The stranger side of tax

February 15, 2024 4:20 PM

Tax professionals are not generally known for their sense of humor. Nevertheless, some tax issues might evoke a smile out of the most serious preparer.

Throughout the year, David De Jong, a Rockville, Maryland-based tax attorney and CPA, and chair of the tax law group at law firm Stein Sperling, flags the most impactful tax issues being addressed by the courts and bureaucracy.

The developments that follow did not make his "most important" list, but may provide some amusement. Even the most serious preparer can use a tax-related chuckle at the start of another filing season — or at least to know that there are stranger tax situations out there than the ones you have to deal with.

What trustees and beneficiaries?

The Tax Court building in Washington, D.C.

In Saccato v. Commissioner, TC Memo 2023-96, the Tax Court required an individual to report net rental income as well as gain from the sale of real property despite his arguments that he was not subject to federal income tax as a citizen of the State of Oregon, while also rejecting his claim that the income was reportable by a trust; he could not produce a trust document and was unable to explain at trial who were the trustees and beneficiaries.

173 trips

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In Bass v. Commissioner, TC Memo 2023-41, the Tax Court denied a charitable deduction for clothing by an individual who claimed he made 173 separate trips to Goodwill and the Salvation Army and received a donation acknowledgement receipt for each trip; however, inasmuch as his aggregated donations exceeded $5,000, he failed to meet the appraisal requirements for the clothing donations.

Gift vs. payment …

In Estate of Spizziri v. Commissioner, TC Memo 2023-25, the Tax Court determined that a wealthy attorney's payments over five years to seven women, in addition to his daughter and stepdaughter, were gifts, inasmuch as no W-2 or 1099 was issued.

Keep your receipts

Heap of paper sales receipts in a mound isolated on white background.

In Amundsen v. Commissioner, TC Memo 2023-26, the Tax Court denied numerous claimed business expenses of a CPA reporting on a Schedule C for lack of adequate substantiation; in Amundsen v. Commissioner, TC Summary Opinion 2023-30, the same CPA who claimed approximately $67,000 in gross receipts but $2,000 more as cost of goods sold with no other expenses in another year, was able to substantiate only about $6,000 of total expenses and, as a result of the disallowance, received a penalty for substantial understatement of income tax.

Let's triple that penalty

In Sanders v. Commissioner, TC Memo 2023-71, the Tax Court determined that an individual who did not file tax returns or pay estimated taxes from 2008 through 2018 and who owed over $1.5 million in taxes — claiming that he is a "citizen" and not an "individual" subject to taxes — was subject to a fraudulent-failure-to-file penalty (triple the ordinary failure-to-file penalty).

Dial W for Withholding

In Bachner v. Commissioner, TC Memo 2023-148, the Tax Court upheld a civil fraud penalty for creating false withholding statements in the case of an individual imprisoned for attempting to kill his wife with a neurotoxin to benefit from a $20 million insurance policy. His wife was found to be an innocent spouse.

We understand why he was divorced

ele - stock.adobe.com

In Boykin v. United States, 131 AFTR2d 2023-1718, a North Carolina federal district court determined that an emergency room physician who owed the IRS almost $4.5 million fraudulently transferred to his new wife upon marriage a 50% interest in his management company plus cash for building a house; he justified the transfer based on his first wife having gotten 50% of his assets upon their divorce.

Affection is not currency

In United States v. Millett, 131 AFTR2d 2023-2025, a Montana federal district court allowed an IRS lien to apply to a real property interest previously transferred for "one dollar and love and affection;" the transferor had also argued that only residents of the District of Columbia were subject to income tax.