IRS Commissioner Charles Rettig, in a letter to members of Connecticut’s Congressional delegation, indicated that the Connecticut Foundation Solutions Indemnity Company, Inc. (CFSIC) is not required to issue Forms 1099 to homeowners who receive reimbursement from the state-chartered insurer, for pyrrhotite related foundation damage.[1]

The Journal Inquirer’s website reported that the CFSIC had previously issued such Forms 1099 to recipients of such payments, which led to inquiries asking why such payments would be deemed to be taxable income.  Officials of the CFSIC then wrote to the Congressional delegation seeking clarification, who then forwarded the question on to the IRS.[2]

In the case of Simonsen v. Commissioner, 150 TC No. 8, the Tax Court reaffirmed its previously stated position regarding a short sale when a nonrecourse debt is involved.  As well, for the first time the Court also addressed the reportable gain/loss on a property converted to rental use that was sold for less than its original cost but more than its date of conversion fair market value.

The couple in question had purchased a townhouse in San Jose in 2005 for $695,000.  They lived in that home for five years, during which the real estate crisis hit.  In 2010 they relocated to Southern California and began renting the townhouse.  At the time it was converted to a rental the fair value had declined to $495,000.

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The IRS has revised the relief granted in Revenue Procedure 2017-60 by issuing Revenue Procedure 2018-14.  The procedures apply to individuals who have damage to the concrete foundations of their personal residences caused by the presence of the mineral pyrrhotite.

As was described in the article that discussed the original relief provision posted on Current Federal Tax Developments:

The issue affects residents of the Northeastern United States due to the presence of pyrrhotite in the concrete mixture used to pour the affected foundations.  The IRS notes that this is a mineral that naturally occurs in stone aggregate which is used to produce concrete.  The mineral oxidizes in the presence of water and oxygen, leading to the formation of expansive mineral products and causing the concrete to deteriorate prematurely.

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In Revenue Procedure 2017-60 the IRS has provided a safe harbor for use by individuals who have suffered damage to their personal residences due to deteriorating concrete foundations caused by the presence of pyrrhotite. Under the safe harbor, amounts paid to repair such damage will count as a casualty loss in the year of payment.

The issue affects residents of the Northeastern United States due to the presence of pyrrhotite in the concrete mixture used to pour the affected foundations.  The IRS notes that this is a mineral that naturally occurs in stone aggregate which is used to produce concrete.  The mineral oxidizes in the presence of water and oxygen, leading to the formation of expansive mineral products and causing the concrete to deteriorate prematurely.

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The Tax Court found that, in the case of Partyka v. Commissioner, TC Summ. Op. 2017-79, that while the taxpayer had sustained a theft loss that was properly deductible in 2012, the taxpayer had not taken sufficient care to obtain proper values for the property stolen, assessing the accuracy related penalty of 20% under IRC §6662 in addition to the tax due.

This case involves a combination of the sale of household furnishing and the rental of a residence to a tenant who ended up giving the taxpayer a check that bounced to pay for the furnishings and initial rent.  The tenant did not make good on the amount due, so the taxpayers undertook proceedings to evict the tenant.

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In the case of Hamilton v. United States, USDC Northern District of Indiana, Case No. 1:15-cv-00303 a couple was attempting to invoke Revenue Procedure 2009-20 to claim a theft loss related to a failed investment scheme.

The Hamiltons had invested in a program where their credit would be used, along with the credit of others, to finance a development.  As the Court described the arrangement:

In 2006, plaintiffs Robert and Joan Hamilton were approached with an investment opportunity in a real estate development project in North Carolina known as the Grandfather Vista Development. The investment was portrayed as the means by which the developers were financing the development. For $500,000, investors could purchase a 10-acre lot within the development site from the developers. They would also simultaneously execute a buy-back agreement effective one year after the date of purchase, by which the developers would repurchase the lot at a price of $625,000. The developers personally guaranteed the buy-back agreements, and apparently represented to buyers that they had over $100 million in net worth, meaning they portrayed the investment as nearly risk-free. In addition, the buyers would not need to put substantial amounts of cash into the investment; instead, they would finance the investment through bank loans secured by the lots they were purchasing. The developers also agreed to pay the interest on those loans over the one-year period they would be outstanding. Thus, for a small down payment, the investors believed they would receive large, guaranteed returns after one year. As the Hamiltons explain it, they “understood that in exchange for using [their] credit to procure loans from pre-arranged banks, [they] would be repaid within a year with a significant return.”

