Jason Freeman | TaxConnections

08 Dec 2022

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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Written by Jason Freeman | Posted in Taxpayer Bank Deposits

06 Dec 2022

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:

Written by Jason Freeman | Posted in Depreciation Deduction • Passive Activity

22 Nov 2022

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.

Written by Jason Freeman | Posted in Freeman Law • Innocent Spouse Relief

15 Nov 2022

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.

Written by Jason Freeman | Posted in Freeman Law • IRS Automated Underreporter Program

10 Nov 2022

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

Written by Jason Freeman | Posted in IRS Appeals Cases

01 Nov 2022

Preclusion For Deficiency Determination, IRS Form 8962 And Premium Tax Credit

Manzolillo v. Comm’r, T.C. Memo. 2022-107 | October 24, 2022 | Kerrigan, J. | Dkt. No. 25481-16

Summary: This case regards a deficiency of $4,750 for 2015 based on advance premium tax credit (APTC) benefits that were applied against George Manzolillo and Lucy Manzolillo’s (Petitioners) monthly health insurance premium. Before their marriage on May 16, 2015, Petitioners separately enrolled in health insurance for taxable year 2015 through Aetna Life Insurance Company, which they purchased through the Health Insurance Marketplace. Petitioner husband elected to receive APTC payments of $640 per month for 12 months for a total annual credit of $7,680. Petitioner wife similarly elected to receive APTC payments of $90 for three months—January 1 to March 31, 2015— totaling $270 for the year. Petitioners received a combined APTC benefit of $7,950 in 2015.

This amount was paid directly to Petitioners’ insurance company and applied to the cost of their 2015 health insurance premiums. Petitioners timely filed a joint income tax return. They attached to their return Form 8962, Premium Tax Credit, which is used to reconcile the amount of APTC benefit received with the amount the taxpayer was entitled to receive. They reported modified adjusted gross income (MAGI) and claimed a $4,515 PTC for 2015. They claimed erroneously that $3,200 had been paid on their behalf; it was in fact $7,950. Petitioners elected the alternative calculation for year of marriage but failed to complete Part V of Form 8962. After submission of additional information to the IRS, the IRS issued Petitioners a previously frozen refund of $4,187 plus interest.

Written by Jason Freeman | Posted in IRS Form 8962

27 Oct 2022

Partnership Intangible Assets, Economic Effect And Treas. Reg. § 1.704-1 Share This Article

Clark Raymond & Company, PLLC v. Comm’r, T.C. Memo. 2022-105 | October 13, 2022 | Gustafson, J. | Dkt. No. 2265-19 (partnership intangible assets, substantial economic effect, capital accounts, distributions, tests for economic effect and Treas. Reg. § 1.704-1)

Summary: This 56-page opinion regards a partnership-level action under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which was repealed for returns filed for partnership tax years beginning after December 31, 2017. The case regards, basically, a partnership agreement of Clark Raymond & Company, PLLC (CRC) (an accounting firm) and tax liabilities of CRC and its partners arising from a withdrawal of various partners and fact-specific (and intensive) transactions involving CRC and its partners from the period 2006 through 2018. The tax year in issue is 2013. The partners of CRC included professional liability companies, professional services corporations, and a professional limited liability company.

In 2011 through 2013, the CRC partners negotiated a buyout of a partner (or partners) and the CRC partnership agreement was restated. Shortly thereafter, two partners withdrew and certain clients of CRC retained the withdrawn partners’ new partnership. A tax quagmire arose when the tax matters partner for CRC reported, via Form 1065, U.S. Return of Partnership Income, (1) the value of the defecting clients to the partnership formed by the partners who withdrew and (2) otherwise made allocations to the withdrawn partners’ capital accounts. Because the issues were ultimately narrowed by concessions, the Tax Court focused on specific defined terms used in the partnership agreement and how those terms applied to provisions for (1) determining and allocating Net Profit and Loss among the partners, (2) computing retirement payments for a retiring partner, (3) calculating contributions to the partners’ capital accounts, and (4) calculating distributions for non-cash assets, such as clients.

