The tax year in review: Top federal developments in 2023

January 15, 2024 9:00 AM

Last year was an eventful one for tax professionals. Although not as challenging as the Tax Cuts and Jobs Act or the COVID-related issues of recent memory, new legislation, regulations, court decisions and IRS pronouncements in 2023 have all impacted the tax landscape. While major developments are familiar to most professionals, there are some that might have been overlooked due to the busy nature of the profession.

Below are some of the more important developments for the year, as selected and explained by David De Jong, CPA, LLM, a partner at the Rockville, Maryland, law firm of Stein Sperling Bennett De Jong Driscoll PC. And of course, for the practitioner, the most important development is the one that speaks directly to an issue they currently face.

INDIVIDUALS: Monetized installment sales

Andrew Harrer/Bloomberg

Proposed regulations under Code Section 6011 would cause monetized installment sale transactions to be considered as listed transactions, which must be disclosed. Monetized transactions are installment sales involving an intermediary where the seller receives substantially all of the purchase price upfront through a combination of a down payment and a loan.

Roman v. Commissioner

The U.S. Tax Court

In Roman v. Commissioner, TC Memo 2023-142, the Tax Court concluded that $700,000 paid by a landlord to a formerly married couple still living together for vacating their shared apartment was not paid for physical injury despite the poor medical condition of the former husband and that each should be taxed on $350,000, despite the former wife by agreement receiving the entire amount. The court found that the former wife was not subject to further tax on the added $350,000 that was waived by her former husband, the IRS arguing unsuccessfully that the payment was for her being a caregiver to him after termination of the marriage but she, in fact, was being paid separately by California for providing care.

Taxing disability income

22 North Gallery - Fotolia

In Hailstone v. Commissioner, TC Summary Opinion 2023-17, the Tax Court concluded that disability income was taxable to an individual whose premiums were employer-paid in pretax dollars, unsuccessfully arguing that he was not given a choice at the time and should get an exclusion.

Cancellation of debt

In the case of In Re: Lambert, 132 AFTR2d 2023-6108, a Georgia Bankruptcy Court found that the issuance of Form 1099-C did not establish cancellation of a debt inasmuch as the form is an administrative reporting requirement upon occurrence of an "identifiable event," whether or not there is an actual discharge; however, the court determined that the filing was erroneous and that the creditor must amend or rescind to allow the debtor to avoid a taxable event.

Child support interest as income

Alena Stalmashonak - Fotolia

In Rodgers v. Commissioner, TC Memo 2023-56, the Tax Court concluded that interest paid on a past due child support obligation constitutes income to the recipient and not additional tax-free child support.

Withdrawal scams

In Gomas v. United States, 132 AFTR2d 2023-5165, a Florida federal district court determined that the victim of a scam in which she withdrew funds from retirement plans in a fraudulent scheme in which her daughter participated still had to report the stolen monies as income inasmuch as she did the withdrawal personally. The court noted without analysis that a theft deduction was not available for 2019 as a result of the abolition of personal theft losses in the 2017 Tax Cuts and Jobs Act (the argument to the contrary that retirement plans are in an investment account apparently was not made).

Conservation easement deductions

In Glade Creek Partners v. Commissioner, TC Memo 2023-82, the Tax Court concluded that a partnership could only claim a conservation easement deduction to the extent of basis when the land had constituted inventory in the hands of the contributing partner. In Mill Road 36 Henry LLC v. Commissioner, TC Memo 2023-129, the Tax Court allowed a deduction for a conservation easement but, because the contributing members used the land for business purposes, the deduction was limited to the LLC's basis in the land, as sales proceeds would have generated ordinary income.

Donated easements

Beautiful evening scene in rural Kentucky

In Murphy v. Commissioner, TC Memo 2023-72, the Tax Court determined that the taxpayers "severely overstated" the value of donated easements and were subject to penalty. In Carter v. Commissioner, TC Memo 2023-133, the Tax Court concluded that a conservation easement on 500 acres of land in Georgia was worth $1 million and not the $14.1 million claimed; the court imposing the 40% penalty for a gross valuation misstatement.

