Western CPE Blog
Breaking tax and accounting news and analysis from the experts at Western CPE.
Thomas and Maureen Richey v. Comm., TCM 2023-43
Storm Damage Loss Flounders and Sinks for Lack of Appraisals or Other Proof of Loss (Thomas and Maureen Richey v. Comm., TCM 2023-43) Thomas and Maureen Cleary Richey owned a home and a boat in March 2017, when Winter Storm Stella hit Stone Harbor and flooded the city’s streets. Richey and Cleary claimed that the storm damaged the waterside portion of their property and their 40-foot boat, The Celtic Dream. On their 2017 tax return, they claimed total casualty losses of more than $820,000 and a deduction—after considering the income limitation—of nearly $740,000. Calculating the deduction. There are three rules …
Nadine Vichich v. Comm., 146 TC No. 12
Widow Can’t Use Deceased Husband’s AMT Credits (Nadine Vichich v. Comm., 146 TC No. 12) Before his marriage to Nadine Vichich, William Vichich exercised incentive stock options that resulted in AMT liability, which he reported on a 1998 tax return filed jointly with his first wife, Marla. Payment of the AMT liability in 1998 generated an AMT credit carryforward of $304,442. Ms. Vichich was married to Mr. Vichich from 2002 until his death in 2004. On her 2009 tax return, Ms. Vichich reported an AMT credit of $151,928 derived from her deceased husband’s 1998 AMT credit carryforward that she used …
Alfred Christopher Morgan v. Comm., TCS 2022-10
Tax Court Agrees Taxpayer Was a Bona Fide Resident Eligible for Foreign Earned Income Exclusion (Alfred Christopher Morgan v. Comm., TCS 2022-10) Alfred Morgan’s tax problems began when he failed to timely file his 2016 tax return. The IRS prepared a substitute return based on the information that they had. Mr. Morgan filed a return showing, in addition to the IRS income items, a Form 2555 claiming a foreign earned income exclusion as a bona fide resident of Saudi Arabia. When the IRS challenged the exclusion, they found fault with the fact that when asked to substantiate his dates of …
Elena and Frederick Weschenfelder v. Comm., TCM 2019-133
Foreign Earned Exclusion on Delinquent Return Disallowed by Court (Elena and Frederick Weschenfelder v. Comm., TCM 2019-133) Elena Lea Morgan Weschenfelder and Frederick Burkhart Weschenfelder were employed by CACI Premier Technology, Inc. (CACI) and Sycoleman Corp. in Iraq during 2004 and 2005. They lived and worked full-time on a military base, living in Republican Guard barracks. The Weschenfelders were employed as intelligence analysts. Their jobs involved strategic and tactical intelligence, and they worked with the Iraqi interim government to help identify threats and coordinate safe passage and gatherings within the country. In 2006, they moved to Germany, where they continued …
Suzanne Montes v. Comm., USTC, Docket No. 17332-21
Firefighter’s Harassment Settlement Not Excludable Personal Injury Award (Suzanne Montes v. Comm., USTC, Docket No. 17332-21 (Jun. 29, 2023)) Suzanne Montes is a San Francisco firefighter. She was assigned to an all-male firehouse. Within days of her assignment, she was subjected to disparaging comments, sabotaged equipment, and “extremely unsanitary things (were done) to her personal property.” She complained to her chiefs of the harassment, “which only served to increase the harassment she was suffering from.” Ms. Montes filed a lawsuit and subsequently received a settlement of $382,000. Her CPA told her the settlement was not taxable and she didn’t report …
US v Payward Ventures, Inc., 23-mc-80029-JCS
Kraken Must Comply with Summons for Customer Crypto Transactions (US v Payward Ventures, Inc., 23-mc-80029-JCS (ND Cal. (Jun. 30, 2023)) On March 30, 2021, Payward Ventures, Inc., doing business as Kraken.com, was issued a summons for relevant information on cryptocurrency transactions by Kraken’s customers for the years 2016 through 2020. After Kraken failed to comply with the summons, the Government filed a petition to enforce the summons. The Court agreed that parts of the summons were overly broad. The Court ordered Kraken to produce the following documents for Kraken users with any combination of accounts having at least the equivalent …
Debra Jean Blum v. Comm., CA-9, 21-71113
Malpractice Settlement Regarding a Personal Injury Lawsuit was Taxable (Debra Jean Blum v. Comm., CA-9, 21-71113 (Mar. 22, 2022)) Debra Jean Blum received a payment of $125,000 in 2015 in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit against a hospital. She did not report this amount on her 2015 federal income tax return. The only question was whether Ms. Blum was entitled to exclude from her gross income the $125,000 settlement payment as damages received “on account of personal physical injuries or physical sickness” under §104(a)(2).Legal malpractice …
