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Tax Research Briefs - Archived (August 2015 - April 2015)

AUGUST 2015

ACCOUNTING

Congress Swaps Partnership and C Corp Deadlines, Overturns Supreme Court Decision: On July 31, President Obama signed into law a bill that restructures the due dates for Partnership and C corporation tax returns beginning with the 2016 tax year, with a goal of reducing the need for extended and amended tax returns. The new law also effectively reverses the Supreme Court's decision in United States vs. Home Concrete & Supply, changes the due date for FBAR filings, and makes a few other permanent changes to the tax code. H.R. 3236). Read more...

Taxpayers Can't Change to Closed Transaction Method of Accounting for Buy-Out Payments: Once a couple elected to report buy-out payments under the open transaction method, generating ordinary income, they were bound to continue using that method absent IRS consent to a change. The taxpayer's were thus unable amend their returns to treat the payments as long-term capital gains. Greiner v. U.S., 2015 PTC 249 (Fed. Cl. 2015). Read more...

IRS Provides Economic Performance Safe Harbor for Ratable Service Contracts: The IRS has provided a safe harbor for accrual method taxpayers to treat economic performance as occurring ratably on contracts that provide services on a regular basis. Under the safe harbor, which is effective for tax years ending on or after July 30, 2015, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract. The IRS also provides procedures for obtaining automatic consent to change to the safe harbor method of accounting. Rev. Proc. 2015-39. Read more...

Mortgage Contract Warranty and Representations Not Securities, Losses Disallowed: In CCA 201529006, the IRS advised that reserve losses reported by taxpayer from its repurchase and indemnity obligations arising from its breach of mortgage sale contract warranty and representations were improperly treated as Code Sec. 475 mark-to-market losses on securities. The IRS determined that by the terms of the mortgage contracts, the obligations were not severable and could not be characterized as put options and thus losses were not deductible under Code Sec. 475.

APPLICABLE FEDERAL RATES

August AFRs Issued: In Rev. Rul. 2015-16, the IRS issued the applicable federal rates for August 2015.

DEDUCTIONS

Services Performed for Corporation's Joint Ventures Were Capital Contributions: In FAA 20153101F, IRS Field Attorneys, citing Young & Rubicam, Inc. v. U.S., 410 F.2d 1233 (Ct. Cl. 1969) advised that the cost of services a corporation performed on behalf of its joint venture were not deductible business expenses under Code Sec. 162 because they did not provide a proximate and direct benefit to the taxpayer. Instead, the payments were capital contributions, thus increasing the corporation's basis in the joint venture's stock.

Marijuana Excise Tax Treated as Reduction in Amount Realized: In CCA 201531016, the IRS advised that a taxpayer who paid Washington state marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property pursuant to Code Sec. 164(a). Although Code Sec. 280E prohibits deductions and credits for businesses selling marijuana, the IRS determined that the excise tax was not a deduction or credit for purposes of that code section.

Tax Court Holds Entire Consolidated NOL Is Reduced under Code Sec. 108: Neither the Code nor the consolidated return regulations provide authority for an affiliated group to allocate and apportion a consolidated NOL to the consolidated group members for purposes of reducing tax attributes pursuant to Code Sec. 108(b)(2)(A) and, thus, a consolidated group's entire consolidated NOL had to be treated as the NOL subject to reduction. Marvel Entertainment, LLC v. Comm'r, 145 T.C. No. 2 (2015). Read more...

Taxpayer Denied Charitable Contributions for Amounts Paid By His Company: In Zavadil v. Comm'r, 2015 PTC 242 (8th Cir. 2015), a taxpayer claimed charitable contribution deductions for amounts he directed his S corporation to donate, arguing he was required to reimburse the company for the contributions. The court noted that while a taxpayer may make a deductible contribution with borrowed money under Rev. Rul. 78-38, there was no written agreement requiring repayment and the S corporation's contributions did not create bona fide indebtedness.

ESTATES, GIFTS AND TRUSTS

Final Regs Address Basis Determination for CRTs: In T.D. 7929, the IRS issued final regulations that provide rules for determining a taxable beneficiary's basis in a term interest in a charitable remainder trust (CRT) upon a sale or other disposition of all interests in the trust to the extent basis consists of a share of adjusted uniform basis. The regulations apply to sales and other dispositions of interests in CRTs occurring on or after January 16, 2014, except for sales or dispositions occurring pursuant to a binding commitment entered into before January 16, 2014.

Tax Court Determines Applicable Calculation to Value NIMCRUT Remainder Interest: In Est. of Schaefer v. Comm'r, 145 T.C. No. 4 (2015), the Tax Court held that where the payout of a net income with makeup charitable remainder unitrust (NIMCRUT) is the lesser of the trust income or a fixed percentage, the value of the remainder interest must be calculated using the greater of 5 percent or the fixed percentage stated in the trust instrument to determine whether the estate is eligible for a charitable contribution deduction under Code Sec. 664.

EXEMPTIONS

Unsigned Divorce Agreement Prevents Taxpayer from Claiming Dependency Exemption: In Porter v. Comm'r, T.C. Memo. 2015-141, the Tax Court denied a noncustodial parent's claim for a dependency exemption under Code Sec. 152(e)(2). An unsigned divorce agreement entitled taxpayer to claim one child as a dependent, but his ex-wife claimed that child for the year at issue. The court denied the exemption because the taxpayer did not obtain a signed Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

GROSS INCOME AND EXCLUSIONS

Value of Identity Protection Services Excludable from Gross Income: In Announcement 2015-22, the IRS states 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 (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals.

German Citizen Working for the U.S. in Germany Subject to U.S. Taxation: In Dinger v. Comm'r, T.C. Memo. 2015-145, a German citizen, working as a receptionist at a U.S. Army dental clinic in Germany, was married to a U.S. citizen. On their joint return she elected to be treated as a U.S. resident, but sought to exclude her income under Code Sec. 911(a) foreign earned income exclusion. The Tax Court determined that because she was paid by an agency of the U.S., her income could not be excluded from U.S. taxation and upheld a notice of deficiency.

Advances to Distressed Medical Practice Were Unreported Income, Not Loans: In Holden v. Comm'r, T.C. Memo. 2015-131, a taxpayer did not report funds received by his medical practice from a medical software company during a period of financial distress, arguing the amounts were non-taxable loans. After applying a seven-factor test from Welch v. Comm'r, 204 F.3d 1228 (9th Cir. 2000), the tax court determined the amounts were not loans, noting the lack of a written agreement, collateral, or any attempt to repay the amounts, and found taxpayer had underreported his income.

HEALTHCARE TAXES

IRS Addresses Additional Issues Regarding Excise Tax on "Cadillac" Health Plans: In Notice 2015-52, the IRS has supplemented guidance issued in Notice 2015-16 by addressing additional issues regarding the excise tax on high cost employer-sponsored health coverage under Code Sec. 4980I, including the identification of the taxpayers who may be liable for the tax, employer aggregation, the allocation of the tax among the applicable taxpayers, and the payment of the tax. The notice also addresses issues regarding the cost of applicable coverage.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-55, 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 Ends Automatic Extension of W-2 Information Returns to Combat Identity Theft: Effective July 1, 2016, the IRS will end the automatic extension of time to file information returns on forms in the W-2 series (except Form W-2G). The IRS will also plans to end automatic filing extensions for all other information returns included under Reg. Sec. 1.6081-8T at an undetermined date that will be no earlier than January 1, 2018. T.D. 9730, REG-132075-14. Read more...

IRS Announces Changes to Employee Plans Determination Letter Program: Effective January 1, 2017, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans and will limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination. Announcement 2015-19. Read more...

Final Section 482 Reg Invalid; Fails to Satisfy "Reasoned Decision Making" Standard: In issuing Reg. Sec. 1.482-7(d)(2), which requires controlled parties entering into qualified cost-sharing agreements to share stock-based compensation (SBC) costs, the IRS failed to support its belief that unrelated parties would share SBC costs, failed to satisfy the reasoned decision making standard in Motor Vehicle Mfrs. Ass'n of the U.S. v. State Farm Mutual Auto Ins. Co., 463 U.S. 29 (1983), and had no reasonable explanation for adopting the regulation; thus the regulation is invalid. Altera Corporation and Subs v. Comm'r, 145 T.C. No. 3 (2015). Read more...

Prop Regs on Disguised Payments for Partnership Services Focus on Importance of Entrepreneurial Risk: On July 23, the IRS issued proposed regulations (REG-115452-14) under Code Sec. 707 which provide guidance to partnerships and their partners on when an arrangement will be treated as a disguised payment for services. The proposed regulations stress that entrepreneurial risk is the most important factor to consider and an arrangement that lacks significant entrepreneurial risk will be considered a disguised payment for services. Read more...

IRS Issues Final Regs for Filing a Claim for Credit or Refund: In T.D. 9727, the IRS issued final regulations clarifying that, unless otherwise directed, the proper place to file a claim for credit or refund is with the service center at which the taxpayer currently would be required to file a tax return for the type of tax to which the claim relates, irrespective of where the tax was paid or was required to have been paid.

IRS Extends Time to Make Disclosures for Basket Contracts and Basket Option Contracts: The IRS has amended Notice 2015-47 and Notice 2015-48 to provide taxpayers with more time to disclose participation in Basket Contracts or Basket Option Contracts. If, under Reg. Sec. 1.6011-4(e), a taxpayer is required to file a disclosure statement with respect to either of the two reportable transactions after July 8, 2015, and prior to November 5, 2015, that disclosure statement will be considered to be timely filed if the taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by November 5, 2015.

LEGISLATION

Senate Finance Committee Approves Tax Extenders Bill: On July 21st, the Senate Finance Committee voted 23 to 3 to approve a package of tax extenders. The bill would extend for two years 52 tax provisions that expired at the end of 2014, including the increased small business expensing limitation and phase-out amounts ($500,000 and $2 million respectively), the 50 percent bonus depreciation, the deduction for state and local sales taxes, and the Code Sec. 41 research credit.

NONTAXABLE EXCHANGES

Manufacturing Rights Allowed Like-Kind Exchange Treatment: In PLR 201532021 the IRS ruled that rights to manufacture and distribute certain products were of the same nature and character and could be exchanged between a taxpayer and its subsidiary tax-free as a like-kind exchange under Code Sec. 1031. The IRS noted each agreement related to a single business activity (integrated manufacturing and distribution of the products) and differences such as territories covered were insubstantial and did not relate to the nature or character of the rights.

PARTNERSHIPS

IRS Issues Final Regs on Determining Distributive Share When a Partner's Interest Changes: The IRS has issued final regulations regarding the determination of a partner's distributive share of partnership items of income, gain, loss, deduction, and credit when a partner's interest changes during a partnership tax year. T.D. 9728. Read more...

IRS to Issue Regulations on Transfers of Property to Partnerships with Related Foreign Partners: In Notice 2015-54, the IRS announced its intention to issue regulations under Code Sec. 721(c) to ensure that when a U.S. person transfers certain property to a partnership that has foreign partners related to the transferor, the associated income or gain will be taken into account by the transferor either immediately or periodically. The prospective regulations, which are discussed in detail in the notice, aim to prevent partnerships from transferring highly appreciated intangible assets to a foreign partnership and shifting the gain to the foreign partner, and will apply to transfers occurring on or after Aug. 6, 2015.

Former TMP Had Apparent Authority to Extend Assessment Period: In Summit Vineyard Holdings, LLC v. Comm'r, T.C. Memo. 2015-140, the Tax Court held that a Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, signed by a partnership's former tax matters partner (TMP), was valid to extend the period of limitations even though the current TMP had not signed the consent form. The court found the former TMP had apparent authority to sign the form, and the IRS reasonably believed he had such authority.

Bankruptcy of Agent Doesn't Convert Partnership Items for TEFRA Purposes: In CCA 201530021, the IRS advised that the bankruptcy of a tier partnership does not convert the partnership items for the indirect partners to non-partnership items or make TEFRA inapplicable because the partnership is merely an agent for its partners. In other words, the IRS stated, the bankruptcy of an agent does not serve to convert the partnership item of partners holding an interest through an agent.

TEFRA Small Partnership Exception Applies to Non-S Corporation Partners: In CCA 201530019, the IRS advised that under Reg. Sec. 301.6231(a)(1)-1 any corporation, including those created under state law, that is not an S corporation is deemed to be a C corporation solely for the purpose of applying the small partnership exception to TEFRA. That exception applies to a partnership with 10 or fewer partners, all of whom are individuals or C corporations, absent an affirmative election to be governed by the TEFRA provisions.

IRS Consent Required for Foreign Tax Matters Partners: In CCA 201530018, the IRS advised that while a partnership can select a foreign tax matters partner, it can only do so with IRS permission. If the TMP is overseas and has no U.S. presence through which the IRS can secure partnership books and records, the IRS probably will not consent.

