Deficiency For Early 401(k) Distribution; 10% Additional Tax; “Unable To Engage In Substantial Gainful Activity" Exclusion

Tax Court in Brief | Lucas v. Comm’r

Deficiency for Early 401(k) Distribution; 10% Additional Tax; Exclusion for “Unable to Engage in Any Substantial Gainful Activity

Lucas v. Comm’r, T.C. Memo. 2023-9| January 17, 2023 | Urda, J. | Dkt. No. 2808-20

Summary: In 2017, Robert Lucas worked as a software developer, but he lost his job in that year. To make ends meet, he obtained a distribution of $19,365 from a section 401(k) plan. He had not reached 59 1/2 years old at the time. The administrator reported the amount as an early distribution with no known exception on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Lucas reported the distribution on his 2017 return but did not include it as taxable income. His return reflected his understanding that the distribution did not constitute income because of his diabetic medical condition. The IRS issued a notice of deficiency for his 2017 tax year, determining a deficiency of $4,899 based on the inclusion of the retirement plan distribution in Lucas’s 2017 gross income and a ten-percent additional tax imposed by section 72(t).

Key Issues: Whether Lucas’s 401(k) plan account distribution is taxable and subject to the ten-percent additional tax imposed by 26 U.S.C. section 72(t)(1)?

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Exclusion of Value of Lodging Provided by Employer

Tax Court In Brief: Freeman Law

Smith v. Comm’r, T.C. Memo. 2023-06| January 12, 2023 |Toro, J. | Dkt. No. 5191-20

Summary: This is a deficiency case and a continuation of the Tax Court’s opinion in Smith v. Commissioner, No. 5191- 20, 159 T.C. (Aug. 25, 2022), which is blogged right here on the ol’ Tax Court in BriefSee (addressing the issue of whether a closing agreement could be avoided if there is malfeasance or misrepresentation of a material fact). In this more recent opinion, the Court addresses, basically, one issue: Whether, under 26 U.S.C. § 119, Smith may exclude from gross income the value of lodging his employer provided during the relevant years (2016-2018).

Smith was employed by Raytheon Company, a private defense contractor, to work as an engineer in Pine Gap, Alice Springs, Northern Territory, Australia (Pine Gap). Raytheon used an Australian operations handbook, which informed Smith that he was eligible for housing in Alice Springs but was responsible for IRS taxable income on the rental value of furnished housing and the associated utilities. The Raytheon handbook stated that income tax on the value of housing and the associated utilities is the responsibility of the employee, and the taxable value of housing provided was reported via a Form 1099 issued by the U.S. Air Force.

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Deficiency For Disallowed American Opportunity Credit

Vassiliades v. Comm’r, T.C. Memo. 2023-1 | January 9, 2023 | Panuthos, J. | Dkt. No. 12283-20S.

Summary: This case involves whether taxpayers are allowed to claim the American Opportunity Credit (AOC) on their federal income tax return. In 2018, the IRS disallowed the AOC claimed by John M. Vassiliades and Eliza Ortizluis Vassiliades (Vassiliades) on their 2018 federal income tax return. Mr. Vassiliades has a daughter (AM) from a prior relationship, who lived in London and was enrolled in postsecondary education at the University College London (UCL). Mr. Vassiliades made several wire transfers to his daughter in an account in the UK to pay for school tuition, fees, and other expenses. Vassiliades claimed AM as a dependent in their 2018 tax return. Additionally, under Form 8863 Education Credits they claimed the AOC, consisting of a refundable education credit and a refundable credit regarding qualified education expenses paid during AM’s enrollment at UCL for 2018. However, Vassiliades did not receive a Form 1098-T, Tuition Statement, from the University for such year.

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Henry v. Comm’r T.C. Memo. 2023-2| January 5, 2023|
Ashford, J. | Dkt. No. 18832-18

Summary: From early 2015 and through 2016 Marie Henry (“Henry”) was unemployed and in a terrible financial, physical, and mental state. To get by, she made early withdrawals from a retirement plan. She was enrolled in health insurance coverage provided by Blue Cross Blue Shield (Blue) for the first 11 months of 2016 through the Health Insurance Marketplace (Marketplace).  The Marketplace determined that Henry was eligible for premium tax credit and the Advanced Premium Tax Credit for her coverage, so she received the benefit of monthly APTC payments, totaling $7,205. The Marketplace sent to the IRS and to petitioner a 2016 Form 1095−A, Health Insurance Marketplace Statement, which reflected Henry’s coverage information under Blue.

The letter directed her to file a tax return if the form showed she received the benefit of the APTC and complete and attach to the return Form 8962, Premium Tax Credit (PTC), which is used to figure the amount of PTC and reconcile it with the APTC. Henry filed a 2016 Form 1040, U.S. Individual Income Tax Return, reporting or claiming: head of household, one exemption for herself and one dependency exemption for her son, total income (and adjusted gross income (AGI)) of $91,274 (consisting of taxable pensions and annuities of $68,750 and taxable Social Security benefits of about $26,524), itemized deductions, income tax withholding from the pensions, and claimed refund of $5,846.
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Substantiation For Schedule C Deductions (Lodging, Vehicle, Entertainment, Gifts, Dry Cleaning, etc.)

