The top tax developments of 2022

December 15, 2022 9:00 AM

At year's end, 2022 has been an eventful year for tax professionals. New legislation, regulations, court decisions and IRS pronouncements have all had an impact on the tax landscape. While the major developments are familiar to many professionals, there are some that might have been overlooked due to the busy nature of the profession. And, of course, the year is not over. Despite the comprehensive list that follows, remember that something more might occur prior to the end of the year.

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

The Inflation Reduction Act

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Public Law 117-169, the Inflation Reduction Act of 2022:

Extended the limitation on ordinary business losses by individuals through 2028.
Extended the health insurance premium credit through 2025 with modifications.
Effective 2023, created an annual rather than a lifetime limitation on the residential energy credit with a yearly cap of $1,200.
Effective 2023, increased the tax credit for purchasing new all-electric vehicles to $7,500 and created a credit for the first purchaser of a used all-electric vehicle up to $4,000 (can be claimed only by low and middle income taxpayers on dealer purchases of up to $25,000 on vehicles at least two model years old claimable only once every three years).
Effective 2023, created a 15% minimum tax on the adjusted financial statement income of C corporations with financials showing over $1 billion in average profit over a three-year period (estimated to be 150 companies).
Created a 1% tax on the fair market value of stock in a public company that is redeemed if the total redemption value is at least $1 million.
Increased the Research & Development Credit that can be claimed by small businesses against payroll taxes by $250,000 to $500,000.
Increased the IRS budget by $80 billion over 10 years to hire more personnel and to upgrade technology.

Proposed RMD regs

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Proposed regulations under Code Section 408 take 275 pages to explain the changes to the minimum distribution rules as a result of the 2019 SECURE Act; 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 they had not.

Proposed gift regs

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Proposed regulations under Code Section 2010 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.

Soni v. Commissioner

The U.S. TaxCourt

In Soni v. Commissioner, TC Memo 2021-137, the Tax Court concluded that the wife of a once successful businessman was deemed to have acquiesced in joint tax returns and in multiple consents to extend the limitations period despite not signing the forms; she declined to get involved in any tax matters, testifying, "I trust him with everything." (It is unclear whether she had sufficient income to necessitate a separate filing obligation, as the court seemed to find that issue to be irrelevant.)

Are injuries taxable?

In Blum v. Commissioner, 129 AFTR2d 2022-1170, 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.

In Dern v. Commissioner, TC Memo 2022-90, the Tax Court concluded that damages paid to a sales representative who was terminated because he could not make in-person calls following a heart attack were taxable, as the payment was not for physical injury but was for emotional distress and otherwise as set forth in the complaint, as no physical injury arose or was worsened by the company's conduct.

Gericke v. Truist

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

In Gericke v. Truist, 129 AFTR2d 2022-2099, the Third Circuit Court of Appeals agreed with a New Jersey Federal District Court that a trust properly issued a 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 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).

What counts as living abroad

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In Domdom v. Commissioner, TC Summary Opinion 2022-17, the Tax Court denied an income earned abroad exclusion to an individual working in Iraq in a "walled compound" who leased out his California home while his former spouse and children lived in his Nevada home, the court noting that his abode remained in the United States where he kept his car and bank accounts.

In Morgan v. Commissioner, TC Summary Opinion 2022-10, 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.

Musselwhite v. Commissioner

In Musselwhite v. Commissioner, TC Memo 2022-57, the Tax Court, looking at eight factors and finding six of them in favor of the IRS, determined that a loss on 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 purpose of the entity.

Milkovich v. United States

In Milkovich v. United States, 129 AFTR2d 2022-869, 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.

‘Abritrary and capricious’ regs

In Hewitt v. Commissioner, 128 AFTR2d 2021-7033, the Eleventh Circuit Court of Appeals reversed the Tax Court and found IRS regulations were not properly developed and were arbitrary and capricious that 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.

Champions v. Commissioner

Champions Retreat Golf Founders, LLC v. Commissioner, TC Memo 2022-106, the Tax Court determined that the value of an easement on property with a golf course and capable of sustaining residential housing was in excess of $7.8 million, rejecting the IRS value at $20,000, based on the prohibition of further subdivision of the property and the restriction on future construction of additional buildings and structures; the taxpayer had utilized an original valuation at over $10 million.

No place like your tax home

In Harwood v. Commissioner, TC Memo 2022-8, the Tax Court allowed most pre-2018 travel expenses of a union steamfitter who traveled through Oregon and Washington doing temporary jobs, finding that his "tax home" was in Yakima, Washington, with his family, despite having no actual jobs in that city for a number of years, as Yakima was centered in his region and he kept good records of his expenses.

