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Tax Research Briefs - Archived (February 2017 - October 2016)

 

February 2017

Accounting

How to Handle Missing or Incorrect Forms W-2: If a missing or corrected Form W-2 is not received by the end of February, the IRS should be contacted, and will attempt to obtain the information from the employer. Read More...

February Applicable Federal Rates Issued: In Rev. Rul. 2017-4, the IRS issued the applicable federal rates (AFRs) for February 2017.

Accountant's Adoption of New Paperless Tax System Justified Client's Form 3115 Filing Extension: The IRS granted an extension of time for a taxpayer to file Form 3115 where the taxpayer missed the filing deadline as a result of the adoption by the taxpayer's accounting firm of a new paperless tax system that caused the firm to overlook certain procedures necessary to timely file the Form 3115. The IRS concluded that the facts constituted "unusual and compelling circumstances" for granting an extension of time. PLR 201702021. Read More...

Steep IRS Penalties Put a Premium on Timely, Accurate 1099 Reporting. With sharply increased information reporting penalties in their second year (as high as $260 per late Form 1099), timely issuance of Form 1099s has become a critical imperative for many businesses. The urgency for timely reporting is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, asking whether the taxpayer made any payments in 2016 that would require the taxpayer to file Form(s) 1099. Starting this year, taxpayers also face earlier deadlines for reporting W-2 and 1099 information to the Social Security Administration and the IRS. Read More...

Accounting Methods

Engineering Company Fails Two-year Test for Exception to Percentage of Completion Accounting Method: The Tax Court held that an engineering company couldn't use the completed contract method of accounting to report income from contracts to move, refurbish, and reassemble refineries in Bulgaria and Pakistan. The company was required to use the percentage of completion method because the construction contract exception to the percentage of completion method didn't apply because the company could not have estimated that the contracts would be completed within two years. Basic Engineering Inc. v. Comm'r, T.C. Memo. 2017-26. Read More...

Hybrid Coupons Are Not Premium Coupons for Accounting Method Purposes: In AM-2017-002, the IRS concluded that hybrid coupons, which can be redeemed for products or used as a discount when purchasing a product (depending on the customer's preference upon redemption), are not premium coupons under Reg. Sec. 1.451-4. Implicit to Reg. Sec. 1.451-4 is that the issuance of a coupon with the sale of a product creates an incidental obligation for an accrual method taxpayer that requires the taxpayer to incur additional expenses at some future time, and these additional expenses should be matched with the revenue derived from the sale of the product . This is not the case with discount coupons, which the IRS concluded includes hybrid coupons.

Audit

White House Moratorium on Issuing Regulations Affects Issuance of Proposed Partnership Audit Rules: The White House has ordered a moratorium on regulations, with certain exceptions, and the removal of regulations which have been sent to the Office of the Federal Register but not yet published in the Federal Register. This edict affects proposed regulations on the new partnership audit regime which had been issued by the IRS but not yet published in the Federal Register. White House Memorandum Regarding Regulatory Freeze. Read More...

Bankruptcy

Court Adopts Separate Filings Rule for Allocating Tax Refund Between Spouses: In In re William Nevins, 2016 PTC 5 (Bank. Ct. N. H. 2017), a U.S. bankruptcy court adopted the separate filings rule to allocate a joint income tax refund between a debtor and a non-debtor spouse. After concluding that applicable state (New Hampshire) law does not dictate how the refund should be allocated, the court looked at four possible approaches: the 50/50 rule, income rule, withholding rule, and separate filings rule. The latter rule allocates the refund based on each spouse's hypothetical tax liability as if they had filed as married filing separately, and the court found it preferable because it considers taxes withheld, estimated tax payments, other out of pocket payments, and creditswhich can all impact the amount of the refund.

C Corporations

Six-month Extension Period for Calendar Year C Corporations: In a statement posted on its website, the IRS noted that a new revision of the instructions for Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, correctly reflects that calendar year C corporations are eligible for an automatic six-month filing extension. While Code Sec. 6081(b) provides a five-month automatic extension period for calendar year C corporations, the IRS is granting a six-month extension under Code Sec. 6081(a) instead. The statement was posted "to reassure the tax professional community that the information is correct in the Form 7004 instructions regarding the automatic [six-month] extension.

Credits

Disabled Individuals May Qualify for Earned Income Credit but Many Do Not Claim It: In News Release IR-2017-07, the IRS urges taxpayers with disabilities and parents of children with disabilities to claim the Earned Income Credit (EIC) if they qualify. As many as 1.5 million people with disabilities miss out on the EIC because they fail to file a tax return. If they do not file because their income falls below the filing threshold, they should consider filing to claim the EIC. The IRS stresses that tax refunds, including refunds resulting from EITC claims, do not count as income for determining eligibility for government benefits, including social security disability benefits, Medicaid, and food stamps.

Deductions

Tie-Breaker Rule Prevents Grandmother from Claiming Grandkids as Dependents: The Tax Court held that, under the tie-breaker rule, a grandmother was not entitled to dependency deductions, or other tax benefits, with respect to the grandchildren for which she provided almost all financial support during 2012. Although her son told her to file a return and claim the children as dependents to recoup some of the money she had spent supporting his family, he had also filed a return claiming the children as dependents. Smyth v. Comm'r, T.C. Memo. 2017-29. Read More...

Payments to Ex-spouse Were Not Deductible Alimony: In Quintal v. Comm'r, T.C. Summary 2017-3, the Tax Court held that payments to taxpayer's former spouse were not deductible alimony. An exhibit to the settlement agreement provided that the payments were excludable from income and not allowable as a deduction. This meant the payments did not meet the definition of alimony under Code Sec. 71(b)(1)(B) (i.e., instrument does not designate the payment as not includable in income under Code Sec. 71 and not an allowable deduction under Code Sec. 215).

Couple Can't Rely on Cohan Rule for Deduction of Unsubstantiated Expenses: In Oatman v. Comm'r, T.C. Memo. 2017-17, the Tax Court held that a couple could not deduct unsubstantiated Schedule A vehicle and meal and entertainment expenses and Schedule C vehicle and travel expenses. While the holding in Cohan v. Comm'r, 39 F.2d 540 (2d Cir. 1930) allows the deduction of an estimated expense where the expense was incurred but the precise amount cannot be determined, the "Cohan rule" does not apply to travel, entertainment, and vehicle expenses. Instead, these expenses must be substantiated by adequate records that are prepared at the time the expense is incurred.

Rental Real Estate Loss Deduction Passive for Lack of Credible Substantiation: In Makhlouf v. Comm'r, T.C. Summary 2017-1, the Tax Court determined that a married couple's rental real estate loss deductions were passive because the couple did not substantiate their claim of being real estate professionals. The issue was whether the couple performed, during the year, more than 750 hours of services in a real property trade or business. The court noted that, for one property, the hours shown were inflated, duplicative, and implausible on their face, with few entries supported by contemporaneous recordkeeping. For another property, the court found that the hours listed for family meetings were clearly inflated, with many entries reporting improbable all-day meetings, and some of the entries were contradicted by entries in one of the spouse's diary.

Employment Taxes

IRS Tests Form W-2 Verification Code for 2017 Return Filing Season: In a post on its website, the IRS stated that, for the 2017 filing season, it will expand an initiative to combat tax-related identity theft and refund fraud. The IRS has partnered with some payroll service providers to include a 16-digit code (formatted as XXXX-XXXX-XXXX-XXXX) and a new Verification Code field on a limited number of Form W-2 copies provided to employees. If it appears, the Verification Code field should be entered on e-filed returns but not paper-filed returns. Since this is a test, omitted or incorrect W-2 Verification Codes will not delay the processing of the tax return.

Nonqualified Deferred Compensation Closing Agreements: In Legal Advice AM 2017-001, IRS Chief Counsel concluded that it would not be appropriate to enter into a closing agreement with employers who discovered, after the applicable limitations period had run, that they had not properly taken nonqualified deferred compensation (NQDC) into account under the special FICA tax timing rule in Reg. Sec. 31.3121(v)(2)-1(a)(2). According to the guidance, the special timing rule generally accelerates the FICA taxation of NQDC to the time of deferral, so no FICA tax is due on amounts deferred and the income thereon when paid to the employee. Reg. Sec. 31.3121(v)(2)-1(d)(1) already provides a mechanism for the payment of FICA taxes for NQDC that is not timely taken into account under the special timing rule.

Estate Tax

Final Regs Address Carryover Basis Rules for Taxpayers Dying in 2010: In T.D. 9811 (1/19/17), the IRS issued final regulations under various provisions of the Internal Revenue Code to account for the application of the Code Sec. 1022 modified carryover basis rules to taxpayers who died in 2010. For example, T.D. 9811 revises Reg. Sec. 1.179-4(c)(1) to state that property is not acquired by purchase for Code Sec. 179 expense purposes if determined under Code Sec. 1022. The regulations (1) affect property transferred from certain decedents who died in 2010; (2) are effective on and after January 19, 2017; and (3) adopt the proposed regulations published in 2015 with only nonsubstantive, clarifying changes.

IRS Addresses Exclusion Amount and GST Exemption for Same Sex Couples: In Notice 2017-15, the IRS provides special rules for transfers and bequests by or to same sex spouses which allow taxpayers and the executors of decedents' estates to recalculate the remaining applicable exclusion amount and/or generation-skipping transfer (GST) exemption amount to the extent that an allocation of that exclusion or exemption was made while the taxpayer was married to a person of the same sex. For example, if a transfer did not qualify for the marital deduction because of the Defense of Marriage Act, the spouses can qualify the transfer for the marital deduction and recover the applicable exclusion amount previously applied to the transfer, even if the limitations period for claiming a refund of tax has expired.

Exempt Organizations

IRS Releases Updated Form 990-EZ with Help Icons to Avoid Errors: In IR-2017-14, the IRS announced the release of the 2016 Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, which includes help icons describing key information needed to complete certain fields on the form and links to additional information on the IRS website. (Generally speaking, an organization that has gross receipts of less than $200,000 and total assets of less than $500,000 at the end of the year can file Form 990-EZ.) The help icons and links work on any device with Adobe Acrobat Reader and Internet access. Once completed, filers can print the form and mail it to the IRS.

Foreign

IRS Properly Imposed Penalty for Failing to Report Interest in Foreign Corporation: In Flume v. Comm'r, T.C. Memo. 2017-21, the Tax Court concluded that the IRS correctly imposed penalties under Code Sec. 6038(b) for taxpayer's failure to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, for each year from 2001 to 2009. To establish reasonable cause via reliance on a tax adviser's advice, the taxpayer had to prove in part that he provided necessary and accurate information to the preparer. Since he did not inform the preparer of his ownership in Mexican and Belizean corporations, he was barred from relying on his tax return preparer's advice.

Dividend Equivalents from Sources within the U.S.: In T.D. 9815 and REG-135122-16 (1/24/17), the IRS published final and temporary regulations that provide guidance to (1) nonresident aliens and foreign corporations holding financial products whose payments are contingent on, or determined by reference to, U.S.-source dividend payments; and (2) withholding agents who are responsible for withholding U.S. tax on dividend equivalents, as well as other parties to Code Sec. 871(m) transactions and their agents. While generally applicable to transactions on or after January 1, 2017, implementation of the Code Sec. 871(m) regulations for non-delta one transactions is postponed to January 1, 2018.

Final Regulations Address Corporate Inversions: In T.D. 9812 and REG-135734-14 (1/18/17), the IRS issued final and temporary regulations under Code Sec. 7874 that (1) identify stock of a foreign corporation that is disregarded in calculating ownership of the corporation for determining whether it is a surrogate foreign corporation, and (2) explain the effect of transfers of stock of a foreign corporation after it has acquired substantially all of the properties of a domestic corporation or the trade or business of a domestic partnership. In general, Code Sec. 7874 treats foreign corporations as a U.S. corporation (i.e., the benefits of being foreign are lost) if certain requirements are met. One of the requirements is there must be the acquisition of substantially all of the properties held directly or indirectly by a domestic corporationwhich is important because the final regulations generally apply to domestic entity acquisitions completed on or after September 17, 2009.

Transfers of Appreciated Property to Partnerships with Foreign Partners: In T.D. 9814 and REG-127203-15 (1/18/17), the IRS issued temporary and proposed regulations governing transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. The regulations (1) override the nonrecognition of gain on contributed property rule in Code Sec. 721(a) unless the partnership adopts the remedial allocation method and other requirements are met; and (2) revise the definition of a Code Sec. 721(c) partnership in part to be one where the U.S. transferor and the related foreign partners own 80 percent or more of the partnership instead of 50 percent. In general, the temporary regulations apply to contributions occurring on or after August 6, 2015, and to contributions occurring before August 6, 2015, resulting from an entity classification election under Reg. Sec. 301.7701-3 that is filed on or after August 6, 2015.

Withholding Foreign Partnership and Foreign Trust Agreements: In Rev. Proc. 2017-21, the IRS updated the agreements entered into by withholding foreign partnerships and withholding foreign trusts, which were to expire at the end of 2016 but were extended in anticipation of the issuance of these updated agreements. In general, the agreements allow a foreign partnership or foreign trust to assume the withholding and reporting obligations for payments of some U.S. source income (such as interest, dividends, and royalties) made to direct partners, beneficiaries, or owners, and in some cases, persons holding partnership or trust interests through foreign intermediaries or flow-through entities.

