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We hope you find our complimentary issue of Parker's Federal Tax Bulletin informative. Parker Tax Pro Library gives you unlimited online access to 147 client letters, 21 volumes of expert analysis, biweekly bulletins via email, Bob Jennings practice aids, time saving election statements and our comprehensive, fully updated primary source library.


Parker's Federal Tax Bulletin
Issue 39     
June 19, 2013     

 

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 1. In This Issue ... 

 

Tax Briefs

Portion of Parent Company's Dividends-Received Deduction Denied; Taxpayer's Recollections Can't Substantiate Expense Deductions; IRS Addresses Deductibility of Fees by Health Insurance Providers; Facts Don't Support a Bad Debt Deduction ...

Read more ...

Taxpayer Denied Abandonment Loss for "Underwater" Home

The foreclosure of a mortgage loan securing a residence resulted in a sale or exchange, and a capital gain, where the taxpayer's indebtedness exceeded her adjusted basis in the residence. Malonzo v. Comm'r, T.C. Summary 2013-47.

Read more ...

IRS Rules that Mexican Land Trusts Are Not Foreign Trusts

Mexican Land Trusts are not trusts for U.S. federal tax purposes and, thus, the burdensome foreign reporting requirements do not apply. Rev. Rul. 2013-14.

Read more ...

IRS Retiring Disclosure Authorization and Electronic Account Resolution on August 11; Online Petition Started

The IRS is retiring the Disclosure Authorization and Electronic Account Resolution options on e-services on August 11. IRS Website.

Read more ...

U.S. Employee Working Overseas Was Unable to Exclude Earnings from Income

Because a U.S. employee's tax home was in the United States rather than a foreign country, he could not exclude his overseas earnings from income. Daly v. Comm'r, T.C. Memo. 2013-147 (6/6/13).

Read more ...

Yankees Co-Owner Wins Tax Refund Suit; Loss Carryback Did Not Involve a Partnership Item

Because the trustee of a family trust made the determination to carry back a trust loss to an earlier year and because that determination depended on the circumstances of the family trust, the resulting refund request did not involve a partnership item. U.S. v. Steinbrenner, 2013 PTC 144 (M.D. Fla. 6/7/13).

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Autistic and Bipolar Taxpayer Didn't Qualify as Financially Disabled

An appeal to a district court by a taxpayer whose refund claim was denied by the IRS because the doctors who documented his medical conditions were not treating him when his tax return was due, was untimely. Suvak v. U.S., 2013 PTC 137 (S.D. N.Y. 5/21/13).

Read more ...

Taxpayer Was Not a Real Estate Professional; Rental Property Losses Disallowed

The rental real estate activities of a taxpayer who failed to properly document that he was a real estate professional were treated as passive activities, and the rental property losses attributable to those activities were disallowed. Hofinga v. Comm'r, T.C. Summary 2013-43 (6/3/13).

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Payments Not Made Under a Divorce Decree; Alimony Deduction Disallowed

Letters between a couple's two divorce attorneys, prior to the divorce decree being finalized, did not count as a written separation agreement for purposes of allowing an alimony deduction. Faylor v. Comm'r, T.C. Memo. 2013-143 (6/5/13).

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Individual Precluded From Contesting Trust Fund Recovery Penalty

A taxpayer who refused to accept delivery of the IRS's notice of proposed assessment of a trust fund recovery penalty was precluded from contesting his liability, and the IRS did not abuse its discretion in sustaining the proposed levy action. Giaquinto v. Comm'r, T.C. Memo. 2013-150 (6/12/13).

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Accountant Guilty of Using Trusts to Evade Taxes; 74-Month Prison Sentence Upheld

A prison sentence handed down to an accountant who used trusts to try and hide his income was upheld. U.S. v. Beam, 2013 PTC 141 (3d Cir. 6/12/13).

Read more ...

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 2. Tax Briefs 

 

C Corporations

Portion of Parent Company's Dividends-Received Deduction Denied: In CCM 20131902F, the IRS's Office of Chief Counsel advised that certain S&P 500 options held by a corporation with four subsidiaries are treated as a position held by the subsidiaries pursuant to Reg. Sec. 1.246-5(c)(6). Thus, the holding period of the subsidiaries' equity portfolio is limited under Code Sec. 246(c)(4)(C), resulting in the denial of a portion of the parent company's dividends-received deduction claimed under Code Sec. 243. [Code Sec. 243].

 

Deductions

Taxpayer's Recollections Can't Substantiate Expense Deductions: In U.S. v. Hart, 2013 PTC 137 (D. Ida. 6/6/13), the court held that the taxpayer's testimony showed that most of his claimed deductions with respect to alleged business trips were derived from his own recollections made some time after the expense was incurred. Further, because the taxpayer did not provide any contemporaneous logs, records, or receipts indicating the time or number of miles driven, much less bring forth any records detailing the business purpose of each trip he made or state for which of his alleged businesses a particular trip was made, no deductions were allowed. [Code Sec. 162].

IRS Addresses Deductibility of Fees by Health Insurance Providers: In AM-2013-002, the IRS's Office of Chief Counsel addresses whether fees paid by issuers of certain health insurance policies and plan sponsors of certain self-insured health plans to fund the Patient-Centered Outcomes Research Trust Fund (PCOR) are ordinary and necessary business expenses, and, thus, deductible business expenses. [Code Sec. 162].

Facts Don't Support a Bad Debt Deduction: In CCA 201323021, the IRS's Office of Chief Counsel advised that, with respect to an ongoing audit, it supported an IRS agent's argument that a taxpayer did not have a bona fide debt, and thus was not entitled to a bad debt deduction, because the taxpayer had not provided any information to show that the parties treated the amount as debt. Specifically, the Chief Counsel's Office stated that the taxpayer did not provide a fixed maturity date for the purported loan, and there was no evidence of any principal repayment or interest charged or paid. Further, the purported creditor made no attempt to collect the alleged debt. Finally, the Chief Counsel's Office noted, the parties treated the purported debt as equity for foreign jurisdiction purposes. [Code Sec. 166].

