North Myrtle Beach, SC Tax Controversy CPA

J. Frank Best a North Myrtle Beach, SC Tax Controversy CPA  with locations in North Myrtle Beach & Myrtle Beach, SC and Wilmington & Raleigh, NC is rated in the Top 5 Tax Controversy CPA Profiles/Linkedin and as a United States Tax Court Litigator licensed in all States works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Telephone 800.230.7090   Email: bestcpa@bestirscpa.com  Web: bestirscpa.com

“Serious IRS Problem Resolution”/J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator

Serious IRS Problem Resolutions

J. Frank Best is rated in the Top 5 Tax Controversy CPA Profiles/Linkedin and is a United States Tax Court Litigator licensed in all States and works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Telephone 800.230.7090   Email: bestcpa@bestirscpa.com  Web: bestirscpa.com

Innocent Spouse Relief/J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator

A recent Tax Court decision was reported dealing with Innocent Spouse Relief.  J.  Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator in Raleigh and Wilmington, NC  & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

No Innocent Spouse Relief for Widow Who Failed to Report Insurance Proceeds on Form 8857

The Tax Court held that a widow was not entitled to innocent spouse relief from tax liabilities that arose over several years in which she and her husband filed joint returns but did not pay taxes owed. The court cited the fact that, after her husband’s death, the widow invested the proceeds of life insurance policies purchased by her husband without her knowledge in several savings accounts opened in her parents’ names and did not report the proceeds to the IRS when she requested relief. Hale v. Comm’r, T.C. Memo. 2018-93.

Analysis

Spouses filing joint tax returns are generally jointly and severally liable for any taxes owed. However, Code Sec. 6015(f) allows a spouse to be relived from liability if it would be inequitable to hold the spouse liable.

Rev. Proc. 2013-34 lists seven factors to consider if certain threshold conditions do not apply. The factors are: (1) whether the couple is still married, (2) whether economic hardship would arise if relief is not granted, (3) whether the requesting spouse had reason to know that the taxes would not be paid, (4) whether either spouse had a legal obligation to pay the taxes, (5) whether the requesting spouse significantly benefitted from the unpaid taxes, (6) whether the requesting spouse made a good faith effort to comply with the income tax laws in subsequent years, and (7) whether the requesting spouse was in poor health at the time the returns were filed.

The Tax Court held that it would not be inequitable to deny relief to Mrs. Hale. The court explained that a simple toting up of the seven factors would support granting relief, because Mrs. Hale’s lack of knowledge and mental health weighed in her favor and strictly applied, no factor weighed against relief. However, the court noted that the factors are nonexclusive, the degree of importance of each factor varies depending on the facts and circumstances, and that the court was not bound by the IRS’s published guidelines.

 

Divorce Legal Fees/J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator

A recent Tax Court decision was reported dealing with IRS Divorce Legal Fees.  J.  Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator in Raleigh and Wilmington, NC  & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

Legal Fees Relating to Status of Investment Fund Distributions in Divorce Were Not Deductible Business Expenses

The Tax Court held legal fees that a taxpayer incurred in a divorce proceeding to defend his ownership of investment fund distributions, which he received after his former wife had filed for divorce but before the date the divorce was granted, were not deductible as expenses related to a business or income producing activity. The Tax Court applied the “origin of the claim” test under U.S. v. Gilmore, 372 U.S. 39 (1963) and found that the fees were personal and nondeductible because the former wife’s claim to the distributions originated entirely from the marriage. Lucas v. Comm’r, T.C. Memo. 2018-80.

Tax Court’s Decision

The Tax Court held that Mr. Lucas’s legal and professional fees were nondeductible personal expenses. The court reasoned that but for the marriage, Ms. Lucas would have had no claim to Mr. Lucas’s interest in Vicis. The court further found that Hahn did not apply because, while the fees in that case were business connected, Mr. Lucas’s legal fees had no connection to Vicis’s investment advisory business. Rather, they were incurred defending his ownership and distributions from equitable distribution in the divorce.

