Taxing Lessons Case Summaries

Case — Restitution – Business or Nonbusiness Deduction?

THE QUESTION Are restitution payments a business or nonbusiness deduction? THE DISPUTE Taxpayer Says: The payments are an ordinary and necessary business expense, currently deductible. The loss generated can be carried back to prior years. Internal Revenue Service Says: The payments are nonbusiness expenses, and cannot be carried back. THE LAW From Internal Revenue Code Section 162(a): In general there shall be…

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Taxing Lessons Case Summaries

Case — Effect of Negligence on Casualty Loss

THE QUESTION Does driving while intoxicated rise to the level of willful negligence necessary to deny a casualty loss deduction? THE DISPUTE Taxpayer Says: His actions did not rise to the level of willful negligence and the casualty loss deduction should be allowed. Internal Revenue Service Says: The casualty was caused by the taxpayer’s willful negligence. The loss should be…

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Taxing Lessons Case Summaries

Case — Asset In-Service Date

THE QUESTION When is equipment placed in service for purposes of claiming depreciation under Section 179? THE DISPUTE Taxpayer Says: Equipment purchased in 2002 and 2003 was not placed in service until 2004 and that is the year the Section 179 depreciation deduction should be claimed. Internal Revenue Service Says: The equipment was placed in service in 2002 and 2003.…

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Taxing Lessons Case Summaries

Case — Cancellation of Indebtedness Income – Disputed Balances

THE QUESTION If a taxpayer disputes the original amount owed to a creditor, is income from cancellation of debt based on the original balance of the account or the agreed-upon final settlement? THE DISPUTE Taxpayer Says: The agreed-upon settlement of a disputed debt is the actual balance due. Since the balance due and the amount paid are the same, there…

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Taxing Lessons Case Summaries

Case — Payments to a Retiring Partner

THE QUESTION Are payments made from a partnership to a retiring partner ordinary income or capital gains? THE DISPUTE Taxpayer Says: The payments were made in exchange for an interest in the partnership and should be taxed as long-term capital gains. Internal Revenue Service Says: The distributions are guaranteed payments and should be taxed as ordinary income. THE LAW From…

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Taxing Lessons Case Summaries

Case — Subchapter S Corporation Eligible Shareholder

THE QUESTION Does having a Roth IRA as a shareholder in an S corporation invalidate the subchapter S election? THE DISPUTE Taxpayer Says: A Roth IRA is an eligible shareholder. The company’s status as a Subchapter S corporation remains intact. Internal Revenue Service Says: The corporation’s status is revoked because a Roth IRA is not an eligible shareholder. THE LAW…

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Taxing Lessons Case Summaries

Case — Abatement of Interest on Tax Underpayment

THE QUESTION Should the IRS assess interest on the net or gross amount of a tax underpayment? THE DISPUTE Taxpayer Says: Interest should only be charged on the net amount still due after two corrections to a tax return. Internal Revenue Service Says: Interest is due on the entire amount of the underpayment assessed after the final correction. THE LAW…

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Taxing Lessons Case Summaries

Case — Statute of Limitations – Substantial Omission from Gross Income

THE QUESTION Is overstating the basis of assets a “substantial omission from gross income” that is subject to a six year statute of limitations? THE DISPUTE Taxpayer Says: The standard three year statute of limitations for assessing tax applies because an overstatement of basis is not a substantial omission from gross income. Internal Revenue Service Says: The overstatement of basis…

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Taxing Lessons Case Summaries

Case — Cancellation of Indebtedness

THE QUESTION Can the IRS rely solely on Form 1099-C as evidence of cancellation of indebtedness income? THE DISPUTE Taxpayer Says: Form 1099-C does not reflect the true income required to be reported. Internal Revenue Service Says: Taxpayer is required to report the amount shown on Form 1099-C as taxable income. THE LAW From Internal Revenue Code Section 61(a)(12): Generally,…

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