PENALTIES

Only One Penalty Imposed for False Documents Resulting in Multiple Understatements: In CCA 201531015, an employee plan professional submitted false documents in support of an application for qualified plan status. The IRS advised that under Code Sec. 6701(b)(3), it could assess only one penalty for all false documents that relate to a single plan's application for qualified status, even though the falsified application caused multiple taxpayers to understate their tax liability.

PROCEDURE

Taxpayers' Foreign Bank Records Subject to IRS Summons: In U.S. v. Chabot, 2015 PTC 245 (3rd Cir. 2015), the 3rd Circuit joined the Second, Fourth, Fifth, Seventh, Ninth, and Eleventh Circuits in a precedent-setting decision, holding that production of the foreign bank account records 31 C.F.R. Sec. 1010.420 requires taxpayers to keep falls within the required records exception to the Fifth Amendment privilege against self-incrimination. The court thus affirmed an IRS petition to enforce summonses for taxpayers' foreign bank account records.

PROPERTY TRANSACTIONS

Ninth Circuit Reverses Tax Court: Unmarried Co-owners Apply Mortgage Interest Limitation on Per-Taxpayer Basis: Earlier this month, in an issue of first impression, the Ninth Circuit reversed the Tax Court and held that, when unmarried taxpayers co-own a qualifying residence, the limitation on the qualified residence interest deduction applies on a per-taxpayer rather than on a per-residence basis. Voss v. Comm'r, 2015 PTC 275 (9th Cir. 2015). Read more...

Land Parcels' Modifiable Boundaries Defeats Deduction for Conservation Easement: Because modifications were permitted to the boundaries between land parcels distributed to two partnerships' limited partners and property subject to easements, no charitable deductions for the easements was allowed and the Tax Court upheld a 40-percent gross valuation misstatement penalty. The court also found that the sale of the partnerships' interests in conjunction with the distribution Read more...

IRS Removes Requirement to File Copy of Code Sec. 83(b) Election with Returns: With regard to property transferred in connection with the performance of services, the IRS has issued proposed regulations eliminating the requirement to file a copy of a Code Sec. 83(b) election with returns, noting that taxpayers may find it difficult to comply with the requirement when e-filing. Taxpayers may rely on the proposed rules for property transferred on or after January 1, 2015. REG-135524-14. Read more...

Income from Stock Equivalent Plan Was Ordinary, Not Capital: In Stout v. Comm'r, T.C. Memo. 2015-133, the Tax Court determined that because the stock equivalent plan a taxpayer participated in only provided him with a right to a cash payment, rather than granting him the option to purchase stock in the company, the plan was not a Code Sec. 422 incentive stock option plan, and income from the plan was taxable at ordinary, not capital gains, rates.

RETIREMENT PLANS

Distribution Delay Causes Accelerated Annuity Payments: In PLR 201532026, the IRS ruled that although a taxpayer timely elected ten-year payout options for two annuity contracts for which she was a beneficiary, because the issuing companies did not begin distributions until more than a year after the annuity owner's death, the entire proceeds were required to be paid out over five years under Code Sec. 72(s).

S CORPORATIONS

Interest on S Corp Tax Overpayments Is Calculated at Corporate Rate Rather Than Higher Individual Rate: Interest on S corporation tax overpayments is computed at the corporate tax overpayment rate and not the higher rate applicable to individuals. Eaglehawk Carbon, Inc. v. U.S., 2015 PTC 240 (Fed. Cl. 2015). Read more...

TAX PRACTICE

Draft Instructions for Form 2848 Issued for the 2015 Tax Year: On 8/10/15, the IRS released draft instructions to Form 2848, Power of Attorney and Declaration of Representative, which updates requirements for unenrolled return preparers. The instructions require unenrolled preparers to have a valid Preparer Tax Identification Number (PTIN) and an Annual Filing Season Program Record of Completion for returns prepared and signed after Dec. 31, 2015. Taxpayers may also file a Form 8821 to authorize an unenrolled preparer to inspect and request their tax information.

WITHHOLDING

Taxpayers Liable for Recklessly Disregarding Risks that Payroll Taxes Would Not be Paid: In Bryne v. U.S., 2015 PTC 272 (E.D. Mich. 2015), the district court determined taxpayers were responsible persons who willfully failed to turn over payroll taxes, and were thus liable for those taxes under Code Sec. 6672(a). The court found that although the taxpayers had no actual knowledge of the delinquency, they recklessly disregarded known risks that the payroll taxes would not be paid by relying on an individual who had previously missed multiple payments.

 

JULY 2015

ACCOUNTING

IRS Provides Economic Performance Safe Harbor for Ratable Service Contracts The IRS has provided a safe harbor for accrual method taxpayers to treat economic performance as occurring ratably on contracts that provide services on a regular basis. Under the safe harbor, which is effective for tax years ending on or after July 30, 2015, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract. The IRS also provides procedures for obtaining automatic consent to change to the safe harbor method of accounting. Rev. Proc. 2015-39. Read more...

Applicable Federal Rates: July AFRs Issued in Rev. Rul. 2015-14, the IRS issued the applicable federal rates for July 2015. See Tables...

C CORPORATIONS

Stock Sale of Broadcast Company Lacked Valid Business Purpose: In Shockley v. Comm'r, T.C. Memo. 2015-113, the Tax Court found former shareholders liable as transferees for taxes arising from the sale of their broadcasting company. The taxpayers engaged in a complex series of transactions designed as a sale of their corporation's stock, but the court determined the transactions had the economic effect of an asset sale followed by a distribution. Because the transaction had no business purpose aside from the avoidance of tax, the court found the former shareholders liable as transferees under state law.

DEDUCTIONS

"Welfare Benefit Fund" Was Really a Split-Dollar Insurance Arrangement: The Tax Court determined that because a purported welfare benefit plan was really a split-dollar insurance arrangement, corporate employers could not deduct payments made to the plan. Further, the court held that the shareholder-employees for whom the insurance was purchased were required to realize income from the policies. Our Country Home Enterprises, Inc. v. Comm'r, 145 T.C. No. 1 (2015). Read more...

Pot Dealer's Appeal Goes Up in Smoke; Expenses of Medical Marijuana Business Aren't Deductible: While a taxpayer's medical marijuana dispensary business was legal under California law, Code Sec. 280E precluded him from deducting any amount of ordinary or necessary business expenses associated with the business, other than cost of goods sold, because it was a trade or business consisting of trafficking in controlled substances prohibited by federal law. Olive v. Comm'r, 2015 PTC 229 (9th Cir. 2015). Read more...

Homeless Gambler Denied Deductions for Gambling Losses: In Boneparte v. Comm'r, T.C. Memo. 2015-128, a taxpayer who kept no permanent residence, working at the New Jersey Port Authority by day and gambling in Atlantic City by night, claimed deductions for gambling losses. The Tax Court held that the taxpayer was not a professional gambler because his gambling activity was not engaged in for profit under Reg. Sec. 1.183-2(b), and thus could only deduct losses to the extent of his gambling winnings. Because he did he not report any winnings, the court disallowed the claimed deductions.

No Compensation Deduction for Executive's Stock: In QinetiQ U.S. Holdings, Inc. v. Comm'r, T.C. Memo. 2015-123, the Tax Court denied a corporation's deductions in connection with an executive's stock because the stock was not subject to a substantial risk of forfeiture under Code Sec. 83. The court noted that although the executive would be required to sell back the stock at a below-market price if his employment ended, as an initial investor, it was unlikely the corporation would have terminated his employment.

Losses in Pump-and-Dump Stock Scheme Are Capital, Not Theft, Losses: Because there was no direct transfer of money from the taxpayers to the individuals operating a pump-and-dump stock scheme, or to such individuals' corporate alter egos, the taxpayers were limited to a capital loss, rather than theft loss, deduction. Greenberger v. U.S., 2015 PTC 205. Read more...

No Profit Motive Found for International Consultant: In Strode v. Comm'r, T.C. Memo. 2015-117, the Tax Court held a taxpayer's side business as an international consultant was not engaged in for profit, and disallowed losses claimed for that activity. The taxpayer's various business ventures ranged from establishing a beauty salon, to exploring the possibility of importing military equipment. The court found that seven of the factors under Reg. Sec. 1.183-2(b) favored the IRS, including the fact that taxpayer was not qualified to act as an international consultant, and that the reported expenses were primarily personal in nature. No factors favored the taxpayer.

Charitable Deductions Denied for Donated Fossils: In Isaacs v. Comm'r, T.C. Memo. 2015-121, the Tax Court determined a veterinarian could not take charitable contribution deductions for his donation of four fossil trilobites to the California Academy of Sciences, a 501(c)(3) organization. The taxpayer failed to obtain a qualified appraisal of the donated fossils, and failed to obtain a contemporaneous written acknowledgement of his gifts from the Academy.

Losses Denied Where Taxpayer Acted as Investor, Not as Real Estate Professional: In Padilla v. Comm'r, T.C. Summary 2015-38, the Tax Court determined taxpayers could not deduct losses from their rental real estate activities because taxpayer husband did not meet the 750 hour requirement to be a real estate professional under Code Sec. 469(c). The taxpayers hired third parties to manage the properties and find tenants, and the court determined most of the husband's activities were in the nature of work done as an investor, which did not count toward the required hours.

GROSS INCOME AND EXCLUSIONS

Income from Participation in Medical Study Not Excludable as Compensation for Injury: In O'Connor v. Comm'r, 2015 PTC 215 (9th Cir. 2015), the Ninth Circuit affirmed a Tax Court decision that amounts paid to taxpayer for his participation in a medical research study on gout were not excludable under Code Sec. 104 as compensation for injuries or sickness. The taxpayer was unable to prove a direct causal link between the payment he received and the gout that he had suffered from for years prior to the study, and thus could not show the payment was for anything other than participation in the study.

Signatures Belie Claim of Identity Theft to Avoid Deficiency: In Read v. Comm'r, T.C. Memo. 2015-115, the IRS determined a deficiency in taxpayer's income from unreported gains on stock sales. The taxpayer argued she was victim of identity theft, claiming her ex-husband had fraudulently opened a brokerage account and sold stock in her name. The Tax Court upheld the deficiency, finding that the signatures on the related documents closely matched those of the taxpayer, and found her arguments that her ex-husband forged her signature highly implausible.

Ninth Circuit Remands for Failure to Consider Portion of Settlement Attributable to Physical Injuries: In Smallwood v. U.S., 2015 PTC 209 (9th Cir. 2015), the Ninth Circuit vacated and remanded a district court's decision that a taxpayer was not entitled to a refund for taxes payed on settlement proceeds. The circuit court noted there was a genuine dispute as to what amount, if any, of the proceeds were excludible under Code Sec. 104(a)(2) as compensation for physical injuries or illness, and the district court had not attempted to compute the amount.

HEALTHCARE TAXES

Proposed Legislation Would Eliminate $100 Per Day Penalty on Small Employer HRAs: In H.R. 2911 and S. 1697, senators and congressmen from both sides of the aisle introduced the Small Business Healthcare Relief Act of 2015. The proposed legislation would roll back IRS guidance in Notice 2013-54 imposing a $100 per day per employee penalty on small businesses using Health Reimbursement Arrangements (HRAs) to reimburse employees for health insurance. The legislation would allow businesses with fewer than 50 employees to continue using stand-alone HRAs on a pre-tax basis without incurring penalties under Code. Sec. 4980D. In February, the IRS provided transitional relief from the excise tax to small employers in Notice 2015-17. The transition relief ended on June 30 for most taxpayers, but continues to apply to S corps providing health insurance reimbursements to 2-percent shareholder-employees. Penalty relief will remain in place until at least December 31 for S corps with such arrangements.

Supreme Court Upholds Premium Tax Credits to Individuals in States with Federal Exchanges: On June 25, in King v. Burwell, 2015 PTC 210 (S. Ct. 2015), the Supreme Court upheld the use of tax credits for health insurance purchased on any Exchange created under The Patient Protection and Affordable Care Act (ACA), be it federal or state. In one of the most serious challenges to the ACA to date, the Court, in a 6-3 decision, reasoned that the statute's context and structure compelled this conclusion. Read more...

INNOCENT SPOUSE RELIEF

Taxpayer Denied Innocent Spouse Relief for Taxes on his Unemployment Income: In Agudelo v. Comm'r, T.C. Memo. 2015-124, a taxpayer requested innocent spouse relief under Code Sec. 6015 for taxes on unreported unemployment income, arguing his wife had taken the money. The Tax Court found his testimony implausible and denied the requested relief because the tax deficiency was attributable to benefits he received, he had reason to know he received the compensation, and he and his wife did not report the compensation on their joint return.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-50, 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).

New Draft of Form 3115 Issued: On July 15, the IRS released a revised draft of Form 3115, Application for Change in Accounting Method, for use beginning in the 2015 tax year.

