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Tax Research Briefs - Archived (April 2017 - March 2017)

April 2017


Proposed Revenue Procedure Addresses Changes Relating to New FASB Standards: The IRS issued proposed guidance on procedures for requesting consent to change an accounting method where the change is made as a result of, or directly related to, the adoption of new financial accounting standards relating to the accounting for revenue from contracts with customers. For many entities, the new standards are effective for annual reporting periods beginning after December 15, 2018; however, for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans, the standard are effective for annual reporting periods beginning after December 15, 2017. Notice 2017-17. Read More...


Individual's Claim of Exemption in Bankruptcy Did Not Shield EITC Refund from IRS Offset: After noting an apparent conflict in the Bankruptcy Code with respect to whether a tax credit can be shielded from the IRS in bankruptcy, a bankruptcy court held that the IRS could offset an individual's refund resulting from application of the earned income tax credit against the individual's tax liability for a prior year. The court also ruled that it had jurisdiction over the individual's action for a refund because sovereign immunity was waived. In re Benson vs. U.S., 2017 PTC 159 (Bankr. W.D. Va. 2017). Read More...

Individual Can Ask Bankruptcy Court for Innocent Spouse Relief; Relief Not Limited to Tax Court: The U.S. Bankruptcy Court for the Southern District of Texas held that it had jurisdiction over an individual's claim for innocent spouse relief, rejecting the IRS's contention that the issue could only be decided in the Tax Court. However, the individual first had to file a Form 8857, Request for Innocent Spouse Relief, and wait for the earlier of a final IRS determination or the passage of six months before the court could decide the issue. In re Pendergraft vs. U.S., 2017 PTC 141 (Bankr. S.D. Tex. 2017) Read More...

Supreme Court Denies Cert In Case Involving Discharge of Taxes in Bankruptcy: In Justice v. U.S., 2017 PTC 146 (S. Ct. 2017), the Supreme Court declined to hear an appeal of an Eleventh Circuit decision (2016 PTC 127 (11th Cir. 2016)) in which the lower court concluded that 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 liability was not dischargeable in bankruptcy.


Shareholders Failed to Take Reasonable Precautions in Structuring Sale of Corp: In Makric Engerprises, Inc. v. Comm'r, 2017 PTC 147 (5th Cir. 2017), the Fifth Circuit upheld a Tax Court determination that a corporation did not have reasonable cause to avoid an accuracy-related penalty, and that there was no mutual mistake and thus no remedy of reformation of a $16.5 million stock purchase transaction, where the stock purchase agreement at issue unambiguously required the sale of a taxpayer's wholly owned subsidiary rather than the sale of the taxpayer's stock. The court noted that it's important that taxpayers take reasonable precautions to ensure that they determine their tax liability properly, and for a $16.5 million dollar purchase, the taxpayer failed to show that the Tax Court clearly erred in determining that the taxpayer did not take such precautions.

Court Leaves Door Open on Hardship Relief for Corps Facing Collection Actions: In Lindsay Manor Nursing Home, Inc. v. Comm'r, 148 T.C. No. 9 (2017), the Tax Court held that an IRS settlement officer was correct in not considering economic hardship relief with respect to collection actions against a corporation operating a nursing home because the regulation offering such relief (i.e., Reg. Sec. 301.6343-1(b)(4)(i)) is limited to individual taxpayers. However, the court left the door open as to whether Code Sec. 6434(a)(1)(D), the Code section under which the regulation was issued, could allow economic hardship relief for corporations, saying that Congress's intent on the issue when it enacted the provision was unclear.

Corporation Can't Deduct Management Fees Paid to Related Corporation: In Home Team Transition Management v. Comm'r, T.C. Memo. 2017-51, the Tax Court held that a corporation which operated a nursing home was not entitled to deduct management fees paid to a related corporation with the same shareholders because the payments were really nondeductible dividends. The court also upheld penalties against the corporation because it failed to meet its burden of showing that the management fees it had deducted were for services rendered and/or were reasonable within the meaning of Code Sec. 162.


Organizer of Time-Share Donation Scheme Must Turn Over Client Information: In U.S. v. Tarpey, 2017 PTC 158 (D. Mont. 2017), a district court ordered the organizer of a time-share donation scheme, in which the organizer prepared at least 5,000 false and fraudulent timeshare appraisals, to identify and collect the names, addresses, e-mail addresses, phone numbers, and social security or other tax identification numbers of all timeshare owners for whom he prepared a timeshare appraisal since 2010 and to turn such information over to the government. The court also ordered him to distribute by mail or email a copy of a final judgment of permanent injunction barring him from preparing any property appraisals to be used in connection with federal taxes to each of those timeshare owners.

