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Tax Research Briefs - Archived (November 2014 - August 2014)

NOVEMBER 2014

Accounting Practice

Year-End BUSINESS Tax Planning Focuses on Tangible Property Rules and Tax Extenders Pre TIPA: New tangible property rules, unknown fate of tax extenders bill add new twists to year-end tax planning for businesses. This article is the final of two installments in Parker's year-end tax planning series. Read more...

Year-End Tax Planning for INDIVIDUALS in Light of Uncertainty Regarding Tax Extenders Pre TIPA: Unknown fate of tax extenders bill produces uncertainty in year-end individual tax planning. This article is the first of two installments in Parker's year-end tax planning series. Read more...

Accounting Practice Aids

CPA CLIENT LETTER: 2014 Year End Tax Planning for INDIVIDUALS Pre TIPA. It's that time of year where we should think about preparing an estimate of your current year tax liability and see if we can reduce that liability. There are several things to consider when doing year-end tax planning: taking advantage of expiring tax provisions, deferring income into next year, or accelerating income into the current year (and doing the opposite with expenses). The proper strategy depends on whether or not you anticipate a significant change in income or expenses next year. Read more...

CPA CLIENT LETTER: 2014 Year End Tax Planning for BUSINESSES Pre TIPA. This year saw numerous tax developments that affect businesses, many of which deserve special scrutiny for year-end planning in an effort to minimize your 2014 tax bill. While Congressional gridlock has prevented favorable tax provisions, known as the "tax extenders," from being passed, these provisions may not yet be dead. Read more...

C Corporations

Final Regs Clarify Rules for E&P Allocations in Tax-Free Transfers: In T.D. 9700 (11/10/14), the IRS issued final regulations under Code Sec. 312 clarifying current regulations on allocation of earnings and profits in tax-free transfers from one corporation to another. The IRS also issued final regulations under Code Sec. 381 that modify the definition of an acquiring corporation with regard to certain acquisitions of assets.

IRS Issues Final Regs on Allocation of Basis in All Cash D Reorganizations: In T.D. 9702 (11/12/14), the IRS issued final regulations on the determination of the basis of stock or securities in certain reorganizations where no stock or securities of the issuing corporation is issued and distributed in the transaction. The final regulations clarify that only a shareholder that owns actual shares in the issuing corporation in such a reorganization can designate the actual share of stock of the issuing corporation to which the basis, if any, of the stock or securities surrendered will attach.

Credits

Property Received from Executor Not Eligible for First-Time Homebuyer Credit: In Est. of Menges v. Miller, 2014 PTC 563 (M.D. Pa. 11/04/14), the district court held that the taxpayer was not eligible for the first-time homebuyer tax credit with respect to property she had received from the executor of her grandmother's estate. As the taxpayer was a beneficiary and acquired the property from a "related person" (the executor of the grandmother's estate), she did not "purchase" the property within the meaning of Code Sec. 36(c)(3) and thus was not entitled to the credit.

Taxpayer's Solar Energy Systems Constitute Energy Property for Investment Tax Credits: In PLR 201444025 (10/31/14), a taxpayer requested a ruling that the solar energy systems it manufactured, produced, and occasionally owned and operated, constitute energy property for purposes of the energy credit under Code Sec. 48. As all of the components of the solar energy systems used solar energy directly to generate electricity, the systems were energy property eligible for the energy credit.

Deductions

Software Licensing Arrangement Qualifies for Domestic Production Activities Deduction:A taxpayer's revenue from licensing software to contracting parties who use the software to perform services for end users qualified as gross receipts for purposes of the Code Sec. 199 domestic production activities deduction. The taxpayer's license to end users did not mean the taxpayer was providing services to the end users. TAM 201445010. Read more...

Theft Loss Deduction Allowed under "Qualified Investor" Safe Harbor: In CCA 201445009 (11/07/14), the taxpayer transferred to third parties money that was to be used to purchase investments, but that was not so used. The Office of Chief Counsel concluded that the taxpayer was a "qualified investor" under the Rev. Proc. 2009-20 Ponzi scheme safe harbor and was thus able to deduct theft losses for amounts invested in a fraudulent scheme.

Individual Taxpayers' NOL Deductions Denied for Insufficient Substantiation: In Boring v. Comm'r, T.C. Summary 2014-105 (11/10/14), the Tax Court decided the taxpayers were not entitled to claim an $87,787 NOL carryover due to a lack of substantiation. The taxpayers' only support for the NOLs were their prior-year tax returns, which the court determined was not sufficient to establish that the losses were actually incurred.

Expenses from a Captive Insurance Arrangement Were Deductible: In Securitas Holdings, Inc. v. Comm'r, T.C. Memo. 2014-225 (10/29/14) the Tax Court held that taxpayers could deduct insurance expenses from a captive insurance arrangement. The arrangement involved insurable risk, shifted and distributed risks, and was insurance in the commonly accepted sense; thus, the insurance expenses were deductible under Code Sec. 162.

Disaster Relief

IRS Designates West African Ebola Outbreak a Qualified Disaster: In Notice 2014-65 (10/29/14), the IRS designates the Ebola virus outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of Code Sec. 139 of the Code. As a result, payments of qualified disaster relief to assist victims affected by the Ebola virus outbreak in these three countries are excludable from the recipients' gross income.

IRS Provides Relief for Leave-Based Donation Programs in Ebola Outbreak Area: In Notice 2014-68 (10/29/14), the IRS provides guidance on the income and employment tax treatment of leave-based donation programs to aid victims of the Ebola virus outbreak. Under this guidance, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2016, to qualified tax-exempt organizations providing relief for the victims of the Ebola outbreak in Guinea, Liberia or Sierra Leone. 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 Announces Tax Relief for California Taxpayers Affected by Earthquakes: In SD-2014-14 (10/31/14), the IRS announced plans to provide tax relief, including deadline extensions, for certain taxpayers in California who were affected by the August 24, 2014, earthquakes.

Estates, Gifts, and Trusts

Proposed Division of Trust Will Not Have Tax Consequences for Beneficiaries: In PLR 201443004 (10/27/14), the IRS determined that the proposed division of a trust in to three new trusts for each of the donor's three children and their issue would not have gift, estate, generation-skipping, or income tax consequences. Because the beneficial interests of the beneficiaries were substantially the same both before and after the proposed division and modification of the trust, no transfer of property was deemed to occur and thus no tax consequences attached.

Excise Taxes

Final Regs Address Highway Use Tax Issues: In T.D. 9698 (10/29/14), the IRS issued final regulations relating to the Code Sec. 4481 highway use tax. The regulations provide guidance on the mandatory electronic filing of Form 2290, "Heavy Highway Vehicle Use Tax Return," for 25 or more vehicles; credits or refunds for sold, destroyed, or stolen vehicles; and the tax liability and computation of tax on the use of certain second-hand vehicles.

Exempt Organizations

Surviving Entity Still Exempt after Merger of Two Exempt Organizations: In PLR 201446026 (11/14/14), the IRS ruled that the merger of two tax-exempt entities would not adversely affect the surviving entity's exempt status under Code Sec. 501(c)(6). Although the target entity was previously recognized as exempt under Code Sec. 501(c)(4), it worked collaboratively with the surviving entity on issues of common concern and was effectively operating in a manner similar to an organization exempt under Code Sec. 501(c)(6). Because the surviving entity was expected to continue operating in a manner consistent with Code Sec. 501(c)(6), the IRS ruled that its exemption would not be jeopardized by the merger.

District Court Dismisses Suit Alleging IRS Mishandling of Requests for Tax-Exempt Status: In True the Vote v. IRS, 2014 PTC 553 (D.D.C 10/23/14), the District Court for the District of Columbia dismissed allegations from a taxpayer corporation regarding alleged IRS misconduct relating to its request for tax-exemption. The court found that it lacked jurisdiction and that taxpayer was unable to state cognizable claims for which relief could be granted. The court reached similar conclusions in Linchpins of Liberty v. U.S., 2014 PTC 552 (D. D.C. 10/23/14).Read more...

IRS Provides Guidance for Certain Organizations Benefitting from Tax-Exempt Bond Financing: In Notice 2014-67 (10/27/14), the IRS provides interim guidance for determining whether a state or local government entity or a 501(c)(3) organization that benefits from tax-exempt bond financing will be considered to have private business use of its bond-financed facilities as a result of its participation in the Share Savings Program through an accountable care organization. The notice also solicits public comments on this guidance and on further guidance needed to facilitate participation in the Shared Savings Program by qualified users of tax-exempt bond financed facilities through accountable care organizations.

Foreign

IRS Issues Regs on Failure to File Gain Recognition Agreements; Relaxes Standards for Penalty Relief:The IRS has issued final and temporary regulations relaxing the existing reasonable cause standard for obtaining relief from penalties for failure to timely file an initial gain recognition agreement (GRA), or to satisfy other reporting obligations associated with certain transfers of property to foreign corporations in nonrecognition exchanges. The regulations, which finalize proposed regulations issued last year, affect U.S. persons that transfer property to foreign corporations. T.D. 9704 (11/19/14). Read more...

Healthcare

Supreme Court to Review Obamacare Insurance Subsidy Case in Wake of Circuit Split:The Supreme Court has granted review of a Fourth Circuit decision that upheld IRS regulations extending tax-credit subsidies to health insurance purchased through federally run Exchanges, bringing to a head the latest challenge to the Affordable Care Act (ACA). King v. Burwell, No. 14-114 (S. Ct. 11/10/14).Read more...

