Tax Roundup: March 17-28, 2025
Cases, rulings, and other interesting tidbits
In Campana v. Commissioner, T.C. Memo 2025-23 (March 19, 2025), the taxpayer received an IRA distribution in 2021 for which, it was implied, there was a hardship withdrawal relating to COVID that would prevent an early withdrawal penalty. However, he failed to report the distribution on his tax return. The Tax Court determined that a claimed 2017 refund could not offset the tax or related penalties, as the Tax Court lacked jurisdiction over that refund. Further, the 10% early withdrawal penalty applied as it appeared that the taxpayer did not qualify for any relief, including the COVID-related relief (which might have deferred taxation of the distribution if the procedure in this video was followed).
Smith v. Commissioner, T.C. Memo 2025-24 (March 24, 2025), reaffirmed that the burden is on the taxpayer to establish the income tax basis for purposes of taking depreciation deductions under IRC Section 167. The taxpayer was 6 years late in filing a return claiming this deduction post-petition to the Tax Court, and while the Tax Court noted this probably wouldn’t have been an issue if the return was timely, the nature of trying to “guestimate” the lesser of basis or FMV at the time of the return was not sufficient.
Jones, et. al v. Commissioner, T.C. Memo 2025-25 (March 25, 2025) was the latest in a long line of cases challenging the deductibility of premiums and exclusions from income for microcaptive insurance arrangements. Amongst other issues, the legitimacy of the insurance program and claimed risks being covered by Clear Sky Insurance Co, Inc. – especially when compared to the existing commercial general liability policy – were called into question. Thrown into the mix was a questionable $400,000 “loan” from Clear Sky to a shareholder that was recharacterized as a constructive dividend.
Gina Jaha and Bob Anderson v. Commissioner, T.C. Memo 2025-26 (March 25, 2025) dealt, in part, with separate returns of two spouses. One of the spouses, Bob Anderson, had assigned certain MLM commission income to a trust and initially conceded that it was part of his unreported taxable income (after a deficiency notice) but later recanted this testimony. Recanting was too late, however. Not much detail was given about the trust, other than its similarity to arrangements by similarly-situated contractors of the same company who were seeking creditor protection for their earnings, but it illustrates the relative difficulty (given assignment of income and grantor trust issues) to assign one’s earnings to a trust or other entity in an effort to avoid taxation.
Certain technical corrections have been published for the new spinoff regulations.
In PLR 202513002, a spousal beneficiary of a qualified domestic trust (QDOT) had become a U.S. citizen and received late election relief relating thereto. This event can remove the QDOT-specific requirements (such as a U.S. trustee and the withholding regime of IRC Section 2056A) so long as the spouse had been a U.S. resident at all times since the death of the decedent (who funded the QDOT at death). But, the removal of these QDOT requirements – especially withholding mandates that IRS Form 706-QDT be filed by April 15 of the year following the year in which the spouse attained citizenship. The IRS granted an extension of time here for the (presumably U.S.) co-trustee of the QDOT to file this Form.
In PLR 202513001, the decedent’s daughters were in possession of estate property from the decedent (who was survived by a spouse, who was also deceased at the time of this ruling request) and requested an extension of time for a portability election to preserve the decedent’s deceased spousal unused exclusion amount (DSUE). The late election relief was granted. This is important to note, as it illustrates how authority for the portability election is extended to a “non-appointed executor” under Treas. Reg. 20.2010-2(a)(6)(ii) who is in actual or constructive possession of the decedent’s property. Well-drafted plans using subtrusts funded at death can be optimal for tracking the decedent’s property, and possession thereof, for this purpose.
Internal Revenue Bulletin 2025-13 had some interesting updates, including Rev. Proc. 2025-17 (creating a waiver procedure for those claiming income tax exclusions for foreign earned income while living abroad who are unable to meet time in residence or presence tests if war forces them to leave the foreign country in question), and Announcement 2025-8 (implementing a Competent Authority Arrangement relating to paragraph 3 of Article 10 of the U.S.-Swiss tax treaty. The paragraph 3 in question generally deals with Swiss-source or U.S.-source dividends payable to U.S. or Swiss pension and retirement arrangements, including IRAs).