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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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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