IRS Releases Guidance on Eligibility for Minimum Essential Coverage under Pregnancy-Based Medicaid and CHIP Programs: In Notice 2014-71 (11/07/14), the IRS provides guidance on eligibility for minimum essential coverage for purposes of the Code Sec. 36B premium tax credit for pregnancy-related Medicaid and Children's Health Insurance Program (CHIP) programs. An individual enrolled in a qualified health plan who becomes eligible for Medicaid coverage for pregnancy-related services that is minimum essential coverage, or for CHIP coverage based on pregnancy, is treated as eligible for minimum essential coverage under the Medicaid or CHIP coverage for purposes of the premium tax credit only if the individual enrolls in the coverage.

Healthcare Plans Lacking Hospital Coverage Do Not Meet Employer Mandate Requirements: The IRS has determined that plans lacking coverage for in-patient hospitalization services or for physician services do not meet the Affordable Care Act's minimum value (MV) requirement; large employers adopting such a plan may be exposed to penalties under the healthcare law's employer mandate regardless of whether the plan passes muster with IRS's online MV Calculator. Notice 2014-69. Read more...

Hobby Loss

Expert Trainer's Involvement in Thoroughbred Venture Helps Taxpayers Avoid Hobby Classification: The Tax Court gave considerable weight to the involvement of a professional trainer as a co-owner in a thoroughbred racing venture in holding that heavy losses incurred in 2009 and 2010 by the taxpayers were not hobby losses. Annuzzi v. Comm'r, T.C. Memo 2014-233 (11/13/14).Read more...

Liens and Levies

Transfer of Apartment to Trust Deemed Fraudulent; Challenge to Tax Liens Dismissed: In U.S. v. Nassar, 2014 PTC 565 (S.D.N.Y. 11/10/14), the district court denied the taxpayer's motion to dismiss a lien on an apartment held in trust. The IRS had attached the lien under the independent theories that the trust was merely the taxpayer's nominee, and that the transfer of the apartment to the trust was a fraudulent conveyance under New York law. Because the taxpayer transferred the apartment for $10 consideration at a time when he was facing significant financial liabilities (thus making it difficult for creditors to reach), yet still continued personal enjoyment of the premises, the court found the the IRS had adequately plead that the taxpayer had, at the very least, a general intent to defraud his subsequent creditors and denied the taxpayer's motion to dismiss the lien.

Court Finds Bank's Security Interest had Priority over IRS Tax Lien: In Susquehanna Bank v. U.S., 2014 PTC 560 (4th Cir. 10/31/14), the Fourth Circuit determined priority between a tax lien filed by the IRS and a bank's security interest created by a deed of trust that was executed before the IRS filed its lien but recorded thereafter. The court held that under Maryland common law, the bank had acquired an equitable security interest in the property and thus had priority over the IRS's tax lien.

Survivorship Rights In Jointly Held Property Invalidate IRS Tax Lien: In NPA Associates, LLC v. Est. of Cunning, 2014 PTC 551 (D. V.I. 10/17/14), a district court held that an IRS tax lien was extinguished when the taxpayer died and the encumbered property - held in joint tenancy with a right of survivorship - went to the surviving joint tenant. Federal tax liens cannot extend beyond the property interests held by the delinquent taxpayer.

Partnerships

Proposed Partnership Regs Embrace "Hypothetical Sale" Approach for Hot Asset Distributions: The IRS issued proposed regulations embracing the "hypothetical sale" approach for measuring whether a distribution reduces a partner's interest in the partnership's Section 751 property, and allowing greater flexibility in determining tax consequences when a reduction occurs. REG-151416-06. Read more...

Penalties

Net-Worth Method Used to Support Fraud Determination Against Surf Shop Owners:The Tax Court upheld the IRS's use of the "net worth and personal expenditures" method (net-worth method) of income reconstruction; finding a family running a chain of surf and skateboard shops was liable for taxes on underreported income and civil fraud penalties. Worth v. Comm'r, T.C. Memo 2014-232 (11/13/14). Read more...

Procedure

Tax Preparer Permanently Barred from Preparing Taxes after Fraud Conviction: In U.S. v. Majette, 2014 PTC 568 (D.N.J. 11/12/14), the IRS sought a permanent injunction to prohibit a tax preparer from preparing income tax returns for others. The preparer had prepared and filed false federal income tax returns on behalf of his customers, and is currently incarcerated after pleading guilty to two tax fraud offences. The court determined such an injunction was necessary to prevent further fraud.

Taxpayer's Bankruptcy Petition Didn't Bar Petition with Tax Court: In Perry v. Comm'r, T.C. Memo. 2014-231 (11/10/14), the taxpayer filed a petition for redetermination with the Tax Court, and 3-1/2 hours later filed a petition for bankruptcy with a California U.S. Bankruptcy Court. The IRS sought to dismiss the case in the Tax Court on the grounds that an automatic stay barred the case. The court held that as the taxpayer had filed with the Tax Court before she filed with the Bankruptcy Court, and thus before the automatic stay took effect, the court still had jurisdiction to hear the case.

Taxpayers' Frivolous Challenge of Substitute Returns Results in $10,000 Sanction: In Rader v. Comm'r, 143 T.C. No. 19 (10/29/14), taxpayers failed to file multiple returns, and after the IRS recreated and filed substituted returns, it assessed deficiencies. The taxpayers attacked the sufficiency of the substitute returns, argued that certain deficiencies should be offset by tax withheld, raised a frivolous Fifth Amendment claim, and contested the IRS's imposition of additions to tax. The court sided with the IRS on all issues, and additionally imposed a $10,000 penalty under Code Sec. 6673(a)(1) after concluding that the taxpayer had instituted proceedings primarily for purposes of delay.

Property Transactions

Proprietor of a Residential Glass Business Failed to Establish He Was a Real Estate Professional:The rental real estate activities of a taxpayer who failed to properly document that he was a real estate professional were treated as passive activities. The taxpayer's failure to keep records of time spent on specific activities that could be considered "construction" or "reconstruction" in his residential glass business proved fatal to his bid to claim real estate professional status. Cantor v. Comm'r, T.C. Summary Opinion 2014-103 (11/06/14). Read more...

Taxpayer Required to Report Amounts from Merger as Ordinary Income: In Brinkley v. Comm'r, T.C. Memo. 2014-227 (10/30/14), taxpayer, a key employee of a company acquired in a merger was offered a large sum of money in exchange for his stock, conditioned on his employment with the acquirer. Taxpayer claimed the entire amount received was in exchange for his stock and thus capital gain, but the Tax Court held that the sums were mostly compensation and thus ordinary income.

Eighth Circuit Reverses Tax Court on Treatment of CRP Payments to Nonfarmer: Conservation Reserve Program payments made to nonfarmers constitute rentals from real estate for purposes of Code Sec. 1402(a)(1) and are excluded from the self-employment tax. Morehouse v. Comm'r, 2014 PTC 534 (8th Cir. 2014). Read more...

Retirement Planning

IRS Clarifies Application of One-Per-Year Limit on IRA Rollovers; Provides Transition Rule:The IRS has issued guidance clarifying the application of the one-per-year limit on tax-free rollovers between IRAs and provided a transition rule. Announcement 2014-32 (11/10/14).Read more...

IRA's Purchase of Shares in a Trust Owning Gold is Not an Acquisition of Collectibles: In PLR 201446030 (11/14/14), the IRS ruled that the acquisition of shares in a trust, whose assets are principally gold bullion, by the trustee of an IRA is not the acquisition of a collectible within the meaning of Code Sec. 408(m). Thus, an IRA owning shares of the trust will not be treated as making a deemed distribution under Code Sec. 408(m)(1) solely by virtue of owning such shares. However, an exchange of those shares for the underlying gold would constitute the acquisition of a collectible and would trigger a deemed distribution.

Taxpayer's Default on 401(k) Loan Triggers Deemed Distribution: In Scroggins v. Comm'r, T.C. Summary 2014-106 (11/13/14), the Tax Court determined that a taxable distribution from the taxpayer's 401(k) retirement plan occurred when he stopped making payments on a loan from the plan in late 2010. The taxpayer argued that the default should be treated as occurring in 2011, but the court concluded that the default happened when he stopped making payments in 2010, and in accordance with Reg. Sec. 1.72(p)-1, Q&A-10, the deemed distribution should be included in income for that year.

Defined Contribution Plans Allowed to Offer Lifetime Income Investments: In Notice 2014-66 (10/27/14), the IRS provides a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants. This special rule provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the Code Sec. 401(a)(4) nondiscrimination requirements.

Tax Accounting

IRS Releases Inflation-Adjusted Amounts for 2015: The IRS has released annual inflation-adjusted amounts for deductions, credits, phaseouts, and retirement plan limitations for 2015. Rev. Proc. 2014-61(10/30/14); IR-2014-99 (10/23/14).Read more...

Challenge to IRS Filing Program Dismissed - AICPA Can't Prove Risk of Injury: A federal district court dismissed the AICPA's challenge to the IRS's new Annual Filing Season Program, rejecting a myriad of theories claiming that the program would cause injury to AICPA members. AICPA v. IRS, 2014 PTC 555 (D. D.C. 10/27/14). Read more...

OCTOBER 2014

Accounting

Graduated Tax Rate Applies to Affiliated Group with Qualified Personal Service Corp: The taxable income of an affiliated group including a qualified personal service corporation is taxed at the graduated corporate tax rates, but the income of the qualified personal service corporation is not separately taxed at the 35 percent rate. Applied Research Associates, Inc. v. Comm'r, 143 T.C. No. 17 (2014). Read more...

