Federal Tax News – February

By Team HRH | March 1, 2017

Father isn’t responsible for a steep tax penalty. A struggling restaurant didn’t send payroll taxes it collected from employees to the IRS and ultimately stopped doing business. The father of the restaurant’s co-owner occasionally helped out at the business and signed four checks when his son was out of town. The IRS sent trust fund recovery penalty letters for nonpayment of employment taxes, including one to the father. The IRS argued he was a responsible person because he acted as a “de facto officer” by signing the checks. The U.S. Tax Court disagreed, concluding the father lacked sufficient control over the business; wasn’t an owner, director or employee; and wasn’t an official signatory of the business’s bank accounts. The penalty would have been equal to the amount of tax that wasn’t paid. (Schaffran, TC Memo 2017-35)

Less time for April Fools’ Day tricks if you must take a required minimum distribution (RMD). IRA owners who turned age 70½ in 2016, but opted to wait until 2017 to begin taking their 2016 required minimum distributions (RMDs), must receive their 2016 RMDs by April 1. A participant in a qualified retirement plan generally must begin taking distributions from it by April 1 of the calendar year following the later of (a) the year in which he or she reaches age 70½ or (b) the year he or she retires. Note: April 1 falls on a Saturday this year. The IRS says that is the deadline, not the following Monday, April 3.

Court rejects expert’s valuation of artwork. A decedent’s estate included two 17th Century “Old Master” oil paintings from well-known artists. The U.S. Tax Court redetermined for estate tax purposes the value of the paintings. The estate hired the vice president of an auction house to value the artwork and granted him exclusive rights to auction the pieces. The estate reported a $600,000 fair market value for the paintings on its estate tax return, based on the expert’s valuation. However, the IRS valued the paintings at $2.6 million. The court rejected the estate’s valuation because it determined that its expert stood to gain from providing a lowball estimate, didn’t offer supporting comparables, exaggerated the paintings’ dirty condition, and didn’t adequately explain that one painting sold a few years later for almost five times the amount he estimated. (Estate of Kollsman, TC Memo 2017-40)

Medical deduction for alternative care allowed. In a small tax case bench opinion, the U.S. Tax Court ruled that a woman suffering from spinal disease could deduct expenses for “integrative medical care” as a medical expense. Her doctor recommended the treatment, which addresses a full range of physical, emotional, mental, social, spiritual and environmental influences that affect a person’s health, and may include acupuncture, massage, biofeedback, yoga, tai chi, meditation and other stress reduction programs. A medical expense deduction is allowed if it is paid for the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body. (Malev, Docket No 1282-16S)

Court denies deductions due to lack of proof. A taxpayer ran his businesses through several entities. The U.S. Tax Court ruled he wasn’t entitled to deduct consulting fees and commission expenses that one of his LLCs paid to his solely owned C corporation. The taxpayer claimed the expenses were for sophisticated camera rentals and were “ordinary and necessary” for his business. However, he didn’t provide sufficient, credible evidence to prove it. He also didn’t explain how expenses were calculated or whether the business charged third parties the same amount for similar services. (Kauffman, TC Memo 2017-38)

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