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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Taxing Lessons Case Summaries

Case — The Effect of Legal Separation on Filing Status

THE QUESTION Can legally separated taxpayers who live together claim married filing jointly tax status? THE DISPUTE Taxpayer Says: The legal separation agreement was not a decree of separate maintenance because it failed to require the parties to live apart in the future. Taxpayers continued to live together after signing the agreement, and married filing jointly status is appropriate. Internal…

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Taxing Lessons Case Summaries

Case — Reasonable Cause for Penalty Abatement

THE QUESTION Is depression a qualifying disability for penalty abatement? THE DISPUTE Taxpayer Says: Depression suffered due to the death of a spouse in June 2001 and the loss of friends and neighbors in the September 11, 2001 attacks qualifies as total disability, providing reasonable cause for penalties to be abated. Internal Revenue Service Says: Disability for insurance purposes does…

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Taxing Lessons Case Summaries

Case — Capital vs. Ordinary Treatment of Stock Trades

THE QUESTION Is taxpayer a securities trader or an investor? THE DISPUTE Taxpayer Says: Trading activity was conducted as a business, so losses on stock sales are ordinary income and deductible in full, as are expenses related to the trading. Internal Revenue Service Says: Taxpayer is an investor, not a trader. Losses on stock sales are subject to capital gains…

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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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