Ruling Addresses Sec. 199 Deduction for Partnership: In CCA 201323015, the IRS's Office of Chief Counsel advised that, where an agreement between two parties did not indicate whether the collaboration between the parties was meant to be a partnership, the conduct of the parties had to be evaluated to determine if a partnership existed. After finding that, despite side agreements to the contrary, the collaboration between the parties was a partnership, the Office of Chief Counsel advised that one of the parties, as a partner in the partnership, was entitled to claim the Code Sec. 199 domestic production activities deduction. [Code Sec. 199].

 

Employment Taxes

Court Questions Whether Taxpayer Exercised Control over Company: In U.S. v. Gray, 2013 PTC 143 (E.D. N.Y. 6/7/13), a district court held that, because the taxpayer's role in a company that did not pay over withholding taxes was largely in dispute, it could not grant summary judgment to either the taxpayer or the IRS. The IRS had assessed trust fund penalty taxes against the taxpayer but the court noted that there was a genuine issue of material fact about whether the taxpayer exercised significant control over the company's finances. As a result, if a settlement is not reached between the taxpayer and the IRS, the case will go to trial. [Code Sec. 6672].

 

Excise Taxes

IRS Issues Final Indoor Tanning Regs: In T.D. 9621 (6/11/13), the IRS issued final regulations on the indoor tanning services excise tax imposed by the Patient Protection and Affordable Care Act. These final regulations affect persons that use, provide, or pay for indoor tanning services. [Code Sec. 5000B].

 

Partnerships

Partnership Is Continuation of LLP with Different EIN: In CCM 20132101F, the Office of Chief Counsel advised that a partnership to which members of a limited liability partnership (LLP) transferred their interests was a continuation of the LLP by virtue of Code Sec. 708 and Rev. Rul. 66-264, even though the transferee partnership has a different employer identification number. [Code Sec. 708].

 

Penalties

Prison Sentences of Legislators Upheld: In Munchak v. U.S., 2013 PTC 125 (3d Cir. 5/31/13), the Third Circuit upheld the prison sentences of two Pennsylvania county commissioners who were found guilty of abusing their power for financial gain by demanding cash payments of thousands of dollars from firms and contractors who had, or wished to receive, county contracts. A jury convicted them of conspiracy to commit bribery, bribery, conspiracy to commit extortion under color of right, extortion under color of right, filing false tax returns, and income tax evasion.

Prison Term Upheld for Man Who Let Others Use His Bank Account: In U.S. v. Coachman, 2013 PTC 124 (11th Cir. 6/4/13), the Eleventh Circuit affirmed a 70-month prison term for an individual who allowed a woman who was like a daughter to him to use his bank account to deposit fraudulently obtained IRS refunds.

 

Procedure

No Abuse of IRS Discretion in CDP Hearing: In Law Offices of Robert A. Cushman, LLC v. Comm'r, T.C. Summary 2013-48 (6/13/13), the Tax Court held that the IRS did not abuse its discretion in conducting the taxpayer's CDP hearing through correspondence and telephone calls, and there was no abuse of discretion in denying collection alternatives. The court noted that, although a CDP hearing may consist of a face-to-face conference, a proper hearing may also occur by telephone or by correspondence under certain circumstances. [Code Sec. 6330].

IRS Lien Attaches to Property in Revocable Trust: In CCA 201324017, the IRS's Office of Chief Counsel advised that a federal tax lien attached to property a taxpayer transferred to a revocable trust. [Code Sec. 6321].

 

Retirement Plans

IRS Issues Guidance on Corporate Bond Yields: In Notice 2013-37, the IRS provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the Notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under Code Sec. 417(e)(3)(D) as in effect for plan years beginning after 2007. [Code Sec. 430].

 

Tax-Exempt Bonds

Rev. Proc. Provides Nationwide Average Purchase Price for Sec. 141 Purposes: In Rev. Proc. 2013-28, the IRS provides issuers of qualified mortgage bonds and issuers of mortgage credit certificates the nationwide average purchase price for residences located in the United States, and average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. [Code Sec. 141].

 

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 3. In-Depth Articles 

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Taxpayer Denied Abandonment Loss for "Underwater" Home

Losses arising from the actual physical abandonment of depreciable property are deductible if the intent of the taxpayer is to irrevocably discard the property so that it will not be used again by the taxpayer or retrieved by the taxpayer for sale, exchange, or other disposition. In Malonzo v. Comm'r, T.C. Summary 2013-47, the taxpayer tried to use this rule to take an abandonment loss on her "underwater" home. After buying the home and living there for a year, the taxpayer then rented it, and subsequently abandoned the home when it was worth less than the mortgage. But there is a caveat to taking an abandonment loss deduction. Reg. Sec. 1.1001-2(a)(1) and the Supreme Court's decision in Crane v. Comm'r, 331 U.S. 1 (1947), provide that the subsequent foreclosure of a mortgage loan securing the property constitutes a sale or exchange. As a result, the taxpayer's abandonment loss was denied.

Background

In 2005, Drucella Malonzo bought a home in Sacramento, California. She lived there until sometime during 2006, when she moved to San Francisco. For some portion of 2007, Drucella rented out the Sacramento home. She reported the income from the rental, and claimed $12,118 in depreciation. Later in 2007, Drucella was unable to rent the home. At that time, the home's fair market value was less than the outstanding mortgage loan balance, and Drucella stopped making the mortgage payments and, in effect, abandoned the home. Although she stopped making the mortgage payments, Drucella took no formal steps to transfer title or to provide her lender with notice of her intention to abandon the home. After Drucella stopped making mortgage payments, the lending institution determined that her note was in default, and the mortgage loan securing the home was foreclosed upon during 2008. The lender resold the residence for approximately $278,300 in early 2008. Drucella had paid $333,239 for the home in 2005, and that amount was considered by the IRS to be Drucella's unadjusted basis in the residence.

During 2008, Drucella's lender sent her a Form 1099-A, Acquisition or Abandonment of Secured Property, reflecting that the outstanding balance of her mortgage was $325,844. The same Form 1099-A reflected the fair market value of the residence to be the resale price of $278,300. Finally, the Form 1099-A reflected that January 22, 2008, was the date of lender's acquisition or knowledge of abandonment.

IRS Audit

Upon auditing Drucella's 2008 income tax return, the IRS determined that she had a $4,734 long-term capital gain, which, in turn, resulted in a $737 income tax deficiency for 2008. The IRS computed the gain as follows: $325,855 amount realized (i.e., the outstanding mortgage) less Drucella's basis of $333,239 plus recaptured depreciation of $12,118. Thus, the IRS calculated Drucella's basis in the home as $321,121 ($333,239 - $12,118) and that left a gain of $4,734. The foreclosure, the IRS said, resulted in a sale or exchange because Drucella's mortgage exceeded her adjusted basis in the residence.

