j.d., ll.m. (taxation)...§71 bonus split with ex wife in early stages of divorce proceeding not...

THE BRADLEY BURNETT FEDERAL TAX

UPDATE 2017

By Bradley Burnett J.D., LL.M. (Taxation)

Bradley Burnett Tax Seminars, Ltd.

Courtesy preview. Buy the handbook at https://store.cpatrendlines.com/shop/bb18ftu/

Disclaimer

These materials are intended to provide professionals with guidance in federal tax law matters. The materials do not constitute, and should not be treated as, professional advice regarding the use of any particular tax treatment of the consequences associated with any technique. Every effort has been made to ensure the accuracy of these materials. Bradley Burnett Tax Seminars, Ltd. and Bradley Burnett and the sponsoring organization(s) do not assume responsibility for any individual’s reliance upon the written or oral information provided. Reader must independently verify all statements made before applying them to a particular fact situation and independently determine the impact of any particular tax planning or compliance technique implementing it.

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BradleyBurnettTaxSeminars.com

“As I sit, looking at the place the piano used to be before I had to sell it to pay my income tax,

I find myself in a thoughtful mood.”

P.G. Wodehouse


2017 Federal Tax Update

i © 2017 Bradley Burnett Tax Seminars, Ltd.

Table of Contents

Chapter 1 Individual .................................................................................................................................................... 1—i Chapter 2 Real Estate .................................................................................................................................................. 2—i Chapter 3 Investment ................................................................................................................................................. 3—i Chapter 4 Individual Retirement Accounts ....................................................................................................... 4—i Chapter 5 Estate, Gift and Fiduciary ..................................................................................................................... 5—i Chapter 6 Business and Cost Recovery ............................................................................................................... 6—i Chapter 7 Fringe Benefit and Qualified Retirement Plans .......................................................................... 7—i Chapter 8 Employment Tax, Self-Employment Tax and Forms 1099 .................................................... 8—i Chapter 9 C Corporations and Exempt Organizations .................................................................................. 9—i Chapter 10 S Corporations .................................................................................................................................... 10—i Chapter 11 Disregarded Entities......................................................................................................................... 11—i Chapter 12 Partnerships and LLCs .................................................................................................................... 12—i Chapter 13 IRS Practice and Procedure ........................................................................................................... 13—i Chapter 14 Special Topics ...................................................................................................................................... 14—i



© 2017 Bradley Burnett Tax Seminars, Ltd.

1—i

Chapter 1 Individual Table of Contents

Disaster Tax Relief and Airport and Airway Extension Act of 2017 ................................................................ 1—1 Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823, Public Law No. 115-63 (Signed by President on 09/29/17)) ....................................................... 1—1 Casualty Losses – More Generous Casualty Loss Rules for Hurricane Victims ...................... 1—1 Employee Retention Credit for Employers – New for Hurricane Victims ................................ 1—4 Earned Income Tax Credit (EITC) and Child Tax Credit (CT) – New Option for Hurricane Victims to Use Either Current or Prior Year Income for EITC and CTC Eligibility ......................................................................................................................................................... 1—5

Parsonage Allowance for Ministers ............................................................................................................................... 1—5 §107 Re-Tooled and Re-Loaded Lawsuit Shoots Down Parsonage Allowance Exclusion on Constitutional Grounds (Freedom From Religion Foundation, et al (Annie Laurie Gaylor, et al), v. Lew, Case No. 16-CV- 215 (D.C. W.D. WI 04/06/16)) (Gaylor v. Mnuchin, 16-cv-215-bbc (WD WI 10/06/17))................................................................ 1—5

Filing Status .............................................................................................................................................................................. 1—5 §6013 Couple Entitled to File Married Filing Jointly Return, Even After Husband Mistakenly Initially Mistakenly Filed as Single – IRS Opined Husband’s Filing as Single Constituted a Married Filing Separately Return – Tax Court Rules MFJ Still Available (Fansu Camara and Aminata Jatta, pro se, v. Comm., 149 TC No. 13 (09/28/17)) .................................................................................................................................................... 1—6 §6012 MFJ Status Not Available to Husband – His Wife, Though Mentally Ill, Filed MFS Return Claiming Delusional $350,000 Madoff Loss – Husband Did Not Have Agency (Form 2848) or Consent to File MFJ (Peter William Moss, pro se, v. Comm., TCM 2017-30 (02/08/17)) ........................................................................................................................ 1—6 §§2, 7703 No Head of Household Status – Married Filing Separately Applies Instead Where Spouses Did Not Live Apart at All Times During Last Half of Year (Gregory Alan Brown, pro se, v. Comm., TCS 2017-24 (04/25/17)) ............................................ 1—8 §6103 Attempted MFJ Return Filed After Divorce Final Not Valid – Ex Wife Maintained Intent Throughout Divorce Proceeding to File Separately – Filed Own MFS Return Later – She Even Filed Form 14039, Identity Theft Affidavit, After Learning Prior Husband Had Filed MFS (Victor A. Edwards v. Comm., TCS 2017-52 (07/17/17)) .................................................................................................................................................... 1—8

Dependency Exemptions ................................................................................................................................................. 1—11 §§152 No Dependency Exemption for Father With Custody of Child for 150 Days – Did Not Prove Child’s Mother Did Not Have Child for More Than 150 Days (Adrian Corey Jenkins, TCS 2017-22 (04/03/17)).......................................................................................... 1—11 §152 Uncle of Niece Who Lived With Him Entitled to Dependency Exemption, EITC, Child Tax Credit and Head of Household Status – Child’s AWOL Mother Sent a Few Bucks Occasionally (Raymond Ochoa, pro se, v. Comm., v. Comm., TCS 2017-78 (10/04/17)) ................................................................................................................................................. 1—11

Loan vs. Salary ...................................................................................................................................................................... 1—13 §61 $2.2 Million Drawn from Father’s C Corp Was Income, Not Loans – “Eight Factor” Test to Establish a Loan Badly Flunked – This Case Shows How to Set It Up the Wrong Way (Caiping Zang and Tao Liu v. Comm., TCM 2017-55 (04/03/17)) ........... 1—13 §§61, 162 $146,500 Transferred from Medical Center to Vascular Physician as Part of New Physician Recruitment Agreement Constituted a Loan – Loan Repayments Not Income Tax Deductible (Ellis J. Salloum and Mary Virginia H. Salloum v. Comm., TCM 2017-127 (06/29/17)) ............................................................................. 1—16 §§61, 3401, 3402, 3101, 3111, 3301 Recruiting “Loans” to Attract and Retain New Hire Physicians Deemed at Its Source to be Wages – U.S. District Court in




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Washington State Thought Purpose was Compensation (The Vancouver Clinic, Inc. v. U.S., DC WD WA (04/09/13))............................................................................................................. 1—19

Reporting Inconsistent Positions ................................................................................................................................. 1—21 §§6221-6234 (TEFRA) and 6662 IRS Could Assert and Tax Court Could Uphold Negligence Penalty Against Partner Who Failed to Report Partnership K-1 Income on Personal Return and Did Not File Notice of Inconsistent Treatment (Bernard P. Malone and Mary Ellen Malone v. Comm., 148 TC No. 16 (05/01/17) ..................................... 1—21

Disability Income ................................................................................................................................................................. 1—21 §86 Social Security Disability Benefits are Taxable Income, Even if Recipient Must Pay Them Back Later – Income Not Reduced By Amount of Repayment Unless Repayment Made in Same Year as Receipt (William A. Alexander, Jr. and Diane C. Alexander, pro sese, v. Comm., TCS 2017-23 (04/10/17)) .......................................................... 1—21 §104 Disability Income Received from North Carolina Employee’s Retirement System Taxable – Why? Because Payouts Were Determined by Reference to Recipient’s Age, Length of Service or Prior Contributions (Jack Howard Taylor, pro se v. Comm., TCM 2017-132 (07/05/17)) ......................................................................................... 1—22 Combat-Injured Veterans Tax Fairness Act of 2016 ..................................................................... 1—22 §104(a)(2) $121,500 Payment Received On Account of EEO Disability Based Employment Discrimination Not Excludable, Even if Discrimination Related Back to Prior Physical Injury – But at Least $55,000 Attorney Fees and Court Costs Deductible Above the Line Because Lawsuit Involved Claims of Unlawful Discrimination (Laura Stepp and Kaleb Stepp v. Comm., TCM 2017-191 (09/27/17)) ................................................................................................................................................. 1—23

COD / Insolvency ................................................................................................................................................................. 1—24 §§61, 108 Pension Plan (CALPERS) Not Counted as Asset in Computation of Insolvency (Schieber, TCM 2017-32 (02/09/17)) ........................................................................ 1—24 §§61, 108 In Absence of Proof that Participant Could Not Have Withdrawn from Pension Plan, Net Plan Balance Counted as Asset in Insolvency Computation (Trudy Reed, TCS 2017-30 (05/08/17)) ............................................................................................ 1—25 §108 The 114th Congress Did Not Extend Beyond 2016 the Exclusion for Discharge of Indebtedness on a Principal Residence .................................................................. 1—25 §§108, 6050P Bye Bye 36 Month Rule .............................................................................................. 1—25

Unemployment Compensation ...................................................................................................................................... 1—25 §§85, 451 Unemployment Benefits Received in Year 1, Yet Paid Back in Year 2, Were Income Taxable in Year 1 – No Rescission of Income Available Because Amounts Not Paid Back in Year of Receipt (Michael S. Yoklic and Kay E. Ross, pro sese v. Comm., TCM 2017-143 (07/19/17)) ..................................................................................... 1—25

Moving Expense Deduction ............................................................................................................................................ 1—26 §217 39 Week Rule Axes Moving Expense Deduction – Employee Must Be Full Time at New Place of Employment For at Least 39 Weeks After Arriving at New Location – Pennsylvania Man Moves to California, Then Waits Too Long to Start New Job – New Employment Begins When You Start Getting Paid, Not When You’re Getting Trained Without Pay (Christopher B. and Sandra R. Anderson, pro sese, v. Comm., TCS 2017-17 (03/16/17)) ....................................................................................................... 1—26

§62(l) Health Insurance Deduction ............................................................................................................................. 1—29 §62(l) If Partnership Pays for Health Insurance Premiums, Partner Can Deduct Them on Form 1040 (Daniel E. Larkin and Christine L. Larkin, pro se, v. Comm., TCM 2017-54 (04/03/17)) ..................................................................................................................... 1—29

Alimony or Not ..................................................................................................................................................................... 1—29 §71 Conflicting Clauses in Separation Instrument Ace Out Alimony Deduction – Last Minute, Negotiated, Handwritten Changes Too Helter-Skelter and Hokey To Be Effective – Conflict With Other Existing Provisions in Base Agreement Confusing – If the Changes Don’t Go With the Grain, They’re Out of Here (Mark A. Quintal, TCS 2017-3 (02/02/17)) ........................................................................................................ 1—29