Refund Rate of Tax Return Preparer's Clients Were Well Above Others in That Zip Code: In U.S. v. Williams, 2017 PTC 132 (6th Cir. 2017), the Sixth Circuit affirmed a district court and held that the conviction of a tax-return preparer on the charge of filing false tax returns was adequately supported by the evidence presented at trial. The court noted that 99 percent of the taxpayer's clients received refunds, compared to 71 percent of taxpayers in the zip code in which the taxpayer operated.

Court Upholds 27-Month Prison Sentence for Chiropractor Guilty of Tax Fraud: In U.S. v. Tran, 2017 PTC 136 (6th Cir. 2017), the Sixth Circuit affirmed a 27-month prison sentence handed down to a licensed chiropractor after he pled guilty to tax fraud and structuring currency transactions. The court rejected the taxpayer's appeal of the imposition of an enhancement in the sentence, saying the taxpayer had previously waived his ability to challenge the enhancement.

Wife of Former Jenkens & Gilchrist Attorney Can't Keep Fraud Proceeds: U.S. v. Daugerdas, 2017 PTC 128 (S.D. N.Y. 2017), a district court dismissed a taxpayer's petition asserting an interest in assets preliminarily forfeited by her husband, former Jenkens & Gilchrist attorney Paul Daugerdas, upon his conviction of conspiracy to defraud the United States and various other crimes relating to a vast fraudulent tax-shelter scheme. The court concluded that the taxpayer did not obtain a vested interest in the property until after her husband, who was sentenced to 15 years in prison, committed his fraud whereas the government had a vested interest from the date the fraud was perpetrated.


Tax Court Rejects Amortization Deduction for Mortgage Points: In Singh v. Comm'r, T.C. Summary 2017-19, the Tax Court held that a taxpayer was not entitled to a $4,000 deduction for mortgage points because he did not demonstrate to the court that his refinancing was in connection with the purchase or improvement of his personal residence. The court also concluded that the taxpayer was not entitled to amortize points relating to a loan from a private lender where the loan was for an indefinite period.

Fees for Nuclear Waste Removal Aren't Deductible Under Code Sec. 172(f): In Nextra v. U.S., 2017 PTC 149 (S.D. Fla. 2017), a district court denied summary judgment to a power company seeking a refund of taxes in connection with payments made to the Department of Energy for nuclear waste disposal. The court rejected the taxpayer's argument that the fees paid to DOE qualified as decommissioning expenses, leading to deductions under Code Sec. 172(f) for specified liability losses and net operating loss carrybacks.

Employment Taxes

Architectural Firm Owner Is Responsible Person Liable for Employment Tax Penalties: In Commander v. U.S., 2017 PTC 161 (D. N.J. 2017), a district court held that a 50-percent owner of an architectural firm, who was one of two officers and one of two managing members of the company, was a responsible person with respect to the firm's nonpayment of employment taxes. According to the court, the taxpayer either knew or ought to have known that there was a grave risk that the withholding taxes were not being paid, and, therefore, when he paid other creditors, he acted with reckless disregard for whether the employment taxes had been paid.

Penalty Imposed for Failing to Properly Monitor Employment Tax Payments: In Gann v. U.S., 2017 PTC 138 (Fed. Cl. 2017), the Federal Claims Court held that an imposition of a trust fund penalty on the taxpayer was proper in light of the taxpayer's reckless disregard of the potential for a failure by his company to pay FICA taxes and the subsequent failure to pay such taxes. The court rejected the taxpayer's argument that the IRS's internal policies regarding how it applies payments when a taxpayer has a mix of past and current liabilities is a "gotcha" scheme that entraps the unwary taxpayer and inequitably results in the assessment of penalties.


Tax Court Rejects IRS Adjustments to Amazon's Cost Sharing Arrangement: In, Inc. & Subs v. Comm'r, 148 T.C. No. 8 (2017), the Tax Court held that, in evaluating a cost sharing arrangement (CSA) between a U.S. parent company and its Luxembourg subsidiary, the use by the IRS of a discounted cash-flow methodology to determine that the subsidiary should've made a buy-in payment of more than $3 billion, as opposed to the $255 million actually paid, was arbitrary, capricious, and unreasonable. Furthermore, the court found that the IRS's determination that 100 percent of costs captured in one important cost center should be allocated to intangible development costs (IDCs) to be an abuse of discretion. The court concluded that the taxpayer's comparable uncontrolled transaction method, with certain adjustments, was the best method to determine the requisite buy-in payment and the taxpayer's cost-allocation method, with certain adjustments, provided a reasonable basis for allocating costs to IDCs.

Regs Under Sec. 883 Are Valid; Foreign Corp Can't Escape U.S. Tax: In Good Fortune Shipping SA v. Comm'r, 148 T.C. No. 10 (2017), the Tax Court rejected a foreign corporation's assertion that, because it was not described in Code Sec. 883(c)(1), it was entitled under Code Sec. 883(a)(1) to exclude certain income from gross income and, thus, U.S. tax. The Tax Court held that regulations under Code Sec. 883 were valid and precluded the foreign corporation from taking into account, in establishing ownership of another foreign corporation, certain shares that were issued in bearer form.