Healthcare Taxes

Extended Due Date for Health Coverage Tax Credit Election: In Notice 2017-16, the IRS extended the due date for electing to claim the Code Sec. 35 health coverage tax credit for eligible coverage months in tax years beginning on or after June 29, 2015, and before January 1, 2017. The extension is necessary because, prior to its reinstatement, Code Sec. 35 did not require an election. The election can be made on Form 8885, Health Coverage Tax Credit, within three years from the due date of the return, including extensions, and can be made on an amended return.

Income

Discharge of Debt Income Relief for Students of American Career Institutes: In Rev. Proc. 2017-24, the IRS extended relief from discharge of debt income to taxpayers whose federal student loans to attend a school owned by the American Career Institutes, Inc. have been discharged by the Dept. of Education under the "Closed School" or "Defense to Repayment" discharge process. Previously, Rev. Proc. 2015-57 authorized similar discharge of debt income relief for students who took out federal student loans to finance attendance at a school owned by Corinthian Colleges.

Innocent Spouse Relief

Wife Who Remained Married Granted Innocent Spouse Relief: In Hudson v. Comm'r, T.C. Summary 2017-7, the Tax Court granted equitable innocent spouse relief under Code Sec. 6015(f) even though the taxpayer remained married (though estranged) because she did not believe in divorce. Because of her financial situation (unemployed, car repossessed, entered into consumer debt relief program, etc.), the court said, requiring her to pay the tax liability would create a financial hardship. Furthermore, the court noted that taxpayer did not benefit from the unpaid liability and, in fact, her lifestyle, particularly in recent years, had been quite to the contrary.

IRS

IRS Appropriations and Enforcement Budget Fell from 2011 to 2016: The Government Accountability Office, in a January 2017 review of the 2016 filing season (GAO-17-186), noted that the IRS's fiscal year (FY) 2016 appropriation was $11.24 billion, which was 7 percent less than its FY 2011 appropriation of $12.12 billion. The reduction was not evenly allocated across all functionswhile taxpayer services increased about 2 percent from $2.29 billion to $2.33 billion from FY 2011 to FY 2016, enforcement decreased about 11 percent from $5.49 billion to $4.87 billion during this period of time. The FY 2016 appropriation included a $290 million increase over FY 2015, which was directed to improving taxpayer services ($178.4 million), cybersecurity ($95.4 million), and identity theft prevention ($16.1 million).

IRS Cautions Taxpayers about Refund Information and Delivery Date: In News Release IR-2017-16, the IRS noted that "Where's My Refund?" the IRS website and the IRS2Go mobile app will be updated with the projected deposit dates for Earned Income Credit and/or Additional Child Tax Credit filers a few days after February 15. Plus, the IRS cautions taxpayers that (1) these refunds likely will not start arriving in bank accounts or on debit cards until the week beginning Monday, February 27, assuming there are no processing issues with the tax return and the taxpayer chose direct deposit; and (2) the Monday, February 20 President's Day holiday may impact when they get their refund, since many financial institutions do not process payments on weekends or holidays.

Phishing Schemes Lead the IRS's Dirty Dozen List of Tax Scams for 2017: In IR-2017-15, the IRS warned taxpayers to watch out for fake emails or websites looking to steal personal information, since these phishing schemes continue to appear on the annual list of Dirty Dozen tax scams. The IRS saw a big spike in phishing and malware incidents during the 2016 return filing season, and new/evolving phishing schemes have already been seen targeting tax and payroll professionals, human resources personnel, and schools. Unsolicited emails that appear to be from the IRS or a return or payment processing-related organization, such as the Electronic Federal Tax Payment System (EFTPS), should be reported to the IRS at phishing@irs.gov.

IRS Changes Position on Claiming Childless EIC; Amended Returns May be in Order: The IRS issued proposed regulations which reflect a change in the IRS's position on the interaction of the Code Sec. 152(c)(4) tiebreaker rules, which goes into effect when two or more people can claim a child as a qualifying child for tax purposes, with the Code Sec. 32 earned income credit rules. Under the revised position, if an individual is not treated as a qualifying child of a taxpayer after applying the tiebreaker rules in Code Sec. 152(c)(4), then the individual will not prevent that taxpayer from qualifying for the childless earned income credit. REG-137604-07 (1/19/17). Read More...

Proposed Regs Update Rules for Claiming Dependency Exemption and Other Tax Benefits: The IRS issued proposed regulations which amend the rules relating to the dependency exemption deduction, surviving spouse and head of household filing statuses, the child and dependent care credit, the earned income credit, the standard deduction, joint tax returns, and taxpayer identification numbers for children placed for adoption. In determining a taxpayer's eligibility to claim a dependency exemption, the proposed regulations change the IRS's position regarding the adjusted gross income of a taxpayer filing a joint return for purposes of the tiebreaker rules in Code Sec. 152(c)(4) and the source of support of certain payments that originated as governmental payments. REG-137604-07. Read More...

Tax Court Petition Received Eight Days After Deadline Nevertheless Treated as Timely Filed: The Seventh Circuit reversed the Tax Court and held that although the 90-day deadline for filing a Tax Court petition is jurisdictional, the Tax Court could not disregard an agreement between the IRS and the taxpayer that the taxpayer's petition was timely filed. The court rejected the Tax Court's reliance on the date the envelope had entered the Postal Service's tracking system as being indicative of the date the petition was filed. Tilden v. Comm'r, 2017 PTC 17 (7th Cir. 2017). Read More...

IRS Supplements Schedules of Prevailing State Assumed Interest Rates: In Rev. Rul. 2017-3, the IRS supplements the schedules of prevailing state assumed interest rates set forth in Rev. Rul. 92-19 for tax years beginning after December 31, 2015. This information is used by insurance companies in computing reserves for (1) life insurance and supplementary total and permanent disability benefits, (2) individual annuities and pure endowments, and (3) group annuities and pure endowments.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2017-13, 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).

Telephone Impersonation Scams a High Investigative Priority: In its latest semiannual report to Congress, the Treasury Inspector General for Tax Administration (TIGTA) noted that IRS telephone impersonation scams continue to pose a serious threat and remain one of TIGTA's highest investigative priorities. As of September 30, 2016, more than 9,000 victims reported that they had paid impersonators more than $49 million. To combat the scams, TIGTA established an "Advise and Disrupt" approach that identifies and calls the numbers to advise the scammers of their criminal exposure. According to TIGTA, this has shut down more than 92 percent of the telephone numbers used by the scammers.

IRS Procedure

Payment Erroneously Credited by IRS Was Not an Erroneous Refund: In Schuster v. Comm'r, T.C. Memo. 2017-15, the Tax Court held that an $80,000 payment a taxpayer made on his mother's behalf, which the IRS incorrectly credited to his account, was not an erroneous refund under Code Sec. 7405. Therefore, the IRS was not subject to the two-year limitations period for recovering the refund under Code Sec. 6532(b). Once the IRS corrected the error, collection of the $47,045 unpaid balance was subject to the normal 10-year collection period prescribed by Code Sec. 6502(a).

Partnerships

IRS Granted Extension to Make Section 754 Election: In PLR 201704015, the IRS granted a partnership an extension of time to file an election under Code Sec. 754 to adjust the basis of partnership property. This ruling is contingent on the (1) partnership adjusting the basis of its properties to reflect any Code Sec. 734(b) or 743(b) adjustments that would have resulted if the Code Sec. 754 election had been timely made; and (2) partners adjusting the basis of their partnership interests to reflect what their basis would have been if the Code Sec. 754 election had been timely made, regardless of whether the limitations period on assessing tax or filing a claim for refund has expired for the year(s).

Qualifying Income Exception for Publicly Traded Partnerships: In T.D. 9817 (1/24/17), the IRS issued final regulations which address the qualifying income exception for publicly traded partnerships to avoid treatment as a corporation for federal income tax purposes. The regulations define activities that generate qualifying income from exploration, development, mining or production, processing, refining, transportation, and marketing of minerals or natural resources, and generally apply to income earned by a partnership in tax years beginning on or after January 19, 2017.

Penalties

Return Preparer Liable for Penalty After Failing to Perform Due Diligence: The Court of Federal Claims held that a tax preparer was liable for a $2,500 penalty after failing to perform due diligence with respect to a return on which an earned income credit was claimed. Testimony indicated that the return preparer told the taxpayer that she could receive a tax refund if she reported additional income on her return rather than just the $16 that her W-2 showed. Foxx v. U.S., 2017 PTC 46 (Fed. Cl. 2017). Read More...

No Negligence Penalty for Failing to Include IRA Withdrawals in Income: In Cheves v. Comm'r, T.C. Memo. 2017-22, the Tax Court refused to impose a negligence penalty against a couple who withdrew funds from their traditional IRAs to pay their living expenses, once their personal savings were exhausted. The husband asked their insurance agent to withhold amounts to pay additional taxes triggered by the early withdrawals, although amounts were withheld from only $3,221 of the total $27,721 amount withdrawn. The husband also made payments to the agent under the mistaken belief that they "constituted reimbursements mitigating the effect of early withdrawals." Considering the couple's background and circumstances, the court concluded that they acted reasonably and thus were not liable for the penalty under Code Sec. 6662(a).

Procedure

Tax Court Upholds Notice of Deficiency Showing Zero Deficiency: In Dees v. Comm'r, 148 T.C. No. 1 (2017), the Tax Court (in a split decision) upheld the validity of a notice of deficiency that showed a zero deficiency. Ten judges voted to allow Tax Court jurisdiction while seven judges concluded that a zero notice is invalid. Despite errors, the notice of deficiency did state that the IRS was disallowing taxpayer's claimed Code Sec. 36B refundable premium tax credit and withholding his refund. The IRS established that it had determined a deficiency, and the record showed that taxpayer was not misled by the notice of deficiency, as evidenced by the content of his timely filed Tax Court petition.

Retirement Plans

IRS Provides Covered Compensation Tables: In Rev. Rul. 2017-5, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2017 plan year.

Employer Qualified Matching or Nonelective Contributions: In REG-131643-15 (1/18/17), the IRS issued proposed regulations that amend Reg. Sec. 1.401(k)-6 to provide that amounts used to fund qualified matching contributions (QMACs) or qualified nonelective contributions (QNECs) must be nonforfeitable and subject to distribution restrictions when they are allocated to participants' accounts, and not when they are first contributed to the plan. Applying the requirements when amounts are first contributed would prevent sponsors with plans that allow use of amounts in plan forfeiture accounts to offset future employer contributions from applying those amounts to fund QMACs and QNECs.

S Corporations

Payments by Failing S Corporation to Shareholder Were Distributions, Not Wages or Expense Reimbursements: The Tax Court concluded that payments by a failing law firm to its shareholder were not wages as the IRS contended, and were not reimbursements for expenses as the shareholder argued, but instead were a nontaxable return of capital to the extent of the shareholder's basis. Goldsmith v. Comm'r, T.C. Memo. 2017-20. Read More...

Court Rejects Attempt to Use Dissolved S Corp to Deduct Trust Fund Penalty Taxes: The Tax Court held that a married couple that owned an S corporation, which had been administratively dissolved, could not deduct a trust fund liability payment made on behalf of the dissolved corporation. The court found that, while the dissolved corporation filed a return for the year the trust fund liability payment was made and passed through a deduction for the payment to the couple, the corporation did not exist and was not engaged in a trade or business in the year of the payment and, even if it was in existence, no deduction is allowed for trust fund recovery penalties. Brown v. Comm'r, T.C. Memo. 2017-18. Read More...

 

January 2017

Accounting

Steep IRS Penalties Put a Premium on Timely, Accurate 1099 Reporting. With sharply increased information reporting penalties in their second year (as high as $260 per late Form 1099), timely issuance of Form 1099s has become a critical imperative for many businesses. The urgency for timely reporting is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, asking whether the taxpayer made any payments in 2016 that would require the taxpayer to file Form(s) 1099. Starting this year, taxpayers also face earlier deadlines for reporting W-2 and 1099 information to the Social Security Administration and the IRS. Read More...

CPA Sample Client Letter: Requirement to File Forms 1099. See now...

January AFRs Issued: In Rev. Rul. 2017-2, the IRS issued the applicable federal rates for January 2017.

Parker's Annual Review: Top Tax Developments of 2016 In 2016, the tax practitioners experienced the usual slew of important court decisions and major new IRS regulations, procedures, and rulings. But the biggest development was a seismic shift in the political terrain, expected to produce the most significant tax changes in a generation. Read More...

The Latest: Republican Election Sweep Sets the Stage for Major Tax Changes in 2017: By winning the White House and holding on to their majorities in the House and Senate, Republicans are in a position to fulfill campaign promises to reduce individual and corporate tax rates, repeal healthcare taxes, repeal the estate tax, and possibly implement broad, substantive tax reform. Read More...