Recurring Item Exception Inapplicable for Liability to Pay for Damaged Goods: In CCA 201442048 (10/17/14), the IRS's Office of Chief Counsel determined that the Reg. Sec. 1.461-5 recurring item exception to the normal economic performance requirement for accrual method taxpayers cannot be used for a liability to pay for damaged goods. The taxpayer, a professional moving company, offers a liability contract to cover any damage to goods moved. Because the payment liability for damaged goods is not described in any other provision under Reg. Sec. 1.461-4(g)(5), by default it is a liability under Reg. Sec. 1.461-4(g)(7), and as such is not eligible for the recurring item exception.

Change in Reporting of Oil and Gas Expenses Considered Change in Accounting Method: In CCA 201442050 (10/17/14), the IRS's Office of Chief Counsel determined that taxpayer's changes in the reporting of expenses for its oil and gas operations represented changes in its method of accounting, and because taxpayer failed to obtain consent from the IRS for such changes, taxpayer could not implement the new accounting methods for the years at issue.

Bankruptcy

Credits Received Before Petition Was Filed Aren't Exempt from Estate: In In re Frueh, 2014 PTC 528 (Bankr. N.D. Ill. 9/30/14), a bankruptcy court held that because a debtor received his tax refunds -- resulting from the earned income credit and the child care credit -- before his bankruptcy petition date, he could not exempt the tax refunds from his bankruptcy estate.

Court Partially Grants Request to Recharacterize Notes in Chapter 11 Case: In U.S. v. State Street Bank and Trust Co, 2014 PTC 543 (Bankr. De. 10/15/14), a bankruptcy court addressed the IRS's request to either recharacterize or equitably subordinate certain secured notes. These notes were issued in 1996 as part of a chapter 11 reorganization plan to two classes of creditors - known as Series A Junior PIK Notes and Series B Junior PIK Notes. The court denied the request to recharacterize the Series A Junior PIK Notes, but granted the request to equitably subordinate them. The requests to recharacterize or equitably subordinate the Series B Junior PIK Notes were both denied.

Deductions

Option Premium Not Deductible as Part Interest: In CCA 201442052 (10/17/14), the IRS's Office of Chief Counsel concluded that no portion of the deferred premium payments made by the taxpayer were deductible as interest expense under Code Sec. 163. The taxpayer, an insurer and member of an affiliated group of corporations, purchased put options to hedge certain annuity contracts and was required to pay premiums on those options, which its parent corporation deducted as part interest. Noting that the agreements characterized the payments as premiums, not interest, and the transactions as options, not indebtedness, the Chief Counsel's Office found no basis for deducting the payments as interest.

Ten-Year Carryback of Worthless Stock Loss Inapplicable: In CCA 201442054 (10/17/2014), the IRS's Office of Chief Counsel concluded that the taxpayer's worthless stock loss was not attributable to product liability under Code Sec. 172(f) and thus was not eligible for a special 10-year carryback period. According to the Chief Counsel's Office, the worthlessness loss was due to the cancellation of the stock in a bankruptcy proceeding, rather than due to any product liability claim against the taxpayer.

Tax Court Holds That Distinguished Artist's Work Was Not a Hobby: The taxpayer's work as an artist was not a hobby and, thus, the losses from her artist business were not limited by the hobby loss rules; however, the court left for another day a decision on whether the taxpayer's expenses were deductible as ordinary and necessary business expenses. Crile v. Comm'r, T.C. Memo. 2014-202 (10/2/14). Read more...

Employment Taxes

Claim to Recover Taxes Must be Brought Under Federal Statute: In Chalfin v. St. Joseph's Healthcare System, 2014 PTC 541 (D. N.J. 10/10/14), a district court held that a class action complaint in state court alleging negligence by a hospital for withholding too much FICA tax from doctors working for the hospital and seeking a refund of such tax was preempted by federal law. The court agreed with the hospital that the purported negligence claim brought under state law was completely preempted by the federal tax refund statute - Code Sec. 7422 - because the claim sought to recover a refund of taxes the employer collected and remitted to the IRS.

Offers of Compromise Extended Statute: In U.S. v. Eichhorn Stained Glass, Inc., 2014 PTC 535 (W.D. Ky. 10/9/14), a district court held that two offers in compromise filed by the taxpayer, both of which the IRS rejected, extended the statute of limitations period by 948 days. Thus, the IRS's lawsuit against the taxpayer for the collection of employment taxes was timely filed with respect to all time periods except one. Further, because the IRS timely revoked the certain certificates of release of federal tax lien that were mistakenly filed, collection was not barred.

Estates, Gifts, and Trusts

Transfer by Recapitalization Triggers Gift Tax: In CCA 201442053 (10/17/14), the IRS's Office of Chief Counsel determined that the recapitalization of a family owned LLC constituted a transfer from the donor to her children for gift tax purposes. When the LLC was recapitalized, the donor surrendered her right to participate in future profit and loss, including those attributable to the LLC's assets, but held an applicable retained interest senior to the transferred interest. The donor received property in the form of an agreement by her children to manage the LLC. Thus, the recapitalization was a transfer for gift tax purposes.

Foreign

IRS Simplifies Reporting of Canadian Retirement Plans; Eliminates Form 8891: A new revenue procedure makes it easier for taxpayers who hold interests in certain Canadian retirement plans to get favorable U.S. tax treatment. Rev. Proc. 2014-55 (10/7/14). Read more...

Dual Resident Can't Informally Abandon U.S. Resident Status and Escape Tax on Stock Sale: The Tax Court rejected a taxpayer's claim that he was not subject to tax on a sale of U.S. corporate stock because he became a German resident and a U.S. nonresident alien when he "informally" abandoned his status as a lawful permanent resident; the taxpayer was subject to tax on the stock sale under the U.S. - Germany Treaty. Topsnik v. Comm'r, 143 T.C. No. 12 (9/23/14). Read more...

Gross Income

IRS Updates Guidance on Per Capita Payments to Indian Tribes: In Notice 2014-61 (10/6/14), the IRS supplements Notice 2013-1, in which it provided guidance on the federal tax treatment of per capita payments that members of Indian tribes receive from proceeds of certain settlements of tribal trust cases between the United States and those Indian tribes. Additional tribes have settled tribal trust cases against the United States since the publication of Notice 2013-1 and, in Notice 2014-61, the IRS updates the Appendix of Notice 2013-1 to reflect the additional settlement agreements. [Code Sec. 61].

Healthcare

ACA Challenges Continue with Oklahoma Court Invalidating Section 36B Regs: Adding to the tumult surrounding the survival of "Obamacare," a federal court in Oklahoma struck down the IRS regulation interpreting the Affordable Care Act (ACA) as permitting premium subsidies in states with federally established health care Exchanges. Oklahoma v. Burwell, 2014 PTC 515 (E.D. Okla. 9/30/14). Read more...

IRS Issues Final Rules on Excepted Benefits: In T.D. 9697 (10/1/14), the IRS issued final regulations that amend the regulations regarding excepted benefits. Excepted benefits are generally exempt from the health reform requirements that were added by the Health Insurance Portability and Accountability Act and the Patient Protection and Affordable Care Act. In addition, eligibility for excepted benefits does not preclude an individual from eligibility for a premium tax credit under Code Sec. 36B if an individual chooses to enroll in coverage under a Qualified Health Plan through an Affordable Insurance Exchange. The final regulations apply to group health plans and group health insurance issuers for plan years beginning on or after January 1, 2015. [Code Sec. 5000A].

Information Reporting

IRS to Eliminate 36-Month Rule for Deemed Debt Discharges: Proposed regulations would remove a rule that a deemed discharge of debt for which a Form 1099-C, Cancellation of Debt, must be filed occurs at the expiration of a 36-month non-payment testing period. REG-136676-13 (2014). Read more...

Final Rules Address Magnetic Media Filing of Benefit Plan Statements: In T.D. 9695 (9/29/14), the IRS issued final regulations relating to the requirements for filing certain employee retirement benefit plan statements, returns, and reports on magnetic media. For this purpose, the term "magnetic media" includes electronic filing, as well as other magnetic media specifically permitted under applicable regulations and IRS guidance. [Code Sec. 6058].

Original Issue Discount

November AFRs Issued: In Rev. Rul. 2014-28 (10/16/14), the IRS issued the applicable federal rates for November 2014.

Penalties

IRS Clarifies Terms Relating to the Economic Substance Doctrine: The IRS has provided additional guidance on the codification of the economic substance doctrine and related penalty amendments. Notice 2014-58. Read more...

Procedure

Surviving Corporation can Net Interest Following Statutory Merger: In Wells Fargo v. U.S., 2014 PTC 545 (10/20/14), the Court of Federal Claims, in a case of first impression, considered whether the term "same person" for purposes of netting interest on overpayments and underpayments under Code Sec. 6621(d) includes merged corporations. The IRS argued that "same person" meant entities with the same TIN at the time of the initial tax overpayment or underpayment, but the court found no support for this interpretation and sided with taxpayers, concluding that principles of corporate law, as well as IRS rules governing statutory mergers, supported a holding that merged corporations are the "same taxpayer" for purposes of Code Sec. 6621(d).

Property Subject to Levy Even After Transfer to Ex-Wife: In U.S. v. Rominski, 2014 PTC 546 (10/17/14), a district court found that the taxpayer was the true owner of a residence and his ex-wife was a mere nominee title-holder. Thus, the IRS could levy on the residence to enforce a lien against the taxpayer for unpaid taxes. The taxpayer had transferred title to the residence to his wife for estate planning and professional liability purposes. When the couple split, they neglected to transfer title back to the taxpayer, even though he paid all upkeep and continued to live there exclusively. Although the court found that the taxpayer was the true owner of the residence, the court rejected the IRS's argument that the transfer was a sham.