IRS Narrows Definition of Stock of a Corporate Partner: In T.D. 9722, the IRS issued corrections to the definition of "Stock of a Corporate Partner" under temporary regulations in T.D. 9722. The corrections provide that the term includes the Corporate Partner's stock, or other equity interests, in a corporation that controls the Corporate Partner within the meaning of Code Sec. 304(c), except that the constructive ownership rules in Code Secs. 318(a)(1) and (3) do not apply.

Taxpayer's Return Did Not Offer the Necessary "Clue" to Limit Statute to Three Years: The six-year statute of limitations period under Code Sec. 6501(e)(1)(A) applied to the taxpayer's 2003 tax return because he did not adequately disclose on that return a distribution from his employee stock ownership plan. Heckman v. Comm'r, 2015 PTC 191 (8th Cir. 2015). Read more...

IRS Issues Proposed Regulations for Section 529A ABLE Programs: The IRS has issued proposed regulations under Code Sec. 529A that provide guidance regarding programs under the Achieving a Better Life Experience (ABLE) Act of 2014. Code Sec. 529A provides rules under which states may establish and maintain a new type of tax-favored savings program through which contributions may be made to the account of an eligible disabled individual to meet qualified disability expenses. REG-102837-15. Read more...

Nearly 44,000 Tax Return Preparers Completed IRS Voluntary Education Program: In IR-2015-90 (6/18/15), the IRS states that nearly 44,000 tax return preparers participated in the voluntary Annual Filing Season Program in its first year. Return preparers had to meet the program's continuing education requirements by Dec. 31, 2014, to obtain a 2015 Record of Completion. For the 2016 filing season and in future years, return preparers will generally need to complete 18 hours of continuing education including a six-hour refresher course, 10 hours on federal tax law topics and two hours on ethics.

IRS Defines "Return Information" for Purposes of Confidentiality: In CCA 201526012, the IRS Office of Chief Counsel advised that, for confidentiality and disclosure purposes, the definition of "return information" is extremely broad and encompasses anything the IRS gathered, collected, or created as part of a determination of liability, or possible liability. In addition, the fact that a taxpayer cannot be identified by the information does not change its status as return information.

PARTNERSHIPS

Prop Regs on Disguised Payments for Partnership Services Focus on Importance of Entrepreneurial Risk: The IRS issued proposed regulations (REG-115452-14) under Code Sec. 707 which provide guidance to partnerships and their partners on when an arrangement will be treated as a disguised payment for services. The proposed regulations stress that entrepreneurial risk is the most important factor to consider and an arrangement that lacks significant entrepreneurial risk will be considered a disguised payment for services. Read more...

PROCEDURE

IRS Can't Avoid Paying Taxpayer's Attorneys' Fees after Allowing Qualified Offer to Expire: In Knudsen v. Comm'r, 2015 PTC 236 (9th Cir. 2015), a taxpayer made a qualified offer to settle a review of the IRS's denial of innocent spouse relief. The IRS allowed the offer to expire, but later conceded taxpayer's entitlement to such relief. The Ninth Circuit held that a unilateral concession by the IRS is not a settlement for purposes of the Qualified Offer Rule, and reversed a Tax Court decision denying taxpayer attorneys' fees and litigation costs.

Federal Courts Can't Hear Refund Claims for Virgin Islands Taxes: In Hess Oil Virgin Islands Corp. v. U.S.V.I., 2015 PTC 221 (S.D.N.Y. 2015), a district court addressed an issue of first impression: whether the Virgin Islands qualify as "the United States" for purposes of federal jurisdiction over refund claims for alleged overpayments to the Virgin Islands Bureau of Internal Revenue. The court found that, despite the Virgin Islands' mirror tax structure, it did not so qualify, and dismissed taxpayer's refund claim for lack of jurisdiction.

IRS Employee Convicted of Extortion: In U.S. v. Fountain, 2015 PTC 230 (3rd Cir. 2015), the court affirmed the Hobbs Act Extortion conviction of an IRS employee who participated in schemes to fraudulently obtain cash refunds from the IRS. The court found the conviction for extortion under color of official right was proper because taxpayers paid the IRS employee with the understanding she would use her position to obtain a cash refund, and threatened to "red flag" their returns if they did not cooperate.

Refund Claims Can be Amended Until Final Action Taken: In CCA 201526007, the IRS Office of Chief Counsel responded to an inquiry on whether a timely filed refund claim can be supplemented or amended based upon an overpayment credit remaining in a taxpayer's account. The IRS advised that the refund claim may be supplemented or amended up until the point at which final action, either an allowance or a disallowance, is taken on that claim.

D.C. Circuit Addresses Tax Court Jurisdiction over Sham Partnerships: In Tigers Eye Trading, LLC v. Comm'r, 215 PTC 213 (D.C. Cir. 2015), the D.C. Court of Appeals resolved a lengthy legal battle regarding the Tax Court's jurisdiction over penalties and outside basis relating to taxpayer partners of a partnership found to be a tax shelter. Relying on precedent from the Supreme Court in U.S. v. Woods, 134 S. Ct. 557 (2013), the court upheld the Tax Court's application of a gross-valuation misstatement penalty, but reversed its holding that the taxpayers had no outside basis in the partnership, finding the Tax Court lacked jurisdiction to determine that issue.

Taxpayer's Bank Records Not Protected by Attorney-Client Privilege: In Deng v. U.S., 2015 PTC 204 (D. Del. 2015), the IRS, investigating a criminal defense attorney's tax liabilities, issued a summons to the taxpayer's bank for the records of the taxpayer's attorney trust account because he had initially redacted his client's names and account numbers on requested documents. The taxpayer petitioned to quash the summons, asserting attorney-client privilege. The district court denied the petition, noting that because specific communications would not be revealed, attorney-client privilege did not extend to the records.

PROPERTY TRANSACTIONS

Court Rejects IRS Attempt to Put S Corporation on Cash Method; Disallows Deductions for Fossil Contributions: A taxpayer could not deduct charitable contributions of fossils because he did adequately satisfy the substantiation requirements. However, a majority of disputed expenses of the taxpayer's wholly owned S corporation were allowed because the S corporation was an accrual basis taxpayer and not a cash method taxpayer as argued by the IRS. Isaacs v. Comm'r, T.C. Memo. 2015-121. Read more...

Section 752 Regs Don't Determine If Debt Is Recourse or Nonrecourse When Characterizing Income on Foreclosure: The regulations under Code Sec. 752 do not determine if a debt is recourse or nonrecourse to a partnership for purposes of determining whether, upon foreclosure of property purchased by the partnership, the partnership has cancellation of debt income under Code Sec. 61(a)(12) or gains from dealings in property under Code Sec. 61(a)(3). CCA 201525010. Read more...

RETIREMENT PLANS

IRS to Amend Required Minimum Distribution Regulations: In Notice 2015-49, the IRS informs taxpayers that it intends to amend the required minimum distribution regulations under Code Sec. 401(a)(9) to address the use of lump sum payments to replace annuity payments paid by a qualified defined benefit pension plan. The regulations will apply as of July 9, 2015 and will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated forms of distribution.

Early Retirement Distribution to Avoid Foreclosure Subject to Penalty: In Kott v. Comm'r, T.C. Summary 2015-42, a taxpayer who had not reached the age of 59 1/2 was delinquent on his mortgage payments, and took amounts from his 401(k) to avoid foreclosure. The Tax Court noted that although Reg. Sec. 1.401(k)-1(d) allows for 401(k) plans to make distributions for payments necessary to prevent foreclosure, it does not exempt the distribution from the 10 percent early distribution penalty, and Code Sec. 72(t) does not include a general "financial hardship" exemption from the penalty.

Small Businesses Can Get IRS Penalty Relief for Unfiled Retirement Plan Returns: In IR-2015-96 (7/14/15), the IRS encouraged eligible small businesses that did not file certain retirement plan returns, such as the Form 5500-EZ, to take advantage of the penalty relief program in Rev. Proc. 2015-32. By filing late returns under this program, eligible taxpayers can avoid penalties of up to $15,000 per return by paying $500 for each return submitted, up to a maximum of $1,500 per plan. For most plans, returns for the 2014 year are due on July 31, 2015.

Tax Court Rejects Diabetic Taxpayer's Attempt to Avoid Penalty on Early Retirement Distribution: The Tax Court held that a diabetic taxpayer could not claim a disability exemption to avoid the 10 percent early distribution penalty on amounts distributed from his retirement account. Despite suffering a debilitating coma just weeks after the distribution, the court found the taxpayer could not prove he was disabled within the meaning of the exemption at the time of the distribution. Trainito v. Comm'r, T.C. Summary 2015-37. Read more...

Taxpayers Can't Use DISC to Disguise Excessive Contributions to Roth IRAs: Commissions from an operating corporation to a DISC, which was indirectly owned by Roth IRAs belonging to the sons of the operating corporation's founder, were properly characterized as contributions to the Roth IRAs which exceeded the annual contribution limits and, thus, were subject to excise tax penalties. Summa Holdings, Inc. v. Comm'r, T.C. Memo. 2015-119. Read more...

S CORPORATIONS

Trustee Signatures Invalidate S Corp Election: In PLR 201525004, the IRS ruled that an election to be taxed as an S corporation was invalid because the trustees, and not the grantors, of the shareholder trusts signed the Form 2553, Election by a Small Business Corporation, which caused the trusts to be ineligible shareholders. Since the invalid election was inadvertent, the IRS ruled the corporation could retain its S status, provided proper consents were signed by the grantors.

STOCK TRANSACTIONS

Tax Court Fails to Properly Apply "Stern Test", Must Consider Economic Substance in Analyzing Stock Sale: The Ninth Circuit held that by focusing on whether shareholders were transferees before addressing the substance of a series of transactions, the tax court applied the wrong legal standard to characterize a stock sale. The case was sent back to the tax court to consider the economic substance of the transactions in order to correctly apply the Stern Test. Slone v Comm'r, 2015 PTC 187 (9th Cir. 2015). Read more...

 

JUNE 2015

ACCOUNTING

Filing the Wrong Withholding Tax Return May Still Start Assessment Period: IRS Field Attorneys advised that where one type of return is required from an employer, but another type is filed, the document filed is still a valid return and will start the period of limitations on assessment if the document meets certain requirements. FAA 20152101F. Read more...

IRS Extends Time to File Forms 3115 for Some Fiscal Year Taxpayers and Tweaks Earlier Guidance: The IRS has granted certain fiscal year taxpayers extended time to file Forms 3115 in consideration of the timing of the release of the final tangible property regulations. In addition, the IRS has made clarifying updates to earlier guidance on procedures for obtaining automatic consent for changes in accounting methods. Rev. Proc. 2015-33. Read more...

Applicable Federal Rates: July AFRs Issued in Rev. Rul. 2015-14, the IRS issued the applicable federal rates for July 2015. See Tables...

Tax Court: Defective Change in Accounting Method Can't Be Reversed Years Later without IRS Consent: The Tax Court determined that, although the taxpayer's initial application for automatic consent to change its method of accounting was defective, its consistent use of the new method over seven years constituted a method change. Accordingly, the court rejected the taxpayer's attempt to revert back to its old method without IRS consent. Hawse v. Comm'r, T.C. Memo. 2015-99. Read more...

Applicable Federal Rates: June AFRs Issued in Rev. Rul. 2015-14, the IRS issued the applicable federal rates for June 2015.

Charitable Deduction Permitted for Bargain Sale of Property to Retirement Home Developers: The Tax Court held that a taxpayer's sale of property to a charitable organization for less than its fair market value was a bargain sale, entitling the taxpayer to a charitable contribution deduction. However, the taxpayer was required to recalculate his claimed deduction, as the property was valued incorrectly. Davis v. Comm'r, T.C. Memo. 2015-88. Read more...

C CORPORATIONS

IRS Amends Consolidated Return Regulations to Eliminate Circular Adjustments to Basis: In REG-101652-10 (6/11/15) the IRS issued proposed amendments to the consolidated return regulations that provide guidance regarding the absorption of members' losses in a consolidated return year, and to eliminate the "circular basis problem" in a broad class of transactions. The amendments would revise the rules concerning the use of a consolidated group's losses in a consolidated return year in which stock of a subsidiary is disposed of.

Transfer of Assets to Wholly Owned Corporation Not a Sale; Capital Gains Treatment Denied: The transfer of a sole proprietorship’s assets to a corporation wholly owned by the taxpayer and his wife was a capital contribution rather than a sale of property and payments subsequently received by the taxpayers were ordinary income rather than capital gains. Bell v. Comm’r, T.C. Memo. 2015-111. Read more...

Dissolution by State Did Not Affect Corporate Status for Federal Tax Purposes: In PLR 201522001, a taxpayer corporation was administratively dissolved by the state in which it incorporated for failure to file an annual report and to pay an annual franchise tax. The IRS ruled that the taxpayer's status as a corporation for federal tax purposes was not terminated by the dissolution, noting that whether an organization is to be taxed as a corporation under the IRC is determined by federal, not state, law.