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§71 Oral Modifications to Alimony Not Deductible – California Man Pays $26,000 Extra for Each of Two Years – Only Alimony Spelled Out in Divorce Decree Deductible – The Extra? Forget About It (Barry Leonard Bulakites, pro se, v. Comm., TCM 2017-79 (05/11/17)) ..................................................................................................... 1—30 §71 Bonus Split With Ex Wife in Early Stages of Divorce Proceeding Not Alimony, Agreement Originally Labeled it Alimony, But Both Sides Crossed that Provision Out – This Guy Is a Lawyer, But His Own Divorce Did Not Get Done Right (But, Then Again, The Cobbler’s Kid Goes Barefoot) (Paul S. Mudrich, pro se, v. Comm., TCM 2017-101 (06/01/17)) ............................................................................................................................ 1—30 §71 New Yorker’s Divorce Decree Confusing as to Whether $10,000 was Alimony – Payer’s Testimony Remarkably Allowed to Fill in the Gaps – Payment Deductible as Alimony – His Testimony: The $10,000 is a Buy Down of Higher Alimony Monthly Payments – Payer Thought If Ex Wife Died, All Payments Stopped (Gary Lee McIntee, pro se, v. Comm., TCS 2017-48 (07/11/17)) ........................................................... 1—31 §§71, 451 $5,568,200 Received in Divorce Settlement Ruled Taxable Alimony – California Law, in Absence of Clarity in Marital Settlement Agreement, Supplied Provision that Payments Would Cease Upon Recipient’s Death – Waive Out of California Law Not Exercised (Maria G. Leslie v. Comm., TCM 2016-171 (09/14/16)) ................................................................................................................................................. 1—34

§213 Medical Expense Deductions ............................................................................................................................. 1—35 §213 Medical Deduction Allowed for Alternative Treatments for Woman with Spinal Disease – Treatments Not Commonly Recognized as Conventional Medical Treatment by a Conventional Medical Caregiver – Methods Termed "Alternative Medicine" by the Polite, But the Less Tolerant Would Characterize the Treatments in Other than Legitimate or Complimentary Terms (Victoria Malev v. Comm., Bench Opinion, Docket No. 1282-16S (03/01/17)) ...................................................................... 1—35 §213 Deep Tissue Massage Therapy Recommended by Doctor to Treat Sever Scoliosis Deductible as Medical Expense (Alan Brooks and Carol Brookes v. Comm., TCM 2017-146 (07/26/17)) .................................................................................................................. 1—37 §35 Refundable Health Coverage Tax Credit (HCTC) Covers 72½% of Qualified Health Insurance Premiums for Eligible Individuals and Qualified Family Members (TIGTA Report Implementation of the Health Coverage Tax Credit Enrollment and Systemic Advance Monthly Payment Process (05/22/17) Ref. No. 2017-40-033) (also: The Health Coverage Tax Credit (HCTC): In Brief (CRS R44392))....................................................................................................................................................... 1—37

Schedule A Taxes ............................................................................................................................................................... 1—38 2017 (or 2018) Tax Reform Banter – What if Deduction for State and Local Taxes Goes Away, Not Just for Itemizers, But for Business, Rental and Investment Activities as Well?...................................................................................................................................... 1—38 §111 Tax Benefit Rule – State Income Tax Refund Not Includable in Year 2’s Income if AMT Negated Deduction in Year 1 – But If Tax Court Case Makes AMT Go Away, Then State Income Tax Refund Taxable in Year 2 (Jagtar Singh Khinda, pro se, v. Comm., TCS 2017-32 (05/11/17)) ............................................................................................ 1—39 §§111, 6662 Self Prepared Handwritten 1040 Blown Out of Water by IRS Computer – AMT, NII and Income from State Income Tax Refund All Conspicuous by Absence – Accuracy Penalty Sticks – Who Needs Tax Prep Software Anyway? (Atef Fahmey Isaac, pro se v. Comm., TCS 2017-55 (07/20/17)) .............................................. 1—39

Home Mortgage Interest .................................................................................................................................................. 1—40 §§316, 163 Sole Owner of C Corp Allowed Home Mortgage Interest Deduction for House Payments His C Corp Made for Him – Since the C Corp’s Payments on His Behalf Were Taxable as Dividends, He Got the Home Mortgage Interest Deduction (Gregory Alan Brown, TCS 2017-24 (04/25/17)) .......................................................................... 1—40

Home Mortgage Interest Points .................................................................................................................................... 1—41 §461(g) Look Before You Leap in Writing Off Home Mortgage Interest Points – Amortization of Points Over Life of Loan Not Available for “Interest Only” Balloon




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Loans – The Life of the Loan is Indefinite, So What Is the Amortization Calculation? There Is No Calculation (Pardeep Singh, pro se, v. Comm., TCS 2017-19 (03/23/17)) ................................................................................................................................................. 1—41

Charitable Contributions ................................................................................................................................................. 1—42 IRS Standard Mileage Rates ................................................................................................................... 1—42 §170(f)(12) What Do You Have to Attach to Your Tax Return When You Give Away a 40 Year Old Airplane to Get a $338,000 Charitable Contribution Deduction? Texas Man Finds Out the Hard Way He Did Not Attach It (Joe Alfred Izen, Jr., pro se, v. Comm., 148 TC No. 5 (03/01/17)) ............................................................................................ 1—43 Contemporaneous Written Acknowledgement from Charity Required for Gift of $250 or More ............................................................................................................................................... 1—43 §170 Charitable Contribution Deduction Disallowed for $50 Payment to “Breast Cancer Angels” – Donor Did Not Prove Payment Exceeded Value of Lunch Received in Exchange (Martin J. and Alisa M. Luczaj v. Comm., TCM 2017-42 (03/08/17)) ............. 1—43 When Payment Made to Charity in Exchange for Consideration, Burden Is On Taxpayer to Show All or Part of Payment is Contribution or Gift ............................................ 1—44 §§162, 62 Unreimbursed Employee Expenses of a Teacher – California High School Teacher Aced Out of Most Deductions Because His Substantiation Fell Short – But, He Could Deduct Football Equipment He Purchased for Disadvantaged Kids He Coached (Martin J. Luczaj and Alisa M. Luczaj v. Comm., TCM 2017-42 (03/08/17)) ................................................................................................................................................. 1—45 §162 School Teacher With Four Cell Phones Allowed to Deduct 40% of Monthly Cell Phone Service for One Phone for Business Use – Cell Phones No Longer Listed Property, So Her Testimony Sufficed (Diana C. Czekalski, pro se, v. Comm., TCS 2016-56 (09/15/16)) ............................................................................................................................... 1—49

Casualty Loss ......................................................................................................................................................................... 1—49 §165 Story About Fire in the Kitchen Believable – But Documentation Fell Short of Proving $17,300 Repair Costs Incurred in Excess of Insurance Proceeds – In the Detail Lies the Heart of the Casualty Loss Deduction (John E. Wainwright v. Comm., TCM 2017-20 (04/25/17)) ..................................................................................................................... 1—49

ACA Silent Returns .............................................................................................................................................................. 1—49 ACA Premium Tax Credit ................................................................................................................................................. 1—50

Premium Tax Credit - Proposed Regs Propose to Modify PTC (CMS Issues Proposed Rule to Increase Patients’ Health Insurance Choices for 2018 (02/15/17)) ........................ 1—50 §36B Health Exchange Marketplace Enrollee Who Received $12,924 Advance Premium Tax Credit Had to Pay It Back – Get Out Your Checkbook (Carol Sue Walker and Theodore Paul Walker, pro sese, v. Comm., TCS 2017-50 (07/12/17)) .......... 1—51 §36B Advance Payments of Premium Assistance Tax Credits Made on Behalf of Dependent Son Income Taxable to Parents – Price You Pay for Claiming Your Kid as a Dependent Includes PTC Recapture (Benjamin J. Gibson, Sr., and Delores B. Gibson, pro sese, v. Comm., TCM 2017-187 (09/25/17)) ............................................................. 1—53

Earned Income Tax Credit ............................................................................................................................................... 1—54 §32 Even in Absence of Records, Part of Hairdresser’s Income Sustained for Earned Income Tax Credit Purposes – Customers Paid Her in Cash and She Issued No Receipts – Court Trimmed Her Back from $17,800 in Earned Income to $10,000 (Rita Lopez, TCS 2017-16 (03/16/17)) .............................................................................................. 1—54 §32 Tax Court Awards Earned Income Tax Credit (EITC) to Washington State Man Who Filed Married Filing Separately Return – Later IRS Nonacquiecsence Declares War (Yosef A. Tsehay, pro se, v. Comm., TCM 2016-200 (11/03/16), IRS Nonacq., AOD 2017-05, 2017-27 IRB 1) .............................................................................................................. 1—55

EITC, ACTC and AOTC Due Diligence .......................................................................................................................... 1—55 §6695 State of Washington CPA Failed to Perform EITC Due Diligence on 14 Tax Clients – At $500 a Pop, $7,000 Penalty Got Pricey – Referral to Director of OPR Stung Quite a Little Bit Too (Abdiwali Suldan Mohamed, pro se, v. Comm., TCS 2017-69 (08/29/17)) ............................................................................................................................... 1—55




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IRS Letter to Tax Preparers (e-news for tax professionals 2017-4) re: EITC Claimed for Household Employees With No W-2 ............................................................................................ 1—57 §32 No EITC If Incarcerated (Including a Stay in a Mental Institution) – Criminal First Sentenced to Prison, Then Transferred to Larned, Kansas State Mental Institution (Kevin Dewitt Skaggs, 148 TC No. 15 (04/26/17)) ................................................ 1—57

American Opportunity Tax Credit (AOTC) ............................................................................................................... 1—57 §25A(i) American Opportunity Credit .............................................................................................. 1—57 §25A Cost of Tools Used in Weekly College Workshop Not Eligible for American Opportunity Credit Unless Paid Directly to School (Raymond Ochoa, pro se, v. Comm., v. Comm., TCS 2017-78 (10/04/17)) ................................................................................... 1—58 §25A American Opportunity Tax Credit for Daughter who Drifted from University to Community College to Canine Clippers Trade School? No – Flunked Half Time Student Test and Did Not Prove Doggie Haircut School was Eligible Educational Institution – Parent Cannot Claim Credit for Child’s Tuition Unless Parent Paid It (Michael Lee Martin and Carol Feather Martin, pro sese, v. Comm., TCS 2017-73 (09/07/17)) ................................................................................................................................................. 1—58 §25A(i) Virginia Woman Entitled to American Opportunity Credit After Her College “Kind of Dropped the Ball” on Form 1098-T – She Proved She Spent the Dough and the Credit Was Legit – It Doesn’t Matter What’s on the 1098-T if the Taxpayer Gets It Right (Angela A. Terrell, pro se, v. Comm., TCM 2016-85 (05/02/16)) ................................................................................................................................................. 1—59 §25 American Opportunity Tax Credit Disallowed in 2012 for Tuition Paid on December 18, 2011 Taxpayer Argued “It Just Seems Kind Of Wrong” – The Cash Method is Usually Your Friend, But Not This Time – The 3 Month Rule Doesn’t Flip Around – Cash Method Timing Doesn’t Bend (Lucas Matthew McCarville, pro se, v. Comm., TCS 2016-14 (04/04/14)) ........................................................................................................ 1—61 §25A Cohan Rule Used to Estimate Tuition Paid to Support American Opportunity Tax Credit (AOTC) – Tax Court Going Berserk With Cohan Rule Lately – AOTC Credit Allowed $350 Tuition Payment Despite Apparent Lack of Cancelled Check or Credit Card Receipt – But Credit for Cost of Computer Shot Down Because Not Required by School (Djamal Mameri, pro se vs. Comm., TCS 2016-47 (08/24/16)) ........ 1—63 §529 Distributions from §529 Plan Taxable Income Unless Proceeds Used For Educational Purposes – Submitting Proof Too Late is Submitting No Proof at All – She Who Sleeps on Her Rights Loses Them (Dora Marie Martinez and Carlos Garcia v. Comm., TCM 2016-182 (09/28/16))............................................................................................... 1—65

