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Tax Research Briefs - Archived (September 2016 - March 2016)

September 2016


Taxpayer Could Change Accounting Method after Forgetting to Attach Copy of Form 3115: In PLR 201636038, the IRS granted a taxpayer's request for an extension of time to file Form 3115, Application for Change in Accounting Method, to change his method of accounting for advance payments to the deferral method under Rev. Proc. 2004-34. The IRS found that the taxpayer had timely filed a Form 3115 with the IRS National Office, but had inadvertently failed to submit a copy of the form with his income tax return for the year at issue.


IRS Releases Audit Technique Guide on Capitalization of Tangible Property: Last week, the IRS has issued a 202-page Audit Technique Guide titled "Capitalization of Tangible Property". The guide gives auditors detailed instructions regarding what to look for when conducting an audit of a taxpayer's capitalization policies and other capitalization-related issues. ATG on Capitalization of Tangible Property. Read more...

Capital Gains

Royalties Are Ordinary Income Where Doctor Retained Rights in Patents: The Tax Court determined that royalty payments a doctor received under an agreement for the use of his drug delivery technology were taxable as ordinary income, rather than as capital gain. The court held that because the doctor could choose how the technology was used, and retained the right to use the patents outside the pharmaceutical field, he did not transfer "all substantial rights" to the patents and the resulting royalties were not eligible for capital gain treatment under Code Sec. 1235. Spireas v. Comm'r, T.C. Memo. 2016-163. Read more...


Taxpayer Not Entitled to Education Credit for Computer Expense: In Mameri v. Comm'r, T.C. Summary 2016-47, the Tax Court determined that a college student was entitled to an American Opportunity Tax Credit for his college tuition expenses, but not for a computer he purchased for use in an English course. Citing Reg. Sec. 1.25A-2(d), the court stated that because the taxpayer was not required to purchase the computer directly from the college, nor was it a condition of enrollment, the expense did not qualify as "books, supplies, and equipment" eligible for the credit.


Teacher Entitled to Deductions for Home Office Used for Administrative Assignments: The Tax Court held that a physical education teacher, who taught at multiple schools each day, was entitled to deductions for the use of her home office. The court determined that the nature of the taxpayer's work required her to use portions of her home as her principle place of business in order to complete administrative and management activities, and found she did so for the convenience of her employer. The court disallowed the taxpayer's claimed deductions for unreimbursed vehicle and travel expenses, finding that she was not able to substantiate those expenses. Czekalski v Comm'r, T.C. Summary 2016-56. Read more...

No Deduction for S Corp's Payment to Welfare-Benefit Plan: In Schechter v. Comm'r, T.C. Memo. 2016-174, the Tax Court held that because a purported welfare-benefit plan's qualified costs were zero, Code Sec. 419(b) prevented a taxpayer from deducting a payment his wholly-owned S corporation made to the plan. The taxpayer argued the payment was made to a 10-or-more employer plan that did not maintain experience rating with respect to individual employers, and thus, under Code Sec. 419A(f)(6), the limitation did not apply. The court, however, noted that the taxpayer failed to provide evidence that more than one employer participated in the plan.

No Deductions Where Taxpayer Couldn't Prove He Followed Proper NOL Procedures: In Jasperson v. Comm'r, 2016 PTC 332 (11th Cir. 2016), the Eleventh Circuit affirmed the Tax Court's holding that a taxpayer was not entitled to deductions for net operating loss (NOL) carryforwards because he couldn't prove that he first carried back the purported NOLs two years from the loss year, as required by Code Sec. 172(b). The court found the taxpayer failed to substantiate his claim that he followed this procedure, or that he waived the carryback requirement.

CPA Couldn't Take Depreciation Deductions for Antique Office Furniture: In Kilpatrick v. Comm'r, T.C. Memo. 2016-166, the Tax Court held that a CPA wasn't entitled to deductions in excess of those allowed by the IRS for expenses related to his solo practice. The court found he failed to substantiate automobile and office expenses. In addition, costs for office furniture weren't entitled to depreciation deductions under Code Sec. 168 because they were antiques that would retain their value.

Exemptions - Personal and Dependency

Taxpayer Didn't Provide Majority of Support for Son, Not Entitled to Exemption: In McSweeney v. Comm'r, T.C. Summary 2016-51, the Tax Court held that a taxpayer's son was not a qualifying child or relative under Code Sec. 152 because he did not live with her for the majority of the year, and she did not prove that she provided more than 50 percent of his support for the year. Accordingly, the court determined that the taxpayer wasn't entitled to a dependency exemption deduction for the child, and could not claim head-of-household filing status, a child tax credit, or an earned income credit.


