Receiver Barred from Claim of Right Deduction Due to Fraudulent Conduct of Those Who Originally Obtained Funds

The First Circuit Court of Appeals determined that a District Court went beyond the law in attempting to mitigate an unfair result in the case of Robb Evans & Associates, LLC v. United States, CA1, Case Nos. 15-2540 & 15-2552.

The case involved the always confusing concept of a claim of right under IRC §1341.  This rule provides that if a taxpayer included an item in gross income in a prior year because it appeared the taxpayer had an unrestricted right to the item that is more than $3,000, and the amount is repaid in a later year, the taxpayer can, on the return for the year of repayment, either take a deduction for the amount repaid or claim a credit for the amount of additional tax paid when the item was originally included in income.

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Ways and Means Committee to Begin Mark Up of American Health Care Act

Added March 11 - Link to Ways and Means Copy of the Bill.

The House Ways and Means Committee has released the markup version of the American Health Care Act, the proposed replacement for the Affordable Care Act.  The committee will meet on March 8 to begin the mark up process.

The bill in its present form is merely a starting point for the process of the modification, repeal and/or replacement of various provisions that were enacted in 2010 as part of the Patient Protection and Affordable Care Act and the Healthcare Reconciliation Act.

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Medical Deduction Allowed for Treatments Not Generally Recognized as a Conventional Treatment

The fact that a medical treatment may not be recognized as a proper treatment by medical authorities does not mean that federal tax law will deny the taxpayer a deduction for such expenses.  In a bench opinion, the Tax Court in the case of Malev v. Commissioner, Tax Court Case No. 1282-165 held that the taxpayer would be allowed a deduction for such expenses even though the only diagnosis she cited as evidence of her condition took place after the treatments in question, calling into question her belief that her unusual treatment had cured her.

The Court noted that the treatments the taxpayer sought to deduct related to her spinal conditions were outside the norm, noting:

Concerned that conventional treatments for her condition posed too much risk, or were or would be ineffective, Petitioner subscribed to various forms of treatment from four individuals, none of whom would be commonly recognized as a conventional medical caregiver. And to be sure, none of the methods utilized by these individuals would commonly be recognized as a conventional medical treatment. The methods Petitioner subscribed to might be termed “alternative medicine” by the polite, but we expect the less tolerant would characterize the treatments in other than legitimate or complimentary terms.

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Doctrine of Substantial Compliance Did Not Apply to Taxpayer Who Failed to Meet Documentation Requirements for Donation of Used Airplane

The case of Izen v. Commissioner, 145 TC No. 5 involved the question of whether a taxpayer had complied with the requirements of IRC §170(f)(12) for his donation of his interest in an aircraft to a museum in Houston.

IRC §170(f)(12) was enacted to impose additional substantiation requirements for taxpayers claiming donations of used motor vehicles, boats and airplanes.

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Morgan Stanley Discloses It Has Discovered Errors in Basis Reported to IRS from 2011 to 2016 in Customer Information Returns

Morgan Stanley, in a Form 10-K filed with the Securities and Exchange Commission on February 27, disclosed that it had discovered errors in information reporting forms provided to the IRS for the years from 2011-2016. The erroneous data related to cost basis information reported to the IRS and retail brokerage clients.

Since 2011 brokers have been required to report to the IRS, as part of the Form 1099-B reporting, basis on securities sold during the year that were acquired after various dates depending on the type of security.

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IRS Delays Deadline for Required Notices for Employers Offering Reimbursement for Individual Insurance Policies

The IRS has yet again bailed out the Congress after a new law imposed a deadline for taking action that was simply unworkable (in this case, for calendar year plans 90 days after the law was enacted).  In Notice 2017-20 the IRS has granted relief from notices that were required to be given to employees eligible to be covered by a qualified small employer health reimbursement arrangement (QSEHRA), a requirement added by the 21st Century Cures Act that enacted December 13, 2016.