Ayria v Commissioner, T.C. Memo. 2022-123 | December 19, 2022 | Lauber, J.| Dkt. No. 13745-20

Short Summary: This case involves the disallowance of taxpayer’s business expenses reported on Schedule C, Profit or Loss from Business for not meeting substantiation requirements and the assessment of an accuracy-related penalty. In the 2017 tax return, Ayria reported wages income received as an employee of Honda. Additionally, he included in his tax return a Schedule C where he described his sole proprietorship as “consulting”, where he reported gross receipts and claimed several deductions. All the expenses reported were incurred in connection with his work as manager of Honda. The expenses incurred were vehicle expenses, meals, and entertainment, gifts, telephone and Internet Charges, and Dry Cleaning. The IRS disallowed all the deductions claimed under Schedule C. The Tax Court determined that expenses shall be “ordinary and necessary” business expenses to be deductible under Section 26 U.S.C. § 162. The tax Court disallowed all the deductions made by Ayria under Schedule C, for the following reasons: (1) Lodging expenses – Ayria incurred hotel expenses that were not essential to carry out his business, but merely a substitution of his daily commuting from his home to his job. (2) Vehicle expenses – Ayria did not maintain any odometer readings to keep track of his mileage nor records for his business travel related. (3)

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Tax Court in Brief | Recordkeeping And Constructive Dividends

Tax Court in Brief | Palmarini Inc. v. Commissioner, Palmarini v. Commissioner | Recordkeeping and Constructive Dividends

Palmarini Inc. v. Comm’r, Palmarini v. Comm’r, T.C. Memo. 2022-119 | December 7, 2022 | Gustafson, J. | Dkt. Nos. 1719-17, 1723-17


Short Summary: During tax years 2013 and 2014 (the “Tax Years”), petitioners husband and wife filed joint Forms 1040, U.S. Individual Income Tax Returns. Petitioner wife worked as a procurement analyst for the U.S. Department of Defense. Petitioner husband worked as a cement contractor for petitioner corporation.

Petitioner husband owned an approximately 33% interest in petitioner corporation, with the remaining interests being owned by his brothers.  Petitioner husband also was the sole member of a limited liability company (“LLC”) that was engaged in the business of affiliated online marketing. Petitioner husband viewed all accounts of petitioner corporation and LLC as his own and used them for both business and personal purposes. Petitioner husband also owned various residential properties and hired professional real estate management companies to manage the renting of the properties to tenants.

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Passport Revocation Notice For “Seriously Delinquent Tax Debt”; Limitations On Tax Liens

Mattson v. Comm’r, T.C. Memo. 2022-118 | December 6, 2022 |Copeland, J. |Docket No. 16982-18P 

Summary: Eric Mattson did not file income tax returns for tax years 2001, 2002, and 2005 through 2008. The IRS prepared substitutes for returns using third-party information return documents. In six separate notices of deficiency the IRS determined various deficiencies and additions to tax for each year in issue. Mattson contested none of them. So, the IRS assessed the deficiencies, additions to tax, and applicable interest. To collect Mr. Mattson’s outstanding tax liabilities for the years in issue, the IRS mailed Mr. Mattson a Notice CP508C, Notice of certification of your seriously delinquent federal tax debt to the State Department (certification notice) that (1) notified Mr. Mattson that his tax debt was $61,933.71 and (2) certified to the State Department that his tax debt is seriously delinquent such that the State Department was prohibited from issuing or renewing a passport to Mr. Mattson. Mr. Mattson filed a Petition with the Tax Court pursuant to section 7345(e)(1), and both the IRS and Mr. Mattson moved for summary judgment on the certification notice issue.

Key Issues:

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A Case About Taxpayer Deposits In Company Bank Account

Showalter, v. Commissioner, T.C. Memo. 2022-114 | November 30, 2022 |Lauber, J.| Dkt. No. 13116-18

Short Summary: This case involves whether a taxpayer has additional unreported income based on the deposits in its company’s bank account. Richard Showalter (Showalter) is the sole owner of Real Estate Consulting Services, LLC (RECS). RECS has only one bank account. Showalter did not file his 2013 tax return. The IRS issued a substitute for return as provided in 26 U.S.C. § 6020(b). The IRS determined that Showalter failed to report business income, gambling winnings, and interest. The IRS issued a notice of deficiency assessing him a deficiency of a certain amount, plus addition to tax under sections 6651(a)(1) and (2), and 6654 of the I.R.C. Showalter contended the IRS’s deficiency arguing that the IRS did not consider his business expenses as deductions. He offered as evidence RECS’ bank account statements. IRS agreed that Showalter was entitled to certain deductions. However, the IRS determined that Showalter excluded other additional income regarding a real estate transaction from the analysis made to RECS bank statement. Showalter considered that the real estate income might be not subject to tax. The Tax Court analyzed all the evidence regarding the additional amount received by Showalter. The Tax Court determined the IRS correctly determined the additional unreported income for 2013.