Ireland Ordered to Recoup Billions in Illegal Tax Benefits Provided to Apple: A European Commission investigation concluded that an advance pricing agreement between international affiliates of Apple and the Irish government granted up to $13 billion Euros ($14.5 billion USD) in tax benefits to Apple, artificially lowering the tax the company paid to Ireland since 1991. The Commission determined such benefits were illegal under the European Union's state aid rules, and ordered Ireland to recover the benefits, plus interest.

Gross Income and Exclusions

Share of Fees From Enron Suit Not Income Where Taxpayer Had No Control of Funds: In Leslie v. Comm'r, T.C. Memo. 2016-171, the Tax Court determined that a taxpayer's share of attorney's fees her ex-husband received from pursuing a suit against Enron were alimony because, under state law, her right to receive installments of the fees would terminate on the attorney's death. However, the court held that a portion of the fees was not income to the taxpayer for the year at issue because the amount had been put into an account over which she had no control.

Taxpayer Required to Include Premium from Canceled Annuity in Income: In Peterson v. Comm'r, T.C. Summary 2016-52, the Tax Court determined a taxpayer improperly excluded from his income a distribution of an annuity contract premium following the contract's cancellation. Because the taxpayer had paid for his annuity by rolling over a SEP-IRA that had been funded entirely with pre-tax dollars, the court determined his investment in the contract was zero, and thus the entire distribution of the premium was taxable under Code Sec. 72(e)(2).

Insurance Companies

IRS Provides Information for Foreign Insur. Companies to Calculate Investment Income: In Rev. Proc. 2016-48, the IRS provided the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after December 31, 2014.


IRS Concludes That Gross Receipts from Taxpayer's Construction Activities Qualify as DPGR: The IRS National Office (IRS) concluded that gross receipts, received by a taxpayer actively engaged in the construction trade or business for projects in which it substantially renovated, constructed, or erected property, were domestic production gross receipts (DPGR). The IRS determined that that the property constructed by the taxpayer qualified as inherently permanent structures and thus the taxpayer's activities involved the construction of real property for purposes of Code Sec. 199. TAM 201638022. Read more...

IRS Announces Interest Rates for Fourth Quarter of 2016: In Rev. Rul. 2016-23, the IRS provides the rates for interest on tax overpayments and underpayments for the calendar quarter beginning October 1, 2016. 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.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-54, 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).

Relief Provided for Participants in Leave-Based Donation Programs Aiding Louisiana: In Notice 2016-55, the IRS provides guidance on the income and employment tax treatment of leave-based donation programs to aid victims of recent Louisiana storms. 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 storms. 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.


House Bill Reduces Threshold to Claim Medical Expense Deductions: On September 14, the House approved the Halt Tax Increases on the Middle Class and Seniors Bill (H.R. 3590), which would restore the floor for taking medical expense deductions to its pre-ACA levels. Effective for tax years beginning in 2013, the ACA imposed a threshold of 10 percent of AGI for taxpayers to claim itemized deductions for unreimbursed medical expenses, increased from 7.5 percent for prior years. An exemption to this limit for individuals age 65 or older is set to expire at the end of 2016. The bill now goes to the Senate for a vote.


Partnership Not Entitled to Capital Gain Treatment on Forfeited Deposit: The Tax Court held that, where a partnership received as income a $9.7 million deposit forfeited by a prospective buyer of its hotel when the deal fell through, the deposit was taxable as ordinary income. The court rejected the partnership's argument that, under Code Sec. 1234A, the income was capital gain because the sale of the hotel would have been treated as capital gain under Code Sec. 1231. CRI-Leslie, LLC v. Comm'r, 147 T.C. No. 8 (2016). Read more...

Managing Partner Could Argue Reasonable Cause Defense to Tax Shelter Penalties: In McNeill v. U.S., 2016 PTC 334 (10th Cir. 2016), the Tenth Circuit reversed and remanded a district court's holding that, as a managing partner, a taxpayer could not argue a Code Sec. 6664 reasonable cause/good faith defense to penalties imposed against him for his partnership's participation in a tax avoidance scheme. The Circuit Court found TEFRA did not prevent a managing partner from bringing the defense, and observed that the regs and prior court decisions supported concluding that the defense was a partner-level proceeding.


