Some recent legal rulings from tax court which involving insider trading profits, deductions from business mileage, excessive borrowing on life insurance policy, and taxpayer fraud.
Insider Trading Profits
When a former executive was convicted and sentenced to jail for insider trading, he was required by the court to return his profits. He reported the gains as taxable income on his prior year return. In the year he repaid the gains, he claimed a deduction for the losses but the IRS said these were not deductible because they resulted from an illegal and criminal activity and the amounts paid back were for punishment by the court. In 2014, a federal trial court overruled the IRS stating that the forfeited gains were deductible. The IRS appealed the ruling and the Washington D.C. federal court of appeals reversed the lower court and upheld the disallowed loss and additional taxes, interest, and penalty assessed by the IRS [Nacchio, Fed. Cir].
Business Mileage Deduction
A taxpayer who had a business marketing petroleum products used his personal auto and took a deduction for mileage. For some of the activities he kept a detailed log of the dates traveled, the purpose, destinations, and number of miles. But he did not keep detailed records for some of the other activities. For the ones he didn’t have exact records, he estimated the mileage or did not list the purpose and destination. The IRS disallowed the entire mileage deduction but the Tax Court allowed the deduction for the mileage substantiated by detailed records [Powell, TC Memo. 2016-111].
Excessive Borrowing On Life Insurance Policy
A taxpayer paid the premiums in advance and then borrowed against the policy’s cash value but the loans were more than the cash value. The insurance company canceled the policy and reported the excess as income on a 1099. The policy holder contended it was not taxable and did not report it. The IRS assessed back taxes, penalties and interest on the tax deficiency. The taxpayer appealed to the Tax Court which upheld the IRS’s decision [Mallory, TC Memo. 2016-110].
Taxpayer and Preparer Fraud
An IRS auditor found that a taxpayer failed to report income and overstated expenses on returns for three years for himself and his wife. The auditor also found that the taxpayer prepared returns for two clients and did the same thing. The auditor said these false returns represented a pattern of fraudulent conduct and assessed back taxes, interest, and penalties for filing fraudulent returns. However, the Tax Court said these actions were not fraud but only negligence [Ericson, TC Memo. 2016-107]. The statute of limitations had expired on two of the three years in question, so the taxpayer had to pay the additional taxes and penalties only for the open year.
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