Payments to Disbarred Lawyer Were Compensation, Not Gifts: In Alexander v. Comm'r, T.C. Summary 2017-23, the Tax Court held that payments by a lawyer to a disbarred lawyer for legal help with a class action lawsuit were compensation and not a nontaxable gift. The court also upheld the IRS's assessment of accuracy-related penalties on the taxpayer.

Innocent Spouse Relief

Wife Who Prepared Joint Tax Returns Isn't Entitled to Innocent Spouse Relief: In Yancey v. Comm'r, T.C. Memo. 2017-59, the Tax Court held that a taxpayer failed to establish that she was entitled to innocent spouse relief with respect to tax deficiencies relating to joint tax returns she prepared and on which she incorrectly took deductions for her then-husband's gambling losses. The court noted that the taxpayer was aware of her former husband's gambling addiction and outstanding gambling debts and that, at the time she signed the returns at issue, she had no mental or physical health problems which prevented her from being able to understand the content of those returns.


IRS Nonacquiesces to Several Court Decisions: In I.R.B. 2017-15 (4/10/17), the IRS stated that it does not acquiesce to the following decisions: (1) Stine, LLC v. U.S., 2015 PTC 477 (W.D. La. 2015), in which a district court allowed a company to take accelerated depreciation deductions with respect to GO ZONE property; (2) Shea Homes, Inc. and Subs. v. Comm'r, 2016 PTC 323 (9th Cir 2016), in which the Ninth Circuit affirmed a Tax Court decision allowing a real estate developer to use the completed contract method; and (3) Scott Singer Installations, Inc. v. Comm'r, T.C. Memo. 2016-161, in which the Tax Court held that payments by an S corporation to its sole shareholder were repayments of loans and not wages subject to employment taxes.


Wife Escapes Liability for Fraud Penalties with Respect to Husband's Illicit Business: The Tax Court held that the wife of a taxpayer, who ran a business which specialized in the unauthorized duplication of copyrighted works and who significantly underreported his 2008 and 2009 business income, was not liable for the 75 percent fraud penalty for 2008 and 2009. Further, the court concluded that neither the husband nor the wife was liable for the fraud penalty for 2010 because the deficiency for that year was a run-of-the-mill deficiency arising from a failure to substantiate expenses underlying claimed deductions, and not the existence of fraud. Ballard v. Comm'r, T.C. Memo. 2017-57. Read More...

Lawyers in Professional Limited Liability Company Subject to Self-Employment Tax: The Tax Court held that Lawyers who were members of a professional limited liability company were functionally the equivalent of general partners and thus could not avail themselves of the exception in Code Sec. 1402(a)(13) and exclude certain partnership distributions from self-employment income. However, the court also concluded that the lawyers were not subject to income tax on unidentified amounts in a trust account and were not liable for accuracy-related penalties. Castigliola v. Comm'r, T.C. Memo. 2017-62. Read More...

Second Circuit Reverses Imposition of Accuracy-Related Penalty; IRS Did Not Obtain Supervisory Approval: The Second Circuit held that a taxpayer should have been permitted to raise as a defense to the imposition of an accuracy-related penalty by the IRS the fact that the IRS failed to obtain the written supervisory approval required under Code Sec. 6751 before assessing the penalty. The court also registered its disapproval with a divided 2016 Tax Court opinion which reached the opposite conclusion on the same issue, possibly signaling a shift in how much the courts will scrutinize IRS procedures used in assessing penalties against a taxpayer. Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017). Read More...


No Refund Where Taxpayer Failed to Designate Liability to Which Overpayments Related: In Warfield v. U.S., 2017 PTC 165 (D. Mass. 2017), a district court held that a taxpayer's tax overpayment to the IRS, which the taxpayer intended to be credited to a prior year tax liability that arose when the IRS issued her an erroneous refund, were instead properly credited to an outstanding tax liability relating to her husband's business. The court found that, because the taxpayer did not indicate the liability as to which she intended the tax return overpayments to be credited, she could not later claim that it was a different liability than the one to which the IRS credited the payments.

IRS Rejection of Taxpayer's OIC Was Reasonable in Light of Her Collection Potential: In Lloyd v. Comm'r, T.C. Memo. 2017-60, the Tax Court held that the IRS did not abuse its discretion in rejecting a taxpayer's offer in compromise because it was less than the taxpayer's reasonable collection potential (RCP), which was calculated by the IRS and based solely on the taxpayer's net income. In calculating the taxpayer's RCP, the IRS determined that the taxpayer's reported monthly expenses, which included almost $7,000 per month for housing and $1,600 a month for the lease of a Lexus, exceeded the applicable local standards by more than $1,000 per month and that the taxpayer was not entitled to a deviation from those standards.