IRS's Restitution Based Assessments Weren't Unconstitutional: In CCA 201637001, the IRS Office of Chief Counsel (IRS) advised that Code Sec. 6201(a) restitution-based assessments against a taxpayer convicted of falsifying income tax returns were not retroactively applied and did not violate the ex post facto clause of the Constitution. The IRS noted that even though the taxpayer's crimes were committed prior to the effective date of the act conferring authority to the IRS to assess and collect criminal restitution, the assessments were made after that date and thus were not retroactive.


Taxpayer Could Elect to Group Real Estate Activities Despite Missing Deadline: In PLR 201638014, the IRS granted a taxpayer's request for an extension of time to file an election under Code Sec. 469(c)(7) to treat all interests in rental real estate as a single rental real estate activity. The IRS determined the taxpayers were qualified to treat their activities as a single activity, and noted their failure to timely request the election was because their preparer had not advised them that the election was available.

IRS Attorney's Dementia Diagnosis Didn't Excuse Violation of Bankruptcy Discharge: In IRS v. Murphy, 2016 PTC 347 (D. Me. 2016), a district court held that a bankruptcy court applied the proper definition of "willfully" when determining that the IRS "willfully violated" the court's discharge injunction under Code Sec. 7433(e). The IRS argued that the violation occurred as a result of an attorney's then unknown diagnosis of ALS and dementia, but the court found nothing in the record indicated that the impairment affected the attorney's competence at the time.

Tax Fraudster Could Sue IRS for Disclosing His Returns: In Taylor v. Pekerol, 2016 PTC 339 (N.D. Fla. 2016), a district court held that a taxpayer, who had been convicted of tax fraud, could proceed with his claim against the IRS under Code Sec. 7413 for improper disclosure of his tax-return information to individuals not connected with his prosecution. The court noted that, contrary to the IRS's assertions, a conviction does not preclude a person from pursuing a claim for improper disclosure.

Consolidated Group Required to Calculate NOLs Using Single Entity Approach: In Marvel Entertainment, LLC v. Comm'r, 2016 PTC 337 (2d Cir. 2016), the Second Circuit affirmed the Tax Court, holding that a consolidated group must reduce its consolidated net operating loss (CNOL) under Code Sec. 108(b) by the total amount of the group's previously excluded COD income under a "single entity" approach, as opposed to determining each member's share of the CNOL and applying Code Sec. 108(b) on a memberbasis.

Drinking Habit Lets Preparer off the Hook for Filing False Returns: In U.S. v. Jenkins, 2016 PTC 327 (D. Conn. 2016), a district court rejected a tax preparer's guilty plea for aiding in filing false returns. The court noted the preparer's work environment was "like a bar" because the employees, including the preparer, frequently drank at work; as a result she often overlooked improperly included credits in her clients' returns. The court found the taxpayer did not "willfully" file false returns, but rather "recklessly" did so, and thus did not meet the requisite mental state for a conviction of filing false returns.

No Legal Fees Awarded Despite Taxpayer's Use of IRM to Overturn Indictment: In U.S. v. Johnson, 2016 PTC 328 (6th Cir. 2016), the Sixth Circuit held that a taxpayer wasn't entitled to an award of legal fees after successfully overturning as time-barred his indictment for making false statements on his return. The taxpayer successfully argued that the IRS's Internal Revenue Manuals (IRM) provides that the six-year limitation period for bringing criminal charges under Code Sec. 6513 expired on April 15, not April 17. However, the Sixth Circuit found that the IRS's position that April 17 was the last date to file an indictment was based on a reasonable interpretation of the applicable statutes and involved an issue of first impression.

Property Transactions

Purported Like-Kind Exchanges Involving Sale-Leasebacks Didn't Meet Section 1031 Requirements: The Tax Court held that purported like-kind exchanges involving sale-leaseback strategies were not like-kind exchanges but rather were transactions properly characterized as loans since the transactions did not transfer the benefits and burdens of ownership. In addition, the taxpayer did not satisfy the like-kind exchange requirement of exchanging similar property because it exchanged power plants for an interest in financial instruments. Exelon Corporation v. Comm'r, 147 T.C. No. 9 (2016). Read more...

