The Test for Profit Motive: Allowance of Deductions under IRC § 183 Test

What factors aid the Tax Court in deciding when an activity is entered into with a “profit motive” (with allowable ordinary and necessary expenses) versus a hobby (where losses may be taken only up to the amount of profit received)? Taxpayers can deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business,[1] for the production or collection of income,[2] or for the management, conservation, or maintenance of property held for the production of income.[3] Nevertheless, before engaging in the “ordinary and necessary” inquiry, taxpayers must pass the IRC § 183 test. IRC § 183(a) generally disallows any deduction attributable to an activity “not engaged in for profit,” and is aimed at disallowing the deduction of the expenses of a hobby that a taxpayer might try to use to offset taxable income from other sources. In turn, IRC § 183(c) defines an “activity not engaged…

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The Truth about Amending Tax Returns

Clients are untrustworthy.  As a tax controversy attorney, this is my experience. I have heard that other types of law deals with more honorable sorts, but I'll believe it when I see it.  When a client comes to you and says "whoopsie, I forgot to report [insert absurdly large number here] on my return, what should I do?" what should you tell him?  What if the IRS has already discovered the understatement?  Is he under the obligation to file an amended return?  Are you required to tell him to file one? In this brief article, Briefly Taxing examines amended returns in general, whether filing them is required, and whether a CPA and tax attorney must advise their client to file an amended return. Quick Rules An amended return filed by a taxpayer reporting an underpayment is an admission by that taxpayer of an underpaid tax liability.[1] The taxpayer has no…

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Mathews v. Commissioner (T.C. Memo. 2021-85)

On July 8, 2021, the Tax Court issued a Memorandum Opinion in the case of Mathews v. Commissioner (T.C. Memo. 2021-85). The primary issue presented in Mathews was whether the Tax Court had jurisdiction to hear a petitioner when the pro se petitioner filed his petition (sent a letter to the Tax Court) well after the 90 day deadline had passed, and whether because the Tax Court had jurisdiction over one year’s petition, the Tax Court ipso facto had jurisdiction over another. Held: No, and No. The Timeliness Problem The IRS sent the notice of deficiency by certified mail on March 24, 2016, to the petitioner at his address in Conway, Arkansas address as evidenced by the notice itself and the certified mailing list, which was the same address he has used in all of his correspondence in this case. The petitioner did not file his “petition” (a letter to…

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Delgado v. Commissioner (T.C. Memo. 2021-84)

On July 7, 2021, the Tax Court issued a Memorandum Opinion in the case of Delgado v. Commissioner (T.C. Memo. 2021-84). The primary issue presented in Delgado was whether the petitioner’s frivolous argument that he did not receive taxable income in 2017 because he was not engaged in a “trade or business” as defined by IRC § 7701(a)(26) held any water… Quick Work of the Frivolousness Compensation for services is included in gross income. IRC § 61(a)(1). Petitioner argues that the payments he received as an independent contractor were not taxable to him because he did not participate in a “trade or business” as defined in IRC § 7701(a)(26). Specifically, petitioner contends that a person is only in a “trade or business” if he or she performs “the functions of a public office” and that earnings received from private companies are not taxable income.  Not unsurprisingly, a similar argument was…

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Peterfreund v. Commissioner (T.C. Memo. 2021-83)

On July 7, 2021, the Tax Court issued a Memorandum Opinion in the case of Peterfreund v. Commissioner (T.C. Memo. 2021-83). The primary issue presented in Peterfreund was whether the IRS’s Whistleblower Office (WBO) abused its discretion because it did not initiate an administrative or judicial action and it did not collect any proceeds from the target taxpayer on the basis of the information the petitioner furnished. Whistleblowin’ Jurisdiction The Tax Court has jurisdiction to review final determinations by the IRS regarding whistleblower award claims including so-called rejections and denials as classified by the Whistleblower Office (WBO). See Lacey v. Commissioner, 153 T.C. 146, 163-164 (2019); see also Cooper v. Commissioner, 135 T.C. 70, 75-76 (2010). The regulations provide that a rejection is a determination limited to the whistleblower and the information provided on the face of the claim. Treas. Reg. § 301.7623-3(c)(7). On the other hand “[a] denial is…

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Pragias v. Commissioner (T.C. Memo. 2021-82)

On June 30, 2021, the Tax Court issued a Memorandum Opinion in the case of Pragias v. Commissioner (T.C. Memo. 2021-82). The primary issue presented in Pragias was whether the six-year statute of limitations under IRC § 6501(e) (substantial omission of items) applied. The Substantial Omission Extension under IRC § 6501(e) IRC § 6501(a) generally requires that the IRS assess tax within three years after the taxpayer files his return. However, IRC § 6501(e), as relevant to this case and as in effect at the relevant time, extends this period to six years for returns that satisfy a two-part test. See Quick Tr. v. Commissioner, 54 T.C. 1336, 1346 (1970), aff'd per curiam, 444 F.2d 90 (8th Cir. 1971). First, the extended limitations period applies only if “the taxpayer omits from gross income an amount properly includible therein” and that amount “is in excess of 25% of the amount of…

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Long v. Commissioner (T.C. Memo. 2021-81)

On June 30, 2021, the Tax Court issued a Memorandum Opinion in the case of Long v. Commissioner (T.C. Memo. 2021-81). The primary issue presented in Long was whether the petitioner was entitled to dispute her underlying liabilities when she failed to do so with prior opportunity arising out of a notice of deficiency that was mailed to the petitioner’s last known address—which she did not receive. Underlying Liability in CDP Case A taxpayer's underlying liability is properly at issue if she did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. IRC § 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609 (2000). Generally, a notice of deficiency is valid if it was properly mailed to the taxpayer at her last known address. IRC § 6212(b)(1); Hoyle v. Commissioner, 131 T.C. 197, 200, 203-204 (2008), supplemented by 136 T.C. 463 (2011).…

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