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Federal Tax Research Bulletin - The Latest Tax and Accounting Articles

              

Parker's Federal Tax Bulletin
Issue 112     
April 8, 2016     

 

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 1. In This Issue ... 

 

Tax Briefs

IRS Confirms Audit Protection on Repair Reg Account Method Changes; IRS Finalizes Anti-Loss Importation Rules; Early Tuition Payment Prevents Student from Claiming Educational Credit; Manufacturer Who Mined Raw Materials Must Make Two Separate Depletion Calculations ...

Read more ...

Loan Guarantees to Self-Directed IRA Results in Deemed Distribution and Penalties to Owners

Loan guarantees made by a couple in transactions involving their self-directed IRAs and a corporation owned by the IRAs were prohibited transactions, resulting in deemed distributions to the couple to which the 10 percent penalty tax under Code Sec. 72(t) applied. Thiessen v. Comm'r, 146 T.C. No. 7 (3/29/16)

Read more ...

Temp and Prop Regs Combat Corporate Inversions and Earnings Stripping

The IRS has issued temporary and proposed regulations addressing transactions that are structured to avoid existing limits on corporate inversions, along with post-inversion tax avoidance transactions. In addition, the IRS has released proposed regulations that would treat related-party interests in a corporation as indebtedness in part and stock in part, in order to address earnings stripping transactions. T.D. 9761 (4/8/16); REG-135734-14 (4/8/16); REG-108060-15 (4/8/16).

Read more ...

Income from Sporadic Sales of Scrap Metal Not Subject to Self-Employment Tax

Applying an eight factor test, the Tax Court determined a taxpayer who sold leftover scrap steel from his failed steel fabrication business was not engaged in a trade or business, and thus the sales were not subject to self-employment tax under Code Sec. 1401. Ryther v. Comm'r, T.C. Memo. 2016-56,

Read more ...

Taxpayer Granted Refund where IRS Substitute Returns Failed to Account for Foreign Taxes Paid

A federal district court determined that although a decedent had failed to file U.S. tax returns while working abroad, his estate was entitled to a nearly $1.6 million refund because the IRS's substitute returns failed to account for foreign tax credits and the foreign earned income exclusion. Estate of Herrick v. U.S., 2016 PTC 122 (D. Utah 2016).

Read more ...

Former Tax Court Judge and Husband Indicted for Tax Evasion, Filing False Returns, and Impeding an Audit

A grand jury has indicted a former Tax Court judge and her husband with filing false tax returns, tax evasion, and obstructing an IRS audit. The indictment charges that numerous personal expenses, including vacations to China, Australia and Thailand, were deducted on the business tax return of the husband's lobbying firm. U.S. v. Fackler, 2016 PTC 134 (D. Minn. 2016).

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IRS Provides Guidance on Statute of Limitations for Omissions or Understatements of Prior Year Gifts on Form 709

The IRS Office of Chief Counsel advised that the normal three year limit on assessment applies where a taxpayer had omitted or understated gifts given in prior years on his return for a subsequent year. The unlimited period for assessment under Code Sec. 6501(c)(9) only applies to unreported and undisclosed current year gifts. CCA 201614036.

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Late Forms 1040 Weren't an Honest Effort to Comply with Law; Taxes Not Dischargeable in Bankruptcy

A taxpayer's late-filed Forms 1040 did not qualify as tax returns under the test in Beard v. Comm'r, 82 T.C. 766 (1984), because they did not evince an honest and reasonable effort to comply with the tax law. As a result, the taxpayer's tax debts for 2000 through 2003 were not dischargeable in bankruptcy. Justice v. U.S., 2016 PTC 127 (2016).

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Taxpayer Not Liable for a Deficiency Where He Repaid More Than He Misappropriated

The Tax Court held that, contrary to an IRS agent's analysis, a taxpayer repaid to a former business associate more than the amount the agent determined the taxpayer to have misappropriated. The doctrine of collateral estoppel did not support the assessment of a deficiency for the year of misappropriation, even though the taxpayer had pled guilty to, and been convicted of, tax evasion based on the IRS agent's erroneous analysis. Senyszyn v. Comm'r, 146 T.C. No. 9 (2016).

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2016 Luxury Vehicle Depreciation Limits and Lease Inclusion Amounts Announced

The IRS issued the 2016 luxury vehicle depreciation limitations and the income inclusion amounts for leased vehicles. Rev. Proc. 2016-23.

Read more ...

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 2. Tax Briefs 

 

Accounting Methods

IRS Confirms Audit Protection on Repair Reg Account Method Changes: In CCA 201614037, the IRS Office of Chief Counsel (IRS) advised that if a taxpayer timely filed a Form 3115, Application for Change in Accounting Method, for 2014 to change its method of accounting for non-incidental materials and supplies under Rev. Proc. 2015-14, and properly included the limited Code Sec. 481(a) adjustment, then the audit protection provided in Rev. Proc. 2015-13 applied and the IRS could not require the taxpayer to change its method of accounting for its non-incidental materials and supplies costs incurred prior to the year of change.

 

C Corporations

IRS Finalizes Anti-Loss Importation Rules: In T.D. 9759 (3/28/16), the IRS issued final regulations that prevent erosion of the corporate tax base when a person transfers property to a corporation and the result would be an importation of loss into the federal tax system. The regulations apply to nonrecognition transfers of loss property to corporations in liquidations under Code Sec. 322 and in transactions described in Code Sec. 362(a).

 

Credits

Early Tuition Payment Prevents Student from Claiming Educational Credit: In McCarville v. Comm'r, T.C. Summary 2016-14, the Tax Court disallowed a student's claimed American opportunity credit for qualified tuition expenses paid in December for his spring semester the following year, noting that under Reg. Sec. 1.25A-5(e)(1) cash method taxpayers must claim the American opportunity credit for the year expenses were actually paid.

 

Deductions

Manufacturer Who Mined Raw Materials Must Make Two Separate Depletion Calculations: In FAA 20161401F, IRS Field Attorneys (IRS) advised that, where a taxpayer both mined raw minerals for sale and for use in manufacturing, two different percentage depletion allowance calculations under Code Sec. 611 should be performed: one for the mineral the taxpayer sold, and one for the rest that it processed and manufactured before selling. The IRS stated the latter calculation would be based on the representative market or field price of the minerals.