Tax Court Makes U-Turn on Statute of Limitations for Excise Tax: In Eggertsen P.C. v. Comm'r, 143 T.C. No. 13 (10/1/14), the Tax Court reversed its prior holding and held that the general statute of limitations under Code Sec. 6501 applies for assessing an excise tax stemming from an impermissible allocation of securities in an employee stock ownership plan (ESOP). This effectively gives the IRS an unlimited period to assess excise tax if Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, is not filed, regardless of whether the taxpayer has notified the IRS of the prohibited allocation in other filings. [Code Sec. 6501].

Ford Motor Co. Not Entitled to Interest on Deposits with the IRS: In Ford Motor Company v. U.S., 2014 PTC 516 (10/1/14), the Sixth Circuit held that Ford Motor Co. was not entitled to interest between the time the company submitted amounts to the IRS as a deposit, and the time the company requested those amounts be treated as an advance payment for tax deficiencies. Ford argued that the conversion of its deposits into advance tax payments applied retroactively and that interest should thus accrue from the date the company remitted the deposits, instead of when the conversion occurred. The court determined that, at the outset, Ford could have remitted the estimated tax amount as an advance payment, but decided instead for a deposit. Thus, the court held that Ford's election prevented the remittances from being treated as overpayments, and the IRS correctly refused to pay interest for the time the funds were labeled as a deposit. [Code Sec. 6601].

Tax Court Has Jurisdiction to Review Denial of Whistleblower Claim: In Comparini v. Comm'r, 143 T.C. No. 14 (10/2/14), the Tax Court held that it had jurisdiction under Code Sec. 7623(b)(4) to review the denial by the IRS of a whistleblower award because the IRS had made a determination regarding the award and the taxpayers timely filed a petition invoking the Tax Court's jurisdiction. [Code Sec. 7623].

Tenth Circuit Reverses Imposition of Sanctions: In U.S. v. Melot, 2014 PTC 507 (10th Cir. 9/26/14), the Tenth Circuit reversed a district court's imposition of sanctions on the taxpayer because the district court violated the Fifth Amendment's Due Process Clause by imposing the sanctions without notice and an opportunity to be heard. The Tenth Circuit remanded the case and said that the district court is free to consider reimposing sanctions; but if the court reimposes sanctions, it must provide the taxpayer with notice and an opportunity to be heard.

Tax Court Addresses Issues for Judicial Review under Section 6330: In Buczek v. Comm'r, 143 T.C. No. 16 (10/6/14), the Tax Court held that it has jurisdiction to review the IRS's determination as to whether a taxpayer who has sought judicial review under Code Sec. 6330(d)(1) has raised an issue other than issues that have been identified by the IRS as frivolous or that reflect a desire to delay or impede the administration of federal tax laws. In so holding, the Tax Court clarified its prior decision in Thornberry v. Comm'r, 136 T.C. 356. Further, the court concluded that because the taxpayer did not raise on Form 12153 any issues specified in Code Sec. 6330(c)(2) that might be considered in an administrative hearing, no portion of the taxpayer's request for a hearing was excluded from the IRS's determination to disregard the entire request, and Code Sec. 6330(g) prohibited further judicial review of that determination. [Code Sec. 6330].

Statute of Limitations Tolled as a Result of Installment Agreement: In U.S. v. Chelsea Brewing, 2014 PTC 513 (S.D. N.Y. 9/26/14), a district court held that, where a taxpayer entered into three installment agreements during a limitations period, the statute of limitations was tolled 90 days based on the termination of each of the three installment agreements. [Code Sec. 6331].

Retirement Planning

IRS Releases Inflation Adjusted Retirement Plan Limitations for 2015: The IRS has announced the 2015 Pension Plan Limitations, which provide the 2015 retirement plan cost-of-living adjustments (COLA). IR-2014-99. Read more...

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2014-62, 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).

Divided Tax Court Holds That CSRS Did Not Accept Contribution as a Rollover:A taxpayer who used an IRA withdrawal to fund an increased annuity under the Civil Service Retirement System (CSRS) was subject to tax on the withdrawal because CSRS did not accept the taxpayer's contribution as a rollover. Bohner v. Comm'r, 143 T.C. No. 11 (9/23/14). Read more...

IRS Issues Guidance on Allocation of After-Tax Amounts to Rollovers: This IRS has issued rules for allocating pre-tax and after-tax amounts among disbursements that are made to multiple destinations from a Code Sec. 401(a) qualified plan, a 403(b) plan, or a governmental 457(b) plan. Notice 2014-54 (9/18/14); REG-105739-11 (9/19/14). Read more...

Tax Accounting

Chief Counsel's Office Doesn't Support Imposing Simplified Method on Restaurants: In CCA 201439001 (9/26/14), the Office of Chief Counsel advised the LB&I Operating Division, which is currently auditing a number of restaurants, that it would generally not support the imposition of the simplified production method if the restaurants under audit are willing to develop and implement a reasonable facts-and-circumstances method instead. In addition, if the restaurants use the simplified production method, the Chief Counsel's Office said it would support allowing them to treat all of their direct production costs (including kitchen labor) as Code Sec. 471 costs. [Code Sec. 263A].

Tax Credits

Tax Court Mostly Agrees with Taxpayer on Research Credit; A corporation was able to show that most of its projects qualified for the research tax credit; however, part of the CEO's compensation that went into the calculation of the credit was determined to be unreasonable for purposes of Code Sec. 174(e). Suder v. Comm'r, T.C. Memo. 2014-201 (10/1/14). Read more...

Tax Practice

Injunction Against Tax Return Preparer Not Necessary: In U.S. v. Hand-Bostick, 2014 PTC 533 (N.D. Tex. 10/8/14), a district court held that, although the taxpayers engaged in conduct normally subject to preparer tax penalties, an injunction was not necessary to prevent them from engaging in the same or similar prohibited conduct or interfering with tax administration or enforcement in the future. As a result, the court denied the IRS's request for injunctive relief.

Court Enjoins Preparer from Tax Practice: In U.S. v. Allen, 2014 PTC 544 (S.D. Ohio 10/15/14), a tax return preparer submitted several returns on behalf of clients in which, based on unreasonable theories and a reckless disregard for IRS rules and regulations, he falsely claimed that they did not earn any taxable income. The court noted that the IRS had identified hundreds of returns that the tax return preparer had prepared in contravention of the IRS rules and regulations - a course of conduct that the court described as "continual or repeated." As a result, the court held that the preparer was enjoined from acting as a federal tax return preparer.

SEPTEMBER 2014

Bankruptcy

No Theft Loss or Bad Debt Deduction Allowed for Unwise Investment made by Taxpayers: Where a husband and wife attempted to claim a bad debt or theft loss for money invested in a fraudulent real estate development companythat had filed for bankruptcy, the court disallowed the loss as there was a chance the couple could recover, and did in fact recover, some of their investment. Bunch v Comm'r, T.C. Memo. 2014-177 (8/28/14). Read more...

Failing to Pay Taxes Doesn't Qualify as "Scandalous": In In re Hart, 2014 PTC 457 (D. Ida. 9/2/14), a bankruptcy court held that a debtor's bankruptcy records did not meet the criteria for being sealed under Bankruptcy Code Section 107. The debtor had argued that Section 107(b)(2) applied to protect him with respect to a "scandalous" matter, i.e., the allegation that he failed to pay income taxes for 12 years. The court held that the allegations against the debtor did not rise anywhere near to a scandalous level.

One Hundred Percent REIT Exaction Tax Is Really a Penalty: In In re Desert Capital REIT, Inc., 2014 PTC 427 (9th Cir. B.A.P. 8/11/14), the Ninth Circuit Bankruptcy Appellate Panel held that the 100 percent exaction tax in Code Sec. 857(b)(7) is not a "tax" but rather functions as a penalty against a parent REIT for improperly allocated deductions to a taxable REIT subsidiary. The court concluded that the amount owed under Code Sec. 857(b)(7) was a non-pecuniary loss penalty and, thus, was not entitled to priority status as a "tax" in bankruptcy. [Code Sec. 857].

Deductions

Deduction for Year-End Bonus Denied Because Company Could Not Honor Check:A corporation could not deduct compensation paid to its sole shareholder because the company had insufficient funds to honor the check. Vanney Assoc. v. Comm'r, T.C. Memo. 2014-184 (9/11/2014). Read more...

No Deduction for Recoverable Losses: In Bunch v. Comm'r, T.C. Memo. 2014-177 (8/28/14), the Tax Court held that the taxpayers could not deduct unrecovered funds they had loaned to a mortgage company, which went into bankruptcy, as either a bad debt loss or as a theft loss. The taxpayers attempted to establish their loss by filing a proof of claim in the company's bankruptcy proceeding. However, the court concluded that the taxpayers did not adequately show that there was no reasonable prospect of recovery as of the end of the year in which they claimed the deduction. [Code Sec. 165].

Renting Home for Less Than FMV Precludes Rental Expense Deductions: In Hunter v. Comm'r, T.C. Memo. 2014-164 (8/14/14), the Tax Court held that a merchant marine, who spent years at sea, could not deduct over $95,000 in rental expenses for a three-year period for renting his home while he was at sea. The court said that even if the taxpayer didn't live at the property, he was deemed to have used the property for personal purposes because he rented it for less than fair rental value. The taxpayer had told the court that he based the amount of rent on what the renter of the property could pay rather than on the fair rental value rates for comparable properties. Thus, the court held that he could only claim deductions with respect to the property, such as mortgage interest, that are allowable without regard to any income-producing activity. [Code Sec. 280A].