Key Issues: Whether, Showalter has additional unreported income based on the deposits of RECS’ bank account?
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Depreciation Deduction, Rental Income, And Passive Activity

Heather P. Dunn and Edison Dunn v. Comm’r |T.C. Memo 2022-112 | November 29, 2022 | Wells, J. | Dkt. No. , No. 9996-17

Short Summary:  At issue in this case are several deductions that the taxpayers claimed – including depreciation and certain losses from passthrough of their wholly-owned corporation.  Unfortunately, the taxpayers in this case failed to maintain sufficient documentation and failed to satisfy multiple rules that would have allowed them to claim such deductions.  As a result, the deductions were denied, and accuracy-related penalties were sustained.

Key Issues:

  • Whether the taxpayers were entitled to a depreciation deduction on the wife’s Ford Explorer;
  • Whether the taxpayers were entitled to a deduction of certain net losses; and
  • Whether the taxpayers were entitled to deduct flowthrough losses from an entity they owned, Magnet Development LLC.
  • Whether the taxpayers were properly assessed accuracy-related penalties.

Facts and Primary Holdings

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Innocent Spouse Relief, Equitable Factors Under Section 6015(f)

Parker v. Commissioner, T.C. Memo. 2022-110 | November 15, 2022 |Paris, J.| Dkt. No. 6054-19

Short Summary: This case involves whether a taxpayer is entitled to relief from joint and several liability regarding a deficiency in federal income tax under 26 U.S.C. § 6015(f).  Haywood Earl Parker Jr. (Parker) and Jaqueline Ann Parker (Ann Parker) married in 1988 and divorced in April 2018. Parker has severe health problems and his only income as of 2012 arises from Social Security (SS) disability payments. Ann Parker received a ­settlement award in relation to a discrimination claim she asserted against her employer. The Parkers filed their joint tax return for 2016, where they excluded the attorney’s fees or noneconomic and compensatory damages from the settlement amount. They considered those amounts were non-taxable from a call held with the IRS.

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IRS Automated Underreporter Program, Gifts From Employer, Accuracy-Related Penalty

Freeman Law Tax Court In Brief

Fields v. Comm’r, T.C. Summary Opinion 2022-22 | November 10, 2022 | Panuthos, Special Trial J. | Dkt. No. 2925-20S (IRS Automated Underreporter, gifts from employer, unreported gross income, and accuracy-related penalty)

Summary: Pursuant to 26 U.S.C. § 7463(b), this decision is not reviewable by any other court, and the opinion shall not be treated as precedent for any other case. The case regards a deficiency determination and a 26 U.S.C. § 6662(a) accuracy-related penalty assessed against petitioners, Jennifer Fields (“Jennifer”) and Walter Fields (with Jennifer, the “Fields”). Jennifer worked for Paragon Canada ULC. Paragon Canada ULC operated in Canada, and it operated in the U.S. as Paragon Gaming (collectively, Paragon). She had a personal relationship with the CEO of Paragon, Scott Menke. On a few occasions, Paragon wired funds to or for Jennifer’s personal benefit, such as for use as a down payment to purchase a residence or other unspecified.

In January 2017, she separated from Paragon. In a severance agreement, the respective parties agreed to a write-off of certain employee advances totaling $79,581.50. A revised draft severance agreement modified the consideration but was never signed. Jennifer executed a Form W–9, Request for Taxpayer Identification Number and Certification, which was provided to Paragon. Paragon issued to Jennifer and filed with the IRS a Form 1099–MISC, reporting $79,581 in other income for the year in issue.

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The IRS Appeals Office: Goal Is To Resolve Tax Controversies Without Litigation

The IRS Independent Office of Appeals (“IRS Appeals”) was established to provide an “independent” IRS function that is separate and independent from the IRS’s compliance functions that maintain responsibility for collecting and assessing taxes.  By statute, its function is to resolve tax controversies without litigation on a basis that: (1) is fair and impartial to both the IRS and the taxpayer; (2) promotes a consistent application and interpretation of, and voluntary compliance with, federal tax laws; and (3) enhances public confidence in the integrity and efficiency of IRS.

IRS Appeals has been around—by one name or another—for almost a century.   Section 1001 of the 2019 Taxpayer First Act renamed the IRS Office of Appeals to the IRS Independent Office of Appeals. But most of its operations remained the same.

IRS Appeals plays an important role in the IRS’s overall structure. Indeed, it resolves more than 100,000 tax cases every year. Perhaps the two most common avenues for such resolutions are Collection Due Process Hearings and appeals pursuant to the Collection Appeals Program.

The Origins of the Current IRS Appeals

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