In response, Drucella submitted an amended 2008 Form 1040 reporting a $313,737 ordinary loss from the abandonment of the residence. Drucella saw her intended abandonment as a situation where she lost the value of the residence at a time when the debt obligation exceeded the value.

Tax Court Decision

The issue before the Tax Court was whether the circumstances in Drucella's case resulted in an ordinary loss attributable to abandonment of the home in Sacramento or a capital gain attributable to a sale or exchange.

The Tax Court began by noting that the basic principles that govern situations such as Drucella's could be found in a well established line of cases beginning with the Supreme Court's opinion in Crane v. Comm'r, 331 U.S. 1 (1947). In Crane, the taxpayer inherited real property that was encumbered by a mortgage that had not been assumed by the taxpayer. For tax purposes, the taxpayer claimed depreciation using the value of the property. When the taxpayer subsequently sold the property, the value of the property and the mortgage balance were approximately equal, and she received a net amount of $2,500, which she treated as the gain from the sale. The IRS, on the other hand, treated the value of the property less depreciation as the taxpayer's basis and the outstanding balance of the mortgage plus the $2,500 as the sale price, thereby resulting in a larger gain and an increased tax burden. The Supreme Court concluded that the amount of the unassumed mortgage should be considered part of the proceeds of sale.

Thirty-six years later, in Comm'r v. Tufts, 461 U.S. 300 (1983), the Supreme Court considered whether the same rule applied even where the unpaid amount of a nonrecourse mortgage exceeded the fair market value of the property sold. In that case, the Court held that the taxpayer, although required to include the outstanding mortgage obligation as proceeds of sale, was not entitled to a loss to the extent the mortgage exceeded the fair market value of the property.

In a case decided soon after Tufts, the Fifth Circuit affirmed the Tax Court's holding in Yarbro v. Comm'r, 737 F.2d 479 (5th Cir. 1984), aff'g T.C. Memo. 1982-675, that an abandonment of real property subject to a nonrecourse debt is a sale or exchange for purposes of determining whether a loss is a capital loss.

As a result of the above-mentioned decisions, the Tax Court held that Drucella was not entitled to an ordinary loss on the abandonment of her home in Sacramento. Allowing such a loss, the court said, would ignore the fact that she held a capital asset that was subject to a mortgage. Thus, the court agreed with the IRS that Drucella had a $4,734 capital gain.

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IRS Rules that Mexican Land Trusts Are Not Foreign Trusts; Foreign Reporting Obligations Don't Apply

A recent IRS ruling on Mexican Land Trusts (MLTs), which are popular with individuals buying Mexican vacation or retirement homes, is good news for taxpayers. Prior to the ruling, there had been a lot of uncertainty about whether U.S. taxpayers who set up such trusts were required to comply with onerous tax reporting requirements involving foreign trusts. In Rev. Rul. 2013-14, the IRS ruled that MLTs are not trusts for U.S. federal tax purposes and, thus, the burdensome foreign reporting requirements do not apply.

Background

The Mexican Federal Constitution prohibits non-Mexican citizens from owning real property located within 100 kilometers of Mexico's inland borders or within 50 kilometers of its coastline. These areas are known as the restricted zones, and only Mexican citizens (or Mexican corporations whose bylaws forbid the ownership of stock by non-Mexican citizens) are allowed to directly own real property within the restricted zone.

Non-Mexican persons, however, may hold residential real property located in the restricted zones through an MLT with a Mexican bank after obtaining a permit from the Mexican Ministry of Foreign Affairs. As a result, U.S. taxpayers who want to purchase vacation or retirement homes often use MLTs to purchase Mexican real estate.

Foreign Trust Reporting Requirements

Under Code Sec. 6048(a), U.S. persons (and executors of estates of U.S. decedents) must file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, to report (1) certain transactions with foreign trusts, and (2) ownership of foreign trusts under the grantor trust rules. A separate Form 3520 must be filed for transactions with each foreign trust. Under Code Sec. 6048(b), a foreign trust is any trust other than a domestic trust. A domestic trust is any trust if (1) a U.S. court is able to exercise primary supervision over the administration of the trust; and (2) one or more U.S. persons have the authority to control all substantial decisions of the trust.

In addition, any foreign trust with a U.S. owner is required to file a Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, and give copies of the Foreign Grantor Trust Owner Statement (page 3 of Form 3520-A) and Foreign Grantor Trust Beneficiary Statement (page 4 of Form 3520-A) to the U.S. owners and U.S. beneficiaries.

In addition, under recently enacted Code Sec. 6038D, any individual who, during any tax year, holds any interest in a specified foreign financial asset must attach to his or her income tax return for the tax year certain information with respect to each such asset if the aggregate value of all such assets exceeds a threshold amount.

Rev. Rul. 2013-14

Earlier this month, the IRS issued Rev. Rul. 2013-14, in which it examined the following three situations involving MLTs.

Situation 1

In Situation 1, a U.S. individual is the sole owner of a limited liability company (LLC) organized under the laws of a state in the United States. The LLC is disregarded as an entity separate from its owner. The individual, through LLC, wants to buy Mexican residential real property located in a restricted zone. Neither the individual nor the LLC may hold title to the property directly under Mexican law. The LLC obtained a permit from the Mexican Ministry of Foreign Affairs and signed an MLT agreement with a Mexican bank. The LLC negotiated the purchase of the property directly with the seller of the property and paid the seller directly. The seller had no interactions with the Mexican bank with respect to the sale. At settlement, legal title to the property was transferred from the seller to the bank, subject to the MLT agreement, as of the date of sale.