Elder Abuse ............................................................................................................................................................................ 1—66 Elder Abuse – Financial – Red Flags .................................................................................................... 1—66 §§61, 102 Is It a Loan? Is It a Gift? Affection, Respect, Admiration, Charity or Like Impulses? No. It’s Elder Abuse. Dementia and Gross Lack of Gentle and Considerate Care Were Clues – For the Rest of Us, What is the Difference Between a Gift or Undue Influence in Eldercare? There is No Detached and Disinterested Generosity in the Presence of Coercion or Undue Influence (Angelina Alhadi, pro se, v. Comm., TCM 2016-74 (04/21/16)) .......................................................................................... 1—67




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Chapter 1

Individual

Disaster Tax Relief and Airport and Airway Extension Act of 2017

Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823, Public Law No. 115-63 (Signed by President on 09/29/17))

H.R. 3823 extends several expiring Federal Aviation Administration programs and authorities through 03/31/18. The bill also amends the Internal Revenue Code to extend through 03/31/18, the expenditure authority for the Airport and Airway Trust Fund and the taxes that finance the fund, including fuel taxes, ticket taxes and taxes related to fractional ownership programs.

H.R. 3823 provides temporary relief by adding or modifying several tax provisions and rules for individuals and businesses in areas affected by Hurricanes Harvey, Irma and Maria, including provisions regarding: loosening restrictions for deductions for personal casualty losses; tax favored early withdrawals and loans from retirement plans, new employment related tax credit of up to $2,400 for qualified wages paid to eligible employees; deductions for charitable contributions; and giving the option of using either current or prior year income for the earned income tax credit and the child tax credit.

Casualty Losses – More Generous Casualty Loss Rules for Hurricane Victims

Current law. Under §165(a), a taxpayer may claim a deduction for any loss sustained during the year and not compensation by insurance or otherwise. Under §165(h), individuals may claim a personal loss from casualty to the extent it:

1. Exceeds $100; and 2. All casualty losses combined (after application of the $100 floor to each) for the tax year exceed 10% of AGI. A personal casualty loss deduction is an itemized deduction. If a disaster occurs in a federally declared disaster area, the taxpayer may elect to claim a casualty loss deduction in the tax year immediately preceding the tax year in which the disaster occurs. §165(i) New law. For any qualifying casualty loss suffered as a result of hurricanes Harvey, Irma or Maria (net disaster loss), the Act removes the 10% of AGI limitation, removes the requirement that the taxpayer itemize to claim the loss and increases the per casualty loss floor for qualified personal casualty losses from $100 to $500. For non-itemizers, the standard deduction is increased by the amount of allowed casualty losses. The portion (and only such portion) of such additionally increased standard deduction is not taxable for AMT purposes. A qualifying casualty loss for these purposes is defined under §165(h)(3)(A) as a “net disaster loss”. A “net disaster loss” is the excess of qualified disaster losses over personal casualty gains. Act §504(b) Retirement Plans and IRAs – New and Expanded Privileges for Hurricane Victims


https://www.congress.gov/bill/115th-congress/house-bill/3823/text



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1. Loosened Retirement Plan Loan Rules Current law. A loan from a retirement plan is treated as a distribution unless certain requirements are met: 1. The loan amount does not exceed the lesser of: a. $50,000; or

b. One half of the present value of the participant’s nonforfeitable accrued benefit under the

plan (but, a loan of up to $10,000 is permitted, even if it exceeds one half the accrued benefit)

(§72(p)(2)(A)); and

2. The loan is required to be repaid within five years (longer if principal residence plan loan)

(§72(p)(2)(B))

New law. Under the Act, a “qualified hurricane distribution” may be made from any IRA or retirement (defined by §402(c)(8)(B)) plan up to $100,000. Act §502(a)(2)(A)

A “qualified hurricane distribution” is:

(i) Any distribution from an eligible retirement plan made on or after August 23, 2017, and before January 1, 2019, to an individual whose principal place of abode on August 23, 2017, is located in the Hurricane Harvey disaster area and who has sustained an economic loss by reason of Hurricane Harvey; (ii) Any distribution (which is not described in clause (i)) from an eligible retirement plan made on or after September 4, 2017, and before January 1, 2019, to an individual whose principal place of abode on September 4, 2017, is located in the Hurricane Irma disaster area and who has sustained an economic loss by reason of Hurricane Irma; or (iii) Any distribution (which is not described in clause (i) or (ii)) from an eligible retirement plan made on or after September 16, 2017, and before January 1, 2019, to an individual whose principal place of abode on September 16, 2017, is located in the Hurricane Maria disaster area and who has sustained an economic loss by reason of Hurricane Maria.

1. Under the Act, a “qualified hurricane distribution” garners the following privileges in connection with retirement plan loans:

a. Increased amount borrowable under §72(p)(2)(A) from $50,000 (or less) to $100,000 (or less). Act §502(c)(1)

b. Removes the “one half of present value” limitation. Act §502(c)(1)

c. Allows a longer repayment term by delaying the due date of the first repayment by one year (and correspondingly adjusting due dates for subsequent repayments). Act §502(c)(2)

2. Loosened recontribution rules to 3 years. A “qualified distribution” may be recontributed at any time during a 3 year period beginning on the day after the distribution. Act §502(a)(3)(B) 3. Loosened recontribution rules for cancelled home purchases. A qualified distribution may be recontributed if the distribution received after February 28, 2017, and before September 21, 2017, and which was to be used to purchase or construct a principal residence in the Hurricane Harvey disaster




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area, the Hurricane Irma disaster area or the Hurricane Maria disaster area, but which was not so purchased or constructed on account of Hurricane Harvey, Hurricane Irma or Hurricane Maria. Act §502(b) 4. Loosened income inclusion rules. For a qualified hurricane distribution, unless the taxpayer elects out, any amount required to be included in gross income for such taxable year shall be so included ratably over the 3 taxable year period beginning with such taxable year. Act §502(a)(5) 5. 20% withholding avoided. Under the Act, a qualifying hurricane distribution is not treated as an eligible rollover distribution (an eligible rollover distribution is generally subject to 20% withholding under §3405(c)(1)(B)). Thus, 20% withholding at the source is avoided. Act §502(a)(6)(A)

6. §72(t) 10% additional tax. Current law. Unless an exception(s) to §72(t) is met, pre-age 59 ½

withdrawals from an IRA or qualified plan result in an additional tax in the amount of 10% of amounts

withdrawn includible in taxable income.

New law. Under the Act, a qualified hurricane distribution is exempt from the 10% §72(t) additional tax

on an early retirement plan withdrawal. Act §502(a)(1)

Charitable Contribution Deductions – Limitations Loosened for Hurricane Victims

Current law. Under §170(b)(1), an itemizing individual may deduct charitable contributions, depending

on the type of property contributed and donee, up to 50%, 30% or 20%. Under §170(b)(2), a C

corporation may deduct charitable contributions up to 10% of its taxable income. Under §170(d), any

amount not so deducted may be carried over, subject to certain ordering rules and limitations, for five years by individuals and C Corps.

New law. For “qualified contributions”, the Act:

1. Suspends temporarily §170(b) percentage of AGI limitations;

2. Provides that such contributions will not be taken into account for purposes of applying the §170(b)

percentage of AGI limitations and the §170(d) five year carryover limitation to other contributions (i.e., these contributions are kept in a different hat);

3. Loosens rules on the treatment of excess contributions; and

4. Excepts qualified contributions from the Pease limitation (overall itemized deduction phaseout at

higher income levels).

5. Is elective. The taxpayer must elect for a disaster relief qualified contribution to get the special

treatment. Act §504

“Qualified contribution” means any charitable contribution (as defined in §170(c)) if -

(A) In general … (i) such contribution - (I) is paid during the period beginning on August 23, 2017, and ending on December 31, 2017, in cash to an organization described in §170(b)(1)(A), and (II) is made for relief efforts in the Hurricane Harvey disaster area, the Hurricane Irma disaster area, or the Hurricane Maria disaster area, (ii) the taxpayer obtains from such organization contemporaneous written acknowledgment (within the meaning of §170(f)(8)) that such contribution was used (or is to be used) for relief qualifying relief efforts, and




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(iii) the taxpayer has elected the application of this subsection with respect to such contribution. (B) Exception. Such term shall not include a contribution by a donor if the contribution is - (i) to an organization described in §509(a)(3), or (ii) for the establishment of a new, or maintenance of an existing, donor advised fund (as defined in §4966(d)(2)). (C) Application of election to partnerships and S corporations. In the case of a partnership or S corporation, the election shall be made separately by each partner or shareholder.

Employee Retention Credit for Employers – New for Hurricane Victims

Old law. Under §38(a), the general business credit (GBC) is comprised of various credits, reported on

Form 3800 and equal to the sum of: 1) current year GBC; 2) GBC carryforwards carried to the year; and

3) GBC carrybacks carried to the year.

New law. The Act provides an all new “employee retention credit” for “eligible employers” affected by

Hurricanes Harvey, Irma and Maria. Eligible employers are those who conducted an active business in the disaster zone as of a specified date (08/23/17 (Harvey), 09/04/17 (Irma) and 09/16/17 (Maria))

and the business was inoperable as a result of damage caused by the hurricane on any day between the

specified date and 01/01/18.

The credit is a GBC equal to 40% of up to $6,000 of “qualified wages” paid to each “eligible

employee”. An “eligible employee” is one whose principal place of employment with the employer was

within a Harvey, Irma or Maria disaster zone in as of the date specified above. The maximum credit is $2,400 per employee.

Example: An employer has two employees. The employer pays employee 1 wages of $4,000. The

employer pays employee 2 wages of $10,000. The credit for employee 1 is $1,600 (i.e., $4,000 x 4). The

credit for employee 2 is $2,400 (i.e., $6,000 x 40%). The total employer retention credit is $4,000.