C Corporations

Temp Regs Provide Guidance under Section 355(e): In T.D. 9805 and REG-140328-15 (12/19/16), the IRS issued temporary and proposed regulations that provide guidance regarding the distribution by a distributing corporation of stock or securities of a controlled corporation without the recognition of income, gain, or loss. The regulations provide guidance in determining whether a corporation is a predecessor or successor of a distributing or controlled corporation for purposes of the exception under Code Sec. 355(e) to the nonrecognition treatment afforded qualifying distributions, and they provide certain limitations on the recognition of gain in certain cases involving a predecessor of a distributing corporation. The regulations generally apply to distributions that occur after January 18, 2017, but may be applied earlier if certain conditions are met.

Successor Corporation Is Liable for Predecessor's Tax Bill: In Erien Surgical, Inc. v. U.S., 2016 PTC 506 (7th Cir. 2016), the Seventh Circuit upheld a district court's holding that a levy on the bank account of a corporation, which was really the reincorporation of a business that folded without paying all of its taxes, was valid. The court noted that the new corporation had the same employees, website, and phone number as the corporation that went out of business.

Credits

Age Cap Prevents Child Tax Credit for Permanently Disabled Daughter: In Polsky v. U.S., 2016 PTC 508 (3d Cir. 2016), the Third Circuit affirmed a district court decision that denied a child tax credit to the parents of a permanently disabled daughter because the daughter did not meet the applicable age requirement. The court rejected the parents' argument that the tax credit's definition of "qualifying child," which has an age cap, incorporates by reference a different section of the Code that has no age cap at all for a person who is permanently disabled. The court agreed with the district court's holding that the plain language of the Code supported the IRS's position: the age cap in Code Sec. 24(c) controlled, and the credit was therefore properly denied.

Corporation Wasn't Entitled to a Grant for Investment in Therapeutic Discovery Project: In Silver Medical, Inc. v. Comm'r, 147 T.C. No. 18 (2016), the Tax Court held that a company was not entitled to a cash grant, in lieu of a tax credit, related to investments in a therapeutic discovery project certified under Code Sec. 48D. According to the Tax Court, the company was not certified to make qualified investments after the year at issue and the court required the company to recapture grant funds attributable to estimated qualified investments that exceeded actual investments made during the prior tax year.>

Deductions

Company Not Entitled to Deduction under Code Sec. 83 for Stock Transferred to Officer: The Fourth Circuit affirmed a Tax Court decision disallowing a company's deduction under Code Sec. 83 for stock issued to an officer. After noting that forfeiture provisions triggered by termination for cause or by engaging in competition do not constitute a "substantial risk of forfeiture," the Fourth Circuit concluded that the remaining ground for forfeiturethe taxpayer's voluntary resignationwas unlikely to happen. QinetiQ US Holdings Inc. v. Comm'r, 2017 PTC 6 (4th Cir. 2017). Read More...

Taxpayers Had Donative Intent, Entitled to Charitable Contribution Deduction: In McGrady v. Comm'r, T.C. Memo. 2016-233, the Tax Court concluded that the taxpayers could deduct the FMV of a qualified conservation easement on their 25-acre homestead property and a fee simple interest in an adjoining 20-acre parcel of undeveloped land. In dismissing the IRS's argument that the taxpayers lacked donative intent, the court stated that that whenever a homeowner places a conservation easement over his property, the homeowner in a sense "benefits" by having natural landscapes rather than suburban sprawl in his immediate surroundings.

Taxpayer Not Entitled to Bad Debt Deduction: In Sensenig v. Comm'r, T.C. Memo. 2017-1, the Tax Court ruled that taxpayer was not entitled to a business bad debt deduction of more than $10 million for 2005. In so holding, the Tax Court noted the lack of written evidence demonstrating that there was a valid and enforceable obligation to repay on the part of any of the companies that received advances from the taxpayer. The absence of any formality typically associated with loans supported the conclusion that the advances were contributions to capital.

Deductions Denied for Unsubstantiated Part of Meals and Entertainment Expense: In Lombardi v. Comm'r, T.C. Memo. 2017-4, the Tax Court refused to allow a deduction for meals and entertainment expenses for 2010 in excess of the amount allowed by the IRS. In reaching this conclusion, the Tax Court noted that (1) many of the receipts appeared to be for personal expenses, including receipts for coffee the taxpayer drank and meals he shared with his wife; (2) many of the receipts were illegible, so the court could not determine the amount, time, and/or place of the expenditure; and (3) many of the handwritten notations on the receipts did not indicate the business relationship with the person being entertained.

RV-related Depreciation and Interest Deductions Denied: In Jackson v. Comm'r, 2017 PTC 7 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court decision that a couple couldn't deduct business expenses for their recreational vehicle (RV) because they used it as a residence for the tax years at issue. Although the court agreed that the couple's use of their RV was "appropriate and helpful" in selling insurance policies at RV rallies, the taxpayers were prohibited from deducting depreciation and interest relating to the RV by Code Sec. 280A, which disallows deductions for dwelling units used as a residence. The Ninth Circuit noted that a dwelling unit is defined as "a house, apartment, condominium, mobile home, boat, or similar property," and taxpayer's RV qualified as similar property.

Couple Can Deduct Easement Contribution; Court Rejects Penalty Assessment: In Antoniacci v. Comm'r, T.C. Memo. 2016-233, the Tax Court held that a couple could deduct a qualified conservation easement contribution made during the year, although in a lesser amount than was originally claimed. Noting that the couple made a good faith investigation of the value of the contributed property, the court dismissed the penalty assessment against the couple.

Employee Benefits

IRS Announces Maximum Value of Employer-Provided Vehicles for 2017: In Notice 2017-3, the IRS announced that the maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2017 for which the vehicle cents-per-mile valuation rule in Reg. Sec. 1.61-21(e) may apply is $15,900 for passenger autos and $17,800 for trucks or vans. The maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2017 for which the fleet-average valuation rule in Reg. Sec. 1.61-21(d) may be applied is $21,100 for passenger autos and $23,300 for trucks or vans.

Employment Tax

IRS Reiterates that Direct Sellers Can Sell Tangible or Intangible Products: In PLR 201652020, the IRS noted that case law has eliminated the distinction between tangible and intangible consumer products in classifying direct sellers as independent contractors under Code Sec. 3508. The court's holding was based on the underlying purpose of Code Sec. 3508 to reduce the number of controversies regarding employment tax status and to increase tax compliance by independent contractors.

IRS Issues Procedure on Maintaining Certification as a CPEO: In Rev. Proc. 2017-14, the IRS notes that being certified by the IRS as a certified professional employer organization (CPEO) has certain federal employment tax consequences and describes the procedures that a CPEO must follow, and the requirements a CPEO must satisfy, to maintain its certification. The revenue procedure is effective December 29, 2016.

Estate Tax

IRS Approves Extension of Time to Make Portability Election: In PLR 201653015, the IRS gave a decedent's estate an extension of time to make the "portability election" under Code Sec. 2010(c)(5)(A) to allow the surviving spouse to take into account the decedent's deceased spousal unused exclusion (DSUE) amount. To make a portability election, the executor must file Form 706, even if one is not otherwise required to be filed. Here, Form 706 was not filed because the value of gross estate was less than the basic exclusion amount. Nevertheless, the IRS relied on its discretionary authority under Reg. Sec. 301.9100-3 to grant an extension of time to make the portability election.

IRS Clarifies that Account Transcript Can Be Substitute for Closing Letter: In Notice 2017-12, the IRS provided an alternative to an estate tax closing letter for executors, probate courts, state tax departments, and others to confirm the closing of an estate tax return examination. According to the IRS, an account transcript with a transaction code of 421 can serve as the functional equivalent of an estate tax closing letter.

Excise Taxes

IRS Defines "Chassis" and "Body" for Purposes of Retail Excise Tax: In Notice 2016-81, the IRS provides interim definitions of the terms "chassis" and "body" for purposes of the retail excise tax on heavy trucks, trailers, and tractors imposed by Code Sec. 4051(a) and for purposes of applying the safe harbor provision in Code Sec. 4052(f)(1). The notice also requests comments on these interim definitions.

Expiring Tax Provisions

List of Federal Tax Provisions Expiring in 20162026: A document prepared by the staff of the Joint Committee on Taxation (JCX-1-17, dated January 4, 2017) provides a year-by-year list of federal tax provisions that expired or are scheduled to expire in 20162026. A suspension or deferral of an effective date is not considered to be an expiration, and some provisions terminate on a date that references the taxpayer's tax year and not a calendar year. The document, which can be accessed online at jct.gov/publications.html, omits years in which there are no expiring provisions.

Foreign

IRS Issues Regs on Foreign Account Tax Compliance Act (FATCA): In T.D. 9809 (1/6/17), the IRS issued final and temporary regulations under Code Secs. 1471 through 1474 addressing (1) information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts, and (2) withholding on certain payments to FFIs and other foreign entities. According to the preamble, the 286-page document finalizes with changes proposed regulations issued in 2014, and includes temporary regulations providing additional rules under Chapter 4 of the Code.

IRS Issues Regs on Withholding of Tax on U.S. Source Payments: In T.D. 9808 (1/6/17), the IRS issued final and temporary regulations addressing (1) the withholding of tax on certain U.S. source income paid to foreign persons, (2) information reporting and backup withholding for payments made to certain U.S. persons, and (3) portfolio interest paid to nonresident alien individuals and foreign corporations. According to the preamble, the 303-page document finalizes (with minor changes) proposed regulations under Chapters 3 and 61 and Code Secs. 871, 3406, and 6402, and includes temporary regulations providing additional rules under Chapter 3 of the Code.

IRS Publishes Foreign Financial Institution (FFI) Agreement: In Rev. Proc. 2017-16, the IRS published a sample agreement by a foreign financial institution (FFI) to be treated as a participating FFI under Code Sec. 1471(b) and Reg. Sec. 1.1471-4. This revenue procedure also provides guidance to FFIs and their branches treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA) (reporting Model 2 FFIs) on complying with the terms of the FFI agreement, as modified by the Model 2 IGA. The model FFI agreement applies to FFIs with an agreement effective on or after January 1, 2017.

IRS Publishes Qualified Intermediary (QI) Withholding Agreement: In Rev. Proc. 2017-15, the IRS published a sample qualified intermediary (QI) withholding agreement under Reg. Sec. 1.1441-1(e)(5). In general, a QI agreement allows foreign persons to simplify their obligations as withholding agents under Chapters 3 and 4 and as payors under Chapter 61 and Code Sec. 3406 for amounts paid to their account holders. The sample agreement is effective on or after January 1, 2017. The effective date of the agreement for new QI applicants depends on when the QI submits its application and whether the QI has received any reportable payments before submitting its application.

Willful Failure to File FBAR Leads to Penalty: In U.S. v. Bohanec, 2016 PTC 519 (C.D. Calif. 2016), a district court found that the taxpayers willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR) for 2007 for bank accounts located in Switzerland, Austria, and Mexico, and were liable for a penalty equal to the greater of $100,000, or 50 percent of the balance in the foreign accounts on June 30, 2008. Before concluding that the taxpayers were at least recklessly indifferent to their statutory reporting obligation, the district court dismissed their argument that willfulness only encompasses intentional violations of known legal duties and not reckless disregard by noting that no court has adopted that principle in a civil tax matter.

IRS Guidance Addresses Foreign Currency Gain or Loss for Qualified Business Units: In Notice 2017-7 and T.D. 9795 (12/8/16), the IRS announced that it had issued temporary regulations under Reg. Sec. 1.987-12T relating to the recognition and deferral of foreign currency gain or loss under Code Sec. 987 with respect to a qualified business unit in connection with a deferral event or outbound loss event.

IRS Finalizes Section 367 Rules: In T.D. 9803 (12/16/16), the IRS withdrew temporary regulations and issued final regulations relating to certain transfers of property by U.S. persons to foreign corporations. The final regulations (1) affect U.S. persons that transfer certain property, including foreign goodwill and going concern value, to foreign corporations in nonrecognition transactions described in Code Sec. 367, and (2) combine certain sections of the existing regulations under Code Sec. 367(a) into a single section. The regulations generally apply to transfers occurring after September 14, 2015, and to transfers occurring before September 14, 2015, resulting from entity classifications made under Reg. Sec. 301.7701-3 that are filed on or after September 14, 2015.

Final Regs Address Tax Reporting of Domestic Disregarded Entity Owned by Foreign Person: In T.D. 9796 (12/13/16), the IRS issued final regulations that treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under Code Sec. 6038A.The regulations generally apply to tax years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017.

IRS Issues Final PFIC Regs: In T.D. 9806 (12/28/16), the IRS issued final regulations on determining ownership of a passive foreign investment company (PFIC) and on certain annual reporting requirements for shareholders of PFICs to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. In addition, the final regulations provide guidance on an exception to the requirement for certain shareholders of foreign corporations to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. The regulations, which are generally effective for returns filed on or after December 31, 2013, affect U.S. persons that own interests in PFICs, and certain U.S. shareholders of foreign corporations.

IRS Issues Base Period T-Bill Rate for IC-DISC Shareholders: In Rev. Rul. 2017-1, the IRS issued the base period T-bill rate as determined by the Office of Debt Management for the period ending September 30, 2016, and issued a table of factors compounded daily for taxpayers with short or alternative taxable years. Code Sec. 995(f) requires the IRS to annually publish a base period T-bill rate to be used by shareholders of an interest charge domestic international sales corporation (IC-DISC) to calculate the interest due on their IC-DISC-related deferred tax liability for the year.