Under the terms of the MLT agreement, the LLC has the right to sell the property without permission from the bank. Further, the bank must grant a security interest in the property to a third party, such as a mortgage lender, if the LLC so requests. The LLC is directly responsible for the payment of all liabilities relating to the property and must pay any taxes due in Mexico with respect to the property directly to the Mexican taxing authority. The LLC has the exclusive right to possess the property and to make any desired modifications, limited only by the need to obtain the proper licenses and permits in Mexico. If the property is occasionally leased, the LLC directly receives the rental income and the individual, as the owner of the LLC, reports the income on his U.S. federal income tax return. Although the Mexican bank is identified as a fiduciary in the MLT agreement, it disclaims all responsibility for the property, including obtaining clear title. The bank has no duty to defend or maintain the property. The bank collects a nominal annual fee from the LLC. There is no other agreement or arrangement between or among the individual, the LLC, the bank, or a third party that would cause the overall relationship to be classified as a partnership (or any other type of entity) for U.S. federal income tax purposes.

Situation 2

In the second situation, the facts are the same as in Situation 1 except that the LLC is a corporation organized under U.S. state law. The LLC is treated as a corporation under Reg. Sec. 301.7701-2(a). If the property is occasionally leased, the corporation directly receives the rental income and reports the income on its U.S. federal income tax return.

Situation 3

The facts are the same as in Situation 1 except that the individual deals directly with the Mexican bank without interposing any other entity. The individual obtained the permit from the Mexican Ministry of Foreign Affairs, signed the MLT agreement with the Mexican bank, and negotiated the purchase of the property. Additionally, the provisions of the MLT agreement that apply to the LLC in Situation 1 instead apply to the individual. If the property is occasionally leased, the individual directly receives the rental income and reports the income on his U.S. federal income tax return. The bank collects a nominal annual fee from the individual and there is no other agreement or arrangement between or among the individual, the bank, or a third party that would cause the overall relationship to be classified as a partnership (or any other type of entity) for U.S. federal income tax purposes.

IRS Analysis

The IRS began its analysis of whether the MLTs is the three situations above were trusts for U.S. tax purposes by looking at the regulations. Reg. Sec. 301.7701-4(a) provides that the term trust refers to an arrangement created by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of a trust may be the persons who create it, and the entity will be recognized as a trust if it was created for the purpose of protecting and conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally, an arrangement is treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees the responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility.

The IRS then looked at Rev. Rul. 92-105, which addresses the transfer of a taxpayer's interest in an Illinois land trust under the like-kind exchange rules of Code Sec. 1031. Under the facts of the ruling, an individual taxpayer created an Illinois land trust and named a domestic corporation as trustee. Under the deed of trust, the taxpayer transferred legal and equitable title to the real property to the trust, subject to the provisions of an accompanying land trust agreement. The land trust agreement provided that the taxpayer retained exclusive control of the management, operation, renting, and selling of the real property, together with an exclusive right to the earnings and proceeds from the real property. Under the agreement, the taxpayer was required to file all tax returns, pay all taxes, and satisfy any other liabilities with respect to the real property. Rev. Rul. 92-105 concludes that, because the trustee's only responsibility was to hold and transfer title at the direction of the taxpayer, a trust, as defined in Reg. Sec. 301.7701-4(a), was not established. The ruling holds that, on the facts described in the ruling, the trustee was a mere agent for the holding and transfer of title to the real property, and the taxpayer retained direct ownership of the real property for federal income tax purposes.

Ruling's Conclusion

In Situation 1, the IRS concluded that because the bank's only duties under the MLT agreement are to hold the legal title to the property and transfer title at the direction of the LLC, the MLT is not a trust. Because the LLC is treated as a disregarded entity, the individual who owns the LLC is treated as the owner of property.

In Situation 2, the IRS also ruled that the MLT is not a trust under the same analysis as in Situation 1 except that, because the LLC is treated as a corporation, the corporation is treated as the owner of property.

Finally, in Situation 3, the IRS concluded that because the bank's only duties under the MLT agreement are to hold the legal title to the property and transfer title at the direction of the individual, the MLT is not a trust. The individual is treated as the owner of the property.

Caution: The IRS did add, however, that the conclusions in Rev. Rul. 2013-14 don't apply if, under the MLT agreement, the bank holds legal title to any assets other than the property discussed in the ruling or if the bank is permitted or required to engage in any activity beyond holding legal title to such property.

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IRS Retiring Disclosure Authorization and Electronic Account Resolution on August 11; Online Petition Started

The IRS is retiring the Disclosure Authorization and Electronic Account Resolution options on e-services on August 11. IRS Website.

Due largely to low usage of the IRS's e-services Disclosure Authorization (DA) and Electronic Account Resolution (EAR), the IRS has decided to retire and remove the two applications effective August 11. Last year, users submitted less than 10 percent of all disclosure authorizations through the DA application. Similarly, only 3 percent of all account-related issues came in through the EAR application.

In anticipation of the discontinuance of these e-services, the IRS said it has increased the number of employees who process authorizations and has improved internal work processes to decrease the average processing time significantly from the current 10-day processing period.

The IRS said it will continue to explore better ways to reduce processing time and improve overall service to the users. However, the IRS noted that current budget cuts will impact the IRS's dedicated resources to this program and that it is working to determine the impact on processing time.

Once the IRS removes the two applications, former DA users will need to complete Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization, and mail or fax it to the appropriate IRS location listed on the form's instructions. The IRS asks that taxpayers allow at least four days for the authorization to post to the IRS database before requesting a transcript through the Transcript Delivery System. Former EAR users should call the Practitioner Priority Service at 1-866-860-4259 for help resolving account-related issues.

The IRS said it is continuing to look for ways to improve its current processes and is exploring an improved electronic solution for DA and EAR in the future.

Practitioners have started an online petition at www.beyond415.com urging the IRS to reverse its decision on e-services scale back.

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U.S. Employee Working in Iraq and Afghanistan Could Not Exclude Portion of Earnings from Income

Because a U.S. employee's tax home was in the United States rather than a foreign country, he could not exclude his overseas earnings from income. Daly v. Comm'r, T.C. Memo. 2013-147 (6/6/13).

James and Candace Daly were married and lived in Utah. James was a U.S. citizen and worked full time for a communications company. In 2007 and 2008, James's employer contracted with the U.S. Department of Defense, and James's work for his employer involved the government contract. During the two years in issue, James was assigned to work in Afghanistan and Iraq. When he worked overseas, James was unable to choose the location or duration of his assignments. While in Afghanistan and Iraq, James was provided with a government authorization to travel and lived and worked on U.S. military air bases. He was not allowed to leave either of the military bases on which he lived and worked or have his family live with him during the duration of the assignments. His wages were deposited electronically into his bank account, and he had access to the funds while he was in Afghanistan and Iraq.