Summonses on Bank to Provide Attorney's Records Aren't an Abuse of Judicial Process: In Clements v. U.S., 2017 PTC 168 (W.D. Tex. 2017), a district court rejected an attorney's request to quash summonses served on his bank for records relating to an IRS investigation concerning the attorney's tax returns, as well as documents filed in the attorney's bankruptcy case. The court noted that Code Sec. 7602 grants the IRS wide latitude to summon an individual or third party to testify and produce documents relevant to any inquiry regarding tax liability and the attorney did not establish that the enforcement of the summonses would amount to an abuse of the judicial process.

Court Refuses to Increase Judgment Against IRS for Violating Code Sec. 6103: In Aloe Vera of America, Inc. v. U.S., 2017 PTC 163 (9th Cir. 2017), the Ninth Circuit held that a district court did not clearly err in determining that a group of taxpayers failed to meet their burden of proving by a preponderance of the evidence that the IRS had caused actual damages in a case in which the IRS was found responsible for providing Japan's taxing authority with information about the taxpayers that the IRS knew to be false and that violated Code Sec. 6103. Thus, the district court's award and judgment was affirmed in significant part; however, the district court did reverse and remand the case with instructions to slightly amend the award of statutory damages for two of the individuals involved.

Tax Court Precluded Taxpayer's from Presenting Their Position in a Meaningful Way: In Keenan v. Comm'r, 2017 PTC 150 (9th Cir. 2017), the Ninth Circuit vacated and remanded a Tax Court decision which the Ninth Circuit said had essentially precluded the taxpayers from presenting their position to the Tax Court in any meaningful way. The taxpayers had sought to aside a stipulation regarding the applicability of a penalty under Code Sec. 6662 relating to a prior Tax Court decision.

IRS Can Obtain Bank Records of Medical Marijuana Business: In High Desert Relief, Inc. v. U.S., 2017 PTC 162 (D. N.M. 2017), a district court held that a summons issued to a bank, where a business engaged in the legal distribution of marijuana in New Mexico had its accounts, was issued in connection with the investigation of an offense connected with the administration or enforcement of the internal revenue laws (Code Sec. 280E) and the IRS was not abusing its civil audit power to conduct a criminal investigation into whether the taxpayer was violating the Controlled Substance Act (CSA). With respect to the taxpayer's argument that federal criminal drug laws with respect to state-legal marijuana sales are "dead letter" law, the court cited Feinberg v. Comm'r, 2015 PTC 459 (10th Cir. 2015), in which the Tenth Circuit recently signaled that the CSA is not a "dead letter" law with regard to the prosecution of parties involved in the manufacture and distribution of medical marijuana.

Failure to Provide Requisite Information on Form 1040 Precludes Refund Claim: In Kiselis v. U.S., 2017 PTC 126 (Fed. Cl. 2017), the Court of Federal Claims held that where a taxpayer was aware of the tax liability the IRS had assessed against him based on distributions reported by third-party financial institutions, but failed to report the distributions on his Form 1040, the taxpayer failed to exhibit an honest and reasonable intent to provide the requisite information. As a result, the court concluded that the Form 1040 submitted by the taxpayer did not constitute a valid return and that the court did not, thus, have jurisdiction over the taxpayer's refund claim.

Taxpayers Limited to $1,000 Award for IRS Unauthorized Disclosure of Their Tax Information: Minda v. U.S., 2017 PTC 144 (2d Cir. 2017), the Second Circuit affirmed a district court and held that the taxpayers were limited to an award of statutory damages of $1,000 as a result of the IRS's unauthorized disclosure of their tax information to an unrelated third party. The court also affirmed the lower court's decision that the taxpayers were not entitled to punitive damages.

Whistleblower's Identity Protected, at Least for the Time Being: In Whistleblower 12568-16W v. Comm'r, 148 T.C. No. 7 (3/22/17), the Tax Court held that a whistleblower, who is moving ahead with an action involving a taxpayer that may have avoided a tax liability in excess of $3 billion, can proceed anonymously. While recognizing the whistleblower's concern that if his or her identity were disclosed, there would be a risk of retaliation, physical harm, social and professional stigma, and economic distress, the court said that, at some point in the proceedings, it may be in the public's best interest to know the identity of any individuals involved in the proceedings.

S Corporation

Individual Denied S Corporation Basis Increase for Unpaid Judgments on Real Estate Foreclosures: The Tax Court held that an S corporation shareholder could not increase her basis by the amount of judgments against her resulting from her guarantees on foreclosed real estate owned by the S corporation because she made no payments on the judgments. Her claims for passthrough loss deductions and net operating loss carrybacks resulting from the purported basis increases were denied, but she was not liable for an accuracy-related penalty. Phillips vs. Comm'r, T.C. Memo. 2017-61. Read More...


