Tax Week In Review for Week ending September 16, 2016

Tax Legislation

H.R. 3590 – Halt Tax Increases on the Middle Class and Seniors Act.

      • The House passed legislation that would repeal the 10% limitation (medical bills limited to excess of 10% of taxpayer’s adjusted gross income). The bill would reset the limit to the pre-ACA limit of 7.5%.
      • Currently, the lower 7.5% threshold only applies to individuals age 65 or older and that exemption expires at the end of 2016. After that the threshold for all individuals would be 10%.
      • To see the full text of the bill, please see link: H.R. 3590

H.R. 6058 – To amend the Internal Revenue Code of 1986 to provide for an investment tax credit related to the production of electricity from offshore wind.

      • Bill would amend IRC Section 48 to include tax credits for offshore wind energy facilities in service before 2026.
      • The full text can be seen here:  H.R. 6058


H.R. 6050To provide debt and tax transparency to taxpayers.

    • The purposes of this Act are to bring more transparency to the tax-and-spend habit of the Federal Government; to provide for better accountability in the Federal budget and appropriations process; and to increase the participation of United States citizens in their government.
    • After 2019, taxpayers can request a statement of accounting from the federal government, to include:
      • a summary of the most recent Financial Report of the United States Government, including the Statement of Long Term Fiscal Projections;
      • a calculation by the Secretary of the Treasury of the eligible individual’s share of the total obligations of the Federal Government, including those incurred in Medicare, Social Security, other civilian and military retirement benefits, and
      • a 30-year calculation of the proportional increase in the Federal income tax rates, as established under chapter 1 of subtitle A of the Internal Revenue Code of 1986.

H.R.6042 — To nullify certain proposed regulations relating to restrictions on liquidation of an interest with respect to estate, gift, and generation-skipping transfer taxes.

    • Recently, the Treasury proposed regulations to reduce or limit the discounting of business valuations with regard to transfers of interest between family members. H.R. 6042 was introduced to essentially eliminate the IRS’s ability to enforce the proposed regulations.
    • The full text can be seen here: H.R. 6042
    • See the Federal Register for Proposed Regulations: Federal Register: Vol. 81, No. 150 /Thursday, August 4, 2016 / Proposed Rules

H.R. 6032 – To amend the Internal Revenue Code of 1986 to provide a tax credit for purchase of data breach insurance.

    • Due to the increase in cyber-security attacks and the increased cost of maintaining security, the bill is to allow a 15% tax credit to offset the cost of implementing data security.
    • Per the website of Congressman Ed Pelmutter (D-CO):
      • “The Data Breach Insurance Act (H.R. 6032) provides a two-prong approach by providing a fifteen percent tax credit to companies who purchase data breach insurance coverage and adopt the National Institute of Standards and Technology (NIST) Cybersecurity Framework or any other standard approved by the Secretary of Treasury. The tax credit will help offset some of the costs associated with implementing the cyber frameworks such as risk assessments, hardware/software upgrades, employee education, training, and vendor testing.”
    • The full text can be seen here:  H.R. 6032

H.R.6019 – Relief from Obamacare Mandate Act of 2016.

    • To amend the Internal Revenue Code of 1986 to provide an exemption to the individual mandate to maintain health coverage for certain individuals whose premium has increased by more than 10 percent, and for other purposes.
    • Repeal of distributions for medicine qualified only if for prescribed drug or insulin.
    • Repeal of limitation on health flexible spending arrangements under cafeteria plan
    • The full text can be seen here: H.R. 6019


H.R.5994 – Biodiesel and Renewable Diesel Incentive Extension Act of 2016.

    • To amend the Internal Revenue Code of 1986 to extend biodiesel and renewable diesel incentives.
    • Incentives due to expire December 31, 2016 would be extended until December 31, 2018.
    • The full text can be seen here: H.R. 5994

S. 3311 – CO-OP Consumer Protection Act of 2016

    • To amend the Internal Revenue Code of 1986 to exempt individuals whose health plans under the Consumer Operated and Oriented Plan program have been terminated from the individual mandate penalty.
    • Companion legislation to Nebraska Congressman Adrian Smith’s CO-OP Consumer Protection Act (H.R. 954), that would repeal Obamacare’s mandate for families who lost their insurance coverage
    • To be effective for tax years after 2013.
    • The full text can be seen here: S. 3311



Opinions, Decisions & Rulings Released this Week


    • The issue for decision is whether taxpayer’s vow of poverty causes him to be exempt from liability for Federal income tax and self-employment.
    • Pastor of the World Evangelism Outreach Church (WEOC) signed a document entitled “Vow of Poverty” detailing that he agreed to divest his property and future income to WEOC and in turn WEOC would provide for his physical, financial, and personal needs
    • Petitioner appears to rely on the Internal Revenue Service’s original official public pronouncement regarding the vow of poverty, O.D. 119, which was published in 1919. (Was superseded by Rev. Rul. 77-290, 1977-2 C.B. 26.)
    • Decision: The compensation petitioner received from WEOC — in the form of payments WEOC or its related entities made on his behalf — must be included in his gross income.
    • The full text can be seen here: T.C. Memo. 2016-167

