The top 20 tax developments from 2022

July 21, 2022 2:34 PM

As we enter the homestretch, 2022 has been an eventful year for tax professionals. New proposed regulations, court decisions and Internal Revenue Service pronouncements have all impacted the tax landscape. While the major developments are familiar to most professionals, there are a few that might have been overlooked due to the busy nature of the profession.

Below are some of the more important developments for the year, as selected by David De Jong, a CPA and partner at the Rockville, Maryland, law firm of Stein Sperling Bennett De Jong Driscoll.

1. Proposed regs under Code Sec. 408 under SECURE Act changes

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The 275-page set of regulations explains changes to the minimum distribution rules as a result of the 2019 SECURE Act. Under the regs, annual distributions will be required prior to the 10-year deadline for removing the account balance if the decedent had reached the required beginning date before death, but will not be required if he had not.

2. Proposed regs under Code Sec. 2010

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These regulations reiterate that 2018-2025 gifts will generally remain nontaxable even if larger than the post-2025 exemption at death; however, that rule will generally not apply to pre-2026 transfers that are ultimately includable in gross estates.

3. Gericke v. Truist

The Third Circuit Court of Appeals agreed with a New Jersey federal district court that Truist properly issued a Form 1099-C to the plaintiff inasmuch as regulations require issuance of the form on an identifiable event including a creditor’s decision to discontinue collection activity; the court stated that the Form 1099-C is not a means of accomplishing an actual discharge of debt so that collection activity could resume (forcing the individual to deal with whether the reporting of income is required).

4. Blum v. Commissioner

A recent court ruling in Illinois advances a conspiracy case against prominent Wall Street banks.

The Ninth Circuit Court of Appeals agreed with the Tax Court that payments for legal malpractice in mishandling a physical injury suit are taxable to the recipient, as the settlement was entered to compensate the plaintiff for the harm caused by the malpractice, rather than for the physical injuries sustained in the underlying negligence action.

5. Morgan v. Commissioner

The Tax Court determined that an individual who met the 330-in-365-days-abroad test had his tax home in Saudi Arabia where he worked under a U.S government contract, concluding that he had significant community involvement and stronger ties to Saudi Arabia than he did to the United States, notwithstanding that he retained an unrented home in the United States that was used by his daughter.

6. Musselwhite v. Commissioner

Looking at eight factors, the Tax Court found six of them in favor of the IRS, determining that a loss on the sale of four lots by a personal injury lawyer was capital in nature rather than ordinary; the taxpayer did not help himself by using the term “investments” in the entity name and in the description of the purpose of the entity.

7. Milkovich v. United States

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A divided Ninth Circuit Court of Appeals reversed a Washington federal district court and allowed a bankrupt couple, whose recourse home mortgage was converted to nonrecourse on filing a bankruptcy, to deduct over $100,000 in interest being paid at the time of a short sale despite not having to report relief from indebtedness income due to insolvency.

8. State of New York v. Yellen

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The U.S. Supreme Court declined to review the holding of the Second Circuit Court of Appeals at 128 AFTR2d 2021-6202 permitting the limitation on the deduction of state and local taxes to stand.

9. Hewitt v. Commissioner

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The Eleventh Circuit Court of Appeals reversed the Tax Court and found IRS regulations were not properly developed and were arbitrary and capricious, which would have taken away a deduction for donation of a conservation easement because improvements to the area of the easement would not have inured on a subsequent sale in at least pro rata part to the donee organization; in Oakbrook Landholdings, LLC v. Commissioner, 129 AFTR2d 2022-1031, the Sixth Circuit Court of Appeals agreed with the Tax Court, under similar facts.

10. Kellett v. Commissioner

The Tax Court found that a business information website activity became a business with deductible rather than amortizable expenses when the website’s functionality was completed, which was four years prior to profitability.

11. Hoffman v. Signature Bank of Georgia

The Eleventh Circuit Court of Appeals reversed a Georgia federal district court and held that Roth IRAs enjoy the same protection from creditors under federal law as do traditional IRAs.

12. Hood v. Commissioner

The Tax Court, using a multifactor approach, allowed a deduction by a C corporation for about one half of a $5 million bonus paid in two consecutive years to the owner of a highly successful construction company above and beyond about $200,000 in straight compensation; the owner worked 60- to 70-hour weeks and grew the company from scratch to about $70 million in revenue.

13. Donoghue v. Commissioner

The U.S. Supreme Court building stands in Washington, D.C., U.S., on Tuesday, Feb. 25, 2020. President Donald Trump demanded that Supreme Court Justices Sonia Sotomayor and Ruth Bader Ginsburg recuse themselves from future cases involving his administration after a dissent from a decision allowing the government to test prospective immigrants' wealth.

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The U.S. Supreme Court declined to hear an appeal from the First Circuit Court of Appeals that had sustained a Tax Court decision finding that the breeding, racing and selling of horses was not an activity engaged in for profit where there was not a single year with positive earnings in 30 years.

14. Oosterwijk v. United States

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A Maryland federal district court refused to abate substantial penalties when a taxpayer’s CPA firm failed to file an extension and subsequently incorrectly advised the taxpayer that penalties would stop in a late-filed extension; the first-time penalty abatement policy did not apply due to a $6 abatement several years earlier.

15. Bittner v. United States

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The U.S. Supreme Court agreed to review a decision of the Fifth Circuit Court of Appeals at 128 AFTR2d 2021-6760, in which the court held that the penalty for a nonwillful FBAR violation is on an account-by-account basis each year, rather than on a per-person basis, causing a penalty over five years of $2.72 million, rather than $50,000.

16. Jones v. United States

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The Ninth Circuit Court of Appeals agreed with the Tax Court that a former wife “tacitly consented” to the filing of a joint return which she did not sign, by virtue of providing the tax information and not filing a separate return; the court then found that the factors on balance weighed against providing innocent spouse relief, most particularly knowledge of the likely inability to pay the liability and a history of noncompliance.

17. In re Golden

A California bankruptcy court went against the weight of recent authority and allowed an individual to discharge income tax liability for a year in which a substitute for return was prepared by the IRS prior to the actual filing of the return, with the court noting that financial and family difficulties prevented timely filing, the return was filed within a reasonable amount of time from the extended due date (17 months) and the late filed return reduced the assessed tax.

18. IRS Fact Sheet 2022-20

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The service stated that issuance of a Form 1099-K from money raised on a “crowdfunding” website does not automatically cause taxation to the person receiving the form, and that facts and circumstances must be examined to determine whether these amounts are gifts.

19. Government Accountability Office report

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The report indicated that the IRS audit rate of individual tax returns has declined to 0.25%, down from 0.9% a decade ago and even further from earlier years.

20. Chief Counsel Advice 202204007

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The IRS ruled that a C corporation that provides a search website for rental properties is a broker company and ineligible for the exclusion under Code Section 1202 for qualified small business stock.