Mr. Lucas failed to demonstrate that the expenses were otherwise deductible, in the Tax Court’s view. The court concluded that Mr. Lucas was neither pursuing alimony nor resisting an attempt to interfere with his ongoing business activities as in Liberty Vending. The court found that Mr. Lucas engaged in little trade or business activity in 2010 or 2011, as Vicis began liquidating in 2009 and thereafter he engaged in no business activity other than a limited management role with Vicis. Mr. Lucas did not, in the view of the Tax Court, establish that Ms. Lucas’s claim related to the winding down of Vicis, or that the fees incurred to defeat her claim were ordinary and necessary to his trade or business.

Innocent Spouse- Raleigh & Wilmington, NC North Myrtle Beach & Myrtle Beach, SC

IRS Innocent Spouse Relief. J. Frank Best, Tax Controversy CPA/U.S. Tax Court Litigator. Rated  in Top 5 Tax Controversy CPA Profiles/Linkedin.com. More than 25 years experience. Representation for NC, SC, & All States. PHONE. 800.230.7090  WEB: bestirscpa.com  Email: bestcpa@bestirscpa.com

 

United States Tax Court Decision for the Week-Innocent Spouse

A recent Tax Court decision was reported dealing with Innocent Spouse.  J.  Frank Best, Certified Public Accountant and United States Tax Court Litigator in Raleigh, Wilmington, NC & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

UNITED STATES TAX COURT

T.C. Summary Opinion 2018-1

January 4, 2018.

COLIN C. BISHOP, Petitioner, AND LISA BISHOP, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22108-16S.

Michael S. Sterner , for petitioner. Jan R. Pierce and Myla Sepulveda (specially recognized), for intervenor. Jeffrey D. Rice , for respondent.

SUMMARY OPINION

COHEN, Judge : This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Respondent determined a $3,545 deficiency in petitioner’s Federal income tax for 2014. The issue for decision is whether petitioner should be relieved from liability for all or part of the deficiency that resulted from failure to report on a joint return a distribution from intervenor’s separately owned retirement account. The resolution depends on whether petitioner had actual knowledge of the distribution, or any portion thereof, for purposes of section 6015(c). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 2014.

Background

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Respondent and petitioner have agreed that petitioner is not liable for the deficiency after application of section 6015(c). Intervenor, however, objects to that conclusion.

Petitioner and intervenor were married on October 31, 2007. They were temporarily separated twice during 2014, finally separated in June 2015, and divorced in 2016. At the time his petition was filed, petitioner resided in Washington. At the time her notice of intervention was filed, intervenor resided in Oregon.

Intervenor inherited a retirement account from her father in 2009. The account was maintained at Edward D. Jones & Co. (Edward Jones) in intervenor’s name. Taxable distributions were received before 2014, ranging from $4,000 to $48,000, and were reported on joint Federal income tax returns filed by petitioner and intervenor.

During 2014 and until the time of the permanent separation in 2015, petitioner and intervenor maintained a joint checking account into which their payroll checks were deposited. They made transfers to and from other accounts, and family expenses were paid out of the joint account. Petitioner and intervenor both had access to the funds in the joint account by the use of debit cards.

During 2014 intervenor received a $15,068 distribution from the Edward Jones retirement account. Edward Jones withheld $2,712 from the distribution and reported both of those amounts to the Internal Revenue Service (IRS). On August 1, 2014, $6,000 was deposited into the joint checking account that petitioner and intervenor maintained. The balance of the distribution was used for the benefit of intervenor’s daughter.

As they had in prior years, petitioner and intervenor together provided information to the preparer of a joint tax return for 2014. They did not report the Edward Jones distribution on that return.

Before the petition was filed, petitioner filed a Form 8857, Request for Innocent Spouse Relief, with the IRS. Intervenor provided information during the review process. The IRS determined that petitioner was not entitled to relief under section 6015(b) because he had constructive knowledge of the distribution but was entitled to relief under section 6015(c) because of the absence of proof of actual knowledge.

Neither petitioner nor intervenor disputes the amount of the deficiency. Petitioner contends that he is entitled to relief from the full amount of the deficiency and in the alternative that at most he should be liable for the deficiency relating to the $6,000 deposited into the joint bank account. Intervenor requests that petitioner be held liable for tax on $7,080, which intervenor infers was the portion of the distribution plus withheld tax reflected in the $6,000 deposit.