Final Regs Modify Segregation Rule Effective Date: In T.D. 9721 (6/4/15), the IRS issued final regulations under Code Sec. 382 that make permanent the effective date modification provided in T.D. 9685 (7/31/14). These regulations affect corporations whose stock is or was acquired by the Department of the Treasury pursuant to certain programs under the Emergency Economic Stabilization Act of 2008 (EESA).

CREDITS

Taxpayer Can't Rely on Return Preparer's Error to Avoid Repaying Refund: In Devy v. Comm'r, T.C. Memo. 2015-110, a taxpayer argued he was not responsible for claiming the American Opportunity Credit because it was done fraudulently by his tax return preparer without his knowledge or consent. The Tax Court found the taxpayer was ineligible for the credit as he had no qualifying educational expenses, and that even if the preparer claimed the credit without his knowledge, the taxpayer was still responsible for the resulting deficiency.

Reflective Roofing is Energy Property Under Code Sec. 48: In PLR 201523014, a taxpayer, considering the purchase of a solar generation system to control its electricity costs, requested a ruling on whether reflective roofing installed in connection with the system was eligible for an energy tax credit. The IRS ruled that because the reflective roof enabled the system to generate significant amounts of electricity from reflected sunlight, it was "energy property" for purposes of Code Sec. 48.

IRS Publishes 2014 Nonconventional Fuels Credit Adjustment Factor: In Notice 2015-45, the IRS published the inflation adjustment factor, nonconventional source fuel credit, and reference price for calendar year 2014 as required by Code Sec. 45K.

Inflation Adjustment Factor for Section 45Q Credit Published: In Notice 2015-44, the IRS published the inflation adjustment factor for the credit for carbon dioxide (CO2) sequestration under Code Sec. 45Q for calendar year 2015.

Client-Funded Research Prevents Tax Credits, Claimed Refunds Denied: In Dynetics, Inc. v. U.S., 2015 PTC 175 (Fed. Cl. 2015), an engineering company filed amended tax returns seeking refunds based on research tax credits. The Federal Claims Court held that because the research the taxpayer performed was "funded" by its clients within the meaning of Code Sec. 41, the taxpayer wasn't eligible for research credits, and thus was not entitled to the claimed refunds.

DEDUCTIONS

Eighth Circuit: Return Filed with Head-of-Household Status Is Not a "Separate Return": Reversing the Tax Court, the Eighth Circuit held that references in the Code to "separate returns" exclusively refer to the "married filing separately" status. Thus, a taxpayer who had incorrectly filed using the head-of-household status was not barred under Code Sec. 6013(b) from changing his status to "married filing jointly." Ibrahim v. Comm'r, 2015 PTC 190 (8th Cir. 2015). Read more...

Expenses for Lawsuit against Condo Homeowner's Association Are Partially Deductible: A condo owner was allowed to deduct on her Schedule C a percentage of legal fees incurred to sue her homeowner's association because of unruly dogs in the building, mold in her bathroom, and noise problems; and, because the IRS failed to prove that interest expense relating to her equine activity was not an expense incurred in a trade or business, that amount was deductible as well. McMillan v. Comm'r, T.C. Memo. 2015-109. Read more...

Ongoing Litigation Precludes Deduction of Casualty Loss from House Fire: The Tax Court held that because a taxpayer was actively seeking reimbursement from his landlord for personal property damages incurred in a house fire, he could not claim casualty loss deductions under Code Sec. 165. Hyler v. Comm'r, T.C. Summary 2015-34. Read more...

EMPLOYMENT TAXES

Unclear Whether Responsible Person Willfully Failed to Pay Taxes, Summary Judgement Denied: In Gann v. U.S., 2015 PTC 173 (Fed. Cl. 2015), the IRS requested a judgment against a taxpayer, claiming he was liable for the unpaid withholding taxes of a staffing agency of which he was the sole director. The Federal Claims Court determined that, because the taxpayer could compel or prohibit the allocation of corporate funds, he was a "responsible person," but denied summary judgment because it was unclear whether he willfully chose not to pay the taxes.

ESTATES, GIFTS AND TRUSTS

Eleventh Circuit Rejects Estate's Attempt to Dodge Code Sec. 642(g)'s Bar on Double Deduction: The Eleventh Circuit reversed a district court decision that res judicata applied to prevent the IRS from collecting certain taxes but affirmed the district court's holding preventing an estate from taking an estate tax deduction and an income tax deduction for settlement payments made in various lawsuits. Batchelor-Robjohns v. United States, 2015 PTC 179 (11th Cir. 2015). Read more...

IRS Finalizes Estate and Gift Tax Exclusion Portability Regulations: The IRS has issued final regulations that provide guidance under Code Secs. 2010 and 2505 on the estate and gift tax applicable exclusion amount, in general, as well as on the applicable requirements for electing portability of a deceased spousal unused exclusion (DSUE) amount. T.D. 9726. Read more...

EXEMPT ORGANIZATIONS

Organization Focused on Legal Ethics has Exempt Status Revoked: In PLR 201524026, the IRS revoked the exempt status of a Code Sec. 501(c)(3) organization whose purposes included gaining respect for the legal profession and increasing public awareness of unethical practices of attorneys. The organization had substantial unrelated income, lacked exempt activities, and its earnings inured to the benefit of private shareholders and individuals.

Exempt Status Revoked after Organization Reincorporated: In PLR 201521017, the IRS ruled a business league's exempt status under Code Sec. 502(c)(6) was revoked because it reincorporated in a different state and did not file a new exemption application. Under Rev. Rul. 67-390, an exempt organization incorporated under the laws of one state, then reincorporated under the laws of another state, with no change in its purposes, is considered a new entity that may not be recognized as exempt unless it files a new application for exemption.

Flower Retailer's Plan to Donate Profits Failed "Operational Test" for 501(c)(3) Status: Affirming a Tax Court decision denying a request for declaratory judgment granting tax-exempt status to a nonprofit corporation, the Ninth Circuit Court found the company's plan to donate profits from online sales of flowers to charitable organizations did not meet the "operated exclusively for a charitable purpose" test under Code Sec. 501(c)(3). Zagfly, Inc. v. Comm'r, 2015 PTC 159 (9th Cir. 2015). Read more...

FOREIGN

Final Regs. Address Foreign Substantial Business Activities: In T.D. 9720 (6/4/15), the IRS issued final regulations regarding when an expanded affiliated group will be considered to have substantial business activities in a foreign country. The regulations affect certain domestic corporations and partnerships (and certain parties related to them), and foreign corporations that acquire substantially all of the properties of such domestic corporations or partnerships, and are effective when published.

HEALTHCARE TAXES

Section 4980D Healthcare Penalty Relief for Small Employers Set to End on June 30: In Notice 2015-17, the IRS provided transition relief, set to expire on June 30, from the assessment of $100 per day, per employee penalties under Code Sec. 4980D for small employers who reimburse or pay a premium for individual health insurance for an employee. Transition relief will remain in place until at least December 31, however, for S corps that have similar arrangements with 2-percent shareholder-employees. For a discussion of the expiring relief, see the June 5, 2015, issue of Parker's Federal Tax Bulletin (PFTB 2015-06-05).

Final Regs Address Summary of Benefits and Coverage Under Obamacare: In T.D. 9724, the IRS issued final regulations regarding the summary of benefits and coverage (SBC) and the uniform glossary for group health plans and health insurance coverage in the group and individual markets under the ACA. T.D. 9724 finalizes changes to the regulations that implement the disclosure requirements under section 2715 of the Public Health Service Act to help plans and individuals better understand their health coverage and other coverage options for comparison.

Section 4980D Healthcare Penalty Relief for Small Employers Set to End on June 30: In Notice 2015-17, published February 18, 2015, the IRS provided transition relief, set to expire on June 30, from the assessment of $100 per day, per employee penalties under Code Sec. 4980D for small employers who reimburse or pay a premium for individual health insurance for an employee. Transition relief will remain in place until at least December 31, however, for S corps that have similar arrangements with 2-percent shareholder-employees. The IRS is expected to provide future guidance on whether the penalty applies in those situations. Read more...

IRS

Temp Regs Block Corporations from Using Partnerships to Avoid Recognizing Gains: The IRS has issued temporary regulations intended to prevent corporate taxpayers from using a partnership to avoid gain required to be recognized under Code Sec. 311(b) or Code Sec 336(a). The regulations are intended to prevent circumvention of the General Utilities doctrine repeal. The text of the temporary regulations serves as the text of the proposed regulations. T.D. 9722. Read more...

IRS Will Not Issue Letter Rulings on Grantor Trust Basis Adjustments: In Rev. Proc. 2015-37, the IRS informs taxpayers that it will not issue letter rulings or determination letters regarding whether the assets in a grantor trust receive a Code Sec. 1014 basis adjustment at the death of the deemed owner of the trust for income tax purposes when those assets are not includible in the gross estate of that owner under chapter 11 of subtitle B of the IRC.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-42, 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). In addition, the notice provides guidance as to the interest rates on certain 30-year Treasury securities.

Penalties Paid to Employee by Employer for Delayed Final Paycheck Are Not FICA Wages: The IRS Office of Chief Counsel advised that penalty amounts paid to an employee by an employer under the California State Labor Code for the employer's failure to timely pay the employee's final wages were not themselves wages for federal employment tax purposes. CCA 201522004. Read more...

IRS Extends Time to File Forms 3115 for Some Fiscal Year Taxpayers and Tweaks Earlier Guidance: The IRS has granted certain fiscal year taxpayers extended time to file Forms 3115 in consideration of the timing of the release of the final tangible property regulations. In addition, the IRS has made clarifying updates to earlier guidance on procedures for obtaining automatic consent for changes in accounting methods. Rev. Proc. 2015-33. Read more...

IRS to Refund Registered Tax Return Preparer Test Fees: The IRS has announced that, due to the invalidation of the Registered Tax Return Preparer program, it will be refunding fees incurred by preparers who took the competency test. The IRS has also released a FAQ addressing the refund. IRS RTRP Test Fee Refund FAQ. Read more...

IRS: Registered Tax Return Preparer (RTRP) Test Fee Refunds – Frequently Asked Questions: The IRS offers guidance for Registered Tax Return Preparer (RTRP) Test Fee Refunds with a Frequently Asked Questions guide. Read more...

IRS Announces Interest Rates for Third 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 July 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.

PARTNERSHIPS

Proposed Regulations Address Aggregation of Basis in Corporate Stock Distributions: The IRS has issued proposed regulations requiring certain partners to aggregate their bases in stock distributed by the partnership for purposes of applying Code Sec. 732(f), in order to limit instances of basis reduction or gain recognition. The regulations are intended to prevent circumvention of the General Utilities doctrine repeal. REG-138759-14. Read more...

Temp Regs Block Corporations from Using Partnerships to Avoid Recognizing Gains: The IRS has issued temporary regulations intended to prevent corporate taxpayers from using a partnership to avoid gain required to be recognized under Code Sec. 311(b) or Code Sec 336(a). The regulations are intended to prevent circumvention of the General Utilities doctrine repeal. The text of the temporary regulations serves as the text of the proposed regulations. T.D. 9722. Read more...

Adjustment Was Accounting Method Change despite Effects on Partnership Income: In CCA 201521012, a partnership argued that, because it had made an election under Code Sec. 754, an adjustment proposed by the IRS to its accounting methods under Code Sec. 446(b) would create a permanent difference in its lifetime income, and therefore was not an accounting method change. The IRS advised that whether a partnership made an election under Code Sec. 754 would not affect whether a partnership has a change in accounting method because the election's only purpose is to eliminate distortions caused by distributions and sales of partnership interests.

PENALTIES

Taxpayer Hit with Taxes and Penalties for Collecting a Salary from a Business Started with a Self-Directed IRA: A taxpayer engaged in a prohibited transaction when he used a self-directed IRA to invest in a used car business and then collected a salary from the business. Ellis v. Comm'r, 2015 PTC 180 (8th Cir. 2015). Read more...

S Corp Incurs Hefty Penalties for Failure to Report Welfare Benefit Fund on Form 8886: A federal district court determined that because taxpayer had enrolled his S corporation in a welfare benefit fund that was a tax avoidance transaction, penalties imposed for failure to file forms reporting his participation in a listed transaction were appropriate. Vee's Marketing Inc. v. U.S., 2015 PTC 166 (W.D. Wis. 2015). Read more...

Taxpayer Improperly Applied Overpayments of Tax, Late Penalties Imposed: In Bell v. Comm'r, T.C. Memo. 2015-101, instead of timely filing her tax returns, a taxpayer sent a $10,000 check to the IRS to be applied to her liabilities for 2005 to 2007. On her 2005 return, she requested that $4,000 be applied to her 2006 return, but on that return she made no mention of the 2005 overpayment, and the IRS issued her a refund. The Tax Court found that because the taxpayer received a refund of the overpayment, it was not available to pay her liabilities for 2007, and upheld penalties for her failure to timely file and pay those liabilities.

