Donald S. Ahaiwe, pro se, v. Comm., TCSO 2023-7
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
Insolvency Must Be Proved to Exclude CODI (Donald S. Ahaiwe, pro se, v. Comm., TCSO 2023-7)
Donald Ahaiwe claimed an exclusion from income for canceled debt related to a credit card. Mr. Ahaiwe argued that he was insolvent at the time the debt was canceled and, therefore, met the requirements of §108(a)(1)(B) for the exclusion.
Mr. Ahaiwe has the burden of proving his claim that he was insolvent. In support of his burden, Mr. Ahaiwe relied upon an “insolvency worksheet” he created, but the Court found the “worksheet is little more than numbers on a page.” Mr. Ahaiwe provided neither testimony nor documentation that established how the assets shown on the worksheet were valued, and the balances of the liabilities shown on that document were not confirmed by any independent evidence. Mr. Ahaiwe’s claim that he was insolvent at the time his credit card debt was forgiven was rejected by the Court.
Legal fees paid to secure a taxable judgment are a miscellaneous itemized deduction subject to the 2% AGI limit. The TCJA suspended these miscellaneous itemized deductions for 2018 through 2025, thus the victim pays tax on the gross award even if he or she receives only a part after legal fees and costs.
Tax practitioner planning. Can the victim avoid tax by having the attorney fees paid directly to the attorney? The Supreme Court held that attorney fees, including those paid directly to the litigant’s attorney on a contingent fee basis, are fully includible in the gross income of the litigant (Comm. v. Banks, 543 US 426 (2005)).
Exception. §62(a)(20) establishes an above-the-line deduction for attorney fees and court costs paid in connection with discrimination and certain other suits. §62(a)(21) establishes an above-the-line deduction for attorney fees and court costs associated with suits involving whistleblower claims. The suit must involve:
• Unlawful discrimination,
• A private cause of action under Medicare Secondary Payer statute or certain claims against the federal government,
• A whistleblower award for providing information regarding violations of tax laws.