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Archive for Jason Freeman

The Tax Implications of DeFi: A General Overview

The Tax Implications of DeFi: A General Overview

DeFi, or decentralized finance, has experienced unprecedented growth over the last few years, resulting in a market cap of approximately $85 billion as of October 2021. Built on blockchain technology and cryptocurrency, DeFi has the potential to revolutionize finance by allowing users to borrow, lend, trade, and execute other financial transactions without a centralized authority or financial intermediary. Despite its popularity, the IRS has yet to issue specific guidance on how DeFi transactions should be viewed from a tax perspective. Fortunately, Notice 2014-21, which the IRS originally issued in 2014 and updated this year, can shed some light on how certain transactions conducted on DeFi platforms should be taxed.

In this posting, we will briefly explain what DeFi is and the tax implications of common DeFi transactions, including staking, lending, and yield farming/liquidity mining. It is important to note, however, that the taxation of DeFi transactions is an evolving area and future IRS guidance could supersede or clarify the principles laid out by the Service in Notice 2014-21.

What is DeFi?

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The Freedom of Information Act

The Freedom of Information Act

Originally enacted on July 4, 1966, the Freedom of Information Act established a statutory right of public access to Executive Branch information held by the federal government.  The FOIA provides that any person has a right, enforceable in court, to obtain access to federal agency records under the Act, except to the extent that any portions of those records are protected from public disclosure by an exemption under the statute.

Sometimes referred to as the embodiment of “the people’s right to know” about the activities and operations of government, the FOIA established a presumption of public access to information held by executive branch departments and agencies. In introducing the predecessor to the originally enacted FOIA, then-Senator Long quoted Madison, who was the chair of the committee that drafted the first amendment to the Constitution:

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The Claim-of-Right Doctrine And Section 1341

The Claim-of-Right Doctrine And Section 1341

The U.S. Congress passed the Tax Cuts and Jobs Act (TCJA) in late 2017, substantially overhauling the Internal Revenue Code of 1986.  The TCJA highlighted the importance of several often-overlooked provisions in the Tax Code. Notably, the TCJA increased the importance of Section 1341, a provision designed to mitigate inequities created by the claim-of-right doctrine.

What is the Claim-of-Right Doctrine?

Fundamentally, the claim-of-right doctrine is a rule that governs the timing of income recognition.  That is, it dictates when income is taxable rather than whether it is taxable.  The claim-of-right doctrine stems from Congress’s adoption of an annual accounting period as an integral part of the Tax Code.

As the Supreme Court recognized in United States v. Lewis, 340 U.S. 590 (1951), “[i]ncome taxes must be paid on income received (or accrued) during an annual accounting period.” Thus, a taxpayer must generally calculate the tax due on events taking place during the taxable year without regard to events in prior or subsequent years

In North American Oil Consolidated v. Burnet, then-Justice Brandeis outlined the claim-of-right doctrine. There, Brandeis articulated the doctrine, alluding to its potential inequities:

If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.[1]

As Justice Brandeis explained in North American Oil, should it later appear that the taxpayer was not entitled to the money, he would generally be entitled to a deduction in the year of repayment; the taxes due for the year of receipt would not, however, be affected.

But, of course, the tax benefit from the deduction in the year of repayment might differ from the increase in taxes attributable to the receipt in the earlier year—for example, tax rates might have changed, or the taxpayer might be in a different tax ‘bracket.’ But, at least as the doctrine was originally formulated, these differences were accepted as an unavoidable consequence of the annual accounting system.

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Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

This is from Freeman Law: Tax Court In Brief

Crim v. Comm’r, T.C. Memo. 2021-117 | October 4, 2021 | Lauber, J. | Dkt. No. 16574-17L

Short Summary: During tax years 1999 through 2003, Mr. John Crim promoted a tax shelter scheme involving domestic and offshore trusts. In 2008, Mr. Crim was convicted of certain crimes (conspiracy to defraud the United States and a corrupt endeavor to interfere with the administration of the internal revenue laws) and imprisoned until 2014.

The Internal Revenue Service notified Mr. Crim that it proposed to assess penalties under Section 6700(a) by letter dated June 16, 2010. On July 26, 2010, the Internal Revenue Service assessed the proposed penalties. On November 18, 2011, the Internal Revenue Service filed a notice of federal tax lien. On March 8, 2017, the Internal Revenue Service sent Mr. Crim a Letter 1058, Notice of Intent to Levy.