During the years in issue, James also worked in Utah and was required to travel to California, Nevada, and Germany. James and Candace timely filed their federal income tax return for 2007 and excluded $24,888 in wages that James was paid by his employer. The couple attached Form 2555-EZ, Foreign Earned Income Exclusion, to their tax return and listed Utah as their tax home on the form. James also attached a letter requesting a waiver of the foreign earned income exclusion 330-day physical presence requirement and an exclusion of his wages for the 106 days he was deployed to a combat zone. James and Candace timely filed their federal income tax return for 2008 and excluded $22,259 in wages that James was paid by his employer. The couple attached Form 2555-EZ to their tax return and listed Utah as their tax home on the form. James also attached a letter requesting a waiver of the foreign earned income exclusion 330-day physical presence requirement and an exclusion of his wages for the 93 days he was deployed to a combat zone. The IRS disallowed the foreign earned income tax exclusions that James and Candace claimed for the years in issue.

Observation: The maximum amount eligible for the foreign earned income exclusion in 2007 was $85,700. For 2008, the foreign earned income exclusion amount was $87,600.

Code Sec. 61(a) provides that gross income means all income from whatever source derived. U.S. citizens are generally taxed on income earned outside the United States unless a specific exclusion applies. A qualified individual may elect to exclude his or her foreign earned income from gross income under Code Sec. 911(a). A qualified individual is defined as an individual whose tax home is in a foreign country and who is (1) a U.S. citizen and established that he or she has been a bona fide resident of a foreign country, or (2) a citizen or resident of the United States and who, during any 12-consecutive-moth period, is present in a foreign country during at least 330 full days in that period. If a taxpayer does not meet either of these tests, Code Sec. 911(b)(1)(A) provides that his or her income is not considered foreign earned income.

A taxpayer who fails to meet the 330-day physical presence test may be treated as a qualified individual if he or she is eligible for a waiver of the period of stay in a foreign country under Code Sec. 911(d)(4). An individual who is a bona fide resident of a foreign country and is required to leave the foreign country because of war, civil unrest, or similar adverse conditions that preclude the normal conduct of business, may be treated as a qualified individual during the period he or she was a bona fide resident of the foreign country.

James claimed that he maintained a residence in Utah because Candace had a separate career and could not join him in Afghanistan or Iraq. He argued that his residence was in Afghanistan or Iraq or both during the years in issue and that his principal place of business was in Afghanistan and/or Iraq because he was required to be present in those countries for an entire 12 months.

The Tax Court held that James's home was in the United States during the years in issue, and therefore the couple's tax home was in the United States for purposes of the foreign earned income exclusion. The court noted that a tax home is defined under Code Sec. 911(d)(3) as the individual's home for purposes of the deduction under Code Sec. 162(a)(2) relating to travel expenses incurred while away from home in the pursuit of a trade or business. The court looked to Mitchell v. Comm'r, 74 T.C. 578 (1980), which held that an individual's tax home is the vicinity of the taxpayer's principal place of employment and not where his or her residence is located. The court also looked at Reg. Sec.1.911-2(b), which states if an individual is engaged in a trade or business at more than one location during the tax year, then the individual's tax home is located at his or her principal place of business. The regulation also states that if an individual has no principal place of business, then the individual's tax home is his or her place of abode in a real and substantial sense.

The court determined that James maintained strong ties to his home in Utah during the years in issue. He lived on U.S. military air bases when he was in Afghanistan and Iraq, he was not allowed to leave the military bases, his family did not go with him overseas, and he did not open a bank account in either country. Therefore, James's ties to Afghanistan and Iraq were limited and transitory in nature. The court rejected James's claim that his government travel authorization established that his primary place of business was in a foreign country. The court determined that James failed to show that he established a residence in a real and substantial sense in either Afghanistan or Iraq. The court also noted that James worked in Afghanistan and/or Iraq for no more than 106 days in 2007 and no more than 93 days in 2008. Less than half of his income was derived from services performed in Afghanistan and Iraq. Thus, the court concluded that the couple's tax home was in the United States during the years in issue. Since it concluded that the couple's tax home was in the United States, the court did not have to determine whether James met either the bona fide resident or 330-day physical presence test for purposes of being a qualified individual. However, the court noted that he did not meet either of these requirements. James also did not meet the requirements for a waiver of the 330-day physical presence requirement because he failed to show that he was required to leave either or both countries because of war, civil unrest or similar adverse conditions.

For a discussion of the foreign earned income exclusion, see Parker Tax ¶78,601.

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Yankees Co-Owner Wins Tax Refund Suit; Loss Carryback Did Not Involve a Partnership Item

Because the trustee of a family trust made the determination to carry back a trust loss to an earlier year and because that determination depended on the circumstances of the family trust, the resulting refund request did not involve a partnership item. U.S. v. Steinbrenner, 2013 PTC 144 (M.D. Fla. 6/7/13).

Harold Steinbrenner is a co-owner of the New York Yankees and a son of deceased former owner, George Steinbrenner. Harold is a beneficiary of a family trust that is an indirect partner in YankeeNets LLC through an intervening partnership, Yankees Holdings, L.P. YankeeNets and Yankees Holdings are subject to unified partnership audit procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). In 2006, the IRS settled a tax dispute with the two partnerships. As a result, the partnerships flowed through additional losses for 2002 to the family trust of which Harold is a beneficiary. The IRS disallowed the distribution of the 2002 trust loss to the beneficiaries. Choosing among the alternatives available to him in the family trust (a partner), the trustee elected to carry back the losses to 2001, which resulted in Harold's realizing an overpayment for 2001 and successfully seeking a refund for 2001. The IRS denied the distribution of the loss by the trustee for 2002 and tried to collect the refund.

The issue before a district court was the correct statute of limitations to use in determining if Harold was entitled to the refund. And the determination of the correct statute of limitations depended on whether the refund claim was with respect to a partnership item.

Harold argued that Code Sec. 6511(a) gives a taxpayer two years after the payment of a tax to claim a refund. Since Harold paid the tax in June and October of 2008, and claimed the refund in August 2009, he was well within the refund period.