Discussion

Section 6013(d)(3) provides the general rule that if spouses make a joint return the liability for the tax shall be joint and several. Subject to other conditions, section 6015(c) allows a divorced or separated spouse to elect to limit his or her liability for a deficiency assessed with respect to a joint return to the portion of such deficiency allocable to him or her under subsection (d). Pursuant to section 6015(d)(3)(A), “any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.” Further, “[e]rroneous items of income are allocated to the spouse who was the source of the income.” Sec. 1.6015-3(d)(2)(iii), Income Tax Regs.; see also Agudelo v. Commissioner , T.C. Memo. 2015-124, at *16. Denial of relief requires evidence that the requesting spouse had “actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual.” Sec. 6015(c)(3)(C); see also sec. 1.6015-3(c)(2), Income Tax Regs. Section 6015(c) differs from the relief provisions of subsections (b) and (f), under which relief may be denied if the party requesting relief had constructive knowledge of the item giving rise to the deficiency. See Culver v. Commissioner , 116 T.C. 189, 197 (2001); Richard v. Commissioner , T.C. Memo. 2011-144.

A question exists as to where the burden of proof lies in cases when, as here, the IRS favors granting relief and the nonrequesting spouse intervenes to oppose it. The Court has resolved such cases by determining whether actual knowledge has been established by a preponderance of the evidence as presented by all parties. See Pounds v. Commissioner , T.C. Memo. 2011-202; Knight v. Commissioner , T.C. Memo. 2010-242; McDaniel v. Commissioner, T.C. Memo. 2009-137; Stergios v. Commissioner , T.C. Memo. 2009-15.

To determine whether the requesting spouse had actual knowledge, the IRS considers “all of the facts and circumstances.” Sec. 1.6015-3(c)(2)(iv), Income Tax Regs. Similarly, the Court looks to the surrounding facts and circumstances for “an actual and clear awareness (as opposed to reason to know)” of the items giving rise to the deficiency. See Cheshire v. Commissioner , 115 T.C. 183, 195 (2000), aff’d , 282 F.3d 326 (5th Cir. 2002); Pounds v. Commissioner , T.C. Memo. 2011-202.

In this case, petitioner denies actual knowledge of the distribution although he admits that he knew about the retirement account and about withdrawals made in other years for various family expenditures. He argues that intervenor deliberately deceived him, but he relies on her silence and does not identify any specific misrepresentations by her. He acknowledges that he was at fault for not checking the records on the joint bank account maintained by him and intervenor.

Intervenor disputes petitioner’s credibility. She argues that he had actual knowledge of the 2014 distribution because it was deposited in their joint bank account about seven months before the return was prepared and petitioner continued to write checks from the account and use debit cards accessing funds in the account. Intervenor does not claim that she specifically told petitioner about the distribution when it was received or at the time that the return was prepared or point to any evidence that petitioner had “an actual and clear awareness (as opposed to reason to know)” of the items giving rise to the deficiency. Intervenor testified that they both forgot about the distribution at the time the return was prepared.

The history of withdrawals from the retirement account used by the parties over a period of years and the transactions by petitioner with reference to the joint bank account support a conclusion that petitioner should have known about the distribution. The amount was very large in relation to the average balances and other transactions in the account. There is no evidence, however, that petitioner saw the bank records before the joint return for 2014 was filed. His denials are not incredible, implausible or contradicted by direct evidence. See Culver v. Commissioner , 116 T.C. 189; Richard v. Commissioner , T.C. Memo. 2011-144. Regardless of the strong indications of constructive knowledge, the evidence falls short of establishing actual knowledge of any specific amount of the distribution in 2014.

While the parties make other arguments about “equitable” factors, the absence of proof of actual knowledge is determinative in this case.

Therefore,

Decision will be entered for petitioner .

United States Tax Court Decision for the Week-Legal Fees for Alimony Payments

A recent Tax Court decision was reported dealing with tax litigation and legal fees for alimony payments. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Legal Fees to Recoup Alimony Payments Were Nondeductible Personal Expenses

The Tax Court held that a taxpayer could not deduct legal fees incurred in an action to recover alimony payments that he alleged were made in excess of the amount provided for under a separation agreement with his ex-wife. The Tax Court found that the legal fees were nondeductible personal expenses because the underlying claim did not originate from any profit seeking activity. Barry v. Comm’r, T.C. Memo. 2017-237.