Attempts to Avoid Land Use Restrictions Betrayed Intention to Develop Property for Sale; Gain Was Ordinary, Not Capital: The Eleventh Circuit affirmed a Tax Court holding that married taxpayers had improperly characterized gain from the sale of property they had been developing as capital gain rather than ordinary income. The court determined that the taxpayers' attempts to avoid costly land-use restrictions and their rezoning of the property indicated they had not abandoned their original intention to sell the property in the ordinary course of their business. The court declined to impose accuracy related penalties, finding that the taxpayers reasonably relied on a reputable accounting firm when preparing their returns. Boree v. Comm'r, 2016 PTC 341 (11th Cir. 2016). Read more...

Taxpayer Could Claim Capital Loss for Payment Made to Terminate Merger: In FAA 20163701F, IRS Field Attorneys (IRS) advised that a break fee a taxpayer paid when it withdrew from a merger gave rise to a capital loss. The IRS determined that because stock the taxpayer would have received if the merger went through would have been a capital asset, Code Sec. 1234A provides that the taxpayer's loss on paying the break fee is a capital loss.

Ninth Circuit Affirms Home Builder's Use of Completed Contract Method for Planned Community: The Ninth Circuit affirmed the Tax Court and held that a homebuilder and its affiliates properly accounted for income from their home construction contracts under the completed contract method of accounting. In doing so, the court rejected the IRS's contention that the subject matter of the contracts at issue was limited to a buyer's purchase of a house and lot, concluding instead that the subject matter of the contracts also included the development and its common improvements and amenities. As a result, the taxpayer was able to defer taxes on home sales in a planned community until 95 percent of the community was completed and accepted. Shea Homes, Inc. and Subsidiaries v. Comm'r, 2016 PTC 323 (9th Cir. 2016). Read more...

Retirement Plans

Temporary Nondiscrimination Relief Extended for Certain Qualified Plans: In Notice 2016-57, the IRS extends the temporary nondiscrimination relief provided in Notice 2014-5 for certain closed defined benefit pension plans to plan years beginning before 2018, if the conditions of Notice 2014-5 are satisfied. The notice permits certain employers that sponsor a closed defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Code Sec. 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis.

IRS Seeks Comments on Compliance with Qualified Plan Document Requirements: In Announcement 2016-32, the IRS requested public comments regarding how the IRS can make it easier for plan sponsors to satisfy requirements for qualified plan documents in order to improve compliance with plan qualification requirements, particularly in light of the elimination of the five-year staggered remedial amendment cycle system described in Rev. Proc. 2016-37.

No Extension to Recharacterize Roth IRA Where Taxpayer Had Ample Time to Do So: In PLR 201635013, the IRS declined to grant a taxpayer's request for an extension of time to make an election to recharacterize a Roth IRA as a traditional IRA, finding that the taxpayer had requested relief after the IRS discovered the Roth IRA had not been recharacterized, that the taxpayer had ample time to make the election after she was aware of the need for the election, and that she was unable to prove there were intervening events beyond her control or that she relied on a tax professional.

IRS Modifies Value Requirements for Defined Benefit Plans: In T.D. 9783 (9/9/16), the IRS issued final regulations providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. The regulations, effective on September 9, 2016, permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or other more accelerated form.

RICs and REITs

New Regulations Define Real Property for REITs: In T.D. 9784 (8/31/16), the IRS issued final regulations that clarify the definition of real property for purposes of the real estate investment trust (REIT) provisions of Code Sec. 856 through Code Sec. 859. Reg. Sec. 1.856-10 defines "real property" to mean land, including superjacent water and air space, and improvements to land, which include inherently permanent structures and their structural components. The regulations are effective on August 31, 2016.

S Corporations

Payment of S Shareholder's Personal Expenses Were Loan Repayments, Not Wages: Advances made by the sole shareholder of an S corporation to the corporation before 2009 were intended to be loans and thus the corporation's payment of the shareholder's personal expenses were loan repayments and not wages subject to employment taxes. However, advances made to the corporation after 2008, when its business was deteriorating, were more in the nature of capital contributions because there was no reasonable expectation of repayment. Scott Singer Installations, Inc. v. Comm'r, T.C. Memo. 2016-161. Read more...


August 2016


Applicable Federal Rates: September AFRs Issued: In Rev. Rul. 2016-20, the IRS issued the applicable federal rates for September 2016.

Applicable Federal Rates: August AFRs Issued: In Rev. Rul. 2016-18, the IRS issued the applicable federal rates for August 2016.

C Corporations

Safe Harbors Issued for Section 355 Transactions: In Rev. Proc. 2016-40, the IRS provides two safe harbors under which a distributing corporation will not be considered to lack control of a distributed corporation within the meaning of Code Sec. 355(a). The safe harbors apply where (1) no action is taken by the distributed corporation that would result in an unwind at any time prior to 24 months after the distribution, or where (2) the distributed corporation engages in an unwind as a result of an unanticipated third party transaction (e.g. a merger).


