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Tax Research Briefs - Archived (July 2017 - August 2017)

August 2017


IRS Issues September 2017 AFRs: In Rev. Rul. 2017-17, the IRS issued the applicable federal rates for September 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Cash Method Landfill Business Can Currently Deduct Estimated Future Cleanup Costs: The Tax Court held that an S corporation that operated a landfill and used the cash method of accounting was permitted to elect under Code Sec. 468 to currently deduct estimated reclamation, closure and post closure costs. The court also determined that the term "taxpayer" as used in Code Sec. 468 includes cash method taxpayers and was not limited to taxpayers using the accrual method. Gregory v. Comm'r, 149 T.C. No. 2 (2017). Read More...

C Corporations

IRS Delays Application of Sec. 385 Documentation Regulations by One Year: In Notice 2017-36, the IRS announced that it intends to amend Reg. Sec. 1.385-2, which provides rules for the preparation and maintenance of the documentation and information necessary for the determination of whether certain instruments will be treated as debt for federal tax purposes (i.e., the "documentation regulations"), to apply only to interests issued or deemed issued on or after January 1, 2019. This amendment has the effect of delaying the application of the documentation regulations by 12 months and is aimed at giving taxpayers adequate time to develop any necessary systems or processes to comply with such regulations.


IRS Issues Nonacquiescence in EITC Case; Says Court Didn't Consider Sec. 32(d): In AOD 2017-05, the IRS nonacquiesced to the decision in Tsehay v. Comm'r, T.C. Memo. 2016-200, in which the Tax Court held that (1) a taxpayer's filing status was married filing separately, rather than head of household as claimed by the taxpayer, or single as determined by the IRS, and (2) the taxpayer had qualifying children and therefore was entitled to the earned income tax credit (EITC). The IRS said the reason for its nonacquiescence was that the court's opinion failed to make note of the fact that Code Sec. 32(d) provides that a married taxpayer who does not file a joint return is not entitled to the EITC.


Individual's Personal Loans to Failed Company Qualified for Bad Debt Deduction: The Tax Court held that the owner of a commercial lending business who made personal loans to a laundry business and recovered nothing on the loans was entitled to a bad debt deduction. In ruling that the individual was in the trade or business of lending, the court noted that the individual had, during a 14 year period, personally made at least 66 loans exceeding $24 million, which it found was more than sufficient when compared to the benchmark set in other cases. Owens v. Comm'r, T.C. Memo 2017-157. Read More...

Wealthy Corporate Executives Can't Deduct Billions of Losses from Sham Partnership: In BCP Trading and Investments, LLC v. Comm'r, T.C. Memo. 2017-151, the Tax Court held that a purported partnership, composed of wealthy executives, which used almost perfectly offsetting bets on foreign currency to pass more than $3.3 billion of tax losses through to its partners, who had contributed only $16.5 million to the partnership, was not a partnership for tax purposes. As a result of disregarding the partnership for tax purposes, the court held that the partners recognized gain or loss on the purchases and sales of the foreign currency themselves.

Couple Not Entitled to Child-Related Deductions and Credits, but Escape Penalties: In Woolsey v. Comm'r, T.C. Summary 2017-62, the Tax Court held that a couple's 38-year daughter was not a qualifying child and her children were not qualifying relatives for purposes of dependency exemption deductions and child tax credits and, thus, the couple was not entitled to such deductions and credits. However, because the couple was unaware that their daughter was claiming dependency deductions for her children on a joint tax return she was filing with a man whom the parents didn't know and with whom she had a common-law marriage, and because the parents had provided substantial support to the daughter and her children, the court found the couple was not liable for penalties assessed by the IRS because their tax deficiency was due to reasonable cause and good faith.

Ninth Circuit Rejects Marijuana Dispensary's Arguments for Business Expense Deductions: In Canna Care, Inc. v. Comm'r, 2017 PTC 345 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court decision denying business expense deductions to a corporation operating a marijuana dispensary in California. The court rejected the corporation's arguments that (1) Code Sec. 280E, as applied to the taxpayer, violated the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution, (2) Code Sec. 280E did not preclude state and local tax deductions, and (3) Code Sec. 280E did not preclude the corporation's net operating loss carryover deduction from 2005.

Couple Can't Deduct CARDS Losses and Fees: In Curtis Investment Company, LLC v. Comm'r, T.C. Memo. 2017-150, the Tax Court held that a couple was not entitled to deduct losses and fees associated with Custom Adjustable Rate Debt Structure (CARDS) transactions because such transactions lacked economic substance. Further, the court concluded that the couple was liable for the 40 percent accuracy-related penalty due to a gross valuation misstatement.