March 2017


Obamacare Repeal Moves to House Floor; Ultimate Passage Uncertain: On March 16, The House Budget Committee approved The American Health Care Act (AHCA) 19-17, clearing the way for a vote by the full House later this week. The bill would repeal the Affordable Care Act's (ACA) individual and employer mandates retroactive to January 1, 2016, and replace the means-tested premium tax credit with age-based health insurance credits. Beginning in 2018, it would also repeal most of the taxes used to fund the ACA, including the 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax. American Health Care Act Read More...

Applicable Federal Rates: In Rev. Rul. 2017-8, the IRS issued the applicable federal rates (AFRs) for April 2017.

OMB Directive Offers Interim Guidance on Regulatory Cap; Dearth of New IRS Guidance Continues: The Office of Management and Budget (OMB) has provided guidance to assist the Treasury Department, the IRS, and other government agencies in implementing the President's regulatory cap (aka, the "two-for-one regulation order"). Despite the OMB guidance, the IRS has yet to issue any new regulations or substantive revenue rulings, procedures, or notices under the new administration. Read More...

Accounting Methods

IRS Will Not Acquiescence in Fifth Circuit Farming Syndicate Decision: In AOD 2017-01, 2017-7 IRB 868, the IRS stated that it will not acquiesce in the Fifth Circuit's holding in Burnett Ranches, Ltd. v. U.S., 2014 PTC 249 (5th Cir. 2014) that a limited partnership was not a farming syndicate for accounting method purposes because the sole shareholder of a limited partner S Corporation actively participated in the farming business. (For further discussion of this decision, see the June 6, 2014 Issue of Parker's Federal Tax Bulletin.) A nonacquiescence means that the IRS will not follow the holding nationwide, but will recognize the precedential impact of the opinion on cases arising within the same (Fifth) Circuit.


Bankruptcy Trustee Can't Require Tax Refunds Used for Child Support to be Paid to Her Instead: In In re Gibson, 2017 PTC 120 (Bankr. N. D. Ill. 2017), a bankruptcy court overruled a bankruptcy trustee's objection to a debtor's plan where the plan did not require the debtor to pay future tax refunds to the trustee. The court rejected the trustee's assertion that the half of the debtor's tax refund which is paid for child support should instead be paid to the bankruptcy estate.

Amicus Brief Couldn't Sway Supreme Court to Hear Bankruptcy Discharge Case: The Supreme Court declined to hear an appeal of a Ninth Circuit case affirming a district court's decision that had reversed a bankruptcy court holding, which had been favorable to the taxpayer. The Court was apparently unswayed by an amicus brief filed on behalf of the taxpayer which argued that, because the circuits are divided on the issue of the dischargeability of tax debts, the ability of debtors to discharge tax debt in a bankruptcy will depend upon their geography, leading to disparate treatment of debtors and an inconsistent application of federal bankruptcy law. In re Smith, 2016 PTC 249 (9th Cir. 2016), cert. denied (2/21/17); Amicus Brief in re Smith. Read More...


Court Allows Some Income from Cosmetology Business for EITC, Despite Thin Documentation: In Lopez v. Comm'r, T.C. Summary 2017-16, the Tax Court rejected the IRS's decision to zero out Schedule C gross receipts where the taxpayer failed to provide bank records or other contemporaneous documentation supporting claims she earned $17,800 and $17,581 from her cosmetology business in the 2012 and 2013, respectively. While noting that the claimed receipts were suspiciously close to amounts that would maximize the taxpayer's earned income tax credit (EITC), the court concluded that notarized statements from her clients established that she had at least 12 regular, paid customers. Accordingly, the court held that the taxpayer's gross receipts from the business were $10,000 for each of the years at issue.


CPA's Prison Sentence Vacated Due to Tax-Loss Dispute Which Affected Sentencing: In U.S. v. Johnson, 2017 PTC 119, the Third Circuit affirmed a CPA's conviction on six counts of aiding and assisting in the preparation of false federal income tax returns in violation of Code Sec. 7206. However, the court vacated and remanded for resentencing the sentence of 48 months in prison handed down by the district court because the lower court failed to resolve a tax-loss dispute or disclaim reliance on disputed calculations which figured into the calculation of the prison term.


Court Denies Mortgage Interest Deduction Relating to Home Owned by Girlfriend: In Jackson v. Comm'r, T.C. Summary 2017-11, the Tax Court held that a taxpayer could not deduct mortgage interest of more than $14,000 that he said he paid to his girlfriend so she could make the mortgage payments on a home they both shared but that she owned. Without bank statements, receipts, other records, or testimony, the court said that the taxpayer could not carry his burden of proving he was entitled to the deduction.

