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Tax Research Briefs - Archived (February 2016 - September 2015)

February 2016

ACCOUNTING

February AFRs Issued: In Rev. Rul. 2016-4, the IRS issued the applicable federal rates for February 2016.

CORPORATIONS

Conversion to LLC Did Not Affect Qualified Small Business Stock: In PLR 201603010, a corporation holding qualified small business stock under Code Sec. 1202 converted to an LLC, taxed as a corporation, following the sale of a portion of that stock. The IRS ruled that the status of the common stock as qualified small business stock was unaffected by the conversion.

DEDUCTIONS

Deductions Allowed for Expenses Incurred in Selling Timeshares: In Henao v. Comm'r, T.C. Summary 2016-7, the Tax Court determined a marketer of timeshares could deduct as unreimbursed employee business expenses referral fees paid to travel agents who referred a prospective customer that culminated in a completed timeshare sale, as well as meals and entertainment used to attract prospective customers and discourage purchase cancellations. The court was convinced that the taxpayer's practice of stapling cashier check copies and credit card receipts to followup forms indicating completed sales adequately met the stringent substantiation requirements of Code Sec. 274.

Judge Couldn't Deduct Expenses from Gross Income under Fee Based Public Official Exception: In Jones v. Comm'r, 146 T.C. No. 3 (2016), the Tax Court, in an issue of first impression, determined a state court judge was not entitled to deduct unreimbrused business expenses above the line under the narrow exception for "fee based" public officials in Code Sec. 62(a)(2)(C). The court concluded that although the judge was a public official, because he did not personally retain any of the money paid to him as fees, he was not compensated on a fee basis.

Delayed Recording of Deed Precluded Deduction for Contribution of Conservation Easement: In Mecox Partners LP v. U.S., 2016 PTC 46 (S.D.N.Y. 2016), a district court denied a partnership's deduction for its contribution of a conservation easement, finding that the contribution was not complete until the year following the year in which the deduction was claimed. Although the easement deed was delivered in 2004, it wasn't recorded until 2005, and under state law the contribution was not effective until the deed was recorded.

Management Fees Weren't "Ordinary and Necessary" for Dental Practice: In Wiley M. Elick DDS, Inc. v. Comm'r, 2016 PTC 23 (9th Cir. 2016), a Circuit Court affirmed the Tax Court's holding that management fees paid by the taxpayers' dental practice did not qualify as deductible business expenses because the fees weren't "ordinary and necessary" under Code Sec. 162(a). The court found that the management fees did not correspond to services actually received.

Home Office Expenses Didn't Increase Taxpayer's Basis in Flipped Homes: In Niemann v. Comm'r, T.C. Memo. 2016-11, the Tax Court determined a taxpayer improperly reduced his short-term capital gain from the sale of houses by reporting certain home-office expenses as increasing his basis in the homes. The court determined the amounts should have been reported as business expenses, and rejected the IRS's argument that the expenses weren't substantiated.

Testimony of Expert Unaware of Profit Motive Factors Properly Excluded: In Est. of Stuller v. U.S., 2016 PTC 34 (7th Cir. 2016), the Circuit Court determined the lower court properly excluded taxpayers' expert witness' testimony regarding their profit motive in a horse-breeding operation, finding him unreliable because he was unaware of the nine factors in Reg. Sec. 1.183-2(b) relevant to determining whether an activity is engaged in for profit. The court found the taxpayers did not operate their farm for profit, and denied their claimed deductions.

EDUCATIONAL SAVINGS PLANS

Transition Relief Provided for Section 529 Plans in Wake of PATH Amendments: In Notice 2016-13, the IRS provides transition relief for Code Sec. 529 qualified tuition programs that timely file a 2015 Form 1099-Q, Payments from Qualified Education Programs, that does not reflect the repeal by PATH (Pub. L. 114-113) of the aggregation requirement under Code Sec. 529(c)(3)(D) applicable to distributions from qualified tuition programs.

EXEMPT ORGANIZATIONS

Regs Issued on Requirements for Type I and Type III Supporting Organizations: In REG-118867-10 (2/19/16), the IRS issued proposed regulations that define "control" for purposes of the prohibition on gifts from a controlling donor to Type I and Type III supporting organizations, and that provide additional rules on the requirements of the Type III supporting organization relationship test. Taxpayers may rely on the proposed regulations until final or temporary regulations are issued.

FOREIGN

Foreign Withholding Regulations Issued, Reflect Changes Made by PATH Act: In T.D. 9751 (2/19/16), the IRS issued final and temporary regulations under Code Secs. 897 and 1445 relating to the taxation of, and withholding on, foreign persons upon certain dispositions of, and distributions with respect to, U.S. real property interests (USRPIs). The regulations reflect changes made by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (Pub. L. 114-113, 12/18/15) and are effective on February 19, 2016.

GROSS INCOME AND EXCLUSIONS

Settlement Award for Emotional Distress Wasn't Excludable: In Barbato v. Comm'r, T.C. Memo. 2016-23, the Tax Court determined that because damages a taxpayer received in a settlement were specifically for emotional distress caused by her employer's discriminatory conduct, the amounts could not be excluded from gross income under Code Sec. 104(a).

Foreign Earned Income Exclusion Not Available to Oversees Engineer: In Co v. Comm'r, T.C. Memo. 2016-19, the Tax Court determined a taxpayer, who worked as an engineer in foreign countries with the U.S. Department of State, Office of Overseas Building Operations (OBO), was not entitled to the foreign earned income exclusion under Code Sec. 911 because he was more properly classified as an employee of the State Department rather than an independent contractor. The court declined to impose penalties, concluding that it was reasonable for the taxpayer to believe in good faith that he was not an employee of OBO.

HEALTHCARE TAXES

Health Insurers Can Exclude Expat Health Plans from Annual Fee: In Notice 2016-14, the IRS issued guidance on how the special rule for expatriate health plans for the 2016 fee years under the Expatriate Health Coverage Clarification Act of 2014 applies for purposes of effectively excluding the fee imposed by Code Sec. 9010 of the Affordable Care Act on covered entities providing health insurance.

INFORMATION REPORTING

Regulations Issued on OID Reporting by Brokers: In T.D. 9750 (2/18/16), the IRS issued final regulations on information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations. The regulations are effective as of February 18, 2016.

IRS to Amended FATCA Reporting Rules for FFIs: In Notice 2016-8, the IRS announced it intends to amend the Foreign Account Tax Compliance Act (FATCA) regulations to ease information reporting burdens on foreign financial institutions (FFI) with respect to (1) the date for submitting preexisting account certifications; (2) the date and period for submitting periodic certification of compliance; and (3) transitional reporting of nonparticipating FFIs. Taxpayers may rely on the rules in the Notice until the regs are amended.

INNOCENT SPOUSE RELIEF

Innocent Spouse Relief Not Applicable to Criminal Restitution: In U.S. v. Tilford, 2016 PTC 24 (5th Cir. 2016), a taxpayer argued that the "innocent spouse" provision of Code Sec. 66(c) absolved her of garnishment of her wages in connection with criminal restitution payments for which her husband was liable. The Circuit Court dismissed her complaint, noting that innocent spouse relief only applies to tax liabilities, not to criminal restitution.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-18, 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).

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-7, 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).

PENALTIES

Penalties Applied to Law Firm's Mischaracterization of Bonuses as Compensation: In Brinks Gilson & Lione a Professional Corporation v. Comm'r, T.C. Memo. 2016-20, the Tax Court held that an incorporated law firm was liable for substantial understatement penalties for mischaracterizing, as compensation rather than as dividends, year-end bonuses paid to shareholder attorneys. The court concluded that, under Code Sec. 6662(d), the authorities supporting the taxpayer's characterization were not substantial compared to contrary authorities, and thus the understatement to which the penalties applied was not reduced.

Taxpayer Escapes Penalties Where IRS Failed Notification Requirement: In U.S. v. Appelbaum, 2016 PTC 49 (W.D.N.C. 2016), a district court determined a taxpayer was not liable for trust fund recovery penalties because the IRS failed to send a Letter 1153 as required by Code Sec. 6672(b), and thus failed to give notice to the taxpayer before assessing the penalties. The court held further action was barred because the time for making assessments had expired.

Timely Payment of Taxes Didn't Excuse Failure to Use Electronic Deposits: In Commonwealth Bank and Trust Company v. U.S., 2016 PTC 41 (W.D. Ky. 2016), a district court denied a bank's request for a refund of the failure-to-deposit penalties imposed by Code Sec. 6656. Although the bank paid its taxes on time using paper deposit coupons, because its deposits exceeded $200,000, Reg. Sec. 31.6302-1 required it to use the Electronic Federal Tax Payment System (EFTPS) instead.

Taxpayer's Failure-to-File Penalties Weren't Discharged in Bankruptcy: In U.S. v. Wilson, 2016 PTC 31 (N.D. Cal. 2016), a district court reversed the bankruptcy court's judgement that a taxpayer's failure-to-file penalty was discharged under Bankruptcy Code Sec. 523(a)(7)(B). The court determined that the bankruptcy court misconstrued the applicable limitations period in that section by setting the measuring date as the accrual of the taxpayer's tax obligations, rather than the date the penalty accrued, and found the penalties were not discharged.

PROCEDURE

Untimely Filing of Petition Precluded Review of FPAAs: In Berkshire 2006-5, LLP v. Comm'r, T.C. Memo. 2016-25, the Tax Court dismissed three partnerships' petition for review of final partnership administrative adjustments (FPAAs), finding the notice partner had filed the petition more than 150 days from the date the IRS mailed FPAAs to the tax matters partner, which was outside of the limitations period in Code Sec. 6226(b).

IRS Could Be Sanctioned for Inconsistent Arguments over Jurisdiction: In Wilson v. U.S., 2016 PTC 76 (N.D. Cal. 2016), the IRS was required to explain why it should not be sanctioned for its inconsistent arguments in two related appeals arising from a taxpayer's bankruptcy suit. The IRS did not contest the district court's jurisdiction when it appealed the bankruptcy court's ruling that the taxpayer's failure-to-file penalties were discharged, but claimed the same court lacked jurisdiction when the taxpayer appealed the bankruptcy court's denial of his motion for attorney's fees.

Return Preparers Could Bring Class Action Suit Against IRS Over PTIN Fees: In Steele v. U.S., 2016 PTC 58 (D.D.C. 2016), tax return preparers were granted partial class certification for their class action suit against the IRS challenging the imposition of the preparer tax identification number (PTIN) fees. The district court found that class certification was appropriate in regards to their claim for declaratory relief that the IRS lacked authority to charge the fees, or alternately that the fees are excessive.

Failure to Attach Section 83(b) Election to Return Didn't Invalidate the Election: In PLR 201606015, the IRS ruled that a taxpayer's failure to attach a copy of his Code Sec. 83(b) election with his return, as required by Reg. Sec. 1.83-2(c), did not affect the validity of the original election statement. Thus, the taxpayer's election under Code Sec. 83(b) with respect to the stock he purchased remained in effect.

Tax Court Erred by Departing from Valuation Standard Used by Both the IRS and Taxpayer: In Palmer Ranch Holdings Ltd. v. Comm'r, 2016 PTC 52 (11th Cir. 2016), the Eleventh Circuit reversed the Tax Court's valuation of a conservation easement on a parcel of land, finding the court erred by not explaining why it did not use the comparable sales method as both the IRS and taxpayer's experts had done.

RETIREMENT PLANS

IRS Provides Covered Compensation Tables: In Rev. Rul. 2016-5, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2016 plan year.

