Taxing Lessons Case Summaries

Case — Home Mortgage Interest Deduction

THE QUESTION Can taxpayers deduct mortgage interest on a residence when the property title and mortgage are held in a relative’s name? THE DISPUTE Taxpayer Says: The relative obtained the mortgage and legal title as a convenience. Taxpayers occupied the home and made all mortgage payments. The mortgage interest is deductible. Internal Revenue Service Says: Taxpayers had no legal obligation…

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Taxing Lessons Case Summaries

Case — Exception to 40% Accuracy Penalty

THE QUESTION Can taxpayers claim ‘reliance on expert advice’ to qualify for an exception to an accuracy-related penalty? THE DISPUTE Taxpayer Says: A contribution deduction claimed for medical practice stock donated to an academic-affiliated institution was based on an expert appraisal and advice from tax advisors, and the penalty should not apply. Internal Revenue Service Says: Taxpayers failed to act…

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Taxing Lessons Case Summaries

Case — Abatement of Interest

THE QUESTION Is an Internal Revenue Service decision to not abate interest on a tax underpayment an abuse of discretion? THE DISPUTE Taxpayer Says: Interest charged on a tax underpayment assessed by audit was excessive, caused mainly by the length of time taken to complete the audit, and the assessment should be abated. Internal Revenue Service Says: No abatement of…

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Taxing Lessons Case Summaries

Case — Taxation of Legal Award

THE QUESTION Are damages received from a harassment lawsuit includable in income? THE DISPUTE Taxpayer Says: Compensatory damages are excludable from income because the damages are compensation for physical symptoms caused by harassment. Internal Revenue Service Says: The damages were paid as compensation for emotional distress and are taxable. THE LAW From Internal Revenue Code Section 61(a):  Gross income generally…

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Taxing Lessons Case Summaries

Case — Theft Loss Deduction Based on Replacement Cost

THE QUESTION Can a taxpayer use estimated replacement cost to establish the amount of a theft loss deduction? THE DISPUTE Taxpayer Says: An appraisal from 1980 should suffice as credible substantiation of both the basis and the current market value for a theft loss deduction, and the deduction should be allowed based on the market value. Internal Revenue Service Says:…

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Taxing Lessons Case Summaries

Case — Qualified Retirement Plan Early Withdrawal Tax

THE QUESTION Do retirement plan distributions made to an employee who is age 55 qualify for an exception to the 10% early withdrawal tax? THE DISPUTE Taxpayer Says: Retirement plan distributions made after age 55 are not subject to the additional 10% tax. Internal Revenue Service Says: The exception only applies when the taxpayer is over age 55 at the…

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Taxing Lessons Case Summaries

Case — Casualty or Theft Loss – Decline in Securities Value

THE QUESTION Can a taxpayer claim a casualty or theft loss deduction for the decline in the value of WorldCom stock due to the company’s accounting fraud and resulting bankruptcy? THE DISPUTE Taxpayer Says: The stock became worthless due to fraudulent accounting practices and the resulting bankruptcy filing by WorldCom, and is deductible as a theft loss. Internal Revenue Service…

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Taxing Lessons Case Summaries

Case — Exception to 50% Limitation for Business Meals

THE QUESTION Does a fisherman qualify for an exception to the rule that limits the deduction for business meals to 50% of cost? THE DISPUTE Taxpayer Says: The meal expenses are 100% deductible under an exception to the general rule limiting those deductions. The exception applies when Federal law requires crew members of a commercial vessel be provided with meals.…

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Taxing Lessons Case Summaries

Case — Payment from Employer: Gift or Taxable Income?

THE QUESTION Is a payment received from an employer as the result of a personal relationship a non-taxable gift or taxable compensation? THE DISPUTE Taxpayer Says: A payment of $160,000 received from her employer was due to a personal relationship and romantic interest, and is a non-taxable gift. Internal Revenue Service Says: The payment was a bonus, and is taxable…

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Taxing Lessons Case Summaries

Case — Income Reclassification

THE QUESTION After years of filing tax returns as a sole proprietorship, can a bar owner re-characterize the income as rental? THE DISPUTE Taxpayer Says: Because there was no involvement in the management of the bar, the income is properly considered rental. Internal Revenue Service Says: The original position on filed tax returns is admission of ownership, and sole proprietorship…

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