Calvin Lim and Helen Chu v. Comm., TCM 2023-11
Purported Appraisal Was Prepared in Exchange for a Prohibited Appraisal Fee (Calvin Lim and Helen Chu v. Comm., TCM 2023-11) On their joint Federal income tax return for 2016 Calvin Lim and Helen Chu reported a noncash charitable contribution deduction of $1,608,808 passed through to them from Integra – a pass-through entity created by Michael Meyer as part of his “Ultimate Tax Plan” scheme. Because the contribution amount exceeded the maximum allowable deduction for 2016, taxpayers claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 forward to their 2017 return. “Prohibited appraisal fee” disqualifies the appraisal. Section …
Janet Braen, et al, v. Comm., TCM 2023-85
Rezoning Is Substantial Benefit to Donor in Purported Bargain Sale (Janet Braen, et al, v. Comm., TCM 2023-85) In 1998, Braen Commercial Holdings Corp. (a family mining company founded in 1904) purchased a 505-acre plot of land in Ramapo, New York, with an eye to developing it into a granite quarry, adding to an existing stable of four quarries. Years of delays and disputes with both the state and town followed, including litigation over a 2004 zoning change made by Ramapo. As part of a 2010 settlement of this lawsuit, Ramapo purchased 425.5 acres of the property for $5,250,000 and …
Frank and Collette McNamara v. Comm., TCS 2023-22
Home Mortgage Interest Deduction Revised by Tax Court (Frank and Collette McNamara v. Comm., TCS 2023-22) In 2019, Frank and Collette McNamara owned two homes, which they acquired after Oct. 1987 and before Dec. 16, 2017. The McNamaras owned the first home in Virginia for the entire year. They owned the second home in Massachusetts until May 10, 2019, when they sold it. On their 2019 Form 1040, the McNamaras claimed a total mortgage interest deduction of $39,226 for their two homes. The IRS disallowed $9,140 of the deduction, asserting that the McNamaras miscalculated the deduction for the Massachusetts home. …
Shawn Steven Salter v. Comm., TCM 2022-29
Itemized Deductions Not Allowed After IRS Prepared Substitute Return (Shawn Steven Salter v. Comm., TCM 2022-29) Shawn Salter failed to file a return for the tax year. Having received no return from Mr. Salter, the IRS prepared a substitute for return based on third-party reporting, allowing the taxpayer the standard deduction. Mr. Salter then prepared a late (by seven years) Form 1040 reporting all items of income as shown on the IRS notice of deficiency, but claiming itemized deductions for medical, state, and local taxes, mortgage interest, charitable deductions, and unreimbursed employee business expenses. Section 63(e)(1) provides that, “[u]nless an …
Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77
Alimony Requirement #7: Child-related Contingency Means Alimony Not Deductible (Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77) Alejandro and Cristina divorced in 2012. On July 25, 2012, the Los Angeles Superior Court entered a judgment of dissolution, that stated in part: “[F]amily support shall be payable by Respondent [Alejandro] to Petitioner [Cristina] in the monthly amount of $4,500.00 payable on the 1st of each month. . . Such support order commences Aug. 1, 2011, and is continuing until both minor children emancipate or Petitioner remarries. If Petitioner remarries, the family support obligation shall be modified to $2,500.00 per …
Katrina White v. Comm., TCM 2023-77
COD Income Was Not Taxable Because Of Insolvency (Katrina White v. Comm., TCM 2023-77) Katrina White owned and operated a body sugaring place. The business struggled and she fell behind on loan payments. Her bank loan was forgiven and the bank issued a Form 1099-C on the forgiven amount of $14,433. Ms. White did not report the cancellation of debt income on her timely filed 2016 return. The IRS examined Ms. White’s return and determined the COD income to be taxable. At Tax Court, Ms. White argued that the discharge of the debt should be excluded from income because she …
Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168
