Monday, October 23, 2017
Everyone needs a hobby. Psychology Today explained why here. But some hobbies grow and grow until they become all-consuming. As Benjamin Franklin reportedly put it: beware the hobby that eats. Protesting your taxes for stupid reasons is one of those hobbies that eat.
Bob Wood once wrote a great blog post about stupid tax protest arguments. The legal term for “stupid” is, of course, “frivolous.” Bob rightly says it’s one of the worst names you can be called in the tax world. I really love his line: “In IRS lingo, it’s about as bad as you can get, just shy of the other “f” word, fraudulent.”
The case of Henry M. Jagos and Kathy A. Jagos v. Commissioner, T.C. Memo. 2017-202 (Oct. 16, 2017), teaches such a lesson. It appears from the opinion that the Jagoses are among those lucky taxpayers who do not have to work for their money because their money works for them. Of their total taxable income in 2012 of $544,000, $520,000 seems to have come from investments. At least it came from payments they received from Fidelity Investments and Fidelity withheld about $98,000 in taxes.
With that kind of income, one has plenty of time for hobbies. It appears from this case the Jagoses decided that tax protesting would be a good hobby to have. In 2012 they filed a return to get back the $98,000 in withheld taxes. They reported zero income, claiming the payments they received were not taxable income because they “are private-sector citizens (non-federal employee) employed by a private-sector company (non-federal entity) as defined in 3401(c)(d).”
In old-fashioned texting parlance my reaction to that statement vacillates between OMG, LOL and WTF. For the more measured IRS and Tax Court reaction, see below the fold.
October 23, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Tuesday, October 17, 2017
TaxProf Blog op-ed: Altera Meets Chamber of Commerce, by Kristin Hickman (Minnesota):
Last week, a Ninth Circuit panel heard oral arguments in the government’s appeal from Altera Corp. & Subs. v. Commissioner, 145 T.C. 91 (2015). Frequent readers of this blog will recall that the appeal concerns the Tax Court’s decision to invalidate regulations under Section 482 regarding cost-sharing arrangements on grounds that the regulations were not the product of reasoned decisionmaking as required by the arbitrary and capricious standard of Administrative Procedure Act (APA) § 706(2)(A) and Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983). For the most part, the oral argument considered the substantive reasonableness of the regulations in question as an interpretation of Section 482, although there was also some discussion of whether the IRS adequately explained its reasoning in the regulatory preamble. Judge Kathleen O’Malley of the Federal Circuit, sitting by designation, asked a question that in turn raises an interesting issue, particularly in light of recent coverage of Chamber of Commerce v. IRS, in which a federal district court in Texas interpreted the Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a), as allowing pre-enforcement judicial review of an APA procedural challenge against Treasury regulations addressing inversion transactions.
October 17, 2017 in New Cases, Scholarship, Tax | Permalink
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Saturday, October 14, 2017
These would seem to be fat times for organizations that want tax-exempt status. As everyone and their little dog seems to know, Service resource constraints have made recognition as a tax-exempt organization “virtually automatic” for most applicants on the front end. Even the National Taxpayer Advocate complained that it was too easy for organizations to obtain approval.
This week’s lesson from the Tax Court is that the upside of easy approval on the front end may carry a significant downside on the back end. In the reviewed opinion Creditguard of America, Inc. v. Commissioner, 149 T.C. No. 17, Judge Lauber expressed the Tax Court’s opinion that when the Service revokes an organization’s tax exempt status retroactive to a given year, interest starts running from that retroactive year’s return due date, and not just from the date when the Service made its determination to revoke or actually assessed the tax liability. Why is this such a downside? Because the very resource constraints that make for easy application approval on the front end also create significant delays in completing examinations on the back end. In the Creditguard case, the examined year was 2002, the audit was opened in 2003, completed in 2012 and the resulting deficiency assessed in 2013. And now it’s 2017. That’s a lotta interest. More below the fold.
October 14, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Tuesday, October 10, 2017
TaxProf Blog op-ed: Misapplication Of The Anti-Injunction Act In Chamber Of Commerce v. IRS, by Bryan Camp (Texas Tech):
This is a follow-up to some good blogs on a recent decision by the District Court for the Western District of Texas in Chamber of Commerce v. IRS. See these posts by Professors Les Book, Kristin Hickman, Daniel Hemel and Andy Grewal. All are worth reading.
The more I think about this opinion, the more convinced I am that the court misapplied the Anti-Injunction Act. What I want to point out in this post is what I see as a logical disconnect between the court’s ruling on standing and its ruling on the Anti-Injunction Act. My contention is that the court’s rationale for finding standing necessarily poisons the plaintiffs’ ability to avoid the Anti-Injunction Act. In brief, I just don’t think the plaintiffs here can have it both ways. If they have standing because the disliked regulation will hurt them by potentially increasing their taxes, the Anti-Injunction Act applies. But if, in order to avoid §7421, they claim that striking down the disliked regulation will have no effect on the assessment or collection of taxes from them (or anyone else) then they lose standing.
October 10, 2017 in New Cases, Tax | Permalink
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Monday, October 9, 2017
It takes money to make money. I use that adage to teach my students the basic idea behind the §162 deduction: the money it takes to make money should be deductible from the money made. On October 2, 2017 the Tax Court decided the case of John S. Barrett and Maria T. Barrett v. Commissioner, T.C. Memo 2017-195. The case illustrates a common problem with that adage: how to know when the costs of traveling away from home are deductible business expenses under §162.