Court Refuses to Dismiss Indictment Alleging Law Firm President Underreported Income: In U.S. v. Gibson, 2017 PTC 354 (D. Mass. 2017), a district court denied a motion to dismiss made by the president and managing director of a law firm who was indicted on charges that he and a CPA he had hired shared a common goal to underreport the law firm president's income for financial gain for multiple years, and that he and the CPA knowingly altered financial records and underreported the law firm's and the law firm's president's income for the purpose of achieving this goal. According to the indictment, the firm's president intentionally underreported the firm's income by more than $3.7 million, enabling him to underreport his personal income by more than $2.4 million.

No Deduction Allowed for Expenses Incurred in Abandoned Business Ventures: In Carrick v. Comm'r, T.C. Summary 2017-56, the Tax Court held that a taxpayer was not entitled to deductions for expenses relating to two business ventures on which he spent time but subsequently abandoned. The court said it was clear that the taxpayer was not "carrying on" a trade or business in the years at issue because carrying on a trade or business requires more than preparatory work such as initial research or solicitation of potential customers.

Taxpayer Can't Deduct Expenses of Vehicle Owned by His Wholly Owned Corp: In Drah v. Comm'r, T.C. Memo. 2017-149, the Tax Court held that a taxpayer, who worked as an independent contractor for FedEx, could not deduct depreciation, Code Sec. 179 expenses, and repairs and maintenance expenses relating to a vehicle used for the FedEx work because the vehicle was leased by a corporation incorporated by the taxpayer. The court noted that the corporation had presumably deducted the related lease expenses.

Employment Taxes

Employer Can't Withhold on Employee's FELA Judgment: In Loos v. BNSF Railway Company, 2017 PTC 355 (8th Cir. 2017), the Eighth Circuit affirmed a district court and held that the Railroad Retirement Tax Act (RRTA) does not require an employer to withhold tax from a judgment for lost wages obtained by an employee under the Federal Employers Liability Act (FELA). According to the court, the RRTA is unambiguous and does not include damages for lost wages within the definition of "compensation" and, therefore, regulations providing to the contrary receive no deference because it is the intent of Congress that controls.

Estates, Gifts, and Trusts

IRS Liens Have Priority Over Assets of Insolvent Estate: In U.S. v. Spiekhout, 2017 PTC 352 (S.D. Ind. 2017), a district court agreed with a magistrate judge's report which concluded that an IRS federal tax lien had priority to the assets of an insolvent estate. The court rejected the personal representative's argument that the magistrate judge erred in omitting facts relating to the personal representative's efforts in preserving the main estate asset after finding that such facts were irrelevant to the issue of priority and noting that the IRS had made clear that it would allow the representatives unreimbursed expenses to be paid ahead of the federal tax liens if documentation evidencing such expenses were provided.


Senate Rejects Multiple Healthcare Bills, Pulls Away from Obamacare Repeal: After narrowly clearing procedural hurdles to move healthcare legislation to the Senate floor, debate on various alternatives culminated in the defeat of three separate Obamacare repeal bills. Former presidential candidate John McCain (R-AZ) joined Susan Collins (R-ME), Lisa Murkowski (R-AK), and 48 Democrats in voting against the final bill, likely ending Congressional Republicans' efforts to repeal the Affordable Care Act (ACA) for the year. Read More...

IRS Issues Guidance on Information Reporting on Minimum Essential Coverage: In Notice 2017-41, the IRS provides health insurance issuers may, but are not required to, report 2017 coverage under a catastrophic plan enrolled in through an Exchange. Issuers reporting coverage under a catastrophic plan are not subject to information reporting penalties under Code Sec. 6721 and Code Sec. 6722 with respect to returns and statements voluntarily filed and furnished under this notice.


Tribe's Per Capita Payments Aren't Earned Income: CCM 201729001, the Office of Chief Counsel advised that a Tribe's per capita payments of the Tribe's gaming revenues made pursuant to its revenue allocation plan paid to or on behalf of a child (as defined in Code Sec. 1(g)(2)) who is a member of the Tribe are not earned income of that child under Code Sec. 911(d)(2)(A) or (B). Consequently, these per capita payments are income that is not attributable to earned income under Code Sec. 1(g)(4)(A) and Code Sec. 1(g), Code Sec. 911, and the temporary and final regulations under those provisions do not provide any support for the position that these per capita payments to a member of Tribe who is a child are earned income for purposes of Code Sec. 1(g).


