “substantial risk of forfeiture” for programs subject to IRC §457(f).

457 plans are divided into “eligible” plans (§457(b) plans) and ineligible plans (§457(f) plans). Eligible plans work much like traditional qualified retirement plans in terms of when an employee is taxed on the amounts, taking place only when the amounts are distributed to the employee. However, participants in §457(f) plans pay tax when the amounts are no longer subject to a substantial risk of forfeiture, regardless of when the participant will actually receive any funds from the plan.

Not heeding the advice of both an attorney and CPA firm proved costly to the taxpayers in the case of the Estate of Richard L. Marshall et al. v. Commissioner, T.C. Memo. 2016-119. The case involved a situation where the taxpayers were shareholders in a corporation whose major business activity became the pursuit of a claim against the U.S. Bureau of Reclamation. The corporation had previously been involved in construction jobs, but that activity ended when one of key shareholders was permanently disabled following a stroke.

The IRS has extended the time periods provided originally in Notice 2016-22 (see earlier coverage in Procedures for Obtaining Work Opportunity Credit Certifications for 2015 and Early 2016 Hires Outlined by IRS) to deal with the extension of the Work Opportunity Credit passed by Congress as part of the Protecting Americans from Tax Hikes Act of 2015.

Now the relief applies to employees hired on or before August 31, 2016 so long as the application is submitted on or before September 28, 2016.

The Tax Court in the case of Finnegan v. Commissioner, TC Memo 2016-118 a question the court had dealt with before in the 2007 case of Allen v. Commissioner, 128 TC No. 4. If the taxpayer hires a “less than fully ethical” tax preparer that, in an effort to gain and retain business, prepares returns that fraudulently understate the taxpayer’s tax, can the IRS use the fraud rule to argue that the statute of limitations on that return never closes—even if the taxpayer was never aware of the fraudulent nature of the return?

In Allen the Tax Court held that the answer was yes—a fraudulent return keeps the statute open even if the taxpayer him/herself did not have the required fraudulent intent in filing the return to evade the payment of tax. So you’d expect this would be a simple question for the Court to answer—but in the interim a federal appeals court in the case of BASR Partnership v. United States, CA FC (2015), 116 AFTR 2d ¶2015-5100 had rejected that view in dealing with flow through items from a partnership return where there had existed fraudulent intent at the partnership level.

The IRS discovered that an S corporation had been “holding back” a large number of checks received in the fourth quarter of its tax year and not depositing them until January of the following year and, not surprisingly being on the cash basis of accounting, not reporting that income until it was deposited in the bank account. Given that the income was constructively received in the earlier year, the IRS issued notices of deficiency that required the taxpayers to pick up that income in the earlier year.

However while the IRS removed the January deposits that were from checks received in the prior year in two of the three years for which it issued notices, the IRS left the January deposits in gross receipts for the first year under exam. The taxpayers in Squeri, et al v. Commissioner, TC Memo 2016-116 protested that the IRS could not do that.

Transfer of property incident to a divorce that is covered by IRC §1041 is a nonrecognition transaction, with each spouse getting a carryover basis, even if the transaction otherwise appears to be a sale. The taxpayer in the case of Belot v. Commissioner, TC Memo 2016-113 argued that this nonrecognition provision should apply in his case.

IRC §1041(a) provides:

(a) General rule

No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

PLR 201624003 reminds us that when it comes to S corporations, the “check the box” regulations can be more complicated than they first appear.

Under the check the box provisions found at Reg. §301.7701-3 an entity that is not automatically classified as a corporation is allowed to elect whether to be treated as a corporation or, if it has one owner, a disregarded entity or, with two or more owners, a partnership. Since, once an entity elects to be treated as a corporation under check the box it is treated as a corporation for the entire IRC (IRC §7701 applies “for purposes of this title” which means the entire Internal Revenue Code found at Title 26 of the United States Code), if the entity is otherwise eligible it may elect to be treated as an S corporation.