Section 162 allows a deduction for “traveling expenses...while away from home in the pursuit of a trade or business.” In contrast, §262 denies deductions for “personal, living or family expenses.” So that is the tension: is an expense business or personal? The more a taxpayer can connect expenses to business needs and away from personal preferences, the more likely the taxpayer can deduct those expenses.
Travel expenses that are more closely connected to taxpayer’s personal preferences are called “commuting” costs and are not deductible. The idea is that everyone has to live somewhere. And our personal choice of where to live should not allow us a deduction in the cost of going to work. That is the idea of your “tax home.” However, expenses for travel away from the “tax home” that are incurred because of business needs, and so duplicate otherwise personal living expenses, are deductible. The IRS has a really good explanation of this distinction in Rev. Rul. 99-7. The classic case on the subject is Commissioner v. Flowers, 326 U.S. 465 (1946), where the Court held that when a taxpayer’s job moved to a different city, his choice to continue living in the old city and travel 165 miles to the new job was a personal choice. His “tax home” was the new city where his employer required him to work. So his choice to remain in the old city just created a long commute.
On the surface, the Barrett case looks like Flowers. In Barrett, the married taxpayers liven in Las Vegas. For some 20 years Mr. Barrett had a business of providing video recording to one client: the American Israel Public Affairs Committee (AIPAC) and did so using a studio in Las Vegas. But when AIPAC built a new building in Washington D.C., it built its own video recording and production studio. So now instead of travelling across town, Mr. Barrett had to travel to D.C. each year, spending two or more months either in hotels or in a rented condo. The issue was whether Mr. Barrett’s expenses of travel, lodging, and meals were deductible under §162. The IRS thought Mr. Barrett just had a long commute, that his “tax home” was now Washington D.C. The Tax Court disagreed.
October 9, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Sunday, October 8, 2017
Gaylor v. Mnuchin, No. 16-cv-215 (W.D. WI Oct. 6, 2017):
The question in this case is whether Congress may give a subset of religious employees an income tax exemption for which no one else qualifies. At issue is the constitutionality of 26 U.S.C. § 107(2), which excludes from the gross income of a “minister of the gospel” a “rental allowance paid to him as part of his compensation.” (Although the phrase “minister of the gospel” appears on its face to be limited to Christian ministers, the Internal Revenue Service has interpreted the phrase liberally to encompass certain religious leaders of other faiths as well. ...
As to the merits, I will deny defendants’ motions for summary judgment and grant summary judgment in plaintiffs’ favor. I adhere to my earlier conclusion in Lew that § 107(2) violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.
October 8, 2017 in New Cases, Tax | Permalink
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Thursday, October 5, 2017
Following up on Monday's post, U.S. District Court Strikes Down Obama-Era Anti-Inversion Regulation, Limiting IRS's Power To Make Rules That Skirt The APA:
TaxProf Blog op-ed: Chamber of Commerce v. IRS: The Post-Mayo Shake Out Continues, by Kristin Hickman (Minnesota):
Here we go again. In 2011, the Supreme Court in the Mayo Foundation case declared that it was “not inclined to carve out an approach to administrative review good for tax law only.” Since then, courts and scholars have been engaged in an ongoing enterprise of debating just how far to take that suggestion. Last week, in Chamber of Commerce v. IRS, a federal district court in Texas offered up the latest installment in the ongoing post-Mayo shake out when it invalidated a set of Treasury regulations —this time, Temp. Treas. Reg. 1.7874-8T regarding inversion transactions — on Administrative Procedure Act (APA) grounds. The court’s opinion addressed several issues concerning the relationship between the IRC and general administrative law principles. And, as with Cohen, Home Concrete, Altera, and other cases in this line, the Chamber of Commerce decision has inspired cheers from some, hand wringing by others, and a great deal of curiosity as tax specialists and administrative law generalists again try to understand one another.
October 5, 2017 in IRS News, New Cases, Tax | Permalink
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Monday, October 2, 2017
Chamber of Commerce v. IRS, No. 1:1 6-CV-944 (W.D. TX Sept. 29, 2017) (citations omitted):
In April 2016, the Internal Revenue Service and the United States Department of the Treasury (the "Treasury Department") (together, the "Agencies") issued a rule identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to categorization for federal-tax purposes because the stock is attributable to prior domestic-entity acquisitions. 26 C.F.R. § 1 .7874-8T (the "Rule"). The Rule was simultaneously issued as a temporary regulation effective immediately and as a proposed regulation subject to notice and comment. 26 C.F.R. § 1.7874-8T(j); Prop. Treas. Reg. § 1.7874-8.
Plaintiffs, the Chamber of Commerce of the United States of America (the "Chamber") and the Texas Association of Business, now bring this lawsuit asserting Defendants, the Internal Revenue Service, Treasury Department, John A. Koskinen, and Jacob J. Lew, violated the Administrative Procedures Act (the "APA") by promulgating the Rule.
October 2, 2017 in IRS News, New Cases, Tax | Permalink
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In a fully reviewed 28 page opinion released Thursday, September 28, 2017, the Tax Court gave full attention to an important problem: when a married taxpayer files a return with an impermissible filing status (such as single or head of household) can the spouses later still elect to file jointly or do the restrictions in §6013(b)(2) apply?
The case is Fansu Camara and Aminata Jatta v. Commissioner. The opinion is worth your time not only for the well-reasoned outcome, but also for its neat demonstration of how precedent sometimes operates like a game of telephone. First I will need to sketch out the facts and holding for you. And then I will have one tax policy observation about the outcome. But I promise it won’t be 28 pages. So, if you are brave, you will continue reading below the fold.