IRS Uses U.S. - Canada Treaty as Leverage to Recover FBAR Penalty: A district court held that a provision in the U.S. - -Canada tax treaty under which Canadian tax authorities can withhold Canadian tax refunds from a U.S. citizen who owes a debt to the IRS is not unconstitutional. The IRS used the treaty as leverage against a U.S. citizen living in Canada who had refused to pay a penalty he owed to the IRS in the amount of $120,000 for not filing a Report of Foreign Bank and Financial Accounts for 12 years. Dewees v. U.S., 2017 PTC 366 (D. D.C. 2017). Read More...

IRS Extends Phase-in Period for Sec. 871(m) Regulations: In Notice 2017-42, the IRS provides taxpayers with additional guidance for complying with the final and temporary regulations issued under Code Secs. 871(m), 1441, 1461, and Code Sec. 1473. Specifically, the notice (1) extends the phase-in period provided in Notice 2016-76 for certain provisions of the regulations; and (2) states that the IRS intends to amend the regulations to delay the effective/applicability date of certain rules in the final regulations.

Swiss Entity Was "Treaty Shopping" and Thus Not Entitled to Treaty Benefits: In Starr International Company, Inc. v. U.S., 2017 PTC 383 (D. D.C. 2017), a district court held that a Swiss entity was not entitled to a reduction in the tax rate on its U.S. source dividends under the U.S. - Switzerland Treaty. The court concluded that the IRS, which denied the entity's request for a reduced tax rate on the basis that the entity was an on-paper resident of a treaty country and thus was "treaty shopping," had reasonably concluded that the company had established itself in a treaty jurisdiction with a principal purpose of obtaining treaty benefits.

Like-Kind Exchanges

IRS Rejects Tax Court's Decision in Est. of Bartell, Jr. v. Comm'r: In AOD 2017-06, the IRS nonacquiesced to the decision in Est. of Bartell, Jr. v. Comm'r, 147 T.C. 140 (2016), a like-kind exchange case that had a taxpayer-favorable outcome. According to the IRS, the nonacquiescence relates to the court's holding that the taxpayer's sale and acquisition of business property qualified as a like-kind exchange under Code Sec. 1031 even though 17 months before the purported exchange, an accommodating party facilitating the transaction acquired title to the replacement property and the taxpayer acquired the benefits and burdens of ownership of the property.

Passive Activities

Rental Real Estate Losses Limited by Passive Activity Loss Rules: In Hickam v. Comm'r, T.C. Summary 2017-66, the Tax Court concluded that (1) neither the taxpayer's mortgage brokerage services nor his loan origination services were performed in a real property trade or business within the meaning of Code Sec. 469(c)(7)(C); and (2) the hours the taxpayer spent performing his mortgage brokerage services and his loan origination services could not be counted for purposes of determining if the taxpayer met the real estate professional test. Accordingly, the court held that the taxpayer did not meet the definition of a real estate professional under Code Sec. 469(c)(7)(B) for the years at issue and thus his rental real estate losses were limited by the passive activity loss rules in Code Sec. 469.


CPA Liable for Accuracy-Related Penalty for Failing to Properly Allocate Expenses: In Levine v. Comm'r, T.C. Summary 2017-60, the Tax Court held that a CPA who failed to substantiate vehicle expenses underlying disallowed Schedule C deductions for his financial services business beyond an uncorroborated statement that his computer hard drive crashed was liable for the Code Sec. 6662(a) accuracy-related penalty. The court found that the CPA, who had testified that allocating some of his expenses between personal and business activities required more time than he was willing to spend, had not met his burden of proving reasonable cause to avoid the penalty.

Tax Protester Fined $5,000 for Frivolous Appeal: In Nevius v. Comm'r, 2017 PTC 342 (8th Cir. 2017), the Eighth Circuit affirmed the Tax Court's dismissal of a taxpayer's petition, noting that the courts have repeatedly rejected the taxpayer's boilerplate tax-protester arguments. The court also granted the IRS's motion for sanctions in the amount of $5,000 as a result of the taxpayer's frivolous appeal.


Company Wins Litigation Fees but Court Finds Legal Interns Time Is Only Worth $100 an Hour: In C1 Design Group, LLC v. U.S., 2017 PTC 358 (D. Idaho 2017), a district court awarded attorney's fees of almost $34,000 to a company that won a refund claim on the basis that it had reasonable cause for the untimely payment of excise taxes because a car accident involving the company's president led to financial difficulties which in turn lead to the late payment of taxes. However, in calculating the amount of attorney's fees, the court stated that the rate of $150 for legal intern time was excessive because the interns were law students and their time was only worth $100 per hour.