Form 5500 Filers Not Required to Complete Optional Compliance Questions: Because the proposed 2015 IRS compliance questions on the Forms 5500, Annual Return/Report of Employee Benefit Plan, and 5500-SF and Schedules H, I, and R weren't approved by the Office of Management and Budget when the 2015 Form 5500 and Form 5500-SF were published on December 7, 2015, the IRS stated that plan sponsors should not complete these questions for the 2015 plan year.

Guidance Issued on Permissible Mid-Year Changes to Safe Harbor Plans: In Notice 2016-16, the IRS issued guidance providing that a mid-year change made to a safe harbor plan under Code Sec. 401(k) or Code Sec. 401(m) or to the content of a plan's required safe harbor notice does not violate Reg. Secs. 1.401(k)-3 and 1.401(m)-3 merely by reason of the change, provided that the applicable notice and election opportunity conditions are satisfied and the change is not a prohibited mid-year change.

ESOP That Allowed Transfer of Vested Benefits Wasn't Qualified: In Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Comm'r, T.C. Memo. 2016-10, the Tax Court found no abuse of discretion where the IRS determined the taxpayer's employee stock option program (ESOP) was not qualified under Code Sec. 401(a). The court found the ESOP failed to satisfy the antialienation requirements of Code Sec. 401(a)(13) and failed to follow its plan document by allowing the transfer of vested benefits.

Relief Provided for Plans with Grandfathered Groups of Highly Compensated Employees: In REG-125761-14 (1/29/16), the IRS issued proposed regulations that modify the nondiscrimination requirements applicable to certain retirement plans providing additional benefits to grandfathered groups of employees following certain changes in the coverage of a defined benefit plan or a defined benefit plan formula. The changes apply where the proportion of highly compensated employees in a grandfathered group has increased compared to the employer's total workforce.

RICs and REITs

Guidance Issued Relating to Refunds of Foreign Tax for RICs: In Notice 2016-10, the IRS describes regulations it intends to issue that address the application of Code Secs. 853 and 905(c) to the receipt by a regulated investment company (RIC) of a refund of a tax that was eligible for a foreign tax credit under Code Sec. 901 or 903 ("foreign tax") if that foreign tax, when paid by the RIC, was treated as paid by the RIC's shareholders under Code Sec. 853(b)(2) because of an election under Code Sec. 853(a).

TAX CREDITS

IRS Sets Maximum Face Amount of Qualified Zone Academy Bonds for 2015 and 2016: In Notice 2016-20, the IRS set forth the maximum face amount of Qualified Zone Academy Bonds that may be issued for each state for the calendar years 2015 and 2016 under Code Sec. 54E(c)(2).

Regs Amend Rules for Low-Income Housing Credit Compliance-Monitoring: In T.D. 9753 (2/25/16) and REG-150349-12 (2/25/16), the IRS issued final, temporary, and proposed regulations relating to the compliance-monitoring duties of a state or local housing credit agency for purposes of the low-income housing credit. The regulations revise and clarify the requirement to conduct physical inspections and review low-income certifications and other documentation. The regulations are effective on February 25, 2016.

IRS Sets Minimum Number of Low-Income Housing Units Subject to Inspection and Review: In Rev. Proc. 2016-15, the IRS set forth, for purposes of the low-income housing credit, the minimum number of low-income units in a low-income housing project for which a state or local housing credit agency must conduct physical inspections and low-income certification reviews.

 

January 2016

ACCOUNTING

In_Depth: 1099 Reporting Takes on New Prominence as Sharp Penalty Increases Take Effect: With hefty increases in information reporting penalties (as high as $250 per late 1099) taking effect on January 1, timely issuance of 1099s has become a critical imperative for many businesses. The new urgency for timely 1099 compliance is compounded by the continued presence of questions on major tax forms asking whether the taxpayer made any payments in 2015 that would require the taxpayer to file Form(s) 1099.
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Practice Aid: CPA Client Letter: Requirement to File Forms 1099.

Updated - Congress Permanently Extends Numerous Tax Provisions Including Increased Section 179 Expensing and Enhanced Child Tax Credit: On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act (PATH) of 2015. The law permanently extend numerous tax breaks, including increased Code Sec. 179 expensing, the research and development tax credit, and the enhanced child tax credit. H.R. 2029.
Read more...

Practice Aid: CPA Client Letter: 2015 Tax Extenders (PATH) for Individual Taxpayers.

Practice Aid: CPA Client Letter: 2015 Tax Extenders (PATH) for Business Taxpayers.

Top 15 Tax Developments of 2015: Last year saw some major developments on the federal tax front, many of them quite positive. In particular, 2015 ended on a high note with the permanent extension of increased Section 179 expensing limits and several other perennial "extender" tax breaks, along with the temporary extensions of many more.
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Applicable Federal Rates: January AFRs Issued: In Rev. Rul. 2016-01, the IRS issued the applicable federal rates for January 2016.

CREDITS

Taxpayers' Unreported Capital Gains Precluded Eligibility for EITC: In Simmons v. Comm'r, T.C. Memo. 2015-252, the Tax Court found married taxpayers had $4,117 in unreported income from a sale of stock through their TD Ameritrade account. Because their capital gains from the sale exceeded the $3,200 disqualified income threshold for determining eligibility for the earned income tax credit (EITC), the court determined the couple was not entitled to their claimed $5,633 EITC.

IRS to Send Letters Regarding Questionable EITC Claims for 2014: The IRS announced on its website that it is sending letters to some taxpayers who may not be entitled to some or all of the earned income tax credit (EITC) claimed on their 2014 tax return. The IRS states that taxpayers who receive Letter 5621, regarding qualifying children, or Letter 5621-A, regarding self-employment income, should review their 2014 tax return for accuracy and, if needed, file an amended tax return to make the necessary corrections.

DEDUCTIONS

Hollywood Set Designer Entitled to Deduct Expenses as an Independent Contractor: The Tax Court determined that a taxpayer who built and designed sets for advertisements and TV commercials was an independent contractor, and properly deducted his business expenses on a Schedule C. Quintanilla v. Comm'r, T.C. Memo. 2016-5.
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Unsupported Valuation Precludes Deduction for Facade Easement; Penalties Imposed: In Gemperle v. Comm'r, T.C. Memo. 2016-1, the Tax Court denied married taxpayers' deductions for their contribution of a facade easement on their historic residence because they failed to include a qualified appraisal. The court found the couple liable for the 40 percent gross valuation misstatement penalty under code Sec. 662(h) because their unsupported valuation was 200 percent more than the maximum valuation supported by the only credible expert.

Equitable Ownership Argument Rejected, Parents Cannot Claim Loss on Daughter's Property: In Ghafouri v. Comm'r, T.C. Memo. 2016-6, the Tax Court determined taxpayers weren't entitled to net operating loss (NOL) carryforward deductions because their daughter owned the property supposedly giving rise to the NOL. The court rejected the taxpayer's argument that they used their daughter's good credit instead of their own in order to purchase the property and were thus the equitable owners, finding no such agreement between the taxpayers and their daughter.

Saddlebred Horse Business Couldn't Be Combined with Real Estate Business to Show Profit Motive: In Judah v. Comm'r, T.C. Memo. 2015-243, the Tax Court determined that married taxpayers could not treat their real estate and saddlebred horse activities as a single undertaking for purposes of Code Sec. 183(d), finding the two activities were completely unrelated aside from a common owner. The court further held that the taxpayers were not engaged in the horse activity for profit, concluding that seven of the nine factors in Reg. Sec. 1.183-2(b) weighed against finding a profit motive.

EXEMPT ORGANIZATIONS

IRS Withdraws Controversial Prop Reg Allowing Nonprofits to Collect Donor SSNs: A proposed regulation under Code Sec. 170(f)(8) that would give charitable organizations the option of reporting information to the IRS on donor's who contributed $250 or more during the year, including the donor's social security numbers, has been withdrawn. REG-138344-13.
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IRS Finalizes Regs on Certain Type III Supporting Organizations: In T.D. 9746 (12/23/15), the IRS issued final regulations regarding the distribution requirement for non-functionally integrated Type III supporting organizations. Reg. Sec. 1.509(a)-4 adopts, with minor changes, proposed regulations issued in REG-155929-06 (12/28/12) and is effective as of December 21.

Exempt Status Denied for Social Club Benefitting Founder's Event Planning Business: In PLR 201551009, the IRS ruled that a social club didn't meet the exemption requirements in Code Sec. 501(c)(7) to be recognized as a tax-exempt organization because its earnings inured to the benefit of its founder, a for-profit event planning LLC.

EXEMPTIONS - PERSONAL AND DEPENDENCY

Noncustodial Parent Entitled to Dependency Exemptions Despite Custodial Parent's Protest: In CCA 201602009, the IRS Office of Chief Counsel (IRS) advised that a noncustodial parent was entitled to dependency exemptions because he had attached a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, to his return, despite the custodial parent's claim that she did not recall executing the form. The IRS stated it will allow the deduction if the form is completed, signed, and attached to the noncustodial parent's return. If the custodial parent did not execute the Form 8332, the IRS noted her remedy was against the noncustodial parent.

FOREIGN

Sixth Circuit Reverses Tax Court; Foreign Currency Option Can be a Foreign Currency Contract: Although the Tax Court's disallowance of a tax loss by the taxpayers made sense to the Sixth Circuit as a matter of tax policy, it found the plain language of the statute clearly provided a different result and the Sixth Circuit reversed the lower court and held that a foreign currency option can be a "foreign currency contract" under Code Sec. 1256. Wright v. Comm'r, 2016 PTC 4 (6th Cir. 2016).
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GROSS INCOME AND EXCLUSIONS

Settlement Proceeds Weren't Capital Gains from Lost Goodwill: In Duffy v. U.S., 2016 PTC 9 (Fed. Cir. 2016), the Federal Circuit affirmed the lower court's holding that a taxpayer could not treat settlement payments received from an employment discrimination suit as capital gains, and was required to report the amounts as ordinary income. The court rejected the taxpayer's argument that the proceeds were capital-gain income from the lost goodwill of his business, finding the taxpayer could not demonstrate that the settlement included a sale or exchange of any goodwill.

Purported Contributions to a Partnership was a Disguised Sale of Tax Credits: In Route 231, LLC v. Comm'r, 2016 PTC 8 (4th Cir. 2016), a circuit court affirmed the Tax Court's holding that purported capital contributions to a partnership were in fact gross income. The court found the transaction, which involved an allocation of state income tax credits in exchange for a percent ownership in the partnership, was a disguised sale of the tax credits.

Taxpayer Required to Report Portion of Merger Payout as Ordinary Income: In Brinkley v. Comm'r, 2015 PTC 450 (5th Cir. 2015), the Fifth Circuit affirmed the Tax Court's holding that a key employee's $3.1 million payout, received when his company merged with Google, could not be ascribed exclusively to the sale of his interest in his company. According to the court, the $1.8 million difference between his claimed capital gain and the actual value of his stock was taxable as ordinary income.

Legal Fees Awarded to Organizations Working Pro Bono Not Included in Client's Income: In PLR 201552001, the IRS ruled that an award of attorneys' fees paid to legal aid organizations working on behalf of taxpayer at no charge were not includable in the taxpayer's income because the taxpayer had no obligation to pay attorneys' fees.