In Nelson v. Commissioner, in a bench opinion the Tax Court determined that the "tax home" of an individual whose employer had offices in Washington, D.C., and Dallas and whose additional self-employment income took him for periods to Atlanta, the Dominican Republic and Africa, had his tax home in the D.C. area, as he derived most of his income from employment and D.C. was the primary location of his employer.

In Re: Gilbert

In In Re: Gilbert, 130 AFTR2d 2022-5719, a New Jersey bankruptcy court found that qualified retirement plans enjoy protection from creditors under the law even if there is no anti-alienation provision in the retirement plan.

In Re: Hoffman

In In Re: Hoffman, 129 AFTR2d 2022-________, 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.

Estate of DeMuth v. Commissioner

In Estate of DeMuth v. Commissioner, TC Memo 2022-72, the Tax Court found that only one of 11 checks using the annual exclusion for gifts cleared by the time of death; thus the others were not completed transfers and were to be includable in the decedent's estate.

Chan v. Commissioner

The U.S. Tax Court

In Chan v. Commissioner, TC Memo 2021-136, the Tax Court found that the individual had to pay taxes on unreported gross receipts of a defunct restaurant, as the underlying corporation had made an S election and could not prove that it had taken affirmative steps to revoke it.

What stage of business?

In Kellett v. Commissioner, TC Memo 2022-62, 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; in Antonyan v. Commissioner, TC Memo 2021-138, the Tax Court concluded that a couple who purchased property in the middle of the Mojave Desert named "Paradise Acres" could not deduct costs associated with a purported organic farming business because none of the steps in the business plan were completed.

Vorreyer v. Commissioner

In Vorreyer v. Commissioner, TC Memo 2022-97, the Tax Court, proffering that a taxpayer cannot deduct expenses paid on behalf of another party, denied a deduction to stockholders for corporate expenses that they paid individually; under the facts, the court would have treated the individual payments as capital contributions to the corporation which constructively paid the expenses.

Aspro v. Commissioner

In Aspro Inc. v. Commissioner, 129 AFTR2d 2022-1581, the Eighth Circuit Court of Appeals agreed with the Tax Court that payments made by a C corporation to two corporations and an individual who collectively owned 100% of the stock were not consulting payments but were distributions in the lack of any documentation to the contrary.

Hood v. Commissioner

In Hood v. Commissioner, TC Memo 2022-15, using a multifactor approach the Tax Court 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 60-70 hour weeks and grew the company from scratch to about $70 million in revenue.

Slone v. Commissioner

In Slone v. Commissioner, TC Memo 2022-6, the Tax Court once again found that transferee liability applied when stock in a C corporation with significant built-in gain was sold after depleting the corporation of funds to pay the taxes.

Horses and donkeys

In Donoghue v. Commissioner, No. 21-6737, the 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; in Huff v. Commissioner, TC Memo 2021-140, the Tax Court found that combined losses over two years of $135,000 in breeding miniature donkeys were from an activity engaged in for profit, the court noting that the couple got "zero personal pleasure" from the donkeys who were "quite ugly" and could not be petted or cuddled.

Pediatric Impressions v. Commissioner

In Pediatric Impressions Home Health v. Commissioner, TC Memo 2022-35, the Tax Court agreed with IRS that nurses working for a staffing agency and paid on an hourly basis were employees rather than independent contractors, despite the fact that they could do other work in their off hours, citing the use of terms such as "employed" and "full-time" in their communications as well as the requirement of giving two weeks notice on termination; the court denied Section 530 relief inasmuch as the workers had been previously treated as employees.

Scott v. U.S.

In Scott v. United States, 130 AFTR2d 2022-________, the Eleventh Circuit Court of Appeals sustained a Florida jury's finding that a daughter who was "accounting manager" for her father's HVAC company with discretionary authority and signature ability was liable for the trust portion of unpaid payroll taxes.

Applications of the Anti-Injunction Act

In Hancock County Land Acquisitions, LLC v. United States, 130 AFTR2d 2022-________, the Eleventh Circuit Court of Appeals agreed with a Georgia Federal District Court that the IRS cannot be enjoined per the Anti-Injunction Act from enforcing the tax assessed on a partnership related to a $180 million deduction for donation of a conservation easement.

In Harper v. Commissioner, 130 AFTR2d 2022-________, the First Circuit Court of Appeals reversed a New Hampshire Federal District Court and held that a suit to enjoin the IRS from using information obtained from a third-party summons regarding cryptocurrency was not barred by the Anti-Injunction Act that the U.S. Supreme Court previously stated does not apply to information gathering but only acts of assessment and collection.

