2018 Tax Season Court Cases

Loss on Sale of Couple’s Home is Not Deductible. After living in the house for years the couple moved out and began substantial renovations. Five years of renovations later, the couple leased the house to a friend, but for below market rent. (Renting out for below FMV rent will cause problems in many tax situations). Also, the primary reason for renting the house was for insurance purposes not for income generation reasons. The Tax Court disallowed the loss.

Audit Red Flag! Warning: Reporting Schedule C losses when you have high income otherwise will surely draw the IRS’ attention. Especially if the activity could be a hobby. Case in point.: A pilot with substantial wage and pension income bought an antique fighter jet. He spent a lot of money restoring the jet. He then flew the plane in air shows. He deducted his expenses as losses on his Schedule C. the pilot had four strikes against him: 1) he never intended to make a profit, 2) didn’t operate the activity in a business-like manner, 3) he didn’t follow expert advice, and 4) his losses increased every year. Loss disallowed.

Payment to Settle Lawsuit isn’t Deductible. Jani-King’s owner, his girlfriend and two employees went vacationing in the Caribbean. The owner’s girlfriend overdosed on cocaine. Her mother sued both the owner and Jani-King. A settlement is reached for $2.3 million. Jani-King pays for and deducts the settlement and legal fees as business expenses. The IRS challenges the deductions. The Tax Court and the U.S. Court of Appeals for the 5th Circuit affirm. The IRS’s position: No deduction allowed.

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