Written by Jason Freeman | Posted in Partnership Intangible Assets

25 Oct 2022

Tax Court In Brief: Charitable Contribution Deduction Regarding Champions Retreat Golf Course Conservation Easement

Champions Retreat Golf Founders, LLC v. Comm’r, T.C. Memo. 2022-106 | October 17, 2022 | Pugh, J. | Dkt. No. 4868-15

Summary: This 43-page opinion is another lengthy chapter in over ten years of litigation regarding a charitable contribution deduction for the donation of a conservation easement given in 2010 by Champions Retreat to North American Land Trust (NALT) that covered about 348 acres of a private golf course designed by Gary Player, Arnold Palmer, and Jack Nicklaus. This opinion (we will call Champions III) supplements Champions Retreat Golf Founders, LLC v. Comm’r (Champions I), T.C. Memo. 2018-146, the latter of which was vacated and remanded by the U.S. Court of Appeals for the 11^th Circuit in Champions Retreat Golf Founders, LLC v. Comm’r (Champions II), 959 F.3d 1033 (11^th Cir. 2020). The focus of Champions III is the determination of the proper amount of the charitable deduction applicable to the charitable contribution, which required that the Tax Court value the conservation easement at the time of the donation.

Champions Retreat and the IRS’s experts agreed that the before and after method applied. However, Champions Retreat claimed a $10,427,435 charitable contribution deduction on its Form 1065, U.S. Return of Partnership Income, for the 2010 taxable year, for its grant of the easement to NALT. Champions Retreat’s claim was supported by an appraisal performed by Claud Clark III, which relied on the “before and after” method to value the easement. See Treas. Reg. § 1.170A-14(h)(3)(i), (ii). Clark concluded that the highest and best use of the property unencumbered by the easement was as a residential subdivision. The IRS, on the other hand, engaged an expert real estate appraiser, David G. Pope, who concluded that the highest and best use of the property before and after the easement grant was the operation of the golf course. Pope opined that the fair market value of the conservation easement was $20,000.

Key Issues:

Written by Jason Freeman | Posted in Conservation Easement • Qualified Conservation Easement • Tax Court In Brief

11 Oct 2022

Charitable Contribution Substantiation And Reliance On Tax Professional

Freeman Law: Standing To Contest Deficiency Of Another

Sander v. Comm’r, T.C. Memo. 2022-103 | October 6, 2022 | Morrison, J. | Dkt. No. 22472-16

Short Summary: This case concerns a charitable contribution deduction for a gift of art and substantiation requirements of section 170(f)(11) and related Treasury Regulations. Petitioner, Schweizer, is an art dealer, lawyer, and otherwise heavily educated and involved in the commercial industry of artworks. He engaged Wasserman & Wise (Wasserman firm) to prepare his income tax returns. Petitioner donated works of art to various museums. He claimed charitable contribution deductions for these gifts, all of which were reported on returns prepared by the Wasserman firm. Petitioner donated a sculpture and anticipated claiming a charitable contribution deduction for this gift. So, with professional assistance, he requested a Statement of Value (SOV) from the IRS with respect to the sculpture. The proposal valued the work at $600,000, although the appraiser was a novice in the matter. Without receiving a response from the IRS, The Wasserman firm prepared, and Petitioner filed a return claiming a $600,000 deduction for his gift of the sculpture. The amount exceeded the maximum allowable as a deduction for 2011, see § 170(d)(1)(A), so Petitioner claimed a $406,395 deduction for that year and carried the balance forward and submitted a partially completed Form 8283. The Form 8283 was missing most information and was substantially mis-completed otherwise, including lack of an appraisal as required by section 170(f)(11)(D) for gifts valued in excess of $500,000. The IRS selected Petitioner’s 2011 return for examination. An IRS staff appraiser determined that the FMV of the sculpture was $250,000. The IRS issued petitioner a timely notice of deficiency, asserting as its primary position that no deduction was allowable because petitioner failed to satisfy the statutory and regulatory substantiation requirements for this gift. The notice determined a deficiency of $95,081 and an accuracy-related penalty of $19,016. Petitioner timely petitioned the Tax Court. Motions for summary judgment were filed on the issue and mainly to determine if Petitioner’s failure to meet the substantiation requirements was due to “reasonable cause and not to willful neglect.” See 26 U.S.C. § 170(f)(11)(A)(ii)(II). This opinion was issued.