You still have to file and pay on time

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In Remisofsky v. Commissioner, TC Memo 2022-89, the Tax Court agreed with the IRS that a doctor's alcoholism and depression was insufficient for penalty abatement for late filing and payment as he was able to continue his profession and, in any event, his wife could have gathered the needed information; in Bennett v. Commissioner, in a bench opinion the Tax Court found that a physician who failed to timely file and pay was subject to both penalties as she showed an ability to practice medicine despite an alleged reduction in hours.

In Oosterwijk v. United States, 129 AFTR2d 2022-512, 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 on a late-filed extension; the first-time penalty abatement policy did not apply due to a $6 abatement several years prior.

U.S. v. Katholos

In United States v. Katholos, 130 AFTR2d 2022-5484, a New York federal district court reiterated that a taxpayer must file an FBAR when the taxpayer has a beneficial interest in a foreign account irrespective of legal title, leaving the issue of willfulness to a subsequent merits trial.

Calculating FBAR penalties

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In Bittner v. United States, the Supreme Court agreed to review a decision of the Fifth Circuit Court of Appeals at 128 AFTR2d 2021-6760, in which that 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 (the case was argued on Nov. 2, 2022); in United States v. Solomon, 128 AFTR2d 2021-6537, and in United States v. Hadley, 129 AFTR2d 2022-1279, Florida Federal District Courts reached the same results.

Pond v. U.S.

In Pond v. United States, 129 AFTR2d 2022-1483, a North Carolina federal district court agreed with the IRS that its regulations supplanted the common law mailbox rule and that the taxpayer, who sent a claim for refund by regular mail, could not prove timely mailing when IRS had no record of receiving the return; the courts differed on the issue prior to IRS updating its regulations.

U.S. v. Taylor

In United States v. Taylor, 130 AFTR2d 2022-5564, a North Carolina federal district court determined that a limited liability company and a trust were both alter egos of a couple when they controlled the accounts and used funds to pay their living expenses, as opposed to a debt of over $7 million to the IRS.

Passport troubles

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In Maehr v. State Department, at 128 AFTR2d 2021-5256, the US Supreme Court declined to hear an appeal from the Tenth Circuit Court of Appeals that had sustained a Colorado Federal District Court decision rejecting a constitutional challenge to the ability of IRS to obtain passport revocation through the State Department for "seriously delinquent tax debt;" in Franklin v. United States, 130 AFTR2d 2022-6000, the Fifth Circuit Court of Appeals, affirming a Texas Federal District Court, concurred.

In Re: Golden

In In Re: Golden, 129 AFTR2d 2022-1630, 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 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.

Excessive spending and bankruptcy

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In IRS v. Ransdell, 129 AFTR2d 2022-579, a Florida federal district court agreed with a bankruptcy court that living a lavish lifestyle with excessive personal spending and even large discretionary expenditures is not sufficient standing alone to deny discharge of a bankrupt from an obligation to IRS otherwise eligible for discharge.

In In Re: Fernandez, 130 AFTR2d 2022-5688, a Florida bankruptcy court held that a physician could discharge hundreds of thousands of dollars in tax debt where he was treated as an independent contractor and failed to make estimated taxes, finding that his spending was high but not necessarily excessive or lavish despite numerous overseas trips and expensive jewelry purchased for successive wives.

Revenue Procedure 2022-32

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In Revenue Procedure 2022-32, the IRS extended the time for electing portability by estates not otherwise required to file an estate tax return up to the fifth anniversary of the first spouse's date of death with the submitted return stating at the top that it is "filed pursuant to Rev. Proc. 2022-32 to elect portability under Section 2010(c)(5)(A)."

Late filing relief

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In Notice 2022-36 and News Release 2022-155, IRS announced that it would not impose the penalty for late filing on 2019 and 2020 Forms 1040, 1041, 1065, 1120 and 1120-S among other returns with certain narrow exceptions, provided the applicable return is filed by Sept. 30, 2022 (with a refund being generated to those who have already paid such penalties); the IRS will give similar relief in the case of 2019 and 2020 information returns filed by the August 1 following the due date.

ERC warnings

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In News Release 2022-183, IRS warned employers about claiming the Employee Retention Credit when they may not qualify, with eligibility limited to those who sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings during 2020 or the first three quarters of 2021, those who experienced a significant decline in gross receipts during 2020 or during the first three quarters of 2021 or those qualified as a "recovery startup business" for the third and fourth quarters of 2021.

Crowdfunding

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In IRS Fact Sheet 2022-20, IRS 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.

PPP taxes

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In Chief Counsel Memorandum 202237010, IRS indicated that businesses that have their Paycheck Protection Program loan forgiven even though they did not meet the requirements are taxable on the relief from indebtedness.

C corp advice

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In Chief Counsel Advice 202204007, 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.