Under §51(c), qualified wages are paid or incurred by an eligible employer with respect to an eligible

employee on any day as of the specified date above and before 01/01/18 which occurs during the

period:

1. Beginning on the date the employer’s business first became inoperable at the principal place of

employment of the employee immediately before the hurricane; and

2. Ending on the date on which such business has resumed significant operations at such principal place

of employment.

Qualified wages include wages paid whether or not the employee performed services or whether the

employee performs services at another location or the principal place of employment before significant operations have resumed.

An employee cannot be taken into account for more than one hurricane. Under §§51(i), an employer is

not eligible for the credit for an employee considered related to the employer. The credit is apportioned

among commonly controlled businesses. Act §503




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Earned Income Tax Credit (EITC) and Child Tax Credit (CT) – New Option for Hurricane Victims to

Use Either Current or Prior Year Income for EITC and CTC Eligibility

Current law. Under §32, an eligible individual is allowed each year to claim the earned income tax credit

(EITC) in an amount equal to the credit percentage of earned income (the “earned income amount” up to

a ceiling amount). For 2017, the earned income amount is $14,040 for taxpayers with two or more

qualifying children, $10,000 for those with one qualifying child and $6,670 for taxpayers with no

qualifying children. Under §32(c)(2)(A), EITC earned income includes wages, tips, other employee comp

and net earnings from self-employment (less the deduction of one-half of SE tax for the year).

Under §24, an individual may claim a $1,000 child credit (CTC) for each qualifying child he or she can

claim as a dependent. Under §24(c), the child must be under 17 and either a U.S. citizen or resident alien.

Under §24(b), the credit is phased out by $50 for each $1,000 (or portion thereof) of MAGI above

$110,000 for MFJ filers, $75,000 for unmarried individuals and $55,000 for MFS. Under §24(d), if the

CTC exceeds tax liability, a refundable credit is available in the amount of 15% of earned income in excess of a threshold dollar amount.

New law. Under the Act, if the 2017 income of a “qualified individual” is less than such individual’s

earned income for 2016, the individual may elect to substitute 2016 income for 2017 income for purposes of computing the EITC or CTC.

A “qualified individual” means any qualified Hurricane Harvey individual, any qualified Hurricane Irma individual and any qualified Hurricane Maria individual. For Hurricane Harvey, a “qualified individual” is one whose principal place of abode on 08/23/17 was located either in the Hurricane Harvey disaster zone (or in Hurricane Harvey disaster area and such individual was displaced from such principal place of abode by reason of Hurricane Harvey). For Hurricane Irma, a similar definition applies, referencing instead Hurricane Maria, using a 09/04/17 date. For Hurricane Maria, a similar definition applies, referencing instead Hurricane Maria, using a 09/16/17 date. Act §504(c) For a joint return, the above election is available if either spouse files a joint return and the earned income of the taxpayer for the preceding taxable year shall be the sum of the earned income of each spouse for such preceding taxable year. Act §504(c)(5)

Parsonage Allowance for Ministers

§107 Re-Tooled and Re-Loaded Lawsuit Shoots Down Parsonage Allowance Exclusion on

Constitutional Grounds (Freedom From Religion Foundation, et al (Annie Laurie Gaylor, et al), v. Lew, Case No. 16-CV- 215 (D.C. W.D. WI 04/06/16)) (Gaylor v. Mnuchin, 16-cv-215-bbc (WD WI 10/06/17))

On 01/19/17, the Court signed an order granting a motion to intervene filed by Bishop Edward Peecher,

Chicago Embassy Church, Father Patrick Malone, Holy Cross Anglican Church, and the Diocese of Chicago and Mid-America of the Russian Orthodox Church Outside of Russia.

On 10/16/17, the Western District of Wisconsin Federal District Court ruled the §107(2) parsonage

exclusion violates the establishment clause because it lacks a secular purpose or effect, and a reasonable person would view it as an endorsement of religion. It has been indicated an appeal will be filed.

Filing Status




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§6013 Couple Entitled to File Married Filing Jointly Return, Even After Husband Mistakenly

Initially Mistakenly Filed as Single – IRS Opined Husband’s Filing as Single Constituted a Married

Filing Separately Return – Tax Court Rules MFJ Still Available (Fansu Camara and Aminata Jatta, pro

se, v. Comm., 149 TC No. 13 (09/28/17))

Although Tennessee residents Fansu Camara and Aminata Jatta were married during 2012, Fansu

erroneously claimed single filing status on his 2012 Form 1040. IRS changed Fansu’s filing status to

married filing separately. After petitioning this Court, Fansu and Aminita filed a joint 2012 Form 1040.

IRS contended that Fansu’s original 2012 single return was a “separate return” under §6013(b)(2) and married filing jointly was not available.

The Tax Court held the 2012 return that Fansu originally filed, erroneously claiming “single” status, did

not constitute a “separate return” under §6013(b). The court also held Fansu and Aminita were entitled to joint filing status and rates.

Food for thought: The Tax Court tiptoed around six prior TCM cases which had more or less

ruled that filing a return other than MFJ was the filing of a separate return. One commentator

(Bryan Camp, Tax Prof Blog (10/02/17)) suggests as a result “if you really press the precedent, you may find it is much weaker than you think”.

Food for thought: If a taxpayer could file first as single, then later switch to MFJ, does this ability

provide a strategy for unscrupulous gamers to keep their options open? It appears the Camara case cuts a break to the less than sophisticated unsuspecting, but does it open the floodgates for

less than well intended scoundrels?

§6012 MFJ Status Not Available to Husband – His Wife, Though Mentally Ill, Filed MFS Return

Claiming Delusional $350,000 Madoff Loss – Husband Did Not Have Agency (Form 2848) or

Consent to File MFJ (Peter William Moss, pro se, v. Comm., TCM 2017-30 (02/08/17))

Connecticut resident Peter Moss timely filed a 2008 joint income tax return claiming married filing jointly (MFJ) status, personal exemptions for himself and his wife and an $823 overpayment from their previous year’s joint income tax return. Peter’s wife, however, refused to sign the 2008 return. Peter nevertheless filed the return and attached to it a letter stating that his wife is seriously mentally ill, that IRS should disregard all information she sends and that the return included her income for 2008 as well as his. Peter did not attach any power of attorney that would authorize him to act on behalf of his wife. Mrs. Moss never submitted to IRS any consent for Peter to file the 2008 return for her.

Peter believed he served a guardianship function for his wife because a condition of her hospital release in 2006 was that she live with him. To avoid worsening the rift in their relationship caused by her hospitalization, however, Peter did not seek any official status as a conservator, holder of a power of attorney or guardian of his wife.

Mrs. Moss filed a separate 2008 return because she believed she was entitled to a theft loss deduction under the delusion she had lost $350,000 in 2008. She had no investments affected by the Madoff fraud. In her return, Mrs. Moss checked the “Married filing separately” box, reported Social Security and taxable interest income and claimed the Madoff loss.

The filing of a separate return was a significant departure for Mrs. Moss. The 2008 tax year was the only instance, from 1966 to 2011, in which she filed a separate return.


https://mail.google.com/mail/u/0/#sent/15eca31c692db109

https://mail.google.com/mail/u/0/#sent/15eca31c692db109

http://taxprof.typepad.com/taxprof_blog/2017/10/lesson-from-tax-court-when-precedent-is-a-game-of-telephone.html

http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11099



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Generally, both spouses must sign a joint return. A taxpayer may claim married filing jointly status if he and his spouse are legally eligible to file jointly and in fact do so. §§1(a), 6013. As a general rule, both spouses must sign a joint return. §1.6013-1(a)(2). Because Mrs. Moss did not sign the return in issue, it does not comply with the requirements for a joint return.

Two circumstances in which a return may be accepted as jointly filed even though it is signed only by one spouse: Authorized agency and consent. There are, however, two circumstances in which a return may be accepted as jointly filed even though it is signed only by one spouse: 1. When a taxpayer acts as an authorized agent for his or her spouse (§1.6061-1(a)); and 2. When there is sufficient evidence that, despite the lack of a signature, the spouse consented to filing jointly. Estate of Campbell v. Comm., 56 TC 1, 12 (1971); Strong v. Comm., TCM 2001-103

Authorized agency requires Form 2848, other document or IRS approval. When a person is unable to make a return, “the return of such individual shall be made by a duly authorized agent, his committee, guardian, fiduciary or other person charged with the care of the person or property of such individual.” §6012(b)(2). Disease, illness or continuous absence from the U.S. are all reasons for which a person may be unable to make a return. §1.6012-(a)(5)

Even when such a person is a disabled spouse, the “would be” duly authorized agent must comply with the provisions of §1.6012-1(a)(5). §1.6013-1(a)(2). These provisions require that the return be accompanied by: 1) an IRS Form 2848, Power of Attorney and Declaration of Representative, or, a power of attorney authorizing the agent to represent the taxpayer in making, executing, or filing the return; 2) a statement signed by the spouse who is signing the return confirming that the incapacitated spouse consents to the signing of the return; or 3) a request for permission from, and determination made by, the appropriate IRS district director that good cause exists for permitting an agent to submit the return. §1.6012-1(a)(5)

Previous commitment to a hospital and a spouse’s assertion of mental illness aren’t enough. Peter has failed to show that in April 2009 his wife was unable to file a return, and, even if she were unable, that he qualified as her agent when he filed the joint return. Peter contends that his wife could not file a valid return because of her mental illness. However, a person’s previous commitment to a hospital and a spouse’s assertion of mental illness are generally not sufficient to invalidate an individual’s right to file his or her own return.

Peter has not shown that he qualifies as his wife’s agent. Peter had no power of attorney or Form 2848 to attach to the return. Peter did not file a statement confirming that Mrs. Moss consented to the signing of the return. Indeed, he filed a statement that she refused to sign the return. At the time of the filing of the return, it appears no one other than Mrs. Moss had the authority to file a return on her behalf. §1.6012-3(b)(3). Thus, Peter was not her duly authorized agent and could not properly filed a joint return with his wife as her agent.

Consent can be proven by pattern of behavior and actions enabling and consistent with MFJ. A joint return may be found, even without a spouse’s signature, if there is other evidence that the husband and wife intended to file a joint return. Heim v. Comm., 27 TC 270, 273 (1956), aff’d, 251 F.2d 44 (8th Cir. 1958); Strong v. Comm., TCM 2001-103. In Strong, the Court found that such an intent existed when there was a history of the husband’s signing for his wife, the pattern continued even after the taxpayers separated, the wife provided the husband with her Forms W-2 so that he could prepare the joint return and she did not file a separate return until years after the joint return had been filed and accepted.

Mrs. Moss filing own MFS is not consent for MFJ. Mrs. Moss did not intend to file a joint return for the 2008 tax year. She expressly refused to sign the 2008 joint return and filed a timely return of her own.