 

Estates, Gifts, and Trusts

Sons Thwart Deceased Mother's Intended Charitable Contributions: In Estate of Dieringer v. Comm'r, 146 T.C. No. 8 (3/30/16), the Tax Court held that an estate's charitable contribution of stock in a closely held corporation was less than the date-of-death fair market value of the bequeathed property. The decedent's sons had redeemed voting shares in the corporation and modified redemption agreements after the decedent's death but prior to the transfer of the stock, which resulted in an alteration of the value of the decedent's intended donation.

Trust Distributions Were Returns of Property, Not Gifts: In PLR 201613007, the IRS ruled that contributions of property to a trust were not completed gifts because the grantor had retained a testamentary power to appoint the trust property to any person other than his estate or creditors. Accordingly, the IRS determined any distribution from the trust to the grantor was a return of his property, not a gift.

 

Excise Tax

IRS Issues Regs on Highway Vehicle Excise Taxes: In REG-103380-05 (3/31/16), the IRS issued proposed regulations relating to the Code Sec. 4051 excise tax imposed on the sale of highway tractors, trailers, trucks, and tires; the use of heavy vehicles on the highway; and the definition of highway vehicle related to these and other taxes. The proposed regulations reflect changes to the Code since 1982.

 

Foreign

Advance Pricing and Mutual Agreement Report Issued: In Announcement 2016-12, the IRS issued its annual report on advanced pricing agreements (APAs) and the Advance Pricing and Mutual Agreement (APMA) Program.

 

IRS

IRS Issues Requirements for Substitute Form W-2c and Form W-3c: In Rev. Proc. 2016-20, the IRS states the requirements regarding the preparation and use of substitute forms for Form W-2c, Corrected Wage and Tax Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements.

 

Partnerships

Taxpayer Who Made No Partnership Contributions Couldn't Deduct Losses: In Hastings v. Comm'r, T.C. Memo. 2016-61, the Tax Court held that taxpayers were not entitled to a deduction for losses their partnership sustained. The court noted that the taxpayers had made no contributions to the partnership and could not otherwise prove they had basis in the partnership, and thus Code Sec. 704(d) prevented them from deducting the loss.

 

Tax Practice

Tax Court Announces Changes to Practice and Procedure: In a March 28, 2016, press release, the Tax Court announced that it has adopted interim amendments to its Rules of Practice and Procedure, relating to legislation enacted toward the end of 2015. The amendments affect interest abatement claims, jurisdiction after the filing of a bankruptcy procedure, and rules of evidence.

 

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 3. In-Depth Articles 

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Loan Guarantees to Self-Directed IRA Results in Deemed Distribution and Penalties to Owners

Loan guarantees made by a couple in transactions involving their self-directed IRAs and a corporation owned by the IRAs were prohibited transactions, resulting in deemed distributions to the couple to which the 10 percent penalty tax under Code Sec. 72(t) applied. Because the transactions were not disclosed on the taxpayers' individual tax return for the year the guarantees were made, the six-year statute of limitations period under Code Sec. 6501(e) also applied. Thiessen v. Comm'r, 146 T.C. No. 7 (3/29/16)

Background

In 2002, a company that James Thiessen had been employed with for 30 years announced that it was moving to another state. Thiessen decided to leave the company and began searching for a new job in metal fabrication, an area in which he had a degree. His search included looking for a business that he and his wife could acquire. He subsequently learned that Ancona Job Shop (Ancona), an unincorporated business specializing in the design, fabrication, and installation of metal products, was for sale through the brokerage firm A.J. Hoyal & Co., Inc. (AJH).

Thiessen and his wife decided to acquire Ancona, and they and AJH began discussing the terms of the acquisition. Jay Hoyal, a broker at AJH, informed the Thiessens that they could use the funds in their retirement accounts to acquire Ancona. Specifically, he stated that the Thiessens could roll over their retirement funds into individual retirement accounts (IRAs), cause the IRAs to acquire the initial stock of a newly formed C corporation, and cause the C corporation to acquire Ancona.

Thiessen discussed the funding structure with a CPA and asked the CPA to help with implementing the acquisition of Ancona. Thiessen and his wife then hired an attorney to help them with the terms of the sale contract and with the terms of a financing arrangement in acquiring Ancona. The CPA helped the Thiessens establish the C corporation, Elsara Enterprises, Inc. (Elsara), that was eventually used to effect the IRA funding structure. On May 29, 2003, the CPA filed articles of incorporation for Elsara. The Thiessens were named as Elsara's officers and directors, and they (and no one else) have served in those positions ever since.

In June 2003, the Thiessens each established an IRA, with each retaining all discretionary authority and control concerning investments by his or her IRA (an arrangement referred to as a self-directed IRA). The Thiessens then rolled over their tax-deferred retirement funds of approximately $432,000 into the newly formed IRAs and caused the IRAs to acquire the initial stock of Elsara. Shortly thereafter, Elsara purchased the assets of Ancona for approximately $600,000. The purchase price included a promissory note to the seller of $200,000, guaranteed by the Theissens, and earnest money deposit of $60,000, which came from the Theissens' bank account. The rest came from the Theissens' IRAs.

On their 2003 joint tax return, the Theissens reported that they received IRA distributions of $432,000 which were the subject of a tax-free rollover. The 2003 joint return did not disclose the Theissens' guaranties of the loan or any other fact that would have put the IRS on notice of the nature and the amount of any deemed distribution resulting from the guaranties. The 2003 joint return also did not disclose or even mention Elsara or its 2003 corporate return.

In 2010, the IRS sent the Theissens a notice of deficiency as a result of their failure to report for 2003 a taxable distribution from their IRAs. The deficiency notice was sent after the expiration of the three-year statute of limitations. According to the IRS, the Theissens' guaranties were prohibited transactions under Code Sec. 4975(c)(1)(B), resulting in deemed distributions of the IRAs' assets under Code Sec. 408(e)(2) on January 1, 2003.

IRS and Taxpayer Arguments

In making its arguments, the IRS relied on the Tax Court's decision in Peek v. Comm'r, 140 T.C. 216 (2013), which involved a transaction similar to the one in which the Theissens engaged and even involved the same CPA. In Peek, the court held that a couple had engaged in a prohibited transaction by guaranteeing loans related to transactions involving their self-directed IRAs. Thus, the couple had a deemed distribution from their IRAs.

