Western CPE Blog
Breaking tax and accounting news and analysis from the experts at Western CPE.
Frank and Collette McNamara v. Comm., TCS 2023-22
Home Mortgage Interest Deduction Revised by Tax Court (Frank and Collette McNamara v. Comm., TCS 2023-22) In 2019, Frank and Collette McNamara owned two homes, which they acquired after Oct. 1987 and before Dec. 16, 2017. The McNamaras owned the first home in Virginia for the entire year. They owned the second home in Massachusetts until May 10, 2019, when they sold it. On their 2019 Form 1040, the McNamaras claimed a total mortgage interest deduction of $39,226 for their two homes. The IRS disallowed $9,140 of the deduction, asserting that the McNamaras miscalculated the deduction for the Massachusetts home. …
Shawn Steven Salter v. Comm., TCM 2022-29
Itemized Deductions Not Allowed After IRS Prepared Substitute Return (Shawn Steven Salter v. Comm., TCM 2022-29) Shawn Salter failed to file a return for the tax year. Having received no return from Mr. Salter, the IRS prepared a substitute for return based on third-party reporting, allowing the taxpayer the standard deduction. Mr. Salter then prepared a late (by seven years) Form 1040 reporting all items of income as shown on the IRS notice of deficiency, but claiming itemized deductions for medical, state, and local taxes, mortgage interest, charitable deductions, and unreimbursed employee business expenses. Section 63(e)(1) provides that, “[u]nless an …
Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77
Alimony Requirement #7: Child-related Contingency Means Alimony Not Deductible (Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77) Alejandro and Cristina divorced in 2012. On July 25, 2012, the Los Angeles Superior Court entered a judgment of dissolution, that stated in part: “[F]amily support shall be payable by Respondent [Alejandro] to Petitioner [Cristina] in the monthly amount of $4,500.00 payable on the 1st of each month. . . Such support order commences Aug. 1, 2011, and is continuing until both minor children emancipate or Petitioner remarries. If Petitioner remarries, the family support obligation shall be modified to $2,500.00 per …
Katrina White v. Comm., TCM 2023-77
COD Income Was Not Taxable Because Of Insolvency (Katrina White v. Comm., TCM 2023-77) Katrina White owned and operated a body sugaring place. The business struggled and she fell behind on loan payments. Her bank loan was forgiven and the bank issued a Form 1099-C on the forgiven amount of $14,433. Ms. White did not report the cancellation of debt income on her timely filed 2016 return. The IRS examined Ms. White’s return and determined the COD income to be taxable. At Tax Court, Ms. White argued that the discharge of the debt should be excluded from income because she …
Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168
Alimony Requirement #6: Payments Did Not End at Death of Recipient Spouse (Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168, Feb. 27, 2018) Mark Hexum paid his ex-wife, Sherri, half of the net gain from the sale of their marital home because the Illinois family court ruled payment was required under their divorce agreement. Mark had been responsible for the house’s mortgage and expenses after the divorce, and in his view, the equity accrued before the sale was not “marital property” that he should have been made to split with his ex-wife when the house was sold. He characterized the …
Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224
Alimony Requirement #6: Millions in Payments by Hedge Fund Partner to Ex-wife Did Not Meet Alimony’s Survival Criterion (Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224, Aug. 5, 2022) Andrew Redleaf is the majority partner at Whitebox Advisors, LLC, a hedge fund asset management firm. The Redleaf’s marriage termination agreement (MTA) required Mr. Redleaf to pay his ex-spouse $140 million including $1,500,000 per month for sixty months. Mr. Redleaf deducted $51 million in payments he made to his ex-spouse in 2012 and 2013 as spousal maintenance (alimony). The issue in the case was whether the alimony payments would stop after payee …
Jerry Vanderhal v. Comm., TCS 2018-411
Alimony Requirement #4: Payment of Sallie Mae Loan of Ex-Spouse Not Alimony Jerry Vanderhal divorced in 2011. The divorce agreement included a reference to a Sallie Mae student loan account that related to his former spouse. That reference was found in the “Division of Community Debts” section of the agreement and obligated Mr. Vanderhal to “assume and hold his former spouse harmless” from that debt. The agreement also included a section titled “Tax Free Transfers” that stated the parties believe and agree that the transfers of property between them required by the agreement were tax-free transfers of property between them …