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Because the evidence shows that Mrs. Moss intended not to file a joint return, the court could not, under this theory, find that Peter filed a joint return.

No exemption for spouse if no joint return and spouse had income. Personal exemptions allowed by §151(b) serve as deductions against income. Where a joint return is filed, a §151(b) exemption is allowed for both the taxpayer and his or her spouse. §1.151-1(b). Where a joint return is not filed, a taxpayer may claim an exemption for his spouse only if “the spouse, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer.” Conversely, where a spouse files a separate return and has his or her own gross income, a taxpayer is not entitled to a personal exemption for the spouse. Von Tersch v. Comm., 47 TC 415, 421 (1967)

Peter did not file a joint return, Mrs. Moss reported Social Security and interest income on her separately filed 2008 return and did in fact receive some income. Peter is therefore not entitled to a personal exemption for his wife for tax year 2008.

Spouses may assign the entirety of a joint return overpayment to one spouse’s separately filed return. Peter’s 2008 return shows that he claimed the full overpayment of $823 from the joint 2007 return. IRS contends that half of the credit is allocable to Peter and half to his wife. Mrs. Moss did not claim any of the overpayment.

Spouses may assign the entirety of a joint return overpayment to the liability shown on one spouse’s separately filed return. §1.6654-2(e)(5)(ii)(A). At the time the notice of deficiency was issued, IRS had not credited Mrs. Moss with any of the 2007 overpayment and had instead issued levies to collect her 2008 tax liability. Accordingly, IRS had not allocated half of the overpayment to Mrs. Moss. Peter was therefore entitled to a credit of the entire 2007 overpayment.

§§2, 7703 No Head of Household Status – Married Filing Separately Applies Instead Where

Spouses Did Not Live Apart at All Times During Last Half of Year (Gregory Alan Brown, pro se, v.

Comm., TCS 2017-24 (04/25/17))

Maryland resident Gregory Brown married Sherrie Brown in December 2011 and they remained married throughout 2012. Mrs. Brown lived in a separate residence for most of 2012 so her children could finish the year without changing schools. Mrs. Brown moved into Gregory’s house late in 2012.

Gregory filed his 2012 Federal income tax return as a head of household. IRS balked and changed it to married filing separately.

To qualify as a head of household, a taxpayer, among other requirements, may not be married at the close of the taxable year. §2(b). However, an individual is not considered married for the purpose of determining head of household filing status if he or she is legally separated from his or her spouse under a decree of divorce, if his or her spouse is a nonresident alien or if he or she lives apart from his or her spouse for the last six months of the taxable year. §§2(b)(3), (c), 7703(b)

Gregory was married throughout 2012, but Mrs. Brown lived with him for at least part of the second half of 2012. Thus, his correct filing status was married filing separately, not head of household.

§6103 Attempted MFJ Return Filed After Divorce Final Not Valid – Ex Wife Maintained Intent

Throughout Divorce Proceeding to File Separately – Filed Own MFS Return Later – She Even Filed Form 14039, Identity Theft Affidavit, After Learning Prior Husband Had Filed MFS (Victor A.

Edwards v. Comm., TCS 2017-52 (07/17/17))







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Ohio residents Victor and Sharon Edwards married in 1986. They adopted two minor children during 1997 and 1998. On June 21, 2013, Victor filed a complaint for divorce in Ohio State court. However, with the exception of two weeks, from the end of June to the middle of July 2013, Victor, Sharon and their children shared a home during 2013.

Although divorce proceedings were ongoing, Victor and Sharon remained married on December 31, 2013. On February 8, 2014, Sharon sent Victor a text proposing to file a joint Federal income tax return for the taxable year 2013 and then to split the resulting refund. They agreed to discuss the possibility of filing a joint return when she returned to their shared home that evening.

On February 12, 2014, Victor filed a joint Federal income tax return (return) for the taxable year 2013 for himself and Sharon. The return was prepared by Karl Harris, Victor’s longtime tax return preparer. Although Mr. Harris had prepared returns for Victor and Sharon for several years, Sharon had never met with or spoken to Mr. Harris.

In prior years, Victor and Sharon followed a course of conduct under which Victor, with his wife’s actual or implied consent, would provide all of the couple’s tax information to Mr. Harris, who would then use it to prepare a return. Sharon did not expressly provide her tax information, such as her Form W-2, for Victor to use in preparing a 2013 return. Instead Victor provided Mr. Harris with a copy of her W-2 that was mailed to their shared residence.

In prior years, Sharon had not throughly reviewed the couple’s tax returns before they were submitted. However, she would sign an authorization for the return to be submitted on her behalf, which Victor would return to Mr. Harris before the return was submitted. Sharon was not provided with a copy of the taxable year 2013 return, and she did not sign the return or any other authorization before Victor had the 2013 return filed.

On the purported joint return, Victor reported wage income of $30,714, of which $26,777 was attributable to Sharon and $3,937 was earned by Victor. IRS processed Victor’s 2013 return and issued Mr. and Sharon a refund check, in March 2014, for $6,240, which Mr. Edwards cashed.

During their marriage, Victor and Sharon had separate bank accounts. During the pendency of their divorce Victor and Sharon were jointly responsible for certain household expenses, and Victor felt that Sharon owed him money because she had not paid her share of these expenses. Victor did not immediately inform Sharon that he had filed the 2013 return or that he had received a refund, and he did not share any of the refund with her.

On April 5, 2014, Sharon sent Victor an additional text message inquiring about whether they should file a joint return for the taxable year 2013. Victor responded that Sharon should “talk to the Judge about it”. On April 15, 2014, Sharon electronically filed Form 4868 to extend her 2013 1040.

Throughout the summer of 2014 attorneys for Victor and Sharon exchanged emails concerning the divorce proceedings. Through the summer Sharon apparently believed that Victor had filed a married filing separately return on his own behalf for 2013 on which he had claimed both of the couple’s children as his dependents.

An Ohio State court entered a divorce decree for Victor and Sharon on September 5, 2014. The divorce decree did not mention their tax status for the 2013 taxable year. Under the divorce decree, both Victor and Sharon maintained control over their respective bank accounts. Victor retained the claimed tax refund for 2013.




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On October 6, 2014, Sharon tried to file a married filing separately return for the 2013 tax year. IRS rejected that return. Sharon wrote a letter to the IRS in which she indicated that she now believed that Victor had filed a return for her for the 2013 tax year. On October 14, 2014, Sharon sent Victor a text asking whether he had filed a return using her Social Security number. Victor responded “you don’t need to file.”

On October 18, 2014, IRS received a Form 1040 from Sharon which reflected a married filing separate status and which claimed both marital children as dependents. On November 20, 2014, IRS informed Sharon that its records showed that she had now submitted two income tax returns for 2013. IRS requested that Sharon explain whether she filed two returns and indicate her filing status. Sharon’ reply indicated that she did not file more than one federal income tax return for 2013, that her filing status was married filing separately and that Victor had used her Social Security number without her knowledge. Sharon provided IRS with a Form 14039, Identity Theft Affidavit.

Because Sharon filed a separate return, IRS determined that Victor’s correct filing status for the taxable year 2013 was married filing separately. Accordingly, IRS removed wages, federal income tax withholding and a personal exemption attributable to Sharon from Victor’s return. IRS also disallowed Victor’s claimed dependency exemptions for the two children, an earned income tax credit and claimed charitable contributions.

§6013(a) permits a husband and wife to file a joint return. Spouses who elect to file a joint return for a tax year are required to compute their tax on the aggregate income of both spouses, and both spouses are jointly and severally liable for all tax due. §6013(d)(3).

Married filing jointly status does not apply to a return unless both spouses intend to make a joint return. Jones v. Comm., 327 F.2d 98, 101 (4th Cir. 1964). Although both spouses are required to sign the joint return, the failure of one spouse to sign does not necessarily negate the intent to file a joint return by the nonsigning spouse. Estate of Campbell v. Comm., 56 TC 1, 12 (1971); §1.6013-1(a)(1)

Whether an income tax return is a joint return or a separate return of the other spouse is a question of fact. The focus of the inquiry is whether Sharon intended to file and be bound by the return in question.

The courts have considered various factors in determining whether a nonsigning spouse intended to file a joint return, including (1) whether the returns were prepared pursuant to an established practice of preparing and filing a joint return, (2) whether the nonsigning spouse failed to object to the filing of a joint return, (3) whether an affirmative act was taken indicating an intention to file other than jointly, (4) whether one spouse entirely relied on the other spouse to file returns, (5) whether the spouse examined returns presented for a signature, (6) whether separate returns were filed, (7) whether the returns included the income and deductions of the nonsigning spouse, and (8) and whether the nonsigning spouse was aware of the contents of the purported returns. Estate of Campbell v. Comm., 56 TC at 12-13

Victor did not carry his burden of showing that he and Sharon agreed to file a joint return for the taxable year 2013. The two did not actually agree to file a joint return for 2013.

The purported 2013 joint return was prepared in a somewhat different manner than had been the case of prior years. Estate of Campbell v. Comm., 56 TC at 12-13 (a spouse intended to file a joint return notwithstanding a lack of her signature where the return was prepared in a similar manner to those of prior years); Boyle v. Comm., TCM 1994-294. While the same tax preparer was employed as in prior years, the preparer interacted only with Victor and relied on information Victor provided. Even if she




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did not throughly review the returns, Sharon had previously at least signed a filing authorization for the returns before they were filed. The lack of any signature by Sharon for the 2013 return is inconsistent with an agreement to file a joint return with Victor for that year. Boyle v. Comm., TCM 1994-294

Several of the subsequent steps taken by Sharon also indicate she did not consent to a joint return or believe that a joint return had been, or was being, filed on her behalf. Sharon was evidently aware of her responsibility to file a return for 2013. Almost two months after Victor filed the purported joint return, Sharon sent a text message to further inquire about the possibility of filing a joint return.

The April 5, 2014, text message and the entire record indicate that Sharon was unaware that Victor had filed a joint return for 2013. Subsequent communications between attorneys for Sharon and Victor indicate that Sharon likely believed that Victor had filed a separate return, on which he claimed their children as dependents.

After their divorce was finalized, Sharon filed her own separate return. Springmann v. Comm., TCM 1987-474 (no joint return was intended where taxpayer filed a separate return after previously expressing willingness to file joint return). Sharon’ course of conduct demonstrates that she did not actually agree to file a joint return with Victor, that she was unaware of the contents of the return filed and that she did not intend to be bound by the return her husband filed. Shea v. Comm., 780 F.2d at 567. Victor’s correct filing status for the taxable year 2013 was married filing separately.