Mortgage Interest Deduction Denied to Taxpayer Who Couldn't Prove Ownership: In Luciano-Salas v. Comm'r, T.C. Summary 2014-76 (8/11/14), the Tax Court held that, although the record showed the taxpayer made sporadic mortgage payments over the course of several years, there was no objective evidence that she was the legal owner of the property. The taxpayer had testified that, because her credit rating was poor, she had asked an acquaintance to assist her by acting as the purchaser of the property. Absent any evidence proving such an agreement existed, the Tax Court rejected the taxpayer's argument that she owned the property and was entitled to a mortgage interest deduction. [Code Sec. 163].

Conservation Easement Contribution Not Deductible Until Deed Was Recorded: In Zarlengo v. Comm'r, T.C. Memo. 2014-161 (8/11/14), the Tax Court held that the taxpayers were not entitled to a charitable deduction for their contribution of a faeasement until 2005, the year following the year that the deduction was taken. While the parties all signed the conservation deed of easement in 2004, the deed was not recorded until 2005 and, thus, was not protected in perpetuity until 2005. The Tax Court also held that the taxpayers substantially complied with the substantiation requirements with respect to the conservation easement and met the reasonable cause and good faith exception to the accuracy-related penalties assessed by the IRS. [Code Sec. 170].

Employment Taxes

Ninth Circuit Holds that FedEx Drivers Aren't Independent Contractors: The fact that FedEx's operating agreement with its drivers labeled the drivers as "independent contractors" did not make them so when viewed in the light of the entire agreement, the relevant policies and procedures, and state law; thus, they were reclassified as employees. Alexander v. FedEx Ground Package System, Inc., 2014 PTC 451 (9th Cir. 8/27/14). Read more...

IRS Authorized to Issue Additional Rules for Voluntary Withholding Agreements: In T.D. 9692 (9/16/14), the IRS issued final regulations underCode Sec. 3402(p) relating to voluntary withholding agreements. The final regulations allow the IRS to issue guidance in the Internal Revenue Bulletin (IRB) to describe specific types of payments for which income tax withholding under a voluntary withholding agreement would be appropriate, as well as the form and duration of such agreements. [Code Sec. 3402].

Estates, Gifts, and Trusts

Use of IRA Assets to Satisfy Pecuniary Legacies Are Treated as Sales and Exchanges: In PLR 201438014 (9/19/14), the IRS ruled that because a trust will use IRA assets to satisfy its pecuniary legacies, the trust must treat the payments as sales or exchanges. Therefore, under Code Sec. 691(a)(2), the payments are transfers of the rights to receive the income in respect of a decedent (IRD) and the trust must include in its gross income the value of the portion of the IRA which is IRD to the extent the IRA was used to satisfy the pecuniary legacies. In addition, because the terms of the trust do not direct or require that the trustee pay the pecuniary legacies from the trust's gross income, the transfer of a portion of the IRA in satisfaction of the pecuniary legacies does not entitle the trust to a deduction under Code Sec. 642(c)(1). Finally, because the purpose of a court order reforming the trust was to obtain tax benefits rather than resolve a conflict, the IRS will not respect the trust's reformation. [Code Sec. 691].

Executor Liable for Decedent's Taxes: In U.S. v. Est. of Reitano, 2014 PTC 467 (D. Mass. 9/4/14), a district court held that the IRS was entitled to a lien against the property of the executor of an estate because she transferred estate assets to herself rather than paying the IRS the tax liability owed by the decedent. The executor argued that family allowances and funeral and administrative expenses took priority over the IRS' claims. The court noted that this may be true if the executor left assets in the estate, but as she had transferred assets to herself, she violated the Federal Priority Statute. [Code Sec. 6321].

Recipient of Estate Property Can't Challenge Estate's Tax Liability: In U.S. v. Cowles-Reed, 2014 PTC 418 (9th Cir. 8/13/14), the Ninth Circuit held that a district court did not err when it refused to allow the taxpayer to challenge the amount of an estate's tax liability. The district court was correct, the Ninth Circuit said, that only the estate itself, and not an interested third party, can contest the tax assessment. The court noted that the government had sued the taxpayer in his individual capacity as a surviving joint tenant in receipt of estate property and that the estate was not a party to the litigation. As such, the court concluded, the taxpayer was a third party with respect to the estate's tax liability, and he could not use the lawsuit by the government as a vehicle for contesting the merits of the estate's tax assessment. [Code Sec. 7422].

Foreign

German Citizen Taxed in U.S. on Worldwide Income: In Topsnik v. Comm'r, 143 T.C. No. 12 (9/23/14), the Tax Court held that because a German citizen did not formally abandon his lawful permanent resident (LPR) status until 2010, he remained an LPR during the years in issue and was taxable by the United States on his worldwide income. Because the taxpayer was not subject to German tax as a German resident during the years in issue, he was not a German resident pursuant to the Germany-U.S. treaty and, therefore, was not exempted by the treaty from U.S. tax during those years. Thus, the court held that the taxpayer was taxable by the United States on this gain recognized during the years in issue from his 2004 installment sale of stock in a U.S. corporation. [Code Sec. 7701].

Section 956 Property Includes Accrued but Unpaid Interest on U.S. Obligation: In CCA 201436047 (9/5/14), the Office of Chief Counsel advised that for purposes of the rules in Code Sec. 956 relating to investment of earnings in U.S. property, the term "obligation" in Reg. Sec. 1.956-2T(d)(1)(i) includes accrued but unpaid interest on an obligation that is U.S. property within the meaning of Code Sec. 956(c)(1)(C). [Code Sec. 956].

IRS Plans to Amend Section 1298(f) Regs: In Notice 2014-51, the IRS announced that it will amend the regulations under Code Sec.1298(f) to provide guidance concerning U.S. persons that hold stock of a passive foreign investment company (PFIC) that is marked to market under Code Sec. 475 or another income tax provision other than Code Sec. 1296. The Treasury Department and the IRS determined that a U.S. person holding PFIC stock that is marked to market under a non-section 1296 MTM regime generally should not be subject to the reporting requirements of Reg. Sec. 1.1298-1T with respect to that stock, and the regulations will be amended to reflect this. [Code Sec. 1298].

Gains and Losses

New Rules Address Straddles and Debt Instruments: In T.D. 9691 (8/27/14), the IRS issued final regulations relating to the application of the straddle rules to a debt instrument. The final regulations clarify that a taxpayer's obligation under a debt instrument can be a position in personal property that is part of a straddle. The final regulations primarily affect taxpayers who issue debt instruments providing for one or more payments that reference the value of personal property or a position in personal property. [Code Sec. 1092].

Gross Income

Cost of Tenant Improvements Aren't Rental Income to Taxpayer: In CCA 201436048 (9/5/14), the Office of Chief Counsel advised that payments for the cost of certain tenant improvements were not rental income to the taxpayer because the terms of the lease did not indicate that the parties intended the lump sum reimbursements to be rent. The Chief Counsel's Office also concluded that the qualified leasehold improvement property placed in service and relating to the original premises was not tax-exempt use property under Code Sec. 168(h) because the property was nonresidential real property for purposes of Code Sec. 168(h) and the lease was not a disqualified lease. [Code Sec. 168].

Health Care

Obamacare Insurance Subsidy Case to be Reheard by Entire D.C. Circuit Court: On December 17, 2014, the entire panel of the D.C. Circuit Court will rehear the case involving the issue of whether Code Sec. 36B authorizes the IRS to provide tax credits for health insurance purchased on federal Exchanges. Halbig v. Burwell, 2014 PTC 456 (D.C. Cir. 9/4/14). Read more...

IRS Issues Regs on Compensation Provided by Health Insurers: In T.D. 9694 (9/23/14), the IRS issued final regulations on the application of the $500,000 deduction limitation for remuneration provided by certain health insurance providers under Code Sec. 162(m)(6). These regulations affect certain health insurance providers providing remuneration that exceeds the deduction limitation. [Code Sec. 162].

IRS Issues Guidance on Code Sec. 4980H for Determining who is a Fulltime Employee: In Notice 2014-49 (9/18/19), the IRS describes a proposed approach to the application of the look-back measurement method, which may be used to determine if an employee is a full-time employee for purposes of Code Sec. 4980H, in situations in which the measurement period applicable to an employee changes. This notice describes how to address situations in which the employee is in a stability period at the time of the change and in which the employee is not yet in a stability period at that time.. [Code Sec. 4980H].

IRS Expands Permitted Election Rules for Cafeteria Plan Health Coverage: In Notice 2014-55 (9/18/19), the IRS expands the permitted election rules for health coverage under a Code Sec. 125 cafeteria plan and addresses two specific situations in which a Code Sec. 125 cafeteria plan participant is permitted to revoke his or her election under the Code Sec. 125 cafeteria plan during a period of coverage. The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer's group health plan. The second situation involves an employee participating in an employer's group health plan who would like to cease coverage under the group health plan and purchase coverage through a competitive marketplace established under Section 1311 of the Patient Protection and Affordable Care Act, commonly referred to as an Exchange or Marketplace. Notice 2014-55 permits a cafeteria plan to allow an employee to revoke his or her election under the cafeteria plan for coverage under the employer's group health plan (other than a flexible spending arrangement (FSA)) during a period of coverage in each of those situations provided specified conditions are met. The IRS intends to modify the regulations under Code Sec. 125 consistent with these provisions, but taxpayers may rely on the notice immediately. [Code Sec. 125].

Applicable Dollar Amounts for PCORI Released: In Notice 2014-56 (9/18/19), the IRS provides the applicable dollar amount for determining the Patient-Centered Outcomes Research Institute (PCORI) fee for policy years and plan years ending on or after October 1, 2014 and before September 30, 2015. [Code Sec. 4375].

Change to Definition of Eligible Organizations Provided in Prop. Regs: In REG-129786-14 (8/27/14), the IRS issued proposed regulations which contain a change to the definition of an eligible organization that can avail itself of an accommodation with respect to coverage of certain preventive services under Section 2713 of the Public Health Service Act (PHS Act).