Foreign Students' Tax Home Was the U.S. for Summer Work Program; Travel Deductions Denied: In Liljeberg, et al v. Comm'r, 148 T.C. No. 6, the Tax Court held that several full-time foreign students visiting the U.S. to participate in the State Department's Summer Work Travel Program (SWTP) were not "away from home in the pursuit of a trade or business" for purposes of Code Sec. 162(a)(2), because none of them maintained residences in their home countries for business purposes while working in the U.S. The court was not swayed by the fact that the students had entered the U.S. on nonimmigrant visas that effectively required them to maintain a residence in a foreign country. The IRS conceded prior to trial, however, that the taxpayers were entitled to deduct fees paid for their visas and for participation in the SWTP as unreimbursed employee expenses.

No Moving Expense Deduction Where New Job Started Four Months after Move: In Anderson v. Comm'r, T.C. Summary 2017-17, the Tax Court determined that a taxpayer's employment began on the date his paid work activities began (four months after he moved), not when he executed his employment contract, and not when he helped his new employer prepare materials highlighting his background for dissemination to clients, and engaged in unpaid training activities. Accordingly, the court held that he was not a full-time employee at his new place of employment for at least 39 weeks during the one-year period beginning with his arrival in the general location of his new principal place of work, as required by Code Sec. 217(c)(2)(A).

Retired Naval Officer Intended to Defraud Government in Tax Scheme: In Omega Forex Group, LC v. U.S., 2017 PTC 119 (D. Utah 2017), a district court held that a taxpayer - a college graduate, a retired naval officer of 20 years, and a private dentist with a practice that produced revenues of several hundred thousand dollars per year was not entitled to pass through losses from a partnership that allegedly engaged in foreign currency speculation. The court found that the taxpayer intended, by clear and convincing evidence, to defraud the United States of rightfully owed taxes for the years at issue.

Mortgage Interest Deduction Denied Where Taxpayer Failed to Show Improvements Were Made: In Kauffman v. Comm'r, T.C. Memo. 2017-38, the Tax Court held that a taxpayer was not entitled to certain mortgage interest deductions where he could not produce evidence showing that the interest was incurred as acquisition indebtedness used to improve his residence. In addition, because the taxpayer did not maintain sufficient records to substantiate most of the expenses underlying deductions disallowed by the IRS, and because the disallowed deductions were directly attributable to the taxpayer's failure to maintain adequate records, the court upheld the accuracy-related penalties assessed by the IRS.

Lump Sum Payments to Former Spouse Are Not Alimony: In PLR 201706006, the facts indicated that a taxpayer was required under a court judgment to make lump sum and annual payments of "alimony" to a former spouse. The IRS ruled that the lump sum payments did not constitute deductible alimony under Code Sec. 71(b) and Code Sec. 215(a). To be deductible as alimony, the payments must meet the requirements in Code Sec. 71(b)(1), and the second requirement was not met because there was an express designation in the court judgment that the lump sum payments were not includible in the former spouse's income. Conversely, the couple agreed that the annual alimony payments authorized by the judgment would be taxable to the former spouse and deductible by the taxpayer, which meant that such payments qualified as deductible alimony for federal income tax purposes.

Employment Taxes

Fourth Circuit Affirms Prison Terms for Couple That Diverted Employment Taxes: In U.S. v. Carden, 2017 PTC 83 (4th Cir. 2017), the Fourth Circuit affirmed the 72 month and 60 month prison sentences handed down to a husband and wife, respectively, for diverting employment tax payments from their payroll service company to their own accounts. The couple's payroll service company received money from small companies for the purpose of making payroll payments to the clients' employees and remitting the employees' payroll tax withholdings to the IRS.

Subsidiary Corporation Is Successor Employer for Wage Limitation Purposes: In PLR 201706010, the IRS concluded that a subsidiary corporation qualified as a successor employer for purposes of the annual wage limitations under Code Secs. 3121(a)(1) and 3306(b)(1) for wages paid to persons becoming employees of the subsidiary following a corporate reorganization. The predecessor-successor rule in these Code sections is an exception to the general rule that a new contribution and benefit base applies to the second employer.

Estate Tax

District Court Bucks the Trend of Penalizing Estates for Relying on Expert's Advice: A district court went against the grain of several recent court decisions and held that an estate was not liable for a late filing penalty where the estate's executors filed the estate tax return late based on their tax attorney's advice. In reaching its conclusion, the court noted that other courts had ruled the opposite way on substantially similar facts but said it was obliged to follow precedent set by the circuit court to which the case was appealable. Estate of Hake v. U.S., 2017 PTC 74 (M.D. Pa. 2017). Read More...