Pre-2018 or post-2025

In Gregory v. Commissioner, 131 AFTR2d 2023-1864, the Eleventh Circuit Court of Appeals agreed with the Tax Court that expenses related to hobby losses can only be claimed as miscellaneous itemized deductions pre-2018 and post-2025.

In Schmerling v. Commissioner, TC Summary Opinion 2023-14, the Tax Court decided that performance bonuses and commissions of a car salesman placed on a 1099 rather than a W-2 that were tied to the wage income are reportable as "other income" on the tax return and not on a Schedule C (accordingly, the associated expenses can only be claimed as miscellaneous itemized deductions pre-2018 or post-2025).

Expense deductions

The fixed and variable rate (FAVR) methodology, which calculates reimbursement rates based on an individual driver’s location and mileage-specific costs, is the only mileage reimbursement approach recommended by the IRS. FAVR recognizes that owning a car and driving that car incur different costs, and breaks reimbursement calculations into two separate cost categories. Like the IRS Safe Harbor Rate, FAVR reimbursements are paid tax-free under IRS Revenue Procedure 2010-51. This means that both employers and employees avoid paying taxes on the reimbursement amounts.

Pamela Au/wingedwolf - Fotolia

In Ledbetter v. Commissioner, TC Summary Opinion 2023-19, the Tax Court denied an expense deduction pre-2018 to a sheet metal worker whose daily round trip was 184 miles, as his employment was not "temporary" in nature, with the court tacking on time with five separate contractors during his time at a single location.

Professional education

In Uchizono v. Commissioner, TC Summary Opinion 2023-21, the Tax Court ruled that the type of courses taken pre-2018 by a part-time MBA student qualified her for her next job and were not deductible; the court held that "if the education in question qualifies a taxpayer to perform tasks and activities significantly different from those he or she performed before the program, then it qualifies the taxpayer for a new trade or business."

Crediting foreign taxes against NII

In Christensen v. United States, 132 AFTR2d 2023-4265, the Court of Federal Claims held that the U.S.-France tax treaty requires the U.S. to credit taxes paid in France against the net investment income (Medicare) tax. The same result is likely with regard to other treaties.

Preventative health care

In Information Release 2023-47, IRS answered "frequently asked questions" regarding preventative health care, maintaining its position that tests and programs for diagnosis and/treatment of a specific disease including obesity are deductible and subject to reimbursement by various programs; the FAQ states that insulin is the only nonprescription drug that is deductible on Schedule A, but over-the-counter drugs and menstrual care products can be reimbursed by a health savings account, medical savings account, medical reimbursement plan or cafeteria plan.

RETIREMENT AND ESTATE PLANNING: Sons and employees

In Jadhav v. Commissioner, TC Memo 2023-140, the Tax Court concluded that two sons of a couple owning a business were employees in a year in which they received no W-2s for their research work, the W-2s commencing in the succeeding year, and permitted retirement plan contributions for the sons to be deducted. The court noted that the IRS apparently missed the fact that contributions are tied to paid compensation.

'Open-ended authority'

In Balint v. Commissioner, TC Memo 2023-118, the Tax Court concluded that an incarcerated taxpayer should not be taxed for withdrawals from an IRA as well as a life insurance policy when the divorcing wife used a power of attorney for her own benefit and not that of her husband. The decision was based upon Florida law, which did not provide the wife with "open-ended authority."

An ex's retirement plan

mipan/Getty Images/iStockphoto

In In Re: Myatt, 132 AFTR2d 2023-_______, a North Carolina bankruptcy court concluded that rights to a distribution from an ex-spouse's qualified retirement plan were protected in bankruptcy despite the fact that a qualified domestic relation order had not yet been issued, the court finding that the intended transferee had a vested ownership interest in the distribution notwithstanding.

Retirement plans in bankruptcy

In the case of In Re: Green, 132 AFTR2d 2023-5728, an Illinois federal district court affirmed the bankruptcy court and concluded that foreign plans cannot be tax-qualified retirement plans under the Bankruptcy Code are within reach of the trustee in bankruptcy. In the case of In Re: Kelly, 131 AFTR2d 2023-_______, an Iowa federal district court ruled that a bankrupt's IRA rolled over from the IRA of her late husband cannot be reached by the trustee in bankruptcy, in contrast to an "inherited IRA," which cannot be the subject of a rollover.

