Freeman Law’s “The Tax Court in Brief” covers each substantive Tax Court opinion, offering a weekly transient of its choices in clear, concise prose.
For a hyperlink to our podcast masking the Tax Court in Brief, obtain right here or try different episodes of The Freeman Law Project.
Tax Litigation: The Week of May ninth, 2022, by May thirteenth, 2022
Lewis v. Commissioner, TC Memo. 2022-47| May 9, 2022 | Greaves, J. | Dkt. No. 10007-20W
Rogerson v. Commissioner, TC Memo. 2022-49| May 12, 2022 | Toro, J. | Dkt. No. 5848-20
Jackson v. Comm’r, T.C. Memo. 2022-50 | May 12, 2022 | Vasquez, J. | Dkt. No. 19634-18L
Evert v. Comm’r, T.C. Memo. 2022-48| May 9, 2022 | Marshall, A | Dkt. No. 12901-19
Harrison v. Comm’r, T.C. Memo 2022-6 | May 12, 2022 | Panuthos, J | Dkt. No. 12170-19S
Opinion
Summary: The IRS declared a deficiency, further tax, and accuracy-related penalties on the 2015 earnings tax return of Nicole Harrison, an worker of Samsung Electronics and a advisor on the facet. Harrison made a number of charitable contributions, principally made by a PayPal account, and she or he usually donated clothes, sneakers, and jewellery to organizations comparable to Goodwill and Dress for Success. Harrison traveled in reference to Samsung and usually booked enterprise class flights; nonetheless, when firm coverage modified in order that she might solely be reimbursed for the price of coach, she continued to e book enterprise class. She started to deduct the distinction on her Schedule A and substantiated the prices with financial institution statements of her company card. In connection along with her sole proprietorship consulting, she paid an organization to arrange a web site, networked, traveled for 2 shoppers, purchased a laptop computer, and renovated her private condominium to incorporate a home-office. Lastly, she and a relative, bought a rental property. She contributed to the mortgage by sending Venmo funds. She didn’t obtain any earnings and claimed passive-activity losses for remediating a flooded basement, insurance coverage, and different house-related bills.
Issues:
Whether Harrison is entitled to deduct charitable contributions and unreimbursed worker bills reported on Schedule A, Itemized Deductions?
Whether Harrison is entitled to sure expense deductions referring to her consulting exercise reported on Schedule C, Profit or Loss from Business?
Whether Harrison is entitled to deduct actual property exercise bills reported on Schedule E, Supplemental Income and Loss?
Whether Harrison is chargeable for an addition to tax for failure to well timed file pursuant to § 6651(a)(1)?
Primary Holdings
Yes and no. The Court restricted charitable contributions for lack of proof to correctly substantiate the claimed deductions on each money and noncash contributions. The document lacked approximate dates of acquisition, detailed descriptions, and the prices or different bases for the non-cash contributions, and Harrison didn’t present enough substantiation for her claimed deduction on the money contributions.
Harrison didn’t meet the necessities of § 274(d) for reimbursement of flight bills. She failed to supply information to exhibit instances, locations, and enterprise objective.
Harrison’s consulting exercise didn’t rise to the extent of carrying on a commerce or enterprise. Harrison was nonetheless in the exploratory phases of forming a enterprise of which deductions beneath § 162(a) aren’t permitted.
Harrison didn’t exhibit she qualifies for the lively participation exception of the rental endeavor. She solely testified to co-signing the lease, she didn’t present a replica of the lease, she didn’t present receipts of the Venmo funds on the mortgage, and she or he didn’t obtain any earnings from the exercise. Therefore, she didn’t qualify for the exception beneath § 469(i). Accordingly, Harrison was not entitled to make use of § 162(a) for bills related to the actual property.
Harrison didn’t present her failure to well timed file a return was as a result of cheap trigger. Thus, she was chargeable for the § 6651(a)(1) addition to tax.
