Tax Advisory

Recent Tax Court Cases Addressing the “Augusta Rule”

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Occasionally, self-proclaimed tax evangelists pop up on my Instagram feed hawking the benefits of a special tax loophole called the “Augusta” rule. So, let’s discuss the latest Tax Court rulings on this seemingly hot Instagram topic.

Let’s start by covering the basics of this rule. Section 280A(a) provides the general rule that no deduction is allowed for expenses related to the use of a “dwelling unit” by a taxpayer as a residence. Section 280A(g) provides a specific exception to the general rule which states that if a taxpayer rents out their home for 14 days or fewer in a year, they do not have to report the rental income, and they cannot deduct any expenses related to the rental. This provision is particularly beneficial for homeowners who rent out their homes during high-demand events, such as the Masters golf tournament in Augusta, Georgia, which is where the rule gets its nickname. A Google search shows that you can rent a home for 7 nights during the 2025 during Masters week for the tidy sum of $75,000. https://rentlikeachampion.com/Augusta-GA?game=The-Masters-2025&p=1. It’s a safe bet that the owner of this home will not agree to rent this same home in 2025 for any more than an additional 7 nights, so they don’t have to report the rent received income.

Even though section 280A(g) bars the taxpayer/lessor from claiming any expenses related to the rental of his Georgia home, it’s a nice tax break to avoid reporting any rental income. But what if there was more tax benefit to extract here? What if a different taxpayer, say an S corporation, decides to rent out a dwelling unit for 14 days to hold business meetings? Well, then, the S corporation is allowed a deductible business under section 162 and the homeowner is still allowed to exclude the rental income for the 14-day period under section 280A(g). Win-win? The facts present a slippery tax scenario especially if the taxpayer/lessor also is a shareholder of the S corp/lessee of the residential property. But the tax code permits this double benefit – deduction for the rent paid by the S corp/lessee and exclusion of the rent received by the taxpayer/lessor – unless there’s sloppy execution.

In Sinopoli v. Commissoner, T.C. Memo. 2023-105, the Tax Court agreed with the IRS when the agency challenged an S corporation’s deduction of rental expenses paid for use of shareholders’ home to hold business meetings. Below are the critical takeaways from the court’s decision:

  • Rental price – Petitioners failed to obtain an independent third-party appraisal of the rental value of their residence as meeting space. Instead, one shareholder of the S corporation provided his independently researched rental rate for meeting space in the same locality. The IRS conducted its own market research for local meeting space and determined that $500 for a full or half day was the market rate.
  • Business conducted at meetings – Petitioners failed to produce any credible evidence (minutes, agendas or calendars) of the business conducted at such meetings.
  • Additional facts – occasionally, the spouses or other family members who were not shareholders of the S corporation attended the meetings. Petitioners’ testimony was not credible as to the frequency of the meetings held during the years at issue.

Based on the lackadaisical execution by the petitioners in Sinopoli and the fact the business meetings appeared more like family gatherings, the Tax Court agreed with the IRS that “it seems that petitioners adopted a tax savings scheme to distribute [the S corporation’s] earnings to petitioners through purported rent payments, claim rent deductions, and exclude the rent from their gross income relying on section 280A(g).” Despite the Court’s view that the petitioners engaged in a tax savings scheme, it nonetheless held that rental expenses were allowed to the extent conceded by the IRS. The IRS didn’t advance a harsh position and the Tax Court reluctantly (it seems) acceded to the result.

When a taxpayer’s execution of the Augusta rule moves from lackadaisical to fecklessness, then we have the result in Jadhav v. Commissioner, T.C. Memo. 2023-140. In Jadhav, the Tax Court addressed the same section 162/280A(g) tax play involving an S corporation that claimed rental expense deductions for use of petitioners/shareholders’ residential property for allegedly business purposes. Unlike Sinopoli, however, the Tax Court in Jadhav disallowed all rental expenses claimed by the petitioners for failing the reasonableness requirement under section 162. Why such a harsh result in Sinopoli from a very sympathetic jurist in Judge Vasquez? Finding that the payments by the S corporation for use of the residence was for “something other than rent,” the Tax Court focused on the petitioners’ sole reliance on the daily rental price for their residence presented in a tax plan prepared by a tax strategy firm rather than a third-party appraisal/report or the petitioners’ own investigation. In other words, the petitioners in Sinopoli engaged in such little effort (actually no effort beyond securing a tax plan) as to dare the IRS and the Tax Court to take action. It seems that the petitioners in Sinopoli played the audit lottery and lost.

