Busy September Tax Court
The Tax Court was quite busy in September – particularly in hammering taxpayers with a “nice try, but no cigar” conclusion to their cases. Three in particular:
- In Ronald C. Fish v. Commissioner, the taxpayer tried one which has been pled to us on many occasions by beleaguered taxpayers: deduction on the 1040 of losses passed through from partnership investments owned by his IRA. The taxpayer in this case argued that (in his view) an IRA has “all the attributes of a grantor trust and is therefore a pass through entity which makes all items of income, deduction and credit treated as belonging…(to him) and reportable on …(his) individual tax return.” Of course, IRS and the Tax Court did not agree, because clearly transactions occurring within the IRA do not result in taxable events which are reported on the holder’s individual income tax return. The law is quite clear that only distributions from and payments out of an IRA trigger income tax consequences for the payee or distribute. And if you think about it, the taxpayer eventually will get the benefit of the losses – in the form of less dough available within the IRA to distribute to him as retirement income. It’s just that simple.
- And then we have Donald L. Dunnigan v. Commissioner which was another “nice try” on the taxpayer’s part, but to no avail. Seems that Dunnigan obtained a business line of credit to help support his sole proprietorship appraisal business, and he drew $50,000 down on the line over time. In 2009, he was unable to repay the borrowed funds in full, negotiating with the lender to settle the obligation for about $15 grand. The lender ultimately issued a Form 1099-C at year end, reporting the $35 grand as cancellation of indebtedness income, of course, but erroneously checked the box on the form indicating that the taxpayer was not “personally liable” for the debt repayment. So, in preparing his income tax return for the year, Dunnigan improperly relied on the incorrect 1099-C, in addition to concluding that he was exonerated from reporting the income on some theory of “hardship” (due to a medical condition). Unfortunately, neither claim succeeded, in that the incorrect 1099-C was irrelevant, given the actual legal agreement which the taxpayer had signed in the first place, and further, the law does not provide any form of “hardship” exception for health reasons relative to this kind of tax event.
- Finally, in Charles Okonkwo, et ux. v. Commissioner, IRS slapped the taxpayers for trying to deduct a rental loss associated with a house rented to their daughter for less than a “fair market value” rental rate. The Internal Revenue Code is crystal clear in stating that a dwelling unit is used as a residence of the taxpayers (and thus, by definition, a personal use property and not a rental property) if the taxpayers or a family member uses it for personal purposes for more than a defined period of time and/or does not pay fair market value rent. Thus, daughter’s use of the residence in question was personal and is attributed to the taxpayers themselves. Result: no allowable rental loss!
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He may be reached at 831-7288, and welcomes comments at firstname.lastname@example.org.