The question of whether real estate was or was not a capital asset in the hands of the taxpayer became an issue in the case of Keefe v. Commissioner, TC Memo 2018-28.  While the issue can arise with other assets, real estate investments are generally large enough that the question of whether a gain or loss on sale is capital, §1231 or ordinary is often a very significant issue, with high stakes involved.

In this case, the taxpayer was looking at a seven-figure loss on the sale of a historic waterfront mansion they had acquired to restore and attempt to rent in Newport, Rhode Island.  The restoration ended up taking much longer than anticipated and was far costlier.  Although they talked with a real estate agent about renting out the property to wealthy individuals who were expected to pay $75,000 a month for the property during peak season, it was never actually rented out.

Image copyright jacquespalut / 123RF Stock Photo

In the case of Simonsen v. Commissioner, 150 TC No. 8, the Tax Court reaffirmed its previously stated position regarding a short sale when a nonrecourse debt is involved.  As well, for the first time the Court also addressed the reportable gain/loss on a property converted to rental use that was sold for less than its original cost but more than its date of conversion fair market value.

The couple in question had purchased a townhouse in San Jose in 2005 for $695,000.  They lived in that home for five years, during which the real estate crisis hit.  In 2010 they relocated to Southern California and began renting the townhouse.  At the time it was converted to a rental the fair value had declined to $495,000.

Image copyright damedeeso / 123RF Stock Photo

The IRS announced the publication of a set of questions and answers related to the tax imposed under IRC §965 under changes made by the Tax Cuts and Jobs Act in News Release IR-2018-53.  The questions and answers are published in the form of a frequently asked question document (FAQ) on the IRS website at:

https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns

Image copyright yupiramos / 123RF Stock Photo

How much should an employee recognize as income when his/her employer provides the employee with tax preparation services?  That was the question addressed by Chief Counsel Advice 201810007.

The employer in this case had U.S. citizens that were given work assignments in various other countries, with employees also being relocated from time to time.  As is often the case in such situations, the employer decided to provide a “tax equalization” program.  Under such a program, the employer agrees to compensation employees in such a fashion that their after-tax income will not fluctuate as they move from taxing regime to taxing regime.

Images copyright kenishirotie / 123RF Stock Photo

When taxpayers attempt to reconstruct their hours in activities from memory when they receive an exam notice to sustain their burden of proving qualification as a real estate professional, the result is rarely a successful defense of that assertion.  Many of the problems are illustrated in the case of Pourmirzaie v. Commissioner, TC Memo 2018-26.

The taxpayers did have several rental properties.  The Court listed them as follows:

• A four-unit residential property in San Jose, California (San Jose property);
• A single-family condominium in San Diego, California, in which petitioners owned a partial interest (San Diego property);
• A single-family residence in Tucson, Arizona (Tucson property);
• A single-family condominium in Bremerton, Washington (Bremerton property); and
• A single-family residence in Discovery Bay, California (Discovery Bay property).

The taxpayers did not maintain any sort of log or calendar of the work performed on these properties during the years in question.  Nevertheless, on their tax returns for the year in question they took the position that Mrs. Pourmirzaie was a real estate professional. 

Image copyright jarin13 / 123RF Stock Photo

His tenants’ inability to deal with taking out the trash appears to have been a key factor in allowing the taxpayer in Franco v. Commissioner, TC Summary Opinion 2018-9 to qualify as a real estate professional.

Jose Franco is a licensed architect and he ran a small architectural business for the year in question.  Normally this would create a significant issue for Mr. Franco to be classified as a real estate professional, since Mr. Franco was not contending that his architectural work was a real property trade or business. 

Image copyright ljupco / 123RF Stock Photo

The IRS issued guidance that may put at risk the ability of individuals in certain states to participate in health savings accounts (HSAs) beginning in 2020 in Notice 2018-12.

As Tax Analysts reported in covering this Notice, several states, including California, Illinois, Maryland, and Vermont, prohibit cost-sharing for insurance coverage of male sterilization and contraception services.  But only Vermont has a “carve-out” for HSA-qualified high deductible health plans (HDHPs).

Image copyright melpomen / 123RF Stock Photo

The Tax Court and U.S. District Court were considering the same basic issue for different years for the same taxpayers.  The courts came to opposite conclusions in the issue.  The United States District Court for the Western District of New York ruled in 2017 that the taxpayers in Perkins v. United States, No. 1:16-cv-00495, plausibly stated a claim for exemption from taxation for the 2010 sale of gravel based on two treaties between the United States and the Seneca Nation.  But in a case looking at the same two cases, the Tax Court decided in the case of Perkins v. Commissioner, 150 T.C. No. 6 that no exemption was available to the taxpayers under those treaties for sales of gravel in other years.

Alice Perkins is an enrolled member of the Seneca Nation and had received permission from the Seneca Nation to remove and sell gravel from lands held by Nation.  She and her husband lived on Seneca property.  For the years in question they sold gravel which they had mined from Seneca lands.

Image copyright aleutie / 123RF Stock Photo

While it is possible to transfer some or all of an IRA account tax free to the soon to be ex-spouse pursuant to a divorce, certain rules need to be followed.  In the case of Kirkpatrick v. Commissioner, TC Memo 2018-20, the taxpayer discovered that a failure to follow these procedures can be a very costly mistake.

Image copyright andreypopov / 123RF Stock Photo

In the case of Sugar Land Ranch Development LLC et al. v. Commissioner, TC Memo 2018-21, the IRS challenged the taxpayer’s treatment of gain from the sale of land.  The taxpayer had treated the gain as capital gain from the sale of investment property.  But the IRS argued that the property was held for sale to customers in the ordinary course of business and that the gain should be treated as ordinary gain.

To qualify for capital gain treatment, the gain must arise from the sale of an asset that is a capital asset in the hands of the taxpayer.  What is a capital asset is defined, under the IRC, by what is not a capital asset.  All assets held by a taxpayer are capital assets unless one of the exclusions, found at IRC §1221(a), applies.

Image copyright joshuaraineyphotography / 123RF Stock Photo

In News Release IR-2018-33 the IRS announced that it was now able to begin accepting returns claiming certain tax benefits retroactively restored for 2017 by the Bipartisan Budget Act of 2018.  The three benefits that the IRS is now ready to accept returns containing are the following:

• Exclusion from gross income of discharge of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness),
• Mortgage insurance premiums treated as qualified residence interest, and
• Deduction for qualified tuition and related expenses.

These provisions had expired at the end of 2016 and Congress had not enacted legislation to extend them for an additional year until the passage of the Bipartisan Budget Act on February 9.

Image copyright boarding1now / 123RF Stock Photo

In News Release IR-2018-32 the IRS sought to deal with what appears to be a widespread misunderstanding of how the home mortgage interest deduction works under the revisions passed as part of the Tax Cuts and Jobs Act.  The IRS points out that merely because a lender refers to a loan as a “home equity” loan, that does not mean the interest will not be deductible in 2018, so long as proceeds of the loan are used to acquire or substantially improve the residence.

Under IRC §163(h)(3)(F), only “acquisition indebtedness” (as defined by IRC §163(h)(3)(B)) will be deductible, and “home equity” indebtedness (as defined by IRC §163(h)(3)(C)) will not be.  Too many taxpayers, reporters and, in this author’s experience, even tax advisers are ignoring the “as defined by” clauses above and instead go directly to using loan labels to determine deductibility.

Image copyright tallyclick / 123RF Stock Photo