Cynthia Hailstone and John Linford v. Comm., TCS 2023-17
Disability Payments Taxable if Premiums Paid by Employer (Cynthia Hailstone and John Linford v. Comm., TCS 2023-17) John Linford was provided disability insurance by his employer. Under the terms of the policy, employees were not required to contribute to the policy premiums. Rather, the company was required to pay 100% of the premiums. During 2017, Mr. Linford was approved and he received $105,000 of disability payments and a 2017 Form W-2 reporting the payments. He did not report the payments. Under §105(a) if the amounts of the disability payments were paid under a policy for which the contributions (premiums) were …
Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8
Proof of Insolvency Lacking for Exclusion of Cancelation of Debt Income (Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8) The discharge of indebtedness is income (§61(a)(12)). Section 108(a) provides an exclusion to the extent of the taxpayer’s insolvency (§§108(a)(1)(B) & (3)) and defines an insolvent taxpayer as one who has an “excess of liabilities over the fair market value of assets” (§108(d)(3)). The burden to prove insolvency is on the taxpayer. Because Ernesto and Marilyn Patacsil couldn’t prove the FMV of their assets and the extent of their liabilities, the cancellation of debt due to the foreclosure of their properties …
James H. Kim v. Comm., TCM 2023-91
IRS Summons Nets More than $4 Million of Unreported Cryptocurrency Gains(James H. Kim v. Comm., TCM 2023-91) In response to a summons, the IRS received information reports from Coinbase, Inc. a virtual currency exchange, reporting the proceeds of James Kim’s transactions in Bitcoin and Litecoin (during 2013–2016), and Ethereum (during 2017). For 2013–2016, Mr. Kim reported no cryptocurrency gains or losses. For 2017, he received an information return from Coinbase that reported $18,557,230 of proceeds from virtual currency transactions. On the 2017 Schedule D, Mr. Kim reported gross proceeds in that amount but offset against those proceeds a claimed basis …
Denine and Bryan Kerns, pro sese v. Comm., TCM 2019-14
Failed to Reconcile Advance Premium Tax Credit on Form 8962 (Denine and Bryan Kerns, pro se v. Comm., TCM 2019-14) Denine and Bryan Kerns purchased their health insurance through Covered California. They received an advanced premium tax credit (APTC) of $8,420 in 2014. They timely filed their 2014 return, reporting AGI of $97,061. They claimed personal exemptions for themselves and no exemptions for dependents. The IRS determined that the Kerns were not eligible for any credit because their household income exceeded the maximum allowable under §36B(b) and (c)(1)(A). For 2014, 400% of the FPL was $62,040. The Kerns’ household income …
Chalaundra Sneed v. Comm., TCS 2023-11
Advance Premium Tax Credits Require Taxpayer Attach Form 8962 to Tax Return (Chalaundra Sneed v. Comm., TCS 2023-11) Chalaundra Sneed enrolled in health insurance for herself and her two dependents through the Oklahoma insurance Marketplace. She received Advance Premium Tax Credits (APTC) on the basis of the information she provided in her application. Ms. Sneed did not attach a copy of Form 8962, Premium Tax Credit (PTC), to her income tax return, but later mailed it separately. The notice of deficiency determined that Ms. Sneed was ineligible for the PTC because her MAGI for year at issue exceeded 400% of …
Alice Kimble v. US, (CA-FC), 2021-1 USTC 50,110
FBAR Violation Recklessness and, Thus, Willful (Alice Kimble v. US, (CA-FC), 2021-1 USTC 50,110; (Mar. 25, 2021)) Because the penalty for willfully failing to file FBAR is a maximum penalty of the greater of $100,000 (inflation adjusted to $136,399 for 2021) or 50% of the balance in the account or the amount of the transaction, the determination of willful versus non-willful is meaningful. What’s willfulness? The US Supreme Court in Safeco Ins. Co. of Am. v. Burr, 551 US 47, 57 (2007), defined “recklessness” as “violating an objective standard: action entailing an unjustifiably high risk of harm that is either …
Lindsey Jones v. Comm., CA-9, 2022-1 USTC §50,111