The IRS argued that Code Sec. 6511(g) applied. In Harold's situation, Code Sec. 6511(g) would require that, if a pertinent tax is attributable to a partnership item, as defined in Code Sec. 6231(a)(3), the limitation of Code Sec. 6230(c)(2)(B)(i) applies, not the limitation in Code Sec. 6511(a). Code Sec. 6230(c)(2)(B)(i) requires that a claim of refund occur within two years of the day on which the settlement with the IRS was entered into. Thus, the outcome of the case depended on whether the refund involved a partnership item.

The district court held that, because the trustee's determination to carry back the loss to an earlier year was a matter determined by the trustee and depended on the circumstances of the family trust and was not a matter determined at the partnership level and that depended on the circumstances of the partnership, the trustee's determination to carry back loss was neither a partnership item nor attributable to a partnership item. Both the IRS's independent action in denying distribution of the loss by the trustee for 2002 and the trustee's choice among alternatives (whether, for example, to contest the IRS's determination for 2002 or carry back the loss to 2001 or to another year), the court said, intervened and interrupted any chain of causation or any hint of attribution between a partnership item and the beneficiary's refund. The trustee's decision to carry back the loss to 2001 (or another year) rather than to contest the IRS's disallowance for 2002, the court said, was detached from any partnership item and from attribution to any partnership item.

For a discussion of TEFRA audit procedures and the determination of what constitutes a partnership items, see Parker Tax ¶28,505.

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Autistic and Bipolar Taxpayer Didn't Qualify as Financially Disabled

An appeal to a district court by a taxpayer whose refund claim was denied by the IRS because the doctors who documented his medical conditions were not treating him when his tax return was due, was untimely. Suvak v. U.S., 2013 PTC 137 (S.D. N.Y. 5/21/13).

Robert Suvak did not file his federal income tax returns for tax years 1998 through 2004 until 2010. At that time, he requested a refund for overpaid taxes for years 1998 through 2004.

The IRS denied the refund claims because Robert had filed his returns more than three years after the date they were due. He appealed on the ground that the three-year statute of limitations did not apply because he was financially disabled. He claimed that he was unable to file the returns on time because he was financially disabled due to bipolar disorder and Asperger's Disorder, a form of Autism.

An IRS Appeals Officer denied Robert's 1998 refund claim because the doctors who documented his medical conditions were not treating him when his 1998 tax return was due. The Appeals Office denied the claims for tax years 2000 through 2003 because Robert was working and, therefore, did not qualify as financially disabled.

Robert claimed he subsequently obtained letters that established he was financially disabled since 1998, but the Appeals Office refused to review those letters. On August 6, 2012, Robert brought suit in a district court. The IRS moved to dismiss, saying the suit was not timely.

The district court dismissed Robert's suit. Under Code Sec. 6532(a)(1), the court noted, the time for Robert to file suit for claims related to tax years 1998, 1999, and 2004, expired on March 31, 2012 (for tax years 1998 and 1999), and May 12, 2012 (for tax year 2004). Because Robert brought the suit on August 6, 2012, the court held that the statute of limitations had lapsed for all three claims. Moreover, the court noted, Robert had not provided any evidence that he entered into a written agreement with the IRS to extend the time for filing suit in accordance with Code Sec. 6532(a)(2), nor did the IRS records reflect that the parties entered into any such written agreement. Thus, the court concluded that Robert's claims as to tax years 1998, 1999, and 2004 were untimely and had to be dismissed.

For a discussion of the statute of limitations for obtaining tax refunds, see Parker Tax ¶261,180.

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Taxpayer Failed to Establish that He Was a Real Estate Professional; Rental Property Losses Were Disallowed

The rental real estate activities of a taxpayer who failed to properly document that he was a real estate professional were treated as passive activities, and the rental property losses attributable to those activities were disallowed. Hofinga v. Comm'r, T.C. Summary 2013-43 (6/3/13).

Peter Hofinga and his wife, Margaret, purchased and rented residential real estate properties during their marriage. In 2006 and 2007, the couple owned nine rental properties and elected to treat their interests in the rental properties as one activity. Margaret worked for a local university. Peter was not employed in any capacity during 2006 and 2007 and had more responsibility for the management of the properties than Margaret. He primarily managed the properties from his home office and regularly paid various bills, arranged for repairs, purchased supplies, reviewed rental applications, supervised renovations and remodeling of a property if needed, and occasionally inspected the rental properties. The couple did not maintain a contemporaneous log or record that showed the amount of time spent or the specific services provided with respect to any specific rental property on any specific date. The couple also hired property managers for some of the rental properties. The property managers would collect rents, respond to tenant inquires, and supervise repairs. On their 2006 and 2007 federal income tax returns, Peter and Margaret deducted losses of $111,042 and $141,133, respectively, attributable to the rental properties. If the rental property losses had not been taken into account, the couple's adjusted gross income reported on their returns would have exceeded $150,000. The IRS disallowed the rental property losses in the notice of deficiency after determining that the couple did not meet the requirements of Code Sec. 469(c)(7) and, therefore, the rental activities were considered passive activities subject to the passive activity loss limitation rules.

Code Sec. 469(c)(2) and (4) provide that a rental activity is generally treated as a passive activity regardless of whether the taxpayer materially participated. However, there are two exceptions to the general rule. One exception that allows a limited deduction if the taxpayer actively participates in the rental real estate activity did not apply to Peter and Margaret since the couple's adjusted gross income exceeded $150,000 for each year in issue. The second exception provides that if the taxpayer is a real estate professional, then Code Sec. 469(c)(2) does not apply and the taxpayer's rental real estate activity is not treated as a passive activity as long as the taxpayer materially participates in the activity.

Observation: In general, rental activities are passive, whether or not the taxpayer materially participates in the activity. However, rental activities of a real estate professional are treated as passive and are fully deductible if the real estate professional materially participates in the rental activities.

Code Sec. 469(c)(7) contains two tests a taxpayer must satisfy to be considered a real estate professional. One test requires that more than one-half of the personal services performed in the trade or business of the taxpayer during the tax year be performed in a real property trade or business in which the taxpayer materially participates. The second test requires that the taxpayer perform more than 750 hours of services during the tax year in a real property trade or business in which the taxpayer materially participates.

The IRS did not dispute that Peter and Margaret materially participated in the rental property activity for the two years in issue. Instead, the IRS claimed that Peter did not qualify as a real estate professional under Code Sec. 469(c)(7).

