Qualified retirement plan provision in the IRC generally give controlling owner-employees a trade-off—they can benefit under the plan, but only to the extent that an appropriate benefit is offered to the “rank and file.” Not surprisingly, some owners, attempting to maximize their benefit and avoid the cost of funding for other individuals, have attempted to establish structures to “isolate” the rank and file outside of the organization whose employees are covered by the program while still obtaining their services. And, similarly not surprisingly, the law has provisions meant to address such structures.

This type of arrangement was challenged by the IRS in the case of Paza Staffing Services v. Commissioner, Docket No. 6881-12R and is the subject of an unpublished order and decision published on August 17, 2017.   The plan in question was an employee stock ownership plan (ESOP) established by a corporation controlled by Dr. Zapolanski.

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Actress Helen Hayes is not often quoted in Tax Court proceedings, but this case the court referenced her statement that “age is not important unless you are a cheese” as an introduction to a case that dealt with a situation where age was important to more than cheese. The case of Omoloh v. Commissioner, T.C. Summ. Op. 2017-64.

The issue in this case arose because Mr. Omoloh had taken a distribution from an individual retirement account. The question was whether Mr. Omoloh was over age 59 ½ and thus not subject to the 10 percent additional tax on premature distributions from his IRA.

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In a split decision, the Fifth Circuit Court of Appeals reversed and remanded the Tax Court’s 2015 opinion in the case of BC Ranch II, LP et al v. Commissioner, Case No. 16-60068 and 16-60069. All the judges on the panel agreed that the Tax Court had erred in deciding that the entire amount paid by limited partners for their interests represented disguised sales and in deciding that a valuation penalty applied. But the panel split on a key question of whether the partnership had complied with the requirements to obtain a charitable contribution for the donation of a conservation easement, with a majority finding the Tax Court had erred in determining the contribution did not qualify for a deduction.

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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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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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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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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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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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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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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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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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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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