HEALTHCARE TAX

Guidance Issued on Claiming the Health Coverage Tax Credit, Interaction with Premium Tax Credit: In Notice 2016-02, the IRS provides guidance regarding the health coverage tax credit (HCTC) under Code Sec. 35. The notice provides information on who may claim the HCTC, the amount of the HCTC, and the procedures to claim the HCTC for tax years 2014 and 2015. The notice also provides guidance for taxpayers who enrolled in a qualified health plan (QHP) through the Marketplace in 2014 or 2015, and who claimed, or are eligible to claim, the premium tax credit under Code Sec. 36B.

IRS Extends Deadline for Applicable Large Employers to Report Health Coverage Information: The IRS has extended the due dates, for the 2015 tax year only, for applicable large employers to file Form 1095-B and Form 1095-C from February 1, 2016, to March 31, 2016. For taxpayers required to file Form 1094-B and Form 1094-C (generally insurers or self-insuring employers), the due dates have also been extended for 2015. Notice 2016-4.
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INFORMATION REPORTING

IRS to Require Country-by-Country Reporting for Large MNEs: In REG-109822-15 (12/23/15), the IRS issued proposed regulations that require certain U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with revenues of $850,000,000 or more to file an annual report containing information on a country-by-country basis related to the MNE group's income and taxes paid, together with certain indicators of the location of economic activity within the MNE group. The regulations will be effective when finalized.

IRS

IRS Agent Erred in Applying Hobby Loss Rules to "Productive Use" Test for Like-Kind Exchange: The IRS Office of Chief Counsel advised that a partnership that exchanged an aircraft for a replacement aircraft held the property for productive use in a trade or business for purposes of Code Sec. 1031. The Chief Counsel's Office disagreed with a revenue agent's analysis that used Code Sec. 183 hobby loss rules to reach the opposite conclusion, finding those rules inapplicable. CCA 201601011.
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Employer Guidance Issued on Retroactive Increase in Excludable Transit Benefits for 2015: To address employers' questions regarding the retroactive application of the increased transit benefits exclusion for 2015 pursuant to PATH, the IRS has issued guidance on how the increase applies and provided a special administrative procedure for employers to use in filing their fourth quarter Form 941, and Forms W-2. Notice 2016-6.
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IRS Supplements Schedules of Prevailing State Assumed Interest Rates: In Rev. Rul. 2016-2, the IRS supplements the schedules of prevailing state assumed interest rates set forth in Rev. Rul. 92-19 for tax years beginning after December 31, 2014. This information is used by insurance companies in computing reserves for (1) life insurance and supplementary total and permanent disability benefits, (2) individual annuities and pure endowments, and (3) group annuities and pure endowments.

IRS Advises Attorneys on New Position for Litigating Penalties: In CC-2016-4, the IRS advised that counsel attorneys should not concede Code Sec. 6662 or Code Sec. 6663 penalties based on disallowed refund claims for erroneous refundable credits asserted in a notice of deficiency. Under Code Sec. 6664 as amended by PATH (Pub. L. 114-114), disallowed refundable credits must be taken into account when determining the tax shown on the return and can reduce the tax below zero for purposes of calculating penalties under Code Secs. 6662 and 6663.

IRS Announces Interest Rates for First Quarter of 2016: In Rev. Rul. 2016-23, the IRS provides the rates for interest on tax overpayments and underpayments for the calendar quarter beginning January 1, 2016. The interest rates will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and 0.5 percent for the portion of a corporate overpayment exceeding $10,000. The rates are the same as for the preceding quarter.

IRS Changes Litigation Position Regarding Tax Court Jurisdiction: In CC-2016-002, the IRS informed counsel attorneys of a change in litigation position concerning the scope of the Tax Court's jurisdiction under Code Sec. 7436. The IRS notes that it will no longer argue that a Notice of Determination of Worker Classification (NDWC) is a prerequisite to Tax Court jurisdiction.

PROCEDURE

Form 872 Still Valid After Corporation Changed its Name: In CCA 201602010, the IRS Office of Chief Counsel (IRS) advised that a Form 872, Consent to Extend the Time to Assess Tax, would still be valid even if signed by the corporate taxpayer in a different manner than on its tax return (e.g. because of a change in the corporation's name between signing the return and the form). The IRS noted this would not be the case if the return and form were signed in the name of a different taxpayer.

Taxpayer's Criminal Sentence Restricting Employment Was Unreasonable: In U.S. v. Thody, 2016 PTC 10 (5th Cir. 2016), a circuit court vacated and remanded the portions of a taxpayer's tax evasion sentence requiring him to pay restitution and prohibiting him from entering into contracts with the Government as a condition of supervised release. The court noted it had previously held that restitution cannot be imposed as part of a tax evasion sentence, and found the employment restriction was not reasonably related to his offense.

Taxpayers Barred from Carrying Over Business Bad Debts Denied in Prior Litigation: In Herrera v. Comm'r, T.C. Memo. 2015-251, the Tax Court determined that collateral estoppel applied to disallow a couple's claimed carryover of business bad debt deductions. The court had already determined taxpayers weren't entitled to the bad debt deductions in prior litigation, a decision which was upheld by the Fifth Circuit.

PROPERTY TRANSACTIONS

Sporadic Sales of Real Property Don't Amount to a Trade or Business; Loss on Foreclosure Is Capital: A taxpayer's real estate activities did not amount to a trade or business because his property sales were sporadic, and not frequent and continuous. Thus, a loss on the foreclosure of one of his real estate properties was a capital, not ordinary, loss. Evans v. Comm'r, T.C. Memo. 2016-7.
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Investor's Mortgage Canceled Through Deed in Lieu of Foreclosure Wasn't a Bad Debt: In CCA 201602005, the IRS Office of Chief Counsel (IRS) advised that, assuming the taxpayer-mortgagee was an investor (i.e. the underlying mortgage wasn't described under Code Sec. 1221(a)), a note evidencing a mezzanine loan would be a capital asset and the cancellation of the note through a deed in lieu of foreclosure would be a "sale or exchange" under Code Sec. 1222. The IRS further noted that the bad debt rules under Code Sec. 1.166-6(b) do not apply to a deed in lieu of foreclosure.

Taxpayer Had No Basis in Stock from Demutualized Insurance Company: In Reuben v. U.S., 2016 PTC 2 (9th Cir. 2016), a taxpayer appealed a denial of a tax refund stemming from the sale of stock he received as part of a mutual life insurance company's demutualization. The taxpayer initially reported he had zero basis in the shares, but later amended his return, increasing his basis and claiming a refund. The circuit court affirmed the denial, finding the stock acquired in demutualization had no basis.

RETIREMENT PLANS

Unused Vacation Time Could be Contributed to Retirement Plans Without Adverse Effect: In PLR 201601012, the IRS ruled that amendments to a defined contribution retirement plan allowing employees to contribute the cash value of unused vacation time did not cause the plan to offer additional cash or deferred arrangement under Code Sec. 401(k), such that the contributions would be considered employee pre-tax contributions subject to the annual limitations under Code Sec. 402(g), because the amounts would only be available in the future.

 

DECEMBER 2015

ACCOUNTING

Practice Aid: Updated CPA Client Letter: Year-End Tax Planning for 2015 for Individuals. December 22, 2015

Practice Aid: Updated CPA Client Letter: Year-End Tax Planning for 2015 for Businesses. December 22, 2015

Updated 12/22/2015 - Congress Permanently Extends Numerous Tax Provisions Including Increased Section 179 Expensing and Enhanced Child Tax Credit: On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act (PATH) of 2015. The law permanently extend numerous tax breaks, including increased Code Sec. 179 expensing, the research and development tax credit, and the enhanced child tax credit. H.R. 2029 (12/16/15).
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2015 Saw Significant Tax Law Changes, But Tax Extenders Remain up in the Air: Congress made significant changes to the Tax Code in 2015, including a restructuring of Partnership and C corporation return due dates, sharp increases to information reporting penalties, and a repeal of TEFRA partnership audit procedures. But a permanent or multi-year extension of dozens of tax breaks, known not-so-affectionately as the "tax extenders," remains up in the air with just two weeks left before Congress recesses for the year.
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December AFRs Issued: In Rev. Rul. 2015-25, the IRS issued the applicable federal rates for December 2015.

C CORPORATIONS

IRS Fails to Prove Former Shareholders Were Liable for Unpaid Taxes: In John M. Alterman Trust v. Comm'r, T.C. Memo. 2015-231, the Tax Court determined that former shareholders were not liable as transferees for a corporation's tax deficiencies, finding the taxpayers took steps to ensure taxes would get paid. The court noted the corporation itself remained solvent even after the shareholders sold their interests, leaving the IRS to argue that the taxpayers should be liable under a "transferee of a transferee" theory, but the IRS failed to show that any of the transferors were insolvent at any of the relevant times.

DEDUCTIONS

Court Corrects IRS Mistake on Taxpayer's Mortgage Interest Deduction: In Boring v. Comm'r, T.C. Summary 2015-68, the Tax Court sustained the IRS's disallowance of a married couple's claimed home mortgage interest deduction for the business use of their home, finding their home office was not used exclusively for business. The court noted, however, that the IRS did not make a corresponding adjustment to the taxpayers' personal deduction for the interest expense, and increased their itemized deductions accordingly.

Payments to Settle Bribery Allegations Weren't Deductible: In FAA 20154702F, IRS Field Attorneys advised that a taxpayer could not deduct a payment made to a foreign country in settlement of charges stemming from an alleged bribery scheme. IRS notes that no deduction is allowed under Code Sec. 162(a) for any fine or similar penalty paid to the government of a foreign country.

EDUCATIONAL SAVINGS PLANS

IRS Revises ABLE Program Regs to Ease Administrative Burdens: In Notice 2015-81, the IRS revised three provisions of the proposed regulations under Code Sec. 529A to address practitioners' concerns that provisions requiring a qualified Achieving Better Life Experience (ABLE) program to establish safeguards to categorize distributions, collect taxpayer identification numbers (TINs) from contributors, and process disability certifications with signed physicians' diagnoses, would impose substantial burdens on the states administering qualified ABLE programs.

FOREIGN

IRS Issues Additional Rules to Combat Corporate Inversions: In Notice 2015-79, the IRS describes regulations that would address transactions structured to avoid the purposes of Code Sec. 7874 and would address certain post-inversion tax avoidance transactions. The notice also provides corrections and clarifications to earlier inversion guidance in Notice 2014-52. These regulations would generally apply to acquisitions completed on or after November 19, 2015, although taxpayers may elect to apply certain provisions of the notice before that date.

GROSS INCOME AND EXCLUSIONS

Disability Payments Excluded from Income Are Not Excluded from Collection Potential: In Mathews, Jr. v. Comm'r, T.C. Memo. 2015-225, a taxpayer argued the IRS abused its discretion by including his monthly veteran disability payments in calculating his ability to pay liabilities under a settlement agreement. The Tax Court found no abuse, noting that even assuming the disability payments were excludable from the taxpayers income under Code Sec. 104(a)(4), they could still be used to calculate the amount he could pay each month.