Dependency Exemptions

§§152 No Dependency Exemption for Father With Custody of Child for 150 Days – Did Not Prove

Child’s Mother Did Not Have Child for More Than 150 Days (Adrian Corey Jenkins, TCS 2017-22 (04/03/17))

- It’s not enough to prove how many days you had - Must also prove other parent did not have more

§152 Uncle of Niece Who Lived With Him Entitled to Dependency Exemption, EITC, Child Tax

Credit and Head of Household Status – Child’s AWOL Mother Sent a Few Bucks Occasionally

(Raymond Ochoa, pro se, v. Comm., v. Comm., TCS 2017-78 (10/04/17))

California residents Raymond Ochoa and Gloria Mada are the uncle and grandmother of Hanna. In 2013, all three lived in an apartment in Pasadena, California while Hanna’s mother, Darlene Ochoa, resided in Washington, D.C. Hanna attended public school in the Pasadena Unified School District (school district).

Gloria paid approximately $700 to $800 monthly to rent the apartment and the monthly utility bills. Raymond reimbursed Gloria for $500 of the rent and for the entire cost of the utilities each month. Additionally, Raymond paid much if not all of the other living expenses for himself, Gloria and Hanna. Hanna’s mother occasionally sent money to Gloria and/or Raymond to help defray Hanna’s living expenses. Gloria’s only source of income was $889 of Social Security a month.

Qualifying child test under §152(c). Who is entitled to the dependency exemption deduction and certain credits – Raymond, Gloria or Hanna’s momma?

Under §152(c), an individual may be treated as the qualifying child of a taxpayer if the individual:






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1. Is a child of the taxpayer or a descendant of such a child; or a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of such a relative; 2. Has the same principal place of abode as the taxpayer for more than one-half of such taxable year; 3. Meets certain age requirements; and 4. Has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins.

Niece did not contribute more than half of her support. It matters not how much support a child receives from others so long as the child did not provide more than one half of his or her own support. Hanna did not contribute more than one half of her own support in 2013.

Credible testimony aced out school records to determine whether Hanna’s momma lived with her. IRS contended Hanna may not be treated as Raymond’s qualifying child because Hanna did not reside with Raymond during 2013. Relying entirely upon Hanna’s records at the school district, IRS argues that Hanna and her mother resided in the same household during 2013 and that the household did not include Raymond for most of the year. However, Raymond and Gloria credibly testified that they, along with Hanna, shared the same residence during 2013 and Hannah’s mother did not live with them for most of the year. Their testimonies were more persuasive than the inference IRS drew from school district records.

Tiebreaker rule breaks logjam up if parties reside at same residence. Even if Ms. Ochoa and Hanna did share the same principal residence for more than one half of 2013, that fact would not necessarily preclude a finding that Hanna was Raymond’s qualifying child because of the tiebreaker rule of §152(c)(4)(A).

Dependency exemption goes to taxpayer with higher AGI. The evidence shows that for 2013 Hanna fit within the definition of a qualifying child within the meaning of §152(c)(1) with respect to Raymond as well as Gloria. That being so, a tiebreaker rule establishes which of them may treat Hanna as a qualifying child for 2013. Under that rule, Hanna is treated as the qualifying child of the taxpayer with the higher adjusted gross income for the tax year in question. §152(c)(4)(A)(ii)

Raymond’s adjusted gross income (AGI) for 2013 as shown on his return was $21,563. Gloria’s sole income was the $889 of Social Security income a month. Since Raymond had the higher AGI, Hanna is his qualifying child for purposes of the dependency exemption deduction, earned income tax credit, child tax credit and additional child tax credit. §§152(c)(4)(A), 24(c)(1), 32(c)(3)

Raymond entitled to head of household filing status because Hanna is his qualifying child and he pays more than half of household expenses. §2(b) provides that a head of household includes an unmarried individual if the individual maintains a home which is the principal place of abode, for at least one-half of the year, for either a qualifying child as defined under §152(c) or any other person who is the individual’s dependent under §151.

“Costs of maintaining a household” include some expenses, but not others. An individual will be considered to maintain a household only if the individual pays more than one-half of the expenses associated with the household. §1.2-2(d). The expenses of maintaining a household include property taxes, mortgage interest, rent, utility charges, upkeep and repairs, property insurance and food consumed on the premises. Such expenses do not include the cost of clothing, education, medical treatment, vacations, life insurance and transportation.

Payment of most of the rent and utilities was enough. Raymond established that he paid most of the rent and utilities for the apartment that was the principal abode for himself, Gloria and Hanna during




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2013. Ms. Ochoa also contributed to the maintenance of the household during 2013, but the evidence is insufficient to support a finding that whatever support she provided when added to the support provided by Gloria, exceeded the support provided by Raymond. Consequently, Raymond qualifies as a head of household for 2013.

Loan vs. Salary

§61 $2.2 Million Drawn from Father’s C Corp Was Income, Not Loans – “Eight Factor” Test to

Establish a Loan Badly Flunked – This Case Shows How to Set It Up the Wrong Way (Caiping Zang

and Tao Liu v. Comm., TCM 2017-55 (04/03/17))

Husband and wife Caiping Zang and Tao Liu moved from China to the United States in 2002. During 2006-2008, Zang and Liu were employees of Longyuan, a State of Washington C Corp with the primary business activity of the import and export of seafood products.

Longyuan was a wholly owned subsidiary of Qingdao Jiayuan Group Co., Ltd. (Qingdao), a Chinese company. They moved to the United States at the direction of Qingdao’s management to manage Longyuan. Zang’s father was 96% owner of Qingdao. Zang and Liu did not either individually or jointly own an interest in Longyuan or Qingdao.

The question is whether the $2,275,000 (i.e., $1,275,000, $870,000, and $130,000) Zang and Liu received from Longyuan USA Seafood Co. (Longyuan) in 2006-2008 were bona fide loans to Zang and Liu or, instead, income that Zang and Liu improperly failed to report for the tax years in issue.

Zang’s father knew of the additional checks that Zang and Liu issued themselves and the cash withdrawals they made “authorized” Zang and Liu to withdraw these amounts for their personal use from Longyuan’s corporate accounts. According to Zang and Liu, they used most of these checks and cash withdrawals for gambling at casinos. For the tax years in issue Zang and Liu’s total gambling losses exceeded their total winnings.

Purported Loans From Longyuan. Zang and Liu contend that the additional checks they received were not for wages, rent, or reimbursements, and the cash withdrawals they made from Longyuan’s corporate accounts during the tax years in issue were loans from the company and that those amounts should not be included in their gross income.

Loan proceeds are not taxable income. The proceeds of a bona fide loan are not includible in gross income because the receipt of money is offset by a corresponding obligation to repay. Comm. v. Tufts, 461 U.S. at 307. For a bona fide loan to exist the parties to the transaction must have had an actual, good-faith intent to establish a debtor-creditor relationship at the time the funds were advanced. Beaver v. Comm., 55 TC 85, 91 (1970). An intent to establish a debtor-creditor relationship exists if the debtor intends to repay the loan and the creditor intends to enforce the repayment. Fisher v. Comm., 54 TC 905, 909-910 (1970)

Objective factors to determine parties’ intent and whether bona fide loan. No single factor is dispositive. Welch v. Comm., 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g TCM 1998-121. The following factors determine whether the additional checks and cash withdrawals that Zang and Liu received were loans:

1. The ability of the borrower to repay; 2. The existence or nonexistence of a debt instrument; 3. Security, interest, a fixed repayment debt, and a repayment schedule;






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4. How the parties’ records and conduct reflect the transaction; 5. Whether the borrower has made repayments; 6. Whether the lender had demanded repayment; 7. The likelihood that the loans were disguised compensation for services; and 8. The testimony of the purported borrower and lender.

Zang and Liu badly flunked most of the eight factors:

1. The ability of borrower to repay. The parties’ lack of any intent that the funds be repaid after they were advanced suggests that the parties did not intend a bona fide loan. Comm. v. Makransky, 321 F.2d 598, 600 (3d Cir. 1963), aff’g 36 TC 446(1961). Courts assess the ability to repay by whether there was “a reasonable expectation of repayment in light of the economic realities of the situation.” Fisher v. Comm., 54 TC at 910

On their joint 1040s for 2006-2008, Zang and Liu reported combined wage income of $132,000 each year and rental income of $21,000, $38,451, and $68,760. Their gambling losses equaled or exceeded their gambling winnings for those years. Zang and Liu assert they borrowed $1,274,091, $870,672, and $129,506 during those tax years, a total of more than $2.2 million over that period. They could not have reasonably expected to be able to repay those amounts on the basis of their regular sources of income.

They assert that their ability to repay was based predominantly on the equity in their personal residence and rental property. When they sold the Bellevue property in October 2015, they obtained proceeds of $165,000, which they testified they paid to Longyuan, presumably as payment on the Qingdao note. This amount hardly exceeded the $160,000 that Zang and Liu purportedly borrowed from Longyuan to purchase the Bellevue property and represented less than 10% of the amount due on the Qingdao note.

2. Existence or nonexistence of debt instrument. No contemporaneous promissory notes were drafted to memorialize the purported loans that Zang and Liu received from Longyuan. Zang and Liu executed the Qingdao note in July 2010, 4-1/2 years after their first purported borrowing and after the start of the IRS exam of their joint tax returns for the tax years in issue. This lack of contemporaneous promissory notes weighs against that the parties intended bona fide loans.

3. Security, interest, a fixed repayment debt and a repayment schedule. Interest and a fixed schedule for repayment are characteristics of a true debtor-creditor relationship. Frierdich v. Comm., 925 F.2d at 183-184. The Qingdao note provides for no interest rate and no fixed schedule for repayment. The Qingdao note identifies the proceeds of the sales of the Newcastle and Bellevue properties as the primary means of repayment, and Zang and Liu assert that “the parties viewed this provision as a security interest in the properties.” Those proceeds would cover more than a small amount of the purported debt shown on the Qingdao note.

4. How the parties' records and conduct reflect the transaction. The parties’ conduct and what few records they kept of the transactions suggest there was no intent for Longyuan to make bona fide loans to Zang and Liu when the funds were advanced. Zang and Liu have not established that they were authorized to lend themselves funds from Longyuan’s corporate accounts for gambling or any other personal uses.

Zang and Liu contend that the parties’ failure to observe “formalities” such as promissory notes, interest rates, and fixed repayment schedules, is explained by “the relationship between father and son” as well as the parties’ “ethnic Chinese culture”, which they contend regards promissory notes “as unnecessary”. However, Zang and Liu insisted that Zang’s father execute promissory notes for amounts that he




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withdrew from Longyuan’s corporate accounts in 2008. Allegedly they drafted these documents in order to keep a formal record of the transactions “for bookkeeping purposes.”

Zang and Liu’s contention that they were ignorant of the need for formalities in connection with their purported borrowing is undermined by the credible testimony of their CPA The CPA testified that “every time” she met with Zang and Liu during the tax years in issue she expressed concern about the large amounts being withdrawn from Longyuan’s corporate accounts and she advised Zang and Liu to begin “taking care of it.” The CPA testified that she advised Zang and Liu to “have a payment schedule so the company can still support itself”. Zang and Liu repeatedly ignored the CPA’s advice during the tax years in issue and ultimately took no action to “take care of” their purported debts to the company until after the start of the IRS examination.