Alimony Requirement #6: Payments Did Not End at Death of Recipient Spouse (Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168, Feb. 27, 2018) Mark Hexum paid his ex-wife, Sherri, half of the net gain from the sale of their marital home because the Illinois family court ruled payment was required under their divorce agreement. Mark had been responsible for the house’s mortgage and expenses after the divorce, and in his view, the equity accrued before the sale was not “marital property” that he should have been made to split with his ex-wife when the house was sold. He characterized the …
Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224
Alimony Requirement #6: Millions in Payments by Hedge Fund Partner to Ex-wife Did Not Meet Alimony’s Survival Criterion (Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224, Aug. 5, 2022) Andrew Redleaf is the majority partner at Whitebox Advisors, LLC, a hedge fund asset management firm. The Redleaf’s marriage termination agreement (MTA) required Mr. Redleaf to pay his ex-spouse $140 million including $1,500,000 per month for sixty months. Mr. Redleaf deducted $51 million in payments he made to his ex-spouse in 2012 and 2013 as spousal maintenance (alimony). The issue in the case was whether the alimony payments would stop after payee …
Jerry Vanderhal v. Comm., TCS 2018-411
Alimony Requirement #4: Payment of Sallie Mae Loan of Ex-Spouse Not Alimony Jerry Vanderhal divorced in 2011. The divorce agreement included a reference to a Sallie Mae student loan account that related to his former spouse. That reference was found in the “Division of Community Debts” section of the agreement and obligated Mr. Vanderhal to “assume and hold his former spouse harmless” from that debt. The agreement also included a section titled “Tax Free Transfers” that stated the parties believe and agree that the transfers of property between them required by the agreement were tax-free transfers of property between them …
Cynthia Hailstone and John Linford v. Comm., TCS 2023-17
Disability Payments Taxable if Premiums Paid by Employer (Cynthia Hailstone and John Linford v. Comm., TCS 2023-17) John Linford was provided disability insurance by his employer. Under the terms of the policy, employees were not required to contribute to the policy premiums. Rather, the company was required to pay 100% of the premiums. During 2017, Mr. Linford was approved and he received $105,000 of disability payments and a 2017 Form W-2 reporting the payments. He did not report the payments. Under §105(a) if the amounts of the disability payments were paid under a policy for which the contributions (premiums) were …
Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8
Proof of Insolvency Lacking for Exclusion of Cancelation of Debt Income (Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8) The discharge of indebtedness is income (§61(a)(12)). Section 108(a) provides an exclusion to the extent of the taxpayer’s insolvency (§§108(a)(1)(B) & (3)) and defines an insolvent taxpayer as one who has an “excess of liabilities over the fair market value of assets” (§108(d)(3)). The burden to prove insolvency is on the taxpayer. Because Ernesto and Marilyn Patacsil couldn’t prove the FMV of their assets and the extent of their liabilities, the cancellation of debt due to the foreclosure of their properties …
James H. Kim v. Comm., TCM 2023-91
IRS Summons Nets More than $4 Million of Unreported Cryptocurrency Gains(James H. Kim v. Comm., TCM 2023-91) In response to a summons, the IRS received information reports from Coinbase, Inc. a virtual currency exchange, reporting the proceeds of James Kim’s transactions in Bitcoin and Litecoin (during 2013–2016), and Ethereum (during 2017). For 2013–2016, Mr. Kim reported no cryptocurrency gains or losses. For 2017, he received an information return from Coinbase that reported $18,557,230 of proceeds from virtual currency transactions. On the 2017 Schedule D, Mr. Kim reported gross proceeds in that amount but offset against those proceeds a claimed basis …
Denine and Bryan Kerns, pro sese v. Comm., TCM 2019-14
Failed to Reconcile Advance Premium Tax Credit on Form 8962 (Denine and Bryan Kerns, pro se v. Comm., TCM 2019-14) Denine and Bryan Kerns purchased their health insurance through Covered California. They received an advanced premium tax credit (APTC) of $8,420 in 2014. They timely filed their 2014 return, reporting AGI of $97,061. They claimed personal exemptions for themselves and no exemptions for dependents. The IRS determined that the Kerns were not eligible for any credit because their household income exceeded the maximum allowable under §36B(b) and (c)(1)(A). For 2014, 400% of the FPL was $62,040. The Kerns’ household income …