A roundup of influential and important legal decisions from the past year.
By any measure 2017 was a momentous year for tax professionals. Just by itself, the Tax Cuts and Jobs Act would qualify for all 10 spots on most “Top 10” lists of tax developments. Yet there were developments in litigated tax cases that were decided during the year, which accountants should be familiar with as busy season approaches.
David De Jong, CPA, Esq., a partner at Stein Sperling Bennett De Jong Driscoll PC, keeps tabs on such developments as they occur. He maintains a twelve-month Top 40 list, which he updates on a monthly basis. The following are among his picks for the most important tax cases of the past 12 months.
Have you been injured on the job?
In Bates v. Commissioner, TC Memo 2017-72, the Tax Court determined that an individual who received compensation because she was terminated for missing too many workdays due to a back injury could not exclude any of the settlement payments since the “origin of the claim” was discrimination and wrongful discharge, not the physical injury itself; in Rajcoomar V. Commissioner, TC Memo 2017-72, the Tax Court denied an exclusion for damages arising out of physical injury where his employer failed to make workplace accommodations for an injury, since the source of the claim was anti-discrimination laws; Maciujec v. Commissioner, TC Summary Opinion 2017-49 reached the same result where there was an allegation of sexual contact but not physical injury.
Relief from indebtedness
In Schieber v. Commissioner, TC Memo 2017-32, the Tax Court concluded that a defined-benefit plan is not an asset for purposes of determining the insolvency exception to the general principle that relief from indebtedness is taxable; the court reasoned that the interest in the pension plan could not be used immediately to pay the income tax on the relief from the indebtedness.
Be it ever so crumbled …
In Linde v. Commissioner, TC Memo 2017-180, the Tax Court determined that a helicopter pilot in his mid-50s who spent two-thirds of the year working in Iraq and one-third in the United States with his wife and adult children was a bona fide resident of Iraq for purposes of the income earned abroad exclusion, despite stating his intention to return to the United States upon retirement, which was not in the foreseeable future; the court noted that his ties were closer to Iraq than the United States, with some involvement in the local community and with a local bank account, notwithstanding that he kept a driver’s license and voter registration in the U.S. and that he lived in a large metal container home for security in Iraq.
There goes the rectory
In Gaylor v. Mnuchin, 120 AFTR2d 2017-____, a Wisconsin federal district court determined that the housing allowance available to ministers and other religious leaders constitutes a violation of the principal of separation of state and church, thus declaring Code Section 107(2) unconstitutional.
In Hardy v. Commissioner, TC Memo 2017-16, the Tax Court determined that a plastic surgeon did not need to group his ownership interest in a surgical center with his professional practice, thus allowing his passive income from the center to offset other passive losses; the court noted that the surgeon’s income from the center was based on a distributive share and not on how many surgeries he performed, and that his involvement in the surgical center LLC was akin to that of a limited partner and that the self-employment tax did not apply.
Not for your vacation
In Cooke v. Commissioner,TC Memo 2017-74, the Tax Court gave a narrow definition to the term “repair or maintenance work” for the purpose of the 14-day limitation on personal use of a rental property and determined that the use for other purposes related to the property constitutes a personal day.
Real estate professionals
In Zarrinnejar v. Commissioner,TC Memo 2017-34, the Tax Court determined that a dentist who worked 14 hours per week was a ”real estate professional” after proving through contemporaneous records that he spent over 1,000 hours in real estate including brokerage-related activities and managing his four rental properties; in Windham v. Commissioner,TC Memo 2017-68, the court determined that a stockbroker who averaged 2-½ hours a day in the office and who claimed 900 hours a year managing 11 properties was a real estate professional and met the test for material participation on a property by property basis.
A lender be
Owens v. Commissioner, TC Memo 2017-157, determined that an individual who had made at least 89 loans over a 35-year period was in the business of lending and could claim an ordinary loss on a bad debt.
In Morrissey v. United States, 120 AFTR2d 2017-5852, the Eleventh Circuit Court of Appeals agreed with a Florida federal district court that a gay man could not deduct the costs of in vitro-related procedures as they were not paid for the purpose of affecting the taxpayer’s own reproductive function; the court also denied an “equal protection argument.”
In Estate of Koons v. Commissioner, the Eleventh Circuit agreed with the Tax Court’s limitation of a lack of marketability discount to 7-½ percent rather than the 31.7 percent claimed where most assets of the limited liability company were liquid. The court also denied the estate a deduction for interest on a loan from the LLC since the entity could have made a distribution to the estate.
In Estate of Sower v. Commissioner, 149 TC No. 11, the Tax Court backed up the IRS position that, absent a closing agreement, it can adjust the unused exemption of the first spouse to die even if the estate tax return was “accepted as filed” following the first death.
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 rather than a six-month filing extension, distinguishing the case from those where the deadline was known but the professionals were neglectful.
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 her husband’s 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.
In Avraham v. Commissioner, 149 TC No. 7, the Tax Court took 105 pages to disallow a jewelry store chain’s deduction for payments to a captive insurance company where total insurance costs soared from $150,000 to $1.3 million under the captive; the court declined to impose an accuracy-related penalty since the taxpayer relied upon professional advice.
More attorney errors
In Castigliola v. Commissioner, TC Memo 2017-62, the Tax Court determined that three co-owners of a professional limited liability company engaged in the practice of law were liable for self-employment tax not only on their guaranteed payments but also on their flow-through income.
A Pennsylvania federal district court, in Bedrosian v. United States, 120 AFTR2d 2017-5253, determined that a pharmaceutical executive who had unreported Swiss accounts did not willfully fail to file FBAR returns; his first accountant never asked about the accounts for many years, and they advised him to do nothing after he asked.
The Financial Accounting Standards Board released an accounting standards update Thursday to enhance the transparency of how nonprofits report contributed nonfinancial assets, also known as gifts in kind.
Rep. Pete Olson, a Republican from Texas, has introduced a bill that would offer tax incentives to employers who train workers about best practices for reducing the spread of COVID-19 in the workplace.