Key Issues:

Written by Jason Freeman | Posted in Charitable Contribution Substantiation

06 Oct 2022

IRS Forms VS. Statues – Net Capital Loss Deduction

Powell and Iakovenko v. Comm’r, T.C. Summary Opinion, 2022-19 | Copeland, J. | Docket No. 20268-19S

(Freeman Law Tax Court In Brief)

Short Summary

Petitioners claimed a $123,822 long-term capital loss deduction on their 2017 return, far in excess of the $3,000.00 per year limit on the net capital loss deduction. Due to this miscalculation, the Petitioners reported $1,001 in AGI for the year. They also received an advance premium tax credit (APTC) in monthly installments during their 2017 tax year under the Patient Protection and Affordable Care. In response, the IRS issued a math error notice limiting the net capital loss deduction to $3,000. The IRS then examined the petitioners return, concluding that household income disqualified the petitioners for the Premium Tax Credit (PTC). Thus, the IRS determined that: petitioners were not entitled to a PTC of $636 previously credited to them; they had an excess APTC of $17,652; and after allowing $4,000 of newly claimed tuition and fee deductions, they had a resulting deficiency of $17,288 for the 2017 tax year.

Key Issue

Written by Jason Freeman | Posted in IRS Forms VS. Statues • Tax Court Case

04 Oct 2022

Schedule A And Schedule C Itemized Deductions And Documentation Requirements

Opinion

Short Summary: This case involves taxpayers’ entitlement to Schedule A itemized deductions and Schedule C deductions and the taxpayers’ obligation to substantiate those expenses to which the deductions were related were paid or incurred for the 2015 and 2016 tax years. Petitioners were husband and wife that jointly filed their tax return for the years at issue. Mrs. Patitz was an account executive with a copying company and she also operated her own insurance business selling supplemental insurance policies. Mrs. Patitz’s job responsibilities for the copying company required her to travel to client sites in Central Florida. Her employer reimbursed her for travel expenses incurred outside of her home base in Jacksonville, FL. Her weekly mileage expenses only accounted for her local trips in Jacksonville. In 2015 and for part of 2016 Mr. Moody was employed as an area manager for a courier service. His service area spanned from Vero Beach, FL to Key West, FL and his job duties required him to deliver “on demand” packages to clients in the service area. He had to travel to the employer’s warehouses weekly and occasionally had to stay overnight in hotels. For the second half of 2016, Mr. Moody began a new career as a teacher in Jacksonville, FL.

Written by Jason Freeman | Posted in Freeman Law • Schedule A Itemized Deductions • Schedule D Itemized Deductions

30 Sep 2022

United States Income Tax Treaty Network Interactive Map: You Are Invited To Complimentary International Tax Symposium

The United States is a signatory to more than 60 income tax treaties with countries throughout the world. Each treaty offers unique planning opportunities. From permanent-establishment planning, subsidiary or branch formation, transfer-pricing considerations, anti-hybrid planning, and everything in between, our tax attorneys, CPAs, and experts provide insight and guidance that is custom-tailored to our clients and their unique circumstances.

International Tax Treaties

In addition to the U.S. and foreign statutory rules for the taxation of foreign income of U.S. persons and U.S. income of foreign persons, bilateral income tax treaties limit the amount of income tax that may be imposed by one treaty partner on residents of the other treaty partner. Treaties also contain provisions governing the creditability of taxes imposed by the treaty country in which income was earned in computing the amount of tax owed to the other country by its residents with respect to such income. Treaties further provide procedures under which inconsistent positions taken by the treaty countries with respect to a single item of income or deduction may be mutually resolved by the two countries.

Written by Jason Freeman | Posted in U.S. Tax Treaties Network