KPMG Partner Incorrectly Claimed Basis Step-Up for Shares Transferred to Nonresident Alien Wife: The Tax Court held that because a taxpayer had incorrectly claimed a basis step-up for shares with zero basis he had gifted to his nonresident alien wife and was subject to a gross valuation misstatement penalty. The court found he could not avoid the penalty by claiming he relied on professional advice, because given his extensive experience as a CPA, the reliance was not reasonable. Hughes v. Comm'r, T.C. Memo. 2015-89. Read more...

PROCEDURE

Failure to Obtain Physician's Statement Prevents Taxpayer from Claiming Refunds: In Pull v. IRS, 2015 PTC 185 (E.D.C.A. 2015), a district court denied a taxpayer's refund claim, finding the limitations period had expired. The taxpayer argued the limitations period had been tolled because she was financially disabled during the normal three-year window for requesting refunds. The court found that the taxpayer's claim of financial disability was not supported by a physician's statement as required by Rev. Proc. 99-21, and denied the refund.

Filing the Wrong Return May Start Assessment Period: In FAA 20152101F, IRS Field Attorneys advised that where one type of return is required from an employer, but another type is filed, the document filed is still a valid return and will start the running of the period of limitations on assessment if: (1) the document contains sufficient data to calculate the tax liability, (2) purports to be a return, (3) is an honest and reasonable attempt to satisfy the requirements of the tax law, and (4) is executed under the penalties of perjury.

IRS Whistleblower Office Doesn't Have First Claim to Information: In Whistleblower 21276-13W v. Comm'r, 144 T.C. No. 15 (6/2/15), the IRS wrongly claimed whistleblower taxpayers were not entitled to awards under Code Sec. 7623(b) because they provided information to other agencies before submitting it to the Whistleblower Office. The Tax Court found that the Whistleblower Office did not have exclusive authority to investigate the individual subject to an award, and held the fact that taxpayers first supplied their information to other federal agencies, including an IRS operating division, did not render them ineligible for an award.

Taxpayers' Offer to Pay a Small Fraction of Liability Rejected: In Kakeh v. Comm'r, T.C. Memo. 2015-103, an IRS settlement officer rejected taxpayers' offer to discharge their $131,919 tax liability for $3000. The Tax Court found the taxpayers' had at least $337,000 of equity in their assets which they could have borrowed against to discharge their liability. Thus, because the taxpayer's offer was substantially less than their reasonable collection potential, the court held the settlement officer's rejection was not an abuse of discretion.

PROPERTY TRANSACTIONS

Land Held for Development Not a Capital Asset, Gain from Sale was Ordinary Income: The Tax Court determined that taxpayers' extensive and ongoing efforts to develop a parcel of property demonstrated that their primary purpose was to sell the property in the ordinary course of business, and held that they were required to report their gain as ordinary income. Fargo v. Comm'r, T.C. Memo. 2015-96. Read more...

Lackluster Attempts to Rent Vacation Condo Precludes Deductions: The Tax Court held that because taxpayers made minimal efforts to rent out their former vacation home, the condo had not been converted for an income-producing purpose and thus taxpayers could not take deductions for rental expenses or a loss on the property's sale. Redisch v. Comm'r, T.C. Memo. 2015-95. Read more...

Lump Sum Payment toward Lessor's Construction Costs Was Rental Income in Year Received: The Tax Court held that a lessee's lump sum payment toward lessor's construction expenses was rental income. Because the lease agreement only stated when rent was payable and did not specifically allocate rent to specific periods, the court held the entire payment was includible in the taxpayer's income in the year of receipt. Stough v. Comm'r, 144 T.C. No. 16. Read more...

REITs and RICs

IRS Issues Guidance on RIC Dividends: In Notice 2015-41, the IRS provides guidance to regulated investment companies (RICs) and their shareholders under Code Secs. 1(h) and 852(b) concerning capital gain dividends. The notice addresses how changes to Code Sec. 852 made by the Regulated Investment Company Modernization Act of 2010 ("RIC Modernization Act") affect the bifurcation adjustment described in Notice 97-64 and other aspects of the computation of RIC capital gain dividends.

RETIREMENT PLANS

Procedures for Issuing Opinion and Advisory Letters on Pre-Approved Employee Plans Updated: In Rev. Proc. 2015-36, the IRS updates the procedures for issuing opinion and advisory letters regarding the acceptability under Code Sec. 401, 403(a), and 4975(e)(7) of the form of pre-approved employee plans (that is, master and prototype (M&P) and volume submitter (VS) plans). The Rev. Proc. also extends to October 30, 2015, the deadline for submitting on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans' second six-year remedial amendment cycle.

Taxpayer Granted Extension to Rollover Funds from Canceled Retirement Plan: In PLR 201524030, the IRS granted a taxpayer's request for waiver of the 60 day rollover requirement under Code Sec. 402(c)(3). The taxpayer failed to accomplish a rollover of a distribution from her 401(a) plan because she did not receive notification that her plan was terminating, nor did she receive a distribution check from the financial institution managing the plan.

IRS Makes Program to Help Small Businesses with Retirement Plan Penalties Permanent: In Rev. Proc. 2015-32, the IRS established a permanent program providing administrative relief to plan administrators and plan sponsors of "one-participant plans" and certain foreign plans from penalties otherwise applicable under Code Sec. 6652(e) and 6692 for failing to timely comply with the ERISA annual reporting requirements imposed under Code Sec. 6047(e), 6058, and 6059. This permanent program replaces the temporary pilot program established by Rev. Proc. 2014-32

S CORPORATIONS

Providing Services with Respect to Leased Property Precludes Passive Income: In PLR 201523008, an S Corporation taxpayer requested a ruling that rental income it received from commercial real estate property it leased was not passive investment income. The IRS ruled that because the taxpayer provided substantial services with respect to the leasing of the property, such as daily janitorial services, regular maintenance and repairs, and management and control of common areas, the rental income was not passive under Code Sec. 1362(d)(3)(C)(i).

 

MAY 2015

ACCOUNTING

IRS Addresses Application of Preparer Penalties in Scenarios Involving Amended Returns: The IRS Office of Chief Counsel issued advice on assessing penalties against return preparers in four different scenarios involving the preparation of amended returns. CCA 201519029. Read more...

IRS Releases Regulations Addressing Notional Principal Contracts: In T.D. 9719 and REG-102656-15, the IRS issued final, temporary, and proposed regulations amending the treatment of non-periodic payments made or received pursuant to certain notional principal contracts. The regulations provide that, subject to certain exceptions, a notional principal contract with a non-periodic payment, regardless of whether it is significant, must be treated as two separate transactions consisting of one or more loans and an on-market, level payment swap.

IRS Updates Designated Private Delivery Services for Timely Filing Rule: The IRS has updated the list of designated private delivery services for purposes of the timely mailing treated as timely filing/paying rule. Notice 2015-38. Read more...

IRS Clarifies Timing of Refund Claims for Foreign Tax Deductions and Credits: The IRS Office of Chief Counsel advised that a taxpayer's refund claim, stemming from returns amended to deducted foreign taxes instead of taking a credit for those taxes, was outside the time limit allowed for such refunds. CCA 201517005. Read more...

IRS Rules Proposed Disclaimers of Gifts from Deceased Wife were Qualified Disclaimers: The IRS ruled that a taxpayer's proposed disclaimers of securities gifted to him by his wife before her death were qualified disclaimers, resulting in certain gifts being treated as if they had never been made. PLR 201516056. Read more...

Eleventh Circuit Upholds Convictions in Stolen Tax Refund Check Scheme: The Eleventh Circuit upheld the convictions and 133-month prison sentences of a pair of co-conspirators who, with the help of a United States Postal Service worker, stole and cashed hundreds of federal income tax refund checks. U.S. v. Jones, 2015 PTC 121 (11th Cir. 2015). Read more...

May Applicable Federal Rates Issued: In Rev. Rul. 2015-08, the IRS issued the applicable federal rates for May 2015.

BANKRUPTCY

Long Delay in Enforcement of Loan Did Not Establish Taxpayer had Cancellation of Debt Income: The Tax Court held that although the creditor waited ten years to enforce collection of an outstanding loan, the taxpayer-debtor did not receive cancellation of debt (COD) income. Additionally, cancellation of debt income from a forgiven loan was excludable under the Code Sec. 108 insolvency exception. Johnston v. Comm'r, T.C. Memo. 2015-91. Read more...

COMPENSATION AND BENEFITS

IRS Addresses Disposition of Stock Received from an Incentive Stock Option: In CCA 201519031, the IRS Office of Chief Counsel advised that, for purposes of gain recognition and holding period requirements, there is a disposition of stock acquired pursuant to an incentive stock option (ISO) under Code Sec. 422 when the stock is converted into acquirer stock and other consideration during an acquisition that does not qualify as a reorganization. However, there is no disposition of such stock if the acquisition does qualify as a reorganization.

CREDITS

Tie-breaker Rule Prevents Taxpayer from Claiming Dependency Exemptions and Credits: In Rolle v. Comm'r, T.C. Memo. 2015-93, a taxpayer and his estranged wife filed separately and each claimed deductions and credits for their two children. The Tax Court applied the Code Sec. 152(c)(4) tie-breaker rule, concluding under the rule that since the children resided with the wife for a longer period of time during the year, they were her qualifying children, not his. Accordingly, the court denied his claimed dependency exemptions and child tax credits.

IRS Issues Inflation Adjustment Factors for Certain Energy-Related Credits: In Notice 2015-32, the IRS published the inflation adjustment factor and reference prices for 2015 for the renewable electricity production credit and the refined coal production credit under Code Sec. 45. The inflation adjustment factor for 2015 for qualified energy resources and refined coal is 1.5336. The reference price for 2015 for facilities producing electricity from wind is 4.50 cents per kilowatt hour. The reference prices for fuel used as feedstock, relating to refined coal production, are $31.90 per ton for 2002 and $57.64 per ton for 2015. The reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy have not been determined for 2015.

DEDUCTIONS

Lackluster Attempts to Rent Property Precluded Deductions: In Redisch v. Comm'r, T.C. Memo. 2015-95, taxpayers claimed they had converted their secondary residence into rental property and were entitled to deductions for expenses related to the property under Code Sec. 212. The Tax Court found the taxpayers had not made a bona fide attempt to rent the property, and therefore did not convert it to property held for the production of income. Accordingly, the court denied the claimed deductions.

No Charitable Contribution for Easement Granted in Order to Sell Development Rights: In Costello v. Comm'r, T.C. Memo. 2015-87, taxpayers granted a conservation easement to a county government, which entitled them to sell their residential development rights on the rest of their land. The taxpayers claimed a charitable contribution deduction for the easement, which the Tax Court denied. The court concluded the taxpayers lacked donative intent because the transaction was a quid pro quo exchange.

Taxpayer Can't Deduct Back-Alimony Paid Pursuant to State Court's Final Judgement: The Tax Court held that because a taxpayer's spousal support payments were made pursuant to a state court's final money judgement, his liability for the payments would persist after his death and therefore could not be considered alimony. Iglicki v. Comm'r, T.C. Memo. 2015-80. Read more...

Taxpayer Can't Claim Former Foster Son's Daughter as Qualifying Child: The Tax Court held that because taxpayer had not adopted her former foster son after he turned 18, he was no longer legally her child and, therefore, she could not claim his daughter as a qualifying child for purposes of the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and head of household filing status. Cowan v. Comm'r, T.C. Memo. 2015-85. Read more...

Travel Agent's Deductions for Cruise Boat Vacations Disallowed: In Lee v. Comm'r, T.C. Summary 2015-33, a travel agent claimed "research travel" expense deductions for cruises from New York to Los Angeles, and from India to Africa, arguing the expenses enabled her to better advise her clients. The Tax Court disallowed the deductions, finding the taxpayer's trips had no valid business purpose and failed to satisfy strict substantiation requirements under Code Sec. 274(d).

Dividends to Insurance Policyholders were Properly Deducted in Year Guaranteed: The Court of Appeals for the Federal Circuit held that an accrual basis insurance company properly deducted dividends in the year its board of directors calculated and guaranteed the amount to a class of policyholders, rather than in the year the dividends were paid. The court found the practice satisfied the "all events" test. Mass. Mutual Life Insurance Co. v. U.S., 2015 PTC 112 (Fed. Cir. 2015). Read more...

Rural Doctor Received Cancellation of Debt Income Stemming from Forgiveness of Incentive Loans: The Tax Court held that a hospital's forgiveness of loans provided as an incentive for a physician to establish a practice in rural Florida gave rise to cancellation of debt income. The court disagreed with the physician's contentions that he was not personally liable for the loan. Wyatt v. Comm'r, T.C. Summary 2015-31. Read more...