Executing the Augusta rule is not complicated or particularly risky unless you decide to thumb your nose at the required execution.

Action Item: Prepare a Written Information Security Plan

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Periodically, the IRS will remind tax professionals of the critical need to safeguard client information. And most recently, on August 9th, it was announced that Publication 5708, “Creating a Written Information Security Plan for your Tax & Accounting Practice” had been updated. That document provides a template for a Written Information Security Plan (bearing the unfortunate acronym WISP) that is designed to help tax professionals, particularly smaller practices, in minding their responsibilities. Publication 5708 is produced by the Security Summit, a partnership of the Internal Revenue Service, state tax agencies, private-sector tax groups as well as tax professionals. Not surprisingly, the update is intended to respond to increasing levels of identity theft and data breaches.

Since 1999, with the enactment of the Gramm-Leach-Bliley Act, tax and accounting professionals have been statutorily obligated to protect client data. In its implementation of this law, the Federal Trade Commission issued measures required to keep customer data safe, and one requirement is implementing a WISP. Despite the decades, many practitioners remain blissfully unaware of the requirement to develop a written plan that describes how their firm is prepared to protect clients’ nonpublic Personally Identifiable Information (PII), including Social Security numbers, dates of birth, employment data, driver’s license number, income data, asset ownership data, Investment data, financial account numbers, personal identification numbers or passwords, email addresses, and non-listed phone numbers.

The update includes best practices for implementing multi-factor authentication for any individual accessing any information system. Further, it is recommended the WISP include a data theft response strategy, which includes alerting of the Federal Trade Commission and the IRS Stakeholder Liaison after a security incident involving the theft or loss of PII affecting 500 or more people.

While the official pronouncements express hope of making the process of developing a WISP easier, no one should be deceived into thinking it will be a simple cut-and-paste affair. The template is twenty-eight pages of rather detailed requirements. It will take more than a Friday afternoon.

Aid to victims of scams

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On May 31st, the ABA Tax Section made a number of recommendations for inclusion in the IRS’s 2024-2025 Priority Guidance Plan as to tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other administrative guidance. ABA Recommendation. Happily, one issue recommended for further guidance concerned victims of certain scams. Guidance was requested under section 165(c)(2) that would address the treatment by victims of certain imposter scams as transactions entered into for profit. Many scams, including advance-fee scams, are designed to lure taxpayers with promised investment returns. Also, guidance was requested under section 165(e) that would address the timing of discovery of a scam loss. While victims of scams may be immediately aware of (and, in fact, assist in) the transfer of the funds, the nature of that transfer as a scam may only be discovered in a later year.

Both recommendations are rated as a high priority. This is welcome news as we have in these pages previously described the difficulties encountered by victims of scams: Tax Relief for Scam Victims.

Tax relief for scam victims? Maybe.

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In December, the Washington Post reported on a retired environmental scientist with many years of distinguished service in the Federal Government who was defrauded of $655,000 in life savings through a so-called “tech support” scam. Former White House scientist. Her anguish was compounded on learning that as the stolen funds had been withdrawn from a tax-deferred account, the IRS considered it a taxable distribution, saddling her with a bill in the six figures.

The story also highlights a dramatic alteration contained in the Tax Cuts and Jobs Act of 2017 (TCJA): the suspension of the theft-loss deduction from 2018 through 2025. Under prior law, the scientist could have at least claimed such a deduction. And this change in the law was no rushed unintended consequence either but a deliberate act by Congress as part of an effort to make the tax system “simpler and fairer for all families and individuals” and to “offset the cost of lowering tax rates for everyone.” (The TCJA also suspended casualty-loss deductions outside of Federally declared disaster areas, leaving one to suspect a certain Darwinian impulse.)

The scientist has now been advised to seek relief under the procedures established by the IRS in the wake of the Bernie Madoff Ponzi scheme. Help for victims of Ponzi schemes. And according to the Washington Post article, the number of victimized taxpayers claiming such relief has increased dramatically in recent years. Under Revenue Procedure 2009-20, the IRS will provide safe harbor treatment for qualifying taxpayers that enable them to deduct either 95 percent or 75 percent of their losses, depending on whether they pursue recovery. So, could this mean a partially happy ending for the scientist?