October 2, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Friday, September 29, 2017
Last week the Tax Court issued an opinion in Williams v. Commissioner, T.C. Memo 2017-182. Although it involves small amounts, the opinion teaches a big lesson about the IRS power of offset
Mr. Williams filed his 2013 return reporting $503 of taxable income and withholding of $1,214. So he claimed an overpayment of $711. The IRS accepted his return as filed but did not refund the $711. Instead, it used its offset powers under section 6402(a) to credit that supposed $711 overpayment against Mr. Williams' unpaid tax liabilities from 2011. Later, the IRS audited Mr. Williams' return and proposed a deficiency of $1,403. Mr. Williams' protest to Tax Court was not the usual one. He agreed with the amount of the deficiency, but he thought that since there was not actually an overpayment, per the audit, then the IRS should not have credited that $711 to his 2011 liability but should instead apply it to his 2013 liability. After all, it was part of the wage withholding for 2013. Note that it was to Mr. Williams' benefit to pay off the most recent tax liabilities to increase the chances that the older ones would age out.
September 29, 2017 in Bryan Camp, New Cases, Tax, Tax Practice And Procedure | Permalink
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Tuesday, September 26, 2017
Morrissey v. United States, No. 8:15-cv-02736 (11th Cir. Sept. 25, 2017)(citations omitted):
This is a tax case. Fear not, keep reading. In determining whether the IRS properly denied a taxpayer’s claimed deduction on his 2011 return, we must decide two important and (as it turns out) interesting questions. First up: Was the money that a homosexual man paid to father children through in vitro fertilization — and in particular, to identify, retain, compensate, and care for the women who served as an egg donor and a gestational surrogate — spent “for the purpose of affecting” his body’s reproductive “function” within the meaning of I.R.C. § 213? And second: In answering the statutory question “no,” and thus in disallowing the taxpayer’s deduction of his IVF-related expenses, did the IRS violate his right to equal protection of the laws either by infringing a “fundamental right” or by engaging in unconstitutional discrimination?
We hold that the costs of the IVF-related procedures at issue were not paid for the purpose of affecting the taxpayer’s own reproductive function — and therefore are not deductible — and that the IRS did not violate the Constitution in disallowing the deduction. ...
September 26, 2017 in New Cases, Tax | Permalink
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Saturday, September 23, 2017
Forbes, Helicopter Pilot Lands In Tax Court, Successfully Establishes That Tax Home Is In Iraq
Cowardice, it seems, is not a trait Jesse Linde and I share. A two-time Army helicopter pilot, after struggling to find work in the private sector, Linde jumped at the opportunity to relocate to the Middle East in order to continue flying. To date, he has successfully navigated the many dangers to be found in Iraq, but even halfway across the globe, he couldn't escape one domestic menace: the IRS.
Yesterday, Linde found himself in the Tax Court, and it's a decision that all tax professionals would be wise to review, as it addresses a fascinating area of the law:
September 23, 2017 in New Cases, Tax | Permalink
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Monday, September 18, 2017
Last week, in the Summary Opinion of Collins v. Commissioner, the Tax Court agreed with the Service that a taxpayer could not exclude $85,000 under section 104(a)(2) for payments received for "emotional distress" even though that distress resulted in physical sickness. It's a case that not only teaches an important basic lesson about 104(a)(2) but also exposes a distressing gap in current tax law. More below the fold.
Mr. Collins had sued his employer for workplace discrimination and retaliation. One of his allegations was that he had "suffered severe emotional distress and anxiety, with physical manifestations, including high blood pressure." The case settled, with $85,000 of the settlement was allocated to "emotional distress." Could Mr. Collins exclude that $85k under section 104(a)(2)? Mr. Collins---like many of my basic tax students---thought he could because he had undeniably physical sickness stemming from the stress of his workplace situation. The Service and Tax Court properly said "no exclusion" based on current law.
September 18, 2017 in Bryan Camp, New Cases, Tax | Permalink
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Friday, September 15, 2017
Bloomberg Technology: Internet Tax Ruling Worth Billions Poised for Supreme Court Review, by Jef Feeley:
The South Dakota Supreme Court brought the question of whether online retailers should pay sales tax back into sharp focus.
The Mount Rushmore state’s highest court ruled Thursday that companies selling wares over the Internet can’t be forced to collect South Dakota’s 4.5 percent tax on purchases, laying the groundwork for a U.S. Supreme Court appeal that could change law across the country. A decision forcing online retailers to collect such taxes could be worth billions in revenue to state and local governments.The court backed an appeal by online retailers Overstock.com, Wayfair and NewEgg challenging a state law that required companies that do more than $100,000 worth of business in online sales in the state to collect sales taxes.
The law ran afoul of the U.S. Supreme Court’s 1992 decision in Quill Corp v. North Dakota, which forbade states from requiring retailers without a physical presence to collect sales tax. Justice Anthony Kennedy has suggested in later rulings that the court reconsider the decision.
Daniel Hemel (Chicago), The Common Law and the Commerce Clause
South Dakota’s highest court, in a unanimous decision released this morning, struck down a 2016 state law requiring out-of-state retailers to collect sales taxes on transactions with state residents.