Code Sec. 408(e)(2) provides that an IRA ceases to be an IRA if the person for whose benefit the IRA is established (i.e., the IRA owner) or his or her beneficiary engages in a prohibited transaction with respect to the IRA. Under Code Sec. 4975(c)(1)(B), a prohibited transaction generally includes any direct or indirect lending of money or other extension of credit between a plan (e.g., an IRA) and a disqualified person. Under Code Sec. 4975(e)(2) and (3), a disqualified person includes a fiduciary and a fiduciary includes any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets. Code Sec. 408(e)(2)(A) provides that, where the disqualified person is also the IRA owner or his or her beneficiary, the IRA ceases to be an IRA as of the first day of the IRA owner's tax year in which the prohibited transaction occurs.

The Theissens' asked the Tax Court to disregard or to distinguish its opinion in Peek. The Department of Labor, the Theissens argued, has the primary authority to interpret the prohibited transaction rules and the Tax Court in Peek interpreted those rules inconsistently with the interpretation of the Department of Labor. The Theissens also argued that the three-year statute of limitations applied because they disclosed on the face of their 2003 joint return that they rolled over their retirement fund distributions into the IRAs.

Tax Court's Holding

The Tax Court held that the Theissens' guaranties of the loan were prohibited transactions under Code Sec. 4975(c)(1)(B), and the IRAs' assets were deemed distributed to them on January 1, 2003. In reaching its conclusion, the Tax Court cited its decision in Peek. With respect to the Theissens' arguments to disregard the Peek decision, the court noted that Congress included provisions on prohibited transactions in both the Internal Revenue Code and Title 29 (i.e., Department of Labor rules), and President Carter gave the Department of Labor primary authority to interpret both sets of those provisions. However, the court said, that does not mean that the Department of Labor has the final word as to the interpretation of those provisions. The court emphasized that it is the province and duty of the judicial department to say what the law is.

The court further held that the Theissens' reporting that the rollover was nontaxable was insufficient to advise the IRS of the nature and the amount of the unreported income flowing from the deemed distributions from the IRAs on account of the loan guaranties. Thus, the six-year statute of limitation applied. Further, because neither of the Theissens were 59-1/2 the 10 percent penalty tax in Code Sec. 72(t) also applied.

For a discussion of prohibited transactions with respect to self-directed IRAs, see Parker Tax ¶134,505.

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Temp and Prop Regs Combat Corporate Inversions and Earnings Stripping

The IRS has issued temporary and proposed regulations addressing transactions that are structured to avoid existing limits on corporate inversions, along with post-inversion tax avoidance transactions. In addition, the IRS has released proposed regulations that would treat related-party interests in a corporation as indebtedness in part and stock in part, in order to address earnings stripping transactions. T.D. 9761 (4/8/16); REG-135734-14 (4/8/16); REG-108060-15 (4/8/16).

Background

A corporate inversion is a transaction in which a multinational group with a U.S. parent changes its tax residence to reduce or avoid paying U.S. taxes. In specific, a group with a U.S. parent engages in an inversion when it acquires a smaller foreign company and then locates the tax residence of the merged group outside the U.S., typically in a low-tax country. Generally, the primary purpose of an inversion is to reduce taxes, often substantially. After a corporate inversion, multinational corporations often use a tactic called earnings stripping to minimize U.S. taxes by paying deductible interest to their new foreign parent or one of its foreign affiliates in a low-tax country.

In September 2014 and November 2015, the IRS issued guidance (Notice 2014-52 and Notice 2015-79, respectively) that made it more difficult for companies to undertake an inversion and reduced the economic benefits of doing so. The notices also announced the IRS's intention to issue regulations to address corporate inversions.

The IRS has now issued temporary and proposed regulations which further limit corporate tax inversions, and reduce the benefits of doing so by addressing earnings stripping.

Observation: One of the first casualties of the regulations was a merger deal that had been planned between two pharmaceutical companies, Pfizer and Allergan. The deal was attractive to Pfizer because of Allergan's tax domicile in Ireland. The regulations made the deal much less attractive and the merger has been called off.

Temporary Regulations Make It More Difficult for Companies to Invert

The temporary regs (T.D. 9761) limit inversions by disregarding foreign parent stock attributable to certain prior inversions or acquisitions of U.S. companies. The text of the temporary regs also serves as the text of the proposed regs (REG-135734-14).

The IRS noted that some foreign companies may avoid Code Sec. 7874 - the tax code's existing curb on inversions - by acquiring multiple U.S. companies over a short window of time or through a corporate inversion. The value of the foreign company increases to the extent it issues its stock in connection with each successive acquisition, thereby enabling the foreign company to complete another, potentially larger, acquisition of a U.S. company to which Code Sec. 7874 would not apply. Over a relatively short period of time, a significant portion of a foreign acquirer's size may be attributable to the assets of these recently acquired U.S. companies.

The IRS stated that it is inconsistent with the purposes of Code Sec. 7874 to permit a foreign company (including a recent inverter) to increase in its size in order to avoid the inversion threshold under current law for a subsequent acquisition of a U.S. company. For the purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion, the temporary regulations exclude stock of the foreign company attributable to assets acquired from U.S. companies within three years prior to the signing date of the latest acquisition.

The temporary regulations also set forth additional rules that disregard foreign parent stock attributable to certain prior acquisitions of U.S. companies, including:

(1) A rule that addresses a technique by which U.S. companies may seek to avoid Code Sec. 7874 by structuring an inversion as a multistep transaction using back-to-back foreign acquisitions; and

(2) A rule that requires a foreign subsidiary of the inverted U.S. group to recognize all realized gain upon certain post-inversion transfers of assets that dilute the inverted U.S. group's ownership of those assets.

The temporary regulations are effective on April 8, 2016.

Proposed Regulations Address Earnings Stripping

In addition to the temporary regulations, proposed regulations (REG-108060-15 (4/8/16)) were issued which target transactions that increase related party debt that does not finance new investment in the U.S.