Valuation reports

The Biltmore property in Asheville, N.C.

Panas/Wirestock Creators - stock.adobe.com

In Estate of Cecil v. Commissioner, TC Memo 2023-24, the Tax Court adopted portions of three valuation reports (two for the taxpayer and one for the IRS) in the case of a gift of minority stock in the entity owning the Biltmore property in North Carolina and, on the facts, permitted tax affecting an S corporation. The court rejected use of a higher valuation using the asset approach when the shares in the aggregate could not force sale of the assets and disposition was unlikely, and permitted a 20% discount for lack of control and a 19% to 27% discount for lack of marketability.

Catch-up contributions

Al Drago/Bloomberg

In Notice 2023-62, the IRS announced that it will give retirement plans two additional years to comply with a new law requiring over-50 "catch-up" contributions to be treated as after-tax for those whose prior-year Social Security wages were over $145,000. The notice confirmed that the law will not apply to self-employed individuals not receiving a Form W-2.

SECURE 2.0 issues

Samuel Corum/Bloomberg

In Notice 2024-2, IRS used the question-and-answer format to deal with issues under 12 sections of the SECURE 2.0 Act; the guidance set a $250 limit on financial incentives to encourage workers to participate in elective deferrals but stated that the incentives constitute income for the workers.

Reporting for partners and shareholders

Sign in front of IRS building in Washington, D.C.

Pamela Au/wingedwolf - Fotolia

Proposed regulations under Code Section 170 would create reporting requirements for partners and S corporation shareholders other than a family entity who receive a distributive share of any noncash charitable contributions made by the entity; deductions would be denied within a three-year holding period if they exceed two and a half times the outside basis of a partner or S corporation shareholder.

Capitalizing supplies

Above view of people working in large warehouse, counting goods on moving cart between shelves with packed boxes

pressmaster - stock.adobe.com

In Tucker v. Commissioner, TC Memo 2023-87, the Tax Court held that supplies purchased three years before their first usage must be capitalized rather than deducted.

Not really a debt

In Allen v. Commissioner, TC Memo 2023-86, the Tax Court concluded that unsecured advances between affiliated companies were not bona fide debts that would have allowed a deduction to the "lender" on worthlessness but rather were contributions as there was no serious expectation of repayment. In Keeton v. Commissioner, TC Memo 2023-35, the Tax Court disallowed flow-through losses from a partnership for an alleged bad debt found to constitute capital contributions to the "debtor" entity.

Rental expenses

Hemera Technologies/www.jupiterimages.com

In Sinopoli v. Commissioner, TC Memo 2023-105, the Tax Court disallowed most of the huge rental expenses paid to physician owners for use of their home as a meeting space where the owners attempted to exclude the underlying income based on renting their homes for no more than 14 days per year.

Yachts and airplanes

In Conrad v. Commissioner, TC Memo 2023-100, an S corporation was permitted to deduct expenses for both a yacht and an airplane as the majority owner was able to prove that both were extensively used or intended to be used in marketing; however, depreciation deductions on the airplane were disallowed when the owner could not get a pilot license and the plane was sent to storage.

Goodwill and more

In Citigroup, Inc. v. United States, 132 AFTR2d 2023-6621, the U.S. Court of Federal Claims allowed superfluous goodwill with no future benefit to be written off prior to completion of the amortization period. In Villa v. Commissioner, TC Memo 2023-155, the Tax Court permitted a fence-builder to offset portions of unreported income with cash payments to contractors and others for business expenses that could be proven.

R&D credits

pressmaster - Fotolia

In Betz v. Commissioner, TC Memo 2023-84, the Tax Court decided a company that engaged in designing and supplying air pollution control systems was not eligible for a research credit in excess of $500,000, as the projects were not representations or models as a whole designed to resolve uncertainty about a product. In United States v. Grigsby, 132 AFTR2d 2023-6481, the Fifth Circuit Court of Appeals agreed with a Louisiana federal district court that a construction company did not qualify for the research tax credit because it did not create new products or processes and, in any event, the projects were funded and could not qualify.