HEALTHCARE

IRS Addresses Employer Payment of Employee Coverage Provided Under a Spouse's Group Health Plan: An employer may exclude from an employee's gross income payments for the cost of health insurance coverage provided through the spouse's group health plan, but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis. No exclusion from income is available where coverage is paid through salary-reduction under a Code Sec. 125 cafeteria plan. CCA 201547006.
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IRS

Discharge of Corinthian College-Related Student Loans Won't Result in Taxable Income: Effective for tax years beginning on or after January 1, 2015, the IRS has stated that it will not require taxpayers who took out federal student loans to finance attendance at a school owned by Corinthian Colleges, Inc. to recognize gross income as a result of the discharge of such loans under the Department of Education's "Defense to Repayment" discharge process. Rev. Proc. 2015-57.
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IRS Finds Fault with Taxpayer's Statistical Sampling Study; Structural Component Disposition Loss Reduced: A taxpayer was not entitled to the full amount of a structural component disposition (SCD) loss estimated in its statistical sampling study. The proposed regulations under Code Sec. 168 that the taxpayer used were incorrectly applied, an incorrect method was used to calculate the SCD loss, and the taxpayer's records did not fully substantiate the estimated SCD loss. FAA 20154601F.
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Taxpayer's Care of Terminally Ill Wife Is Reasonable Cause for Failure to File Return and Pay Tax: A taxpayer had reasonable cause for failing to timely file his tax return and pay the tax due where he was busy caring for his dying wife. However, because the penalty for failing to make estimated payments is generally mandatory, the taxpayer was liable for that penalty. Ibarra v. Comm'r, T.C. Summary 2015-70.
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IRS Increases Tangible Property De Minimis Safe Harbor Threshold for Taxpayers Without an Applicable Financial Statement: For tax years beginning in 2016, the IRS has increased the threshold for applying the Reg. Sec. 1.263(a)-1(f) de minimis safe harbor for taxpayers without an applicable financial statement from $500 to $2,500 per invoice or item. Notice 2015-82.
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LEGISLATION

Transportation Bill Allows IRS to Use Private Debt Collectors: On December 3, Congress passed a bill providing highway funding through 2020. The Fixing America's Surface Transportation (FAST) Act (H.R. 22) contains two revenue offsets that allow the IRS to use private debt collectors, and would revoke or deny passports for taxpayers with more than $50,000 in unpaid taxes.

ORIGINAL ISSUE DISCOUNT

OID Inflation-Adjusted Amounts Issued for 2016: In Rev. Rul. 2015-24, the IRS issued the dollar amounts, increased by the 2016 inflation adjustment, for Code Sec. 1274A. Inflation-adjusted amounts for Code Sec. 1274A for 2016 are $5,664,800 for qualified debt instruments and $4,046,300 for cash method debt instruments.

PROCEDURE

Taxpayer Must Comply with Summonses Despite IRS's Use of Private Law Firm: In U.S. v. Microsoft Corp., 2015 PTC 420 (W.D. Wash. 2015), a district court noted that while it was troubled by the IRS's use of a private law firm to ask certain questions of summoned individuals, Code Sec. 7602 allowed the IRS to delegate the responsibility to the firm. Finding that enforcement of the summons would not be an abuse of the court's process, the court ordered the taxpayer to comply with the summonses issued.

PROPERTY TRANSACTIONS

Taxpayer's Purchased Interest in Litigation Proceeds Not a Capital Asset: In FAA 20154701F, IRS Field Attorneys advised that amounts a taxpayer received pursuant to an interest he purchased in the proceeds of a litigation claim were not capital gains because the receipt of income was not an amount realized from the disposition of the taxpayer's rights, for purposes of Code Sec. 1001, and therefore could not be "gain" potentially characterized as capital gain under Code Secs. 1222 and 1234A.

 

NOVEMBER 2015

ACCOUNTING

Parker's Annual Guide to Year End Tax Planning for Individuals: An in-depth recap of 2015's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2015 tax bill.
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Parker's Annual Guide to Year End Tax Planning for Businesses: An in-depth recap of 2015's major changes affecting business, and strategies clients can use to minimize their business' 2015 tax bill.
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Practice Aid: CPA Client Letter: Year-End Tax Planning for 2015 for Individuals.

Practice Aid: CPA Client Letter: Year-End Tax Planning for 2015 for Businesses.

November AFRs Issued: In Rev. Rul. 2015-22, the IRS issued the applicable federal rates for November 2015.

DEDUCTIONS

Sports Team Didn't Produce Game Broadcasts, Wasn't Entitled to DPGR Deductions: The IRS advised that a sports team's share of gross receipts from a contract with a television network did not qualify as domestic production gross receipts (DPGR), and thus the team was not entitled to deductions under Code Sec. 199. The IRS determined that the network had the benefits and burdens of ownership of the game broadcasts, which meant that the network, and not the team, was the producer of the broadcast. CCA 201545018.
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IRS Issues Safe Harbor Method for Restaurant and Retail Store Remodeling Projects: The IRS has issued guidance providing certain taxpayers engaged in the trade or business of operating a retail establishment or a restaurant with a safe harbor method of accounting for determining whether expenditures incurred to remodel or refresh a qualified building can be deducted currently or must be capitalized. Rev. Proc. 2015-56
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Costs to Defend Drug Patent Must be Capitalized: In FAA 20154502F, IRS Field Attorneys advised that legal fees incurred by a drug manufacturer to defend against a patent infringement suit, and legal fees incurred for regulatory matters before the FDA to acquire an Abbreviated New Drug Application (ANDA) for a generic drug, were required to be capitalized under Code Sec. 263(a). The IRS also advised that the ANDA was amortizable ratably over a 15 year period as a Code Sec. 197 intangible.

EXCISE TAX

Certain Redemptions of Frequent Flyer Miles May Be Exempt from Excise Tax: In Notice 2015-76, the IRS announced that it is considering excluding from the Code Sec. 4261(a) excise tax certain amounts attributable to mileage awards (sometimes referred to as "frequent flyer miles") that are redeemed other than for the taxable transportation of persons by air (e.g. for gift cards, magazine and newspaper subscriptions, free hotel nights, and items from the airline's shopping catalog). The notice invites public comments on issues that should be addressed in future guidance.

EXEMPT ORGANIZATIONS

Organization Promoting Sober Gaming Properly Denied Exempt Status: In GameHearts v. Comm'r, T.C. Memo. 2015-218, the Tax Court determined the IRS properly denied a non-profit corporation's application for exempt status. The corporation promoted adult sobriety by offering free or low cost tabletop and card gaming activities in a supervised, sober environment. The court stated that while the activities may be therapeutic, the organization's primary purpose for engaging in gaming activities was for recreation, a substantial nonexempt purpose.

Exempt Organization's Weekly Fundraiser Was an Unrelated Business: In TAM 201544025, the IRS ruled that exempt organization's weekly public event was not substantially related to the organization's exempt purpose and was an unrelated trade or business. The organization maintained an alumni association for a community college and raised almost all of its revenue from vendors who paid fees to sell merchandise at the event. The IRS noted that to be substantially related, the event must contribute importantly to exempt purposes other than through the production of income.

FOREIGN

STARS Transaction had Economic Substance, Foreign Tax Credits Allowed: In Sandanter Holdings USA, Inc. v. U.S., 2015 PTC 412 (D. Mass. 2015), a district court determined that a taxpayer's participation in a "structured trust advantaged repackaged securities" (STARS) transaction had economic substance, and allowed taxpayer's claimed foreign tax credits. The court noted its disagreement with the holdings in Salem Financial, Inc. v. U.S., 2015 PTC 158 (Fed. Cir. 2015) and The Bank of New York Mellon Corporation v. Comm'r, 2015 PTC 243 (2d Cir. 2015), which found such transactions lacked substance.

GROSS INCOME AND EXCLUSIONS

Settlement Proceeds Were Not Tax Exempt Under "Origin of the Claim": In Lawson v. Comm'r, T.C. Memo. 2015-211, taxpayers argued that settlement proceeds for claims against their bank were a return of funds improperly taken, and thus were not taxable under the "origin of the claim" doctrine. The Tax Court noted that the agreement did not specify a nontaxable reason for a settlement, and was silent as to whether the payment was to restore funds or was to dispose of the lawsuit. Thus, the court held the IRS properly included the proceeds as unreported income.

Overstated COGS Not Omitted Income For S Corp Shareholder: In CCA 201543015 the IRS advised that overstated cost of goods sold (COGS) did not result in unreported income to an S corporation shareholder. The IRS noted that because the amount of pass-through income that constitutes "omitted income" for purposes of the Code Sec. 6501(e)(1) six-year statute of limitations is the amount of gross receipts omitted on Form 1120S, rather than the understatement of ordinary business income, there was no omission of income.

No-Fault Benefits for Birth-Related Brain Damage Excludable From Income: In PLR 201544019, the IRS ruled that payments provided by a state-created plan to parents of children who have sustained a birth-related neurological injury are excluded from the recipient's gross income under Code Sec. 104(a)(3). The IRS noted that under Rev. Rul. 73-154, disability benefits received under a no-fault insurance contract are amounts received through accident or health insurance for personal injury or sickness within the meaning of Code Sec. 104(a)(3).

INNOCENT SPOUSE RELIEF

Proposed Innocent Spouse Relief Regs Reflect Changes in Law: In REG-134219-08, the IRS issued proposed regulations relating to relief from joint and several liability under Code Sec. 6015. The regulations reflect changes in the law made by the Tax Relief and Health Care Act of 2006 as well as changes in the law arising from litigation. Among other things, the regs propose a definition of underpayment or unpaid tax for purposes of Code Sec. 6015(f) and provide detailed rules regarding credits and refunds in innocent spouse cases.

INSURANCE COMPANIES

Loss Payment Patterns and Discount Factors for 2015 Released: In Rev. Proc. 2015-52, the IRS prescribes the loss payment patterns and discount factors for the 2015 accident year. These factors will be used to compute discounted unpaid losses under Code Sec. 846.

Salvage Discount Factors for 2015 Released: In Rev. Proc. 2015-54, the IRS prescribes the salvage discount factors for the 2015 accident year. These factors must be used to compute discounted estimated salvage recoverable under Code Sec. 832.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-80, 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).

Taxpayer's Cancer Doesn't Negate Liability for Tax on Discharged Debt Income: Where a taxpayer's debt was discharged, he could not rely on statements from the lender and IRS employees that such discharge was excludible from income; nor was there was there any hardship provision that excluded such discharge from income because of the taxpayer's cancer. Dunnigan v. Comm'r, T.C. Memo. 2015-190.
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IRS Issues Proposed Regs Applying Supreme Court Decisions on Same-Sex Marriage: The IRS has issued proposed regulations that reflect the holdings of Obergefell v. Hodges, Windsor v. United States, and Rev. Rul. 2013-17. The proposed regs define terms in the Code describing the marital status of taxpayers in a gender-neutral way. The IRS also reiterates that domestic partnerships, civil unions, or other similar relationships are not considered "marriage" for federal tax purposes. REG-148998-13.
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Eleventh Circuit Rejects Penalties Relating to Voluntary Disclosure under Amnesty Program: The Eleventh Circuit rejected accuracy related penalties, finding it was disingenuous for the IRS to apply penalties on a taxpayer who disclosed his participation in a tax shelter in response to an IRS Announcement that had said no penalties would apply to taxpayers who stepped forward. Kearney Partners Fund, LLC v. U.S., 2015 PTC 366 (11th Cir. 2015).
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LEGISLATION

Transportation Bills Would Allow IRS to Use Private Debt Collectors: On November 16, the House passed a bill providing a short-term extension of funding for the Highway Trust Fund. The Surface Transportation Reauthorization and Reform Bill (H.R. 22) contains two revenue offsets that also appear in the Senate's long-term transportation bill. Both bills include provisions allowing the IRS to use private debt collectors, and to revoke or deny passports for taxpayers with more than $50,000 in unpaid taxes.