EDUCATION

Senate Finance Committee Unanimously Approves Changes to Section 529 Plans: The Senate Finance Committee unanimously approved a bill that would make three key changes to Code Sec. 529, expanding the tax benefits provided by qualified tuition programs. The bill mirrors similar legislation that passed the House with overwhelming bipartisan support in February. S. 335. Read more...

EXEMPT ORGANIZATIONS

IRS Unlawfully Disclosed Application for Exempt Status: In Citizen Awareness Project, Inc. v. IRS, 2015 PTC 147 (D. Colo. 2015), a taxpayer sued the IRS for unlawfully disclosing its application for recognition as a 501(c)(4) organization. The IRS admitted it had inadvertently sent the confidential application in response to a request by a media outlet for publicly available applications. The court concluded the taxpayer had a claim for up to $4,820 for attorney fees and time spent performing damage control with the media, leaving the exact amount to be determined at trial.

National Football League Abandons Tax Exempt Status: In a letter to the U.S. House of Representatives, NFL Commissioner Roger Goodell expressed the League's plans to file returns as a taxable entity for its 2015 fiscal year. Read more...

IRS Revokes Club's Exempt Status for Excessive Investment Income: In PLR 201517016, the IRS ruled that a social and recreation club exempt under Code Sec. 501(c)(7) had lost its exempt status because all of its income was derived from investment income, exceeding the 35 percent limitation for such organizations. The club argued it should be reclassified as an exempt social welfare organization under Code Sec. 501(c)(4) because it made substantial donations to the local community. The IRS disagreed, noting that merely making grants to other charitable organizations was not enough to qualify.

FOREIGN TAX

Dividend Payments Prevents Taxpayer from Claiming Foreign Tax Credits: In Lehman Brothers Holdings, Inc. v. U.S., 2015 PTC 151 (S.D.N.Y. 2015), the taxpayer claimed the IRS wrongfully denied it foreign tax credits for withholding taxes imposed by the U.K. on payments from a series of stock loan transactions. The District Court ruled that because the payments were dividends, foreign tax credits couldn't be claimed under the Code Sec. 901(k)(1)(A)(ii) "withholding tax" rule, and upheld the IRS's denial of over $67 million in foreign tax credits.

Taxpayer Denied $500 Million in Foreign Tax Credits from STARS Transaction: In Salem Financial, Inc. v. U.S., 2015 PTC 158 (Fed. Cir. 2015), the taxpayer entered into a "structured trust advantaged repackaged securities" (STARS) transaction involving a U.K. trust and a $1.5 billion bank loan in order to generate substantial foreign tax credits. The Circuit Court held that the loan portion of the transaction had economic substance and the taxpayer could deduct interest paid on the loan, but found the trust lacked a bona fide business purpose, disregarding its tax consequences and upholding the IRS's denial of nearly $500 million in foreign tax credits.

IRS Clarifies Timing of Refund Claims for Foreign Tax Deductions and Credits: The IRS Office of Chief Counsel advised that a taxpayer's refund claim, stemming from returns amended to deducted foreign taxes instead of taking a credit for those taxes, was outside the time limit allowed for such refunds. CCA 201517005. Read more...

HEALTHCARE TAXES

Enrollment Required for Certain Buy-in CHIP Programs to be Treated as MEC: In Notice 2015-37, the IRS provides guidance on eligibility for minimum essential coverage (MEC) for purposes of the Code Sec. 36B premium tax credit for individuals who may enroll in coverage under designated Children's Health Insurance (CHIP) "buy-in" programs. Taxpayers who enroll in such programs are considered to have minimum essential coverage under the program for purposes of the premium tax credit only for the period the individual is actually enrolled.

IRS

IRS Clarifies Tax Return Deadlines and Payment Dates for 2016: In Rev. Rul. 2015-13, the IRS stated that because the District of Columbia will observe Emancipation Day on Friday, April 15, 2016, the following Monday, April 18 will be the due date for tax returns that would have otherwise been due on April 15. However, because April 18 is Patriots' Day, a legal holiday in Massachusetts and Maine, taxpayers in those states have until Tuesday, April 19, 2016 to file their 2015 income tax returns. The same dates will also be the due dates for first quarter estimated tax payments and for other tax obligations that otherwise would have fallen on April 15.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-39, 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). In addition, the notice provides guidance as to the interest rates on certain 30-year Treasury securities.

IRS Addresses Application of Preparer Penalties in Scenarios Involving Amended Returns: The IRS Office of Chief Counsel issued advice on assessing penalties against return preparers in four different scenarios involving the preparation of amended returns. CCA 201519029. Read more...

IRS Updates Designated Private Delivery Services for Timely Filing Rule: The IRS has updated the list of designated private delivery services for purposes of the timely mailing treated as timely filing/paying rule. Notice 2015-38. Read more...

IRS Alerts Practitioners to June Deadline for Penalty Relief for Late Filed Retirement Plans: In IR-2015-74, the IRS reminds practitioners of the June 2, 2015 deadline for special penalty relief for late filing of certain small retirement plans. The temporary pilot program introduced in Rev. Proc. 2014-32 is designed to help small businesses with retirement plans that failed to comply with reporting requirements. Plan administrators and sponsors who fail to file required annual returns (e.g. Form 5500-EZ) face penalties of up to $15,000 per return.

Tax Relief Available for Victims Impacted by Recent Storms in Kentucky: In KY-2015-08, the IRS announced that victims of severe storms, tornadoes, flooding, landslides and mudslides that took place beginning on April 2, 2015 in parts of Kentucky may qualify for tax relief. President Obama has declared Bath, Bourbon, Carter, Elliott, Franklin, Jefferson, Lawrence, Madison, Rowan, and Scott counties federal disaster area. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

IRS Announces HSA Inflation Adjustment Amounts for 2016: The IRS has provided the 2016 inflation adjusted amounts for health savings accounts. Rev. Proc. 2015-30. Read more...

LIENS AND LEVIES

Taxpayer's Inability to Maintain Standard of Living Couldn't Prevent Forced Sale of Property: In U.S. v. Davis, 2015 PTC 139 (E.D. Mich. 2015), a taxpayer requested a district court reconsider its order of a forced sale of her and her husband's home to satisfy his tax liabilities. She argued that her portion of the proceeds would not be enough to continue her standard of living and that she would be prejudiced by the "practical undercompensation" from the sale. The District Court noted that the Sixth Circuit had already rejected such arguments because a non-liable spouse's one-half share of the sale price of the couple's home would never be sufficient to purchase a new home of the same kind, and upheld the forced sale.

PARTNERSHIPS

Filing Inconsistent Return May Subject Indirect Partners to Taxation without an FPAA: In CCA 201520007, the IRS Office of Chief Counsel advised that if a taxable indirect partner filed a return not consistent with the partnership K-1, without filing a Form 8082 Notice of Inconsistent Treatment, the IRS may assess any tax that results from conforming the partner's return to the partnership return without first issuing a Final Partnership Administrative Adjustment (FPAA). The IRS noted that under Code Secs. 6222(c), 6239(a), and Reg. Sec. 301.6231(a)(6)-1, the tax may be directly assessed if no partner level determinations are required to compute the tax.

Operating Agreement for Oil and Gas Interests Created Partnership: The Tax Court held that the operating agreement under which a taxpayer received working interests in oil and gas ventures created a partnership under the broad definition found in Code Sec. 7701(a)(2) and thus the taxpayer was liable for self-employment taxes on his net income from the interests. Methvin v. Comm'r, T.C. Memo. 2015-81. Read more...

Doctor Improperly Claimed Increased Basis in LLC Interest after Assuming Lease Liability: In Coastal Heart Medical Group, Inc. v. Comm'r, T.C. Memo. 2015-84, a cardiologist argued his assumption of liability for a lease on a CT scanner increased his basis in his LLC interest. The Tax Court determined that the putative lease was actually a conditional purchase by a related corporation, not a liability of the LLC. Because there was no partnership liability for the taxpayer to assume, the court agreed with the IRS that he could not claim a basis increase under Code Sec. 752, resulting in the disallowance of the claimed losses.

Proposed Regulations on Publicly Traded Partnership Qualifying Income Released: In REG-132634-14, the IRS issued proposed regulations under Code Sec. 7704(d)(1)(E) relating to a publicly traded partnership's (PTP) qualifying income from activities relating to minerals or natural resources. The proposed regulations provide a list of activities producing qualifying income for purposes of the Code Sec. 7704(c) exception from the requirement that PTPs be taxed as corporations.

PENALTIES

IRS Addresses Failure to Update EINs, Notes Lack of Penalties: In CCA 201520011, the IRS Office of Chief Counsel responded to an inquiry over whether there were penalties for non-compliance with the requirement in Reg. Sec 301.6109-1(d)(2)(ii) that persons issued employer identification numbers (EINs) must update information as required by forms, instructions, or other guidance. The IRS advised that there are currently no directly-applicable penalties for failure to update this information.

IRS Abates Excess Penalties Paid, Treats Amended Return as Refund Claim: In CCA 201520010, the IRS Office of Chief Counsel determined that a taxpayer's amended return reflected the correct tax liability for the year, and penalties and interest that were assessed based on the original return were excessive. The IRS advised that under Code Sec. 6404(a)(1), the IRS could abate paid portions of the assessments, and taxpayer's amended return should be treated as a claim for refund for the excess penalties and interest paid.

IRS Rules on Tax Consequences of "Triple Drop and Check" Reorganizations: The IRS has addressed the tax consequences of a series of transactions where a parent corporation transferred all of its interests in a LLC through various subsidiaries, ending with the LLC electing to be treated as a disregarded entity. Rev. Rul. 2015-10. Read more...

First Circuit Upholds 40% Penalty for Grossly Overvalued Historic Preservation Easement: The First Circuit affirmed a Tax Court's ruling that taxpayers were liable for the 40 percent gross valuation misstatement penalty because they claimed a deduction for their donation of a historic preservation easement that had no value. The taxpayers were unable to avoid the penalty because, despite obtaining a qualified appraisal, they ignored signs that the valuation may have been incorrect. Kaufman v. Comm'r, 2015 PTC 132 (1st Cir. 2015). Read more...

PROCEDURE

Return Preparer Barred from Practice After Making False Claims on 96 Percent of Returns: In U.S. v. Gbotcho, 2015 PTC 134 (D. Md. 2015), a district court granted the IRS's permanent injunction preventing a tax return preparer from preparing returns or representing others before the IRS. An audit found the preparer had made false and inflated claims on 96 percent of the returns examined, frequently claiming personal property rental deductions even when clients had no rental property.

Taxpayer Lacked Standing to Challenge Obamacare's Individual and Employer Mandates: In Hotze v. Burwell, 2015 PTC 133 (5th Cir. 2015), a taxpayer challenged, on appeal, the ACA's individual mandate and employer mandate, claiming they were constitutionally invalid under the Origination Clause, which provides, in part, that "all Bills for raising Revenue shall originate in the House of Representatives." The District Court had held that the ACA did not violate the Origination Clause, but on appeal the Circuit Court ruled that because the taxpayer could not allege an injury that would allow him to challenge the ACA, the district court had no jurisdiction to hear the case, and dismissed the case.

PROPERTY TRANSACTIONS

IRS Issues Proposed Regs Clarifying Code Section 1022 Carryover Basis Rules: The IRS has issued proposed regulations that provide guidance regarding the application of the modified carryover basis rules of Code Sec. 1022 that affect property transferred from certain decedents who died in 2010. REG-107595-11. Read more...

RETIREMENT PLANS

Portion of Disability Retirement Payments Based on Years of Service were Taxable: The Ninth Circuit affirmed a Tax Court's ruling that because a portion of a taxpayer's retirement payments was based on his years of service, the amount exceeding what he would have received solely based on disability was subject to taxation. Sewards v. Comm'r, 2015 PTC 153 (9th Cir. 2015). Read more...

Splitting Inherited IRA Proceeds Did Not Excuse Taxpayer from Including Proceeds in Income: In Morris v. Comm'r, T.C. Memo. 2015-82, a taxpayer received a distribution from his father's IRA after his father's death and, pursuant to what he believed to be his father's wishes, split the proceeds with his siblings, but failed to include the distribution in his income. The taxpayer claimed he had relied on the advice of a law firm, and argued it would be inequitable to hold him solely liable because he voluntarily shared the proceeds. The Tax Court pointed out that while reliance on professional advice may have helped the taxpayer avoid an accuracy-related penalty (had one been assessed), it didn't provide grounds for excluding the IRA distribution from income.

 

APRIL 2015

IRS Clarifies Limitations Period for Assessing Preparer Penalties for Amended Returns: The IRS's Office of Chief Counsel clarified that the IRS has three years from the time a return with an understatement is filed to assess a penalty against the return preparer, and the preparer has three years from when the penalty is paid to contest that penalty. CCA 201514008. Read more...