C corp bonuses

Medioimages/Photodisc/Getty Images

In Clary Hood, Inc. v. Commissioner, 131 AFTR2d 2023-1875, the Fourth Circuit Court of Appeals dropped a proposed penalty after examining multiple factors as to reasonableness, including, most importantly, comparable companies, and allowed about one-half of two $5 million bonuses above a $169,000 salary paid in successive years by a $70 million C corporation.

Buyout prices

Photodisc/Getty Images

In Connelly v. United States, 131 AFTR2d 2023-1902, the Eighth Circuit Court of Appeals agreed with a Missouri federal district court that the buyout price set forth in a post-death agreement was not controlling as to value inasmuch as the decedent was free to dispose of the stock at any price during his lifetime and was not a formula-based price. The court also agreed that the insurance proceeds were part of the fair market value of the corporation, an issue on which the courts are divided (the U.S. Supreme Court has agreed to hear the case).

Stock sales and unpaid corporate taxes

In Dillon Trust Company LLC v. United States, 132 AFTR2d 2023-6368, the Court of Federal Claims found sellers of stock liable for unpaid corporate taxes as "transferees" where the buyer immediately thereafter sold corporate assets without paying the tax, the court determining that the sellers had constructive knowledge of the buyer's fraud.

Self-employment taxes

In Soroban Capital Partners LP v. Commissioner, 161 TC No. 12, the Tax Court interpreted the statutory exception to imposing self-employment tax on a partner, which excludes from SE tax "the distributive share of any item of income or loss of a limited partner, as such." The court found the term "as such" to require analysis beyond the nomenclature and to look at the role performed by the individual (in this case, three partners received significant guaranteed payments for services on which self-employment tax was reported, but the SE tax was not applied to their flow-through income).

Hobby losses

Eleonora Vatel/Azaliya (Elya Vatel) - Fotolia

In Skolnick v. Commissioner, 131 AFTR2d 2023-968, the Third Circuit Court of Appeals agreed with the Tax Court that a horse farm company that lost more than $3.5 million in four years despite development of multiple business plans was not engaged in the activity for profit when it had been in operation for 12 years. In Bucci v. Commissioner, in a bench opinion, the Tax Court concluded that farming, real estate and horse-racing activities were not conducted for profit where losses were cumulatively far in excess of revenues and the taxpayer was past his 80th birthday.

A hobby loss win

In Woodries v. Commissioner, TC Memo 2022-5, the Tax Court found that a couple engaged in ranching as a business and not as a hobby as they carried on the activity in a professional manner, the husband had decades of ranching experience and the couple reasonably expected the ranch to go up in value. The court noted that the case was a "close call."

Employee classification

In Cardiovascular Center, LLC v. Commissioner, TC Memo 2023-64, the Tax Court found that medical assistants were employees and not independent contractors as they submitted timesheets identifying them as "employees," and were subject to supervision and office procedures and received overtime pay. The court also ruled that Section 530 relief did not apply, inasmuch as there was no reasonable basis to classify the workers as independent contractors.

Payroll taxes

In Dreyer v. United States, 132 AFTR2d 2023-________, a California Federal District Court found the chairman of a private school board to be a "responsible person" who "willfully" failed to pay over payroll taxes to the IRS while other bills were paid. In Cashaw v. Commissioner, 131 AFTR2d 2023-1882, the Fourth Circuit Court of Appeals affirmed a Tax Court decision holding a temporary chief administrator of a hospital personally liable for unpaid payroll taxes when she admittedly used funds first for "essential patient care services."

Bad ERC claims

Andrew Harrer/Bloomberg

In Information Release 2023-247, the IRS announced a voluntary disclosure program in which employers who believe that they received the Employee Retention Credit in error can repay 80% of the amount received up front or, if necessary, through installments. The program runs through March 22, 2024, and is not available to those under criminal investigation or employment tax examination or for those who have received a demand for repayment.