Gross Income

Settlement from Former Employer Includable in Income: In Mckinney v. Comm'r, T.C. Memo. 2017-6, the Tax Court held that $40,000 that a taxpayer received in settling claims against her former employer of discrimination and a hostile work environment, and which were later expanded to include constructive discharge, were not excludable from her gross income under Code Sec. 104(a)(2). When determining whether damages received under a written settlement agreement are excludable from income under Code Sec. 104(a)(2), the court said that it examines the settlement agreement itself for indicia of its purpose. Finding no indicia that the payment was based on physical injuries or sickness, the court concluded that the $40,000 was includable in taxpayer's income.

Settlement of Consumer Protection Act Claim Includable in Income: In Arkow v. Comm'r, T.C. Summary 2016-87, the Tax Court included in the taxpayers' income a $3,000 settlement of their Telephone Consumer Protection Act claim against Wyndham Hotels. The Act does not provide relief for physical injuries of sickness; rather, it was enacted to restrict the use of automated calls. Furthermore, the settlement agreement did not state that the payment was on account of physical injuries or sickness, only that the taxpayers released any and all rights and claims against Wyndham for $3,000.

Wages Earned in Afghanistan Were Not Excludible from Income under Section 911: In Qunell, T.C. Summary 2016-86, the Tax Court held that wages a former U.S. Army soldier earned in Afghanistan while working for AECOM Technology as an atmospheric manager were not excludable from gross income under Code Sec. 911(a) because Afghanistan was not his tax home for the year at issue. However, the court concluded the taxpayer was liable for only one of the three penalties assessed by the IRS; two were dismissed as the result of the taxpayer reasonably relying on the advice of a professional in preparing his return.

Healthcare Taxes

IRS Issues Final Regs Relating to Health Insurance Premium Tax Credit: In T.D. 9804 (12/19/16), the IRS issued final regulations relating to the Code Sec. 36B health insurance premium tax credit which affect individuals who enroll in qualified health plans through Health Insurance Exchanges and claim the premium tax credit, and Exchanges that make qualified health plans available to individuals and employers. The final regulations, which are generally effective for tax years beginning after December 31, 2016, also affect individuals who are eligible for employer-sponsored health coverage.

IRS Procedure

IRS Announces that 2016 Filing Season Begins on January 23, 2017: The IRS notified taxpayers and practitioners that the 2017 individual income tax filing season (for 2016 Forms 1040) will open on January 23, 2017. Because Emancipation Day, a holiday in Washington, D.C., will be observed on Monday, April 17, the normal filing deadline will be pushed back to Tuesday, April 18, 2017. Read More...

IRS Provides Guidance on De Minimis Safe Harbor from Information Reporting Penalties: The IRS has issued guidance for complying with Section 202 of the Protecting Americans from Tax Hikes Act of 2015, which provides that an error on an information return or payee statement need not be corrected to avoid a penalty if the error relates to an incorrect dollar amount and differs from the correct amount by no more than $100 (or $25 in the case of tax withheld). Notice 2017-9. Read More...

IRS Clarifies Extended Statute of Limitations on Assessment of Tax: In PLR 201652022, the IRS noted that Congress amended Code Sec. 6501(e)(1) in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Pub. L. 114-41) to provide that an understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income for purposes of the extended six year limitations period under Code Sec. 6501(e)(1)(B). According to the IRS, this is true even if the overstatement of basis does not relate to a "sold asset."

IRS Updates Refund Publication: The IRS has updated Publication 2043, IRS Refund Information Guidelines for the Tax Preparation Community. The publication provides guidelines for advising clients who are expecting a refund, and includes information about the new law requiring the IRS to hold refunds relating to the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). The IRS will begin releasing EITC and ACTC refunds starting February 15, although the refunds likely will not reach taxpayers until the week of February 27.

Proof that Notices of Deficiency Properly Sent to Taxpayer: In Clarkson v. Comm'r, 2016 PTC 503 (3d Cir. 2016), the Third Circuit affirmed a Tax Court decision that the IRS mailed notices of deficiency to the taxpayer's last known address. The taxpayer focused on alleged irregularities in PS Form 3877 mail forms, arguing that an improperly completed form did not trigger the presumption of regularity in the IRS's mailing practices. The Third Circuit disagreed, noting that the PS 3877 omissions identified by the taxpayer were comparatively minor as each form bore the appropriate signature, corresponded with a notice of deficiency elsewhere in the record, and showed the date of mailing.

IRS Classifies Certain Conservation Easement Transactions as Listed Transactions: In Notice 2017-10, the IRS warns taxpayers that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. The notice describes the transaction and categorizes it as a tax avoidance transaction, with the result that the described transaction and substantially similar transactions are considered listed transactions for purposes of Reg. Sec. 1.6011-4(b)(2).

IRS Updates Guidance on User Fee Exemptions for Certain IRS Determination Letters: In Notice 2017-1, the IRS issued guidance under Code Sec. 7528(b)(2) relating to an exemption from the requirement to pay a user fee for certain requests to the IRS for determination letters with respect to the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans maintained by small employers.

Retirement Plans

Tax Court Finds No Financial Hardship Exception to IRA Early Withdrawal Penalty: The Tax Court held that distributions from a taxpayer's IRA in 2011 to support herself and her children, after she was laid off from her long-time job and was unable to find another one, were subject to the Code Sec. 72(t) early withdrawal penalty tax. While "sympathetic to her financial straits," the court found that that none of the statutory exceptions were available to the taxpayer, and thus the distributions were subject to the Code Sec. 72(t) penalty tax. Elaine v. Comm'r, T.C. Memo. 2017-3. Read More...

IRS Waives 60-day IRA Rollover Requirement: In PLR 201652033, the IRS granted a taxpayer 60 days from the issuance of the letter ruling to contribute an amount that had been distributed from the taxpayer's IRA over 60 days earlier into an IRA account. After her husband's death, the taxpayer was advised to transfer her IRA accounts to another custodian where she would receive a better interest rate, so she transferred the accounts to two non-IRA accounts. In granting the waiver, the IRS noted that the failure to accomplish a rollover within the 60-day period prescribed by Code Sec. 408(d)(3)(A) was due to confusion regarding the status of the IRA as a tax-deferred retirement account after she changed financial institutions.

S Corporations

Financial Advisor Can't Use S Corporation to Shield Himself from Self-Employment Taxes: The Tax Court held that a financial advisor who purchased and sold securities should have reported income earned under agreements with financial institutions on his individual return as Schedule C self-employment income rather than running the income through his S corporation and treating it as K-1 income on which self-employment taxes were not due. The court rejected his argument that the S corporation itself could not contract with the financial institutions because a provision in the 1934 Securities and Exchange Act that would impose a prohibitively expensive licensing requirement on the corporation. Fleischer v. Comm'r, T.C. Memo. 2016-238. Read More...

IRS Grants Relief from Inadvertent S Corporation Termination: In PLR 201653018, the IRS concluded that the termination of a qualified subchapter S subsidiary (QSub) was inadvertent under Code Sec. 1362(f). As part of a reorganization, shares of the QSub were issued to a second corporation, thereby terminating the QSub election because the QSub had more than one owner. The IRS's conclusion was based on the party's (1) representations that they had filed their returns consistent with the subsidiary's status as a QSub, and (2) agreement to make any adjustments consistent with the treatment of the subsidiary as a QSub as may be required by the IRS.

Loans Did Note Create Basis for S Corporation Loss Purposes: In Hargis v. Comm'r, T.C. Memo. 2016-232, the Tax Court held that loans in which a taxpayer was listed as co-borrower or guarantor did not increase his basis in his S corporations. The loans were structured so that the debt ran directly from the S corporations to the lenders. The loan proceeds were advanced directly by the lenders to the S corporations, and the notes executed by the S corporations were not payable to the taxpayer. In fact, the notes did not show the S corporations as indebted to the taxpayer for anything; rather, he was listed as a co-borrower, or in some instances, as a guarantor.

 

December 2016

Accounting

December AFRs Issued: In Rev. Rul. 2016-27, the IRS issued the applicable federal rates for December 2016.

The Latest: Republican Election Sweep Sets the Stage for Major Tax Changes in 2017: By winning the White House and holding on to their majorities in the House and Senate, Republicans are in a position to fulfill campaign promises to reduce individual and corporate tax rates, repeal healthcare taxes, repeal the estate tax, and possibly implement broad, substantive tax reform. Read More...

In-Depth Article: 2016 Year-End Tax Planning for Businesses:The second installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting business, and strategies clients can use to minimize their business' 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. See now...

In-Depth Article: 2016 Year-End Tax Planning for Individuals: The first installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. See now...

CPA Client Letter: 2016 Year-End Tax Planning for INDIVIDUALS See now...

CPA Client Letter: 2016 Year-End Tax Planning for BUSINESSES See now...

November AFRs Issued: In Rev. Rul. 2016-26, the IRS issued the applicable federal rates for November 2016.

Deductions

Taxpayer Not Entitled to Abandonment Loss Where He Couldn't Prove Ownership Interest: In Ibidunni v. Comm'r, T.C. Memo. 2016-218, the Tax Court determined that a taxpayer wasn't entitled to a long-term capital loss deduction under Code Sec. 165(a) for his purported interest in a bankrupt partnership. The court found the taxpayer wasn't listed as a partner in the bankruptcy documents and did not receive a Schedule K-1, and thus failed to prove he had an ownership interest in the partnership.

Deductions Denied for Partnership Expenses Improperly Claimed on Individual Return: In Nwabasili v. Comm'r, T.C. Memo. 2016-220, the Tax Court determined that a taxpayer was not entitled to deductions claimed on his Schedule C because the expenses related to businesses he operated in a partnership with his brother, and thus the expenses belonged to the partnership. The court imposed accuracy related penalties, noting that the taxpayer had claimed the expenses on his individual return and never informed his return preparer or the IRS that he operated his businesses as a partnership.

Lawyer Penalized for Deducting 100 Percent of Meals and Entertainment: In Ekeh v. Comm'r, T.C. Summary 2016-80, the Tax Court upheld penalty assessments against a lawyer where he deducted 100 percent of his meals and entertainment expenses. The court noted that, with his advanced education, the lawyer should've know his deductions were limited to 50 percent of such expenses. Ekeh, T.C. Summ. 2016-80 (12/12/16).

Estates, Gifts, and Trusts

Heirs Not Liable for Estate's Taxes as Trustees or as Personal Representatives: A district court determined that two of a decedent's heirs, who were also personal representatives of her estate and successor trustees to a family trust included in the estate, were not liable for delinquent estate taxes. The court determined that the trust's assets were included in the estate under Code Sec. 2033, and thus the taxpayers weren't liable as trustees. The court also held that the taxpayers had filed a valid Code Sec. 6423A special lien on the trust's assets, and thus they weren't liable as personal representatives. U.S. v. Johnson, 2016 PTC 502 (D. Utah. 2016). Read More...

Chief Counsel's Office Discusses Options Where Portability Election Is Filed Late: The Office of Chief Counsel advised that a taxpayer cannot make a portability election where Form 706 is filed late and the gross estate exceeded the estate tax exclusion amount, even if the estate is nontaxable due to the marital deduction. However, if no Form 706 was filed and the estate was less than the estate tax exclusion amount, relief may be available under the private letter ruling process. CCA 201650017. Read More...

Final Regulations Reiterate Transition Relief for Consistent Basis Reporting Requirements: In T.D. 9797 (12/2/16), the IRS issued final regulations which provide that executors or other persons required to file or furnish a statement under Code Sec. 6035(a)(1) or (2) (relating to the value of property included in a decedent's gross estate) before June 30, 2016, need not have done so until June 30, 2016. The final regulations apply to executors and other persons required to file an estate tax return after July 31, 2015.

Gift Arose from Merger of Family's Corporations; Case Remanded to Consider Challenges to IRS Valuation: The First Circuit affirmed the Tax Court's determination that an IRS notice of deficiency assessing gift taxes from the merger of the taxpayers' corporation with their sons' was not arbitrary, despite the IRS's initial failure to appraise the corporations. However, the court held the Tax Court erred in accepting the IRS's valuation of the corporations without first allowing the taxpayers an opportunity to challenge the valuation. Cavallaro v. Comm'r, 2016 PTC 486 (1st Cir. 2016). Read More...

Excise Tax

Court Rejects Sunoco's $300 Million Refund Claim Relating to Fuel Mixture Credit: The Court of Federal Claims, in an issue of first impression, held that the Code Sec. 6426 fuel mixture credit reduces a taxpayer's gross excise tax liability under Code Sec. 4081, leading to a reduction in the taxpayer's costs of goods sold and an associated increase in taxable income. The court rejected the taxpayer's $300 million refund claim, as well as the taxpayer's argument that the credit is a tax-free payment that does not reduce gross excise tax liability and, thus, does not reduce cost of goods sold. Sunoco, Inc. v. Comm'r, 2016 PTC 492 (Fed. Cl. 2016). Read More...

Exempt Organizations

IRS Revokes Exempt Status of "Nonprofit" Whose Owner Was Duped by a Scam Artist: In PLR 201649015, the IRS revoked the tax exempt status of an organization that had been unwittingly formed as part of a tax scam. A scam artist had met a taxpayer at a yard sale and advised her that she could open her own thrift store if she obtained a particular "license," which was in fact a non-profit designation. After discovering the scam, the organization informed the IRS that it had not intended to apply for tax exempt status, and that no activity outside of funding a bank account with personal money had occurred.