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New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

New Tax Reporting Requirements For Cryptocurrencies And Other Digital Assets In Senate Infrastructure Bill

On August 10, 2021, the U.S. Senate passed a $1 trillion infrastructure bill after months of negotiations. Tucked away within the sweeping legislation are measures that would extend Form 1099-B and cost basis reporting requirements to so-called “digital assets” such as Bitcoin and Ethereum. The requirements, which are expected to raise $28 million of revenue for the bill, could impose onerous tax reporting obligations on crypto miners, software developers, and other players in the industry that may not have the resources or capabilities to report user transactions.

The Proposed Reporting Requirements

Under the Senate bill, starting on January 1, 2023, a “broker” will be required to report transactions involving “digital assets” for the calendar year to the IRS on Forms 1099-B or another similar tax form. The legislation would treat digital assets as “specified securities,” meaning brokers would need to track and report such information as the identity of customers as well as the cost basis and gain/loss from the sale of digital assets. Under the bill, brokers would also be required to report transfers of digital assets to non-brokers. For purposes of the new requirement, digital assets would include any “digital representation of value” recorded on a blockchain or similar technology. This expansive definition would cover all cryptocurrencies and potentially other forms of digital assets such as non-fungible tokens (NFTs). As with traditional Form 1099-B reporting, taxpayers may be subject to substantial penalties for failure to file or timely file an informational return with the IRS.

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U.S. Supreme Court Narrows Computer Fraud And Abuse Act

U.S. Supreme Court Narrows Computer Fraud And Abuse Act

The U.S. Supreme Court recent decision in Van Buren v. United States significantly impacts the scope of the Computer Fraud & Abuse Act (“CFAA”).  The case carries implications for computer fraud prosecutions, employee abuse of computer databases, and a host of other areas, particularly given that the CFAA provides a civil cause of action that has become increasingly prevalent.  The Van Buren decision narrowed the scope of the meaning of “exceed[ing] authorized access” to a computer.

Background

In 2011, an FBI sting in Georgia resulted in police officer Nathan Van Buren being charged with violating the Computer Fraud and Abuse Act (CFAA). The sting operation was initiated after an individual complained that Van Buren had tried to shake them down by soliciting a loan.

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IRS Audit: Expenses And Deductions For Hobbies

IRS Audits On Hobby Expenses And Deductions

Gregory v. Comm’r, T.C. Memo. 2021-115 | September 29, 2021 | Jones, J. | Dkt. No. 10336-18

Short Summary: During tax years 2014 and 2015, Petitioners Carl and Leila Gregory operated CLC Ventures, Ltd. (“CLC”), which generated income and incurred expenses from boat chartering activities. The Gregorys reported CLC’s activities on Schedule C for each tax year. The IRS audited the Gregorys’ tax returns and issued a Notifce of Defiency, assessing deficiencies and certain accuracy-related penalties. The IRS determined that the CLC activities lacked a profit motive and recharacterized (1) the Schedule C income as non-Schedule C “other income,” and (2) the Schedule C expenses as miscellaneous itemized deductions to the extent allowable under Section 183 (with certain exceptions).

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Deductibility Of Trucks, Cars, Retirement Contributions, Unreimbursed Employee And Demolitions Expenses

Deductability Of Trucks, Cars, Retirement Contributions, Unreimbursed Employee And Demolitions Expenses

Freeman Law’s “The Tax Court in Brief” covers  substantive Tax Court opinions, providing a weekly brief of its decisions in clear, concise prose.

Daniel Omar Parker and Chantrell Antoine Parker v. Comm’r, No. 13231-19, T.C. Memo 2021-111 | September 23, 2021 | Lauber | Dkt. No. 13231-19

Short Summary:  This case analyzes the availability of certain deductions of the taxpayer, namely:  (1) Car and truck expenses; (2) Retirement contributions; (3) Certain unreimbursed employee business expenses claimed as itemized deductions on Schedule A; and (4) the cost of demolishing a structure.

Key Issues:

  • The deductibility of various expenditures.