Temp. and Prop. Regs Address Contraceptive Coverage Notice Requirements: In REG-129507-14 (8/27/14) and T.D. 9690 (8/27/14), the IRS issued temporary and proposed regulations under the provisions of the Patient Protection and Affordable Care Act that provide an alternative process that an eligible organization may use to provide notice of its religious objections to providing contraceptive coverage. [Code Sec. 9815].

Notice Addresses 2014 Health Insurance Provider's Fee: In Notice 2014-47 (8/12/14), guidance is provided for the 2014 fee year on how the IRS will administer the definition of a "covered entity" for purposes of the health insurance provider's fee imposed by Section 9010 of the Patient Protection and Affordable Care Act. The notice applies only to the 2014 fee year.

Insurance Companies

IRS Provides Info Necessary for Foreign Ins. Companies to Calculate Investment Income: In Rev. Proc. 2014-53, the IRS provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income for tax years beginning after December 31, 2012. [Code Sec. 842].

Liens and Levies

No Summary Judgment Where Ownership of Property Remained in Question: In U.S. v. Torres. 2014 PTC 474 (9/9/14), a district court denied motions for summary judgment because the ownership of real property subject to a federal tax lien was in dispute. The IRS had placed a lien on real property which taxpayer's mother had purchased from him during foreclosure proceedings. The mother executed a quitclaim deed granting the property to the taxpayer, but claimed she never intended to transfer title at the time and thus the lien was improper. The court held that material questions of fact existed as to the ownership of the property and denied motions for summary judgment. [Code Sec. 6323].

Nontaxable Exchanges

Properties Qualify as Replacement Properties for Like-Kind Exchange: In TAM 201437012 (9/12/2014), the IRS advised that in like-kind exchange program transactions, if certain properties previously matched as replacement properties are later determined to be ineligible as replacement properties under Code Sec. 1031, other eligible replacement properties that were timely identified and acquired, but not reported as matched, qualify as replacement properties. [Code Sec. 1031]

Partnerships

Partnerships Disregarded for Tax Purposes as Shams: In Chemtech Royalty Associates, L.P. v. U.S., 2014 PTC 469 (5th Cir. 9/10/14), the Fifth Circuit upheld a district court's determination that partnerships set up by Dow Chemical and a number of foreign banks were shams. Dow Chemical argued it provided equity to the foreign banks, creating a valid tax partnership. The court held that the parties were not truly partners because they did not share profits and losses, lacked economic substance, and Dow Chemical held all the risk. [Code Sec. 7701].

Partners in Management Partnership Are Subject to Self-Employment Tax: In CCA 201436049 (9/5/14), the Office of Chief Counsel advised that partners of a management partnership whose primary source of income is from fees for providing investment management services are not limited partners for self-employment tax purposes and thus are not exempt from self-employment tax on their distributive shares of the management entity's income. [Code Sec. 1402(a)(13)].

General Partner Can't Use State Law to Escape Partnership's Federal Tax Debt:Once the IRS assesses a tax against a general partnership, it need not separately assess the general partners to make them liable; thus, a tax assessment by the IRS against a general partnership for its unpaid employment tax withholdings suffices to create a tax debt owed by the general partner to the IRS. In re Wendy K. Pitts, 2014 PTC 420 (C.D. Calif. 8/12/14). Read more...

Penalties

Ninth Circuit Permits Equitable Recoupment for Late Refund Claim:Taxpayer was not prohibited from seeking equitable recoupment due to untimely refund claim; Tax Court's denial of equitable recoupment was found to be erroneous. Revah v. Comm'r, 2014 PTC 488 (9th Cir. 9/17/2014) Read more...

Being Designated "Treasurer" Doesn't Necessarily Mean Taxpayer Was a Responsible Person: In Webb-Smith v. U.S., 2014 PTC 473 (E.D. N.C. 9/2/14), a district court rejected the IRS's assertion that because the daughter of a company's owner was the Treasurer of the company, she was a responsible person for purposes of employment tax liability purposes. The court said there was a genuine issue as to the amount of actual, substantive authority that the daughter possessed over the control of company finances and the scope of her decision-making authority, and thus, whether she was a responsible person within the meaning of Code Sec. 6672. The court denied the IRS' motion for summary judgment and set a trial date for September 29, 2014. [Code Sec. 6672].

Highly Complex Schemes Not Necessary to Invoke Enhanced Prison Sentence: In U.S. v. Niko, 2014 PTC 437 (9th Cir. 8/27/14), the Ninth Circuit affirmed the prison sentence of a taxpayer who pled guilty to conspiracy to commit fraud. The court noted that the taxpayer had established a bank account using his name and a dba, Niko Tax Services, despite not having a tax service, which allowed tax refund checks for many people to be deposited into the bank account without arousing suspicion. The court concluded that conduct need not involve highly complex schemes or exhibit exceptional brilliance to justify a sophisticated means enhancement. [Code Sec. 7207].

Procedure

Litigation Costs Denied Where IRS had Substantially Justifiable Position: Taxpayers were not entitled to approximately $13,000 in administrative or litigation costs, even though they prevailed in their appeal of an IRS deficiency assessment, because they did not timely provide the IRS with information supporting their return position. Bussen v. Comm'r, T.C. Memo. 2014-185 (9/11/2014). Read more...

Taxpayer Can Use Predictive Coding to Identify Info for IRS: In Dynamo Holdings Limited Partnership v. Comm'r, 143 T.C. No. 9 (9/17/14), the Tax Court held that the taxpayers could use predictive coding, a technique prevalent in the technology industry but not yet formally sanctioned by the Tax Court, to help identify nonprivileged information that would be responsive to the IRS's request for electronically stored information.

Tax Court Awards Taxpayer Litigation and Administrative Costs: In Swiggart v. Comm'r, T.C. Memo. 2014-172 (8/25/14), the Tax Court held that the taxpayer was the prevailing party and the IRS was not substantially justified in failing to abate a tax assessment against the taxpayer attributable to a change in filing status made by the IRS. As a result, the court granted the taxpayer's request for an award of reasonable litigation and administrative costs. [Code Sec. 7430].

IRS Rationale for Rejecting OIC Unclear and Contradictory at Times: In Duarte v. Comm'r, T.C. Memo. 2014-176 (8/28/14), the Tax Court was asked to decide whether the IRS abused its discretion in rejecting the taxpayer's offer-in-compromise. The court held that the rationale underlying the IRS' determination was unclear and at times contradictory and remanded the case for further consideration. [Code Sec. 6330].

Property Transactions

Patents Transferred to Controlled Corp Aren't Eligible for Capital Gains: In Cooper v. Comm'r, 143 T.C. No. 10 (9/23/14), the Tax Court held that because the taxpayer did not transfer all substantial rights in certain patents to a corporation which he controlled, he and his wife were not entitled to capital gain treatment for the royalties received from the corporation in exchange for the subject patents. The taxpayers were, however, entitled to deduct engineering expenses because the taxpayer's primary motive in paying the expenses was to protect or promote his business as an inventor, and the expenditures constituted ordinary and necessary expenses in the furtherance or promotion of the taxpayer's business. [Code Sec. 1253].

REITs and RICs

REIT Guidance Addresses Debt Secured by Property That Has Declined in Value: In Rev. Proc. 2014-51 (8/22/14), the IRS provides guidance on aspects of a taxpayer's qualification as a real estate investment trust in the context of transactions involving debt secured by real estate the fair market value of which has declined. The new procedure supersedes Rev. Proc. 2011-16. [Code Sec. 856].

Retirement Planning

Withdrawal of IRA Funds to Pay Into CSRS Is a Taxable Event: In Bohner v. Comm'r, 143 T.C. No. 11 (9/23/14), the court held that the taxpayer must include withdrawals from his IRA in his taxable income for the year at issue. Taxpayer had remitted funds to the Civil Service Retirement System (CSRS), but because he did not have sufficient funds in his bank account he borrowed a portion of the fixed sum and paid off the loan by making withdrawals from his IRA. Taxpayer contends that he engaged in a tax-free rollover, but because CSRS did not accept his remittance as a rollover, he could not exclude those amounts from taxable income. [Code Sec. 408].

Guidance on Funding Stabilization Rules Provided: In Notice 2014-53 (9/11/14), the IRS provides guidance on changes to the funding stabilization rules for single-employer pension plans that were made by the Highway and Transportation Funding Act of 2014, enacted on August 8, 2014.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2014-48 (8/13/14), 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). [Code Sec. 417].

IRS Modifies List of Group Trust Retiree Benefit Plans: In Rev. Rul. 2014-24 (8/21/14), the IRS modifies the list of group trust retiree benefit plans eligible to participate in group trusts described in Rev. Rul. 81-100, as modified by Rev. Rul. 2011-1 (which was modified by Notice 2012-6), (i.e., 81-100 group trusts), to include trusts of certain Puerto Rican retirement plans.

Tax Accounting

Couple Can Exclude Settlement Proceeds from Abusive Tax Shelter Scheme:Most of the settlement proceeds received from a CPA firm and some of its accountants were excludible from the taxpayers' income because the payment compensated the taxpayers for additional taxes they paid as a result of incompetent advice from the CPA firm. Cosentino v. Comm'r, T.C. Memo. 2014-186 (9/11/14)Read more...

Drug Manufacturer Legal Fees Must Be Capitalized: In AM-2014-006 (9/12/14), the Office of Chief Counsel advised that where a drug manufacturer files an Abbreviated New Drug Application (ANDA) with ¶ IV certification, the legal fees the drug manufacturer incurs to defend against a patent infringement suit are required to be capitalized. In addition, where a drug manufacturer holds a patent on a drug for which an ANDA with ¶ IV certification is filed, the legal fees incurred by the drug manufacturer to try to establish that the manufacture, use, or sale of the drug subject to the ANDA would infringe the drug manufacturer's patent generally are not required to be capitalized. [Code Sec. 263].

