The proceeds of criminal activities are taxable income. Money that is embezzled from an employer is taxable to the embezzling employee. But what about money transferred between friends with the agreement that one of them will invest the funds, but he instead uses the funds personally and in doing so did not violate a criminal… Continue reading Misappropriated Money Subject to Tax, Even if No Criminal Violation
Category: Federal Income Tax
Federal income tax advice, articles, tips, & more.
The Federal income tax is the largest expenditure for most individuals and businesses. It dwarfs the costs for insurance and basic necessities. This is only going to increase in the future. Tax planning is needed.
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Court: IRS Cannot Apply New Law Based on Conduct Predating the Law
In Rafizadeah v. Commissioner, 150 T.C. No. 1 (2018), the court concluded that the IRS made a late assessment of tax and penalties. The case turns on whether the IRS can benefit from the longer six-year assessment period based on an information return filing that the law did not obligate the taxpayer to make at… Continue reading Court: IRS Cannot Apply New Law Based on Conduct Predating the Law
Family Cattle Operation Denied Tax Deductions
In Barnhart Ranch Co. v. Commissioner, No. 16-60834 (5th Cir. 2017), the court considered who was entitled to deduct expenses for cattle that were descended from cattle the taxpayers inherited and other cattle that were subsequently purchased. The case shows how important it is to implement an accounting system to capture income and expenses in… Continue reading Family Cattle Operation Denied Tax Deductions
No Interest & Penalties on Restitution Assessments
The IRS can assess criminal restitution as if it is a tax tax. But can it assess interest and penalties on the restitution as it would a tax? The IRS policy is to do just that. The court addressed this in Klein v. Commissioner, 149 T.C. 341 (2017), concluding that the IRS policy violates the… Continue reading No Interest & Penalties on Restitution Assessments
Valuation of Management Fees Paid by Related Parties
Related party transactions can raise difficult tax questions. This is especially true for management fees paid by one legal entity to another legal entity that has the same or similar owners or that are controlled by the same owners. As noted in the recent Wycoff v. Commissioner, T.C. Memo. 2017-203 case, related-party management fees often… Continue reading Valuation of Management Fees Paid by Related Parties
IRS Rejects Court’s Passive Activity Loss 5% Owner and Grouping Decision
The passive activity loss (“PAL”) rules can limit the ability to deduct losses from passive activities, such as rental losses. The real estate professional and activity grouping rules can allow taxpayers to avoid having their losses limited by the PAL rules. Earlier this month, the IRS issued AOD 2017-007, IRB 2017-42 , to note its formal… Continue reading IRS Rejects Court’s Passive Activity Loss 5% Owner and Grouping Decision
Court Says Deduction for Tax Loss Not Allowed for Worthless Debt
Tax losses for worthless debts often trigger IRS audits. On audit, it is common practice for the IRS to disallow the losses based on the debt not being worthless, the amount of the loss not being correct, and that the taxpayer took the loss in the wrong tax year. Taxpayers can take steps to limit… Continue reading Court Says Deduction for Tax Loss Not Allowed for Worthless Debt
Court Says Mortgage Broker Not a Real Estate Professional
The passive activity loss rules can prevent real estate investors from being able to deduct their real estate losses. That is the intent and purpose of the rules. The rules and how they have been interpreted draw some known but arbitrary lines in the sand. The recent Hickam v. Commissioner, T.C. Summary Opinion 2017-66, case… Continue reading Court Says Mortgage Broker Not a Real Estate Professional
Tax Court Says Royalties Paid to Roth IRA Were Excess Contributions to IRA
The U.S. Tax Court recently issued another opinion involving a LLC owned by a self-directed IRA. The case is Block Developers, LLC v. Commissioner, T.C. Memo. 2017-142. The case invovles an IRA LLC that purchased a patent and then licensed the patent back to the prior owner, with the intent of the IRA LLC collecting… Continue reading Tax Court Says Royalties Paid to Roth IRA Were Excess Contributions to IRA
Cash-Basis Taxpayers Can Deduct Reclamation Costs Under Sec. 468
Section 468 allows a current deduction for mining and solid waste reclmation costs even though the expenses may not be incurred for several years–if not decades–in the future. It has traditionally been thought that only accrual-method taxpayers can benefit from Sec. 468. The court recently dispelled this notion in Gregory v. Commissioner, 149 T.C. 2… Continue reading Cash-Basis Taxpayers Can Deduct Reclamation Costs Under Sec. 468