Key Points of Law
Burden of Proof. In common, the IRS’s willpower set forth in a discover of deficiency is presumed right, and the taxpayer bears the burden of proving that the willpower is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under § 7491(a), the burden of proof can shift to the IRS if the taxpayer introduces credible proof with respect to any factual points related to ascertaining the taxpayer’s tax legal responsibility. If the burden stays on the taxpayer, then the taxpayer should show she or he in entitled to a selected deduction in query. See Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). If a taxpayer is ready to set up that she paid or incurred a deductible expense however is unable to substantiate the exact quantity, the Court might approximate the deductible quantity, however provided that the taxpayer presents enough proof to ascertain a rational foundation for making the estimate. See Cohan v. Comm’r, 39 F.second 540, 543-44 (second Cir. 1930).
170 Charitable Contributions. There is allowed a deduction for any charitable contribution cost, as outlined by §170(c), and which is allowed beneath the laws. § 170(a)(1); Treas. Reg. § 1.170A-13. The substantiation necessities rely on type of cost and the dimensions of the contribution.
Charitable Contributions of Property. If property apart from cash is donated, “the quantity of the contribution is the truthful market worth (FMV) of the property on the time of the contribution.” Treas. Reg. § 1.170A-1(c)(1). FMV is outlined as the value at which a prepared purchaser and vendor would transact, neither being beneath any compulsion to purchase or promote, and each having cheap information of related details. Treas. Reg. § 1.170A-1(c)(2)
Substantiation Requirements of Money Donation. A charitable contribution of cash have to be substantiated by a minimum of one of many following: (1) a canceled test; (2) a receipt from the donee charitable group exhibiting the identify of the donee, the date of the contribution, and the quantity of the contribution; or (3) in the absence of a canceled test or receipt from the donee charitable group, different dependable written information exhibiting the identify of the donee, the date of the contribution, and the quantity of the contribution. Treas. Reg. § 1.170A-13(a)(1). The reliability of the document is set on the premise of all related details. Treas. Reg. § 1.170A-13(a)(2)(i). If the donation is a small quantity, any written or different proof from the donee charitable group acknowledging receipt is mostly enough. Treas. Reg. § 1.170A-13(a)(2)(i)(C). However, donations in extra of $250 require donee written acknowledgement containing specified info. § 170(f)(8).
Substantiation Requirements of Property Donation. A charitable contribution of property have to be substantiated by a receipt exhibiting (1) the identify of the donee; (2) the date and placement of the contribution; and (3) an outline of the property in element moderately enough beneath the circumstances. Treas. Reg. § 1.170A-13(b)(1). A receipt is just not required if the contribution is made in circumstances the place it’s impractical to acquire a receipt. See id. The reliability of the information is set on the premise of all the related details and circumstances. Treas. Reg. 1.170A-13(b)(2). If the deduction on the contribution of property exceeds $500, then the taxpayer should keep written information establishing (1) the merchandise’s method of acquisition in addition to both the merchandise’s approximate date of acquisition or date the property was considerably accomplished and (2) the associated fee or different foundation, adjusted as supplied by part 1016, of property donated by the taxpayer in the course of the taxable 12 months. See 170(f)(11)(A)(i), (B); Treas. Reg. § 1.170A-13(b)(3)(i).
162 Trade or Business Expense. § 162 typically permits for the deduction for all of the abnormal and mandatory bills paid or incurred in the course of the taxable 12 months in carrying on any commerce or enterprise. Boyd v. Comm’r, 122 T.C. 305, 313 (2004). The taxpayer bears the burden of proving that bills have been of a enterprise nature somewhat than private and that they have been abnormal and mandatory. Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Performing companies as an worker constitutes a commerce or enterprise. See O’Malley v. Commissioner, 91 T.C. 352, 363–64 (1988); Primuth v. Commissioner, 54 T.C. 374, 377–78 (1970).