Foreign

IRS To Issue Regulations Regarding Cross-Border Triangular Mergers: In Notice 2016-73, the IRS announced its intention to issue regulations under Code Sec. 367 to modify rules relating to the treatment of property used to acquire parent stock in certain triangular reorganizations involving foreign corporations. The regulations described in the notice also address transactions designed to repatriate earnings of foreign corporations without incurring U.S. tax and will apply to transactions completed on or after December 2, 2016.

IRS Issues Regulations on Covered Asset Acquisitions: In T.D. 9800 and REG-129128-14 (12/7/16), the IRS issued temporary and proposed regulations under Code Sec. 901(m) regarding transactions that are covered asset acquisitions (CAA) and the assets that are relevant foreign assets (RFA) with respect to a CAA, for purposes on the limitation on the Code Sec. 901(a) foreign tax credit. The regulations generally apply to CAAs occurring on or after July 21, 2014.

Income of Civilian Employee Earned in Kuwait Isn't Excludible under Code Sec. 911: In Owens v. Comm'r, T.C. Summary 2016-83, the Tax Court held that a civilian employee of the Red River Army Depot was not entitled to exclude under Code Sec. 911 income earned while deployed in Kuwait. Code Sec. 911(b)(1)(B)(ii) specifically excludes from "foreign earned income" amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof and, thus, the court said, the circumstances of the employee's employment meant he wasn't eligible for the exclusion. Owens, T.C. Summ. 2016-83 (12/13/16).

Transfer Pricing Adjustment Didn't Affect Dividends Received Deduction: In Analog Devices, Inc. v. Comm'r, 147 T.C. No. 15 (2016), the Tax Court held that a taxpayer was entitled to the full amount of its claimed dividends received deduction (DRD) under Code Sec. 965 for cash dividends repatriated from a controlled foreign corporation (CFC). The court determined that, contrary to the IRS's argument, accounts receivable established as a result of a transfer pricing adjustment under Code Sec. 482 did not increase the CFC's related party indebtedness and thus did not decrease the taxpayer's DRD.

Gross Income and Exclusions

Payments Taxpayer Received Pursuant to Divorce Weren't Alimony: In PLR 201648001, the IRS ruled that court-ordered spousal maintenance payments a taxpayer's ex-husband was required to pay her did not meet the definition of alimony described in Code Sec. 71(b)(1). The IRS noted that the court order required monthly payments over a number of months but did not provide for termination of the payments if the taxpayer died, and thus the requirement that the payments terminate on the death of the payee spouse was not satisfied.

Healthcare Coverage

IRS Extends Deadlines to Furnish Health Coverage Information to Individuals: The IRS has extended the deadline for providers of minimum essential coverage and applicable large employers to furnish to individual taxpayers Form 1095-B, Health Coverage and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, reporting health coverage for the 2016 tax year. The deadline has been extended from January 31, 2017, to March 2, 2017. This extension does not apply to forms required to be filed with the IRS. Notice 2016-70. Read More...

Insurance Companies

Loss Payment Patterns and Discount Factors for 2016 Released: In Rev. Proc. 2016-58, the IRS prescribed the loss payment patterns and discount factors for the 2016 accident year. These factors will be used to compute discounted unpaid losses under Code Sec. 846.

Salvage Discount Factors for 2016 Released: In Rev. Proc. 2016-59, the IRS prescribed the salvage discount factors for the 2016 accident year. These factors must be used to compute discounted estimated salvage recoverable under Code Sec. 832.

IRS

Standard Mileage Rates Decrease in 2017 for Business, Medical, and Moving Purposes: The IRS issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. The IRS also issued the amount taxpayers must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate plan. Notice 2016-79. Read More...

IRS Announces Interest Rates for First Quarter of 2017: In Rev. Rul. 2016-28, the IRS provides the rates for interest on tax overpayments and underpayments for the calendar quarter beginning January 1, 2017. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 6 percent for large corporate underpayments, and 1.5 percent for the portion of a corporate overpayment exceeding $10,000. The rates are the same as for the preceding quarter.

IRS Creates New Fast Track Mediation Program: In Rev. Proc. 2016-57, the IRS replaced its old fast track mediation process and created a new program, the SB/SE Fast Track Mediation - Collection (FTMC), specifically directed at resolving collection cases and issues. The FTMC allows taxpayers to resolve certain offer-in-compromise and trust fund recovery penalty disputes on an expedited basis with an IRS Office of Appeals mediator serving as a neutral party.

Overtime Rules

Implementation of New Overtime Rules Halted by Nationwide Injunction: In State of Nevada v. U.S. Department of Labor, 2016 PTC 501 (E.D. Tex. 2016), a district court granted a permanent injunction, applicable nationwide, stopping indefinitely the December 1 implementation new overtime rules, stating that sharp increase in the salary threshold overstepped the Department of Labor's (DOL) authority. The Government is expected to appeal the injunction to the Fifth Circuit, but it's unknown whether a final decision will be rendered prior to the Trump Administration taking office on January 20, at which point Congress may simply suspend the new rules.

Partnerships

IRS Issues Guidance on Partnership Fractions Rule: In REG-136978-12 (11/23/16), the IRS issued proposed regulations under Code Sec. 514(c)(9) regarding the application of the fractions rule to partnerships that hold debt-financed real property and have one or more (but not all) qualified tax-exempt organization partners. Taxpayers can rely on the rules in the proposed regs for tax years ending on or after November 23, 2016.

Procedure

Chief Counsel Questions Use of Electronic Signatures Where Not Specifically Authorized: In CCA 201650019, the IRS Office of Chief Counsel advised that an electronic signature should only be accepted by the IRS when there is published guidance or Internal Revenue Manual (IRM) provisions that specifically authorize use of an electronic signature for the specific form involved.

Conviction for Tax Evasion Supports Denying Discharge of Liabilities in Bankruptcy: In U.S. v. Wanland, Jr., 2016 PTC 504 (E.D. Ca. 2016), a district court reduced a suspended attorney's tax liabilities to judgement, finding they were not discharged in his bankruptcy. The court noted the liabilities were exempt from the general discharge rule because the attorney had made fraudulent returns and willfully attempted to evade the taxes, as evidenced by his criminal conviction for tax evasion.

Taxpayer's Attorney Could Face Sanctions for Meritless Challenges to Limitations Period: In U.S. v. Gershon, 2016 PTC 505 (D. Conn. 2016) a district court declined to dismiss the IRS's suit to reduce a delinquent taxpayer's liabilities to judgement, finding the suit was not barred by the statute of limitations. The court ordered the taxpayer's attorney to show cause why sanctions should not be imposed on him, noting that the attorney's challenge to the limitations period were unsupported and ran against clearly established case law and the Code.

Taxpayer Unaware of Lawsuit While Investigating Related Fraud; Default Judgement Set Aside: In U.S. v. Talmage, 2016 PTC 499 (D. Utah 2016), a district court granted the owner of an LLC's motion to set aside a default judgement entered to foreclose liens on real property his LLC held, allegedly as an alter-ego of delinquent taxpayers. The owner had been out of the country investigating fraud perpetrated against him and his LLCs by the delinquent taxpayers, and was not aware of the complaint filed against him.

Taxpayer Can Sue Bank For Failing to Issue Correct Form 1099: In Henry v. Synchrony Bank, 2016 PTC 495 (S.D.W. Va. 2016), a district court declined to dismiss a taxpayer's claims against a bank under Code Sec. 7434 for willfully filing false information returns relating to a settlement agreement. The court noted that the bank had issued the taxpayer a Form 1099-MISC reporting double the settlement amount, but refused to issue a correct form even after the taxpayer notified it of the error.

Property Transactions

Mortgage Modifications Qualify for Debt Forgiveness If Entered into Before January 1st: The IRS has issued a notice providing that qualified principal residence debt will still be considered discharged under the exclusion in Code Sec. 108(a) if, before January 1, 2017, a mortgage loan servicer sends a borrower-homeowner a notice in conjunction with a written Trial Period Plan (TPP) under the Principal Reduction Modification Program (PRMP) or the Home Affordable Modification Program (HAMP), even if the related mortgage modification occurs after that date. Notice 2016-72. Read More...

Retirement Plans

Rollover Limit Precludes Waiver of 60-Day Requirement for Taxpayer's Second IRA Distribution: The IRS ruled that a taxpayer's cognitive impairment prevented him from rolling over two distributions from his IRA and granted his request for a waiver of the 60-day rollover requirement for the first distribution. However, the IRS noted that Code Sec. 408(d)(3)(B) imposes a one-per-year limit on IRA rollovers, and ruled that the second distribution could not be rolled over. PLR 201647014. Read More...

IRA Withdrawals Are Includible in Income Where Taxpayer Can't Show Where Money Went: In Skog v. Comm'r, T.C. Memo. 2016-210, the Tax Court held that a taxpayer was required to include in gross income amounts withdrawn from his ex-wife's IRA. The taxpayer argued that he withdrew the amounts during divorce proceedings out of fear for his daughter's financial future, and claimed he did a tax-free rollover to a trust of which she was a beneficiary. However, the court noted the trust documents didn't name the daughter as a beneficiary and there were no records showing the amounts were rolled over.

One-Per-Year Limit Precludes Rollover For Second IRA Distribution: In PLR 201647014, the IRS ruled that a taxpayer's cognitive impairment prevented him from rolling over two distributions from his IRA and granted his request for a waiver of the 60-day rollover requirement for the first distribution. However, because Code Sec. 408(d)(3)(B) imposes a one-per-year limit on IRA rollovers, the IRS ruled that the second distribution could not be rolled over tax-free.

Corporation Found Liable for Excise Taxes on Single-Participant Defined Benefit Plan: In Pizza Pro Equipment Leasing, Inc. v. Comm'r, 147 T.C. No. 14 (2016), the Tax Court held that a corporation was liable for excise taxes under Code Sec. 4972 for contributions to a defined benefit pension plan whose only participant was the corporation's president. The IRS had determined that portions of the contributions to the plan were nondeductible, and thus subject to the excise tax, because the plan's funding didn't fully account for reductions under Code Sec. 415(b) for benefits beginning before age 62, and those contributions were in excess of the Code Sec. 404 limitations.

RICs and REITs

REIT's Nursing Homes Were Qualified Health Care Properties: In PLR 201647005, the IRS ruled that a taxpayer real estate investment trust's (REIT) senior living communities that offered a wellness center and onsite rehabilitation therapy were "qualified health care properties" within the meaning of Code Sec. 856(e)(6)(D). Accordingly, the IRS ruled that amounts paid to the taxpayer by its subsidiary leasing the property would not be excluded from rents from real property by reason of Code Sec. 856(d)(2)(B) provided the properties were operated and managed by an eligible independent contractor.

S Corporations

Death of Trust Owner Inadvertently Terminated S Corporation Status: In PLR 201648006, the IRS ruled that an S corporation inadvertently terminated when a trust holding shares in the corporation ceased to be an eligible shareholder, pursuant to Code Sec. 1361(c)(2), two years after the trust's owner died. The IRS determined that the corporation would continue to be treated as an S corporation provided the trustee sold the corporation's stock to an eligible S corporation shareholder within 120 days, and provided the trust filed tax returns treating the trust as an electing small business trust (ESBT).

 

November 2016

Accounting

IRS Issues Inflation-Adjusted Amounts for 2017: The IRS has released annual inflation-adjusted amounts for deductions, credits, phaseouts, and other amounts for tax year 2017. Rev. Proc. 2016-55. Read More...

The Latest: Republican Election Sweep Sets the Stage for Major Tax Changes in 2017: By winning the White House and holding on to their majorities in the House and Senate, Republicans are in a position to fulfill campaign promises to reduce individual and corporate tax rates, repeal healthcare taxes, repeal the estate tax, and possibly implement broad, substantive tax reform. Read More...

In-Depth Article: 2016 Year-End Tax Planning for Businesses:The second installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting business, and strategies clients can use to minimize their business' 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. See now...

In-Depth Article: 2016 Year-End Tax Planning for Individuals: The first installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. See now...

CPA Client Letter: 2016 Year-End Tax Planning for INDIVIDUALS See now...

CPA Client Letter: 2016 Year-End Tax Planning for BUSINESSES See now...

November AFRs Issued: In Rev. Rul. 2016-26, the IRS issued the applicable federal rates for November 2016.

Credits

IRS's Expert Finds the Service Miscalculated Allowable Energy Credits: In GUSC Energy, Inc. v. U.S., 2016 PTC 451 (Fed. Cl. 2016), the Court of Federal Claims determined that an open-loop biomass facility was entitled to damages related to the IRS's underpayment of credits under Section 1603 of the American Recovery and Reinvestment Act (ARRA) of 2009. The court noted that the testimony of the IRS's own expert undermined its original allocation, and held that the damages should be calculated based on that expert's testimony.