Under current law, following an inversion or foreign takeover, a U.S. subsidiary can issue its own debt to its foreign parent as a dividend distribution. The foreign parent, in turn, can transfer this debt to a low-tax foreign affiliate. The U.S. subsidiary can then deduct the resulting interest expense on its U.S. income tax return at a significantly higher tax rate than is paid on the interest received by the related foreign affiliate. The related foreign affiliate can also use various strategies to avoid paying any tax at all on the associated interest income. The IRS stated that when available, these tax savings incentivize firms with a foreign parent to load up their U.S. subsidiaries with related party debt.

The proposed regulations makes it more difficult for groups with a foreign parent to quickly load up their U.S. subsidiaries with related party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions.

For example, the proposed regulations:

(1) Treat as stock an instrument that might otherwise be considered debt if it is issued by a subsidiary to its foreign parent in a shareholder dividend distribution;

(2) Address a similar two-step version of a dividend distribution of debt in which a U.S. subsidiary borrows cash from a related company and pays a cash dividend distribution to its foreign parent; and

(3) Treat as stock an instrument that might otherwise be considered debt if it is issued in connection with certain acquisitions of stock or assets from related corporations in transactions that are economically similar to a dividend distribution.

In addition, the proposed regulations allow the IRS on audit to divide a purported debt instrument into part debt and part stock. An interest in a corporation is generally treated as entirely debt or entirely equity for federal tax purposes. The IRS noted this all-or-nothing approach can create distortions when the facts support treating a purported debt instrument as part debt and part stock. The proposed regulations would allow the IRS to treat an instrument issued to a related party as being part debt and part equity to eliminate these distortions.

The proposed regulations also require documentation for members of large groups to include key information for debt-equity tax analysis. The IRS noted that under current law it can be difficult for it to obtain information to conduct a debt-equity analysis of related party instruments, especially information that demonstrates the intent to create a genuine debtor-creditor relationship.

Lastly, under the proposed regulations, companies are required to undertake certain due diligence and complete documentation up front to establish that a financial instrument is really debt. Specifically, the proposed regulations require key information be documented, including a binding obligation for an issuer to repay the principal amount borrowed, creditor's rights, a reasonable expectation of repayment, and evidence of an ongoing debtor- creditor relationship. If these requirements are not met, instruments will be characterized as equity for tax purposes.

The proposed regulations generally apply to instruments issued after April 4, 2016.

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Income from Sporadic Sales of Scrap Metal Not Subject to Self-Employment Tax

Applying an eight factor test, the Tax Court determined a taxpayer who sold leftover scrap steel from his failed steel fabrication business was not engaged in a trade or business, and thus the sales were not subject to self-employment tax under Code Sec. 1401. Ryther v. Comm'r, T.C. Memo. 2016-56,

Background

Thomas Ryther incorporated Knight Steel in 1997 and was its sole owner, officer, and board member. The firm fabricated steel frames, primarily for general contractors. Knight Steel's fortunes sagged after the stock market collapsed in 2000. In 2001 it fell behind on paying employment taxes, and the IRS assessed penalties. The company's troubles continued, and in 2004 a bankruptcy trustee took over to manage its liquidation. The trustee closed the business in April 2004 and the bankruptcy court discharged the company's debts the following January. In winding up Knight Steel's operations, the trustee focused on the company's cash and accounts receivable and chose to abandon the company's few items of tangible property - two run-down trailers, some well-used fabrication equipment, and a large pile of scrap steel - because they appeared to be worthless.

Before Knight Steel entered bankruptcy, Ryther had incorporated a second business, Mission Steel. When Knight Steel was liquidated, Mission Steel took control of its abandoned trailers and fabrication equipment and assumed its land leases. Ryther hoped to continue in the steel-fabrication business, but the new company never did much business.

Ryther discovered, however, that the large quantities scrap steel that had accumulated over the years had value and there was an active market. He also learned that wholesalers were willing to come to his lot, fill their trucks with the scrap, and pay for it on the spot. Over the course of 2004 to 2011 he sold scrap steel once or twice a month, to at least five different scrap wholesalers, in sales totaling over $300,000.

Ryther didn't file tax returns during these years. In 2012 he filed all seven missing returns, and reported his scrap sales as miscellaneous income. In 2013 the IRS assessed a deficiency after determining that Ryther's scrap selling was a trade or business and his income from those sales was therefore subject to self-employment tax.

Analysis

Code Sec. 1402 defines self-employment income as "net earnings from self-employment," which is defined as "the gross income derived by an individual from any trade or business carried on by such individual."

The sale of a taxpayer's own property is generally exempt from the definition of self-employment income. But an exception applies where the property is held primarily for sale to customers in the ordinary course of the trade or business (Code Sec. 1402(a)(3)(C)(ii)).

The Tax Court pointed out that neither Code Sec. 1402 nor its regulations define the term "property held primarily for sale to customers in the ordinary course of the trade or business." But, the court observed, the phrase appears in Code Sec. 1221(a)(1). Although Code 1221 doesn't define these phrase either, the court determined that case law under Code Sec. 1221(a)(1) explaining the phrase was relevant.

The court cited Williford v. Comm'r, T.C. Memo. 1992-450, in which a taxpayer who sold pieces of art was a part-time art dealer but claimed that his income from the sale of particular pieces at issue was capital gain because they were from his personal collection. There, the court had to decide if the specific pieces were "held primarily for sale to customers in the ordinary course of the trade or business." In finding the art was not so held, it used the following eight factors:

(1) frequency and regularity of sales;

(2) substantiality of sales;

(3) length of time the property was held;

(4) segregation of property from business property;

(5) purpose of acquisition;

(6) sales and advertising effort;

(7) time and effort spent on sales; and

(8) how the proceeds of the sales were used.

Applying the factors in the instant case, the court determined that three favored the taxpayer and the remaining five were neutral.

The court found factor 1 (frequency and regularity of sales) favored Ryther because he sold scrap on average only once or twice a month. The court was persuaded that a holding period of seven years indicated that Ryther wasn't holding his scrap for sale in the ordinary course of business, and therefore factor 3 (length of time the property was held) also favored Ryther. With regard to factor 8 (how the proceeds of the sales were used), the court noted it was undisputed that Ryther didn't use the proceeds to buy more scrap but instead to pay everyday expenses. Accordingly, the court concluded that factor 8 greatly favored Ryther.