IRS Finalizes Regs on Dispositions of Tangible Depreciable Property: The IRS issued final regulations on dispositions of MACRS property, which provide rules for determining the gain or loss on such dispositions, identifying the asset disposed of, and accounting for partial dispositions of MACRS property. T.D. 9689 (8/18/14). Read more...

Tax Credits

Temporary Relief from Certain LIHC Requirements Available: In Rev. Proc. 2014-49 (8/21/14), the IRS provides temporary relief from certain low-income housing credit requirements for governmental housing credit agencies and owners of low-income housing projects in a major disaster. The revenue procedure also provides emergency housing relief for individuals who are displaced by a major disaster from their principal residences in certain major disaster areas. [Code Sec. 42].

Tax-Exempt Bonds

Temporary Relief from Certain Tax-Exempt Bond Requirements Available: In Rev. Proc. 2014-50 (8/21/14), in the context of a major disaster, the IRS provides temporary relief from requirements of Code Sec. 142(d) for an entity that issued certain tax-exempt facility bonds. [Code Sec. 142].

Tax Research

Tax Research Methodology: A Guide to Perfecting Your Tax Research Techniques and Assessing Sustainable Tax Return Filing Positions. Read more...

AUGUST 2014

Bankruptcy

Debtors Elections to Waive NOL Carrybacks Can't Be Set Aside: In In re Ames, 2014 PTC 389 (Bankr. E.D. Tex. 7/30/14), a bankruptcy court rejected a Chapter 7 trustee's request to set aside several debtors' elections to waive their carrybacks of net operating losses (NOLs) under Code Sec. 172(b)(3) as fraudulent transfers under 11 U.S.C. Sections 548 and 550. In each instance, within two years of filing bankruptcy, the debtors had filed a federal income tax return for 2008 and/or 2009. Although each of the debtors had incurred an NOL, the debtors affirmatively elected not to apply those losses as a credit to offset their gains, if any, in the prior two years. The court refused to set aside the waiver of the NOL carryback, saying such elections are normally irrevocable once made.

IRS Can't Reopen Closed Bankruptcy Case: In In re Sexton, 2014 PTC 365 (W.D. Va. 7/21/14), a bankruptcy court declined an IRS request to reopen a bankruptcy case. The IRS had argued that the case should be reopened because of an administrative mistake of closing the case before the entry of a final judgment decree. The IRS, the court noted, had provided no authority to suggest such an administrative mistake was proper cause to reopen a case, let alone sufficient to satisfy the high burden of demonstrating a compelling circumstance. In this case, the court said, the only real effect of reopening the case would be to restart the time for the IRS to appeal the court's ruling, if it so chose. The court concluded that reopening a case solely for the purpose of allowing a creditor to appeal was not only improper, but also was against one of the central purposes of the Bankruptcy Code.

C Corporations

IRS Issues Sec. 382 Temp Regs: In T.D. 9685 (7/31/14), the IRS issued temporary regulations that modify the effective date provision for T.D. 9638 (10/22/13), which provided final regulations that altered the operation of certain of the public group segregation rules under Code Sec. 382. The temporary regulations apply to stock acquired by the Treasury Department under certain programs under Emergency Economic Stabilization Act of 2008. [Code Sec. 382].

Deductions

Regs Confirm Subsequent Events Are Not Relevant to Deductibility of Research and Experimental Expenses: Final regulations on the deductibility of research and experimental expenses confirm that the ultimate success, failure, sale, or other use of the research or property resulting from the research or experimentation is not relevant in determining the deductibility of such expenses. T.D. 9680 (7/21/14).
Read more...

Designation of Ex-Wife as Custodial Parent Irrelevant Where Child Lived with Taxpayer: In Davis v. Comm'r, T.C. Memo. 2014-147 (7/24/14), the Tax Court held that it was irrelevant that the taxpayer's ex-wife was listed in court documents as the custodial parent. Instead, the taxpayer was the custodial parent for purposes of Code Sec. 152(e)(4)(A) because his daughter spent the greater portion of the calendar year with him. Thus, he was entitled to the dependency exemption for his daughter. [Code Sec. 152].

Taxpayer Can't Deduct Unredeemed Perks Associated with Loyalty Program: A taxpayer's obligation to redeem certain perks given to customers as part of a loyalty reward program was subject to a condition precedent that was only satisfied after the close of taxpayer's tax year, and the exception to the all-events test for trading stamps or premium coupons did not apply to allow a current year deduction. Giant Eagle, Inc. v. Comm'r, T.C. Memo. 2014-146 (7/23/14). Read more...

Employment Taxes

Fear of Reprisal Doesn't Excuse Responsible Person Liability: In U.S. v. Miniken, 2014 PTC 253 (W.D. Wash. 7/17/14), a district court held that, where a convicted murderer visited the taxpayer to tell him to follow orders from a prisoner in charge of a prison newsletter that the taxpayer oversaw, the taxpayer's claim of duress for not paying employment taxes was not reasonable cause for avoiding the responsible person penalty. [Code Sec. 6672].

IRS Revises SSN Procedures for Prevention of Back-up Withholding: In Rev. Proc. 2014-43 (7/17/14), the IRS issued revised procedures for individual payees who are required under Reg. Sec. 31.3406(d)-5(g)(5) to obtain validation of social security numbers from the Social Security Administration to prevent or stop backup withholding following receipt of a second backup withholding notice from a payor within a three-year period. A payor (such as a bank) must send a notice to a payee after being notified by the IRS or a broker that the payee provided an incorrect name and taxpayer identification number (TIN) combination with respect to an account (the B notice). The B notice informs the payee that the name/TIN combination furnished to the payor does not match IRS or SSA records and describes the steps the payee must take to stop or prevent backup withholding from payments made after receipt of the B notice. [Code Sec. 3406].

Argument That Payment of FICA and FUTA Would Hinder Company Operations Rejected: In U.S. v. Chelsea Brewing Company, LLC, 2014 PTC 357 (S.D. N.Y. 7/18/14), a district court held that the taxpayer failed to show that it exercised ordinary business care and prudence in managing its tax and financial obligations. Further, the court found the company's assertion that compliance with its tax obligations would have crippled its ability to stay open and function to be flatly insufficient. Thus, the company was liable for over $800,000 of past due FICA and FUTA obligations. [Code Sec. 3111].

Estates, Gifts and Trusts

Tax Court Rejects IRS's Excessive Valuation of Estate's Closely Held Stock:The Tax Court rejected the IRS's valuation of an estate's closely held stock in favor of the valuation the estate reported on its return and, since there was no estate tax deficiency, no penalties applied. Est. of Adell v. Comm'r, T.C. Memo. 2014-155 (8/4/14). Read more...

Exclusions from Gross Income

Chief Counsel Clarifies Effect of Repealed Code Section 121(d)(11): In CCM 201429022 (7/18/14), the Office of Chief Counsel advised that, for most taxpayers, Code Sec. 121(d)(11) is obsolete. The only exception is in the case of a taxpayer receiving a residence from a decedent who died in 2010 for whom the executor of the decedent's estate made an election to not have the estate tax provisions apply to the decedent's estate. [Code Sec. 121].

Foreign

New Procedure Deals with Foreign Partnership Withholding: In Rev. Proc. 2014-47 (8/8/14), the IRS provides guidance for entering into a withholding foreign partnership agreement (WP agreement) and a withholding foreign trust agreement (WT agreement) with the IRS. The procedure highlights changes to the existing WP agreement and WT agreement published in Rev. Proc. 2003-64. Rev. Proc. 2014-47 also provides the application procedures for becoming a withholding foreign partnership or withholding foreign trust and for renewing a WP agreement or WT agreement. [Code Sec. 1441].

More Information Issued on Sec. 901(m) Rules: In Notice 2014-45 (7/29/14), the IRS issues additional information on regulations to be issued under Code Sec. 901(m), which deal with dispositions of assets following covered asset acquisitions. [Code Sec. 901].

IRS Updates List of Foreign Countries for Which Sec. 911(d) Rules Are Waived: In Announcement 2014-28, the IRS updates the list of foreign countries for which the eligibility requirements of Code Sec. 911(d)(1) are waived in Rev. Proc. 2014-25. In Rev. Proc. 2014-25, the IRS provided guidance to any individual who fails to meet the eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country preclude the individual from meeting those requirements. Rev. Proc. 2014-25 provides a current list of foreign countries and the departure dates for those countries for which the eligibility requirements of Code Sec. 911(d)(1) are waived. In Announcement 2014-28, the IRS adds the country of South Sudan and the departure date of December 17, 2013. [Code Sec. 911].

U.S. Corporation Cannot Deduct Fine Paid to Commission of European Community: In determining if a fine paid to the Commission of the European Community was deductible, the phrase "government of a foreign country," as used in Reg. Sec. 1.162-21(a) denying deductions for fines paid to governments, may refer both to the government of a single foreign country and to the governments of two or more foreign countries. Guardian Industries Corp. v. Comm'r, 143 T.C. No. 1 (7/17/14). Read more...

Regs Address Allocation of Corporate Interest Expense: In T.D. 9676 (7/16/14) and REG-113903-10 (7/16/14), the IRS issued temporary and proposed regulations that provide guidance on the allocation and apportionment of interest expense by corporations owning a 10 percent or greater interest in a partnership, as well as the allocation and apportionment of interest expense using the fair market value method. The regulations also update the interest allocation regulations to conform to certain changes made in 2010 by the Education Jobs and Medicaid Assistance Act, affecting the affiliation of certain foreign corporations for purposes of Code Sec. 864(e). [Code Sec. 861].