IRS Underpaid Taxpayers Eligible for Energy Property Grants: In Alta Wind I Owner-Lessor C v. U.S., 2016 PTC 435 (Fed. Cl. 2016), the Court of Federal Claims found the IRS underpaid owners of wind farm facilities by over $206 million when it used the value of the farms' grant-eligible parts and respective development costs to calculate basis in the property for purposes of awarding the taxpayers grants under Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA). The court determined that basis in the facilities must be calculated according to their purchase prices, and held the taxpayers were entitled to damages equal to the underpayment.

Deductions

Taxpayer Couldn't Prove Exclusive Business Use of Aston Martin, Depreciation Denied: In Roy v. Comm'r, T.C. Summary 2016-77, the Tax Court determined that a taxpayer wasn't entitled to a depreciation expense deduction under Code Sec. 167(a) for an Aston Martin he claimed he used in his aerospace consulting business. The court noted the taxpayer provided no credible evidence to show that he used the Aston Martin strictly as a business vehicle, and found it very unlikely that he did not use it for occasional personal excursions.

Tax Court Erred in Defining "Deposits" and "Loans," Decision Vacated: In Moneygram International v. Comm'r, 2016 PTC 473 (5th Cir. 2016), the Fifth Circuit vacated and remanded a Tax Court decision, finding the Tax Court applied incorrect definitions of "deposits" and "loans" in reaching its holding that the taxpayer wasn't a bank under Code Sec. 581, and thus couldn't deduct securities as bad debts. The Fifth Circuit disagreed that "deposits" included a requirement that funds be held for an extended period of time, and noted the Tax Court did not apply the appropriate definition of "loan" under prior court precedent.

Video Subscription Packages Aren't Qualified Films Eligible for DPAD: In TAM 201646004, the IRS National Office (IRS) advised that a subscription package of multiple channels of video programming distributed by a taxpayer was not a "qualified film" for purposes of the Code Sec. 199 domestic production activities deduction (DPAD), and thus gross receipts from the subscription package were not domestic production gross receipts (DPGR). However, the IRS noted that gross receipts from an individual film included in the package could qualify as DPGR.

Treasury Releases Statistics Regarding Use of Bonus Depreciation and Expensing Limits: In the Office of Tax Analysis Working Paper 110 (2016), the Treasury Department issued a study examining business use of bonus depreciation and Code Sec. 179 expensing limits. The study found that approximately 60 percent to 80 percent of corporations, pass-through entities, and individuals use Code Sec. 179 expensing. For bonus depreciation, the take-up rates relative to eligible investment generally were in the 50 percent to 60 percent range for C corporations and S corporations, in the 40 percent to 60 percent range for partnerships, and in the 30 percent to 40 percent range for individuals.

Charitable Deduction Denied Where Facade Easement Didn't Preserve Entire Building Exterior: In Partita Partners LLC v. U.S., 2016 PTC 424 (S.D.N.Y. 2016), a district court held that a partnership was not entitled to a deduction for its charitable donation of a preservation easement in the facade of a building located in a historic district. The court determined that because the easement did not include a restriction preserving the entire exterior of the building, the contribution did not satisfy the statutory requirements of Code Sec. 170(h).

No Deductions for Taxpayer Who Couldn't Prove Business Purpose for Writing and Cartoonist Activities: In Rangen v. Comm'r, T.C. Memo. 2016-195, the Tax Court determined that a taxpayer was unable to show that his writing and cartoonist activities were conducted with substantial regularity or for the purpose of producing income so as to constitute a trade or business, and denied his claimed business expense deductions.

Employment Taxes

Taxpayer Wasn't a Responsible Person Where Signing Paychecks Was Only Ministerial: In Fitzpatrick v. Comm'r, T.C. Memo. 2016-199, the Tax Court determined that the wife of the owner of a wine bar was not a responsible person for purposes of Code Sec. 6672. The court found that although the taxpayer had engaged the services of a payroll company on the business' behalf and would occasionally sign and deliver paychecks, she otherwise had little or no decision making power beyond those ministerial duties.

Estates, Gifts, and Trusts

Failure to Report Prior Years' Gifts Won't Extend Assessment Period for Current Year Gifts: In CCA 201643020, the IRS Office of Chief Counsel (IRS) advised that Code Sec. 6501(c)(9) does not provide an extended limitations period for assessing additional tax due where a taxpayer filed a gift tax return that reported a gift made during the calendar year but failed to report prior years' gifts on the return, thus causing the tax on the reported gift to be incorrectly calculated. The clear language of Code Sec. 6501(c)(9), the IRS said, precludes it from applying to a gift that was reported on the gift tax return even if prior years' gifts were omitted.

Exemptions - Personal and Dependency

Taxpayer's Lack of Records Undermined Claims She Was the Custodial Parent: In Lowe v. Comm'r, T.C. Memo. 2016-206, the Tax Court determined that a mother wasn't a custodial parent and wasn't entitled to a child tax credit or a dependency exemption deduction for her child, finding that the taxpayer couldn't prove the child livedwith her for more than half the year as required by Code Sec. 152(c). The taxpayer kept no records regarding the time the child spent between her and her ex-husband's home, and had admitted that the child may have spent the greater portion of the year with her ex-husband.

Exempt Organizations

Sale of Assets and Receipt of Royalties Didn't Generate UBTI: In PLR 201644019, the IRS ruled that an exempt organization's one-time sale of assets to a partnership would not result in unrelated business taxable income (UBTI) because the sale was not a business that is regularly carried on under Code Sec. 512(a). In addition, the IRS determined that payments by the partnership to the organization pursuant to a trademark license agreement for use of its brands were royalties excluded from UBTI under Code Sec. 512(b).

Foreign

Final Regulations Prevent CFCs from Using Partnerships to Defer U.S. Tax: In T.D. 9792 (11/03/16), the IRS issued final regulations treating property held by a controlled foreign corporation (CFC) in connection with certain transactions involving partnerships as U.S. property for purposes of Code Sec. 956. The regulations also provide rules for determining whether a CFC is considered to derive rents and royalties in the active conduct of a trade or business for purposes of determining foreign personal holding company income (FPHCI). The regulations are effective November 3, 2016.

Gross Income and Exclusions

Former Police Officer Could Exclude State Disability Payments from Income: In PLR 201643003, the IRS ruled that a statewide defined benefit plan was in the nature of a workmen's compensation act, and thus disability payments a former police officer received pursuant to the plan were excludible from his income under Code Sec. 104(a)(1).

Pastor's "Love Offerings" Received in Lieu of Salary Were Taxable Compensation: In Jackson v. Comm'r, T.C. Summary 2016-69, the Tax Court determined that amounts a pastor received from his church in lieu of a salary were taxable nonemployee compensation, rather than nontaxable "love offerings," gifts, or loans, as argued by the pastor. The church's bookkeeper had reported the amounts as compensation on Forms 1099-MISC, and the taxpayer was unable to provide convincing evidence that the church intended the payments as anything other than compensation.

Healthcare Taxes

Enrollment for 2017 HCTC Advance Monthly Payment Program Now Open: In IR-2016-148 (11/15/16), the IRS announced that it has opened registration and enrollment for the 2017 Advance Monthly Payment program for the health coverage tax credit (HCTC). Under this program, qualified taxpayers pay 27.5 percent of their health insurance premiums in advance to the HCTC program, which then adds the 72.5 percent advance portion of the HCTC and sends the full payment to the health plan or third party administrator each month.

Definition of Short Term Insurance Revised to Preclude Use as Primary Coverage: In T.D. 9791 (10/31/16), the IRS issued final regulations revising the definition of "short-term, limited-duration insurance" to provide that such coverage must be less than three months in duration, rather than less than 12 months under prior law. The revision addressed the issue of such insurance being sold as a type of primary coverage. The final regulations also adopt, without substantive change, proposed regulations on supplemental health insurance and the treatment of travel insurance as excepted benefits.

IRS

Leave-Based Donations to Hurricane Matthew Victims Not Included in Income: In Notice 2016-69, the IRS issued guidance on the income and employment tax treatment of leave-based donation programs to aid victims of Hurricane Matthew. Under such programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to Code Sec. 107(c) charitable organizations for the relief of those affected by the hurricane. The donated leave will not be included in the income or wages of the employees, and employers will be allowed to deduct the amount of the cash payment.

IRS Issues Correction to Disguised Sale Regulations: In T.D. 9788 (11/17/16), the IRS issued corrections to temporary regulations under Reg. Sec. 1.707-5T, amending language regarding the determination of a partner's share of a partnership liability. The correction is effective as of January 3, 2017.

Micro-Captive Transactions Deemed Transactions of Interest: In Notice 2016-66, the IRS identified "micro-captive transactions" as transactions of interest subject to reporting and disclosure under Code Sec. 6111 and Code Sec. 6112. In such transactions, a taxpayer attempts to reduce aggregate taxable income using contracts that the parties treat as insurance contracts and a related company that the parties treat as a captive insurance company.

Liens and Levies

LLC's Distributions and Fees to Owners Were Subject to Levy: In U.S. v. Dent, 2016 PTC 410 (9th Cir. 2016), the Ninth Circuit determined that a manager of an LLC was, pursuant to a levy, required to turn over to the IRS membership distributions and licensing fees the LLC paid to its owners. The court rejected the manager's argument that the distributions and fees were property interests not subject to levy, finding they fell within the scope of "income."

Penalties

Taxpayer's Financial Anxiety Might Be Reasonable Cause for Late Filing: In Lyerly v. U.S., 2016 PTC 446 (N.D. Ala. 2016), a district court declined to grant summary judgement for a taxpayer's refund claim for penalties assessed on his untimely returns. The taxpayer, who had severe anxiety regarding financial matters, argued his anxiety was so severe that it rendered him incapable of filing tax returns and prevented him from ensuring his preparers timely filed such returns. The court stated that whether the taxpayer's anxiety constituted "reasonable cause" was a question for a jury.

Fraud Penalties Applied Where Preparer Didn't Report Cash Payments: In Pena v. Comm'r, T.C. Memo. 2016-208, the Tax Court determined that a tax preparer was liable for fraud penalties relating to his unreported income and unsubstantiated deductions. The taxpayer was paid in cash for his services, did not deposit most of the payments into a bank, and paid himself from the undeposited amounts. He also claimed personal expenses as businesses expenses, and had extensive unsubstantiated business expenses.

Taxpayer Penalized for Taking Deductions After Ignoring Warnings That Partnership Was a Tax Shelter: In Arashiro v. Comm'r, T.C. Summary 2016-70, the Tax Court imposed negligence and substantial understatement penalties on a taxpayer whose losses from his interest in an organization's cattle breeding partnership were disallowed. The court noted that despite multiple warnings from the IRS that a similar partnership promoted by the organization was an abusive tax shelter, the taxpayer made no attempt to investigate the operation and continued to take deductions for substantial losses.

Procedure

Taxpayers Lacked Standing to Sue over Get Transcript Program Breach: In Welborn v. IRS, 2016 PTC 447 (D. D.C. 2016), a district court determined taxpayers did not have standing to bring a class action lawsuit alleging the IRS violated their rights by failing to prevent the disclosure of their personal identification information to third parties in conjunction with the hacked Get Transcript program. The court stated the taxpayers' claim that the disclosure of their return information through the Get Transcript program was negligent was conflated with their claim that the IRS failed to safeguard their information when designing the program, and found the IRS had not waived sovereign immunity with respect to the claims.

Tax Court Decision Not Enough to Overturn Tax Evasion Convictions: In Senyszyn v. U.S., 2016 PTC 470 (D.N.J. 2016), a taxpayer requested that a district court grant him relief from his tax evasion charges, arguing that a Tax Court decision finding that he was not liable for deficiencies where he repaid misappropriated funds was evidence of his innocence. The court agreed that the opinion established that the taxpayer wasn't guilty of evasion through embezzlement, but noted that he had also been found guilty of evasion through the preparation of fraudulent returns, which was not refuted by the Tax Court's decision.

Lack of Deficiency Notice Doesn't Bar Suspension of Assessment Period If a Proceeding Is Docketed: In CCA 201644020, the IRS Office of Chief Counsel (IRS) advised that the suspension of the limitations period on assessment in Code Sec. 6503(a) applies when a proceeding with respect to a deficiency is docketed in the Tax Court, even if no notice of deficiency had been issued to the taxpayer. The IRS noted that language in the Internal Revenue Manual (IRM) suggesting the suspension did not apply was incorrect.

Property Transactions

Exchange of Property Between Related Parties Doesn't Qualify as a Like-Kind Exchange: The Tax Court held that an exchange of property between related parties did not qualify for deferred recognition of gain under the like-kind exchange rules of Code Sec. 1031. The court determined the transaction was structured with a tax avoidance purpose, noting that the aggregate tax liability of the taxpayer and the related person that arose from their like-kind exchange and a sale transaction was significantly less than the hypothetical tax that would have arisen from the taxpayer's direct sale of the relinquished property. The Malulani Group, Limited and Subsidiary v. Comm'r, T.C. Memo. 2016-209. Read More...

Taxpayers Weren't Required to Include "Cash for Keys" Payment in Ordinary Income: The Tax Court determined that gross proceeds received by a married couple upon the foreclosure of their vacation home included a "cash for keys" payment received in conjunction with a deed in lieu of foreclosure agreement. The court rejected the IRS's arguments that the payment was ordinary income, finding it was inexorably linked to the relinquishment of their home and should be treated as part of the amount realized in the exchange. Bobo v. Comm'r, T.C. Summary 2016-74. Read More...