LIENS AND LEVIES

Harm to Delinquent Taxpayers Was Not Enough to Deny Foreclosure of Lien: In U.S. v. Nichols, 2015 PTC 402 (E.D. Wa. 2015), a district court granted the IRS' motion to foreclose tax liens and order a judicial sale of taxpayers' property to satisfy liabilities. The court declined to exercise its discretion and deny the sale, noting that the taxpayers could not show evidence that a third party would be harmed, and stating that, under U.S. v. Rodgers, 461 U.S. 677 (S.Ct. 1983), harm to the delinquent taxpayers is not a reason to refuse to authorize a sale.

Funds Weren't Taxpayer's Property Before Passing Through Trust, Lien Denied: In Duckett v. Enomoto, 2015 PTC 411 (D. Ariz. 2015), the IRS served the representative of an estate with a notice of levy demanding that she turn over amounts she was obligated to pay the decedent's son. The court determined that, because under the will the representative was first required to remit the proceeds to a trust, which would then distribute the amounts to the son, the son had no right or interest in payment from the representative to which the IRS could attach a lien.

Discharge of Liabilities in Bankruptcy Renders Tax Lien Moot: In Trumbly v. Comm'r, T.C. Memo. 2015-207, the Tax Court found an IRS determination to sustain a notice of federal tax lien was inapplicable because the taxpayer's liabilities were discharged in bankruptcy. Thus, the IRS could not pursue collection of the liabilities.

NET OPERATING LOSS

Form 1120X, not Form 1139, is Used for Claiming Refunds from NOLs: In CCA 201545022, the IRS advised that a corporate taxpayer would need to file a Form 1120X to claim a refund caused by a carryback of a NOL. The taxpayer had filed a Form 1139, Corporation Application for Tentative Refund, but the IRS stated that Code Sec. 6411 provides that an application for a tentative carryback adjustment is not a claim for a refund, and numerous courts have held that Form 1139 cannot serve as an informal refund claim.

PARTNERSHIPS

Pre-TEFRA Credit Carryovers Allowed In Absence of Deficiency Notice: In Mandich v. U.S., 2015 PTC 400 (Fed. Cl. 2015), a taxpayer argued the IRS improperly disallowed carryover credits from years prior to 1983 in connection with taxpayer's investments in a partnership subject to a Final Partnership Administrative Adjustments (FPAA), because TEFRA did not go into effect until 1983 and the disallowance could not be a computational adjustment. The court agreed, noting the disallowance was unlawful without a notice of deficiency and the time in which the IRS could have issued the notice had passed.

Bipartisan Budget Act Avoids Government Shutdown, Replaces TEFRA Partnership Audit Procedures: On November 2, President Obama signed into law the Bipartisan Budget Act of 2015 (2015 BBA), which will fund the government through the 2017 fiscal year and avoids a repeat of the 2013 government shutdown. The law repeals TEFRA partnership audit procedures and replaces them with a single centralized audit system, eliminates Obamacare's automatic enrollment requirement for employers with more than 200 employees, and makes several other tax changes. P.L. 114-74.
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PENALTIES

No Double Taxation Where Taxpayer Liable for Restitution and Penalties: In Clues v. Comm'r, T.C. Memo. 2015-209, a taxpayer challenged a notice of determination, arguing that she should not be liable for both trust-fund-recovery penalties and a nearly $1.4 million criminal-restitution sentence for failure to pay the employment taxes of her staffing agency. The Tax Court sustained the IRS's determination, noting that because the restitution payment would reduce the assessed penalties once non-trust-fund taxes were paid, there was no danger of double taxation.

PROCEDURE

Taxpayer Can't Recover Voluntary Return of Erroneous Refund: In Willson v. Comm'r, 2015 PTC 399 (D.C. Cir. 2015), the IRS sought to recover an erroneous refund by levy. The taxpayer returned some of the refund but challenged the levy. The IRS conceded the levy was improper, zeroed out the taxpayer's liability, and the Tax Court dismissed the case. Unsatisfied, the taxpayer appealed, seeking a return of the voluntarily payment. The Circuit Court affirmed as there was no longer any liability to contest, noting that the amounts retained by the IRS were to recover an erroneous refund, not to satisfy a tax liability.

Returns Missing "Under Penalties of Perjury" Were Invalid: In CCA 201545016, a taxpayer's paper return, which reported false income and false withholdings and claimed an overpayment, was submitted to the IRS with the "under penalties of perjury" portion of the jurat struck through. The IRS advised that, under Code Sec. 6061, the returns were invalid because they were not executed under penalties of perjury.

Representatives Can't Sign Power of Attorney Forms for Each Other: In CCA 201544024, the IRS advised that a Form 2848, Power of Attorney and Declaration of Representative, should be rejected as to a representative who did not personally sign the form because the representative must provide the requested declaration and it is impermissible for one representative to sign on behalf of another.

PROPERTY TRANSACTIONS

Court Rejects IRS Arguments Aimed at Limiting Taxpayers' Real Estate Losses: A district court determined a taxpayer was a real estate professional, based partly on his hours worked for a property management company in which he had more than a 5% ownership interest. The court rejected multiple IRS arguments to the contrary, finding the IRS incorrectly denied deductions for rental real estate losses. Stanley v. U.S., 2015 PTC 407 (W.D. Ark. 2015).
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Payments to Buy Consent for a Spin-Off Modified a Debt Instrument: In PLR 201546009, the IRS ruled that payments made by a corporation to debt holders so they would agree to a spin-off resulted in the debt holders receiving money to which they had not been previously entitled, and was thus a modification of the debt instrument that was required to be tested for significance under Reg. Sec. 1.1001-3(e)(1). To determine if there was a significant modification, taxpayer was instructed to compare the "go-forward yield" to the "original yield" of each note.

Fifth Circuit Affirms Bright Line Test on Use of Completed Contract Method by Developers: The Fifth Circuit affirmed a Tax Court decision holding that a developer's contracts were not home construction contracts and, thus, gain or loss from such contracts could not be reported using the completed contract method. The court relied on the fact that the taxpayer did not build homes on the land it sold, and qualifying dwelling units did not exist at the time of the sales. Howard Hughes Company, LLC v. Comm'r, 2015 PTC 387 (5th Cir. 2015).
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RETIREMENT PLANS

IRS Reminds Retirees to Take Required IRA Distributions: In IR-2015-122, the IRS reminded taxpayers born before July 1, 1945, that they generally must receive payments from their IRAs and workplace retirement plans by Dec. 31, 2015. Known as required minimum distributions (RMDs or MRDs), these payments normally must be made by the end of 2015, but those who reached age 70 1/2 during 2015 can wait until as late as April 1, 2016.

TAX PRACTICE

IRS Reminds Tax Return Preparers of Limited Practice Changes: In IR-2015-123, the IRS notes that, effective for tax returns and claims for refunds prepared and signed after Dec. 31, 2015, the limited right to represent clients before the IRS held by non-credentialed preparers will be accorded to only those preparers participating in the IRS Annual Filing Season Program (AFSP). To participate in the ASFP, non-credentialed tax return preparers must complete either 15 or 18 hours of continuing education (CE) from IRS-approved CE providers by Dec. 31, 2015.

TAX SHELTERS

IRS Goes After Law Firm for Tax Shelter Transactions, Assesses Over $11 Million in Penalties: The IRS assessed $11.28 million in fines under Code Sec. 6708 for a law firm's failure to register transactions the IRS deemed were tax shelters, and to turn over a list of participants. A district court needed additional fact finding to determine whether the fines were excessive and whether the firm had reasonable cause to withhold the list and, thus, judgment could not be entered at this stage. Callister Nebeker & McCullough v. U.S., 2015 PTC 365 (D. Utah 2015).
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OCTOBER 2015

ACCOUNTING

Parker's Annual Guide to Year End Tax Planning for Individuals: An in-depth recap of 2015's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2015 tax bill.
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Practice Aid: CPA Client Letter: Year-End Tax Planning for 2015 for Individuals. October 25, 2015

Practice Aid: CPA Client Letter: Year-End Tax Planning for 2015 for Businesses. October 25, 2015

November AFRs Issued: In Rev. Rul. 2015-22, the IRS issued the applicable federal rates for November 2015.

October AFRs Issued: In Rev. Rul. 2015-21, the IRS issued the applicable federal rates for October 2015.

IRS Changes Applicability Date of Embedded Loan Rule: In T.D. 9719, the IRS issued amendments to temporary regulations relating to guidance for the treatment of nonperiodic payments made or received pursuant to certain notional principal contracts. These amendments change the applicability date of the embedded loan rule for the treatment of nonperiodic payments from November 4, 2015, to the later of January 1, 2017, or six months after the regulations are finalized.

Fifth Circuit Agrees That Custom Homebuilder Must Capitalize CEO's Salary: A custom homebuilder was subject to the uniform capitalization rules and the salary of the president and CEO was also subject to capitalization because a substantial amount of his time and activities directly benefitted, or were incurred by reason of, production activities. Frontier Custom Builders, Inc. v. Comm'r, 2015 PTC 334 (5th Cir. 2015). Read more...

BANKRUPTCY

Post-Assessment Tax Documents Not "Returns" Under Bankruptcy Code: In Giacchi v. U.S., 2015 PTC 355 (E.D. Penn. 2015), a taxpayer appealed a bankruptcy court's decision that his tax debts were nondischargeable under Bankruptcy Code 523(a)(1)(B)(i) because he failed to file tax returns for the years at issue. The district court affirmed, noting that documents taxpayer argued were returns were filed after the IRS assessed deficiencies, and thus weren't "returns" for purposes of the bankruptcy code.

DEDUCTIONS

Taxpayers Weren't Entitled to Losses from Brother's Business: In Espaillat v. Comm'r, T.C. Memo. 2015-202, taxpayers were denied losses claimed on their Schedule Cs relating to their brother's scrap metal business. Although taxpayers were heavily involved in the business, the Tax Court found they were not engaged in an independent trade or business and could not claim the losses. The court declined to impose penalties because the taxpayers relied on their tax advisor and were accustomed to reporting similar losses from their own businesses on their Schedule Cs.

Multiple Poker Tournament Buy-Ins Aren't Aggregated for Form W-2G Reporting: Multiple buy-ins into a single poker tournament event are not identical wagers and therefore should not be aggregated for purposes of reporting the winnings on Form W-2G. FAA 20153601F. Read more...

ESTATES, GIFTS AND TRUSTS

Taxpayer's Disclaimer of Interest in Husband's Trust Not a Gift: In PLR 201540006, the IRS ruled that a taxpayer's disclaimer of an interest in a trust following her marriage to the original beneficiary was not a gift under Code Sec. 2501. The trust provided income to the taxpayer's future husband, with a provision that the income was to be split with his spouse when he married. The husband had created a second trust naming the taxpayer as beneficiary, but it provided that her interests would terminate if she did not disclaim her interests in the first trust.

EXEMPT ORGANIZATIONS

Pet Spa Was Not a Charitable Organization: In PLR 201540016 the IRS denied a pet care organization's request for tax-exempt status. The organization planned to provide reduced cost services for stray and rescued animals, promote animal population control, and lessen animal cruelty, but the IRS noted the charitable activities were an insubstantial part of the organizations overall activities. The primary activities were for-profit pet care services, including spa treatments with massages, penthouse suites with heated floors for dogs, and a party hall.

FOREIGN

Economic Substance Doctrine Can Be Applied to Disallow Foreign Tax Credits: The economic substance doctrine applies to transactions involving foreign tax credits and, where economic substance is lacking, foreign tax credits will be denied. The Bank of New York Mellon Corporation v. Comm'r, 2015 PTC 243 (2d Cir. 2015). Read more...

