The Tax Court ruled that the taxpayers had constructive receipt and did not quality for nonrecognition treatment under Sec. 1031.
As part of the exchange, the parties established two escrow accounts.
Neither account limited taxpayers’ right to receive, borrow, or otherwise obtain the benefit of the funds nor made any mention of a like-kind exchange. [ Ralph Crandall, TC Summ. Op. 2011-14]
Initially the IRS planned to cease issuing provisional PTINs when the Registered Tax Return Preparer competency test began and to require individuals to pass the test and meet all other requirements before the issuance of a PTIN. However, the IRS stated in Notice 2011-80 that provisional PTINs would continue to be issued until at least April 18, 2012.
At this time the IRS plans to continue issuing provisional PTINs past April 18, 2012 and will determine the future of them by December 31, 2013.
Congress changed the law to permit tax-deferred exchanges of life insurance or annuities for long-term care policies. Long-term care insurance can be offered as part of an annuity contract.
The IRS has stated that no tax is due if the insurance premiums are paid with the annuity’s cash value. The cash value in annuities and life insurance policies can be used tax free to purchase long-term-care insurance coverage. [Notice 2011-68]
Wrap fees charged to IRA holders are not counted as payments to the IRA if separately paid by the owner. The fee covers investment help, broker commissions, and the like. Although the payment of broker commissions is usually treated as an IRA payment, the rule does not apply to wrap fees because the charge does not vary with the number of trades made. It is based on a percentage of total assets under management. [PLR 201104061]
Contributions to IRAs cannot be based on interest and dividend income or Social Security benefits, the Tax Court says. Contributions must be based on earned income such as wages or Schedule C income. Interest and dividends received in the capacity of security dealer qualify as earned income. [Kobell, TC Memo 2011-66]
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Attendees taking approved IRS Continuing Education programs should not submit their Certificates of Completion to the IRS. The Continuing Education providers will collect and maintain required PTIN information for all students who complete programs in 2012 and submit the information to the IRS through a PTIN Excel template.
The PTIN upload/input capability will not be available on this system until approximately July 1, 2012.
A venture capitalist’s $3.6 million bad loan to a business associate is deductible business bad debt. [Dagres, 136 TC No. 12] The capitalist loaned money to a businessman who had given him several leads on companies that he would then invest in and help operate. Unfortunately, the tipster defaulted.
The Service treated the loan as a nonbusiness bad debt, deductible as a short-term capital loss. The Tax Court said the loan was related to his business, because the dominant motivation for making the loan was to protect or enhance his business, not to protect his investments. The loss is fully deductible, without regard to the $3,000 annual limit on capital losses.
Taxpayers must materially participate in short-term rentals in order to deduct their losses. Short-term rentals are where the average rental period is seven days or less. [Jende, TC Summ. Op. 2011-82]
This rule applies to the active-participation requirement for the $25,000 exception. Short-term rentals are not considered rental property. The active participation test does not apply in the case of short-term rentals.
The taxpayers must put in at more than 100 hours a year on each unit and their participation must be more than anyone else’s. Or they must work over 500 hours on each rental activity.
Real estate professionals with rental losses can make a late election to treat all rentals as a single unit. [Rev. Proc. 2011-34] A real property trade or business includes development, construction, acquisition, conversion, rental, leasing, management, or brokerage. Ordinarily, the PAL rules apply as if each taxpayer’s interest in rental real estate were a separate activity.
However, a taxpayer may elect to treat all interests in rental real estate as a single real estate activity, by filing a statement with the taxpayer’s original income tax return for the year. The election is binding for the year in which it is made and for all future years, unless the taxpayer is not a qualifying taxpayer. The taxpayer can make the election in any year in which the taxpayer qualifies; not just the initial year of qualification. A taxpayer can revoke the election only if there is a material change in the taxpayer’s circumstances.
The new procedure is in lieu of applying for a letter ruling. Accordingly, the taxpayer does not have to pay user fees to obtain permission for a late election. Taxpayers not eligible for the shortcut procedures can still apply for a letter ruling, provided the three-years statute of limitations on assessment has not expired.
To obtain relief under the new procedures from an otherwise untimely election, representations must be made that the taxpayer:
• Failed to make the election solely because the election would not have been timely.
• Filed return consistently with having made an election and aggregating the taxpayer’s activities, and did not file any returns inconsistent with the requested aggregation of activities.
• Timely filed each return that would have been affected by a timely election. A return is timely if field within six months after its due date, excluding extensions.
• Has reasonable cause for not making a timely election.
The taxpayer must attach the statement to an amended return for the most recent tax year, explain the reason for the failure to file a timely election, and identify the year for which it is making a late election. The IRS will notify the taxpayer that has received a completed application for relief that satisfies the requirements of Rev. Proc. 2011-34. The taxpayer may then treat all interests in rental real estate as a single rental real estate activity for the year for which the election was made.
A venture capitalist’s $3.6 million bad loan to a business associate is deductible business bad debt. [Dagres, 136 TC No. 12]
The capitalist loaned money to a businessman who had given him several leads on companies that he would then invest in and help operate. Unfortunately, the tipster defaulted. The Service treated the loan as a nonbusiness bad debt, deductible as a short-term capital loss.
The Tax Court said the loan was related to his business, because the dominant motivation for making the loan was to protect or enhance his business, not to protect his investments. The loss is fully deductible, without regard to the $3,000 annual limit on capital losses.
The Tax Court affirmed that the taxpayer’s wagering costs were limited to the amount of his wagering gains under Sec. 165(d). However, the Court held that Sec. 165 loss limitations did not apply to the taxpayer’s business expenses from his professional gambling. [Mayo, 136 TC No. 4 (2011)]
The Court chose not to follow the decision in Offutt that held that losses from wagering transactions included both losses from wagers and more general expenses incurred in the conduct of a gambling business. [16 TC 1214 (1951)]
Related expenses such as meals, lodging, and transportation are not treated as wagering losses. These costs can offset self-employment tax, and if large enough can even create a net operating loss to offset prior years’ income.
The Tax Court found that the 148 trading transactions the taxpayer made with his Merrill Lynch account after leaving the firm was insufficient to qualify him as a trader.
His Schedule C $1.4 million of losses should have been reported on Schedule D, subject to the $3,000 limitation on capital losses.
The court has held that he held stock for asset appreciation rather than short-term price variations. [Henricus van de Lee, TC Memo 2011-234]
Attorney’s fees paid in a divorce were not deductible because they failed to meet the “ends-on-death” criteria of Section 71. [Dan Nicolas, TC Summ. Op. 2011-9]
The judgment order did not state whether the obligation would continue if his ex-wife died. Oregon state law was ambiguous on this point.
This allowed the court to read the divorce instrument and make its own determination based on the language of the document.