IRS Misapplied Taxpayer's Tax Payment and Abused Its Discretion: In Fagan v. Comm'r, T.C. Summary 2017-61, the Tax Court held that the IRS misapplied a taxpayer's payments of $2,900, an amount which exceeded the outstanding balance of the tax liability that the IRS said was owed. The court agreed with the taxpayer that his payments covered the amount due for 2011 and that the IRS abused its discretion in pursuing collection.

Property Transactions

Fifth Circuit Vacates Tax Court Holding Against Donors of Conservation Easements: The Fifth Circuit held that a homesite adjustment provision relating to conservation easements donated by two partnerships to charity did not prevent the grants of the conservation easements from satisfying the perpetuity requirement of Code Sec. 170(h)(2)(C) and thus did not prevent the grantors of these easements from taking charitable deductions. The court also rejected the Tax Court's finding that the entirety of the limited partners' contributions were disguised sales, and remanded the case to correct the amount of any taxable income resulting from the disguised sale. Bosque Canyon Ranch, L.P. v. Comm'r, 2017 PTC 367 (5th Cir. 2017). Read More...


Royalty Payments Reclassified as Excess Roth IRA Contributions under Substance over Form Doctrine: The Tax Court recharacterized royalty payments to a partnership owned by a family's individual Roth IRAs as excess contributions to the Roth IRAs, thus finding the family members liable for the excise tax on excess contributions. The arrangement failed the substance over form test in Notice 2004-8 because the partnership was only a conduit to divert funds to the Roth IRAs. Block Developers, LLC v. Comm'r, T.C. Memo. 2017-142. Read More...


IRS Issues Guidance on Distributions by a Publicly Offered RIC or REIT: In Rev. Proc. 2017-45, the IRS issued permanent guidance regarding the application of Code Sec. 305 to a stock distribution by a publicly offered regulated investment company (RIC) or real estate investment trust (REIT). Where a publicly offered RIC or REIT permits its shareholders to elect to receive a portion of a distribution in cash or common stock, then any stock received under the election will be treated as a distribution of property to which Code Sec. 301 applies by reason of Code Sec. 305, so long as the amount of cash to be distributed in the aggregate to all shareholders under the election is not less than 20 percent of the aggregate declared distribution.

Tax-Exempt Organizations

Country Club Had UBTI and Was Liable for Negligence Penalties: In Losantiville Country Club v. Comm'r, T.C. Memo. 2017-158, the Tax Court held that a country club's nonmember sales activities were not entered into for profit, that such sales could not offset the club's investment income, and the club's investment income was unrelated business taxable income. The court also upheld the IRS's assessment of Code Sec. 6662(a) and (b)(1) accuracy-related penalties for negligence because the club failed to exercise due care in the preparation of its returns.

Tax Reform

Congress Moves Forward on Tax Reform; Border Adjustment Tax Dead: On July 27, House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX) issued a joint statement on tax reform. The statement primarily reaffirmed previously stated goals, such as providing tax relief to families and sharply lowering tax rates for businesses. The statement did, however, preclude one avenue for tax reform - indicating that a controversial border adjustment tax (BAT), previously advocated by Ryan and Brady, was off the table.

Tax Returns

Taxpayer Who Kept Spouse in the Dark Didn't File Valid Joint Return: In Edwards v. Comm'r, T.C. Summary 2017-52, the Tax Court held that a taxpayer did not file a valid joint return for himself and his then spouse for 2013. The court found that text messages and other evidence indicated that the spouse was unaware that the taxpayer had filed a joint return and had kept the refund from that return in order to compensate himself for the alleged failure of his spouse to contribute to household expenses.


July 2017


IRS Targets Eight Regulations in Attempt to Reduce Regulatory Burden: In furtherance of Executive Order 13789, the Treasury Secretary has identified eight tax-related regulations that will be evaluated for possible amendment or repeal. Included in the eight regulations are (1) the temporary partnership liability regulations under Code Sec. 752, which significantly changed the rules relating to partnership disguised sales and the allocation of partnership liabilities; (2) the proposed regulations under Code Sec. 2704, which would impose major restrictions on valuation discount planning for transfers among family members of interests in family owned businesses; and (3) the final and temporary regulations under Code Sec. 385, which were a dramatic deviation from decades of debt/equity law. Notice 2017-38. Read More...