William and Beth Barry were divorced in 2002. The judgment of dissolution ordered Mr. Barry to pay alimony of $2,400 per month. In 2011, Mr. Barry sued Ms. Barry for breach of contract. He alleged that under a separation agreement they had previously signed, Ms. Barry was entitled to total alimony of approximately $45,000 and that he had paid that amount in full. He said that Ms. Barry was in default of the separation agreement when she filed for divorce in 2000 and demanded alimony. Mr. Barry sought a judgment of approximately $201,000 – an amount equal to the excess of the total alimony he paid over the amount he claimed Ms. Barry was entitled to under the separation agreement. Mr. Barry’s lawsuit was dismissed in 2011 as time barred.

On his 2013 tax return, Mr. Barry claimed a deduction of over $34,000 for the legal fees he paid with respect to the action against Ms. Barry. The IRS determined a deficiency of approximately $5,000 and an accuracy-related penalty of $1,000. Mr. Barry petitioned the Tax Court for redetermination of the deficiency.

Personal and family expenses are generally not deductible. However, a deduction is allowed under Code Sec. 212 for ordinary and necessary expenses for (1) the production or collection of income, or (2) the maintenance or conservation of property held for the production of income. In U.S. v. Gilmore, 372 U. S 39 (1963), the Supreme Court held that legal fees incurred by a taxpayer in resisting his wife’s property claims in a divorce were not deductible because the claims that gave rise to the fees stemmed from the marital relationship rather than from any profit seeking activity. The Supreme Court stated that the origin of the claim with respect to which an expense was incurred, rather than its potential consequences, is the controlling test of whether an expense is deductible.

Barry argued that Gilmore was decided based on the language of Code Sec. 212(2), which applies to expenses incurred in the conservation of property held for the production of income, but that his his claim was based on Code Sec. 212(1), which allows a deduction for expenses paid for the production of income. Barry said that the origin of the claim test therefore did not apply. Barry also cited Wild v. Comm’r, 42  T.C. 706 (1964), where the Tax Court held that legal fees paid by a wife in obtaining alimony includible in gross income were deductible under Code Sec. 212(1). Barry argued that his legal expenses should also be deductible because they were incurred for the purpose of collecting money that would be included in his income under the tax benefit rule.

The Tax Court held that Barry’s legal fees were not deductible under Code Sec 212(1). First, it found that, contrary to Barry’s argument, the Gilmore origin of the claim test applied to both paragraphs (1) and (2) of Code Sec.212. According to the Tax Court, Gilmore interpreted the predecessor statute to Code Sec.212, which contained in one paragraph the provisions now codified in Code Sec. 212(1) and Code Sec.212(2). The Tax Court also cited language from the Gilmore opinion stating that the only kind of expenses deductible under the predecessor to Code Sec. 212 were those that related to a profit seeking purpose and did not include personal, living, or family expenses.

Next, the Tax Court cited several of its previous decisions applying the origin of the claim test to deductions for legal fees under Code Sec. 212(1). The Tax Court noted that in Sunderland v. Comm’r, T.C. Memo. 1977-116, it applied the Gilmore test to disallow a deduction claimed under Code Sec.212(1) for legal expenses the taxpayer incurred in a legal action which resulted in a reduction of the alimony paid to his former wife. The Tax Court also cited Favrot v. U.S., 550 F.Supp. 809 (E.D. La. 1982), where a district court applied Gilmore in disallowing a claimed deduction for legal expenses incurred in an attempt to recoup alimony payments. The Tax Court rejected Barry’s assertion that his legal fees should be deductible because any recovered alimony payments would have been includible in his income. In the Tax Court’s view, Barry improperly focused on the potential consequences of his lawsuit rather than on the origin and character of his claim.

The Tax Court also disagreed with Barry’s reading of its decision in Wild, finding that it turned on an exception to the Gilmore rule in the regulations under Code Sec. 262 specifically providing for the deductibility of legal fees of a wife incurred for the collection of alimony and similar amounts received by a wife in connection with a marital relationship. The Tax Court concluded by citing the general rule as stated in the regulations under Code Sec. 262, which is that attorney’s fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife.

Finally, the Tax Court reasoned that if Barry had filed suit in the same year as his divorce to challenge the alimony obligations, his legal expenses would have been nondeductible personal expenses. In seeking to deduct legal expenses incurred in an action to recoup the alimony payments, Barry was seeking to do indirectly what could not have been done directly, according to the Tax Court.