The Tax Court agreed with the IRS and denied the rental losses. Because Peter was not employed during either year in issue, the court found the he satisfied the first test that more than one-half of the personal services performed in the trade or business of the taxpayer during the tax year be performed in a real property trade or business in which the taxpayer materially participates.

The court focused on the requirements of the second test and determined that Peter failed to establish that he performed more than 750 hours of services during the tax year in a real property trade or business in which he materially participated.

Peter and Margaret did not maintain contemporaneous logs of the time devoted to the rental real estate activity and attempted to establish Peter's participation by providing noncontemporaneous logs based on their calendars, bank statements, credit card records, property trip files, bills, receipts and other records. Their logs used a general allocation of time spent by both Peter and Margaret and were supported by the amount of time Peter spent in his home office. Some of the log entries referenced specific properties and provided a distinct description of the services performed.

The court noted that, although the couple likely expended significant time during each year providing services in connection with the rental properties, it was unable to quantify the total time that Peter spent doing so from the logs the couple had provided. The court also noted that the couple hired others to provide management and maintenance services in connection with the properties. Thus, the court concluded that Peter failed to show that he satisfied the 750-hour test for either year in issue. Thus, he was not a real estate professional for either year, the couple's rental real estate activity was a passive activity and the losses attributable to the activity were properly disallowed.

For a discussion of the deductibility of rental losses, see Parker Tax ¶247,120.

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Former Spouse's Payments Were Not Made Under a Divorce or Separation Instrument; Alimony Deduction Denied

Letters between a couple's two divorce attorneys, prior to the divorce decree being finalized, did not count as a written separation agreement for purposes of allowing an alimony deduction. Faylor v. Comm'r, T.C. Memo. 2013-143 (6/5/13).

James and Mary Faylor separated in May 2007, and in July 2007 Mary's attorney filed a motion for temporary support. In August 2007, the attorneys for James and Mary exchanged letters with proposals for the amount of monthly temporary support. In September 2007, while the parties were discussing the terms of the temporary support order, James began to make monthly transfers of $5,000 to a joint checking account he shared with Mary with a belief that Mary would withdraw the funds from the joint account. In October 2007, Mary's attorney sent James's attorney a proposed temporary support order that set the amount of temporary support at $5,000 a month. James' attorney responded with a revised proposal adding paragraphs with respect to the couple's bills and tuition for the couple's daughter. In November 2007, Mary's attorney rejected the revised proposal. In December 2007, Mary's attorney sent a letter to James's attorney with further revisions to the proposal. Neither James nor Mary signed either of the two proposed temporary support orders. Although there was no temporary support order in effect, James continued to make monthly $5,000 transfers into the joint account. In May 2008, a decree of dissolution of marriage was entered and awarded alimony to Mary of $2,500 a month for six months and $1,500 a month for 66 months thereafter. James timely filed his 2008 federal income tax return in which he claimed a deduction of $36,500 for alimony paid. Of that amount, $16,500 represented payments James made to Mary pursuant to the divorce decree. The remaining $20,000, which the IRS disallowed, represented the transfers James made to the joint account before the divorce decree was entered.

Code Sec. 71(b)(2) defines a divorce or separation instrument as (1) a decree of divorce or separate maintenance or a written instrument incident to such a decree: (2) a written separation agreement: or (3) a decree requiring a spouse to make payments for the support or maintenance of the other spouse.

The IRS argued that James was not entitled to deduct the amounts he transferred to the couple's joint checking account because (1) the transfers to the joint account were not payments in cash; (2) the $20,000 was not paid under a divorce or separation agreement; and (3) the divorce decree did not designate the amounts as a payment which is not includible in gross income under Code Sec. 71(b)(1) and not allowable as a deduction under Code Sec. 215.

James claimed that, although the amounts he transferred to the joint account were not paid under a decree, the letters between the couple's two attorneys constituted a meeting of the minds and formed the basis of a written separation agreement. In August 2007, the parties' attorneys had exchanged letters proposing differing temporary support amounts and terms. In October 2007, the attorneys exchanged drafts of proposed temporary support orders. The attorneys did not agree to each other's draft proposals and the parties did not sign either draft.

The Tax Court held that the letters exchanged between the parties' attorneys did not constitute a meeting of the minds between James and Mary and did not establish the existence of a written separation agreement. The court noted that the term written separation agreement is not defined in the Internal Revenue Code. The court looked at case law in Jacklin v. Comm'r, 79 T.C. 340 (1982), in which a written separation instrument was interpreted to require a clear statement in written form memorializing the terms of support between the parties. The court also looked to Grant v. Comm'r, 84 T.C. 809 (1985), which held that letters that did not show a meeting of the minds between the parties could not collectively constitute a written separation instrument.

Thus, the court concluded that the correspondence between the parties' attorneys did not establish the existence of a written separation agreement. Accordingly, Mary did not receive the $20,000 under a divorce or separation instrument, and James was not entitled to deduct the $20,000 as alimony.

For a discussion of the taxation of alimony and separate maintenance payments, see Parker Tax ¶14,220.

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Refusal to Accept Delivery of Proposed Tax Assessment Precludes Taxpayer from Later Contesting Liability

A taxpayer who refused to accept delivery of the IRS's notice of proposed assessment of a trust fund recovery penalty was precluded from contesting his liability, and the IRS did not abuse its discretion in sustaining the proposed levy action. Giaquinto v. Comm'r, T.C. Memo. 2013-150 (6/12/13).

Cesare Giaquinto worked as a designer for a professional architectural firm. In 2006, 2007 and 2008, the architectural firm failed to pay over its withholding taxes to the IRS. An IRS Revenue Officer visited the firm on two occasions to secure payment of the withholding taxes. Cesare was present during both of the visits. During the second visit, the Revenue Officer took an inventory of the firm's office equipment and interviewed Cesare regarding the potential application of the Code Sec. 6672 trust fund recovery penalties to him. Cesare completed Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. However, he refused to complete Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. In November 2008, the Revenue Officer sent a Letter 1153 and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty to Cesare's home by certified mail. The envelope was returned to the IRS by the U.S. Postal Service with a Return to Sender sticker, Unclaimed stamp and three notations of dates marked on the envelope. The Letter 1153 informed Cesare that the IRS proposed to assess trust fund recovery penalties against him and he had a right to appeal the decision to an IRS Appeals Office.