C Corporations

Minnesota Law Doesn't Allow Tax Court to Collapse Transactions in Transferee Liability Case: In Buckrey v. Comm'r, T.C. Memo. 2017-138, the Tax Court held that the sole owners of a corporation that partially redeemed the owners' shares of stock for the corporation's liquid noncash assets and then sold all its operating assets were not liable to the IRS under the Minnesota Business Corporations Act for subsequent taxes owed but not paid to the IRS because the owners did not receive a liquidating distribution from the corporation. According to the court, under the transferee liability provisions of Code Sec. 6901, the question of whether the Tax Court can or must recast a series of transactions is a question of state fraudulent transfer law and, the court noted, Minnesota law requires a transfer-by-transfer analysis and the Tax Court can thus not collapse the transactions at issue under a substance-over-form analysis.


Court Affirms 70-Month Prison Sentence for Filing False Returns and Aggravated Identity Theft: In U.S. v. Hunter, 2017 PTC 324 (8th Cir. 2017), the Eighth Circuit affirmed the conviction of a tax return preparer on one count of conspiracy to defraud the United States by filing false income tax returns, nine counts of filing false claims for payment of tax refunds, and two counts of aggravated identity theft. In affirming the taxpayer's 70 month prison sentence, the court noted the taxpayer's involvement in the filing of 48 fraudulent income tax returns claiming $231,494 in refunds, which included the taxpayer's own return and the returns of 47 "filing coconspirators" who were relatives of the taxpayer, people who lived with the taxpayer's relatives, and people who knew the taxpayer through church.

Tax Return Preparer Must Turn Over Names of Clients for Whom Returns Were Prepared: In U.S. v. Leverett, 2017 PTC 325 (N.D. Ala. 2017), a district court entered a permanent injunction against a taxpayer under Code Sec. 7402, Code Sec. 7407, and Code Sec. 7408, and which enjoins the taxpayer from acting as a federal tax return preparer and operating or engaging in a business that prepares federal tax returns or related forms. In addition, the court ordered the taxpayer to produce within 30 days a list that identifies by name, social security number, address, e-mail address, telephone number, and tax period(s) all persons for whom she, Tax Money Now, Dynamic Tax Services, Dynamic Tax Solutions, Express Money Tax, and any other tax return preparation business in which she has a direct or indirect interest, prepared federal tax returns or claims for refund since January 1, 2014.


Court Disallows Charitable Deduction for Alleged Donation of 20,000 Items to Goodwill: In Ohde v. Comm'r, T.C. Memo. 2017-137, the Tax Court held that a couple was not entitled to a $145,000 charitable contribution deduction for the alleged donation of more than 20,000 items to Goodwill. The court found the couple's allegations that they made such contributions implausible and upheld a 20 percent accuracy-related penalty.

Taxpayer's Explanation of Divorce Decree Plausible; Court Allows $10,000 Alimony Deduction: In Mcintee v. Comm'r, T.C. Summary 2017-48, the Tax Court held that a $10,000 payment that a taxpayer made to his soon-to-be ex-wife pursuant to a court stipulation and a final divorce decree was a deductible alimony payment. The court found the taxpayer's testimony to be a plausible explanation of what was intended in the stipulation and final divorce decree and also found the taxpayer to be a credible witness whose testimony was not contradicted by any other witnesses.

Legal Fees Only Deductible as a Miscellaneous Itemized Deduction: In Dulik v. Comm'r, T.C. Summary 2017-51, the Tax Court held that a couple could not deduct legal fees as an ordinary and necessary business expense relating to the husband's activity as a sole shareholder of an S corporation. The court concluded that the fees were deductible as a miscellaneous itemized deduction, subject to applicable limitations, since the fees related to a severance agreement with respect to a company the husband worked for prior to incorporating the S corporation.

Partnership Can't Deduct Contribution of Remainder Interest in Property to University: The Tax Court held that a partnership was not entitled to a deduction for the charitable contribution of a remainder interest in real property because it failed to substantiate the value of the property on its tax return. The partnership was liable for a gross valuation misstatement penalty because its valuation of the property exceeded the correct value by more than 400 percent and the partnership did not have reasonable cause for the misstatement. RERI Holdings I, LLC v. Comm'r, 149 T.C. No. 1 (2017). Read More...