September 15, 2017 in New Cases, Tax | Permalink
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Monday, September 11, 2017
Broadly speaking, tax administration (as currently structured) consists of two main functions: determining tax liability and collecting the tax liabilities so determined. There is, however, some overlap because taxpayers sometimes have the opportunity during the tax collection process to get a re-determination of the underlying tax liability. The main opportunity comes in the Collection Due Process (CDP) hearing. This is an administrative hearing conducted by the IRS Office of Appeals and is subject to judicial review by the Tax Court. Two recent Tax Court cases — Mohamed v. Commissioner (TC Sum. Op. 2017-69) and Bruce v. Commissioner (TC Memo. 2017-172) — illustrate just how narrow this opportunity is for taxpayers. To me, they teach the take-home lesson that the best shot taxpayers have at getting the most favorable result is to respond early and often to tax notices. Taxpayers who wait are the taxpayers who cry. For a lesson that Mohamed teaches about tax return preparer penalties see Les Book's great post here. More below the fold.
September 11, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Monday, September 4, 2017
Last week, in Borenstein v. Commmissioner, 149 T.C. No. 10 (Aug. 30, 2017), the Tax Court was asked to apply Section 6511 contrary to its very, very intricate terms. The Court declined to do so. That meant that a taxpayer lost out on a $30k+ refund. Ms. B. had paid about $112k in taxes by the due date of her 2012 return (April 15, 2013), but she did not file the return. While she did get the 6 month extension she still failed to file a return by October 15, 2013. The months went by — 22 of them— before the Service was kind enough in June 2015 to send her an NOD but was unkind in slamming her with an asserted $1.2m deficiency. You know that drill. Ms. B. then quick-like-a-bunny filed a return that September, showing a $79k liability. The Service said "oh, ok, that's good" and accepted her return as accurate. So she now only needed to get her refund, right? Wrong. See below the fold for why.
September 4, 2017 in Bryan Camp, New Cases, Tax Practice And Procedure | Permalink
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Sunday, August 20, 2017
Following up on my recent posts (links below): Crawford v. U.S. Treasury Dep’t, No. 16-03539 (6th Cir. Aug. 18, 2017) (citations omitted):
In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), a law aimed at reducing tax evasion by United States taxpayers holding funds in foreign accounts. FATCA imposes account-reporting requirements (and hefty penalties for noncompliance) on both individual taxpayers and foreign financial institutions (FFIs). FFIs are further required to deduct and withhold a "tax" equal to 30% of every payment made by the FFI to a noncompliant (or "recalcitrant") account holder. To implement FATCA worldwide, the United States Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) have concluded intergovernmental agreements (IGAs), which facilitate FFIs' disclosure of financial-account information to the United States government, with more than seventy countries. Separately from FATCA and the IGAs, the Bank Secrecy Act imposes a foreign bank account reporting (FBAR) requirement on Americans living abroad who have aggregate foreign-account balances over $10,000; willful failure to file an FBAR invites a penalty of 50% of the value of the reportable accounts or $100,000, whichever is greater.
Plaintiffs — who include Senator Rand Paul and several individuals who claim to be subject to FATCA and the FBAR — sought to enjoin the enforcement of FATCA, the IGAs, and the FBAR, and they now appeal the dismissal of their lawsuit for lack of standing. For the reasons that follow, we affirm the judgment of the district court. ...
August 20, 2017 in New Cases, Tax | Permalink
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Wednesday, July 19, 2017
Forbes, Billionaire Miami Dolphins Owner Gets Shut Out At Tax Court:
Billionaire Stephen Ross, owner of the Miami Dolphins, who thanks to a $200 million donation (largest in the history of the school) was described as Leader, Visionary, Philanthropist, Wolverine by the Universtiy of Michigan. ... Mr. Ross got his start in real estate based on his knowledge of federal tax garnered as a tax attorney for Coopers and Lybrand. ... I have to wonder whether the name of his flagship Related Companies is a tax geek joke.
Forbes, Billionaire Stephen Ross And The Ten For One Charitable Deduction:
The brazenness of the charitable plan with the University of Michigan designed to benefit Wolverine Billionaire Stephen Ross revealed in the Tax Court RERI Holdings I decision is stunning.
The bare bones of the plan are that RERI, whose principal investor was Mr. Ross, bought an asset (call it "the thing") which it donated to the University of Michigan toward a $5 millon pledge that Mr. Ross had made. Under the gift agreement UM had to hold onto "the thing" for two years, then sell it. The amount that UM received would be credited to Mr. Ross's pledge. Round numbers RERI acquired "the thing" for $3 million. When it came time to sell it UM had it appraised at $6 million. UM sold it to a partnership for $2 million under pressure from Mr. Ross who threatened to count that amount towards his pledge, if they ended up getting less. How large was the charitable deduction taken by RERI, of which Ross was the principal investor? That would be $33,019,000.
Mr. Ross is a prominent philanthropist. It is tough to characterize this particular transaction as philanthropic as the claimed tax savings dwarf the amount out of pocket or the amount netted by the University of Michigan. You have to wonder to what extent University development officers knew what was going on. Was University of Michigan seeking charitable donations or renting its brand to a tax avoidance scheme?
July 19, 2017 in Celebrity Tax Lore, Legal Education, New Cases, Tax | Permalink
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Sunday, July 16, 2017
Forbes, IRS Rejects Minister Tax Write-Offs For Lack Of Profit Motive:
The U.S. Tax Court has agreed with the IRS that a minister and author could not deduct business expenses. Why? He was not engaged in a trade or business for profit. To top it off, the reverend also wasn't allowed any deductions under the more liberal hobby loss rules, because he had no gross income from these activities. The case is Lewis v. Commissioner, involving a minister and author named Willie Lewis. He occasionally performed weddings, attended meetings, and conducted seminars. On his 2011 tax return, he claimed business expenses from these activities. The IRS said no, assessed more taxes, and added penalties. So Mr. Lewis went to Tax Court.
