Federal Income Tax Update
By I. Wife Not Entitled to Any of Foreclosure Sales Proceeds of Husband’s Marital Home to Pay Husband’s Taxes Since Title was Solely in the Husband’s Name; United States vs. Byers, US Court of Appeals, 133 F 4th 824 (8th Cir. 2025).
Mr. and Mrs. Byers lived in Minnesota in a home titled solely in Mr. Byers’ name. Mr. Byers owed substantial taxes. The IRS sought to foreclose on Mr. Byers’ home to satisfy his tax debt.
Although the home was titled solely in Mr. Byers’ name, Mrs. Byers argued she was entitled to one-half of the foreclosure sales proceeds because the home was a marital homestead under Minnesota law. Under Minneszota homestead exemption law, even if property is owned by one spouse, the non-owner spouse has legal protections to preserve the family homestead. For example, if the homestead owner is married, he cannot convey any portion of the homestead without the signatures of both spouses. Mrs. Byers argued the Minnesota homestead exemption and the Supreme Court’s decision in Rogers, 461 U.S. 677 (1983), gave her a property interest in the home that should be protected from the IRS foreclosure sale.
The Eighth Circuit ruled in favor of the IRS. The court determined, under Minnesota law, Mrs. Byers did not have a vested interest in the marital home during Mr. Byers’ lifetime. Instead, Mrs. Byers held a contingent interest in the homestead during Mr. Byers’ life that would vest in favor of Mrs. Byers only if Mr. Byers predeceased her. Thus, since the marital home was titled solely in Mr. Byers’ name, Mrs. Byers had no claim to any of the foreclosure sales proceeds.
II. No Depreciation Deductions Allowed for Property Converted from Personal Use to Rental; Smith vs. Commissioner, TC Memo 2025-24.
Mr. Smith and his brother co-owned residential property used by Mr. Smith’s brother as a residence from 2002 until 2017. Mr. Smith and his brother co-signed a loan securing the property. In years before 2011, Mr. Smith made significant mortgage payments on the residence. In 2011, Mr. Smith’s brother conveyed a one-half interest in the property to Mr. Smith.
In 2017, Mr. Smith’s brother moved from the residence. Mr. Smith and his brother began renting the home to third parties. On his 2018 tax return, Mr. Smith claimed depreciation deductions against the rental income he received. However, he did not file his 2018 tax return until 2024, five years after it was originally due.
The Tax Court agreed with the IRS that no depreciation deductions were available to Mr. Smith. Under Section 167, if personal use realty is converted to rental property, the property’s tax basis for computing depreciation is equal to the lesser of the fair market value or the adjusted basis of the property on the date of the conversion. Reg. 1.167(g)-1. Mr. Smith was unable to substantiate the property’s depreciable basis at the time the conversion in 2017. He could not prove his original acquisition cost basis and merely provided his best “guesstimate” of the property’s value in 2017 when it was converted to rental use.
III. Lawyer’s Negligence in Filing a Tax Court Petition One Day Late Does Not Give Rise to Equitable Relief. Belagio Fine Jewelry vs. Commissioner, 164 TC No. 7 (2025).
Belagio Fine Jewelry needed to file a Tax Court petition to challenge an employment tax assessment under Section 7436(b)(2). The IRS determined certain workers for Belagio were employees rather than independent contractors. Belagio’s attorney submitted the petition via FedEx Express Saver four days before it was due. The petition, however, did not arrive until one day after the statutory notice of deficiency deadline. Belagio argued equitable relief tolling should save the late-filed petition.
The Tax Court agreed equitable relief can save a late-filed petition in a worker classification case. However, equitable relief is only available where the taxpayer establishes it took all reasonable steps to ensure the timeliness of the petition, and the circumstances that caused late filing were extraordinary and beyond the taxpayer’s control. Belagio’s attorney used a FedEx delivery method that was not an IRS designated private delivery service. Notice 2016-30 lists all private delivery services that have been designated by the IRS as eligible private delivery services. FedEx Express Saver is not on that list. Thus, Belagio assumed the risk of its attorney’s negligence. The attorney’s negligence, in failing to use a designated private delivery service, did not satisfy the requirements for equitable tolling. The court noted, in some extraordinary circumstances, an attorney’s negligence can justify equitable tolling, such as where an attorney abandons his client. Belagio’s case, however, involved mere garden variety negligence that did not warrant equitable tolling.
IV. No Equitable Tolling for Late Filed Petition after Address Change; Stokey v. Commissioner, TC Memo 2025-44.
On February 6, 2023, the IRS mailed a 90-day statutory notice of deficiency to Mr. Stokey’s New York address listed on his 2021 tax return. Mr. Stokey moved from New York to New Jersey in early 2023. Mr. Stokey advised the IRS of his new address when he filed his 2022 return in April 2023. The last day for Mr. Stokey to file his Tax Court petition was May 8, 2023. Mr. Stokey did not file the petition until September 27, 2023. In June 2023, after Mr. Stokey failed to file a petition, the IRS mailed Mr. Stokey a bill for his 2021 tax lability.
The court ruled equitable tolling could not save Mr. Stokey’s late-filed petition. To be entitled to equitable tolling, a taxpayer must establish (1) he pursued his rights diligently and (2) extraordinary circumstances beyond his control prevented his filing on time. Sanders vs. Commissioner, 160 T.C. 563 (2023). Mr. Stokey alleged no facts to support his assertion he did not receive the statutory notice of deficiency until June 2023. Once he received the statutory notice of deficiency in June 2023, Mr. Stokey knew his petition was late but still delayed filing the petition until September 2023.
Keith Wood is an attorney with Carruthers & Roth, P.A. in Greensboro.