Expenses for Meals Provided to Professional Hockey Team While Away from Home Were Fully Deductible: The Tax Court held that the owners of a professional hockey team could fully deduct the cost of pregame meals provided to team players and team personnel while the team was away from home. While the deduction for meal expenses under Code Sec. 274 is generally limited to 50 percent, the team's pregame meals qualified for the exception for de minimis fringe benefits. Jacobs v. Comm'r, 148 T.C. 24 (2017). Read More...

Daily Stock Trader Can Deduct Related Expenses Except Unsubstantiated Home Office Deduction: In Crissey v. Comm'r, T.C. Summary 2017-44, the Tax Court held that a taxpayer, who had more than 500 stock trades during the year at issue and received most of his earned income from daily stock trading, had an active trade or business and any deductions from that activity could be used to determine adjusted gross income. However, because the taxpayer could not substantiate the costs of operating his home or the specific portion of his home that was exclusively dedicated to the trading activity, no home office deduction was allowed.

Employee Benefits

IRS Revises Procedures for Applying for Approval of a Suspension of Multiemployer Plan Benefits: In Rev. Proc. 2017-43, the IRS revised procedures for applying for Treasury Department approval of a suspension of benefits under a multiemployer defined benefit pension plan that is in critical and declining status under Code Sec. 432(e)(9). Effective for applications submitted on or after September 1, 2017, the revenue procedure modifies and supersedes Rev. Proc. 2016-27 and is intended to facilitate the Treasury Department's review in light of its experience in processing benefit suspension applications.

Employment Taxes

S Corporation Liable for Employment Taxes Not Paid by Professional Employer Organization: The Chief Counsel's Office advised that an S corporation that hired a professional employer organization (PEO) to fulfill the S corporation's employment tax obligations was liable for the employment taxes that the PEO failed to pay. Had the S corporation used a certified PEO instead, it would not have been liable for the unpaid taxes. CCA 201724025. Read More...

IRS Clarifies Way to Correct Administrative and Non-Administrative Withholding Tax Errors: In CCA 201727008, the Office of Chief Counsel advised that, generally, an employer may correct non-administrative errors for federal income tax withholding on an adjusted employment tax return only if the errors are discovered in the same calendar year the employer paid the wages and, for an over collection, an employer may correct federal income tax withholding only if the employer also repaid or reimbursed the employees in the same year. Further, the Chief Counsel's Office said, only transposition or basic math errors, such as addition, subtraction, and multiplication computations, in which the amount reported on Form 941, line 3 (federal income tax withheld from wages, tips, and other compensation), doesn't agree with the amount withheld from an employee's wages are considered administrative errors.

PEOs Were Statutory Employers and Have Standing to File for Employment Tax Refunds: In Paychex Business Solutions, LLC v. U.S., 2017 PTC 295 (M.D. Fla. 2017), a district court held that a group of professional employer organizations were the statutory employers of their clients' employees and thus had standing to sue the IRS for refunds of overpaid social security taxes relating to those employees. The court rejected the IRS argument that the PEOs lacked standing to sue because they did not have a financial interest in the amounts sought to be refunded due to the client companies reimbursing them for the amounts they paid in social security taxes.


Senate Begins Floor Debate on Healthcare; New "Skinny" Obamacare Repeal Plan Seen as Leading Contender for Passage: On Tuesday afternoon, the Senate approved 51 to 50 a "motion to proceed" on Obamacare repeal legislation, clearing the way for floor debate and voting on several competing healthcare bills. A few hours later the Senate rejected the Better Care Reconciliation Act (BCRA), the repeal-and-replace plan Republicans had been developing for months. The Senate is now expected to move on to voting on a range of alternatives, including a "clean" Obamacare repeal along the lines of the one it passed in 2015, and a new "skinny" repeal plan set to make its debut later this week. Read More...


Proceeds from Settlement with Home Depot Are Includible in Taxpayer's Gross Income: In Maciujec v. Comm'r, T.C. Summary 2017-49, the Tax Court held that, while a taxpayer may have suffered physically as a result of battery committed against her at her job at Home Depot, there was no indication in a settlement agreement she signed with Home Depot or in the record as a whole that she was compensated for a physical injury or physical sickness, or emotional distress attributable thereto, and thus the proceeds from the settlement with Home Depot were includible in gross income. The court noted that the complaint that the taxpayer filed against Home Depot did not allege that she suffered any physical injury or physical sickness as a result of the conduct of Home Depot or its employees, but did state that as a proximate result of the actions underlying the complaint, the taxpayer suffered "loss of income, wages and other pecuniary losses" and "mental anguish, embarrassment, humiliation, and emotional distress," and that damages received for such injuries are not excludible from income under Code Sec. 104(a).