Nonacquiescent

Andrew Harrer/Bloomberg

In Action on Decision 2023-2, IRS announced its nonacquiescence in Complex Media v. Commissioner, TC Memo 2021-14, which had held that a party to a transaction may not be bound by the form of a transaction and can assert substance.

Sales of partnership interest

Bloomberg via Getty Images

In Chief Counsel Advice 202309015, the IRS stated that a taxpayer's gain on sales of interests in partnerships holding land primarily for sale to customers in the ordinary course of business is ordinary rather than capital in nature.

C corp stock

Andrew Harrer/Bloomberg

In Letter Ruling 202319013, IRS opined that stock in a C corporation software company was eligible for the small-business stock exclusion as the principal asset of the business was not the reputation or skill of employees because their training was on processes unique to the company that could be learned quickly.

Crypto reporting

Angel Garcia/Bloomberg

Proposed regulations under Code Section 6045, if finalized, would require crypto brokers to report gross proceeds on the sale of digital assets effective for 2025 transactions, with basis information required one year later.

BOI reporting

Samuel Corum/Bloomberg

Proposed regulations by the Financial Crimes Enforcement Network of the Treasury Department, or FinCEN, would extend the time period for newly formed companies in 2024 to report beneficial ownership information to 90 days after formation instead of 30 days; existing companies as of the start of 2024 will have one year to file their initial disclosure reports.

Late-filed returns

Di Studio - Fotolia

In Lee v. United States, 132 AFTR2d 2023-6257, the Eleventh Circuit Court of Appeals agreed with a Florida federal district court that the U.S. Supreme Court's 1985 decision in Boyle, making a taxpayer responsible for late-filed returns even when the accountant erred in nonfiling, also applies to electronically filed returns.

Failure penalties

In Tracy v. Commissioner, TC Summary Opinion 2023-20, the Tax Court abated failure-to-file and failure-to-pay penalties of a 92-year-old solo practitioner attorney who was closing his practice and failed to supervise his assistant.

Foreign bank accounts

In United States v. Xiao, 132 AFTR2d, 2023-5446, the Seventh Circuit Court of Appeals agreed with an Illinois federal district court that the question on Schedule B regarding foreign bank accounts was not vague and accordingly a criminal tax conviction could stand.

FBAR ruling

In Bittner v. United States, 131 AFTR2d 2023-799, the U.S. Supreme Court by a 5-4 margin reversed the Fifth Circuit Court of Appeals and concluded that the $10,000 penalty for nonwillful failure to file the FBAR report was measured per annual filing and not per bank account; the courts have been deeply divided.

FBAR confusion

In Kurotaki v. United States, 132 AFTR2d 2023-6138, a Hawaii federal district court determined that a U.S. green card holder who lived in Japan and spoke no English did not willfully fail to file FBAR reports as his accountant mistranslated the English instructions into Japanese such that he believed that the filing was only required by U.S. resident taxpayers. In United States v. Burga, 132 AFTR2d 2023-6551, a California Federal District Court concluded that a widow had become aware of most foreign bank accounts established by her late husband and could no longer use his influence or abuse as a defense to willfulness.

FBARed

A recent court ruling in Illinois advances a conspiracy case against prominent Wall Street banks.

In United States v. Kelly, 131 AFTR2d 2023-6011, a Michigan Federal District Court, rejecting an argument by an anesthesiologist that he did not seek advice concerning the tax implications or reporting obligations on a Swiss bank account because he "didn't see a need" and he "had no questions," concluded that he willfully failed to file an FBAR. In United States v. Kelly, 132 AFTR2d 2023-6246, the court ordered him to repatriate foreign assets to pay FBAR penalties because he had insufficient assets in the U.S. to pay the liability.

Skip the revenue agent

In Seaview Trading, LLC v. Commissioner, 131 AFTR2d 2023-988, a divided Ninth Circuit Court of Appeals agreed with the Tax Court that filing a return with a revenue agent does not constitute a proper filing as the return must be sent to the required destination or must actually end up at that location.