The way the purported loans were reflected on Longyuan’s corporate tax returns also evidences a lack of intent to establish a genuine debtor-creditor relationship with Zang and Liu. The CPA testified she did not “feel comfortable” with Zang and Liu’s representations that they had the authority to lend themselves such large sums of money from Longyuan, a company to which Zang and Liu owed a fiduciary duty as officers. The CPA testified that Longyuan could not afford to extend loans of that magnitude during the tax years in issue. In order to avoid reporting the withdrawals as loans to Zang and Liu, the CPA reported Zang and Liu’s withdrawals as decreases in Longyuan’s account payable to Qingdao, which she testified was an attempt to “directly link tem to the China company.”

Zang and Liu’ conduct following the start of the IRS examination suggests an effort to cover up their previous intent with respect to the amounts that they withdrew from the corporate accounts for gambling. Liu testified that she altered Longyuan’s canceled checks and the company’s QuickBooks records before providing them to IRS’s agent “[b]ecause [she] wanted to let them know it’s actually money we borrowed from the company.” Zang and Liu’s alterations of the business records were attempts to mislead rather than clarify. Zang and Liu’s execution of the Qingdao note in July 2010 was a belated attempt to create documentary evidence of a debtor-creditor relationship where previously none existed.

5. Whether borrower has made repayment. Zang and Liu provided evidence of two cash deposits made into Longyuan’s corporate account at U.S. Bank in April and May of 2006 for $6,000 and $1,000, respectively. Zang’s father’s wife testified that she made these deposits and that they were to “pay back the loans we borrowed.” These cash deposit slips are Zang and Liu’s only evidence of any payments that they made into Longyuan’s corporate accounts.

Zang and Liu testified that they began making payments to Longyuan in December 2010 and that the payments were “to pay the company back for the loans.” Payments Zang and Liu made starting in 2010 do not show that Zang and Liu intended a bona fide debtor-creditor relationship to exist at the time that they received the unreported funds from Longyuan.

6. Whether lender had demanded repayment. Zang and Liu were the sole executive officers of Longyuan. On brief Zang and Liu assert that Zang had to discuss the matter of the purported loans with Qingdao’s management and that Qingdao’s management has requested information about Zang and Liu’s plans to repay. Requesting information about plans to repay is not a demand for repayment. Zang and Liu presented no evidence that Longyuan, Qingdao, or Zang’s father ever made demands on Zang and Liu to repay any checks issued or cash withdrawals made from Longyuan’s corporate accounts.

7. Likelihood loans were disguised compensation for services. Zang and Liu received numerous checks from Longyuan for “salary” during the tax years in issue. IRS does not assert that the additional unreported check payments and cash withdrawals that Zang and Liu received were payments to




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compensate Zang and Liu for their services to the company. The payments were not disguised compensation for services.

8. The testimony of purported borrower and lender. Zang and Liu did not testify as to how and when they planned to make repayment. Zang and Liu testified generally that they had the authority to make the purported loans from Longyuan to themselves, but they also testified that frequently Zang’s father would not give his authorization until after the funds had already been withdrawn.

Zang’s father did not testify on behalf of Qingdao. No other person familiar with Qingdao’s business testified about whether Zang and Liu had the authority to make loans to themselves from Longyuan for personal purposes or whether Qingdao intended to establish a debtor-creditor relationship with Zang and Liu at the time that Zang and Liu made the withdrawals from Longyuan’s corporate accounts.

Zang and Liu testified they wrote numerous checks and made numerous cash withdrawals from Longyuan’s corporate accounts at the direction of Zang’s father, who took the money for his own gambling. Zang and Liu contend that a significant portion of the unreported checks and cash withdrawals that IRS determined were income to them for the tax years in issue were actually loans to Zang’s father and not amounts received by them. Zang and Liu failed to corroborate their testimony to this effect with any convincing evidence.

Conclusion. Zang and Liu did not in good faith intend to repay the purportedly borrowed amounts at the time that they received them, and neither Longyuan nor Qingdao intended to enforce repayment. Because there was no genuine intent at that time to establish a debtor-creditor relationship between the parties, the additional checks issued and the cash withdrawals made from Longyuan’s corporate accounts during the tax years in issue were not bona fide loans to Zang and Liu and should be included in their income.

§§61, 162 $146,500 Transferred from Medical Center to Vascular Physician as Part of New

Physician Recruitment Agreement Constituted a Loan – Loan Repayments Not Income Tax

Deductible (Ellis J. Salloum and Mary Virginia H. Salloum v. Comm., TCM 2017-127 (06/29/17))

Does the $146,500 that Centerpoint Medical Center of Independence, LLC d.b.a. Centerpoint Medical Center, transferred to Ellis J. Salloum during 2009 constitute a loan? The court held it indeed did constitute a loan.

Centerpoint Medical Center of Independence, LLC (CMC), was engaged in recruiting Salloum to join their medical practice as a vascular surgeon. CMC’s recruiting efforts were successful. On April 23, 2009, CMC and Salloum entered into an agreement pursuant to a document titled “PHYSICIAN RECRUITING AGREEMENT” that comprised several documents, including a document titled “RECRUITING AGREEMENT”.

CMC and Salloum agreed in the physician’s recruiting agreement that:

1. Salloum was to join CMC’s medical practice in Independence, Missouri, for a period of at least 36 months during which he was to engage in the private practice of medicine as a vascular surgeon; 2. Salloum was to work in CMC’s medical practice as an independent contractor; and 3. CMC was to loan to Salloum $146,500 to be advanced in monthly installments over a period of six months and that loan was to be evidenced by a promissory note.


T.C.%20Memo.%202017-127%20UNITED%20STATES%20TAX%20COURT%20ELLIS%20J.%20SALLOUM%20AND%20MARY%20VIRGINIA%20H.%20SALLOUM,%20Petitioners%20v.%20COMMISSIONER%20OF%20INTERNAL%20REVENUE,%20Respondent%20Docket%20No.%2017709-15.%20Filed%20June%2029,%202017.



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One of the documents that is part of the physician’s recruiting agreement was titled “COMPENSATION GUARANTEE WITH FORGIVENESS”. That document incorporated by reference and had attached to it another document titled “PROMISSORY NOTE”.

Salloum not only signed the compensation guarantee with forgiveness agreement, he also signed the promissory note. The recruiting agreement, the compensation guarantee with forgiveness agreement, and the promissory note set forth the agreements of CMC and Salloum with respect to the $146,500 that CMC agreed to loan to Salloum.

The recruiting agreement provided in pertinent part that Salloum “agrees to engage in the private practice of medicine as a/an Vascular Surgeon in the Community on a full-time permanent basis for at least thirty-six (36) months after Physician [Salloum] commences said private practice of medicine”. The recruiting agreement further provided in pertinent part that CMC was to report in Form 1099-MISC any compensation that Salloum received, regardless of whether he received cash compensation from CMC or compensation from CMC as a result of the “forgiveness of amounts owed” by Salloum to CMC.

The compensation guarantee with forgiveness agreement and the promissory note provided in pertinent part that Salloum was obligated to repay to CMC the $146,500 that it agreed to, and did, loan to him.

Pursuant to the physician’s recruiting agreement, in particular the compensation guarantee with forgiveness agreement and the promissory note that were part of the physician’s recruiting agreement, in 2009, during the first six months of Salloum’s employment with CMC, CMC loaned $146,500 to him. Salloum did not include the $146,500 loan in gross income for Salloums’ taxable year 2009, and thus that amount was not taxed on disbursement to him during that year.

During 2009, CMC paid Salloum total nonemployee compensation of $4,876 and reported that nonemployee compensation in Form 1099-MISC that it issued to him for that year. CMC did not include the $146,500 loan in Form 1099-MISC or in another information return that it issued to Salloum for his taxable year 2009.

During 2010, CMC paid Salloum total nonemployee compensation of $53,414 and reported that nonemployee compensation in Form 1099-MISC that it issued to him for that year.

In February 2011, Salloum terminated his employment with CMC. During 2011 and 2012, CMC did not pay Salloum any nonemployee compensation. CMC did not issue to Salloum Form 1099-MISC for his taxable years 2011 or 2012.

During 2012, Salloum made payments to CMC totaling $46,883.54 (Salloum’s repayments) in repayment of the remaining balance of the $146,500 that CMC had loaned to him in 2009.

On Form 1040 2012 Schedule C, Salloums claimed Salloum’s repayments of $46,883.54 as “Other expenses” (claimed 2012 Schedule C repayment expenses).

A taxpayer is not entitled to deduct the repayment of a loan. Brenner v. Comm., 62 TC 878, 883 (1974). Consequently, Salloums do not dispute that if we were to find that the $146,500 that CMC transferred to Salloum during 2009 constitutes a loan, they would not be entitled to the claimed 2012 Schedule C repayment expenses of $46,883.54. They do dispute, however, IRS’s position that the $146,500 in question constitutes a loan.




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The determination of whether a transfer of funds constitutes a loan is a question of fact. Fisher v. Comm., 54 TC 905, 909 (1970). In order for a transfer of funds to constitute a loan, at the time the funds are transferred there must be an unconditional obligation (i.e., an obligation that is not subject to a condition precedent) on the part of the transferee to repay, and an unconditional intention on the part of the transferor to secure repayment of, the funds. Haag v. Comm., 88 TC 604, 616 (1987), aff’d 855 F.2d 855 (8th Cir. 1988)

Whether a transfer of funds constitutes a loan may be inferred from factors surrounding the transfer, including the existence of a debt instrument, the existence of a written loan agreement, the provision of collateral securing the purported loan, the accrual of interest on the purported loan, the solvency of the purported borrower at the time of the purported loan, the treatment of the transferred funds as a loan by the purported lender and the purported borrower, a demand for repayment of the transferred funds and the repayment of the transferred funds. Haag v. Comm., 88 TC at 616 n.6

Various factors surrounding the transfer during 2009 by CMC to Salloum of $146,500 indicate that that transfer of those funds constitutes a loan, including the following:

1. Salloum executed a promissory note in which he agreed to repay to CMC all amounts that CMC transferred to him and that the compensation guarantee with forgiveness agreement referred to as the “Loan Repayment Amount” (i.e., $146,500); 2. There was a loan agreement with respect to CMC’s transfer to Salloum of the $146,500 in question that comprised the recruiting agreement, the compensation guarantee with forgiveness agreement, and the promissory note; 3. Salloum agreed to pay interest on the $146,500 he received from CMC at the rate specified in that note; 4. Salloum agreed to secure repayment of the $146,500 loan and the interest thereon by granting CMC a security interest in all accounts receivable of his private medical practice; 5. Salloum had the ability to repay the $146,500 that CMC transferred to him; 6. Salloum in fact repaid the $146,500; and 7. Salloum and CMC treated the $146,500 that CMC transferred to Salloum as a loan in that CMC did not include the $146,500 loan in Form 1099-MISC or in any other information return that it issued to Salloum for his taxable year 2009 and Salloum did not include the $146,500 in gross income for Salloums’ taxable year 2009.