An employer with fewer than 50 employees who does not offer group plan to any employees is eligible to establish a qualified small employer health reimbursement arrangement. [IRC §9831(d)]  However, an employer establishing such an arrangement is required to give written notice to all eligible employees at least 90 days before the beginning of a year for which a QSEHRA is provided.  [IRC §9831(d)(4)]

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IRS Releases Letter to Be Sent to Taxpayers Assigned to Collection Agency

The IRS has released a copy of the letter that they will send when accounts are sent to an outside collection agency.  The new letter, Notice CP40, will be used when the IRS forwards accounts to a collection agency in the cases Congress required that step to be taken when it passed the Fixing America’s Surface Transportation Act in December of 2015.

The form will assign the taxpayer a “Taxpayer authentication number” which will be found in the upper right section of the first page of the notice. The first five digits of that number will need to be provided to the collection agency before the collection agency will be able to assist the taxpayer. This will serve to confirm to the agency that the person on the phone is the taxpayer.  The agency will then recite the final five digits of the taxpayer authentication number to allow the taxpayer to confirm that the collection agency is the party calling.

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Court Rejects Valuation of Painting That Was Only 20% of What Painting Sold for 3 ½ Years Later

The IRS and the taxpayer in the case of Estate of Kollsman v. Commissioner, TC Memo 2017-40 had wildly different values that each ascribed to two paintings.  In the view of the estate the paintings in question were valued at $500,000 and $100,000 respectively.  But the IRS position was that the paintings were far more valuable, arguing at trial that the proper values were $2,100,000 and $500,000 respectively.

One reason the IRS was skeptical of the estate’s value was the that the more valuable of the two paintings was sold 3 ½ years later for a $2,100,000 hammer price and a full price paid by the buyer of $2,434,500, well above the estimated $500,000 value.

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IRS Makes List of Organizations Granted Exemption via Form 1023-EZ Available for Download Online

The IRS announced in News Release IR-2017-41 that it has now made available lists of approved exemption applications that were obtained using Form 1023-EZ, Streamlined Application for Recognition of Exemption.

The information, provided in the form of an Excel spreadsheet, provides approved applications by year beginning with mid-2014 when the streamlined form was first released.  The IRS will release updated information quarterly.

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No Deduction Allowed for Payment to Related Entity When Reasonableness of Payment Not Demonstrated

Whenever taxpayers are paying for services between related entities the same interests control, the IRS is known to be skeptical of the reality of the arrangement.  The IRS questioned just such an arrangement in the case of Kauffman v. Commissioner, TC Memo 2017-38.

The taxpayer in this case was a realtor and cinematographer who operated several single member LLCs (all of which were treated as disregarded entities) and a C corporation.  The IRS was questioning payments made from one of the LLCs to the C corporation of $191, 000 for “consulting fees” and $75,000 in “commissions and fees.”

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No Business Bad Debt Nor Partnership Loss Allowed to Taxpayer

The taxpayer in the case of Scheurer v. Commissioner, TC Memo 2017-36 claimed that he either had a large business bad debt loss or a partnership loss related to funds that he stated he had advanced to a business being operating by a friend of his.  Unfortunately for Mr. Scheurer, the Tax Court did not accept either claim.

Mr. Scheurer had a friend, Kevin Zinn, who was planning to start a robo-call operation, marketing his company’s services to individuals with high credit card debt.  For a fee, the organization (Continental Financial Services, referred to as CFS) would contact the individual’s bank and attempt to negotiate a lower interest rate.  If a prospect agreed to hire CFS, the prospect would be charged an upfront fee that would be charged to the prospect’s credit card,

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Yet Another Phishing Email Warning from the IRS

A new warning has been issued by the IRS to tax preparers regarding fake emails in News Release IR-2017-39. The phishing email arrives with a subject of “Access Locked” and seeks to take advantage of preparers who may have run into security procedures added this year in their software where too may failed attempts results in—denied access.

Phishing emails are often designed with the understanding that users are most likely to open and act on emails without thinking if the context makes sense with regard to a user’s current situation. One standard security procedure that has been added to most tax software is to lock users out after a certain number of failed attempts to access the software. Such lock outs also will be used on related web sites (such as those used for electronic filing of returns in certain software).