Taxpayer's Ties to U.S. Preclude Excluding Income Earned Overseas from Gross Income: In Lock, II v. Comm'r, T.C. Summary 2017-10, the Tax Court held that a taxpayer who worked for a private security company as a personal security specialist and who provided protection for U.S. Department of State personnel and other high-ranking U.S. government officials in Iraq was not entitled to exclude from income a portion of the wages he earned while overseas. The court concluded that the taxpayer's tax home was the United States because he had strong family, personal, and economic ties to the United Stated, including rental properties he maintained, as well as maintaining his status as a Florida deputy.

IRS Provides 2017 Foreign Housing Adjustments: In Notice 2017-21, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911 for specific locations for 2017. The adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. While the notice is effective for tax years beginning on or after January 1, 2017, a taxpayer may elect to apply the 2017 adjusted housing limitations contained in the notice to his or her tax year beginning in 2016.

Rev. Proc. Addresses Eligibility Rules for Certain Individuals in Foreign Countries: In Rev. Proc. 2017-26, the IRS provides information to any individual who failed to meet the eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting those requirements for 2016 tax year. The only country listed was South Sudan.


ACA Program Tax Is Nondiscriminatory and Applies Evenly to Public and Private Health Plans: In State of Ohio v. U.S., 2017 PTC 78 (6th Cir. 2017), Ohio and several of its political subdivisions and public universities filed suit against the federal government alleging that the federal government had illegally collected certain monies from the state in order to supplement the Transitional Reinsurance Program of the Affordable Care Act (ACA). They argued that the mandatory payment scheme under that program applied only to private employers and not to state and local government employers and requested refunds of all payments made on its behalf and a declaration that the program would not apply to the state in the future. The Sixth Circuit disagreed and held that the tax imposed under the program was a nondiscriminatory tax applied evenly to public and private group health plans and application of the program to Ohio did not violate the intergovernmental tax immunity doctrine.


Cellular Towers and Cable Distribution Systems Are Like Kind Property: In PLR 201706009, the IRS ruled that cellular towers that a communications services provider uses in its business are of like-kind to cable telecommunication signal distribution property that it intends to receive in exchange for the cellular towers. After noting that state law property classifications are not the sole basis for determining whether the towers and the cable distribution systems are like kind property, the IRS found the property qualified for Code Sec. 1031 treatment because the towers and the cable distribution systems (1) transmit or support the transmission of telecommunication signals across distances; (2) are not used for other activities; and (3) are, or are intended to be, permanently affixed to land.

Quick Way to See Whether Social Security Benefits Are Taxable: In Tax Tip 2017-13, the IRS provides the following short-cut to find out whether taxpayers must pay taxes on their social security benefits. First, add one-half of the taxpayer's social security income (which should appear on Form SSA-1099, Social Security Benefit Statement) to other income, including tax-exempt interest. Then, compare that amount to the applicable base amount, which depends on filing status: (1) $25,000 for taxpayers who are single, head of household, qualifying widow(er) with a dependent child, or married filing separately and lived apart from their spouse for all of 2016; (2) $32,000 for taxpayers who are married filing jointly; and (3) $0 for taxpayers who are married filing separately but lived with their spouse at any time during the year. If the total is more than the base amount, some of the benefits may be taxable.


Taxpayer Had No Legitimate Expectation of Privacy in Records Held by CPA: A district court denied a motion to suppress all evidence relating to tax records the IRS obtained from a taxpayer's CPA. The court rejected the taxpayer's argument that Code Sec. 7609 and the Code of Professional Conduct for CPAs conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. U.S. v. Galloway, 2017 PTC 80 (E.D. Calif. 2017). Read More...

Substance-Over-Form Doctrine Doesn't Authorize IRS to Reclassify Transfers from DISC to Roth IRAs: The Sixth Circuit reversed the Tax Court and held that, because a corporation used a domestic international sales corporation and Roth IRAs for their congressionally sanctioned purposes - tax avoidance - the IRS had no basis for recharacterizing transactions involving the transfer of funds from the DISC to the Roth IRA accounts. Nor, the court said, did the IRS have any basis for recharacterizing the law's application to the transactions at issue. Summa Holdings v. Comm'r, 2017 PTC 58 (6th Cir. 2017). Read More...

IRS Gears Up to Report Unpaid Taxes to State Dept; Revocation or Denial of Passports Could Result: The IRS announced that it will begin certifying seriously delinquent tax debts to the State Department in early 2017. As a result, any taxpayer such a debt could have his or her passport revoked or the State Department could refuse to issue or renew a passport to that individual. IRS Website. Read More...

IRS Sends Earned Income Credit Letters to Some Return Preparers: In the e-News for Tax Professionals Issue 2017-6, the IRS said it is sending (1) Letter 4858 to return preparers who completed 2016 returns claiming the earned income tax credit (EITC) but who may not have met the required due diligence requirements; and (2) Letter 5364 to return preparers who completed two or more 2016 paper returns claiming the EITC, American Opportunity Tax Credit, or Child Tax Credit/Additional Child Tax Credit without including Form 8867, Paid Preparer's Due Diligence Checklist.

