Federal tax update: Top developments of the past year

Published
  • July 17 2017, 4:25pm EDT
15 regs, court cases, revenue procedures and other tax-related news practitioners should take note of.

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Federal tax rules and regs are always subject to change, so tax lawyer and CPA David De Jong keeps a comprehensive, running list of the top developments over the previous 12 months, including legislative developments, court cases, and IRS pronouncements.

De Jong, a partner in the Rockville, Md., firm Stein Sperling Bennett De Jong Driscoll PC, regularly updates the list, which often includes scores of new developments; here are 15 from his current list, which covers July 1, 2016 to June 30, 2017.

1. Proposed regs on centralized audit released

Proposed regulations under Code Section 6230 et seq. require the election out of a centralized audit by eligible partnerships to be on a timely filed return, including extensions; the regs make it clear that the IRS can adjust the return of a partner that is inconsistent with the partnership return through a mathematical correction under which the Tax Court will not have jurisdiction.

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2. Losses from closed years in NOL situation

In Jasperson v. Commissioner, 118 AFTR2d 2016-5633, the Eleventh Circuit Court of Appeals agreed with the Tax Court that an individual who claimed losses in prior years now closed to adjustment still needs to be able to prove those losses in order to use a net operating loss in a subsequent year.

3. Comic strip loan was non-business bad debt

In Hatcher v. Commissioner, TC Memo 2016-188, the Tax Court determined that an individual who lent in excess of $600,000 to her ex-boyfriend to develop a comic strip had a non-business bad debt, as she was not engaged in the business of lending money.

4. Payments were alimony despite no termination at death.

In Leslie v. Commissioner, TC Memo 2016-171, the Tax Court determined that $5.5 million received by a woman from a former spouse constituted taxable alimony income (although the document did not indicate that payments stopped upon her death, California state law provides that marital support terminates on the death of either party unless otherwise agreed in writing); in Letter Ruling 201648001, the IRS concluded that payments of spousal support not terminating on the recipient’s death under the terms of the document did not terminate automatically under Minnesota law as a result of language in the Separation Agreement removing jurisdiction of the Court to effectuate a modification.

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5. Deducting ‘alternative medicine’ costs

In Malev v. Commissioner, Bench Opinion in Docket No. 1282-16S, the Tax Court determined that integrative medical care costs, otherwise known as “alternative” medicine, are deductible based on a subjective test of whether the individual believed that they may be effective at least where they are of the type that would not be routinely incurred for non-medical reasons, stating that medical care must take into account not only what is known but what is less understood as well -- namely, the role that an individual’s state of mind plays in the treatment of disease.

6. Transfer to FLP through POA was void

In Estate of Powell v. Commissioner, 148 TC No. 18, the Tax Court determined that a decedent’s transfer of $10 million to a family limited partnership through her power of attorney followed by the transfer of her 99 percent interest to a charitable lead trust one week before death was void as outside the authority given in the power of attorney (concurring judges would have reached the same result but set the transfer aside as a sham).

7. Reasonable cause for late filing of estate tax return

In Estate of Hake v. United States, 119 AFTR2d 2017-727, a Pennsylvania Federal District Court found that there was reasonable cause for a late filing of an estate tax return when the attorney incorrectly advised that there was a one-year filing extension, rather than a six-month filing extension, distinguishing the case from those where the deadline was known but the professionals were neglectful.

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8. Double deduction for same seed

In Estate of Backemeyer v. Commissioner, 147 TC No. 17, the Tax Court allowed a farmer’s widow to deduct expenses for seed, fertilizer and fuel in the year following his death although they were deducted by the husband in the preceding year; notwithstanding that no estate tax was paid, the court allowed the heir a deduction for the business use of inherited property.

9. Home care workers could not be reclassified

In Nelly Home Care Inc. v. United States, 117 AFTR2d 2016-680, a Pennsylvania Federal District Court indicated that home care agency workers, though failing the traditional test, could not be reclassified as employees due to the “safe harbor” under Section 530 as nine of 22 companies surveyed classified similar workers as independent contractors, including three immediate competitors (additionally, Pennsylvania law defined home care registries as businesses that “supply, arrange and refer independent contractors to provide home care services”).

10. Taxpayers relieved from accuracy-related penalty

In McNeill v. United States, 119 AFTR2d 2017-943, a Wyoming Federal District Court determined that a public company chairman and CEO, despite his business sophistication, had little tax knowledge and relied on his advisors (including Big Four firm Ernst & Young), finding reasonable cause in claiming a $20 million loss in a tax shelter transaction in which he was the “tax matters partner;” the court directed IRS to abate a $4.59 million penalty.

Separately, in Whitsett v. Commissioner, TC Memo 2017-100, the Tax Court declined to impose an accuracy-related penalty of $108,000 on a physician who turned over all information on a stock sale to her preparer who failed to report the transaction accurately, the court noting that “although petitioner is a highly educated person and a skilled physician, she had no knowledge of federal income taxation.”

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11. Supreme Court declined to review discharge in bankruptcy holding

In Smith v. United States, the U.S. Supreme Court declined to review a decision of the Ninth Circuit Court of Appeals at 118 AFTR2d 2016-5127 where the court, now in accord with nine other Courts of Appeal (the Eighth Circuit being an exception), held that income tax liability may not be discharged in bankruptcy after the IRS has prepared a Substitute for Return.

12. Nursing home not entitled to levy release

In Lindsay Manor Nursing Home Inc. v. Commissioner, 140 TC No. 9, the Tax Court accepted the IRS interpretation of the law that allows only individuals and not businesses to obtain a levy release due to economic hardship.

13. PTIN user fees struck down

In Steele v. Commissioner, 119 AFTR2d 2017-818, a District of Columbia Federal District Court ruled that the IRS could not charge a user fee for PTINs.

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14. Unmarried couples get double deduction

In Action on Decision 2016-2, the IRS announced that it acquiesces in the decision of the Ninth Circuit Court of Appeals in Voss v. Commissioner, which held that the $1 million acquisition indebtedness and $100,000 home equity indebtedness maximums for deducting interest are on a per-individual basis and not also on a per-residence basis.

15. IRS provides self-certification procedure for rollovers

In Revenue Procedure 2016-47, IRS announced a new self-certification procedure for rollovers missing the 60-day period for good cause; the trustee can rely upon the self-certification absent actual knowledge to the contrary, but must report the late rollover to the IRS.