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Sixth Circuit Panel Finds IRS Cannot Use Substance Over Form to Recharacterize DISC-Roth IRA Structure

A Sixth Circuit panel in the case of Summa Holdings Inc. v. Commissioner, No. 16-1712, CA6 reversed the Tax Court in case involving transactions involving a Domestic International Sales Corporation (DISC) and a Roth IRA should be recharacterized as being a method of making impermissibly large contributions to the Roth IRA. 

The case concludes by noting:

The last thing the federal courts should be doing is rewarding Congress’s creation of an intricate and complicated Internal Revenue Code by closing gaps in taxation whenever that complexity creates them.

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IRS Will No Longer Reject Returns That Are Silent on Health Insurance Issues

The IRS has announced that it will revert to its prior practice and not reject 2016 individual income tax returns that fail to either check the “full year coverage” box on Form 1040 or provide information related to why the shared responsibility penalty will not apply to them.  The IRS explanation of this can be found on their website in the article titled “Individual Shared Responsibility Provision.” (version updated February 15, 2017)

The IRS had announced last year that, beginning with 2016 individual returns, the agency would reject tax returns during processing where the taxpayer failed to provide the required health care information.  In prior years the IRS had not rejected the returns (referred to as “silent returns” because they are silent with regard to health insurance issues), but continued to process the return and then, if necessary, contact the taxpayers.

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Dentist Establishes He Was a Real Estate Professional

The Tax Court accepted the taxpayer’s position that he was a real estate professional in the case of Zarrinnegar, et al v. Commissioner, TC Memo 2017-34.  And Dr. Zarrinnegar prevailed in this case despite working in his own dental practice with his spouse, Dr. Dini.

To be classified as a real estate professional a taxpayer must meet two tests.  First, the taxpayer must have over 750 hours of services in real property trade or businesses in which he actively participates and more than one-half of the personal services performed in trades or businesses in which the taxpayer participates must be in real property trades or businesses.  [IRC §469(c)(7)]

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Estate Found to Have Reasonably Relied on Attorney's Erroneous Advice for Extended Due Date

Most often taxpayers who attempt to claim reasonable cause for late filing of a return due to reliance on a tax professional don’t succeed in their case.  But the result was different for the taxpayer in the case of Estate of Hake v. United States, No. 1:15-cv-01382, US District Court, MD PA.

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Value of CalPERS Pension Not Included in Calculation of Insolvency

The general rule is that income from the cancellation of debt is included in a taxpayer’s gross income. [IRC §61(a)(12)]  However, IRC §108 provides various exclusions from income for cancellation of debt if certain requirements are met.  One of those exclusions, found at IRC §108(a)(1)(B), provides for excluding from income cancellation of debt to the extent the taxpayer is insolvent at the time the debt is discharged.

The taxpayers in the case of Schieber v. Commissioner, TC Memo 2017-32 argued that they were insolvent at the time GMAC Mortgage had cancelled debt of $448,671.  The debt was secured by a piece of property (the Stockdale Highway property) that was not the taxpayer’s principal residence. 

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Husband Not Allowed to Sign Joint Return on Wife's Behalf Where He Claimed Her Mental Illness Rendered Her Decision to File Separately Void

What do you do about filing a joint return if your spouse refuses to sign the return and insists on filing married filing separate? Generally you are out of luck and must file married filing separate. But in the case of Moss v. Commissioner, TC Memo 2017-30 the taxpayer contended that his spouse wasn’t competent to file a return and that he should be allowed to sign the return on her behalf.

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Preparer Failed To Exercise Proper Due Diligence in Failing to Seek Additional Supporting Evidence of Business Income

In the case of Foxx v. United States, U.S. Court of Federal Claims, No. 1:15-cv-01266 the IRS had assessed a penalty against a tax preparer, claiming he had failed to exercise proper due diligence in reporting over $18,000 from an auto detailing business that caused a taxpayer to qualify for the earned income tax credit.  When the IRS examined the taxpayer’s return, the taxpayer admitted she had no such business and, thus, was not eligible to have received the credit.

The IRS had assessed a penalty against Dr. Foxx under IRC §6694(b) for “willful or reckless conduct” in preparing the tax return.  Dr. Foxx argued that he has simply relied upon the representations of the taxpayer about her income.  So the key question became whether Dr. Foxx’s actions were sufficient to show an exercise of proper due diligence.

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