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U.S.-Israeli Dual Citizen Denied Foreign Earned Income Exclusion Because “Tax Home” Is In U.S.

In Hirsch v. Commissioner (here) the Tax Court held that the taxpayer’s “tax home” for purposes of  the foreign earned income exclusion (I.R.C. section 911) was in the New York metropolitan area, despite the fact that the taxpayer resided in Israel, because regulatory restrictions on his professional practice limited his ability to communicate with clients while working in Israel. As a result, the taxpayer, a duel U.S.-Israeli citizen, was not able to utilize the foreign earned income exclusion on his personal U.S. federal income tax return. Tax Home and Foreign Earned Income Exclusion Generally, the foreign earned income exclusion provides U.S. expatriates with an opportunity to exclude foreign earned income from federal income tax while living abroad.[1] The exclusion has several statutory requirements, one [...]

March 15th, 2017|

Tax Court Rejects Taxpayer’s Reasonable Cause Argument Regarding Automatic Penalties from Failure to File Forms 5471

Flume v. Commissioner (here) revolved around one noteworthy issue: did the taxpayer’s reliance on the advice of his tax return preparer spare the taxpayer from $110,000 in penalties for the taxpayer’s failure to report foreign investments on Form 5471? The taxpayer argued that he relied on the expertise of his tax return preparer to guide him to prepare the necessary forms. The IRS argued that the taxpayer could not escape penalties because the taxpayer failed to advise the tax return preparer of his foreign investments. Brief Summary of Facts The taxpayer is a U.S. expat living in Mexico and owned a majority interest in a Belizean corporation and a Mexican corporation.[1]  From 2001 to 2008 the taxpayer did not tell [...]

March 10th, 2017|

Goldsmith v. Commissioner: Can An Owner of A Personal Service Based S Corporation Take Distributions Without Also Taking a Salary?

In Goldsmith v. Commissioner, T.C. Memo. 2017-20 (link) the Tax Court held that the payments from the shareholder’s S corporation were not wages. The Tax Court reasoned that the payments to the taxpayer constituted a non-taxable return of capital. The court reached this conclusion even though the taxpayer did not draw a salary for the years in question. Background: The taxpayer was an attorney that left the relative safety of a stable law firm to establish his own practice. The law firm was established as an S corporation, which had up to 4 associates at one point. The taxpayer experienced some early success, but his practice was ultimately unprofitable. As a result, the taxpayer got behind on his payroll taxes obligations. To make ends meet, [...]

February 18th, 2017|

Shaffran v. Commissioner: Tax Court Rejects IRS’s “De Facto Officer” Argument in TFRP Case

The taxpayer in Shaffran v Commissioner, T.C. Memo. 2017-35 (link) was not an owner, officer, or employee of a restaurant that got behind in its federal payroll taxes. Yet, the IRS still attempted to assert the Trust Fund Recovery Penalty ("TFRP") against the taxpayer under the theory that he was a “de facto officer”. How does one become a "de facto officer" for purposes of TFRP investigation? The IRS argued that he became a de factor officer by signing four checks and writing out several others for the business’s manager’s signature. This is despite the fact that the taxpayer did not have check signing authority and he was not an owner, officer, or employee of the business. Fortunately, the Tax Court rejected this argument and [...]

February 16th, 2017|

Tax Court: CalPERS Pension Plan Not an “Asset” for Section 108 Insolvency Calculation

Takeaway: When calculating insolvency for purposes of the insolvency exclusion of cancellation of indebtedness income, a pension plan may or may not be considered an “asset”.  The determination depends on whether the taxpayer has an ability to utilize the equity in the pension plan (e.g., through a lump-sum distribution, loan, sale, etc.) as a means for paying a tax liability from the cancellation of indebtedness. In Schieber v. Commissioner, T.C. Memo. 2017-32 (link), the Tax Court held that the taxpayer did not have to include the value of his pension plan with CalPERS as an asset in calculating insolvency under § 108(b) because the taxpayer’s interest in the pension plan could not be used to immediately pay the income tax on canceled debt income. Law [...]