In May 2009, the Revenue Officer sent by certified mail to Cesare's home Form 3552, Notice of Tax Due on Federal Tax Return. The envelope was returned to the IRS by the U.S. Postal Service with a Return to Sender sticker, Unclaimed stamp and one notation of a date marked on the envelope. In July 2009, the Revenue Officer hand delivered to Cesare a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. In August 2009, the Revenue Officer sent Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing under Code Sec. 6320 by certified mail to Cesare's home and the mail was delivered to Cesare.

In August 2009, Cesare timely mailed to the IRS Form 12153, Request for a Collection Due Process or Equivalent Hearing, seeking relief from the proposed levy. In December 2010, Cesare attended an in-person conference with an IRS Settlement Officer and discussed collection alternatives. During the conference, Cesare did not agree to provide Form 433-A or Form 433-B, Collection Information Statement for Businesses. In January 2011, the IRS mailed to Cesare a Notice of Determination Concerning Collection Actions Under Code Sec. 6320 and/or 6330. The IRS Appeal Office attached a notice of determination sustaining the proposed levy action because Cesare had offered no collection alternatives and had a prior opportunity to dispute the underlying liability.

Observation: The IRS is required to provide the taxpayer with notice of trust fund recovery penalties before assessment. A Letter 1153 is sent and provides a taxpayer with required notice and the means of protesting a proposed trust fund recovery penalty assessment administratively with the IRS. When a Letter 1153 is mailed, the IRS must follow mailing procedures that are similar to those provided for notices of deficiency in Code Sec. 6212 (b).

Code Sec. 6672 imposes a penalty for willfully failing to collect, account for and pay over income and employment taxes of employees. Trust fund recovery penalties are assessed and collected in the same manner as taxes against a person who is an officer or employee of a corporation who is under a duty to perform those duties. These persons are referred to as responsible persons.

The IRS is authorized under Code Sec. 6331(a) to collect tax by levy upon a taxpayer's property if the taxpayer who is liable to pay tax neglects or refuses to pay such tax within 10 days after notice and demand for payment by the IRS. Code Sec. 6330 requires the IRS to send written notice to the taxpayer of the taxpayer's right to request a hearing before a levy is made. If the taxpayer makes a timely request for a hearing, the hearing will be held by the IRS Appeals Office. At the hearing, the taxpayer may discuss any relevant issue.

Cesare claimed that he was entitled to contest his liability for the trust fund recovery penalties during the Code Sec. 6330 hearing because he never received the Letter 1153 that the Revenue Officer sent to him by certified mail in November 2008.

The Tax Court held that Cesare deliberately failed to claim the delivery of the Letter 1153 and was therefore precluded from contesting his liability for the trust fund recovery penalty during the Code Sec. 6330 hearing. The court cited its holding in Mason v. Comm'r, 132 T.C. 301 (2009) in which it concluded that, unless the taxpayer deliberately refused to accept its delivery, a Letter 1153 will be considered to have provided a prior opportunity to dispute liability for the underlying trust fund recovery penalty only if the taxpayer actually received the Letter.

The court noted that Cesare was fully aware that the IRS was considering whether to assert trust fund recovery penalties against him. He offered no adequate explanation for his failure to respond to the two USPS Forms 3849 left for him regarding the Letter 1153 sent in November 2008. Cesare also ignored or failed to claim at least one USPS Form 3849 left for him regarding the notice of tax due sent in May 2009. Thus, the court found Cesare deliberately failed to claim delivery of the Letter 1153. Because Cesare was precluded from contesting his liability for the trust fund recovery penalties at the Code Sec. 6330 hearing, the court determined that it lacked jurisdiction to consider whether Cesare was a responsible person liable for those penalties. Cesare provided no evidence that the determination to sustain the levy was arbitrary, capricious or without sound basis in fact. Thus, the court concluded that the IRS Appeal Office's determination to sustain the proposed levy was not an abuse of discretion.

For a discussion of the penalties for failing to pay employment taxes, see Parker Tax ¶210,100.

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Accountant Guilty of Using Trusts to Evade Taxes; 74-Month Prison Sentence Upheld

A prison sentence handed down to an accountant who used trusts to try and hide his income was upheld. U.S. v. Beam, 2013 PTC 141 (3d Cir. 6/12/13).

Troy Beam, a trained accountant, was indicted on attempting to evade taxes and willful failure to file income tax returns, in violation of Code Secs. 7212(a), 7210, and 7203. The events leading to the indictment began when, after hearing about a radio program speaker who had asserted that there was no law requiring American citizens to pay taxes, Troy contacted the speaker and obtained literature on the speaker's claim. Troy purchased at least two trusts from Save-A-Patriot Fellowship, an organization named in the literature, and began transferring personal and business assets to the trusts. Subsequently, he purchased additional trusts from Commonwealth Trust Company (CTC) and its promoter Wayne Rebuck, who testified that he marketed the trusts as tools that appeared legitimate but had been successful to hide assets from the IRS and/or creditors.

Rebuck also testified that he clearly said [this] to Troy Beam and every other person [he] presented the program to. In his presentations, Rebuck used letters from the IRS in an attempt to show that pure trust organizations have no tax requirements. Troy used the trusts to receive income, hold bank accounts, and encumber assets.

In October 2005, the IRS issued Troy a notice of deficiency for federal income taxes for the years 1996 through 1998. In May 2006, Troy was given a final notice of the IRS's intent to levy his unpaid taxes and was advised of his right to a hearing. Troy requested the hearing, which was conducted in October 2006. In January 2007, the IRS notified Troy that his appeal was rejected and that the collection activities were proper. Troy was advised of his right to appeal this decision to the U.S. Tax Court, which he failed to do. He also failed to pay the taxes, penalties, and interest due, and was indicted in February 2010. Troy pleaded not guilty to each count but, after a 14-day trial, the jury found him guilty on all charges. Troy was sentenced to 74 months' imprisonment and appealed.

On appeal, Troy raised three issues: (1) whether the government presented sufficient evidence for conviction; (2) whether the government impermissibly commented during trial on his failure to respond to IRS communications; and (3) whether the district court erred in declining to instruct the jury on his theory of defense.

The Third Circuit rejected all Troy's arguments and affirmed his conviction.

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