GROSS INCOME AND EXCLUSIONS

Income Not Imputed to Employees Purchasing Optional Insurance: In PLR 201542003, an insurance company provided basic group term life insurance to its employees at no cost, but allowed employees to purchase optional coverage from it instead. The IRS ruled that, provided the company elects to treat the optional insurance separately from the basic, no income will be imputed under Code Sec. 79(a) to those employees purchasing the optional coverage.

COD Income Realized Despite Contrary Statements from IRS and Lender: In Dunnigan v. Comm'r, T.C. Memo. 2015-190, a taxpayer argued he had not realized cancellation of debt (COD) income because his lending company indicated on a Form 1099-C that he was not personally liable for repayment of the debt, and because an IRS agent allegedly told him that hardship rules could apply. The Tax Court disagreed, noting that COD income may be realized without personal liability and that there are no hardship exemptions to taxability of discharged debt.

HEALTHCARE TAXES

Modified Obamacare Definition of "Small Business" Indirectly Affects Cafeteria Plans: A change to the non-tax definition of "small businesses" under the ACA, intended to head off expected increases in insurance premiums for some employers after December 31, 2015, indirectly affects qualified benefits under cafeteria health plans. H.R. 1624. Read more...

Applicable Dollar Amounts for PCORI Released: In Notice 2015-60, the IRS provides the applicable dollar amount for determining the Patient-Centered Outcomes Research Institute (PCORI) fee for policy years and plan years ending on or after October 1, 2015 and before October 1, 2016.

INFORMATION REPORTING

Discharge of Debt Not an Identifiable Event, Form 1099-C Not Required: In PLR 201540009, the IRS ruled a financial institution extending lines of credit was not required to report a discharge of indebtedness. Following a class action lawsuit, a court enjoined the taxpayer from collecting outstanding deficiencies from the class members, based on a finding that its presale notices did not meet state law requirements. The IRS noted the discharge was not the result of an identifiable event listed in Reg. Sec. 1.6050P-1(b)(2), but rather was by operation of state law.

INNOCENT SPOUSE RELIEF

No Relief from Liabilities Where Husband Knew of Wife's Tax Evasion: In Williams v. Comm'r, T.C. Memo. 2015-198, a taxpayer was not entitled to equitable innocent spouse relief because he knew of deficiencies stemming from a tax avoidance scheme in which his wife participated. The wife deposited her pretax salary into a corporate checking account, from which she paid living expenses without reporting the income. The wife was prosecuted for tax evasion, and the taxpayer had signed a form admitting he knew of the omissions.

IRS

IRS Releases Retirement Plan COLA Amounts for 2016: The IRS has announced 2016 cost-of-living adjustments (COLA) for pension and retirement plans. IR-2015-118. Read more...

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-71, 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).

IRS Releases ATG Covering the Entertainment Industry: On October 9, the IRS released a new Audit Technique Guide (ATG) focused on the entertainment industry. The Entertainment Industry ATG covers performers, producers, directors, technicians, and other workers in the film industry, the recording industry, and live performances.

IRS Issues Requirements for Substitute Form W-2 and Form W-3: In Rev. Proc. 2015-51, the IRS states the requirements regarding the preparation and use of substitute forms for Form W2, Wage and Tax Statement, and Form W3, Transmittal of Wage and Tax Statements, for wages paid during 2015. Copies of a substitute Form W2 or a substitute Form W3 must conform to the specifications in the revenue procedure to be acceptable to the IRS and the Social Security Administration (SSA).

Comments Requested on Defining Energy Property: In Notice 2015-70, the IRS requests comments on how to define certain types of property qualifying for the Code Sec. 48 energy credit, including equipment using solar energy and qualified small wind energy property. The IRS anticipates issuing regulations under Code Sec. 48 to define these types of property.

Modernized e-File Available During Columbus Day Weekend: Following concerns from the tax professional community, the IRS has modified its Columbus Day weekend maintenance period to avoid affecting the Modernized e-File operation, a change from previous years. The maintenance requirements, however, will affect the e-services secure mailbox operations between Sunday, October 11, 2015, from around 3:00 a.m. Eastern Time until Monday, October 12, 2015, at approximately 4:00 p.m. Eastern Time.

IRS Issues Annual Per Diem Guidance: IRS provides the annual update of the special per diem rates used in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Notice 2015-63. Read more...

Taxpayer's Debt Was Discharged Years Earlier than Form 1099-C Indicated: A taxpayer was not liable for cancellation of debt income in 2011 where the IRS failed to provide any evidence of any significant, bona fide activity that would indicate an active creditor, and thus failed to rebut the presumption that an identifiable event discharging the taxpayer's debt occurred in 2008. Clark v. Comm'r, T.C. Memo. 2015-175. Read more...

IRS Eliminates Foreign Goodwill Exception for Tax-Free Transfers of US Intangibles: The IRS has issued proposed regulations that eliminate the foreign goodwill exception for the outbound transfers of intangibles, and limit the scope of property that is eligible for the active trade or business exception. The proposed regs are effective for transfers occurring on or after September 16, 2015. REG-139483-13. Read more...

PARTNERSHIPS

Ninth Circuit Rejects Assignment of Noncompete Income to Partnership that Contributed No Value to Joint Venture: No valid partnership existed where one party to a joint venture did not contribute anything of value and allocations between the parties did not conform to the joint venture agreement. Accordingly, the Ninth Circuit upheld the Tax Court in declining to assign any portion of the proceeds from a noncompetition agreement to the partnership. DJB Holding v. Comm'r, 2015 PTC 361 (9th Cir. 2015). Read more...

Soon-to-be Publicly Traded Partnership's Income was Qualifying Income: In PLR 201541008, a limited partnership that was to be a publicly traded partnership after an initial public offering sought a ruling concerning the Code Sec. 7704 qualifying income exception. IRS concluded that income derived by the partnership from the transportation, storage, and marketing of fuel constituted qualifying income within the meaning of Code Sec. 7704(d)(1)(E). IRS notes no opinion was expressed as to whether the partnership met the 90 percent gross income requirement in Code Sec. 7704(c).

PROCEDURE

Preparer's Name on False Returns Was Sufficient Evidence, Conviction Upheld: In U.S. v. Perez, 2015 PTC 371 (5th Cir. 2015), a taxpayer challenged the sufficiency of the evidence supporting his convictions relating to preparing false income tax returns. The Circuit Court found the evidence was sufficient and upheld the conviction, noting taxpayer's name appeared as the preparer of the returns at issue, and he listed numerous deductions and credits without his clients' knowledge or consent.

IRS Reissues Notices on Basket Contracts and Basket Option Contracts: In Notice 2015-73, and Notice 2015-74, the IRS reissued Notices identifying basket contracts and basket option contracts as transactions of interest and listed transactions, respectively. Practitioners had expressed concern with the difficulty of identifying similar transactions, initially described in Notice 2015-47 and Notice 2015-48. The new notices provide additional details on these types of transactions, and revoke the original notices.

Tax Court Modifies Earlier Transferee Liability Decision But Does Not Alter Result: In Kardash v. Comm'r, T.C. Memo. 2015-197, the Tax Court granted a motion for reconsideration of its previous decision that minority shareholders were partially liable for unpaid taxes because they received fraudulent transfers while their corporation was insolvent. The court discovered the company was in fact solvent, but held that the transfers were still constructively fraudulent because they were part of a series of transactions that led to insolvency, and did not alter its prior decision.

Taxpayer Granted Extension to Elect Partial Deduction of Success-Based Fees: In PLR 201539005, a corporation was granted an extension of time to elect the Rev. Proc. 2011-29 safe harbor for allocating success based fees paid in business acquisitions or reorganizations described in Reg. Sec. 1.263(a)-5(e)(3). The taxpayer's returns were timely filed, but its CPA inadvertently forgot to make the election to deduct 70 percent of the success-based fees and capitalize the remaining 30 percent.

PROPERTY TRANSACTIONS

No Deduction for Bad Debts Used in Tax Avoidance Scheme; Shareholder Liable as Transferee: In Tricarichi v. Comm'r, T.C. Memo. 2015-201, a sole shareholder was found liable as a transferee for his corporation's unpaid taxes. The taxpayer entered into a purported stock sale agreement that the Tax Court determined lacked economic substance and had tax avoidance purposes. The court also disallowed deductions for bad debts used to eliminate the tax liabilities because the taxpayer could not substantiate the basis claimed.

RETIREMENT PLANS

Stress from Medical Problems Excused Failure to Accomplish Rollover: In PLR 201539036, a taxpayer was granted waiver of the Code Sec. 402(c)(3) 60-day rollover requirement. The taxpayer had received a lump-sump amount from her retirement plan, but was not advised of the tax consequences, did not understand the 60-day requirement, was stressed and distracted at the time of the distribution, and was receiving medical care during that time.

RICs and REITs

Guidance Issued for RICs on Satisfying the 25 Percent Tests When Investing in Other RICs: In Rev. Proc. 2015-45, the IRS describes conditions under which a regulated investment company (RIC) that invests in one or more other RICs will satisfy the asset diversification requirements of Code Sec. 851(b)(3)(B) (the 25 percent tests).

WITHHOLDING

Withheld Taxes Couldn't be Used at Lender's Discretion: In Cherne v. U.S., 2015 PTC 343 (D. Idaho 2015), a district court determined a taxpayer was a responsible person who willfully failed to remit a company's payroll taxes. The taxpayer argued that an agreement giving the primary lender wide control over the company's payables prevented him from paying the withheld taxes. The court disagreed, noting funds are only encumbered when there's an obligation superior to the IRS's interest and stated the company shouldn't have agreed to use those amounts for anything other than paying the IRS.

 

SEPTEMBER 2015

ACCOUNTING

September AFRs Issued: In Rev. Rul. 2015-19, the IRS issued the applicable federal rates for September 2015.

C CORPORATIONS

Final Regs Issued on Domestic and Foreign F Reorgs: In T.D. 9739, the IRS issued final regulations that provide guidance regarding the qualification of a transaction as a corporate reorganization under Code Sec. 368(a)(1)(F) by virtue of being a mere change of identity, form, or place of organization of one corporation. The final regs also address reorganizations in which the transferor corporation is a domestic corporation and the acquiring corporation is a foreign corporation.

Shares Retained in Spinoff Not Used for Tax Avoidance: In PLR 201535006, the IRS ruled that a parent corporation's retention of shares was primarily to raise capital, and not for the principle purposes of tax avoidance under Code Sec. 355(a)(1). The taxpayer conducts three businesses and wanted to separate one potentially lucrative business from the other two. The taxpayer retained 19.9 percent of the business' shares in the spinoff, but represented that was necessary to raise capital, and would dispose of the shares in the months following the transaction.

DEDUCTIONS

Guidance Addresses Retroactive Application of Bonus Depreciation Extended by TIPA: The IRS has issued guidance on how fiscal year taxpayers can retroactively elect to take the 50-percent bonus depreciation deduction for qualified property placed in service during the 2014 portion of fiscal years beginning in 2013. The guidance, which additionally addresses carrying over disallowed Code Sec. 179 deductions for qualified real property, also applies to calendar year taxpayers with short tax years in 2014. Rev. Proc. 2015-48. Read more...

Abandonment Loss Deduction Denied for Property Not Foreclosed: In Tucker v. Comm'r, T.C. Memo. 2015-185, the Tax Court determined a taxpayer did not suffer a Code Sec. 165(a) loss from purportedly abandoned or worthless real property, and denied NOLs stemming from the claimed loss. The Court noted taxpayer's mortgages on the real property were recourse obligations, which precluded loss deductions until the year of a foreclosure sale, regardless of when the property was abandoned.

