Win Some, Lose Some: Basis of Property Sold Reduced Due to Lack of Documentation, But Sales Price was Lender's Bid in Foreclosure Sale

In the case of Breland v. Commissioner, TC Memo 2019-59[1] (May 29, 2019) two different issues were decided by the Tax Court:

  • Did the taxpayers properly substantiate the basis of property sold by producing only a Form 8824 from a prior return when the property was obtained as part of a like-kind exchange?

  • What was the actual sales price and cancellation of debt resulting from the foreclosure sale of the taxpayer’s properties?

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IRS Significantly Raises Limits On Value of Vehicles for Cents Per Mile and Fleet-Average Valuation Rule

In Notice 2019-8 the IRS has set the maximum values for 2018 for employer provided vehicles under which the cents per mile method (Reg. §1.61-21(e)) or fleet-average valuation rule (Reg. §1.61-21(d)) may apply.

The IRS is making a significant increase in this number.  The agency explains its reasoning as follows:

Consistent with the substantial increase in the dollar limitations on depreciation deductions under section 280F(a), as modified by section 13202(a)(1) of the Act, the IRS and the Treasury Department intend to amend Treas. Reg. § 1.61-21(d) and (e) to incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules effective for the 2018 calendar year. Further, the IRS and the Treasury Department intend that the regulations will be modified to provide that this $50,000 base value will be adjusted annually using section 280F(d)(7) for 2019 and subsequent years.

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PMTA Holds Payments to Farmers Under MFP Program to Compensate for Tariff Issues is Taxable Income and Part of Self-Employment Income

The IRS has addressed the taxation of payments made to farmers under a trade aid package (the Market Facilitation Program or MFP) in PMTA 2018-021.  The MFP program gives direct payment to producers of certain crops that have been adversely affected by tariffs.

The memo deals with both the issue of whether such payments are part of gross income under IRC §61 and as self-employment income under IRC §1402.

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Tax Court Disagrees With US District Court Over Potential Tax Exemption for Sale of Gravel

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.

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Payment from Qualified Settlement Fund For Foreclosure Irregularities Is Fully Taxable to Recipient

Clients who receive legal settlements often believe that because they have been awarded damages for a wrong that occurred the payment is not subject to income taxes.  But the tax law is not so simple.  The default under federal tax law, found at IRC §61(a), is that all items of income are taxable, with the burden falling on the taxpayer to point out an exception that applies in his/her case.

The case of Ritter v. Commissioner, TC Memo 2017-185, looks at an award received by a homeowner whose house was taken in a foreclosure proceeding.  The taxpayer received a payment related to a settlement between the lender and the government to deal with, as the Office of the Comptroller of the Currency labeled it, “deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings.”

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Court Accepts IRS's Reconstruction of Business Using Bank Deposits and Forms 1099K

In the case of Kahmann v. Commissioner, TC Summary Opinion 2017-35 the IRS was suspicious that the taxpayers had understated their gross income from their business for the year.  Some of this suspicion arose because the taxpayers failed to turn over bank statements for the business to the agent when they were requested. 

The agent was forced to issue summonses to banks where she was aware the taxpayers maintained at least three accounts. She obtained those accounts to be able to perform a bank deposits analysis, looking for unreported income.

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IRS Publishes Terminal Charge and SIFL Mileage Rates for January-June 2017

In Rev. Rul. 2017-10 the IRS has published the terminal charge and standard industry fare level mileage rates for the first six months of 2017.  These rates are used under Reg. §1.61-21(g)’s rule for valuing noncommercial flights on an employer-provided aircraft. 

The rates are revised every six months, and these rates cover flights occurring between January 1, 2017 and June 30, 2017.

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Payments Received Both From Charities and Individuals by Victims of Orlando Shootings Are Nontaxable Gifts to the Recipient

In a letter to Representative Patrick Murphy dated September 23, 2016 the IRS Commissioner stated to payments made to victims of the Orlando mass shootings at the Pulse nightclub in June by charities do not represent taxable income to those victims.

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Minister's Vow of Poverty by Itself Not Sufficient to Exempt Income from Tax

The taxpayer in White v. Commissioner, TC Memo 2016-167 looked back to a 1919 IRS ruling in support of his position that his payments from a church was not taxable to him due to having taken a vow of poverty.  In what isa citation form that most taxpayer likely have never seen, the taxpayer cited O.D. 119, 1919-1 CB 82.

As the Tax Court noted:

In part, O.D. 119 stated: “A clergyman is not liable for any income tax on the amount received by him during the year from the parish of which he is in charge, provided that he turns over to the religious order of which he is a member, all the money received in excess of his actual living expenses, on account of the vow of poverty which he has taken.”

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Tax Aspects of Crowdfunding Discussed in IRS Information Letter

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.

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Duty of Consistency Requires Taxpayer to Pick Up Income in “Wrong” Year One Last Time

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.

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IRS Announces Disagreement With Case That Allowed Exclusion of Tax Advice Damage Award That Caused Taxpayer to Deviate from Lifetime Plan

The issue of the taxable status of awards received by a taxpayer from his tax adviser was addressed in the case of Cosentino v. Commissioner, TC Memo 2014-186.  While the Tax Court granted the taxpayer a victory, the IRS has announced nonacquiesence with regard to this case (AOD 2016-01).

A key issue when a taxpayer receives a damage award related to negligent tax advice is whether the amounts received will be taxable income to the taxpayer or not.  Generally when a taxpayer receives questionable tax advice, the taxpayer will file a claim against the adviser and argue for damages for taxes, interest and penalties.  The argument for the tax payment generally is based on the claim that if the taxpayer had known the action the adviser was suggesting would not have led to the claimed tax savings, the taxpayer would have taken other actions to reduce his taxes.

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Taxpayer Must Recognize Rental Income from S Corporation Despite Finding S Corporation Activity Lacked a Profit Motive

The Seventh Circuit Court of Appeals had cause to cite the following from the case of Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974):

"[W]hile a taxpayer is free to organize [her] affairs as [she] chooses, nevertheless, once having done so, [she] must accept the tax consequences of her choice, whether contemplated or not, and may not enjoy the benefit of some other route [she] might have chosen to follow but did not."

This was not good news for the taxpayer in the case of Estate of Stuller, et al, v. United States, 117 AFTR 2d ¶ 2016-379, CA7, Docket No. No. 15-1545.

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IRS Expands Identity Protection Income Exclusion to Cover Protection Received from Organizations Not Yet Known to Have a Data Breech

This blog has previously discussed an earlier IRS ruling that stated victims of identity theft will not be deemed to have taxable income from the receipt of such services.  At the time they warned that receipt of such services when no breech had yet occurred would generally be taxable under the standard rules related to items subject to tax.

The IRS did, however, request comments on other situations where entities may provide identity theft protection and whether additional guidance should be issued.  And at end of December 2015 the IRS expanded the relief in Announcement 2016-2.

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