Federal Tax News – August

By Team HRH | September 21, 2016

Cohabitating boyfriend is out of luck. The U.S. Tax Court rejected a man’s deduction claims for money he paid to a woman he lived with as part of the mortgage on the residence they shared. She solely owned and financed the home because he didn’t qualify for a mortgage. The court stated the taxpayer couldn’t take a mortgage interest deduction because he didn’t show that he had the benefits and burdens of ownership. Taxpayers may deduct interest paid (up to certain dollar limits) on qualified residence mortgages if they are legal or equitable owners (Jackson, TC Summary Op. 2016-33)

Stork’s visit allows couple tax-free gain. Taxpayers who sold their condo after having a child qualified for a reduced gain exclusion, the IRS decided in a private ruling. The married couple had a child when they bought the 2-bedroom condo, then later had another. The suitability of the condo changed as a result of an “unforeseen circumstance” and was the reason for selling. Qualified taxpayers can exclude $250,000 of gain ($500,000 if married filing jointly) from selling a home owned and used as a principal residence for at least 2 of the 5 years before the sale. (PLR 201628002)

Auto restoration business had a profit motive. A patent attorney restored 1955 and 1956 Plymouth autos on the side. He managed all aspects of the business, including advertising and sales. At its peak, his inventory reached 40 cars. On his 2009 return, the taxpayer deducted expenses related to the car business. The IRS disallowed the deductions, concluding the business lacked a profit motive and was subject to the hobby loss rules. The U.S. Tax Court disagreed, finding that the taxpayer acted in a businesslike manner and established the required profit motive (TC Memo 2016-127).

Crowd funding generally isn’t tax-free. In an Information Letter, the IRS explained the tax treatment of crowd funding by looking at the principles of income inclusion. Crowdfunding is the practice of funding a project by gathering online contributions. It’s become a popular way to raise capital for a range of endeavors. The IRS stated that money received without an offsetting liability (such as a repayment obligation), which is not a gift or a capital contribution to an entity in exchange for a capital interest in the entity, is generally includable in income.

No effort, no relief. The Court of Appeals for the Ninth Circuit, affirming a district court opinion, has ruled that a taxpayer who failed to make a tax filing until seven years after his return was due and three years after the IRS assessed his deficiency didn’t make “an honest and reasonable attempt” to follow the law. That’s why, in Smith v. IRS, the taxpayer’s tax liability with respect to that return wasn’t discharged in bankruptcy. Under bankruptcy law, tax debts in Chapter 7 bankruptcies may be discharged, but not if a required tax return isn’t filed. (118 AFTR 2d, 7/13/16)

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