The top tax developments of 2023 — so far

July 18, 2023 5:37 PM

With the year already past the halfway point, a review of some of the more notable developments affecting taxpayers and their CPAs is in order. The following is a brief summary of some of the major developments to give a flavor of the types of issues addressed; a full list of the 40 most important developments — selected by David De Jong, CPA, LLM, a partner at Stein Sperling Bennett De Jong Driscoll in Rockville, Maryland — follows below.

Murfam's law

In Murfam Enterprises, LLC v. Commissioner, TC Memo 2023-73, the Tax Court concluded that the value of a donated easement was within 2% of the amount claimed by the partnership on its tax return and that failure to substantially comply with reporting was due to reasonable cause. In this case, reliance on a respected CPA firm was the reasonable cause, according to the court.

"The Murphy family engaged Dixon Hughes Goodman (Dixon Hughes) — one of the largest certified public accountancy firms in North Carolina — to prepare Murfam's tax return for its tax year ending Jan. 1, 2011," the court stated. "Dixon Hughes requested from the Murphy family all the information it deemed necessary to prepare Murfam's return, and the Murphy family provided to Dixon Hughes all the information that the firm had requested."

In a separate case involving the Murphys, 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.

Seconds matter

While most practitioners are familiar with the "timely mailing is timely filing" rule, the Tax Court decided two electronically filed cases against the respective taxpayers. In Nutt v. Commissioner, 160 TC No. 10, the Tax Court dismissed a petition because it was electronically filed five minutes after the deadline in the jurisdiction where taxpayers were located. The petition was filed from Alabama at 11:05 PM CST, the time zone where the taxpayers were located. But the court's filing system shows that it received the petition at 12:05 AM EST, the time zone in Washington, D.C., where the Tax Court is located.

Likewise, in Sanders v. Commissioner, the Tax Court dismissed a petition that was filed 11 seconds after midnight. According to the court, an electronically filed petition is considered filed when it is received by the Tax Court in Washington, D.C.

FBAR clarity

In a decision that could have gone either way, the Supreme Court cleared up the confusion regarding the FBAR penalty. In a 5-4 decision, it reversed the Fifth Circuit's interpretation of the Bank Secrecy Act that the penalty for non-willful violations is to be tabulated per year, not per account. The result was an enormous reduction in liability for the taxpayer. Now that the IRS has clearer guidance, some professionals predict that it will start looking more closely at the willful versus non-willful standard in filing the form late or incorrectly.

More timing issues

In affirming the Tax Court's decision concluding that the IRS Notice of Final Partnership Administrative Adjustment was timely, the en banc court held that neither Seaview Trading LLC's fax of a copy of their delinquent 2001 tax return to an IRS revenue agent in 2005, nor mailing a copy to an IRS attorney in 2007, qualified as a "filing" of the partnership's return. Therefore the statute of limitations did not bar the IRS readjustment of the partnership's tax liability.

INDIVIDUALS: Disability income

The Tax Court in Washington, D.C.

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.

Child support interest

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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.

Reporting relief from indebtedness

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

In Patacsil v. Commissioner, TC Memo 2023-8, the Tax Court required a couple to report relief-from-indebtedness income inasmuch as they did not prove the value of their business or real estate as well as the amount of a contingent liability; in Ahaiwe v. Commissioner, TC Summary Opinion 2023-7, the Tax Court found that the insolvency exception to reporting relief-from-indebtedness income did not apply when the taxpayer provided only a worksheet with "numbers on a page," but neither testimony nor documentation as to how assets were valued and without independent evidence of the balance of liabilities.

Lease obligation as liability

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In White v. Commissioner, TC Memo 2023-77, the Tax Court determined that the entire remaining obligation on a lease counted as a liability upon acceleration such that the taxpayer proved that she was insolvent on discharge of a bank loan.

Confiscation losses

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In Soleimani v. Commissioner, TC Memo 2023-60, the Tax Court concluded that a couple had likely presented false documents to claim Iranian confiscation losses but, in any event, the court found that the couple could not prove the year of the loss.

Murfam's law

In Murfam Enterprises, LLC v. Commissioner, TC Memo 2023-73, the Tax Court found that the value of a donated easement was within 2% of the amount claimed by the partnership on its tax return and that failure to substantially comply with reporting was due to reasonable cause which was reliance on a respected CPA firm; 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.

Conservation easements

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; the partnership had claimed a tax deduction for nearly double the property's fair market value, which was higher than its basis.

Hobby losses

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.

Local disaster relief

In News Release 2023-23, IRS indicated that disaster relief payments made by 17 of 21 states do not need to be reported as income for federal tax purposes; however, those in Georgia, Massachusetts, South Carolina and Virginia may only exclude the payment if the recipient claimed the standard deduction or itemized deductions without receiving a tax benefit, as payments in these states were considered a refund of state taxes paid.

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.

Cryptocurrency

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In Chief Counsel Advice 202302011, the IRS stated that no loss can be claimed on cryptocurrency that has substantially declined in value, in this case to less than one cent, because the virtual currency was not worthless, abandoned or otherwise disposed of.

RETIREMENT AND ESTATE PLANNING: Early withdrawals

In Lucas v. Commissioner, TC Memo 2023-9, the Tax Court determined that a diabetic was able to engage in substantial gainful activity and accordingly was subject to the 10% penalty for early withdrawal from a retirement plan; the taxpayer had excluded the withdrawal from income based on something that he thought he read on a website but it referred to applicability of the penalty and not to taxability of the withdrawal.