Although the $300,000 in sales were substantial, the court said, because Ryther's sales were "sporadic" and generated large profits with little effort factor 2 (substantiality of sales) was neutral. The court found factor 4 (segregation of property from business property) was also neutral because Ryther had a single large pile of scrap, not collections of business scrap and personal scrap that he commingled. Factor 5 (purpose of acquisition) was neutral because there weren't enough facts for the court to determine when and why Ryther acquired the scrap. The court determined factor 6 (sales and advertising effort) was neutral because the market for scrap had established prices and sales could be made by simply picking up the phone and arranging delivery, and thus no other advertising would be ordinary. Because the amount of time Ryther actually spent researching scrap wholesalers and contacting them to arrange sales was unclear, the court found factor 7 (time and effort spent on sales) to be neutral.

Accordingly, the court determined that Ryther's scrap wasn't property primarily held for sale to customers in the ordinary course of a trade or business. Carrying on a business, the court said, citing Austin v. Comm'r, 263 F.2d 460 (9th Cir. 1959), implies an occupational undertaking to which one habitually devotes time, attention, or effort with substantial regularity; merely disposing of assets at intermittent intervals is not engaging in business.

The court thus held that the income Ryther realized from selling the scrap was exempt under Code Sec. 1402(a)(3)(C) from self-employment tax.

For a discussion on self-employment taxes, see Parker Tax ¶13,100.

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Taxpayer Granted Refund where IRS Substitute Returns Failed to Account for Foreign Taxes Paid

A federal district court determined that although a decedent had failed to file U.S. tax returns while working abroad, his estate was entitled to a nearly $1.6 million refund because the IRS's substitute returns failed to account for foreign tax credits and the foreign earned income exclusion. Estate of Herrick v. U.S., 2016 PTC 122 (D. Utah 2016).

Austin Herrick, a U.S. citizen, lived and worked in the Philippines during 2000 to 2006. Herrick mistakenly believed that he would not owe any U.S. taxes on the income he earned in the Philippines because of the high rate of tax he paid on that income in the Philippines. Herrick did not file U.S. tax returns from 2000 through 2006.

Because Herrick failed to file his tax returns, the IRS prepared substitute tax returns for 2000 through 2006. The IRS's substitute tax returns did not take into account the foreign taxes Herrick paid. The IRS determined that Herrick owed approximately $1,330,000 in U.S. taxes and then levied that amount from his investment accounts.

After Herrick died in 2011, the administrator of his estate learned of the tax issues and had U.S. income tax returns prepared and filed for 2000 through 2006. Unlike the IRS-prepared substitute returns, these returns took into account Herrick's foreign taxes paid. Herrick's estate then sought a refund of the levied amounts in a federal district court, based on the application of the foreign-earned income exclusion under Code Sec. 911, and tax credits under Code Sec. 901 for the Philippines taxes Herrick paid.

Generally, U.S. citizens are taxed in the United States on their worldwide income. Under Code Sec. 911, U.S. taxpayers living and working overseas are, under certain circumstances, permitted to adjust their U.S. tax liabilities by excluding some of their foreign-earned income. In addition, Code Sec. 901 provides a credit for foreign taxes U.S. citizens pay, so that taxpayers are not taxed twice on the same income

With regard to the Code Sec. 901 foreign tax credit, the district court noted that the estate was required establish the actual amount of taxes Herrick ultimately paid to the Bureau of Internal Revenue of the Philippines ("BIR") before the credit could be applied and accurately calculated. The court found that records the estate provided relating to Herrick's tax filings in the Philippines, along with certifications from the BIR with respect to the taxes he paid, were sufficient evidence of the taxes Herrick paid in the Philippines. Accordingly, the court determined the estate was entitled to apply the foreign tax credit to Herrick's 2000 - 2006 tax returns.

With regard to the Code Sec. 911 foreign-earned income exclusion, the IRS argued that under Reg. Sec. 1.911-7(a)(2)(i) the exclusion is only available if a taxpayer makes an election on a timely filed income tax return, on an amendment to a timely filed return, or within one year after the due date of the return. The court noted that it was undisputed that Herrick did not timely file his U.S. tax returns, and the estate did not file his returns until well beyond one year after the due dates, However, the court said, the IRS's argument ignored Subsection (D) of Reg. Sec. 1.911-7(a)(2)(i), which allows a taxpayer to make the foreign earned income exclusion in certain situations after the time periods referenced by the IRS expire.

Reg. Sec. 1.911-7(a)(2)(i)(D), the court stated, would apply in the instant case if there was still some tax liability Herrick owed and the estate made the Code Sec. 911 election before the IRS discovered that Herrick did not make the election himself. Because Herrick had outstanding U.S. tax liabilities for interest and dividend income, and because the IRS did not apply the foreign earned income exclusion when it filed the substitute tax returns, the court found there was no evidence that the IRS discovered that Herrick failed to elect the exclusion and concluded that the estate timely made a Code Sec. 911 election.

Accordingly, the district court determined the estate was entitled to a refund plus interest of $1,588,641.

For a discussion of the foreign earned income exclusion, see Parker Tax ¶78,600.

For a discussion of the foreign tax credit, see Parker Tax ¶101,900.

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Former Tax Court Judge and Husband Indicted for Tax Evasion, Filing False Returns, and Impeding an Audit

A grand jury has indicted a former Tax Court judge and her husband with filing false tax returns, tax evasion, and obstructing an IRS audit. The indictment charges that numerous personal expenses, including vacations to China, Australia and Thailand, were deducted on the business tax return of the husband's lobbying firm. U.S. v. Fackler, 2016 PTC 134 (D. Minn. 2016).

Diane Kroupa was a U.S. Tax Court judge from June of 2003 to her retirement in June of 2014. As a Tax Court judge, Kroupa heard and decided cases involving a wide variety of tax law issues, including what is required to be reported as income and what constitutes proper business deductions.

Her husband, Robert Fackler is a self-employed lobbyist and political consultant. For the years at issue, he owned and operated a Schedule C entity known as Grassroots Consulting, the income of which was included as part of his and his wife's joint tax returns for 2004-2010. Through Grassroots Consulting, Fackler provided lobbying and consulting services to three primary clients. The clients paid him as an independent contractor and reported the payments to Fackler and the IRS via Form 1099. Fackler was typically reimbursed by clients for meals, travel, and other expenses incurred in connection with services provided.