Facts and Primary Holdings

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Protective Refund Claims: Preserving The Right To A Tax Refund

Protective Refund Claims: Preserving The Right To A Tax Refund

When is a protective refund claim available?  Taxpayers often face uncertain outcomes in litigation or business transactions, giving rise to contingent tax refund claims.  For example, if a pending lawsuit ends in a favorable result, it may create new law that gives the taxpayer a more favorable tax position in an earlier year—creating a right to a tax refund.  A taxpayer may even be waiting for a hoped-for change in the tax laws that will result in a retroactive right to a refund.  But what if the taxpayer’s right to a refund claim will not become clear until after the statute of limitations expires on their ability to file a claim for refund with the IRS?

A protective refund claim may be the solution.

What is a Protective Refund Claim?

Protective refund claims preserve a taxpayer’s right to claim a tax refund when the taxpayer’s right to the refund is contingent on future events that may not occur until after the statute of limitations expires.  The “protective claim” concept is not contained in the Code or Treasury regulations but is instead established by case law.

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Challenging Testamentary Capacity In Texas

Challenging Testamentary Capacity In Texas

When an interested party contests the capacity of the testator, what standard do courts use to determine the validity of a will? The recent case of Neal v. Neal provides insight.  In that case, following her diagnosis of vascular dementia, a mother cut out two sons from her will, and left a third son left as the sole beneficiary. Neal v. Neal, No. 01-19-00427-CV, 2021 Tex. App. LEXIS 2051, at *1 (Tex. App. Mar. 18, 2021).

Background

In Neal, the decedent, Florene Neal, executed several wills throughout her life, devising her estate in different apportionments to her three sons: John, Randall, and David. Her first and third wills, executed in 2008 and 2011, divided her estate between John and Randall, explicitly excluding David, as he was to gain full ownership of a property that he owned as a joint tenant with right of survivorship. The second will, executed in 2009, left her estate to all three sons in equal shares. In her final will, which was executed in January 2012, Florene devised the entirety of her estate to David, and disinherited both Randall and John.

Florene died in 2015, and Randall opposed admitting the January 2012 will to probate. Randall alleged that Florene lacked testamentary capacity as a result of her vascular dementia diagnosis in August 2011. Ultimately, the court found that Florene was of sound mind when her final will was executed, and Randall appealed the probate court’s decision.

Analysis

On appeal, Randall contended that 1) Florene did not have testamentary capacity when she entered into the final will; and 2) David exerted undue influence to procure the execution of the final will.

Whether Florene had testamentary capacity

For a will to be admitted to probate, a party must first establish that the testator had testamentary capacity. A testator has testamentary capacity when, at the time of the execution of the will, she possesses sufficient mental ability to:

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Innocent Spouse Taxpayer Court Case

Donna M. Sutherland v. Comm’r, No. 3634-18, T.C. Memo 2021-110 | September 16, 2021 | Lauber | Dkt. No. 3634-18

Short Summary:  This is an innocent spouse case in which the taxpayer, Ms. Sutherland, sought relief from joint and several liability under the equitable relief provision of 26 U.S.C. 6015(f).  The Court ultimately found that the taxpayer was not entitled to the relief requested.

Key Issues:

  • Did the taxpayer qualify for relief from joint and several liability for the unpaid employment taxes that accrued from taxpayer’s husband’s business?

Facts and Primary Holdings:

  • The taxpayer was married to her husband Scott in 1990. She has a high school education and completed a few college courses.  She gave birth to the couple’s only child in 1991, and after her child was born, she worked primarily at home or in Scott’s business.

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The False Claims Act: The Risks Of Doing Business With The U.S. Government

The False Claims Act: The Risks Of Doing Business With The U.S. Government

The False Claims Act (FCA) was passed by Congress during the Civil War to punish defense contractors for fraud. Under the FCA, a government contractor who submits fraudulent invoices or induces the government to grant a contract through fraud may face substantial monetary damages.

The FCA poses a challenge for businesses that perform work or supply goods to the U.S. government. These government contractors must implement internal controls and conduct periodic investigations to identify potential fraudulent claims. This obligation, of course, increases both the cost and risk of acting as a government contractor.

Acts Prohibited by the False Claims Act

When a firm becomes a government contractor, it faces a host of regulations. From labor standards to environmental rules, government contractors step into a virtual minefield of legislation, many of which are designed to carry a potential penalty if they are not upheld.

The FCA prohibits a contractor from “knowingly” committing a prohibited act. Under the act, “knowingly” means that the contractor:

Knew the claim was false;

  • Deliberately remained ignorant of the claim’s falsehood; or
  • Recklessly disregarded the truth or falsehood of the claim

The actions prohibited by the FCA can include:

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