IRAs in a bankruptcy

In 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.

What makes a gift?

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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 step daughter, were gifts inasmuch as no W-2 or 1099 was issued.

Valuations

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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 effecting an S corporation; 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 19-27% discount for lack of marketability.

Unpaid estate taxes

In United States v. Paulson, 131 AFTR2d 2023-1743, the Ninth Circuit Court of Appeals agreed with a California Federal District Court that co-trustees and beneficiaries had liability for unpaid estate taxes in a $200 million estate inasmuch as the statutory times for collection from third parties had not passed.

Grantor trusts and step-up in basis

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In Revenue Ruling 2023-2, IRS confirmed that assets in a grantor trust are not eligible for a step-up in basis at death despite income continuing to be reported by the decedent following the transfer to the trust.

BUSINESS: Loans to a family business

In Nath v. Commissioner, TC Memo 2023-22, the Tax Court held that loans to a taxpayer from a family business were taxable on receipt as repayment was not contemplated; in any event, the taxpayer at trial called the payments advances on future earnings (which are taxable).

Reporting insurance commissions

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In Gould v. Commissioner, in a bench opinion the Tax Court followed precedent and required an insurance broker to report income on commissions received for insurance purchased on his own life, noting that the result would be the same in the case of a real estate broker or a stockbroker.

Check dates

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In Gage v. Commissioner, TC Memo 2023-47, the Tax Court determined that an otherwise deductible $875,000 cashier's check obtained in 2012 but not turned over until final acceptance of a settlement in 2013 was not deductible in the earlier year; the court cited prior case law that a check dated in one year but cashed in the next year cannot be deducted until the succeeding year absent proof of delivery in the earlier year.

C corp bonuses

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 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 and value

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.

New LLC owners

In ES NPA Holding, LLC v. Commissioner, TC Memo 2023-55, the Tax Court concluded that a new owner in a limited liability company received only a profits interest as the court accepted that governing documents required that the value at the time of admission of the new owner go entirely to the existing owners in the event of a hypothetical liquidation.

Flowthrough losses

In Keeton v. Commissioner, TC Memo 2023-35, the Tax Court disallowed flowthrough losses from a partnership for an alleged bad debt found to constitute capital contributions to the "debtor" entity.

Taking the fall for unpaid payroll taxes

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 utilized funds first for "essential patient care services."

Hobby v. business

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."

Hobby horses

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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.

ERC warnings

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

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In Information Release 2023-40, the IRS issued a renewed warning as to claiming the Employee Retention Credit and advised that it is auditing and conducting criminal investigations related to false claims; in Information Release 2023-49, the IRS listed mass marketing of the Employee Retention Credit as a "tax scam."

Form v. substance

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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.

Ordinary v. capital

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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.

Small-business stock or not

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

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In Letter Ruling 202319013, the 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.

PROCEDURES: IRS funding

Public Law 118-5, the Fiscal Responsibility Act, rescinds 25% of the additional $80 billion funding for IRS through 2031 from the Inflation Reduction Act, which was intended for customer service and increased examinations.

Abusive no more

In Green Rock, LLC v. Commissioner, 131 AFTR2d 2023-562, an Alabama Federal District Court joined the Sixth Circuit Court of Appeals and the Tax Court in striking down the labeling of syndicated conservation easements as abusive tax transactions for failure to comply with the notice and comments requirements of the Administrative Procedure Act; in Govig & Associates, Inc. v. United States, 131 AFTR2d 2023-1137, an Arizona Federal District Court disagreed (the U.S. Supreme Court declined to review the issue in the Sixth Circuit case of Oakbrook Land Holdings at 129 AFTR2d 2022-1032).

Abated 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.

FBAR penalties

The U.S. Supreme Court building stands in Washington, D.C., U.S., on Tuesday, Feb. 25, 2020. President Donald Trump demanded that Supreme Court Justices Sonia Sotomayor and Ruth Bader Ginsburg recuse themselves from future cases involving his administration after a dissent from a decision allowing the government to test prospective immigrants' wealth.

Stefani Reynolds/Bloomberg

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 liabilities

In Schwarzbaum v. United States, 131 AFTR2d 2023-1226, a Florida Federal District Court on remand from the Eleventh Circuit Court of Appeals ordered an FBAR violator to repatriate assets abroad to satisfy a $17 million liability; subsequently in 131 AFTR2d 2023-1962 it refused to grant a stay of its order.

Form 5471

In Farhy v. Commissioner, 160 TC No. 6, the Tax Court concluded that the IRS could not summarily assess a penalty for failure to file Form 5471, an information return with respect to foreign corporations.

File at the location, not with an 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.

Serious about deadlines

In Nutt v. Commissioner, 160 TC No. 10, the Tax Court threw out a petition because it was electronically filed minutes after the 11:59 p.m. EST 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 EST for lack of jurisdiction.

Homestead exemption

In Summerlin v. Turnage, 131 AFTR2d 2023-1080, a North Carolina Federal District Court agreed with the Bankruptcy Court that North Carolina's homestead exemption precludes selling a principal residence of a tax debtor, noting the disagreement among the courts; nevertheless, the court had discretion under federal law to prevent sale.