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Recent Court Decisions And IRS Rulings

1. Alimony.

(A) Alimony paid subject to a contingency is not deductible (taxable). A divorced couple’s agreement provided that spousal maintenance would end when their child, who had a learning disability, moved out of the mother’s home The IRS denied the alimony deduction due to the contingency clause and held the payments to be non-deductible child support. The law states support payments are considered alimony only if the payments are for spousal support ordered by a court and cease upon the death of the spouse. The IRS decision was upheld by the Tax Court [Resnik, TC Summ. OP. 2015-11].

(B) Paying attorney fees for an ex-spouse is not considered deductible alimony. For these to be deductible as alimony, the divorce decree or state law must clearly provide that the liability for payment terminates at the spouse’s death [Hampers, TC Memo. 2015-27].

(C) Transferring an IRA to an ex-wife is not considered deductible alimony. The IRS and the Tax Court both held that this transfer is considered a tax-free divorce related transfer [Ringbloom, TC Summ.
OP. 2015-12].

2. Self-employment taxes.

A sole proprietor incurred a net operating loss and carried it forward to the next year to offset current year business income. The taxpayer computed his self-employment tax on net income after the loss carryforward. The IRS and Tax Court stated that the NOL carryforward reduces regular income tax but can’t be used to reduce self-employment tax [Stebbins, TC Summ. OP. 2015-10].

3. Casino Gambling Winnings.

(A) The IRS recently announced a safe-harbor rule for gamblers who play electronically tracked slot machines. They will now be able to net their per casino winnings or losses for federal income tax purposes. This applies even if they take a break from gambling during the day to do other things. The decision makes these breaks not count against continuous gambling activity (i.e., the breaks will not make the gambling periods separate sessions) if the gambler returns to the same casino to continue gambling. If the gambler goes to another casino after a break, it is considered a separate session and losses cannot be offset against the winnings. [Author note: if a gambler has winnings and losses from separate sessions, tax law requires winnings to be reported as other income and losses are treated as a miscellaneous itemized deduction (but not subject to the 2% of AGI reduction ) but cannot exceed winnings] {IRS Notice 2015-21}

(B) Players who have winnings from electronically tracked slot machines will now be required to file a W-2G only if they win at least $1,200 in a single play and net winnings for the day are at least $1,200 [IRS Notice 2015-21].

4. Tangible Property Rules.

The IRS has announced, effective for the 2014 tax year, that it will increase the expensing
amount for such property that otherwise would have to be capitalized. Companies with audited financial statements will be able to deduct up to $5,000. For companies without audited financial statements, the
amount is $500, but the IRS said they may increase this. A question and answer forum on these rules can be found at

5. Holding cash in a like-kind exchange.

If a “related” party holds the cash, the realized gain will be taxable. In a recent transaction, a company set up a like-kind exchange by having its subsidiary sell the equipment to an unrelated party and an intermediary sent the sales proceeds to the parent company so it could buy new equipment with the subsidiary receiving the new equipment . The parent paid for it in six months. As a result, the parent company used the money interest free for six months. The IRS ruled this exchange to be taxable due to a related party transaction. The taxpayer appealed the decision but the court upheld the IRS on the grounds that these steps were taken to avoid the related party restrictions on like-kind exchanges [North Central Rental & Leasing, 8th Circuit Court of Appeals].

6. Employee vs. Independent contractor status.

A firm operated apartment buildings and had its managers, maintenance workers, and security officers work at on-site facilities at apartment complexes and report to the limited partner of the partnership that operated the business. The partner hires the workers and supervises their duties. The employees can be terminated at any time and most of them have no other outside employment. Both the IRS and the Tax Court held the workers are employees not independent contractors (thus, the wages are subject to income and payroll tax withholding and the employer must pay FICA and Medicare tax on the wages paid) and workers will receive a W-2, not a 1099. But the court held the present firm is not liable for payroll taxes of prior periods when the now dissolved entities managed the buildings. The court’s reasoning was the taxpayer did not expressly assume the liabilities of the former firms, so it had no successor liability for the former firms taxes [TFT Galveston Portfolio, 144 TC No. 7].

7. Estate deduction for future mandated donations.

The Tax Court ruled these will be allowed if the contributions are made from gross income of the estate
pursuant to the decedent’s will and the estate permanently sets aside the future funds to be used for charity. In this case, the decedent’s will specified that the remainder of her estate go to charity. The executor took an income tax deduction for the charitable contribution on the estate tax return. The executor did not segregate the promised donation from the rest of its funds and was a party to litigation involving real estate owned by the decedent. The Tax Court disallowed the deduction because there was more than a remote chance that the estate would incur legal costs and reduce the charitable donation [Estate of Belmont, 144 TC No. 6].

8. Tax-Exempt Charity.

The IRS recently ruled that an organization that operates a farmers market is not a tax exempt charity because the majority of its funds comes from vendor and membership fees. Even though the group was organized in part to educate the public about healthy foods, operating the farmers market primarily benefits the vendors who make a profit from the sales to the public and does not qualify for a tax-exempt purpose [no citation given].

9. ABLE accounts.

These accounts were established by Congress starting in 2014. Persons may contribute up to $14,000 per year for a person who becomes blind or disabled before age 26.. Contributions are not deductible for federal income taxes but may be a deduction or credit for state income taxes) . Fund earnings are tax free and amounts withdrawn are tax free to the extent the funds are used to pay expenses related to the disabilities. The IRS has stated there are two requirements that must be met for these rules to apply:
(1) the beneficiary must be the owner, and (2) if the beneficiary does not have signature authority, the person who does cannot have an interest in the account and must administer it for the beneficiary [no citation given].

Information obtained from The Kiplinger Tax Letter March 13, 2015

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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