IRS to Issue Regs under Code Section 901(m): In Notice 2014-44 (7/21/14), the IRS announced that it is going to issue regulations addressing the application of Code Sec. 901(m) to dispositions of assets following covered asset acquisitions (CAAs) and to CAAs described in Code Sec. 901(m)(2)(C) (relating to Code Sec. 754 elections). [Code Sec. 901].

Health Care

Jones Day Seeks Expedited Appeal before Supreme Court on Obamacare Subsidies Issue:Attorneys for the losing party in King v. Burwell have petitioned the Supreme Court for an expedited review of whether the IRS can issue regulations extending tax-credit subsidies to coverage purchased through federally run insurance Exchanges (King v. Burwell Supreme Court Petition). Read more...

IRS Guidance Attempts to Resolve Circular Relationship Between Code Sections 36B and 162(l): In Rev. Proc. 2014-41; T.D. 9683 (7/28/14); REG-104579-13 (7/28/14), the IRS issued a new revenue procedure, as well as temporary and proposed regulations, that address the circular relationship that exists in calculating the Code Sec. 36B health insurance tax credit when the taxpayer is also taking a deduction for health insurance premiums under Code Sec. 162(l). Read more...

Circuits Split on Legality of Obamacare Insurance Subsidies in States with Federal Exchanges: In Halbig v. Burwell, 2014 PTC 363 (D.C. Cir. 7/22/14) and King v. Burwell, 2014 PTC 364 (4th Cir. 7/22/14), a monumental split developed between circuit courts on the same day over the legality of IRS regulations interpreting the Affordable Care Act's (ACA) health insurance subsidies; D.C. Circuit and Fourth Circuit took opposing positions on whether the subsidies apply in states with insurance exchanges run by the federal government. Read more...

Guidance Provides Methodology in Computing Section 36B Credit: In Rev. Proc. 2014-37 (7/25/14), the IRS provides the methodology to determine the applicable percentage table in Code Sec. 36B(b)(3)(A) used to calculate an individual's premium assistance credit amount for tax years beginning after calendar year 2014. It also provides the methodology to determine the required contribution percentage in Code Sec. 36B(c)(2)(C)(i)(II) used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage for purposes of Code Sec. 36B for plan years beginning after calendar year 2014. [Code Sec. 36B].

Regs on Manufacturing and Importing Prescription Drugs Issued: T.D. 9684 (7/28/14) and REG-123286-14 (7/28/14), the IRS issued final, temporary, and proposed regulations that provide guidance on the annual fee imposed on covered entities engaged in the business of manufacturing or importing branded prescription drugs. In addition, the earlier temporary regulations on the branded prescription drug fee are withdrawn.

Notice Addresses Annual Fee on Certain Drug Manufacturers and Importers: In Notice 2014-42 (7/24/14), the IRS provides procedural guidance relating to the annual fee imposed on branded prescription drug manufacturers and importers under Section 9008 of the ACA.

Information Reporting

IRS Finalizes Regs on Information Reporting for Certain Passport Applicants: In T.D. 9679 (7/18/14), the IRS issued final regulations that provide information reporting rules for certain passport applicants. The final regulations apply to certain individuals applying for passports (including renewals) and provide guidance to such individuals about the information that must be included with their passport applications. [Code Sec. 6039E].

Original Issue Discount

IRS Issues August AFRs: In Rev. Rul. 2014-19, the IRS issued the August 2014 applicable federal rates. [Code Sec. 1274].

Partnerships

BLIPs Transactions Lacked Economic Substance: In Shasta Strategic Investment Fund, LLC v. U.S., 2014 PTC 392 (N.D. Calif. 7/31/14), a district court held that transactions labeled as "Bond Linked Issue Premium Structures," or BLIPs, lacked economic substance and thus should be disregarded for tax purposes. The transactions were marketed by KPMG as an investment strategy designed to generate significant investment returns through strategic investments in emerging market currencies. In actuality, the court noted, BLIPS were really a tax loss generator. The court also noted that the IRS referred the criminal investigation of BLIPS to the Department of Justice, and several KPMG partners were indicted in a criminal tax fraud conspiracy to defraud the IRS. Finally, the court held that extensions of the statute of limitations for the assessment of taxes on the taxpayers were not invalid. [Code Sec. 6229].

Penalties

Penalties Upheld Where Firm Continued Paying for Christmas Parties and Bonuses: In Valteau, Harris, Koenig and Mayer v. Comm'r, T.C. Memo. 2014-144 (7/21/14), the Tax Court held that, because a law firm did not demonstrate a willingness to decrease its expenses, reduce salaries, or lay off personnel in an attempt to meet its tax obligations, it was liable for additions to tax and penalties. In reaching this holding, the court cited the fact that, during the periods at issue, the firm continued to pay for Christmas parties, provide year-end bonuses to its employees, and pay the partners all of their guaranteed payments. Such behavior demonstrated a lack of ordinary business care and prudence in providing for payment of tax liabilities, the court said. [Code Sec. 6651].

Procedure

IRS Is Stuck with Stipulation That the Taxpayer's Return Was Timely: In Crawford v. Comm'r, T.C. Memo. 2014-156 (8/4/14), the Tax Court held that a taxpayer's income tax return was timely filed, as the parties stipulated, and that the taxpayer was thus not liable for any addition to tax for failure to timely file. The court noted that, in an IRS pretrial memorandum filed two weeks before trial, the IRS asserted that the taxpayer's return was filed late. However, on the day of trial, the IRS executed a stipulation stating that the return was filed timely. To ignore this stipulation, the court said, would likely prejudice the taxpayer, who did not have notice at the time of trial that the IRS would contend that his return was untimely. Furthermore, the IRS never asked to be relieved of the stipulated statement; nor did it supply an explanation for why the stipulated statement should be ignored. [Code Sec. 6651].

IRS Issues Final Regs on Penalties Against Material Advisors: In T.D. 9686, the IRS issued final regulations relating to the assessment of penalties against material advisors who fail to timely file a true and complete return. The regulations implement amendments made by the American Jobs Creation Act of 2004 and affect material advisors responsible for disclosing reportable transactions. [Code Sec. 6707].

Tax Accounting

IRS Issues Final Regs on Mixed Straddles: In T.D. 9678 (7/18/14), the IRS issued final regulations relating to Code Sec. 1092 identified mixed straddles established after August 18, 2014. The final regulations explain how to account for unrealized gain or loss on a position held by a taxpayer before the time the taxpayer establishes a mixed straddle using straddle-by-straddle identification. [Code Sec. 1092].

New Procedure Addresses Money Market Fund Redemptions and Wash Sales: In Rev. Proc. 2014-45 (7/23/14), the IRS describes the circumstances in which it will not treat a redemption of shares in a money market fund (MMF) as part of a wash sale for purposes of Code Sec. 1091. The revenue procedure is in response to Securities and Exchange Commission (SEC) rules that change how certain MMF shares are priced. [Code Sec. 1091].

Disregarded Entity Has Separate and Distinct Trade or Business: In CCM 201430013 (7/28/14), the Office of Chief Counsel advised that a corporation and its wholly owned LLC, which is disregarded as an entity separate from the corporation, have separate and distinct trades or businesses for purpose of determining the appropriate accounting methods to use. The fact that the LLC failed to make an election to be taxed as a corporation and is thus a disregarded entity for federal tax purposes, the Chief Counsel's Office said, does not mean that the LLC can never be a separate and distinct trade or business for purposes of Code Sec. 446(d). [Code Sec. 446].

Prop. Regs. Address Gain/Loss Accounting for Certain Money Market Fund Shares: In REG-107012-14 (7/28/14), the IRS issued proposed regulations that provide a simplified method of accounting for gains and losses on shares in money market funds (MMFs) that distribute, redeem, and repurchase their shares at prices that reflect market-based valuation of the MMFs' portfolios and more precise rounding than has been required previously (floating net asset value MMFs, or floating-NAV MMFs). While the regulations are proposed to apply once they are adopted as final, taxpayers may rely on the rules in the regulations concerning the NAV method for tax years ending on or after July 28, 2014, and beginning before the date the final regulations are published. [Code Sec. 446].

Tax Credits

IRS Updates Guidance on Renewable Electricity Production Credit: In Notice 2014-46, the IRS issued additional guidance on the renewable electricity production tax credit (PTC) under Code Sec. 45, and the energy investment tax credit (ITC) under Code Sec. 48 available in lieu of the PTC. The notice clarifies the application of the physical work test and the effect that certain transfers with respect to a facility after construction has begun will have on a taxpayer's ability to qualify for the PTC or the ITC. The notice also modifies the application of the safe harbor for certain facilities with respect to which a taxpayer paid or incurred less than 5 percent, but at least 3 percent, of the total cost of the facility before January 1, 2014. [Code Sec. 45].

Tax Practice

AICPA Lawsuit Challenges IRS's New Voluntary Tax Return Preparer Program: The AICPA filed a lawsuit against the IRS in the D.C. District Court, in which it argues that the IRS ignored the notice and comment requirements of the Administrative Procedure Act when it established the Annual Filing Season Program. Read more...

Tax-Exempt Organizations

Seventh Circuit Agrees That ABA Fund Doesn't Qualify as Tax Exempt: In ABA Retirement Funds v. U.S., 2014 PTC 359 (7th Cir. 7/21/14), the Seventh Circuit affirmed a district court and held that an organization affiliated with the American Bar Association was not a tax-exempt business league during the years at issue. [Code Sec. 501].

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