Restauranteur Fails to Pin $1.6 Million Omission on Accountant; Slammed with Fraud Penalty: The Tax Court determined a restaurant owner had vastly underreported his businesses income for multiple years, and found the taxpayer's attempt to shift blame to his accountant unconvincing. The court determined the omission was fraudulent, noting the taxpayer met multiple "badges of fraud," and imposed a 75 percent penalty. Musa v. Comm'r, T.C. Memo. 2015-58. Read more...

Betrayal of Friend Leads to $7.8 Million Tax Bill; Misappropriated Funds Included in Gross Income: A taxpayer was required to recognize taxable income when he misappropriated funds entrusted to him for investment purposes by an overseas friend. Minchem Int'l, Inc. v. Comm'r, T.C. Memo. 2015-56. Read more...

Tax Court - Doctor's Bonus from Wholly Owned Surgical Center Not Reasonable: The Tax Court held that a $2 million bonus paid by an eye surgery center to its head surgeon and sole shareholder was not reasonable compensation. The court rejected the taxpayer's argument that the payment, which resulted in a $50,434 net operating loss, was reasonable because of an increase in the doctor's workload and responsibilities. Midwest Eye Center, S.C. v. Comm'r, T.C. Memo. 2015-53. Read more...

Formerly Passive S Corp Owner Materially Participates in Loss Year, Reaps $5.2 Million Tax Benefit: An S corporation owner who stepped in and worked 691 hours to help the company recover from the former president's malfeasance passed the material participation test, opening the door to a loss carryback and a $5.2 million tax refund. Lamas v. Comm'r, T.C. Memo. 2015-59. Read more...

April AFRs Issued: In Rev. Rul. 2015-07, the IRS issued the applicable federal rates for April 2015.

BANKRUPTCY

IRS Sustained Lien in Violation of Bankruptcy Proceedings: In Yuska v. Comm'r, T.C. Memo. 2015-77, a taxpayer filed for bankruptcy after a hearing with the IRS pursuant to a notice of federal tax lien filing. While the bankruptcy case was still open, the IRS issued a notice of determination sustaining the proposed lien, and the taxpayer petitioned the tax court to challenge the notice. The Tax Court held that the IRS issued the notice of determination in violation of the automatic stay on collection procedures during bankruptcy proceedings under 11 U.S.C. 362(a), and dismissed the notice and the taxpayer's petition.

COMPENSATION AND FRINGE BENEFITS

Recharacterization of Workers' Comp Created Tax Liabilities in Excess of Received Benefits: In Carrancho v. Comm'r, T.C. Summary 2015-29, a taxpayer was required to recharacterize excludable workers' compensation as taxable social security benefits. The taxpayer's social security benefits had been reduced by his receipt of workers' compensation, and under Code Sec. 86(d)(3), the workers' compensation offset was included in the social security benefits he received, even though the increase in his tax liability exceeded the amount of the increased benefits.

CONSOLIDATED RETURNS

Final Regs Provide Guidance on Consolidated Group Agents: In T.D. 9715, the IRS issued final regulations regarding the agent for an affiliated group of corporations that files a consolidated return. The final regulations provide guidance concerning the identity and authority of the agent for a consolidated group and affect all corporations in consolidated groups.

CORPORATE TAXATION

Minority Shareholders Liable as Transferees for Corporate Taxes: The Tax Court held that, despite the fact two minority shareholders were unaware that majority shareholders had stripped away pre-tax profits from their company, the minority shareholders were partially liable as transferees for the unpaid corporate taxes as certain transfers to them were fraudulent. Kardash v. Comm'r, T.C. Memo. 2015-51. Read more...

CREDITS

Allocation of Tax Credits to Minority Partner Deemed a Disguised Sale: The Tax Court held that a cash contribution for a minority interest in a partnership that was closely followed by an allocation of state tax credits was a disguised sale resulting in ordinary income and not a tax-free capital contribution. SWF Real Estate LLC v. Comm'r, T.C. Memo. 2015-63. Read more...

IRS Publishes 2015 Adjustment Factors for Certain Energy-Related Credits: The IRS has published in the Federal Register (80 Fed. Reg. 20,295) the inflation adjustment factors and reference prices for calendar year 2015 for the Renewable Electricity Production and Refined Coal Production credits as required by Code Sec. 45.

IRS Reminds Employers of Extension to Claim Work Opportunity Tax Credit: In IR-2015-72, the IRS issued a newly revised Form 8850 for used by employers to request certification from their state workforce agency for purposes of the work opportunity tax credit (WOTC). Pursuant to Notice 2015-13, businesses and tax-exempt organizations planning to claim the WOTC for eligible workers hired during 2014 have until April 30 to request the certification required for these workers.

Unexercised Purchase Option Prevents Taxpayer from Claiming First-time Home Buyer Credit: In Pittman v. Comm'r, T.C. Memo. 2015-44, the Tax Court determined a taxpayer was not entitled to the first-time home buyer credit under Code Sec. 36. The taxpayer had an option contract to purchase a residence she leased, but was unable to obtain adequate financing for the purchase. As she never exercised the option, the court held she was ineligible for the credit, noting that an option to purchase property did not provide any equitable interest in the property.

DEDUCTIONS

Taxpayer Can't Claim Nonresident State Taxes on Partnership Income as Above-the-Line Deductions: The Tax Court held that because the imposition of state nonresident income taxes fell upon the taxpayer partner and not the partnership, the tax payments were deductible only as itemized deductions. Cutler v. Comm'r, T.C. Memo. 2015-73. Read more...

Payment for Accrued Vacation and Sick Leave on LAPD Detective's Retirement Not Excludable as Workmen's Comp: The Tax Court held that, although a former LAPD detective had accrued sick and vacation time while on temporary disability leave, the lump sum payment of that accrued time upon his retirement was not a payment pursuant to a workmen's compensation statute and therefore could not be excluded from his income. Speer v. Comm'r, 144 T.C. No. 14. Read more...

Travel Time Puts Taxpayer Over the Top for Real Estate Professional Status: The Tax Court held that a taxpayer's revised log detailing the time she spent traveling to her rental properties could be used to prove she satisfied the 750-hour material participation requirements for real estate professionals. Leyh v. Comm'r, T.C. Summary 2015-27. Read more...

IRS Disregards Transaction with Offsetting Loan and Contractual Rights In CCA 201515020, the IRS Office of Chief Counsel advised that the taxpayers' participation in a transaction with an offsetting loan and contractual rights may be disregarded under the economic substance doctrine. Although the transaction had a remote possibility for earning a profit, that factor was outweighed by the transaction's expected tax benefits relative to that profit potential, and by the inflated cost the taxpayers paid for the transaction. The IRS found the taxpayers entered into the transaction to generate cash flow through expected tax benefits, rather than through the expectation of a profit, and could not claim deductions from the transaction.

Taxpayer Can't Deduct Startup Expenses of Engineering Business: In Tarighi v. Comm'r, T.C. Summary 2015-28, a taxpayer claimed expenses incurred while setting up his civil engineering business. The IRS disallowed the expenses, claiming that the taxpayer's business had not commenced for purposes of Code Sec. 162(a), as he did not have any income or clients and did not seek to bid on any jobs. The Tax Court determined the amounts claimed were nondeductible startup expenses, and sustained the IRS's disallowance.

Construction Superintendent Cannot Deduct Long Commutes to Jobsites as Travel Expenses: The Tax Court held that a construction superintendent who frequently commuted directly to job sites far from home could not deduct travel expenses because the sites were not temporary assignments and his tax home was within the area of his employment. Bartley v. Comm'r, T.C. Summary 2015-23. Read more...

Support Payments Contingent on Ex-Wife Homeschooling Couple's Child Treated as Alimony: The Tax Court held that a provision in a separate maintenance agreement making support payments contingent upon the taxpayer's ex-wife homeschooling the couple's child did not disqualify the payments from being treated as alimony. Wish v. Comm'r, T.C. Summary 2015-25. Read more...

Final Regs Clarify Deduction Limitation for Compensation in Excess of $1,000,000: The IRS has issued final regulations clarifying that a performance-based compensation plan will meet the requirements of Reg. Sec. 1.162-27(e) for granting option or stock appreciation rights if it specifies a maximum number of shares for which such rights may be granted to an employee within a specified period. The regulations also clarify the application of the compensation deduction limitation for corporations that become publicly held. T.D. 9716. Read more...

Taxpayer Can't Deduct Payments in Lieu of Forfeiture: In CCA 201513003, the IRS Office of Chief Counsel advised that a taxpayer who had violated several criminal statutes could not deduct a payment made in lieu of criminal or civil forfeiture. The taxpayer claimed that, as he had not pleaded guilty, the payment was not a non-deductible fine or penalty under Code Sec. 162(f). Chief Counsel's Office disagreed, noting the argument lacked merit because under Reg. Sec. 162-21(b)(1)(iii), a fine or similar penalty includes an amount paid in settlement of the taxpayer's actual or potential liability for a civil or criminal fine or penalty.

Taxpayer Unable to Deduct Expenses Incurred in Developing a Business in Libya: In Burke v. Comm'r, T.C. Summary 2015-24, a taxpayer claimed his expenses for travels to Libya were deductible because he was developing a consulting business geared toward helping Libyan students come to the United States for postgraduate education. The tax court found that he had not received any income from consulting services, nor was the activity in operation when he took the deductions. As such, the court denied his deductions and held the preoperational expenses were not "ordinary and necessary" as he was not engaged in a trade or business at that time.

Not a Hobby - Tax Court Disregards Horse Farm's Staggering History of Losses: Focusing on subjective intent, the Tax Court held that because the taxpayers were genuinely optimistic their failing horse farm would eventually be profitable, and were able to attribute poor results to weak economic conditions, millions in losses sustained over a six year period were not hobby losses. Metz v. Comm'r, T.C. Memo. 2015-54. Read more...

Tax Court - Doctor's Bonus from Wholly Owned Surgical Center Not Reasonable: The Tax Court held that a $2 million bonus paid by an eye surgery center to its head surgeon and sole shareholder was not reasonable compensation. The court rejected the taxpayer's argument that the payment, which resulted in a $50,434 net operating loss, was reasonable because of an increase in the doctor's workload and responsibilities. Midwest Eye Center, S.C. v. Comm'r, T.C. Memo. 2015-53. Read more...

EMPOWERMENT ZONES

Guidance on Empowerment Zones Issues: In Notice 2015-26, the IRS explains how a state or local government amends the nomination of an empowerment zone to provide for a new termination date of December 31, 2014.

ESTATES, GIFTS AND TRUSTS

Couple Entitled to $1.4 Million in Gift Tax Exclusions for Transfers to Family Trust with 'Crummey Power': The Tax Court held that a husband and wife were each eligible for an annual gift tax exclusion of $720,000 for transfers of property to an irrevocable family trust. The court found the IRS's arguments that the provisions of the trust prevented the gifts from being excludable present interests in property were based on an unrealistic hypothesis and a misinterpretation of the trust's provisions. Mikel v. Comm'r, T.C. Memo. 2015-64. Read more...

EXEMPT ORGANIZATIONS

IRS Failed to Comply with Whale Conservation Group's FOIA Request Relating to its Tax Exempt Status: In Sea Shepherd Conservation Society v. IRS, 2015 PTC 96 (D.D.C. 2015), a marine wildlife conservation group requested documents related to itself under the FOIA to investigate suspicions that the Japanese government had requested the IRS audit the group's tax exempt status. After the IRS missed two deadlines for complying with the request, the group filed suit arguing that that the IRS failed to conduct an adequate search, and that it had withheld or redacted records without justification. The circuit court determined the IRS did not adequately describe its efforts in searching for the requested records, and failed to justify its reliance on exemptions from compliance with the FOIA, and remanded the case to the agency to conduct further searches.

Transfer of Assets Won't Affect VEBA's Tax-Exempt Status: In PLR 201513004, the IRS ruled that a proposed transfer of assets from one Voluntary Employees' Beneficiary Association (VEBA) to another would not affect the associations' tax-exempt status under Code Sec. 501(c)(9), because all of the retired employees who would be eligible for medical benefits provided with the transferred assets were currently receiving basic life insurance through the transferor VEBA.

IRS Required to Produce Information on Exempt Organizations for Class Action Lawsuit: In NorCal Tea Party Patriots et al. v. IRS, 2015 PTC 105 (S.D. Ohio. 2015), a group contending the IRS improperly scrutinized their organizations' tax-exempt status moved to compel the IRS to produce tax records in order for the group to obtain information relevant to certification for a class action lawsuit. The IRS argued it could not provide discovery related to tax returns because Code Sec. 6103 protects return information from disclosure. The district court held that because the return information requested was directly related to the class certification issue, it was exempt from protection under Code Sec. 6103, and the court ordered the IRS to comply with the group's requests.