From 2004 to 2013, Fackler and Kroupa owned a house in Minnesota, where they were residents. That house was their primary residence. They also leased a second residence, a house in Easton, Maryland, where Kroupa stayed while fulfilling her duties as a Tax Court judge in Washington, D.C.

On April 4, a Minnesota grand jury indicted Fackler and Kroupa on a number of charges involving the tax returns they filed for 2009 and 2010. The indictment states that, beginning in or before 2004 and continuing at least through 2012, in Minnesota and elsewhere, the couple conspired to defraud the U.S., particularly by impairing and obstructing the ascertainment and computation of taxes. The purpose of the conspiracy, the indictment states, was to unlawfully evade the couple's tax obligations.

The indictment cites the false reporting of the following expenses as Schedule C business expenses of Grassroots Consulting:

(1) expenses associated with the couple's two homes, such as rent, utilities, internet/cable service, garbage removal, bathroom remodeling, new windows, and interior design fees;

(2) personal expenses incurred by or on behalf of the couple and/or their family members such as pilates classes, spa and massage fees, jewelry and personal clothing, wine club fees and purchases as wineries; airfare, hotel, Chinese tutoring, music lessons, personal computers, family and graduation photos, Christmas cards, household items, groceries, dry cleaning, personal cell phone charges, and other expenses for vacations to and among other locations: Alaska, Australia, Bahamas, China, England, Greece, Hawaii, Mexico, and Thailand.

According to the indictment, from 2004 through 2010, the couple fraudulently deducted at least $500,000 of personal expenses as purported Schedule C business expenses.

The indictment also accuses the couple of giving false and misleading documents to their tax return preparer knowing and intending that the preparer would give this information to IRS auditors. The documents - including typed summaries, handwritten summaries, and cut-and-pasted credit card statements - purported to substantiate certain of the business expense deductions taken by Grassroots Consulting, which the couple allegedly knew were personal and nondeductible expenses.

Kruoupa, the indictment charges, sent an email to the couple's tax return preparer that a deposit into her bank account in the amount of approximately $44,000 in July 2010 was part of an unrelated inheritance and denied that the payment was received as a result of a land sale in South Dakota, when she allegedly knew the payment was from the land sale.

The indictment also charges that the couple prepared false and misleading documents in an attempt to impair and impede IRS audits.

In total, the indictment consists of six counts: (1) conspiracy to defraud the United States in violation of 18 U.S.C. Sec. 371; (2) tax evasion in 2009 in violation of Code Sec. 7201; (3) tax evasion in 2010 in violation of Code Sec. 7201; (4) making and subscribing a false return in 2009 in violation of Code Sec. 7206(1); (5) making and subscribing a false return in 2010 in violation of Code Sec. 7206(1); and (6) obstruction of an IRS audit in violation of Code Sec. 7212(a).

For a discussion of the criminal and forfeiture penalties relating to tax evasion and filing a false return, see Parker Tax ¶265,100.

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IRS Provides Guidance on Statute of Limitations for Omissions or Understatements of Prior Year Gifts on Form 709

The IRS Office of Chief Counsel advised that the normal three year limit on assessment applies where a taxpayer had omitted or understated gifts given in prior years on his return for a subsequent year. The unlimited period for assessment under Code Sec. 6501(c)(9) only applies to unreported and undisclosed current year gifts. CCA 201614036.

In CCA 201614036, the IRS Office of Chief Counsel (IRS) was asked to address the statute of limitations for assessing gift tax deficiencies where a taxpayer understated or omitted gifts made in a prior year on a subsequent year's return (i.e., on Form 709, Schedule B, Gifts From Prior Periods).

The IRS noted that Code Sec. 6501(c)(9) provides an unlimited period to assess gift tax on gifts a taxpayer fails to report or to disclose. Thus, the IRS said, if there was any gift tax deficiency for the year in question resulting from the unreported and undisclosed gifts, it may be assessed at any time.

However, the IRS noted, for the gift tax returns for subsequent years where the taxpayer understated the amounts of his prior year gifts, IRS's view is that the language in Code Sec. 6501(c)(9) ("any tax imposed by chapter 12 on such gift may be assessed at any time") refers to the tax imposed on the omitted gift that is subject to tax on that return (i.e., the current year gift amounts), and it does not refer to omissions or understatements of the prior year gift amount on that return.

Reg. Sec. 301.6501(c)-1(f) provides that if a transfer of property is not adequately disclosed on a gift tax return or in a statement attached to the return, filed for the calendar year period in which the transfer occurs, then any gift tax imposed on the transfer may be assessed at any time. Under the regs, the IRS observed, only the failure to disclose a gift on the return for the year of that gift keeps the assessment period open, not a failure to accurately report the sum of prior year gifts on a return for a later year. The IRS stated that as a result, if the only problem with the subsequent year gift tax returns is understatement of the amounts of prior year gifts, then the understatement of gift tax due for those subsequent years may be assessed only within the normal Code Sec. 6501(a) 3-year period.

Accordingly, the IRS advised that Code Sec. 6501(c)(9) does not extend the statute of limitations for assessing gift tax for subsequent year returns just because the prior year gift amounts on those returns were omitted or understated, even if that resulted in underreported gift tax for those subsequent years.

The IRS also advised that the six-year statute of limitations for a substantial omission under Code Sec. 6501(e)(2) will not extend the limitations period for gift tax returns whose only defect is underreported prior year gifts, because the language in that section also refers to the current-year gifts; gift tax returns, the IRS said, are annual returns, even if the taxpayer is required to report prior year gifts and to properly use those when calculating the tax on the current year gifts.

The IRS stated it would take a legislative fix to Code Secs. 6501(c)(9) and (e)(2) to close this gap.

The IRS concluded by noting that if some other exception, like Code Sec. 6501(c)(1) (false or fraudulent return with intent to evade tax) or Code Sec. 6501(c)(2) (willful attempt to defeat or evade tax), applied, there would be an independent ground for an unlimited period for assessment.

For a discussion of the statute of limitations for assessing tax, see Parker Tax ¶260,130.

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Late Forms 1040 Weren't an Honest Effort to Comply with Law; Taxes Not Dischargeable in Bankruptcy

A taxpayer's late-filed Forms 1040 did not qualify as tax returns under the test in Beard v. Comm'r, 82 T.C. 766 (1984), because they did not evince an honest and reasonable effort to comply with the tax law. As a result, the taxpayer's tax debts for 2000 through 2003 were not dischargeable in bankruptcy. Justice v. U.S., 2016 PTC 127 (2016).