274 Disallowance of Certain Travel Expenses. Travel bills require strict substantiation by enough information or by enough proof corroborating the taxpayer’s personal assertion as to the quantity, time, place, and enterprise objective of those expenditures. § 274(d). Substantiation by enough information requires the taxpayer to keep up an account e book, a diary, a log, an announcement of expense, journey sheets, or the same document ready contemporaneously with the expenditure and documentary proof (e.g., receipts or payments) of sure expenditures. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-5T(c)(2). Substantiation by different enough proof requires the manufacturing of corroborative proof in help of the taxpayer’s assertion particularly detailing the required aspect. Temp. Treas. Reg. § 1.274- 5T(c)(3).
162 vs § 195. § 162(a) doesn’t present the operative rule for deducting start-up prices. The Code part that does present the mechanical rule is § 195. A preliminary seek for a possible enterprise alternative doesn’t qualify the taxpayer for deductions beneath §§ 162, 165, or 212. Dean v. Comm’r., 56 T.C. 895, 902 (1971). Carrying on a commerce or enterprise requires greater than preliminary analysis into enterprise potential and the solicitation of potential prospects. Christian v Comm’r., T.C. Memo. 1995-12.
469 Passive Activity Loss. § 469(a) typically disallows any “passive exercise loss” for the taxable 12 months. A passive exercise loss is outlined as the surplus of the combination losses from all passive actions for that 12 months over the combination earnings from all passive actions for such 12 months. § 469(d)(1).
Passive Activity Defined. A passive exercise is any commerce or enterprise in which the taxpayer doesn’t materially take part. § 469(c)(1). Rental exercise is mostly handled as per se passive no matter whether or not the taxpayer materially participates. § 469(c)(2). There are two exceptions to the final rule that rental actual property actions are per se passive actions: (1) passive exercise losses as much as $25,000 beneath part 469(i) and (2) sure taxpayers in actual property trades or companies (actual property professionals) beneath part 469(c)(7). Moss v. Comm’r., 135 T.C. 365, 368 (2010).
469(i) Exception to Passive Activity Definition. a Section 469(i) permits taxpayers who “actively participated” in rental actual property actions throughout any taxable 12 months to deduct as much as $25,000 of the passive exercise losses attributable to these actions in that 12 months. § 469(i)(1) and (2). This Court has decided that the lively participation normal is met if a taxpayer participates in a major and bona fide sense in making administration choices or arranging for others to supply companies comparable to repairs. Madler v. Comm’r., T.C. Memo. 1998-112.
6651(a)(1) Failure to Timely File. A Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed (together with extensions) except the taxpayer can set up that the failure is because of cheap trigger and never as a result of willful neglect. Respondent bears the burden of manufacturing with respect to petitioner’s legal responsibility for the addition to tax beneath part 6651(a)(1). See § 7491(c); Higbee v. Comm’r., 116 T.C. 438, 446–47 (2001). Once the burden is met, the taxpayer bears the burden of proving that her failure to file a well timed return was as a result of cheap trigger somewhat than willful neglect. Higbee, 116 T.C. at 446.
Insights. This case demonstrates the taxpayer’s burden of manufacturing as soon as the IRS has declared a deficiency as a result of improper deductions. The case highlights the factual circumstances a courtroom will inquire into for sure claimed deductions. As such, taxpayers might want to maintain detailed information for money and noncash charitable contributions. Moreover, taxpayers ought to be aware that pre-business bills aren’t deductible beneath § 162. Instead, the deduction for start-up prices is allowable beneath §§ 195 and 709. Travel expenditures needs to be accompanied with instances, locations, and documentation of the enterprise objective. Lastly, this case exhibits the difficult passive exercise loss disallowance guidelines. Specifically, these associated to actual property owned by people.
For further info on the topic passive versus nonpassive, see Freeman Law’s Tax Court in Brief: Tax Court in Brief | Rogerson v. Commissioner | Passive Income, Rent of Yachts, and Reliance on Competent Tax Counsel – Freeman Law (May 12, 2022).
For further info on the tax remedy of charitable contributions, see Freeman Law’s weblog on Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions – Freeman Law (March 22, 2022).
[View source.]
https://www.jdsupra.com/legalnews/tax-court-in-brief-harrison-v-2339235/