IRS Updates Information on Low Income Taxpayer Clinics: In the January 2017 revision of Publication 4134, Low Income Taxpayer Clinic List, the IRS provided an updated list of low-income taxpayer clinics by state, city, name, telephone number, and languages served. These clinics provide assistance to low income taxpayers who need assistance in resolving a tax dispute with the IRS, or who speak English as a second language and need help understanding their rights and responsibilities. The IRS website (search term "Information for Taxpayers Seeking LITC Services") summarizes the eligibility requirements based on annual income and size of the taxpayer's family.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2017-18, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

Some e-Services Account Holders Need to Revalidate Identity: In an "Important Update about Your e-Services Account" posted to its website, the IRS stated that it had previously mailed Letter 5903, e-Services Account Validation, asking the recipient to revalidate their identity within 30 days, either online or by phone. The e-Services registration accounts of those who fail to do so within 30 days are suspended for security purposes. To restore access, they need to contact the e-Services Help Desk and successfully revalidate their identity.

Taxpayers Should Be Prepared to Validate Identity When Calling the IRS: In IR-2017-32, the IRS noted that mid-February marks the agency's busiest time of the year for telephone calls. Before calling about a personal tax account, taxpayers should have the following information: social security numbers (SSNs) and birth dates for persons listed on the tax return, individual taxpayer identification numbers (ITIN) for those without an SSN, filing status, prior year tax return, copy of the tax return in question, and any letters or notices from the IRS. If calling about someone else's account, callers should have verbal or written authorization to discuss the account; the ability to verify the other person's name, SSN/ITIN, tax period, and form; and a current, completed, and signed Form 8821, Tax Information Authorization, or Form 2848, Power of Attorney and Declaration of Representative.


IRS Failed to Prove Restaurant Owner's Father Was a Responsible Person: In Shaffran v. Comm'r, T.C. Memo. 2017-35, the Tax Court held that a taxpayer was not a responsible person with respect to the nonpayment of employment tax liabilities by a restaurant partially owned by his son. As a result, the taxpayer was not liable for the trust fund recovery penalties (TFRP) that had been assessed against him. The court noted that the IRS agent in charge (1) did not secure the restaurant's bank records or make any attempt to interview the individuals against whom she was proposing TFRPs; (2) failed to determine whether the taxpayer willfully failed to remit employment taxes to the IRS; and (3) made her recommendation to assess TFRPs against the taxpayer on the basis of the limited information she had collected during a brief investigation.


IRS Announces Interest Rates for Second Quarter of 2017: In Rev. Rul. 2017-6, the IRS announced that interest rates on tax overpayments and underpayments will remain the same for the calendar quarter beginning April 1, 2017. The rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 6 percent for large corporate underpayments, and 1.5 percent for the portion of a corporate overpayment exceeding $10,000.

Third-Party Must Turn Over Documents That Might Help Taxpayer Fight Tax Charges: In U.S. v. Reynolds, 2017 PTC 89 (N.D. Ill. 2017), a district court held that subpoenas served by a taxpayer on a third party were valid and that the third party must turn over the requested documents, including the third-party's tax returns and cancelled checks. The taxpayer who served the subpoenas is facing charges that he willfully failed to file tax returns for various years. The court noted that if the requested materials show that monies paid to the taxpayer were business expense advances and not income, then it is more likely that the taxpayer's failure to file income tax returns was not willful.

Property Transactions

Dentist Qualifies as Real Estate Professional; Rental Real Estate Losses Are Deductible: The Tax Court held that a dentist's logs of real estate activities, as well as testimony from various witnesses, established that he spent the requisite amount of time on real estate activities to qualify as a real estate professional. Accordingly, he was entitled to deduct his rental real estate losses against the income from his and his wife's dental practice. Zarrinnegar, T.C. Memo. 2017-34. Read More...

Retirement Plans

IRS Rules on Taxation of IRA Distributions Following Change of Beneficiary Designation: In PLR 201706004, the IRS ruled that, following a state court order changing a decedent's IRA beneficiary designation from a never-created inter vivos trust to the decedent's surviving spouse, there was no designated beneficiary of the IRA under Code Sec. 401(a)(9) because the spouse was not the beneficiary on the date of the decedent's death. Since the decedent died before the required beginning IRA distribution date and without a designated beneficiary, the IRS concluded that the entire interest in the IRA must be distributed using the five-year rule in Code Sec. 401(a)(9)(B)(ii). Under this rule, amounts payable by the IRA to the surviving spouse in years 1following the year of death are not required minimum distributions and are eligible for rollover by the surviving spouse.



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