July 16, 2017 in New Cases, Tax | Permalink
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Tuesday, July 11, 2017
Following up on last month's post, The Boston Bruins (And Other Pro Sports Teams) Can Deduct 100% Of Meal Expenses At Away Games: Wall Street Journal Tax Report, In Face-off With IRS, the Boston Bruins Win Big:
The Boston Bruins ruled the world of professional hockey six years ago when they last won the Stanley Cup. But the team’s victory last week over the Internal Revenue Service will likely resonate far beyond the rink.
In Jacobs v. Commissioner, [148 T.C. No. 24 (June 26, 2017),] the owners of the National Hockey League’s Bruins argued the team should be able to deduct 100% of the cost of certain meals they provided to players and staff. Under current law, only 50% of the cost of many business meals is tax-deductible.
July 11, 2017 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Monday, July 10, 2017
New York Times DealBook: What Constitutes Obstruction? A Tax Case May Narrow the Definition, by Peter J. Henning (Wayne State):
Prosecutors have enormous discretion in the American criminal justice system, aided greatly by catchall provisions in statutes.
Congress often adopts broadly worded laws to catch a wide range of conduct, especially for white-collar crimes, and regularly tacks on a section to catch actions that might otherwise slip through the cracks.
Over the past few years, the Supreme Court has shown a conspicuous concern when the Justice Department seemed to push the envelope of what constitutes a crime in a way that could reach ostensibly innocent acts, or at least conduct that does not deserve the severe punishment meted out under federal law.
Last week, the justices agreed to review the conviction of Carlo J. Marinello II for obstructing the administration of the tax laws, presenting another opportunity to cut back on the scope of white-collar prosecutions under a catchall section.
July 10, 2017 in New Cases, Tax | Permalink
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Thursday, June 29, 2017
Following up on my previous post, Tax Court Petition: Can Boston Bruins (And Other Pro Sports Teams) Deduct 100% Of Meal Expenses At Away Games; Is Hotel A Team's 'Business Premises'?: Journal of Accountancy, Boston Bruins Can Deduct Full Cost of Meals for Team’s Away Games:
Pregame meals provided to Boston Bruins players and personnel before away games qualify as a de minimis fringe benefit under Sec. 274(n)(2)(B) and are not subject to the 50% limitation under Sec. 274(n)(1), the Tax Court held (Jacobs, 148 T.C. No. 24 (6/26/17)). The petitioners, Jeremy and Margaret Jacobs, co-own the Boston Bruins National Hockey League (NHL) team through two S corporations. The IRS had disallowed 50% of the Bruins’ deduction for expenses for meals provided to the Bruins’ employees when traveling to away games, which resulted in deficiencies of $45,205 and $39,823 in the Jacobses’ 2009 and 2010 federal income taxes.
June 29, 2017 in New Cases, Tax | Permalink
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Friday, April 28, 2017
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a rare Tax Court victory for a taxpayer who succeeded in being treated as a real estate professional for purposes of the passive loss rules.
A.M. real estate pro, P.M. stockbroker
The IRS wins most cases in Tax Court involving taxpayers whose real estate rental losses have been disallowed. The tax law, after all, is stacked against taxpayers wanting those losses. They are automatically passive unless the taxpayer passes two stern tests:
- The taxpayer has to work at least 750 hours during the year in a “real estate trades or businesses,” and
- The taxpayer has to work more in real estate than in anything else.
This “real estate professional” rule usually filters out taxpayers with day jobs outside of real estate.
Yesterday’s taxpayer victory in Tax Court on this issue is a notable exception. The taxpayer worked mornings on her rentals. Then she went to her other job. Judge Paris takes up the story:
April 28, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Saturday, February 25, 2017
Following up on last week's post, Sixth Circuit Reverses IRS, Tax Court: 'Citizens Can't Comply With Tax Laws They Can’t See': Wall Street Journal Tax Report, The Secret to Avoiding Taxes on $6 Million: Exports and an IRA:
In less than a decade, two brothers turned a $3,000 investment into $6 million. Thanks to a federal appeals court, they won’t owe income taxes on this monster return.
To lower their taxes, the brothers paired a common retirement account with an obscure export incentive. The Internal Revenue Service challenged these moves in court, arguing that even if the transactions didn’t break the letter of tax law, they violated the spirit of it.
But the transactions were upheld by the U.S. Sixth Circuit Court of Appeals. The decision, Summa Holdings Inc. v. Commissioner, provides new ballast for taxpayers who use legal techniques in ways the Internal Revenue Service objects to.
“It says that if there are two ways to structure a transaction and one incurs less tax, then the IRS can’t force the taxpayer into the other one,” says Robert Willens, an independent tax expert based in New York. ...
February 25, 2017 in New Cases, Tax | Permalink
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Monday, February 20, 2017
Summa Holdings v. Commissioner, No. 16-1712 (Feb. 16, 2017):
Caligula posted the tax laws in such fine print and so high that his subjects could not read them. Suetonius, The Twelve Caesars, bk. 4, para. 41 (Robert Graves, trans., 1957). That’s not a good idea, we can all agree. How can citizens comply with what they can’t see? And how can anyone assess the tax collector’s exercise of power in that setting? The Internal Revenue Code improves matters in one sense, as it is accessible to everyone with the time and patience to pore over its provisions.
