Taxing Lessons Case Summaries

Case — Royalties – Expense or Capitalize?

THE QUESTION Should royalties paid under licensing agreements for the use of trademarks be capitalized or currently deducted? THE DISPUTE Taxpayer Says: Royalty payments are ordinary and necessary business marketing expenses and should be currently deductible. Internal Revenue Service Says: The payments are indirect licensing costs related to production of property and should be allocated to ending inventory. THE LAW…

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Taxing Lessons Case Summaries

Case — Taxability of Legal Settlement

THE QUESTION Are settlement proceeds received as a result of false imprisonment taxable? THE DISPUTE Taxpayer Says: The settlement proceeds arose from a claim based on tort rights. In addition, physical restraint and detention constitute a physical injury. The proceeds qualify for exclusion and are not taxable. Internal Revenue Service Says: The settlement was for nonphysical injuries, and should be…

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Taxing Lessons Case Summaries

Case — Medical Expense Deduction for In Vitro Fertilization

THE QUESTION Are in vitro fertilization expenses that are incurred voluntarily a deductible medical expense? THE DISPUTE Taxpayer Says: Expenses paid for sperm and egg donation and surrogate mothers are deductible. Internal Revenue Service Says: The expenses were not incurred for medical reasons and cannot be deducted. THE LAW From Internal Revenue Code Section 213(a): Allows for the deduction of…

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Taxing Lessons Case Summaries

Case — Theft Loss

THE QUESTION Can a taxpayer claim a theft loss when a building contractor finishes a home but fails to follow contract specifications during the construction? THE DISPUTE Taxpayer Says:  Although the house was completed, a theft loss deduction is allowable because the contractor committed fraud by taking money for the construction while intending to ignore contract specifications. Internal Revenue Service Says: This…

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Taxing Lessons Case Summaries

Case — Penalty Abatement due to Reliance on Professional Advice

THE QUESTION Does reliance on a professional tax return preparer allow a taxpayer to avoid a penalty for errors involving depreciation deductions? THE DISPUTE Taxpayer Says: Ordinary business care and prudence were exercised in the reliance on a professional preparer to properly compute depreciation, and the reasonable cause exception to the penalty applies. Internal Revenue Service Says: The penalty was…

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Taxing Lessons Case Summaries

Case — Deductibility of Legal Settlements and Fees

THE QUESTION Are legal settlements and fees currently deductible or should they be capitalized? THE DISPUTE Taxpayer Says: The settlement payments and legal fees are ordinary and necessary business expenses and are currently deductible. Internal Revenue Service Says: The settlements and fees were related to transfers of asset title and must be capitalized, not currently deducted. THE LAW From Internal…

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Taxing Lessons Case Summaries

Case — Medical Expense Exception to Early Withdrawal Tax

THE QUESTION Do funds taken from a qualified retirement plan to repay a prior year medical loan qualify for an exception to the early withdrawal tax? THE DISPUTE Taxpayer Says: The 2004 early withdrawal was used to reduce a loan taken out in 2003 for medical expenses. The loan repayment should be considered a payment of medical expenses in 2004,…

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Taxing Lessons Case Summaries

Case — Reasonable Compensation

THE QUESTION Is salary paid to a company’s sole officer/shareholder actually a distribution of profits (a nondeductible dividend) instead of compensation? THE DISPUTE Taxpayer Says:  $509,000 paid to officer/shareholder ($500,000 bonus plus $9,000 executive salary) is reasonable compensation. Internal Revenue Service Says: $100,000 of amount paid is reasonable compensation; the balance of $409,000 is a dividend. THE LAW From Internal Revenue Code…

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Taxing Lessons Case Summaries

Case — Deductibility of Investor Expenses

THE QUESTION Can an investor deduct expenses related to a training and instruction course? THE DISPUTE Taxpayer Says: The course was necessary to improve trading skills and is deductible as ordinary and necessary expenses paid for the production or collection of income. Internal Revenue Service Says: The course is a convention, seminar, or similar meeting, and is not deductible. THE…

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Taxing Lessons Case Summaries

Case — Economic Substance and Attribution of Trust Income

THE QUESTION Is income from property transferred to a trust taxable to the trust or the trust’s manager? THE DISPUTE Taxpayer Says: Assets were sold to the trust and the income is attributable to the trust. Internal Revenue Service Says: The trust is a sham and should be disregarded. THE LAW From Gregory v. Helvering, 293 U.S. 465, 469 (1935):…

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