Here is where we are reminded not to rely too much on newspaper reporting of complex tax situations. The revenue procedure is aimed at taxpayers who experience losses in “certain investment arrangements discovered to be criminally fraudulent,” for example, the paradigm Ponzi schemes. The taxpayer, that is, the “qualified investor,” must identify a “lead figure” who is either (1) charged under Federal or state law or (2) is the subject of a Federal or state criminal complaint where either (a) an admission is alleged or an affidavit of admission is executed, or (b) a receiver or trustee has been appointed with respect to the arrangement or the assets of the arrangement were frozen.

The Ponzi scheme procedures fall outside of the TCJA’s suspension as “Other Itemized Deductions” in Schedule A, requiring the completion of a Form 4684. https://www.irs.gov/instructions/i4684. (See Note under “Losses You Can’t Deduct.”) As Revenue Ruling 2009-9 explains, Ponzi scheme losses result from transactions entered into for profit. Sadly, under the facts of the scientist’s case, it is not at all clear she can meet this standard of a “qualified investor” regarding the simple maintenance of retirement funds. And identifying a lead figure is unquestionably problematic when Lord knows who the scammers are or even where in the world they are. Russia? China? Sometimes it may be a good thing if it is your friends who betray you; at least you have their address.

Inflation Reduction Act of 2022 – Update to EV Tax Credits

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The Inflation Reduction Act (“IRA”) enacted August 16, 2022 includes a number of provisions addressing the tax credit for new and used electric vehicles.  The IRA provides significant changes to the existing tax credit under section 30D and two new “clean” vehicle credits – section 25E (for used vehicles) and section 45W (commercial vehicles).  For an easy introduction to these provisions, let’s start with an overview via the following diagram:

Changes to New Vehicle Purchases Provided Under Section 30D

  • Before IRA of 2022: Section 30D provides a credit for qualified plug-in electric drive motor vehicles including passenger and light trucks for vehicles purchased after December 31, 2009.
    • Tax credit structure: base credit of $2,500 and $417 for each kilowatt hour of battery above 5 kilowatt hours allowing an additional max credit of $5,000.  No critical component or battery sourcing requirement.
    • 200,000 limit for vehicles. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).
    • No income threshold for EV tax credit eligibility. Even if your taxable income is $1,000,000, you are eligible for a EV tax credit.
    • No price cap for vehicles that qualified for EV tax credit upon purchase.
  • Changes under the IRA to Section 30D:
    • New tax credit structure for “clean” vehicles: two-part credit up to max of $7,500 (Part 1 = new critical minerals requirement; Part 2 = new battery component requirement).  40-50% of the critical minerals and battery components cannot be sourced from a foreign covered nation, such as China and Russia.[1]
    • Eliminates the 200,000 qualifying vehicle limit
    • New income threshold for eligibility to obtain the clean vehicle tax credit. Based on filing status, any taxpayer with MAGI exceeding a threshold amount cannot qualify for an EV tax credit under section 30D:
      • MFJ filers – MAGI >$300,000,
      • HH filers – MAGI > $225,00, or
      • Single filers – MAGI >$150,000.
    • New car price cap – If a manufacturer’s suggested retail price exceeds a threshold amount, then the vehicle is not eligible for tax credit under section 30D.
      • Vans, SUVs and pick-up trucks – retail price cannot exceed $80,000
      • Any other vehicle – retail price cannot exceed $55,000.
    • New “final assembly” requirement must occur in North America. This provision applies after August 16, 2022.  The U.S. Department of Energy provided a list of 2022 and early 2023 models that meet the “final assembly” requirement here:  https://afdc.energy.gov/laws/inflation-reduction-act.  And, you can go to the following U.S. Department of Transportation link to search by VIN to determine the final assembly status for a new car:  https://vpic.nhtsa.dot.gov/decoder/
    • New transferability of tax credit to dealers who are registered with the Treasury Department so taxpayers who otherwise would not have enough tax liability to fully utilize the credit can take advantage of the credit. The credit is transferred to the dealer, and the dealer lowers the selling price to the buyer.  But, check the effective date in the diagram above for this new transferability of the tax credit.
    • Effective Date: applies to vehicles acquired 2023 thru 2032.  However, the “final assembly” requirement for application of section 30D applies after August 16, 2022

Let’s try a scenario to test our understanding of these new rules:

Scenario:  On August 1, 2022, you visited a Tesla showroom in Walnut Creek, CA and put a $250 nonrefundable deposit for a new Tesla Model Y with a suggested retail price of $67,000.  Tesla tells you that the car may be delivered to you anytime from October 2022 thru February 2023.  Your MAGI is $350,000 and your filing status is “married filing joint.”  Since you put the deposit down before IRA 2022 was enacted and effective, can you still qualify for the credit?