In today’s case, however, the Commissioner of the Internal Revenue Service denied relief to a set of taxpayers who complied in full with the printed and accessible words of the tax laws. The Benenson family, to its good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower its taxes.
February 20, 2017 in IRS News, New Cases, Tax | Permalink
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Saturday, February 18, 2017
Wall Street Journal, Michael Jackson’s Estate Faces Demand for Big Tax Payment: Dispute With IRS Centers on Valuation of the Singer’s Name and Likeness Rights at Time of His Death:
When pop star Michael Jackson died in 2009, weeks before a planned comeback tour, how much was the man in the mirror worth? The answer is far from black and white.
After coming to agreements on the value of some of the King of Pop’s more concrete assets in a legal fight that began four years ago, the estate’s executors are facing off with the Internal Revenue Service in U.S. Tax Court on Monday, primarily over the valuation of the singer’s name and likeness rights at the time of his death.
Depending on the outcome of the case, the estate could be on the hook for more than $500 million in taxes and $200 million in penalties, according to the IRS’s notice to the estate of its deficiency.
February 18, 2017 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Saturday, February 4, 2017
Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017):
Ps filed a motion to disqualify all Tax Court Judges and to declare unconstitutional I.R.C. sec. 7443(f), which authorizes the President to remove Tax Court Judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”
In the Tax Reform Act of 1969 (1969 Act), Pub. L. No. 91-172, sec. 951, 83 Stat. at 730, Congress deleted from I.R.C. sec. 7441 the designation of the Tax Court as an independent agency within the executive branch. In 1971 we said that under the 1969 Act the Tax Court is no longer within the executive branch. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392 (1971). Ps also adopt the view that the Tax Court is not within the executive branch and contend that, as a result, the President’s limited removal authority violates separation of powers principles. In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), the Court of Appeals held that the Tax Court is within the executive branch. The following year Congress amended I.R.C. sec. 7441 because of concerns about statements made by the Court of Appeals in Kuretski.
February 4, 2017 in New Cases, Tax | Permalink
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Friday, January 20, 2017
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes how the Tax Court's treatment of a plastic surgeon's claim that his interest in a surgery center was a passive activity, distinct from his medical practice.
Plastic surgeon gets his passive loss reconstructed
Losing for Winning. A plastic surgeon convinced the Tax Court that his interest in a surgery center was “passive,” defeating an IRS attempt to group it with his medical practice. But the IRS got a partial win out of the deal.
The surgeon, who we will refer to as Dr. H., performed much of his surgery on an outpatient basis. He could not perform surgery requiring general anesthesia in his office. Hospital surgery space was scarce so he began plans to build a surgery center to accommodate patients needing anesthesia, but not an overnight hospital stay.
He dropped the plans when he was approached by a group of other surgeons asking him to invest in a surgery center, MBJ, that they were building. He ended up with a 1/8 interest in it. Tax Court Judge Buch explains how that works:
January 20, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Wednesday, January 4, 2017
National Law Journal, Plaintiffs Firm Stuck With $1M Tax Bill After Trying to Deduct Private Jet Travel:
California plaintiffs firm Engstrom, Lipscomb & Lack owes more than $1 million in federal corporate taxes and penalties relating to business expenses from two personal aircraft, according to a federal appeals court’s ruling this week.
The U.S. Court of Appeals for the Ninth Circuit on Wednesday upheld a finding by a U.S. Tax Court judge that Los Angeles-based Engstrom owed $1.12 million after claiming unsubstantiated travel expense deductions relating to 119 flights taken from 2008 to 2010 [Engstrom, Lipscomb & Lack v. Commissioner, No. 15-70591 (9th Cir. Dec. 28, 2016), aff'g T.C. Memo. 2014-221].
Engstrom founding partner Walter Lack and Thomas Girardi, of Los Angeles plaintiffs firm Girardi Keese, made payments to a corporation they set up called G&L Aviation in order to split the cost of a Gulfstream IV and a Beechcraft King Air 350 turboprop. Lack and Girardi have partnered on several cases including the litigation portrayed in the 2000 film “Erin Brockovich.”
January 4, 2017 in New Cases, Tax | Permalink
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Friday, December 30, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how deductions of a zombie corporations eventually die.
Corporations may have an indefinite life, but not their deductions.
I’ll just keep that company around in case I need it for something. Sometimes clients who sell a business want to preserve the corporation that held the business. While there are occasionally reasons to do so — for example, to deal with potential liabilities — more often such zombie corporations become an annoyance, and clients dissolve them when they realize they have to pay annual state charter fees and tax return fees.
Other taxpayers have other ideas. A human relations consultant who lost his primary client kept his S corporation around for years after the revenue stopped coming in. While there was no revenue, there was no shortage of expenses. The taxpayer claimed a 2009 loss on his K-1 of $5,795 on revenue of zero. Without revenue, what kind of expenses would there be? This kind, according to Tax Court Judge Morrison:
December 30, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Friday, December 16, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how Sec. 263A can apply to a cash-basis farmer.
Sec. 263A – it’s not just for inventories.
Nuts. Few farmers worry much about the so-called “inventory capitalization” rules of Sec. 263A. After all, they don’t have inventories. A California almond grower learned in Tax Court yesterday how Sec. 263A can sneak up even on a cash-basis farmer.