February 9th, 2017|

IRS Releases Notice 2015-82, Increases De Minimis Safe Harbor Limit

On Tuesday November 24, 2015, the IRS released Notice 2015-82 (the “Notice”). The Notice increased the de minimis safe harbor limit, for businesses without “applicable financial statements”, from $500 to $2,500. As a result of the Notice, many small businesses will now be able to expense certain items that would have otherwise been depreciated over a number of years. The de minimis safe harbor is an annual election that merely establishes a minimum threshold below which all qualifying amounts are considered deductible. The final tangible property regulations, including the de minimis safe harbor limit, applies to tax years beginning on or after January 1, 2014. Prior to the release of the Notice, the initial limit was only $500. The new $2,500 limit in the Notice [...]

November 25th, 2015|

Respecting Corporate Formation: Rochlani v Commissioner

Overview How can a corporation have a loss for tax purposes if it does not have any bank accounts, credits cards, or other lines of credit and it does not keep any books or records? The taxpayers in Rochlani v Commissioner found out the hard way.[1] Business Formation and Operations In 2006, Mr. Rochlani (the “Taxpayer”) started Ultimate Presale, which was a business that bought and resold sporting, concert, and other tickets.  Without the Taxpayer’s knowledge, his son--a minor at the time--used an online legal service to incorporate Ultimate Presales under Michigan law. As a result of the incorporation, the state sent the Taxpayer documentation on his new corporation. Although the taxpayer had not initiated the process, he did not seek to stop or unwind [...]

November 23rd, 2015|

Counting Travel Time for Real Estate Professional Test? Leyh v. Commissioner

Overview In Leyh v. Commissioner[1], the Tax Court held that the taxpayer’s time incurred while traveling from her home to rental properties to perform a variety of tasks with respect to 12 rental activities counted towards the test of whether the taxpayer was a real estate professional.[2] As a result, the taxpayer was considered a real estate professional, which excepted her rental activities from the per se passive activity treatment for rental activities of non-real estate professionals.[3] Give the relatively small number of cases on whether travel time can be counted for real estate professional test, Leyh is a favorable case for taxpayers and it provides some guidance on how taxpayers may be able to withstand similar IRS challenges.[4] Facts: Taxpayer’s Real Estate Related Activities [...]

May 23rd, 2015|

Bacon v. Commissioner: Beware, Forms 1099-C Are Not Always Accurate

Overview The Tax Court determined that the extinguishment of the taxpayer’s debt took place in a closed tax year, even though FEMA issued a 1099-C[1] in an open tax year. As a result, the Tax Court held that the IRS was barred by the statute of limitations from assessing the taxpayer for the federal income tax on cancellation of indebtedness income (“COD income”). Takeaway Determining the timing and amount, if any, of COD income can be a very complex analysis.[2] Institutions, including banks and federal agencies, issuing Form 1099-C do not always get the analysis right. As a result, if you receive a Form 1099-C, you should have a discussion with your tax adviser to make sure that the amount and timing of the COD [...]

March 11th, 2015|

DMA v. Brohl: US Supreme Court Holds In Favor of DMA

Overview On Tuesday March 3, 2015, the Supreme Court handed down a unanimous decision in favor of the Direct Marketing Association, (“DMA”) in DMA v. Brohl (575 U.S. ____ )(March 3, 2015) and remanded the case back to the Tenth Circuit for further consideration. Although the decision did not come as a surprise, dicta in Justice Kennedy’s concurring opinion called into question the Supreme Court’s 23-year old holding in Quill Corp. v. North Dakota. Takeaway The Supreme Court’s holding likely suggests that the Tax Injunction Act (“TIA”) is not a bar to federal jurisdiction for certain challenges to state’s pre-assessment, information-reporting statutes, even if challenge would inhibit state tax assessments. DMA v. Brohl Procedural Posture The DMA brought suit against the Colorado Department of Revenue [...]

March 10th, 2015|