Unsigned Return Was Still a Valid Married Filing Joint Return (Lindsey Jones v. Comm., CA-9, 2022-1 USTC §50,111 (Feb. 3, 2022)) The Ninth Circuit Court of Appeals found that the Tax Court did not err by concluding that Lindsey Jones tacitly consented to the filing of a joint return. A joint tax return signed by one spouse on behalf of the other is valid so long as the non-signing spouse tacitly consented to filing the joint return. See Hennen v. Comm., [CCH Dec. 24,658], 35 T.C. 747, 748–49 (1961). The key question is whether both spouses intended at the time …
Sam Bankman-Fried Sentenced to 25 Years
Sam Bankman-Fried, the former wunderkind of the cryptocurrency world, was sentenced to 25 years in prison on Thursday, March 28th, 2024, for his role in defrauding FTX customers of $8 billion. He was facing a maximum sentence of 110 years, and prosecutors were hoping for 40-50 years. For a deep-dive into the background of the Sam Bankman-Fried fraud case from an accounting point of view, see Jeff Sailor, CPA’s on-demand video course, Focus on Fraud: FTX! What Happened? (1 CPE Credit, Accounting) In a statement from the Department of Justice, U.S. Attorney General Merrick Garland said: “There are serious consequences for …
The 90-Day Clock is Ticking for Beneficial Ownership Reporting
An Alabama Federal District Court found the Corporate Transparency Act and its Beneficial Ownership Interest (BOI) reporting to be unconstitutional (National Small Business United et al v. Yellen et al). The Justice Department on behalf of Treasury filed a Notice of Appeal on March 11, 2024. What happens now? While the litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, reporting companies are still required to file beneficial ownership reports as provided in FinCEN’s regulations. …
Bipartisan “Stop Subsidizing Giant Mergers Act” Takes Aim at Tax-Free Reorganizations
Few proposals have been made to change tax-free reorganizations in the past century, but today, a Democrat and a Republican have combined forces to attempt exactly that. This morning (3/21), Sen. Sheldon Whitehouse (D., R.I) and Sen. J.D. Vance (R., OH) introduced new legislation aimed at transforming the tax implications of big mergers by revising the corporate tax code. The Stop Subsidizing Giant Mergers Act is described in a statement from the senators as “ending a wasteful subsidy for mergers where combined average annual revenues exceed $500 million.”The bipartisan bill sets its sights on companies’ ability to complete tax-free mergers. …
New IRS Memo Answers Questions Related to Form 8300 and Cannabis
Once a business receives cash exceeding $10,000 (in either a transaction or related transactions), a Form 8300 must be filed. Cannabis businesses are cash intensive businesses and therefore are subject to the reporting requirement.A March 1, 2024 Chief Council Memorandum 202409016 addresses a series of questions related to the filing of Form 8300 that have arisen in examinations of cannabis businesses. The memorandum provides guidance on many of these issues in a 16 question-and-answer format. Additional guidance on questions related to cash couriers/armored cars who transport cash between growers/manufacturers and dispensaries/sellers is in process.Example from Q and A #2. What …
President Biden Proposes 2025 Budget
President Biden has proposed a 2025 budget, and it’s a pie-in-the-sky plan that has no chance of getting through Congress. It is instead a political statement of what might be, not what will be. So, why read about the proposals? Because some well-read client will ask about a provision that particularly irritates them. (Think real estate investor and the Section 1031 proposed limit.)The proposed budget includes tax increases of $5.1 trillion over the next ten years, and it assumes that the Tax Cut and Jobs Act will not be extended past 2025.Here are a few items from President Biden’s proposed budget.The …
Student Loan Discharge for Small Loans Has Started
The Department of Education has announced that it will automatically discharge $1.2 billion in loans for nearly 153,000 borrowers who are eligible for the shortened time to forgiveness benefit under the Saving on a Valuable Education (SAVE) Plan. For a borrower to be eligible for this forgiveness, they must be enrolled in the SAVE Plan, have been making at least 10 years of payments, and have originally taken out $12,000 or less for college. For every $1,000 borrowed above $12,000, a borrower can receive forgiveness after an additional year of payments. All borrowers on SAVE receive forgiveness after 20 years …