Retirement Plans

Guidance Issued on Rate of Return Limitations for Pension Equity Plans: In Notice 2016-67, the IRS describes the applicability of the market rate of return limitation rules of Code Sec. 411(b)(5) and Reg. Sec. 1.411(b)(5)-1(d) to a defined benefit plan that expresses a participant's accumulated benefit as the current value of an accumulated percentage of the participant's final average compensation, highest average compensation, or highest average compensation during a limited period of years (a type of plan often referred to as a "pension equity plan" or "PEP").

Tax Practice

IRS Slightly Reduces Proposed User Fee Increase for Enrolled Agent Examinations: In REG-134122-15 (10/25/16), the IRS withdrew proposed regulations that would increase the user fee for the special enrollment examination to become an enrolled agent from $11 per exam to $99 per exam, and in its place proposed new regulations that would instead increase the user fee to $81 per exam.

 

October 2016

Accounting

New Overtime Rules Go Into Effect December 1st; What Practitioners Need to Know: On December 1, 2016, final regulations updating overtime rules go into effect. The new rules, estimated to affect over 4.2 million workers, double the salary threshold at which a white collar worker can be classified as an "exempt employee" not entitled to overtime pay. The regulations also increase the salary threshold for highly compensated employees, who are subject to looser exemption criteria. The rules defining the types of employees who can qualify for exemption remain unchanged. RIN 1235-AA11. Read more...

2016 Year-End Tax Planning for Individuals; The first installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. Read more...

CPA Client Letter: 2016 Year-End Tax Planning for INDIVIDUALS See now...

CPA Client Letter: 2016 Year-End Tax Planning for BUSINESSES See now...

November AFRs Issued: In Rev. Rul. 2016-26, the IRS issued the applicable federal rates for November 2016.

Applicable Federal Rates: October AFRs Issued: In Rev. Rul. 2016-25, the IRS issued the applicable federal rates for October 2016.

Credits

IRS Finalizes Regulations on Internal Use Software for Purposes of the Research Credit: The IRS has finalized regulations clarifying the meaning of "internal use software" for purposes of the Code Sec. 41 research credit. Generally, unless such software meets a three part "high threshold of innovation test," development costs do not qualify for the credit. However, the final regulations provide a safe-harbor for expenditures related to software that is developed for both internal and third-party use (dual use software). The regulations are effective October 4, 2016. T.D. 9786 (10/4/16). Read more...

Student's Light Course Load Precluded Education Credit: In Pilmer v. Comm'r, T.C. Summary 2016-59, the Tax Court held that a taxpayer was not entitled to a Code Sec. 25A American Opportunity Tax Credit (AOTC) because she was not enrolled in at least half of her college's normal fulltime workload of 12 academic credits. The taxpayer was only officially enrolled in a course worth five credits, and the court declined to factor in a three credit course in which the taxpayer was not enrolled, but attended on an informal basis.

2016 Inflation Adjustment Factor for Section 45Q Credit Issued: In Notice 2016-53, the IRS published the calendar year 2016 inflation adjustment factor for the carbon dioxide (CO2) sequestration credit under Code Sec. 45Q.

Deductions

S Corporation Could Deduct Owner's Health Insurance Benefits: In Powell v. Comm'r, T.C. Summary 2016-66, the Tax Court determined that a taxpayer's wholly owned S corporation was entitled to deductions for health insurance benefits paid on his behalf. The IRS had disallowed the deductions, claiming the taxpayer had not provided any evidence beyond self-serving testimony that the expenses had been paid, but the court found the taxpayer to be reliable and noted that he had treated the expenses consistently throughout several years.

State Law Precluded Federal Tax Deduction for Alimony Payment: In Muniz v. Comm'r, 2016 PTC 402 (11th Cir. 2016), the Eleventh Circuit affirmed the Tax Court's holding that a taxpayer was not entitled to deduct the amount of a lump-sum alimony payment to his ex-wife. The court noted that state law was clear that liability to pay an award of lump-sum alimony does not terminate on the death of the payee spouse, and thus the amount was not deductible under Code Sec. 71(b) for federal tax purposes.

Unrepaid Advances to Fund Former Boyfriend's Comics Weren't Business Bad Debts: In Hatcher v. Comm'r, T.C. Memo. 2016-188, the Tax Court determined that married taxpayers were not entitled to a business bad debt deduction for unpaid amounts the wife had lent to a former boyfriend to fund the development of his comic strip. The court noted that she was not in the business of lending money and that her main reason for making the advances was personal. Accordingly, the amounts would only generate a short-term capital loss under Code Sec. 166(d).

IRS Will Not Follow Third Circuit's Holding in Giant Eagle: In Action on Decision 2016-3, the IRS announced its nonacquiescence to the Third Circuit's ruling in Giant Eagle, Inc. v. Comm'r, 2016 PTC 159 (3rd Cir. 2016), in which the circuit court held that under the "all events" test a supermarket chain could deduct unredeemed rewards shoppers had earned for gasoline purchases. The IRS believes that a taxpayer's liability for unredeemed discount coupons is not fixed before the customer purchases fuel, and thus the allowance of deductions is improper.

Cattle Activity Losses Attributed to Corporation, Not Owners: In Barnhart Ranch, Co. v. Comm'r, T.C. Memo. 2016-170, the Tax Court held that a corporation owned by taxpayers in connection with their cattle operation was a separate entity and not merely their agent. The court noted the corporation bought and sold the cattle in its own name and held itself out to the public as the manager of the operation. Accordingly, losses from the activity were deductible by the corporation, not the taxpayers.

Expenses to Travel Cross-State for Work Weren't Deductible: In Collodi, Jr. v. Comm'r, T.C. Summary 2016-57, the Tax Court determined that a taxpayer who lived in Northern California but worked on gas wells in Southern California was not entitled to deductions for overnight travel and mileage expenses. The court noted that while the taxpayer's permanent residence was in Northern California, his tax home was his principal place of employment was in Southern California and, thus, expenses for traveling to, and staying near, that location were not incurred while away from home under Code Sec. 162(a).

Construction Worker Could Deduct Cost of Boots, But Not Shirts: In Sanek v. Comm'r, T.C. Summary 2016-60, the Tax Court determined that a taxpayer was entitled to deductions for steel-toed construction work boots the taxpayer purchased for use in his job, but not for work shirts. The court noted that the boots were specifically required as a condition of his employment, but that the taxpayer failed to establish that the shirts were not suitable to general use as ordinary clothing.

Taxpayer Couldn't Switch to Accrual Method to Deduct Legal Fees: In Mills v. Comm'r, T.C. Memo. 2016-180, the Tax Court held that because a taxpayer did not obtain permission from the IRS to change his single-member LLC's accounting method from the cash to the accrual method, he was only entitled to deduct legal fees he paid during the year at issue, rather than the full amount of the fees billed in that year. The taxpayer, who had used the cash method for many years, filed an amended return using the accrual method, citing a tax software error as the reason for his original reporting.

Employment Taxes

CEO Knew Company Wasn't Current on Tax Payments, Liable for Unpaid Payroll Taxes: In U.S. v. Watson, 2016 PTC 397 (W.D. Va. 2016), a district court determined a taxpayer was liable for unpaid payroll taxes and penalties, finding he was a responsible person and that he willfully failed to pay the taxes. The court noted that the taxpayer, the CEO of the company, was well aware that his company had failed to timely remit the trust fund taxes and knew the company habitually prioritized payments to other creditors over the IRS.

Employment Tax Liability Fell on Sole Owner of LLC: In Herber E. Costello, LLC v. Comm'r, T.C. Memo. 2016-184, the Tax Court held that the sole member of an LLC was liable for the company's unpaid employment taxes. The court rejected the taxpayer's arguments that, by later merging with a corporation and filing a Form 1120, the LLC should be treated as a corporation and be held liable for the taxes. The court stated that because the company had never filed a Form 8832, Entity Classification Election, it was a disregarded entity.

Estates, Gifts, and Trusts

Trust Can't Deduct Charitable Contributions Where Will Did Not Explicitly Allow Them: The Tax Court held that charitable contributions made by a trust were not deductible because they were not made pursuant to the will that established the trust. The court stated that if the decedent had intended to give his trustees authority in his will to make charitable contributions, he could have added language to that effect, and disagreed that the will contained a "latent ambiguity" allowing the contributions. Harvey C. Hubbell Trust v. Comm'r, T.C. Summary 2016-67. Read more...

IRS Granted Extension to Make QTIP Election for Marital Trusts: In PLR 201641018, the IRS granted an estate's request for an extension of time to make an election under Code Sec. 2056(b)(7) to treat marital trusts as qualified terminable interest property (QTIP) trusts. The surviving spouse had mistakenly believed that the value of the estate was not enough to fund the marital trusts, but after an additional appraisal, determined the trusts were required to be funded and that a QTIP election for the trusts was necessary.

Incompetent Legal Counsel Doesn't Excuse Estate from Late Filing Penalties: An estate could not recover more than $1.2 million in penalties and interest paid as a result of the late filing of its federal estate tax return, even where the executor was a high-school educated homemaker and her legal counsel was incompetent. The Sixth Circuit held that, although the circumstances in the case were unfortunate, case law makes it clear that the duties to file a tax return and pay taxes are non-delegable and mere good-faith reliance does not constitute reasonable cause to avoid late filing penalties. Specht v. U.S., 2016 PTC 363 (6th Cir. 2016). Read more...

Estate Could Deduct Theft Loss Decedent's LLC Suffered in Madoff Ponzi Scheme: The Tax Court, in an issue of first impression, held that an estate was entitled to a theft loss deduction for a loss the decedent's LLC incurred when its account with Madoff Investment Securities became worthless. The court pointed out that the estate lost value because its interest in the LLC had been reduced to zero as a result of the Madoff Ponzi scheme. Est. of Heller v. Comm'r, 147 T.C. No. 11 (2016). Read more...

IRS Updates Guidance on Unnecessary QTIP Elections to Address DSUE Portability: The IRS has updated its procedures for disregarding and treating as void a qualified terminable interest property (QTIP) election that does not reduce an estate's tax liability. The IRS notes that while initial guidance assumed executors would not purposefully make an unnecessary QTIP election, such elections could be used to increase the deceased spouse unused exclusion (DSUE) amount eligible for portability. The new procedures generally allow a surviving spouse to void an unnecessary QTIP election as long as no DSUE portability election has been made. Rev. Proc. 2016-49. Read more...

Gross Income and Exclusions

Purported Health Plan Resembled Deferred Compensation, Payments Included in Income: In Est. of Barnhorst, II v. Comm'r, T.C. Memo. 2016-177, the Tax Court held that payments, received in conjunction with cancer-related surgery, under a policy a decedent had set up with his law firm, were not from a "health or accident" plan under Code Sec. 105(a) and thus were not excludable from income. The court noted that because the policy did not calculate payments based on medical expenses and the taxpayer would eventually receive 97 percent of the value of the policy regardless of the nature of his condition, the payments received were more in the nature of deferred compensation.

Insurance Companies

Uncollectible Deductibles Were Bad Debt, Not Loss: In CCA 201642034, The IRS Office of Chief Counsel (IRS) advised that an insurance company, who wrote high deductible policies covering workers' compensation, automobile and general liability, was not entitled to a loss incurred for uncollectible deductibles. However, the IRS advised that the taxpayer was entitled to a bad debt deduction under Code Sec. 166, as the taxpayer's entitlement to reimbursement of the deductibles when it paid the insured's claims created a bona fide debt.

IRS

Temp Regs Allow More Time to Make Disaster Loss Elections: The IRS has issued temporary regulations, effective immediately, that extend the time available for taxpayers to make a Code Sec. 165(i) election to treat a loss from a federally declared disaster as sustained in the year preceding the disaster. The due date is now six months after the due date for filing the return for the disaster year. In addition, the IRS has issued a revenue procedure specifying how taxpayers must make the election. T.D. 9789 (10/14/16); Rev. Proc. 2016-53. Read more...

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-61, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

Proposed Regs Would Increase User Fee for Processing Offer in Compromise: In REG-108934-16 (10/13/16), the IRS issued proposed regulations that would increase the user fee for processing an offer in compromise to $300 (up from $186). The increased user fee would be effective for offers submitted on or after February 27, 2017.

Drought-Stricken Farmers and Ranchers Have More Time to Replace Livestock; Counties in 38 States Affected: The IRS has provided guidance regarding an extension of the replacement period under Code Sec. 1033(e) for livestock sold on account of drought in specified U.S. counties. Notice 2016-60. Read more...

IRS Updates Per Diem Rates for Travel Away From Home: The IRS has provided the 2016-2017 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Notice 2016-58. Read more...

IRS Use of Private Debt Collectors Begins Next Spring: In IR-2016-125 (9/26/16), the IRS announced that private collection of overdue federal tax debts will begin in spring of 2017. Taxpayers and their representatives will be given written notice if their account is being transferred to a private collection agency. The new private debt collection program was authorized under the Fixing America's Surface Transportation Act of 2015 (FAST Act) (P.L. 114-94, 12/4/15).

