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Tax Court Corner

Here’s a roundup of several recent tax court cases and what they mean for you.

Locked Out of Home Sale Exclusion

(Webert, TC Memo 2022-32, 4/7/22)

A very generous tax break is available when selling a primary home if several basic qualifications are met, one of which is living in the home for 2 of the preceding 5 years. Single taxpayers can exclude up to $250,000 of gain; married taxpayers can get up to a $500,000 exclusion. A partial exclusion may be available due to unforeseen circumstances if you don't meet the 2 of 5 years test.

Facts: Steven and Catherine Webert started experiencing financial problems soon after they purchased a home in Seattle. They began renting out their home in 2009 to make ends meet, eventually selling the home in 2015 at a gain of $194,752. The Weberts reported the sale of their rental house on their 2015 tax return, but did not report the gain based on the home sale exclusion.

The IRS argued that because the taxpayers hadn't lived in the rental property for the preceding 5 years before the sale, they didn't qualify for the home sale exclusion based on the 2 of the past 5 years test. The Tax Court agreed with the IRS that the Weberts owe tax on the $194,752 gain.

Tax Tip: Don't forget to include your house and other assets when developing a tax planning strategy. Be familiar with the home sale exclusion rules so you don't end up with a tax surprise when selling your home.

No Letter, No Deduction

(Albrecht, TC Memo 2022-53, 5/25/22)

Facts: Martha Albrecht donated to a museum approximately 120 items from her and her late husband's collection of Native American artifacts. Shortly after the donation, Albrecht executed a Deed of Gift to the museum that states that the taxpayer "hereby donates the material described below to the Wheelwright Museum..."

Albrecht subsequently filed a 2014 individual tax return, recording the donation as a deductible charitable contribution on Schedule A. The IRS disallowed the deduction because Albrecht did not receive a letter from the museum that stated the following:

  • the amount of cash and a description of any property other than cash contributed

  • whether the museum provided any goods or services in return for the contribution

  • a description and a good faith estimate of the value of the donated items

The Tax Court agreed with the IRS decision to disallow the charitable contribution deduction because Albrecht failed to meet the documentation requirements. The Court actually complimented Albrecht for a good faith attempt to substantially comply with the Tax Code by executing a deed that identified the donation as unconditional and irrevocable.

Substantial compliance, the Court then reminded the litigants, unfortunately does not satisfy the strict requirements for reporting a charitable contribution as a tax deduction.

Tax Tip: When making a tax deductible donation, you are responsible for obtaining written acknowledgment from the donee organization that complies with IRS rules. Many organizations mail these acknowledgment letters without you needing to ask. But if you don't receive a letter, it's your responsibility to track it down and have it in hand before filing your tax return.

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