Innocent Spouse Relief

Vacations While Taxpayer Aware of Unpaid Liabilities Preclude Innocent Spouse Relief: In Swanson v. Comm'r, T.C. Summary 2017-46, the Tax Court rejected a taxpayer's request for innocent spouse relief with respect to unpaid tax liabilities. The court noted that the taxpayer and her husband took vacations to Mexico and Florida while she was aware of their financial difficulties and said that, while it was possible that the taxpayer's income was at or below the applicable guidelines for granting innocent spouse relief, she failed to provide evidence of her share of living expenses and did not explain why she could not sell some of her assets to pay the tax liabilities due.

Second Circuit Confirms That 90-Day Period to File Innocent Spouse Petition Is Jurisdictional: In Matuszak v. Comm'r, 2017 PTC 312 (2d Cir. 2017), the Second Circuit affirmed a Tax Court decision and held that the 90-day period, specified in Code Sec. 6015(e)(1)(A), in which a taxpayer must file a petition for innocent spouse relief is jurisdictional and may not be tolled for equitable reasons. The court thus upheld the dismissal of the taxpayer's petition seeking innocent spouse relief as untimely.


IRS Launches Country-by-Country Reporting Pages on In IR-2017-116, the IRS announced the launch of Country-by-Country Reporting pages on, the content of which is intended to enhance transparency for tax administrations by providing them with information to conduct high-level transfer pricing risk assessments. The document provides background information on Country-by-Country Reporting, frequently asked questions and other helpful resources, including a list of jurisdictions that have concluded Competent Authority Arrangements with the United States.

Polish Doctor Can't Use Treaty to Avoid Taxes on Hospital Income: In Klubo-Gwiezdzinska v. Comm'r, T.C. Summary 2017-45, the Tax Court held that payments that a doctor, who is a Polish citizen, received from a hospital were not exempt from federal income tax under the tax treat with Poland. The court rejected the doctor's argument that she was the recipient of "a grant, allowance, or award" as specified under the treaty or that she was exempt because the hospital is a teaching hospital and therefore a recognized educational institution, the income from which qualified under the treaty as being exempt from U.S. income taxes.


IRS's Computation of Taxpayer's Reasonable Collection Potential Wasn't Reasonable: The Tax Court held that an IRS settlement officer's rejection of a corporation's offer in compromise solely on the basis of his calculation of reasonable collection potential that used the corporation's going-concern valuation, but disregarded completely its tax liability, was not reasonable. According to the court, the going-concern value is intended to give some indication of what a third party might pay to buy a corporation, but no third party would buy a corporation without taking into account the corporation's unpaid tax liability. W. Zintl Construction, Inc. v. Comm'r, T.C. Memo. 2017-119. Read More...

IRS Procedure

IRS Updates Guidelines and General Requirements for 2017 Substitute Tax Forms: In Rev. Proc. 2017-40, issued guidelines and general requirements for the development, printing, and approval of 2017 substitute tax forms. According to the IRS, approval of such forms will be based on these guidelines and, after review and approval, submitted forms will be accepted as substitutes for official IRS forms.

Interest-Abatement Claim Was Rightfully Excluded from CDP Hearing: In Day v. Comm'r, 2017 PTC 314 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court order sustaining a proposed levy on a couple and held that a couple's interest-abatement claim for a particular tax year was rightfully excluded from a collection due process (CDP) hearing because the couple failed to raise the claim properly during the CDP hearing and support it with evidence and because the couple signed a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, which waived their right to contest the assessment and collection of their tax year deficiency for the year at issue and any interest provided by law. The Second Circuit also held that the Tax Court properly upheld the denial of the couples' requests for a face-to-face CDP hearing because there is no right to a face-to-face CDP hearing and the couple failed to raise any relevant, non-frivolous reasons to disagree with the proposed levy.

Tax Exempt Organizations

IRS Finalizes Streamlined Process for Applying for Sec. 501(c)(3) Nonprofit Status: The IRS finalized temporary and proposed regulations that have applied since July 1, 2014, and that allow the IRS to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under Code Sec. 501(c)(3). The regulations, which were finalized without substantive changes, apply on and after July 1, 2014. T.D. 9819 (6/30/17). Read More...