Ongoing Litigation Defeats Estate's Claim for Charitable Deductions: In Est. of DiMarco v. Comm'r, T.C. Memo. 2015-184, a decedent's estate claimed a charitable contribution deduction under Code Sec. 642(c)(2) for an amount the estate argued it had permanently set aside for charitable purposes. The Tax Court disagreed, noting that because the estate was engaged in active litigation, some of the amounts could go to noncharitable beneficiaries, and denied the claimed deduction.

Failure to Waive Carryback Requirement Precludes Deductions for NOLs: In Jasperson v. Comm'r, T.C. Memo. 2015-186, the Tax Court determined a taxpayer improperly claimed loss deductions for net operating loss (NOL) carryovers. The taxpayer failed to make an election under Code Sec. 172(b)(3) to waive the requirement that NOLs be carried back two years before being carried forward, and failed to provide evidence of whether the NOLs had been absorbed in prior years.

Increase to a Reserve Account Does Not Satisfy the Bad Debt Charge-Off Requirement: Where a taxpayer's books indicated that the entry to record a partial bad debt was in the nature of a reserve for an anticipated future loss and not a sustained loss, no tax deduction was allowed. FAA 20153501F. Read more...

Son's Unauthorized Incorporation of Father's Business Precludes Deduction of Business Expenses on Form 1040: The unauthorized act by a business owner's son of incorporating his father's business was ratified by the father when he filed corporate documents with the state; thus, expenses of the business could not be deducted on the father's personal income tax returns. Rochlani v. Comm'r, T.C. Memo. 2015-174. Read more...

Ninth Circuit Denies Easement Deduction Where Mortgage on Property Was Not Subordinated to Easement: For a taxpayer to take a charitable deduction for the donation of a conservation easement, any mortgage on the property must be subordinated to the easement at the time of the donation. Minnick v. Comm'r, 2015 PTC 280 (9th Cir. 2015). Read more...

Tax Court Denies Deductions for U.S. Legal Education of Attorney Licensed Abroad: The educational expenses incurred by an attorney licensed to practice law in Germany to obtain a U.S. law degree were not deductible because the education did not maintain or improve skills required in his trade or business. O'Connor v. Comm'r, T.C. Memo. 2015-155. Read more...

Taxpayer Spent More Time at Her Day Job than on Real Estate Activities; Losses Disallowed: In Farris v. Comm'r, T.C. Summary 2015-53, the Tax Court upheld the IRS's disallowance of a taxpayer's claimed losses from real estate activity because she was not a real estate professional. The taxpayer was unable to prove the hours she spent on real estate activity exceed the hours she spent as a marketing director, and thus failed the "half personal services test" of Code Sec. 469(c)(7)(B)(i).

Chiropractor's Videogame Consoles Weren't Deductible Business Expenses: In Laudon v. Comm'r, T.C. Summary 2015-54, the Tax Court upheld the IRS' disallowance of a chiropractor's unsubstantiated business expenses, which included deductions for an Xbox 360 and Wii videogame consoles, big screen TVs, and hair-salon equipment. The court also imposed penalties, finding taxpayer did not reasonably rely on professional advice because he gave his tax preparers incomplete information.

Taxpayer Not Required to Capitalize Patent Litigation Costs: In PLR 201536006, the IRS ruled that the litigation costs a taxpayer incurred in connection with a patent infringement suit were deductible business expenses under Code Sec. 162(a). The IRS noted the nature of the claims against the competitor infringing the patent were not those of a dispute of legal title or ownership of the patent, but were incurred to protect against the infringement.

IRS Issues Proposed and Temporary Regs on Domestic Production Activities: The IRS has issued proposed regulations on the domestic production activities deduction under Code Sec. 199 to reflect amendments made in 2008 to rules relating to oil-related qualified production activities income and qualified films. The proposed regs also remove the "benefits and burdens" test and clarify several other rules. Temporary regulations issued simultaneously address the calculation of W-2 wages in a short tax year. REG-136459-09; T.D. 9731. Read more...

EXEMPT ORGANIZATIONS

Prop. Regs Provide Donees With Substantiation Requirements for Charitable Gifts: In REG-138344-13, the IRS issued proposed regulations implementing an exception to the Code Sec. 170(f)(8)(A) "contemporaneous written acknowledgment" requirement for donors to substantiate charitable contribution deductions of $250 or more. The proposed regs provide rules concerning the time and manner for donee organizations, rather than donors, to file information returns that report the required information for such contributions.

Guidance Issued on Investments Made for Charitable Purposes: In Notice 2015-62, the IRS provides guidance on the application of the Code Sec. 4944 excise tax to investments that are made by private foundations for charitable purposes, but are not program-related investments (PRIs). The IRS notes that an investment made by a private foundation will not be subject to the excise tax if the foundation managers exercised ordinary business care in providing for the financial needs of the foundation to carry out its charitable purposes.

FOREIGN

Final and Prop. Regs Address Dividend Equivalents: In T.D. 9734 and REG-127895-14 (9/18/15), the IRS issued final and temporary regs providing rules for determining when a payment made pursuant to certain financial products will be treated as a dividend equivalent for purposes of Code Sec. 871(m). The proposed regs provide guidance relating to the substantial equivalence test, which is used to determine whether a complex contract is a Code Sec. 871(m) transaction.

IRS to Extend Transitional Rules for FACTA Compliance: In Notice 2015-66 the IRS announced its intention to amend the Foreign Account Tax Compliance Act (FATCA) regulations to extend the period of time that certain transitional rules regarding FATCA compliance will apply for withholding agents and foreign financial institutions. Taxpayers may rely on the provision of the notice pending the issuance of the amended regs.

Proposed Regulations Address Tax on Gifts and Bequests from Expatriates: The IRS has issued proposed regulations relating to the Code Sec. 2801 tax on U.S. citizens and residents who receive gifts or bequests from certain individuals who relinquished U.S. citizenship or ceased to be lawful permanent residents of the U.S. on or after June 17, 2008. REG-112997-10 (9/10/15). Read more...

IRS Updates Guidance on Requesting Advance Pricing Agreements: In Rev. Proc. 2015-41, the IRS provides guidance on the process of requesting and obtaining advance pricing agreements from the Advance Pricing and Mutual Agreement program (APMA). The revenue procedure updates and supersedes Rev. Proc. 2006-9 and Rev. Proc. 2008-31.

IRS Issues Guidance on Obtaining Tax Treaty Assistance from U.S. Competent Authority: In Rev. Proc. 2015-40, the IRS provides guidance on the process of requesting and obtaining assistance under U.S. tax treaties from the U.S. competent authority, acting through the Advance Pricing and Mutual Agreement program (APMA) and the Treaty Assistance and Interpretation Team of the Deputy Commissioner (International), Large Business & International Division of the IRS. The revenue procedure updates and supersedes Rev. Proc. 2006-54.

IRS Relaxes Residency Test for Taxpayers in U.S. Territories: In REG-109813-11 (8/27/15), the IRS issued proposed amendments to the 183-day presence test in Reg. Sec. 1.937-1 for determining whether a taxpayer is a bona fide resident of a U.S. territory. Under the proposed regulations, taxpayers would be considered to be present in the relevant U.S. territory for up to 30 days during which the taxpayer is outside of both the United States and the relevant U.S. territory. Taxpayers may rely on the proposed regulations until finalized.

GIFTS, TRUSTS, AND ESTATES

Taxpayers Can Reduce Value of Gift for Assumption of Code Section 2035(b) Estate Tax Liability: The Tax Court held that a donor's daughters' assumption of a potential Code Sec. 2035(b) estate tax liability as a condition of a gift could be factored into calculating the fair market value of the gifted property for purposes of the gift tax. The court noted the assumption was a detriment to the daughters and a benefit to the donor such as would be considered by a willing buyer and willing seller in determining a sale price of the transferred property rights. Steinberg v. Comm'r, 145 T.C. No. 7 (2015). Read more...

Donee's Liability for Donor's Unpaid Gift Tax Is Capped at Gift Amount, Fifth Circuit Holds: A donee's liability for a donor's unpaid gift tax and interest is capped by the amount of the gift; thus, to the extent a district court's judgment imposed liability on the donees beyond the value of the gifts received, that judgment was reversed. U.S. v. Marshall, 2015 PTC 292 (5th Cir. 2015). Read more...

IRS Delays Due Date for New Estate Valuation Statements: In Notice 2015-57, the IRS delays until February 29, 2016, the due date for filing statements pursuant to new Code Sec. 6035, added by Pub. L. 114-41. That section requires executors to furnish statements identifying the value of each interest in property reported on an estate tax return to the IRS and the persons receiving such interest. This delay is to allow the IRS to issue guidance implementing the reporting requirements of section 6035.

IRS has Unlimited Time to Assess Tax on Defective Gift Tax Return: In FAA 20152201F, IRS Field Attorneys advised that the statute of limitation exception in Code Sec. 6501(c)(9) applied to taxpayer's gifts because his Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return failed to adequately disclose his transfers of interests in two partnerships. Thus, the IRS could assess gift tax based on those transfers at any time.

GROSS INCOME AND EXCLUSIONS

Value of Identity Protection Services Excludable from Gross Income: The IRS has stated that it will not require an individual whose personal information may have been compromised in a data breach to include in gross income the value of identity protection services provided by the organization that experienced the breach. The IRS will also not require these amounts to be reported on an information return filed with respect to such individuals. Announcement 2015-22. Read more...

Information in Whistleblower Suit Not a Capital Asset, Reward was Ordinary Income: In Patrick v. Comm'r, 2015 PTC 300 (7th Cir. 2015), a taxpayer claimed the reward received for bringing a whistleblower suit against a medical equipment company was capital gains, arguing the information he gathered was a capital asset. The Circuit Court disagreed, and determined that the taxpayer's $5.9m "relator's share" of the IRS's recovery from the suit was ordinary income from the provision of services.

Discharge of Debt Occurred During Testing Period, Not When Company Filed Form 1099-C: In Clark v. Comm'r, T.C. Memo. 2015-175, a taxpayer argued that she did not have cancelation of debt (COD) income in 2011, when the creditor reported the discharge of her debt on a repossessed car. The Tax Court agreed, noting that under Reg. Sec. 1.6050P-1, a debt is discharged when a creditor has not received a payment during a 36 month testing period. Because taxpayer's last payment was in 2005, the court found the debt was considered discharged in 2008.

Payments Pursuant to Divorce Weren't Alimony, Properly Excluded: In Crabtree v. Comm'r, T.C. Memo. 2015-163, the Tax Court determined a taxpayer properly excluded from gross income payments from her ex-husband pursuant to a divorce agreement. Because the agreement stated payments would only terminate if the taxpayer remarried or cohabitated, the court determined the payments would not terminate on her ex-husband's death, and thus were not alimony by reason of Code Sec. 71(b)(1)(D).

INFORMATION REPORTING

Penalty Relief Provided for Certain Failures in Reporting Minimum Essential Coverage: In Notice 2015-68, the IRS advised taxpayers of its intention to propose regulations under Code Sec. 6055 on information reporting requirements for persons providing minimum essential coverage. The notice also provides that entities required to file such information returns will not be subject to penalties for failure to report a taxpayer identification number (TIN) if they comply with the requirements of Reg. Sec. 301.6724-1(e), with certain modifications.