Tax-Exempt Foundation Could Exclude Large Contribution from Public Support Test: In PLR 201512004, the IRS ruled a proposed grant was an "unusual grant" for purposes of the 33 1/3 percent-of-support test under Reg. Sec. 1.170A-9(f)(6)(ii) for publicly supported organizations. The tax-exempt foundation expected a large contribution from a bank to help fund the organization's mission to develop and test technology-enabled, high-quality solutions to help underserved consumers overcome pressing challenges and ultimately improve their financial health. After considering the factors under Reg. Sec. 1.509(a)-3(c)(4), the IRS determined the contribution could be excluded so that the foundation could retain its public charity classification.

FOREIGN

IRS Provides 2015 Foreign Housing Adjustments: In Notice 2015-33, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911 for specific locations for 2015. The adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. While the notice is effective for tax years beginning on or after January 1, 2015, a taxpayer may elect to apply the 2015 adjusted housing limitations contained in the notice to his or her tax year beginning in 2014.

Advance Pricing and Mutual Agreement Report Issued: In Announcement 2015-11, the IRS issued its annual report on advanced pricing agreements (APAs) and the Advance Pricing and Mutual Agreement (APMA) Program.

HEALTHCARE

Health Insurers Can Exclude Expat Health Plans from Annual Fee: In Notice 2015-29, the IRS provides guidance on how the special rule for expatriate health plans for the 2014 and 2015 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

Final Regs Address Limitation Period for Assessments of Undisclosed Listed Transactions: In T.D. 9718, the IRS issued final regulations relating to the exception to the general three-year period of limitations on assessment under Code Sec. 6501(c)(10) for listed transactions that a taxpayer failed to disclose as required under Code Sec. 6011.

IRS Rules Clearinghouse Not Subject to Broker Reporting Requirements: In PLR 201514001, a clearinghouse providing a marketplace in which barter exchange members could purchase goods or services from members of other barter exchanges requested clarification of its reporting requirements. The IRS ruled that because the organization was not a "broker" within the meaning of Code Sec. 6045, it was not required by that section to report information about its customers and gross proceeds.

IRS

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-31, 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). In addition, the notice provides guidance as to the interest rates on certain 30-year Treasury securities.

IRS Announces Interest Rates for Second Quarter of 2015: In Rev. Rul. 2015-5, the IRS announced the interest rates on tax overpayments and underpayments for the calendar quarter beginning April 1, 2015. The 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.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2015-24, 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). In addition, the notice provides guidance as to the interest rates on certain 30-year Treasury securities.

LIENS AND LEVIES

Taxpayer's Wrongful Levy Claims Dismissed for Failure to Exhaust Remedies: In Goldsmith v. IRS, 2015 PTC 110 (D. Nev. 2015), a taxpayer claimed the IRS had violated Code Sec. 6331(k), barring tax levies while installment agreements are pending or in effect. The taxpayer was the sole owner of a C Corporation and had reached an installment agreement with the IRS to pay off taxes owed, but prior to the start date of the agreement, the taxpayer discovered he was unable to transfer funds from his corporate account to a payroll account due to an IRS levy. The taxpayer brought suit, claiming the IRS had improperly levied his accounts in violation of the agreement, alleging fraud, but because the taxpayer had not exhausted all his administrative remedies with the IRS, the district court dismissed the case.

OTHER

IRS Releases Final Regs Relating to Excepted Benefits: In T.D. 9714, the IRS issued final regulations that amend the regulations regarding excepted benefits under ERISA, the Internal Revenue Code, and the Public Health Service Act to specify requirements for limited wraparound coverage to qualify as an excepted benefit. Excepted benefits are generally exempt from the requirements that were added to those laws by HIPPA and the ACA. Effective May 18, 2015, the final rules adopt, with changes, the 2014 proposed regs issued as REG-132751-14.

PARTNERSHIPS

Limitation Period for Bad-Debt Refund Claims Unavailable for Cash Basis Taxpayer: In CCA 201515018, the IRS Office of Chief Counsel advised that that the seven-year limitations period for bad-debt refund claims under Code Sec. 6511(d)(1) did not apply to a partnership's refund claim for overstating income because it did not relate to bad-debt deductions under Code Sec. 166. The taxpayer was a majority owner of partnerships that kept internal accounting records under the accrual method, but used cash-basis reporting for tax purposes. The court determined that the taxpayer, as a cash basis taxpayer, incorrectly claimed a bad-debt deduction under Code Sec. 166, which is available to accrual-basis taxpayers. Because Code Sec. 166 was inapplicable, the seven-year limitations period did not apply, and the partnership was precluded from making the bad-debt refund claim.

Cash Investment in LLC was Disguised Sale of Tax Credits, Not a Capital Contribution: In SWF Real Estate LLC v. Comm'r, T.C. Memo. 2015-63, a taxpayer entered into a transaction with a third party who acquired a 1 percent interest in taxpayer's partnership for approximately $2 million, with the understanding it would be allocated over $3 million in state tax credits taxpayer received from a donation of a conservation easement. Relying on a previous case with nearly identical facts involving the same third party, the tax court determined the taxpayer had engaged in a disguised sale of the credits under Code Sec. 707. Thus, the court found taxpayer had improperly characterized the transaction as a non-taxable contribution of capital, and held the proceeds from the transfer should be treated as ordinary income.

Passthrough Entity's Negligible Interest in Partnership Precludes Adjustments: In Brumbaugh v. Comm'r, T.C. Memo. 2015-65, taxpayers argued that their partnership was not bound by the IRS's TEFRA proceedings and could adjust claimed deductions, as it was eligible for the small partnership exemption under Code Sec. 6231(a)(1)(B)(i). The tax court disagreed, noting that because the partnership had a passthrough entity as an owner, even though the entity only had a 0.02 percent interest in the partnership, it was ineligible for the exemption. The court stated it was not willing to create a de minimis exception for passthrough partners, holding that the partnership was bound by the TEFRA proceedings and could not claim entitlement to additional losses.

PENALTIES

IRS Provides Penalty Relief to Taxpayers Affected by Erroneous Forms 1095-A: The IRS has provided penalty relief for the 2014 tax year for taxpayers who received a delayed or incorrect Form 1095-A, Health Insurance Marketplace Statement. Notice 2015-30. Read more...

Shareholders Benefitting from Asset Transfer Only Partially Liable for Unpaid Taxes The Tax Court held that shareholders who transferred all of their corporation's cash to a third party, without first paying corporate taxes, were liable as transferees for the unpaid taxes. However, the court found that under state law the shareholders were only liable for the amount of the benefit they received from the transaction. Stuart v. Comm'r, 144 T.C. No. 12. Read more...

IRS Fails to Follow 3-Step Process for Levying Retirement Account, Must Reconsider Collection Alternatives: The Tax Court determined a settlement officer did not follow IRS protocol in sustaining a proposed levy on taxpayers' retirement account, and sent the case back to the IRS Appeals Office for further review. The taxpayers were experiencing economic hardship and relying on loans from a 401(k) account, but the officer did not appear to take that in to consideration when denying collection alternatives. Gurule v. Comm'r, T.C. Memo 2015-61. Read more...

Betrayal of Friend Leads to $7.8 Million Tax Bill; Misappropriated Funds Included in Gross Income: A taxpayer was required to recognize taxable income when he misappropriated funds entrusted to him for investment purposes by an overseas friend. Minchem Int'l, Inc. v. Comm'r, T.C. Memo. 2015-56. Read more...

$2 Million Nonemployee Compensation to Accommodating Party in Tax Shelter Scheme was Not a Return of Capital: The Tax Court rejected multiple arguments presented by a Harvard educated architect dabbling in the tax shelter business attempting to explain why $2 million of nonemployee compensation reported on Form 1099-MISC should be treated as a tax free return of capital. Read more...

Good-faith Reliance on Trusted Attorney Absolves Retiree of Sham Transaction Penalties: The Tax Court held that a retired mortician had reasonably relied on the advice of his long-time attorney in participating in a Son-of-BOSS transaction to divest his funeral home business of its real property holdings. Although the court determined the transaction was a sham, it declined to impose gross valuation misstatement penalties due to the unsophisticated taxpayer's reliance on his trusted attorney's advice. CNT Investors, LLC et al. v. Comm'r, 144 T.C. No. 11. Read more...

PROCEDURE

No Fraud Found; Limitations Period Shields Taxpayer from Tax Liabilities: In Jacoby v. Comm'r, T.C. Memo. 2015-67, the IRS audited a taxpayer over a decade after his participation in a stock sale designed to convert ordinary income into capital gains. The IRS claimed the transaction was fraudulent, and that under Code Sec. 6501(c)(1), the normal three year statute of limitations for assessing deficiencies had been extended. However, the court found none of the badges of fraud were present, noting the taxpayer relied on tax specialists in constructing the deal and never intended to mislead the IRS. Absent fraud, the court ruled the periods of limitations had expired and the taxpayer was no longer liable for the unpaid taxes.

Installment Agreement Unavailable for Taxpayers Refusing to Sell Property: In Robinson v. Comm'r, T.C. Memo. 2015-57, the Tax Court determined an IRS officer did not abuse his discretion in sustaining a levy and rejecting an installment agreement. Taxpayers had real estate with a combined equity of over $70,000, but refused to use the properties as security for a loan, and had not made a good-faith effort to sell the property. Because the Internal Revenue Manual states taxpayers do not qualify for installment agreements if they can fully or partially satisfy their obligations by liquidating assets, the court found no abuse of discretion and sustained the proposed collection action.

PROPERTY TRANSACTIONS

IRS Relies on Self-Rental Rule to Treat S Corp's Rental Income as Nonpassive: The Tax Court held that income taxpayers received through their S corporation for property rented to their C corporation was nonpassive income, and could not be used to offset their passive losses. Williams v. Comm'r, T.C. Memo. 2015-76. Read more...

RESEARCH CREDIT

IRS Issues Temporary Regulations on Research Credit Allocation for Controlled Groups: The IRS has issued temporary and proposed regulations adopting the amendments made by the American Taxpayer Relief Act of 2012 (ATRA) to the allocation of the Code Sec. 41 research credit among controlled group members. The text of the temporary regulations also serves as the text of the proposed regulations. T.D. 9717; REG-133489-13. Read more...

RETIREMENT PLANS

Temporary Nondiscrimination Relief Extended for Certain Qualified Plans: In Notice 2015-28, the IRS extends the temporary nondiscrimination relief certain "closed" defined benefit pension plans (i.e., defined benefit plans that provide ongoing accruals but that have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date) provided in Notice 2014-5 for an additional year by applying that relief to plan years beginning before 2017 if the conditions of Notice 2014-5 are satisfied. The notice permits certain employers that sponsor a closed defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Code Sec. 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis.

Settlement from Retirement Plan Dispute Included in Income: In Marran v. Comm'r, T.C. Summary 2015-21, the Tax Court determined a taxpayer could not treat settlement proceeds as an excludable retirement plan contribution. The taxpayer's employer failed to make a contribution to her retirement plan in the year her employment ended, and after a short legal battle, she received a settlement payment which she excluded from income. The tax court noted that as the taxpayer received the settlement directly, it was taxable income.

Early Distribution Used to Pay Taxes Subject to Tax Penalty: In McKnight v. Comm'r, T.C. Memo. 2015-47, the Tax Court determined a taxpayer was subject to the 10 percent penalty under Code Sec. 72(t) for early distributions taken from his retirement plans. The taxpayer argued that, under Code Sec. 72(t)(2)(A)(vii), he wasn't subject to the penalty because the IRS had levied his retirement account to receive those funds in order to pay his tax liability. The court noted, however, that the funds had first been distributed from his retirement account to his bank account, and the IRS had received the levied funds from the bank.

S CORPORATIONS

Trust Beneficiaries Inadvertently Terminate S Corporation Status: In PLR 201516003, the IRS granted an S corporation relief for an inadvertent termination of its S corporation status. A grantor trust eligible to be a qualified subchapter S trust (QSST) became a shareholder of the corporation, but on the grantor's death the beneficiaries of the trusts failed to timely file a QSST election and trust became an ineligible shareholder, terminating the S election. The IRS ruled the termination was inadvertent, and granted relief contingent on the beneficiaries filing QSST elections within 120 days of the ruling.

TAX PRACTICE

Public Comment Invited on Recommendations for 2015-2016 Priority Guidance Plan: In Notice 2015-27, the IRS solicits recommendations from practitioners for items that should be included on the 2015-2016 IRS Priority Guidance Plan.

TAX-EXEMPT BONDS

Median Gross Income Figures for Use by Bond Issuers Released: In Rev. Proc. 2015-23, the IRS provides guidance with respect to the United States and area median gross income figures that are to be used by issuers of qualified mortgage bonds and issuers of mortgage credit certificates in computing the income requirements described in Code Sec. 143(f).

 

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