Legislation

New Law Lets Olympic Athletes Exclude Value of Medals and Prize Money from Income: On October 7, President Obama signed into law the United States Appreciation for Olympians and Paralympians Act of 2016 (Pub. L. 114-239) which excludes from gross income the value of medals or prize money received on account of competition in the Olympic Games or Paralympic Games. The limitation does not apply to taxpayers with adjusted gross income (AGI) of more than $1,000,000.

Bill Funds Government Through Early December: On September 29, President Obama signed the Legislative Branch Appropriations Act, 2017 (H.R. 5325), a stop-gap spending bill that averts a potential shutdown of the IRS and the federal government. The bill extends funding for governmental agencies through December 9, albeit at a 0.496 percent reduced rate. The bill also contains a provision banning the IRS from continuing to develop proposed regulations that would restrict the ability of Code Sec. 501(c)(4) organizations to engage in political activity.

Partnerships

IRS Revamps Partnership Disguised Sale Rules and Partnership Liability Regs: The IRS has issued final regulations under Code Sec. 707 and Code Sec. 752 regarding disguised sales of partnership property. In addition, the IRS has issued temporary and proposed regulations concerning how partnership liabilities are allocated for purposes of the disguised sale rules, and when certain liabilities are disregarded or treated as recourse liabilities. The final and temporary regulations are generally effective on October 5, 2016, and taxpayers may rely on the proposed regulations until finalized. T.D. 9787 (10/5/16); T.D. 9788 (10/5/16); REG-122855-15 (10/5/16). Read more...

IRS Rejects LLC Member's Argument That Income Attributable to Capital Isn't Self-Employment Income: The IRS Office of Chief Counsel (IRS) advised that the manager and president of a limited liability company (LLC) that operated franchise restaurants was not a limited partner and thus was subject to self-employment tax on his distributive share of the LLC's income as well as the guaranteed payments he received from the LLC. The IRS rejected the LLC's position that the individual's income should be bifurcated for self-employment tax purposes between income attributable to capital invested, and compensation for services rendered. CCA 201640014. Read more...

Procedure

IRS Collection Actions Abuse of Discretion Where SO Used Wrong Address: In Talbot v. Comm'r, T.C. Memo. 2016-191, the Tax Court determined that an IRS settlement officer (SO) abused her discretion in sustaining a levy and notice of federal tax lien for three of a taxpayer's seven tax years because she had failed to properly verify that deficiency notices had been mailed to the taxpayer's last known address for those years. The court noted the SO relied solely on the IRS's certified mailing list, which contained an incorrect address for the taxpayer.

IRS Could Proceed With Suit to Stop Tax Preparation Business: In U.S. v. Lawrence, 2016 PTC 376 (S.D. Fla. 2016), a district court denied a return preparation business's motion for summary judgement seeking to stop an IRS suit against it. The court noted that the taxpayer had directed and trained its employees and preparers to concoct expenses and create fake deductions, and allowed the IRS's suit seeking to enjoin the taxpayer from preparing returns to proceed to trial.

Tax Court Records Exempt from FOIA Requests: In Byers v. U.S. Tax Court, 2016 PTC 384 (D.D.C. 2016), a taxpayer brought suit in a district court, asking the court to order the Tax Court to turn over records identified in his Freedom of Information Act (FOIA) request. The taxpayer argued that, for purposes of FOIA, the Tax Court was an agency of the Executive Branch; however, the district court held that the Tax Court was best understood as a "court," not as an agency, and thus was exempt from FOIA.

Property Transactions

Loss from Sale of Equipment Used to Generate DPGR Didn't Affect QPAI: The IRS Office of Chief Counsel concluded that even though equipment a taxpayer used to produce qualified production property (QPP) generated domestic production gross receipts (DPGR), the equipment itself was not QPP and thus a loss on its sale did not reduce the taxpayer's qualified production activities income (QPAI) for purposes of calculating the Code Sec. 199 deduction. CCA 201642033. Read more...

IRS Issues Advise On Characterization of Gain from Merger Termination Fee: In CCA 201642035, the IRS Office of Chief Counsel (IRS) advised that in two scenarios involving taxpayers who incurred expenses investigating an acquisition of stock and who received a fee for a termination of a merger agreement, gain or loss from the fee would be determined by reducing any amount received by any costs incurred in the investigation that were capitalized. The IRS stated that the resulting gain or loss would be capital in nature.

Retirement Plans

IRA Rollover Extension Granted Where Taxpayer's Death Caused Missed Deadline: In PLR 201639021, the IRS granted an estate's request for an extension of the 60-day rollover requirement. The IRS noted that the failure to accomplish a timely rollover of a distribution from the decedent's IRA was due to his sudden illness and subsequent death during the 60-day period.

S Corporations

IRS Grants Extension to Elect to Treat Stock Sale as Asset Sale: In PLR 201640009, the IRS granted purchasers of an S corporation an extension of time to file an election under Code Sec. 336(e) to treat the sale of the corporation's stock as an asset disposition. The IRS noted that the failure to make the election was because qualified tax professionals did not file, or advise the taxpayers to file, the election statement, and that the request for an extension was made before the IRS discovered the failure.

S Corporation's Status Inadvertently Terminated When Shareholder Permanently Left Country: In PLR 201640001, the IRS determined than a taxpayer's S corporation's election terminated when a resident alien shareholder moved out of the U.S., but found the termination was inadvertent and ruled the taxpayer would be treated as continuing to be an S corporation. The taxpayer had promptly transferred all of the ineligible shareholder's shares to a U.S. citizen when it discovered that the shareholder had become a nonresident alien.

Tax Practice

Self-Study Seminars Available for Practitioners to Earn Continuing Education Credits: In IR-2016-134 (10/17/16), the IRS announced that more than a dozen self-study seminars covering federal and state tax issues are available on the IRS Nationwide Tax Forums Online (NTFO) website. For a fee, CPAs, Enrolled Agents and Annual Filing Season Program participants taking NTFO seminars can earn continuing education credits. The seminars can also be audited for free, although no credits will be earned.

 

Taxpayer Couldn't Use Discrepancies in Levy Notice Dates to Thwart Collections: In Weiss v. Comm'r, 147 T.C. No. 6 (2016), a taxpayer, noticing that the date on a notice of levy was a few days prior to the mailing date, intentionally submitted a request for a collection due process (CDP) hearing on the 31st day after the date on the notice, arguing that under Code Sec. 6330 his request was untimely and that the limitation period for collection was not tolled. The court held that when the date appearing on a levy notice is earlier than the date of mailing, the relevant date was the date the notice was mailed; thus the taxpayer's CDP request was timely and suspended the collection period.

Excessive Business Losses on Prepared Returns Alerted IRS to Tax Fraud: In U.S. v. Morrison, 2016 PTC 310 (5th Cir. 2016), the Fifth Circuit affirmed a couple's convictions for tax and wire fraud connected to their tax preparation business. The IRS investigated the business when it noticed an unusually high number of Schedule Cs reporting significant losses. The couple attempted to sell the business after the investigation began and made multiple misrepresentations in conducting the deals, including stating that they were not under investigation.

IRS Summons Violated Taxpayer's Fifth Amendment Privilege: In U.S. v. Greenfield, 2016 PTC 275 (2d Cir. 2016), the Second Circuit vacated a district court's ruling enforcing an IRS summons seeking documents relating to a taxpayer's foreign bank accounts. The district court had granted enforcement under the "foregone-conclusion" doctrine, but the circuit court determined that IRS failed to establish that it was foregone conclusion that the documents existed, and therefore held that the doctrine could not override the taxpayer's Fifth Amendment privileges.

AICPA's Suit Challenging the Annual Filing Season Program Dismissed: In American Institute of Certified Public Accountants v. IRS, 2016 PTC 285 (D.D.C. 2016), a district court determined the AICPA was not entitled to sue the IRS over its Annual Filing Season Program, finding the organization did not fall within the zone of interests protected by the relevant statute. The court noted the relevant statute (31 U.S.C. Sec. 330) was enacted by Congress to protect consumers in the tax-services marketplace, but found that the AICPA's suit essentially sought to remove competition (i.e. unenrolled preparers).

Tax Court Won't Reconsider Holding Embezzler Not Liable for Deficiency: In Senyszyn v. Comm'r, T.C. Memo. 2016-137, the Tax Court denied the IRS's motion for reconsideration of a prior opinion in which it declined to apply the doctrine of collateral estoppel to uphold whatever minimum deficiency would have been consistent with a taxpayer's prior conviction for tax evasion. The court had found that, contrary to an IRS agent's analysis, the taxpayer repaid to a former business associate more than the amount the agent determined the taxpayer to have misappropriated and that there was no deficiency.

Taxpayer Held In Contempt of Court For Failure to Produce Documents: In U.S. v. Belcik, 2016 PTC 253 (M.D. Fla. 2016), a district court determined that a taxpayer had properly invoked his Fifth Amendment privilege against self-incrimination when he refused to answer questions a revenue agent asked relating to a failure to file tax returns and tax evasion. However, the court found the privilege did not extend to the taxpayer's blanket refusal to produce documents requested by the IRS, and held the taxpayer in contempt of court.

IRS Could Not Rely on Waiver Where Delinquent Returns Lead to Reassessments: In U.S. v. Trevitt, 2016 PTC 255 (M.D. Ga. 2016), a district court found that although a married couple had signed Forms 870 waving their rights to notices of deficiency, their filing of delinquent returns lead to a reassessment that substantially increased their liabilities, requiring the IRS to send a notice of deficiency or obtain a new waiver before making an additional assessment. Because the IRS had not done so, the court held that the IRS's assessments were invalid.

Property Transactions

Two Cases Illustrate Importance of Material Participation for Real Estate Professionals: Two recent tax cases highlight the challenges taxpayers may face when attempting to use the real estate professional exception to the passive loss rules to deduct rental losses. In one, the Ninth Circuit affirmed a district court and held that Code Sec. 469(c)(7) does not automatically render a real estate professional's rental losses nonpassive and deductible where the taxpayer did not materially participate in the real estate endeavors. In the other, the Tax Court found that, because of her credible testimony and the substantial amount of money and time devoted to each rental property, a taxpayer met the material participation requirements in Reg. Sec. 1.469-5T(a)(7) and could deduct her rental losses. Gragg v. U.S., 2016 PTC 288 (9th Cir. 2016); Hailstock v. Comm'r, T.C. Memo. 2016-146. Read more...

Retirement Plans

Trust Could Use Beneficiary's Life Span to Calculate IRA Distributions: In PLR 201633025, the IRS ruled that because a trust that had inherited an IRA met the four requirements of Reg. Sec. 1.401(a)(9)-4, Q&A-5, beneficiaries of the trust were treated as designated beneficiaries of the IRA for purposes of determining the applicable distribution period under Code Sec. 401(a)(9). In addition, the IRS determined that the applicable distribution period for calculating the required minimum distributions from the IRA would be based on the life of the beneficiary with the shortest life expectancy.

Taxpayers Were Subject to Early IRA Withdrawal Penalty, Couldn't Deduct Contribution: In Barie v. Comm'r, T.C. Memo. 2016-160, the Tax Court determined that a married couple was liable for the 10-percent additional tax on a withdrawal the wife took from her IRA before she was 59 1/2 years old, finding the couple had not established that any of the exceptions under Code Sec. 72(t)(2) applied. In addition, because the couple's only source of income was from interest and dividends, Code Sec. 219(b) precluded their claimed deduction for a contribution to the husband's IRA.

Teacher's Rent Payments Didn't Reduce Amount of Early IRA Withdrawal: In Parisi v. Comm'r, T.C. Summary 2016-40, the Tax Court determined that a high school teacher's withdrawal from his IRA was taxable and subject to the 10 percent early withdrawal penalty. The taxpayer argued that the withdrawal was used for qualified higher education expenses that reduced the early distribution subject to penalty under Code Sec. 72(t)(2), but the court found he did not specify or substantiate education-related expenses for tuition, fees, supplies, or equipment and concluded he was not an eligible student for purposes of the exception under code Sec. 72(t).

Decedent's IRA Wasn't an Inherited IRA Where Spouse Received Proceeds Through Trust: In PLR 201632015, the IRS ruled that a decedent's IRA was not an inherited IRA for purposes of Code Sec. 408(d)(3) with respect to his surviving spouse, who had received the proceeds as the sole trustee of the trust containing the IRA. The IRS also determined the surviving spouse would be treated as the distributee of the IRA with respect to amounts rolled over, and that she could roll over those amounts into an IRA established and maintained in her name.

S Corporations

S Corporation's Status Not Terminated If Ineligible Shareholder Trust Files Proper Election: In PLR 201631007, the IRS ruled that an S corporation's election terminated as of the date that a shareholder trust became an ineligible shareholder, but found that the termination was inadvertent. The IRS stated the entity would continue to be treated as an S corporation provided the trust filed an electing small business trust (ESBT) election.

S Corp's Inadvertent Termination Relief Granted Pending Distributions: In PLR 201629001, the IRS determined that an S corporation's election terminated because for three consecutive years more than 25 percent of the corporation's income was passive activity income under Code Sec. 1362(d). The IRS found that the taxpayer's advisors inadvertently failed to inform it of the passive investment rules, and ruled that the taxpayer could continue to be an S corporation provided it distributed all of its accumulated earnings and profits and made an adjustment pursuant to Code Sec. 1362(f)(4).

 

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