Most farmers deduct their input costs when they buy them under “cash basis” accounting. That’s a sweet deal, as other producers have to capitalize their input costs — raw materials, supplies, labor, etc. — into the cost of the goods they produce, recovering the costs only at the time the production is sold.
Sec. 263A, enacted with the 1986 tax reforms, requires producers to capitalize indirect costs into inventory that formerly were expensed. Most farmers aren’t required to keep inventories, so they don’t waste time worrying about inventory capitalization.
December 16, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Friday, November 25, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of not paying other creditors before you pay payroll taxes to the IRS.
No good deed goes unpunished if you owe payroll taxes.
IRS>Employees. Pay the payroll taxes to the IRS, no matter who else you have to stiff. That’s the lesson of a sad court case out of Houston last week.
Dr. McClendon ran Family Practice Associates for 20 years. Sometime along the way his CFO started keeping the payroll taxes the practice was supposed to remit to the IRS for himself, until by 2009 $10 million was unpaid. The U.S. District Court Judge takes up the story (my emphasis, citations omitted):
Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. Dr. McClendon made a $100,000 personal loan to Family Practice “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” Family Practice used that loan to pay its employees.
November 25, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Saturday, October 22, 2016
Friday, October 21, 2016
Note from Paul Caron: As I explained on August 1, due to my growing other commitments, I have taken steps to reduce the amount of time I devote to TaxProf Blog. I previously have announced that:
Today, I am pleased to announce that Joe Kristan, CPA & Shareholder, Roth & Company (Des Moines, Iowa), and editor of Tax Update Blog, one of my favorite tax blogs, has taken over the weekly tax roundup. (I took a side trip to meet with Joe when I went to my son's first Grinnell College soccer game in 2009.) I am delighted that Joe is adding a new feature to the roundup: a discussion of one of the week's important tax developments (often a Tax Court decision).
In this week's inaugural post, Joe discusses Hicks v. Commissioner, T.C. Summ. Op. 2016-68 (Oct. 17, 2016), in Good Records Do Not a Business Mile Make:
Good Records, Bad Facts. A Tax Court case this week shows that no matter how good your records are, they don’t help if they meticulously document why your expenses aren’t deductible.
The taxpayers, whose surname name we abbreviate here as “H,” had an unusual Schedule C. Judge Carluzzo explains:
Petitioners, or at least one of them, established SC Management in 2005. According to petitioner, its stated purpose was to manage the careers of the H family. Although the exact services that the business was intended to provide with respect to the career(s) of each family member are less than clear, it appears that each family member agreed to contribute a portion of income earned from outside sources to SC Management in return for whatever services the family member received. During the years in issue the income shown on the Schedules C is attributable to amounts petitioner and one of his children earned.
October 21, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Monday, October 3, 2016
Byers v. United States Tax Court, No. 15-1605 (D.C. D.C. Sept. 30, 2016) (citations omitted):
Plaintiff Ronald E. Byers, proceeding pro se, brings this action against the United States Tax Court (“Tax Court” or “Defendant”) pursuant to the Freedom of Information Act (“FOIA”). Relying predominately on the D.C. Circuit’s recent decision in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), Mr. Byers argues that, for the purposes of FOIA, the Tax Court is an agency of the federal government’s Executive Branch. Thus, Mr. Byers asks this Court to order the Tax Court to turn over a wide range of records identified in his FOIA request. The Tax Court moves to dismiss the Complaint. Courts of the United States are specifically exempted from FOIA, and the Tax Court argues that Mr. Byers’s Complaint should be dismissed because the Tax Court is a court, not an agency. The resolution of the Tax Court’s motion to dismiss turns on a single legal question: Is the Tax Court a court or an agency for the purposes of FOIA?
October 3, 2016 in New Cases, Tax | Permalink
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Tuesday, September 27, 2016
Estate of Heller v. Commissioner, 147 T.C. No. 11 (Sept. 26, 2016):
James Heller, a resident of New York, New York, died on January 31, 2008. At that time he owned a 99% interest in James Heller Family, LLC (JHF). James Heller's daughter, Barbara H. Freitag, and his son, Steven P. Heller, each held a 0.5% interest in JHF. Harry H. Falk managed JHF, the only asset of which was an account (JHF Madoff account) with Bernard L. Madoff Investment Securities, LLC (Madoff Securities). ...
On December 11, 2008, Bernard Madoff, the chairman of Madoff Securities, was arrested, and the Securities and Exchange Commission issued a press release to alert the public that it had charged him with securities fraud relating to a multibillion-dollar Ponzi scheme. ... As a result of the Ponzi scheme, JHF's interest in the JHF Madoff account and the estate's interest in JHF became worthless.
The estate on April 1, 2009, timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on which the estate reported a $26,296,807 gross estate, including the value of James Heller's 99% interest in JHF (i.e., $16,560,990). The estate also claimed a $5,175,990 theft loss deduction relating to the Ponzi scheme, the amount of which reflects the difference between the value of the estate's interest in JHF reported on the estate tax return and the estate's share of the amounts withdrawn from the JHF Madoff account. Respondent on February 9, 2012, issued the estate a notice of deficiency in which respondent determined that the estate was not entitled to the $5,175,990 theft loss deduction because the estate did not incur a theft loss during its settlement.