INSURANCE COMPANIES

Residual Value Insurance Policies Are Insurance for Tax Purposes: In R.V.I. Guaranty Co. v. Comm'r, 145 T.C. No. 9, the IRS imposed a $55 million deficiency, arguing taxpayer's "residual value insurance" policies protected against investment, not insurance, risk and thus taxpayer could not use insurance company accounting and the special rules under Code Sec. 832. The Tax Court disagreed and determined the policies protecting assets against unexpected declines in value were insurance contracts in the commonly accepted sense.

IRS Provides Info Necessary for Foreign Ins. Companies to Calculate Investment Income: In Rev. Proc. 2015-42, the IRS provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after December 31, 2013.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-61, 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).

IRS Announces Interest Rates for Fourth Quarter of 2015: In Rev. Rul. 2015-12, the IRS provides the rates for interest on tax overpayments and underpayments for the calendar quarter beginning October 1, 2015. The interest rates will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and 0.5 percent for the portion of a corporate overpayment exceeding $10,000. The rates are the same as for the preceding quarter.

Appeals Arbitration Program Eliminated: In Rev. Proc. 2015-44, the IRS announced that it is eliminating the Appeals arbitration program, given the general lack of demand for arbitration and the fact that its use as a tool to settle disputes without litigation has not proven successful. The IRS notes that during the fourteen-year period in which arbitration was available to resolve certain offer in compromise and Trust Fund Recovery Penalty cases, only two cases were settled using arbitration under the program.

LIENS AND LEVIES

Divorce Agreement Contained Fraudulent Conveyance: In U.S. v. Baker, 2015 PTC 290 (D. Mass. 2015), a district court determined taxpayer's divorce agreement fraudulently transferred property to his wife in an attempt to escape liability for his participation in Son-of-BOSS tax shelters, and upheld levies on the taxpayer's property. The court noted that despite the purported divorce, taxpayer and his wife continued to live together, frequently socialized as a couple, and never told their children about their separation.

PARTNERSHIPS

Partners' "Sweat Equity" Translated into Capital Gain, Not Ordinary Income: Although there was no formal partnership agreement between a partnership that managed oil and gas properties and the business that owned the properties, the eventual sale of the properties resulted in capital gain to the managing partnership because it invested "sweat equity" in the arrangement, increasing the value of the partnerships' capital. U.S. v. Stewart, 2015 PTC 294 (S.D. Tex. 2015). Read more...

Limitations Period was Partnership Item, Partners Barred from Bringing Refund Suit: In Rodgers v. U.S., 2015 PTC 306 (S.D. Tex. 2015), the district court held that because Code Sec. 7422(h) deprives refund courts of jurisdiction over a partner's claim for refund attributable to a partnership item it could not hear partners' suit for refund for partnership taxes paid. The court noted their refund claim was attributable to the limitations period in Code Sec. 6229, which was determined to be a partnership item in Irvine v. U.S., 729 F.3d 455 (5th Cir. 2013).

PENALTIES

No Fraud Found Where IRS and Taxpayer's CPA Turned Their Heads on Improper Inventory Reporting: The IRS did not prove fraud by clear and convincing evidence for purposes of extending the statute of limitations. As a result, a company that had improperly reported its inventory escaped liability for over $13 million in taxes and penalties. Transupport, Inc. v. Comm'r, T.C. Memo. 2015-179. Read more...

Late Filings by Individual Partners Preclude Abatement of Penalty for Late Form 1065: Where some partners did not timely file their personal income tax returns, a partnership did not qualify for the reasonable cause exception to the Code Sec. 6698 penalty for late filing of the partnership tax return. The court held that Rev. Proc. 84-35 reasonably interpreted this exception as requiring all partners to timely file their personal returns. Battle Flat, LLC v. U.S., 2015 PTC 340 (D. S.D. 2015). Read more...

Prop. Regs Clarify Calculation of Code Sec. 6707A Penalties on Reportable Transactions: Proposed regulations clarify the calculation of the penalty under Code Sec. 6707A for failing to include on any return or statement any information required to be disclosed under Code Sec. 6011 with respect to a reportable transaction. REG-103033-11. Read more...

Abused Wife with Mental and Physical Health Issues Qualifies for Innocent Spouse Relief: Innocent spouse relief was appropriate where a taxpayer with mental and physical health issues suffered abuse at the hands of her husband and was afraid to question anything having to do with the tax return out of fear of retaliation. Hollimon v. Comm'r, T.C. Memo. 2015-157. Read more...

Taxpayer's Statute of Limitations Isn't Extended by Third Party's "Intent to Evade Tax": The suspension of the three-year statute of limitations in Code Sec. 6501(c)(1) is only triggered by the intent of the taxpayer to evade tax and not the intent of a third party who is remotely connected with the relevant tax return. BASR Partnership v. U.S., 2015 PTC 263 (Fed. Cir. 2015). Read more...

Steep Increases in Information Reporting Penalties Set to Take Effect in January: For the second time in five years, Congress has enacted hefty increases in the penalties imposed under Code Secs. 6721 and 6722 for failures relating to information returns and payee statements. The changes, which were included in the Trade Preferences Extension Act of 2015, take effect on January 1, 2016. Pub. L. 114-27. Read more...

Basement Chemist Wasn't Operating a Tax Exempt Entity, Fraud Penalties Imposed: In George v. Comm'r, T.C. Memo. 2015-158, a chemist operated out of his basement, providing research services and selling health supplements he concocted. He never reported his income, arguing the amounts received were tax exempt donations and that once he had saved $10 million he would formally incorporate as a tax-exempt entity. The Tax Court found there was no tax-exempt entity in place to receive donations and that taxpayer couldn't retroactively create one, sustaining deficiencies and imposing fraud and 75 percent failure to file penalties on $6.6 million in income.

PROCEDURE

Guidance Issued on Waiving Electronic Filing Requirement for Plan Administrators: In Rev. Proc. 2015-47, the IRS sets forth procedures for plan administrators of retirement plans (or, in certain situations, employers maintaining retirement plans) that are required to file electronically Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefit, or Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, to request a waiver of the electronic filing requirement due to economic hardship.

Data from USPS Trumps Stamps.com for Timely Filing Requirement: In Tilden v. Comm'r, T.C. Memo. 2015-188, the Tax Court denied a taxpayer's petition for redetermination as untimely under the 90 day filing requirement of Code Sec. 6213(a). The petition had a mailing label from Stamps.com postmarked on the 90th day, but USPS tracking data reflected a shipping date of the 92nd day, and a delivery date of the 98th day. The Court deferred to the USPS data, and held the petition was not timely mailed and thus not timely filed.

IRS's Interpretation of Trust Provision was Reasonable, Costs not Awarded: In Mikel v. Comm'r, T.C. Memo. 2015-173, taxpayers sought an award of litigation costs. In an earlier decision the IRS disallowed taxpayer's annual exclusions for gifts made to a trust, arguing that a trust provision would deter beneficiaries from exercising withdrawal rights, making the gifts future interests in property. Although the court had found for the taxpayers, in the instant case the court noted that given the unartful drafting of the provision the IRS' interpretation was substantially justified, and denied taxpayers' request for costs.

Ignoring IRS Notices Precludes Taxpayer from Contesting Liabilities: In Haben v. Comm'r, T.C. Summary 2015-55, the Tax Court determined that because taxpayer had ignored delivery of multiple Letters 1153, Trust Fund Recovery Penalty Letter, he could not contest at trial his liability as a responsible person for unpaid employment taxes. The court noted that a taxpayer may not refuse to accept delivery of a notice of deficiency and still maintain that he or she did not have a prior opportunity to dispute the liability under Code Sec. 6330(c).

Payments to IRS After Assessment Period Are Refundable Overpayments: In CCA 201536020, the IRS Chief Counsel's Office advised that a tax payment made to the IRS after the expiration of the period of limitation on assessment is considered an overpayment, even if there was no tax liability. Therefore, a payment made after the assessment period may be refunded to the taxpayer, but only within the limitations set forth in Code Sec. 6511.

IRS Abused Discretion by Not Explaining Why Taxpayer's Arguments were Frivolous: In Ryskamp v Comm'r, 2015 PTC 284 (D.C. Cir. 2015), a taxpayer challenged the IRS's denial of a collection due process hearing based on its unexplained determination that taxpayer's reasons for requesting the hearing were frivolous. The Circuit Court determined that the IRS's boilerplate letter rejecting taxpayer's arguments as frivolous was inadequate and an abuse of discretion because it did not specify any frivolous positions.

Period for Claiming Foreign Tax Credit Refund Begins in Year Taxes Originate: In Albemarle Corp. v. U.S., 2015 PTC 286 (Fed. Cl. 2015), the Court of Federal Claims determined that the 10 year period for claims of refunds for foreign tax credits under Code Sec. 6511 begins in the year the foreign taxes originated, rather than when the liability was finalized and established. The court thus affirmed the lower court's holding that it did not have jurisdiction over taxpayer's refund claims because the taxpayer did not file its claims within the limitations period.

Felony Conviction Reversed Because Returns Handed Over to IRS Weren't Filed: In U.S. v. Boitano, 2015 PTC 282 (9th Cir. 2015), a Circuit Court reversed a CPA's felony convictions for making false statements on personal income tax returns regarding estimated payments that were never made. The court found that a conviction under Code Sec. 7206(1) required proof of filing the returns, and that taxpayer did not "file" the returns when he handed them to an IRS agent.

PROPERTY TRANSACTIONS

Advanced Payments Properly Treated as Development Costs, Not Loans: In CCA 201537022, the IRS advised an S corporation taxpayer that it properly treated amounts advanced to a municipal district for the construction of infrastructure as costs of developing its real property, even though in form the amounts were loans evidenced by bonds. The taxpayer could thus include the costs in the basis of the properties, but was required to treat repayments designated as "interest" on the bonds as a reduction of cost or as income, rather than as tax-exempt interest under Code Sec. 103.

Taxpayer Can't Use Principal-Residence Exclusion to Reduce Gain from Reacquiring Home: A taxpayer cannot use the principal-residence exclusion to exclude from income amounts received as liquidating damages on the reacquisition of a principal residence. DeBough v. Comm'r, 2015 PTC 303 (8th Cir. 2015). Read more...

RETIREMENT PLANS

IRS Issues Guidance on Contributions to, and Excise Taxes for, Defined Benefit Plans: In T.D. 9732 (9/9/15), the IRS issued final regulations under Code Sec. 430 providing guidance on the determination of minimum required contributions for single-employer defined benefit pension plans. The regulations also contain guidance regarding the Code Sec. 4971 excise tax for failure to satisfy the minimum funding requirements for defined benefit pension plans. The regulations are effective on September 9, 2015, and apply to plan years beginning in 2016.

RICs and RETIs

Final Regs Revise Certain RIC Examples: In T.D. 9737, the IRS issued final regulations with revisions to examples that illustrate the controlled group rules applicable to regulated investment companies (RICs). The revised examples illustrate how the controlled group rules affect the RIC asset diversification tests, under which no more than 25% of the value of the taxpayer's total assets may be invested in certain securities.

S CORPORATIONS

IRS Has an Unlimited Time to Assess Excise Tax When Form 5330 Is Not Filed: The Tax Court did not abuse its discretion by reconsidering a mistake it made and, thus, its holding that the IRS has an unlimited period of time to assess excise tax if Form 5330 is not filed, regardless of whether the taxpayer has notified the IRS in other filings of a prohibited allocation with respect to S corporation stock held by an ESOP, was affirmed. Law Office of John H. Eggertsen v. Comm'r, 2015 PTC 319 (6th Cir. 2015). Read more...

 

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