Determining whether an activity for tax purposes is a trade or a company, whether a tax penalty should be waived for valid reasons or the eternal question of when income is taxable – these questions come up frequently and CPAs can benefit from them. that they are familiar with the legal doctrine that regulates them.
That is the premise of “Top Ten Federal Tax Cases of All Time”, a presentation by Annette Nellen, Esq., CPA, CGMA, during the AICPA & CIMA ENGAGE 2021 conference. Nellen, Professor at San José State University and Director of the Master of Science in Taxation program, is former Chair of the AICPA Tax Executive Committee. Your discussion will take place on July 28, beginning at 3:30 p.m. PDT (6:30 a.m. EDT).
Although the topics that are being discussed have a long legacy of controversy, the discussion is intended to be relevant to the common concerns of tax practice at the moment and to help remove uncertainties, said Nellen in an interview. Accordingly, her talk will not focus solely on historical bedrock cases or the cases most frequently cited in later expert opinions, although these will be both considerations.
“I want to make this as useful as possible,” said Nellen. “When I talk about the most important cases that should be considered in practice today, I want to focus on which good cases are in your pocket that can help solve a problem.”
The general principles of tax law are often best appreciated by their contours around the facts of the taxpayer. For example, determining when to start a trade or business may depend on forces beyond the control of the taxpayer. Certainly the COVID-19 pandemic has brought such concerns to the fore, she noted.
“A question that has been asked a couple of times in the past six months was that a company had planned to put some equipment on, but was then shut down by government order. Could you write it down anyway?
“I think you must have been in the practice or tax department for over 30 years and have a reasonably good memory, I can remember, oh, this is like the Sears Oilrs case [Sears Oil Co., Inc., 359 F.2d 191 (2d Cir. 1966)]where an oil boat got stuck in the ice. Was it started up while it was stuck in the ice? “
To that question, the Second Circuit replied, yes, the taxpayer’s depreciation period on its new barge began when it was ready and available for taxpayer operations, months before the icy New York State Channel it was trapped in was thawed and released it for its first service. In doing so, the court relied on several previous cases and set precedents for many more – the case is cited in 35 subsequent federal cases and four IRS revenue decisions, according to Thomson Reuters Citator 2nd Series.
Other cases may not be cited frequently, but will still appear in Nellen’s Top 10 because they address certain everyday practice problems that arise in memorable circumstances.
“One in that category is Woodsum [136 T.C. 585 (2011)]. The taxpayer was a very high income person; he had over 160 information return forms, ”said Nellen.
The tax advisor of the taxpayer omitted only one of these forms in the taxpayer’s tax return for 2006; however, the 1099-MISC, Miscellaneous Income, had income of nearly $ 3.4 million. The omission resulted in an accuracy fine of more than $ 104,000, which the taxpayer and spouse, with reasonable cause and in good faith, challenged by demonstrating that they relied on professional advice to ensure their return is complete .
“But instead the court said, ‘You are responsible for what happens when you return,'” said Nellen, adding that, in turn, the creators owe it to their customers to give enough time to review their return. “So it is meant to remind practitioners to give taxpayers at least one day to look at it. And so that they remind customers that they are responsible for the return. “
Some historical cases are cited frequently, sometimes in the most recent contexts, because of the fundamental nature of the tax issue they settled. One of these is Glenshaw Glass Co., 348 US 426 (1955) (over 1,000 entries in Citator 2nd), which is used for the principle that income recognition for tax purposes depends on whether and when taxpayers “have a clearly realized capital gain, and over which taxpayers have complete control. ”Nellen noted that Glenshaw Glass recently found out in Chief Counsel Advice 202114020 whether a taxpayer who received bitcoin cash as a result of a hard fork had gross income from it.
Sometimes tax cases can be used as an aid when guidance from the IRS could lead to a less than optimal outcome, Nellen said.
“One that I come across a lot is that some practitioners think that renting for Sec is not a trade or business. 199A purposes unless you are using this safe haven in Rev. Proc. 2019-38, ”she said. “But there are a number of jurisdictions that set out when a rental could be a business or a business.” (And the revenue process itself states that a company that does not meet the Safe Harbor requirements could otherwise meet the definition of a trade or business in Regs. Sec. 1.199A-1 (b) (14).)
One such new case is Keefe, 966 F.3d 107 (2nd Cir. 2020), aff’g TC Memo. 2018-28. In analyzing why taxpayers did not have a trade or business as they claimed to rent out their historic Newport, RI mansion (and therefore could not claim an ordinary loss), the Second District tested the taxpayers’ tests ” very well presented ”. must meet, said Nellen.
The topics covered in the presentation may vary, but a touchstone will be avoiding difficulty by knowing both known case histories and others with less profile but good applicability, said Nellen.
“It looks at some important cases that may arise to remind you how to avoid a problem,” she said.
AICPA & CIMA ENGAGE 2021, the premier event for accounting and finance professionals, will be a hybrid event this year. Join us July 26-29 at the Aria Resort and Casino in Las Vegas or online for keynotes and sessions on accounting and auditing; VAT; Technology; Guide; personal financial planning; Diversity, equity and inclusion; and more.
– Paul Bonner ([email protected]) is a senior editor at JofA.