Court Refuses to Entertain Couple's Additional Exceptions to 10% Early Withdrawal Penalty Tax: In Prichard v. Comm'r, T.C. Memo. 2017-136, the Tax Court held that a couple was not excepted from the 10-percent penalty tax imposed by Code Sec. 72(t)(1) where they received a distribution from their retirement plan and did not meet any of the exceptions to the tax that are enumerated in Code Sec. 72(t)(2). The court rejected the couple's argument that it should add the following two exceptions to those enumerated in Code Sec. 72(t)(2): an exception where there is reasonable cause for a taxpayer to make a withdrawal from an individual retirement plan and an exception where the taxpayer uses the retirement distribution to pay outstanding federal and/or state income tax liabilities.

Failure to Properly Supervise Unqualified Employee Precludes Abatement of Penalties: In Xibitmax, LLC v. Comm'r, T.C. Memo. 2017-133, the Tax Court held that a company that failed to timely pay its employment taxes was liable for penalties under Code Sec. 6651(a)(1), Code Sec. 6651(a)(2), and Code Sec. 6656. In affirming the penalties assessed by the IRS, the court noted that (1) the company was by no means disabled from ensuring it was meeting its statutory duties; (2) the company was not rendered incapable of filing employment tax returns by a series of factors largely beyond its control; and (3) the company basically failed to meet its obligations because it relied on an unqualified part-time employee and the supervision of the output and quality of the employee's work product was a factor wholly under the company's control.

40 Percent Gross Valuation Misstatement Penalty Applies on Inflated Contribution: In Fakiris v. Comm'r, T.C. Memo. 2017-126, the Tax Court held that a commercial real estate owner and developer could not carryover charitable contribution deductions for the years at issue in connection with a purported gift of a theater building and was liable for a 40 percent gross valuation misstatement accuracy-related penalty for the portions of underpayments attributable to those carryover deductions. The court also assessed a 20 percent penalty for an underpayment of tax relating to unreported interest income of almost $30,000.

Court Rejects Taxpayer's Reliance on "Outlier" Fifth Circuit Decision: A district court denied a taxpayer's motion to dismiss felony charges that he violated Code Sec. 7206(1) when he made false statements on Form 433-A regarding the transfer of assets for less than full value. The court found that a Fifth Circuit decision the taxpayer was relying on, U.S. v. Levy, 533 F.2d 969 (5th Cir. 1976), was an outlier and that many other courts have since disagreed with the result and the rationale of that decision. U.S. v. Yurek, 2017 PTC 292 (D. Colo. 2017). Read More...


Taxpayer Can Bring Refund Suit under Sec. 6213(a) in District Court: In Walcott, 2017 PTC 322 (D. Colo. 2017), a district court rejected a magistrate judge's holding that a refund suit under Code Sec. 6213(a) must be brought in the Tax Court. The district court also agreed with the taxpayer that Code Sec. 6213(a) contemplates a proceeding by which a taxpayer can seek a refund of funds that were collected by a levy in violation of that provision's terms, even if the IRS has successfully mooted any companion claim for prospective injunctive relief.


Firefighter Is Taxable on Disability Retirement Converted to a Service Retirement: The Tax Court held that disability retirement payments, which the taxpayer excluded from income as amounts received under a statute similar to workmen's compensation, should have been included in the taxpayer's income because they were paid from a state retirement pension and the payments were determined by reference to the taxpayer's age and length of service. Similarly, when such payments were converted to a service retirement allowance, they were also taxable. Taylor v. Comm'r, T.C. Memo. 2017-132. Read More...

Tax Credits

Brown Grease Mixed with Diesel Fuel Doesn't Qualify for Alternative Fuel Credit: In Affordable Bio Feedstock, Inc. v. U.S., 2017 PTC 311 (M.D. Fla 2017), a district court held that a taxpayer who combined a cooking byproduct called "brown grease" with diesel fuel, refined the mixture to remove impurities, and then sold the end product for use as fuel was not entitled to the tax credit available for "alternative fuel." According to the court, a mixture of brown grease and diesel fuel is not an "alternative fuel" as that term is defined in Code Sec. 6426(e)(2).

Tax Payments

IRS Addresses Allocation of Estimated Tax Payments Where Separate Returns Are Filed: In CCA 201727007, the Office of Chief Counsel advised that estimated tax payments made in a separate declaration are the separate property of the spouse making the declaration and, for those estimated tax payments made in a joint declaration of estimated tax for a year in which the taxpayers wind up filing separate returns, the taxpayers may allocate the payment in any consistent manner that they may agree upon. Citing Rev. Rul. 76-140, the Chief Counsel's Office also noted that, if the taxpayers cannot agree, the payment is allocated between them in proportion to the tax liability reported on the separate tax return for the current year.



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