Background

Christopher Justice failed to file timely tax returns for tax years 2000 through 2003. As a result, the IRS attempted to determine Justice's liability for those years using third-party information. The IRS estimated Justice's tax liability and prepared what is known as a "substitute for return" (SFR) tax assessments. Once it had prepared the SFRs, the IRS issued notices of deficiency for all four tax years. Justice did not challenge the notices of deficiency in the Tax Court, so in 2006, the IRS assessed tax deficiencies against Justice in the amounts it had determined through the SFRs.

In 2007, Justice prepared Forms 1040 for all four tax years and delivered them to the IRS. The forms were tendered between three (for the 2003 tax year) and six (for the 2000 tax year) years late. For each tax year, Justice reported a lower tax liability than the IRS had assessed in the SFRs. The IRS reviewed Justice's Forms 1040 and abated a portion of the tax it had assessed against him for each year. Justice did not offer any excuse or explanation for his tardiness in filing his tax returns.

Justice filed a voluntary petition for Chapter 7 bankruptcy in 2011 and, in November of 2011, he received a discharge. Two months later, his attorney filed an administrative claim with the IRS requesting a write-off of Justice's tax debts for years 2000 through 2003. The IRS denied the request, and Justice filed a petition seeking a discharge of his tax debts. A bankruptcy court determined that Justice's tax debts were non-dischargeable. Justice appealed to a district court, which affirmed the bankruptcy court. He then appealed to the Eleventh Circuit.

Analysis

Bankruptcy Code Section 523(a) restricts the circumstances under which tax debts may be discharged in bankruptcy. Specifically, a bankruptcy discharge does not relieve a debtor from any tax debt with respect to which a return, or equivalent required report or notice (1) was not filed or given; or (2) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of a petition.

The criteria for a document to qualify as a tax return is set out in the Beard test articulated by the Tax Court in Beard v. Comm'r, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986). The Beard test was derived from the Supreme Court opinions in Zellerbach Paper Company v. Helvering, 293 U.S. 172 (1934) and Germantown Trust Co. v. Comm'r, 309 U.S. 304 (1940). The Beard test establishes four requirements for a document to serve as a tax return: (1) it must purport to be a return; (2) it must be executed under penalty of perjury; (3) it must contain sufficient data to allow calculation of tax; and (4) it must represent an honest and reasonable attempt to satisfy the requirements of the tax law. Until 2005, the Bankruptcy Code did not include any language defining "return." The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 added, for the first time, a definition of "return" to the Bankruptcy Code. All courts that have considered the issue, agree that BAPCPA's definition of "return" incorporates the Beard test.

Only the fourth prong of the Beard test was at issue in Justice's case: whether Justice's Forms 1040 represented an honest and reasonable effort to comply with the tax law. The parties advocated competing interpretations of that language. The IRS argued, consistent with the holdings of the Fourth, Sixth, Seventh, and Ninth Circuits, that delinquency in filing a tax return is relevant to determining whether the taxpayer made an honest and reasonable effort to comply with the law. Justice urged the contrary approach adopted by the Eighth Circuit, in In re Colsen, 446 F.3d 836 (8th Cir. 2006), which held "that the honesty and genuineness of the filer's attempt to satisfy the tax laws should be determined from the face of the form itself, not from the filer's delinquency or the reasons for it. The filer's subjective intent is irrelevant."

The Eleventh Circuit affirmed the district and bankruptcy courts and held that Justice's late-filed Forms 1040 did not qualify as tax returns under the test in Beard because they did not evince an honest and reasonable effort to comply with the tax law. As a result, Justice's tax debts for 2000 through 2003 were not dischargeable in bankruptcy.

A significant factor in the Eleventh Circuit's decision to adopt the majority position espoused by the Fourth, Fifth, Seventh, and Ninth Circuits was the fact that the U.S. system of taxation relies on prompt and honest self-reporting by taxpayers. A taxpayer who does not file a timely return and who submits no information at all until contacted by the IRS frustrates the requirements and objectives of that system, the court said. Filing tax documents only after the IRS has gathered the relevant information and assessed a deficiency, the court observed, significantly undermines the self-assessment system. Delinquency in filing, therefore, was evidence to the court that Justice failed to make a reasonable effort to comply with the law.

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Taxpayer Not Liable for a Deficiency Where He Repaid More Than He Misappropriated

The Tax Court held that, contrary to an IRS agent's analysis, a taxpayer repaid to a former business associate more than the amount the agent determined the taxpayer to have misappropriated. The doctrine of collateral estoppel did not support the assessment of a deficiency for the year of misappropriation, even though the taxpayer had pled guilty to, and been convicted of, tax evasion based on the IRS agent's erroneous analysis. Senyszyn v. Comm'r, 146 T.C. No. 9 (2016).

In the 1990s and early 2000s, Bohdan Senyszyn worked as an internal revenue agent. Also around that time, Senyszyn became increasingly involved in the business affairs of a real estate developer, David Hook. Senyszyn persuaded Hook to give him control over his business on the basis of Senyszyn's claims that he could save taxes by creating new entities. By mid-2002, Mr. Senyszyn had obtained nearly full control over Hook's business affairs and accounts.

In September of 2002, as part of his tax planning efforts for Hook, Senyszyn set up the Modern Method Trust. The trust indenture identified Senyszyn as both grantor and trustee. Hook later contributed to the trust real property allegedly on the understanding that his children were the trust's sole beneficiaries. The trust indenture, however, identified both Hook's and Senyszyn's children as beneficiaries. In November of 2003, Hook sold real property in Lafayette, N.J., and paid approximately $203,000 of the money received to the trust. In 2003, Hook and Senyszyn purchased real property in Hardyston and Wantage Townships, N.J. (Hardyston property), as joint tenants with the right of survivorship, paying $450,000.

In January of 2004, Senyszyn and his wife filed their 2003 tax return on which they reported approximately $78,000 in wages, $26,000 on Schedule C, and $1,200 of gross receipts on Schedule F. They did not report any other sources of income on the return. In May of 2004, Hook filed a civil suit alleging fraud against the Senyszyns in N.J. state court. The complaint charged that the Senyszyns embezzled and converted a minimum of $400,000. In 2006, Senyszyn and Hook joined in deeding all but one parcel of the Hardyston property to Hook in partial settlement of Hook's claim against Senyszyn and his wife.