September 27, 2016 in New Cases, Tax | Permalink
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Thursday, September 22, 2016
United States v. Daugerdas, No. 14-2437 (2d Cir. Sept. 21, 2016):
Paul M. Daugerdas was a Certified Public Accountant (“CPA”) and tax attorney at Arthur Andersen through August of 9 1994; the law firm Altheimer & Gray from the end of 1994 through 1998; and the Chicago office of the law firm Jenkens & Gilchrist (“J&G”) from 1999 through April 2004. Throughout his career, Daugerdas developed, sold, and implemented a variety of tax‐reduction strategies for wealthy clients: the so‐called Short Sale Shelter, Short Option Shelter, Swaps Shelter, and HOMER Shelter. Besides Daugerdas’s employers, two other entities had significant involvement in this undertaking. The accounting firm BDO Seidman (“BDO”) referred its clients to J&G and helped to sell the shelters, and the investment bank Deutsche Bank. Alex Brown (“DB”) assisted J&G in the design of the shelters, held informational meetings with clients, and implemented the transactions that composed the shelters.
September 22, 2016 in New Cases, Tax | Permalink
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Thursday, August 25, 2016
Thursday, August 11, 2016
Tanzi v. Commissioner, T.C. Memo. 2016-148 (Aug. 9, 2016):
During the first half of 2011 the Tanzis were employed by Seminole State College. Dr. Tanzi taught math and communications classes as an adjunct professor, and Mrs. Tanzi was employed as a campus librarian.
Dr. Tanzi is highly educated—he holds a doctorate in communication. As he explained at trial, individuals holding such terminal degrees bear a lifelong burden of “developing knowledge, finding knowledge, exploring, [and] essentially selfeducating”. Dr. Tanzi therefore insists that all expenses paid in adding to his “general knowledge” should be deductible as unreimbursed employee business expenses. ...
August 11, 2016 in Legal Education, New Cases, Tax | Permalink
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Monday, August 1, 2016
The IRS has issued AOD 2016-02, 2016-31 IRB 193 (Aug. 1, 2016), acquiescing in the Ninth Circuit's decision in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), which held that the § 163(h)(3) limitations on the deductibility of mortgage interest ($1 million of acquisition indebtedness plus $100,000 of home equity indebtedness) are applied on a per-taxpayer basis (for a total of $2.2 of mortgage debt for unmarried couples), rather than on a per-residence basis (and thus limited to $1.1 of mortgage debt for married couples), as previously argued by the IRS and decided by the Tax Court (138 T.C. 204 (2012)).
August 1, 2016 in IRS News, New Cases, Tax | Permalink
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Monday, July 11, 2016
Indianapolis Business Journal, Pacers’ Legal Tenacity on Display in IRS Fight:
The legal fallout stemming from Melvin Simon’s decision to unload his half of the Indiana Pacers to his brother Herb just a few months before his September 2009 death is getting crazier by the day.
Mel’s widow, Bren Simon, got the public spectacle rolling in March 2015 when she sued the IRS in an effort to overturn the agency’s determination that the terms of the deal were so tilted in Herb’s favor that Mel essentially gave him an $83 million gift.
That conclusion left Bren with a $21 million gift-tax bill, which she paid under protest but hopes to get refunded by winning the suit.
July 11, 2016 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Tuesday, June 28, 2016
The Surly Subgroup: Tax Lawyers Kill $38 Billion Merger, by David J. Herzig (Valparaiso):
I remember one of my first days at GT [Greenberg Traurig] we were advising on a corporate merger. At the end of the process (of course), the M&A group asked tax to sign off on the deal. Everything was done and this was supposed to be a rubber stamp. Well, as you can guess by now, the tax consequences of the deal as structure were disastrous and the whole deal had to be restructured. I remember vividly the corporate lawyers saying as they walked out the door, this is why we never ask tax anything!
Today, a judge killed the proposed $38 billion merger between Energy Transfer Equity (“ETE”) and the Williams Companies. Chancery Court Vice Chancellor Sam Glasscock ruled that ETE could back out of the deal because of taxes. Latham & Watkins, actually, tax lawyers at three top firms (L&W, Gibson Dunn and Morgan Lewis and one law professor [Ethan Yale (Virginia)]) could not opine that the deal was tax neutral under 721 despite one law professor [Howard Abrams (San Diego)] and Cravath saying the deal worked. This opinion is a rather big deal for M&A lawyers. Usually, conditions precedent like this won’t allow one side to back out of a transaction. ...
I would love to hear others opinions here. But some off the cuff reactions I had were:
June 28, 2016 in New Cases, Tax | Permalink
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Monday, June 13, 2016
Nacchio v. United States, Nos. 2015-5114 & 2015-5115 (Fed. Cir. June 10, 2016):
This is a tax case arising out of a criminal conviction for insider trading. Joseph P. Nacchio and Anne M. Esker (“Nacchio”) filed this action in the Court of Federal Claims seeking an income tax credit of $17,974,832 for taxes paid on trading profits of $44,632,464.38, which Nacchio was later ordered to forfeit to the United States following his conviction for insider trading with respect to those profits. The government opposed Nacchio’s request, contending that his forfeiture payment was a nondeductible penalty or fine and that he was estopped from seeking tax relief because of his criminal conviction. The parties filed cross-motions for summary judgment.
June 13, 2016 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Kim Brooks (Dalhousie), The High Cost of Transferring the Dream:
This paper is part of a larger project where I use the facts in tax decisions to reveal something about who we are. It looks through a small window into the lives of the people who find themselves caught between our collective and their individual expenditure aspirations. More specifically, it explores the circumstances in which individuals find that their outstanding tax debts pose a threat to their ability to maintain ownership of their home.
June 13, 2016 in New Cases, Scholarship, Tax | Permalink
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