The Hamiltons took the bait, although some might have worried that this deal sounded too good to be true.  For instance, it might raise some questions why the developers, if they were truly as financially sound as they asserted, would be forced to use such a high cost program to provide only short-term financing.  The Court pointed this out in a footnote, stating “[i]t is unclear how the developers explained their willingness to pay a twenty-five percent interest rate if they had such substantial assets to offer as security.”

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IRC §165(i) provides for a taxpayer to electively claim a loss on a federally declared disaster on the return for the year prior to when the disaster occurred.  The IRS has issued Revenue Procedure 2016-53 and proposed regulations (REG-150992-13) for taxpayers who wish to take advantage of this election.

The proposed regulations would set the deadline for both making the election (six months after the due date of the tax return for the year of the disaster excluding any extensions) and for revoking a previous election (90 days after the due date for making the election).

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An S corporation had a problem—its subsidiary which had elected to be treated as a Qualified Subchapter S Subsidiary (QSUB) was about to be placed in receivership by a government agency, being in a condition “unsafe to conduct business.”  This would effectively result in the S corporation losing the entire subsidiary and receiving nothing in return.

The shareholders wanted to make the best of a bad situation and at least get an ordinary loss from the worthlessness of the subsidiary.  They came up with a theory about how to trigger an ordinary loss, a theory the the National Office gave its comments on in Chief Counsel Advice 201552026.  Unfortunately for the shareholders, the National Office did not concur with their view of the proper treatment.

The issue of whether a taxpayer was justified in writing off the balance of a purchased intangible was the matter at issue in the case of Steinberg, et al v. Commissioner, TC Memo 2015-222.

The taxpayers in this case had acquired a towing contract as part of the acquisition of the assets of a business in 2005.  The contract, which provided the taxpayers the sole and exclusive right to operate “Official Police Garages” in a portion of Los Angeles.  The contract had an expiration date on June 27, 2009 and the city of Los Angeles had the exclusive option to extend the term for an additional five years.

A taxpayer who finds that he/she has performed services for which he/she was supposed to be paid but for which payment is not to be received most often believes he/she “obviously” should be able to claim a loss on their return.

In the case of Haff v. Commissioner, TC Memo 2015‑138, the taxpayer felt doubly so, as the entity that he claimed owed him money turned out be a fraudulent investment scheme in which the taxpayer had invested over $1.3 million and which owed the taxpayer, in the taxpayer’s view, over $700,000.

In Chief Counsel Advice 201529008 the IRS noted that while a loss sustained in an automobile accident might normally appear to meet the definition of a casualty loss, that won’t be true if your business is a car rental operation.

In the matter discussed in this advice a car rental company had been claiming as a casualty loss the amount of loss incurred when a customer had bought the company’s damage waiver, become involved in accident and the rental car company determined that they were not going to repair the vehicle and return it to their fleet.  So the question became whether the company was properly classifying the loss they incurred in this case.

In the case of Greenberger, et al v. Commissioner, 115 AFTR2d ¶2015-844, US DC ND Ohio, No. 1:14-cv-01041 the issue is not whether the taxpayers had incurred a deductible loss—the IRS agreed that was so.  Rather the question was the nature of the loss.

Specifically the issue was whether the loss represented a theft loss (deductible as an ordinary loss under IRC §165 or was rather a capital loss that could only offset other capital gains or be slowly absorbed against $3,000 of other income each year.