Not staking claims

Erwin Wodicka

In Libitzky v. United States, 131 AFTR2d 2023-874, a California federal district court ruled that a letter from a tax preparer to the IRS could not be considered a claim for refund when it made no mention of the applicable year other than setting forth the amount of estimated payments applied from that year to the following year (although informality may be permitted, the court found that IRS was not fairly advised of the amount of refund or credit claim). In Daugherly Electric Inc. v. United States, 132 AFTR2d 2023-________, the U.S. Court of Federal Claims concluded that a letter sent just days before expiration of the statute of limitations could not be considered a claim for refund because it lacked a federal identification number, the type of tax and the quarters in issue, all such vital information a requisite for a submission to constitute a claim for refund.

Just-barely-late filing

Rommel Canlas/Innovated Captures - Fotolia

In Nutt v. Commissioner, 160 TC No. 10, the Tax Court once again threw out a petition because it was electronically filed minutes after the 11:59 p.m. Eastern deadline on the 90th day (the time is based on the situs of the Tax Court in the Eastern Time Zone and not based on the residence of the taxpayers, which was in the Central Time Zone). In Sanders v. Commissioner, 160 TC No. 16, the Tax Court threw out a petition that was filed electronically 11 seconds after midnight Eastern for lack of jurisdiction.

Tolling or absolute?

In Culp v. Commissioner, 132 AFTR2d 2023-5198, the Third Circuit Court of Appeals reversed the Tax Court and determined that the 90-day period for filing a petition in a deficiency is not jurisdictional and is subject to tolling, meaning good cause exceptions (the decision is only binding on the Tax Court in Pennsylvania, New Jersey and Delaware). In Sanders v. Commissioner, 161 TC No. 8, the Tax Court again unanimously held that the 90-day deadline for filing a petition following a notice of deficiency is absolute (outside of the Third Circuit), unlike the 30-day period for CDP appeals where exceptions may lie for good cause.

Forced sales

In United States v. Byers, 132 AFTR2d 2023-6329, a Minnesota federal district court permitted the forced sale of a principal residence by the IRS, rejecting the claim of the non-owner spouse as to a homestead or inchoate marital right in the property, which would have given the spouse a portion of the proceeds.

Cello seizures

furtseff - stock.adobe.com

In United States v. Firestone, 131 AFTR2d 2023-1983, a Washington federal district court allowed the IRS to levy upon and seize a cello where the debtor was determined to be the legal and equitable owner of the instrument, despite transfer to a revocable trust.

Beyond deadlines

Close up of farmer hands holding a cannabis plant . Space for text. Farm marijuana plantation concept

meboonstudio - stock.adobe.com

In Organic Cannabis Foundation LLC v. Commissioner, 161 TC No. 4, a divided Tax Court concluded that IRS Appeals has the authority to grant a collection due process hearing request after the 30-day deadline where good cause existed for not filing in time.

A win for Appeals

In Stevenson v. Commissioner, TC Memo 2023-115, the Tax Court found that Appeals acted within its discretion when it rejected collection alternatives because the taxpayer failed to comply with current-year estimated tax obligations.

1099-K reporting

Bloomberg via Getty Images

In Notice 2023-74, the IRS postponed for two years the required reporting by e-commerce platform customers with business transactions of more than $600; the current $20,000 in gross payments and 200 transactions threshold remains in effect for 2024 and a $5,000 threshold applies for 2025.

No more surprise visits

Photographee.eu - stock.adobe.com

In News Release 2023-133, IRS announced it will end most surprise visits to taxpayers by revenue officers for safety purposes; the policy change does not extend to the Criminal Investigation Division.

Penalty relief

An IRS office building in the East Harlem neighborhood of New York

Timothy Fadek/Bloomberg

In Information Release 2023-244, IRS announced approximately $1 billion in penalty relief for about 5 million 2020 and 2021 taxpayers, automatically abating the failure-to-pay penalty in the case of those who received balance due notices between Feb. 5, 2022, and Dec. 7, 2023, or who were otherwise in the collection notice process during this period. The purpose is to provide relief for periods when the IRS did not send out reminder notices due to COVID, but the relief applies only to balances of less than $100,000, and the penalty will resume effective April 1, 2024, with refunds provided where eligible amounts have been made.