Salloum had an unconditional obligation to repay to CMC the $146,500 that it transferred to him. That obligation of Salloum was, however, subject to a condition subsequent. That is to say, if Salloum worked in CMC’s medical practice for at least six months, CMC agreed “to forgive and cancel one thirtieth (1/30th) of Physician’s Loan Repayment Amount [$146,500] for each calendar month after the end of the Guarantee Period [six months] that Physician [Salloum] (1) remains in the full-time practice of medicine in the Community and geographic area served by Hospital, (2) maintains Medical Staff membership and privileges in good standing at Hospital, and (3) remains available for emergency room coverage for patients of Hospital’s emergency room. Amounts forgiven, if any, (as well as any imputed income as required by law) will be reported on Form 1099 as prescribed by the IRS. Amounts paid in error to the physician will not be subject to forgiveness.”

Salloums failed to carry their burden to prove the $146,500 that CMC transferred to Salloum during 2009 was not a loan. Thus, the loan repayment of $46,883.54 is not deductible on Schedule C.

Compare: One way of looking at the CMC/Salloum arrangement is that CMC prevailed in avoiding employment taxable compensation characterization of the $146,500 loan made to Salloum.




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It is interesting to compare Salloum above to the Vancouver Clinic case below.

§§61, 3401, 3402, 3101, 3111, 3301 Recruiting “Loans” to Attract and Retain New Hire

Physicians Deemed at Its Source to be Wages – U.S. District Court in Washington State Thought

Purpose was Compensation (The Vancouver Clinic, Inc. v. U.S., DC WD WA (04/09/13))

The Vancouver Clinic, Inc. (“Clinic”) is a Washington state professional service corporation that provides medical treatment in a variety of specialties at locations in southwest Washington. During 2007-2009, the Clinic entered into agreements, each entitled an “Associate Physician Loan Agreement,” with newly hired physicians (“Agreement”).

The terms of each Agreement were substantially similar, with the exceptions being the identities of the respective physicians and the amounts advanced by the Clinic to the respective physicians.

The purpose of each of the Agreements is to facilitate the Clinic’s physician recruitment and retention. To accomplish this goal, the Agreement requires the newly hired physician to work for the Clinic for a period of five years, in exchange for two advances of funds to the physician during the physician’s first and second years of employment. During the years in question, each advance ranged from $12,000 to $35,000, depending on the physician’s specialty and the difficulty of recruiting that physician. The Agreement provides that the physicians would only have to repay the advances if they broke their contractual promise to remain employed by the Clinic for five years. Under the terms of the Agreement, the advances accrue interest at the prime rate over the five year term of the Agreement. However, physicians are not required to pay interest over the term of the Agreement, and, as long as they continue working at the Clinic, are not required to repay anything at all.

During the course of recruitment, Clinic presented each physician with a copy of the Agreement. The Clinic did not negotiate the terms of the Agreement with new physicians; instead, the Agreement was presented during the course of recruitment alongside the physician’s other employment paperwork. The Clinic did not conduct a financial background investigation or credit check to evaluate the creditworthiness of physicians before advancing funds under the Agreement. Physicians were free to accept or reject the Agreement and some did reject the Agreement. At the time the Clinic entered into the Agreements with the physicians, the Clinic intended to retain the physicians as employees for at least five years. Similarly, when they signed the Agreement, the physicians intended to work at the Clinic for at least five years.

During 2007, the Clinic advanced the aggregate sum of $663,500 to 44 physicians. During 2008, the Clinic advanced the aggregate sum of $482,000 to 35 physicians. During 2009, the Clinic advanced the aggregate sum of $441,674 to 34 physicians.

The Clinic anticipates that by the end of 2013, it will have forgiven 74% of the funds advanced in 2007, 83% of the funds advanced in 2008, and 97% of the funds advanced in 2009. When the Clinic made advances under the Agreement, it did not withhold income or payroll tax, or report the payments on a Form W-2. Rather, the Clinic’s practice was to report income to the physician on a Form 1099 at the time of “forgiveness” under the Agreement.

IRS assessed against the Clinic withholding and FICA taxes (Form 941 taxes), together with interest, in the total amount of $626,745. On or about January 25, 2011, the Clinic paid the Form 941 taxes together with the interest attributable thereto, for each of the tax periods, in the total amount of $626,745.

If an advance from employer to employee is compensation for services, then the employer must withhold the appropriate employment and income taxes and report the payments to the employee on a


http://cases.justia.com/federal/district-courts/washington/wawdce/3:2012cv05016/181221/72/0.pdf?ts=1428927839



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Form W-2. §61(a)(1) (including in gross income all “compensation for services”); §3401 (defining “wages” as “all remuneration for services performed by an employee for his employer”); §3402 (requiring employers to deduct and withhold prescribed amounts from wages); §3101 (imposing employment tax on employees’ wages); §3111 (imposing employment tax on employer’s payment of wages). If, on the other hand, the advance is a loan, then there is no withholding, and the payments are not reported as income to the employee.

The law has developed one principle for determining whether a transaction is a loan for tax purposes. For a transaction to constitute a bona fide loan, there must be an unconditional promise to repay at the time the funds are advanced. Saunders v. Comm., 720 F.2d 871, 873-874 (5th Cir. 1983) (finding the presence of an “exceedingly generous forgiveness” provision to be evidence that a transaction was not a loan)

That dictates the second question: Whether the parties actually intend for the advance to be repaid at the time that it is made. A transaction is not a loan if the parties do not intend repayment at the time it is entered into. Beaver, 55 TC at 91

Intent is a question of fact. Determining the intent of the parties is a factual question that requires examining the facts and circumstances surrounding the exchange. Haber v. Comm., 52 TC 255, 266 (1969). The judicial ascertainment of subjective intent requires the Court to look beyond the parties’ testimony and examine all of the facts and circumstances surrounding the arrangement between the parties. Fisher v. Comm., 54 TC 905, 910 (1970). Courts consider “a number of other factors as relevant in assessing whether a transaction is a true loan.” Welch, 204 F.3d at 1230. This list of factors considered is “non-exclusive” and “no single factor is dispositive”. Rather, the list forms “a general basis upon which courts may analyze a transaction.” Goldstein v. Comm., 40 TCM. (CCH) 752 (1980)

The Court’s logic: Performance between the parties and the Agreement on its terms strongly suggest that the parties did not actually intend repayment. In this case, the performance between the parties and the Agreement on its terms strongly suggest that the parties did not actually intend repayment. The physicians expected to fulfill their promise to work at the Clinic for five years, and, as a result, the advances would be forgiven. The name the parties gave the Agreement is not persuasive, nor is it dispositive. The Agreements provided physicians with up front advances as an inducement to get the physicians to remain working for five years. The Agreement penalized physicians who departed early by making them repay under a provision that functioned like a liquidated damages clause for the physician’s breach of his or her promise to remain employed. Employee retention was what the Clinic wanted to achieve through the Agreement: the Clinic wanted to reap the benefits of the productive years of the physician’s tenure in years three, four, and five, while at the same time giving the physicians much needed funds in the early years of employment when they were not as valuable to the Clinic. If the physicians did not stay, then the Clinic wanted to get that money back.

Expectations of parties, no fixed repayment schedule and no “reasonable prospect” of repayment indicated compensation. The expectation of the parties at the time they entered into the Agreement was that the physicians would serve their time for five years at a minimum. They would not repay any loan because they would fulfill their obligation for five years. It is only in the exceptional case that anyone would repay the advances. That has to be the controlling expectation or the Agreement would look totally different than the deal consummated by the parties. The parties’ expectation, their intent, was that the loan would be forgiven, and there was no fixed schedule for repayment at the time that the agreement was signed. Moreover, the “borrower” did not have a reasonable prospect of repaying in the vast majority of those circumstances.




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The cases cited above compel just one conclusion: advances under the Agreement were compensation for services. The primary purpose of the Agreement was to offer an incentive for physicians to remain with the Clinic for five years. The Clinic adopted a commonsense solution to a common problem. Examined under a microscope, it both appears and is a part of the Clinic’s compensation package. The advances were wages for services, required to be recognized as compensation. As a result, the Clinic was required to withhold the appropriate employment and income taxes from the advances and report the advances to the physicians on a Form W-2 in the tax period in which the payments were received.

Reporting Inconsistent Positions

§§6221-6234 (TEFRA) and 6662 IRS Could Assert and Tax Court Could Uphold Negligence

Penalty Against Partner Who Failed to Report Partnership K-1 Income on Personal Return and Did Not File Notice of Inconsistent Treatment (Bernard P. Malone and Mary Ellen Malone v. Comm.,

148 TC No. 16 (05/01/17)

Disability Income

§86 Social Security Disability Benefits are Taxable Income, Even if Recipient Must Pay Them

Back Later – Income Not Reduced By Amount of Repayment Unless Repayment Made in Same

Year as Receipt (William A. Alexander, Jr. and Diane C. Alexander, pro sese, v. Comm., TCS 2017-23

(04/10/17))

Coloradoan William Alexander is a former attorney who practiced law in the fields of workers’ compensation and Social Security disability matters for approximately 35 years. He considers himself an expert in these fields. In 2011, Mr. Alexander ceased practicing law because (1) he was suffering from serious medical problems and (2) the State of Colorado had suspended him from the practice of law. On May 8, 2012, Mr. Alexander was permanently disbarred from the practice of law.

Although he was working behind the scenes for another attorney, Steven Mullens, Mr. Alexander received $40,956 in Social Security disability benefits in 2012. The disability checks were deposited into the Alexanders’ joint bank account. The Social Security Administration (SSA) issued a Form 1099-G, Certain Government Payments, documenting these disability benefit payments, but the Alexanders do not remember receiving this form.

§86 requires the inclusion in gross income of up to 85% of Social Security benefits, including disability benefits, received during the taxable year. §86(a), (d); Reimels v. Comm., 123 TC 245, 247 (2004), aff’d, 436 F.3d 344 (2d Cir. 2006). The Alexanders concede that Mr. Alexander received $40,956 in Social Security disability benefits, and they do not dispute IRS’s determination that, because of the Alexanders’ other income, 85% of Mr. Alexander’s Social Security benefits is taxable. §86(a)(2)(B). Thus, the Alexanders concede that $34,813 of Mr. Alexander’s Social Security disability benefits constitutes taxable income and that they owe tax as IRS determined.

The Alexanders argue that if the Court were to find that the payments that Mr. Alexander received from Steven Mullins constituted taxable income (which indeed the court ruled they were) (William had tried to argue amounts he received for working was a gift), Mr. Alexander would be obligated to repay to SSA the amounts he received. Consequently, the Alexanders seek an equitable adjustment to Mr. Alexander’s taxable Social Security disability payments.

§86(d)(2)(A) provides for Social Security benefit income to be reduced for repayments during the same tax year as the benefits were received:



http://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=11181

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