Answer:  No.  First, the 200,000 vehicle limit for the Model Y Tesla was exceeded before Aug. 1, 2022 under the old version of Sec. 30D.  Second, what if the vehicle limit wasn’t exceeded for the Model Y?  Here is the transition rule that addresses this situation per the IRS:  “If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022 (for example, because the vehicle has not been delivered), you may claim the EV credit based on the rules that were in effect before August 16, 2022.”  Because your $250 deposit was likely not a “written binding contract,” you probably don’t qualify for the EV credit under the old rule.  OK, what’s with the hedging language on “written binding contract”?   The IRS stated in its website (nonbinding source) that “a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit)….if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract.”  With this explanation, it’s uncertain whether a $250 non-refundable deposit qualifies as a “written binding contract.”  So, if you put down a non-refundable deposit for an EV in effect before August 16, 2022 that did not exceed the vehicle limit, look for IRS guidance with more precision on what constitutes a “written binding contract.”

New Section 45W Creates Business Tax Credit for Commercial Clean Vehicles

  • Effective 2023 thru 2032.
  • Limited to commercial use, placed in service 2023 thru 2032, purchase or lease
  • No “final assembly” in North America required as in amended section 30D(d)(1)(g) for new, non-commercial vehicles.
  • (*) No income limits as in 30D and 25E
  • Limit of tax credit:
    • Lesser of:  (1) 15% of cost basis; 30% if 100% EV, not hybrid; or (2) incremental cost of the vehicle – increased cost between the “qualified commercial clean vehicle” and a “comparable vehicle” (gas/diesel only vehicle that is similar in size and use).  Gray area:  Since this is a “lesser of” test for the tax credit, you have to determine the “comparable vehicle”.  Section 45W(f) provides that the Treasury “shall” issue regulations relating to determination of the incremental cost of any qualified commercial clean vehicle. But who knows when such regulations will be issued.
    • Limit for tax credit:
      • $7,500 if GVW < 14,000 lbs, or
      • $40,000, if GVW 14,000 lbs or greater.
  • Commercial EV credit can apply to new and used cars.
  • Sec. 45W cannot apply if the car already received the EV credit earlier.  E.g., the original buyer claimed the credit, now the new commercial buyer buys the car.

New Section 25E creates a tax credit for previously-owned clean vehicles

  • Effective starting in 2023 – 2032.
  • Limited to individuals (no entities) to qualify for credit.
  • MAGI limits to eligibility for this vehicle tax credit ($75,000 for single; $150,000 for joint filers).
  • Sale price cannot exceed $25,000.
  • Limited to the first transfer since enactment date of 25E (no resellers).
  • Credit is lesser of: $4,000 or 30% of vehicle sale price.
  • Model year is at least 2 years earlier than the purchase year.
  • GVW < 14,000 lbs.
  • Limit of using this credit 1 time within a 3-year period for each buyer.
  • A sale to a spouse or dependent does not qualify for this vehicle tax credit.
  • Purchased from a dealer (a person licensed to engage in the sale of vehicles) – so sales of used vehicles owner to owner doesn’t count.
  • Qualified buyer can transfer the credit to the selling car dealer, but only starting in 2024, not 2023.
    • Question: is this credit available if the original buyer received an EV tax credit?  There is no double benefit prohibition as in section 45W.

[1] GM stated that this new requirement for sourcing included in the IRA will be “challenging.”  However, on Aug. 29, 2022, CNN Business reported that Honda struck a deal with Korean battery giant LG Energy Solution to build a $4.4 billion U.S. factory to supply its electric vehicles.  In May 2022, Hyundai announced that it was building a battery plant in Georgia.  Earlier in 2022, Mercedes-Benz opened a battery plant in Alabama, as reported by CNN Business.

 

Amobi Okugo: Financial Tips for Athletes (and everyone!)

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By Annie Tyler and Anthony Kim, Esq.