WARREN SATCHELL v. COMMISSIONER – T.C. Summary Opinion 2016-55

    • Taxpayer filed a 2009 Form 1040 and claimed a first-time homebuyer credit of $3,250 and attached Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.
    • Taxpayer misinterpreted the instructions, claiming “as a long term resident of the same residence”, he could be considered to be first time homebuyer.
    • Taxpayer submitted records for the purchase of a motor home (considered personal property, not realty) as proof of purchase of a principal residence, although current principal residence had been purchased years before.
    • Per IRS response, records show the home used to claim the First-Time Homebuyer Credit was purchased prior to the date of enactment of the Worker, Homeownership, and Business Assistance Act of 2009.
    • The full text can be seen here: T.C. Summary Opinion 2016-55



    • Taxpayer prepared her own return and under-reported IRA distributions of $56,942 for 2011, then filed an amended return after a notice of deficiency was issued by the IRS.
    • Taxpayer was assessed for accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax for the 2011 tax year. Understatement of income was in excess of 10% and the tax deficiency was greater than $5,000.
    • Taxpayer claimed to have relied on professional advice in the preparation of her tax return, but did not provide sufficient evidence of the claimed professional advice and relief under reasonable cause was denied.
    • The full text can be seen here: T.C. Memo. 2016-172



    • Issues to be decided involved property settlement vs. alimony, theft loss and constructive receipt
    • As part of the marital support agreement, taxpayer was in receipt of installment payments worth $5,568,200 over 3 years that represented 10% of income due to the spouse. Taxpayer spent $400,000 as an investment in an African gold mine that was a scam. Taxpayer also claimed that settlement monies received in 2009 were not in her control until 2010.
    • Court held for the Commissioner in determining that the payments were alimony as would be considered under the 4 point test of IRC Section 71(b).
    • Court held for Leslie in that a theft loss occurred in the year of discovery. Funds were determined to be lost the year following payment.
    • Court held for Leslie regarding constructive receipt. The 2009 installment was deposited in an account opened by the spouse. Leslie did not have access to the funds, nor aware of the account, until 2010.
    • The full text can be seen here: T.C. Memo. 2016-171



    • Issues to be decided involved Schedule C deductions and substantiation
    • Taxpayer was a traveling salesman working for one employer, and as self-employed, selling hard to obtain maintenance parts. Taxpayer claimed numerous deductions for his business that were substantial in relation to the income reported on Schedule C.
    • Upon examination, it appeared that travel expenses were more likely to be related to the work conducted for his employer, rather than incurred for his business and substantiation was lacking.
    • After concessions, expenses of $94,573 were denied. Resulting tax liability included accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax.
    • The full text can be seen here: T.C. Memo. 2016-168


DIANA C. CZEKALSKI v. COMMISSIONER – T.C. Summary Opinion 2016-56

    • Issues to be decided involved deductions for medical expenses and unreimbursed employee expenses, and penalties under section 6662.
    • Taxpayer is a special education teacher with students scattered throughout her school district, requiring her to travel to each school to perform her teaching assignments.
    • Upon examination, it was found that various deductions were overstated or unsubstantiated. A deduction for home office expenses was allowed as she did not have a location from which to carry out administrative duties outside the home.
    • Resulting tax liability included accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax.
    • The full text can be seen here: T.C. Memo. 2016-56



    • Issues to be decided involved innocent spouse relief under Section 6015.
    • Taxpayer is a financial analyst receiving W-2’s from her employer. Her spouse a self-employed attorney. Spouse prepared a Schedule C to report income and deductions for tax years 2010 and 2011. Taxpayer gave her tax information to her spouse. Spouse prepared the tax returns and filed electronically.
    • IRS adjustments included amounts on Schedule C, as well as corrections to other income or deductions.
    • Taxpayer filed Form 8857, Request for Innocent Spouse Relief, claiming that she was not involved in her husband’s business and maintained separate finances.
    • The final determination listed the following reasons for denial, taxpayer did not meet the 5 conjunctive requirements of Section 6015(b) nor the 7 threshold conditions for alternative relief under Section 6015(f).
    • The full text can be seen here: T.C. Memo. 2016-169



    • Issues to be decided involved the proper reporting of losses by a corporation vs its shareholders, the relation of the corporate entity as agent to its shareholders and related penalty assessments under Section 6662.
    • Taxpayers (Barnhart brothers) cattle operation losses of approximately $2.5 million over 3 years, shielding other income reported on their Form 1040’s. The IRS determined that these losses should have been reported on the C-corporation started by the brothers in 1994.
    • The brothers represented themselves as owners of the cattle and that the corporation was merely an agent responsible for accounting and admin functions. Records indicated that transactions were performed in the name of the corporation, employees were employed by the corporation and that cattle were represented as bought and sold by the corporation.
    • By choosing to be taxed as a C-corporation, the court determined petitioners “cannot now escape the tax consequences of that choice, no matter how bona fide * * * [their] motives or longstanding * * * [their] arrangements.”
    •  The full text can be seen here: T.C. Memo. 2016-170

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