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New IRS And Court Rulings – February 2017



Recently, new developments have occurred regarding deductibility of legal expenses for a job related lawsuit, deductibility of interest on student loans paid by parents for a child, use of an internet tax stamp, a defective IRS deficiency notice, and an extension for an IRA rollover due to a bank’s error. Each of these will be discussed.

Deductibility of legal expenses for a job related lawsuit

After a bank executive was fired, the bank sued to recover a bonus mistakenly paid earlier in the year. The executive countersued and both parties settled and the suit was dismissed without any payments by either party. The employee took a deduction on Schedule C for the legal fees. The IRS disallowed them because the fees were not an “ordinary and necessary” business expense because they were incurred as a former employee, not a self-employed taxpayer. The employee appealed to the U.S. Tax Court which upheld the IRS [TC Summary Opinion, 2017-2].

However, the expenses can be deducted as an employee business expense reported on form 2106 and then taken on Schedule A as a miscellaneous expense subject to the 2% AGI limitation. But if the employee can prove that the legal fees were paid for a lawsuit for discrimination, the fees can be taken as a deduction FOR AGI.

Deductibility of interest on student loans paid by parents for a child

The tax law states that only the person who is liable on the student loan (in this case it is the child) can deduct the interest paid. Thus, the parents could not take a deduction because the child took out the loan and the parents were not liable for the loan ( they did not co-sign it). But the child can take a deduction FOR AGI on their return if the child is not claimed as a dependent on the parents return. Even though the parents paid the interest for the child, the IRS considers the interest paid by the parents as if they gave the child the money to pay it and the child then used the funds to pay the interest. The maximum deduction for student loan interest is $2,500 per year but phases out as AGI exceeds $130,000 on a joint return ($65,000 for others) [The Kiplinger Tax Letter, February 10, 2017].

Using an internet tax stamp

A taxpayer’s attorney mailed an appeal of an IRS decision to the U.S. Tax Court. Instead of using a postage stamp, the attorney printed out a stamp and label date from an internet postage software web page and put it on the envelope and mailed it at the post office on the due date of the petition. But the envelope did not have a post office postmark and arrived at the U.S. Tax Court eight days later and was rejected because it was not timely filed (taxpayers must have the petition postmarked within 90 days of the IRS’ statutory notice of deficiency). The post office put the envelope in its tracking system two days after the internet label date. The taxpayer appealed to the U.S. Court of Appeals. The Court held the envelope had only one postmark-the internet stamp date-and overruled the Tax Court and considered the petition timely filed and had to be accepted by the Tax Court [Tilden, 7th Circuit].

Defective IRS deficiency notice

A taxpayer received a deficiency notice from the IRS which mistakenly showed a zero amount due on the first page, but attached a letter to the notice stating that the $484 refundable health premium credit was disallowed, which resulted in a tax increase for the taxpayer. The taxpayer appealed the IRS denial of the credit to the U.S. Tax Court contending that the IRS was at fault because the deficiency notice showed a zero amount due and conflicted with the IRS attached letter. The Tax Court said the letter was ambiguous but upheld the deficiency stated in IRS letter because they made a valid determination and did not mislead the taxpayer [Dees, TC No. 1].

Extension of time for an IRA rollover

A taxpayer rolled over an IRA distribution 10 days after the 60-day deadline. The tax payer said a bank employee told her she had 90 days to complete the rollover and asked the IRS for a ruling. The IRS gave her the additional time and said the rollover was timely [IRS private letter ruling, 2015].

Under present IRS rules, taxpayers do not have to get a ruling from the IRS. They can self-certify they qualify for a timely rollover and waive the 60-day time period. However, the reason must be for one of eleven the Service has specified [e.g., a bank error (see above case), death, serious illness of the account owner or family member, a misplaced check, severe damage to taxpayer’s house]. To avoid a penalty for a late rollover the account holder must complete the rollover within 30 days after the self certification is given for failure to meet the 60 day rollover period.

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Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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