Amobi Okugo recently retired after 13 years as a professional soccer player. In 2010, Amobi was drafted in the first round (6th overall) in the Major League Soccer (“MLS”) SuperDraft by the Philadelphia Union. Over the course of his stellar soccer career, he played on six different MLS teams. Recognized as Forbes 30 under 30 for achievements on and off the field, Amobi Okugo is a first generation Nigerian American professional soccer player, founder of Frugal Athlete (https://www.afrugalathlete.com/) which helps empower athletes through financial education, a philanthropist launching the OK U GO Foundation (https://okugofoundation.org/) to help black and brown youth by creating the foundation for future financial stability, and a content creator on Instagram, YouTube, Twitter, TikTok, LinkedIn, and Apple Podcasts. MLS star Amobi Okugo has taken his experiences as a professional athlete and applied them to his next adventure in life, which is being a
financial advocate, planner, and advisor.

Given Amobi’s focus on financial literacy and the importance of proper planning for athletes and underserved kids, the attorneys at Norton Basu LLP (https://www.nortonbasu.com/) and Kim & Rosado LLP (https://www.kimrosado.com/) invited him to share his thoughts. Here is what we learned in our interview with Amobi on November 21, 2022:

Q: Tell us about your soccer career before you turned pro?

Amobi: I was fortunate enough to play soccer at a very young age, at a very high level, so I always joke around that I was a pro before going pro. My parents got me in soccer because it was a way to stay active first and foremost, and to stay busy with extracurricular activities. I built skills that can only be learned through sports.

Q: What was your experience as a Major League Soccer Player?

Amobi: It was amazing, but it went by quickly. There are so many things that you take for granted until you’re done playing. Soccer is truly a global game. I played with people from various countries and cultures such as Africa, South America, and Europe. I was able to compete at a high level and get paid for it. Athletes were naturally competitive, we’re naturally greedy, so we don’t really come to appreciate those moments. At the end of the day what are you really complaining about? You’re playing soccer for a living!

Q: What did you know about how to manage your financial situation when you first became a Major League soccer player?

Amobi: When I first became a professional soccer player, I didn’t know much about managing finances. I thought: You make money, and you save money. But when it comes to investing, taxes, and estate planning there are different factors to consider when you’re making substantial money. And it goes deeper than that, depending on how you live, where you live, and what you want for your life. All those factors play a big role in your overall financial performance and there’s a lot of lessons that I had to learn either through trial and error or just by asking questions.

Q: What do you know now that you wish you would have known when you entered the world of professional sports, in terms of finance?

Amobi: I wish I knew different tax strategies and estate planning. As athletes, we want to build a legacy.

Q: When did you finish your career as a professional athlete?

Amobi: I’m done playing, I retired last year.

Q: How has your experience as a professional athlete impacted your career path?

Amobi: I think it’s impacted everything, especially me right now, as a pseudo-entrepreneur. I’ve applied what I learned to the work that I’m doing now, which is financial literacy, a little bit of sports business, a little bit of marketing.

Q: What are a few key financial lessons that you think are important for people to know?

Amobi: I think the biggest one for me is the legal and tax ramifications to various types of investments. I think another one is understanding your budget. Sometimes the hardest thing to do is the simplest thing. And then, lastly, investing, because there are many ways to get to the top of the mountain. Some people like to invest in real estate. Some people like to invest in alternative assets. Some people like to invest in the stock market, so it’s finding what works for you and staying diversified within that. Everyone has their main asset-grower or asset-builder.

Q: Now that you’re rich and famous, and knowing that there is a legacy of many very famous, wealthy, and accomplished people passing away without an estate plan such Whitney Houston, Aretha Franklin, and Prince – and so many others – what do you know about estate planning?

Amobi: This is a great point that you bring up. I think, as athletes, we think we’re going to play forever and we’re going to live forever. We never want to have a GoFundMe page to take care of our family if we’re gone. That’s why we work so hard, to make sure that our family and our loved ones are supported long after we’re gone. And we don’t want our family fighting over, “Who gets what?”

Q: Do you plan to have total assets over 12 million dollars during your lifetime?

Amobi: Ideally, yes.

Q: Then we’re going to talk about what’s called the Basic Exclusion Amount. The acronym is BEA. It’s about 12 million dollars. It goes up every year, but based on projected tax law, it may go down dramatically. If your estate is valued at less than 12 million dollars, you pay zero estate tax. The estate tax rate can vary between 18 to 40 percent, which is separate from income tax.

But what if your estate is above the estate tax limit? Knowledge is power, and you must plan for it.

Should tax and estate planning be part of personal financial planning?

Amobi: Most definitely, I think it’s part of the holistic financial portfolio. That would be like working out and only working your upper body and missing out on your legs, your core, and your cardio.