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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Taxing Lessons Case Summaries

Case — Deductibility of Education Expenses

THE QUESTION Are tuition and fees incurred in obtaining a Master of Business Administration (MBA) degree deductible as ordinary and necessary business expenses? THE DISPUTE Taxpayer Says: The MBA was necessary to maintain or improve skills in working as an entrepreneur, project manager, or supervisor in the beverage industry, and the related expenses are deductible. Internal Revenue Service Says: The…

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Taxing Lessons Case Summaries

Case — Self-Employment Income

THE QUESTION Are commissions received by a retired insurance agent self-employment income subject to self-employment tax? THE DISPUTE Taxpayer Says: Due to retirement, no trade or business was carried on and self-employment tax is not owed on commissions received. Internal Revenue Service Says: Commissions are deferred compensation from past income- producing activities and are subject to self-employment tax. THE LAW…

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Taxing Lessons Case Summaries

Case — Classification as Statutory Employee

THE QUESTION Is an educational consultant working for a school district considered a statutory employee who is not required to pay self-employment tax? THE DISPUTE Taxpayer Says: Services rendered to the school district meet the requirements necessary to qualify under the statutory definition of “home worker”, and self-employment tax is not owed. Internal Revenue Service Says: Self-employment tax is owed.…

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Taxing Lessons Case Summaries

Case — Discharge of Indebtedness Income – Insolvency Exclusion

THE QUESTION Does a taxpayer have to be insolvent both immediately before and immediately after having debt discharged in order to exclude the income from being taxed? THE DISPUTE Taxpayer Says: At the time mortgage debt was forgiven, taxpayer’s liabilities exceeded assets, so cancellation of indebtedness income is excludable from income. Internal Revenue Service Says: The insolvency exception does not apply…

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