Hook's civil suit led to a federal criminal investigation of Senyszyn. As part of that investigation, Internal Revenue Agent Carmine DeGrazio was asked to determine the amount of unreported income Senyszyn received in 2003. Agent DeGrazio examined records belonging to the Senyszyns, Hook, and related entities - including bank statements, canceled checks, and supporting documentation - to determine the flow of funds between Hook's accounts and Senyszyn's accounts. Agent DeGrazio compared the transfers made from Hook's accounts to Senyszyn's accounts with the transfers in the opposite direction and concluded that. Senyszyn had taken $481,947 from Hook and returned $229,221. This meant, the agent said, that Senyszyn received $252,726 of net "benefits" from Hook that were not reported on the Senyszyns' 2003 Form 1040. Senyszyn later pled guilty to, and was convicted of, criminal charges, including tax evasion in violation of Code Sec. 7201. Under a plea agreement, Senyszyn agreed to a stipulation that he knowingly and willfully failed to report $252,726 of taxable income for 2003.

In 2008, the Senyszyns filed an amended 2003 tax return in which they reported the $252,726 of additional income. According to Senyszyn, the judge in his criminal case directed him to file correct amended returns. The Schedule C on the amended return also reported undetailed expenses of $476,005, resulting in a reported loss of $223,279. According to Senyszyn, the undetailed expenses were additional repayments to Hook that Agent DeGrazio had omitted from his analysis. Those expenses, Senyszyn said, consisted primarily of two payments deposited in escrow to fund his and Hook's purchase of the Hardyston property, evidenced by copies of two checks that were attached to the Schedule C. The IRS did not process the amended return and instead, in 2011, assessed a tax deficiency along with interest and penalties for the amounts not reported on the original 2003 tax return.

The Tax Court held that, even if it accepted Agent DeGrazio's determination that, during 2003, Senyszyn took $481,947 from Hook's accounts and used those funds for his own purposes, the evidence showed that Senyszyn repaid to Hook during 2003 more than he took. Any taxable income to Senyszyn as a result of his misappropriation, the court said, should be offset by amounts repaid in the same year and, because the deficiency that the IRS asserted was based entirely on the Senyszyns' omission of $252,726 of income, the evidence presented by the IRS did not support the asserted deficiency.

The court noted that, while the evidence did not support any deficiency at all, the court could apply the doctrine of collateral estoppel to uphold a deficiency in whatever minimum amount would justify Senyszyn's conviction under Code Sec. 7201. Under the doctrine of collateral estoppel, or issue preclusion, once an issue of fact or law is determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation

The court noted that it had never faced the question of whether a taxpayer's prior conviction for tax evasion required the determination of a deficiency when the evidence showed that no deficiency existed. Senyszyn, the court observed, did not explain why he agreed to the stipulation of unreported income for 2003 as part of his plea agreement if, in fact, he repaid to Hook during that year more than he took. While puzzled over Senyszyn's motives, the court nonetheless concluded that Agent DeGrazio erred in his analysis and found that Senyszyn repaid to Hook more than he misappropriated.

Accordingly, the Tax Court declined to apply the doctrine of collateral estopple to uphold whatever minimum deficiency would have been consistent with Senyszyn's conviction, and determined that he was not liable for any deficiency.

For a discussion of the statute of limitations with respect to filing refund claims and notices of tax deficiencies, see Parker Tax ¶261,180 and ¶260,130, respectively.

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2016 Luxury Vehicle Depreciation Limits and Lease Inclusion Amounts Announced

The IRS issued the 2016 luxury vehicle depreciation limitations and the income inclusion amounts for leased vehicles. Rev. Proc. 2016-23.

Background

Under Code Sec. 280F(a), depreciation deductions allowable for passenger automobiles, trucks, and vans are limited to a maximum dollar amount each tax year. This limitation is known as the luxury automobile limitation. The amounts allowable are adjusted each year by an inflation adjustment.

Code Sec. 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile, truck, or van. The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of such vehicles. This reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table. Each table (one for passenger automobiles and one for trucks and vans) shows inclusion amounts for a range of fair market values for each tax year after the vehicle is first leased.

The Protecting Americans From Tax Hikes Act of 2015 (PATH) increased the first year depreciation allowed under Code Sec. 280F by $8,000 for passenger automobiles placed in service by the taxpayer after December 31, 2015 and before January 1, 2018, and to which bonus depreciation under Code Sec. 168(k) applies. Bonus depreciation does not apply if the taxpayer: (1) acquired the passenger automobile used, (2) did not use the passenger automobile during the tax year more than 50 percent for business purposes, (3) elected out of the bonus depreciation under Code Sec. 168(k)(7), or (4) elected to increase the alternative minimum tax (AMT) credit limitation under Code Sec. 53, instead of claiming the bonus depreciation.

2016 Depreciation Limitations for Vehicles to which Bonus Depreciation Applies

The depreciation limitations for passenger automobiles placed in service in calendar year 2016 to which bonus depreciation applies are:

1st Tax Year - $11,160

2nd Tax Year - $5,100

3rd Tax Year - $3,050

Each Succeeding Year - $1,875

The depreciation limitations for trucks and vans placed in service in calendar year 2016 to which bonus depreciation applies are:

1st Tax Year - $11,560

2nd Tax Year - $5,700

3rd Tax Year - $3,350

Each Succeeding Year - $2,075

2016 Depreciation Limitations for Vehicles to which Bonus Depreciation Does NOT Apply

The depreciation limitations for passenger automobiles placed in service in calendar year 2016 to which bonus depreciation does not apply are:

1st Tax Year - $3,160

2nd Tax Year - $5,100

3rd Tax Year - $3,050

Each Succeeding Year - $1,875

The depreciation limitations for trucks and vans placed in service in calendar year 2016 to which bonus depreciation does not apply are:

1st Tax Year - $3,560

2nd Tax Year - $5,700

3rd Tax Year - $3,350

Each Succeeding Year - $2,075

For a discussion of the luxury auto limitations, see Parker Tax ¶94,920. For a discussion of the lease inclusion rules, see Parker Tax ¶94,915.

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