Individual Returns Weren't Sufficient to Prove Existence of NOLs: In Power v. Comm'r, T.C. Memo. 2016-157, the Tax Court determined that a taxpayer could not carry forward purported net operating losses (NOLs), finding that the taxpayer's prior year tax returns were inadequate to substantiate the claimed losses or show that they had not already been absorbed.

Seizure of Taxpayer's Records from Storage Prevented Substantiation of Expenses: In Walker v. Comm'r, T.C. Memo. 2016-159, the Tax Court denied a taxpayer's deductions for expenses related to maintaining her ambulance service business. The court noted that her business records were lost when the contents of her storage unit were seized due to her failure to pay her bill, and found her testimony alone was not sufficient to support the deductions under the strict substantiation rules of Code Sec. 274(d).

Rental Expense Deductions Limited Where Taxpayers Lived in Rental Property: In Szanto v. Comm'r, T.C. Memo. 2016-145, the Tax Court determined that because married taxpayers used rental property as their personal residence for half of the year, their rental expense deductions were limited by Code Sec. 280A. The court held that the taxpayers could deduct their rental expenses only to the extent of the reported rental income, and could deduct any additional mortgage interest for real estate taxes allocable to their personal use of the property.

IRS Concedes Per-Taxpayer Deduction for Qualified Residence Interest: In AOD 2016-02, the IRS announced its acquiescence to Voss v. Comm'r, 2015 PTC 275 (9th Cir. 2015), in which the Ninth Circuit held that, when unmarried taxpayers co-own a qualifying residence, the Code Sec. 163(h)(3) limitation on qualified residence interest deductions applies on a per-taxpayer rather than on a per-residence basis.

Expenses for Purported Education Materials Not Deductable: In Tanzi v. Comm'r, T.C. Memo. 2016-148, the Tax Court denied deductions a professor and a campus librarian took for internet, cell phone, and television service, and for their maintenance of a library of books, CDs, and DVDs. The court found that while the couple spent significant time using those resources to educate themselves and expand their "general knowledge," the expenses were not ordinary and necessary for their trades and were nondeductible personal, living, or family expenses.

Sports Team Didn't Produce Broadcasts of Its Games, Income Wasn't DPGR: In CCA 201630015, the IRS Office of Chief Counsel (IRS) advised that for purposes of Code Sec. 199, a television network produced broadcasts of sports games on its own behalf pursuant to the rights granted to it in a contract with the taxpayer sports team, rather than on behalf of the team. Accordingly, the IRS determined that the taxpayer was not the producer of the broadcasts, and any gross receipts the team derived from the contract were not domestic production gross receipts (DPGR).

Deductions Allowed Despite Lack of Substantiation Where City Destroyed Records: In Probandt v. Comm'r, T.C. Memo. 2016-135, the Tax Court held that, despite having no written records, a taxpayer was entitled to travel and meal expenses. The taxpayer's records had been destroyed when, while he was in China, a city tore down his storage unit under eminent domain. Finding that the taxpayer could not have retrieved his records in the short amount of time the city provided, the court determined he was eligible for "exceptional circumstances" substantiation under Reg. Sec. 1.274-5T(c)(4) and allowed partial deductions based on credit card records.

Employment Tax

Puerto Rican Resident Liable for U.S. Self-Employment Tax: In Curet v. Comm'r, T.C. Memo. 2016-138, the Tax Court determined that a taxpayer was liable for deficiencies and penalties for his failure to report self-employment taxes on his income earned while he was a resident of Puerto Rico. The court noted that although Code Sec. 933(1) generally exempts bona fide residents of Puerto Rico from U.S. income tax, Reg. Sec. 1.1402(a)-9 requires such individuals to compute net earnings from self-employment in the same manner as a U.S. taxpayer.

Short-Week Benefits Were Subject to FICA Tax: In CCA 201634023, the IRS Office of Chief Counsel (IRS) advised that "short-week" benefits paid to workers who worked less than 36 hours in a week, or who could not work due to weather, were not excluded from FICA wages as supplemental unemployment benefits under Rev. Rul. 90-72. The IRS stated that because the workers did not qualify for state unemployment compensation, the payments did not satisfy the narrow exception for excludability provided in Rev. Rul. 90-72.

Taxpayer Liable for Penalties Despite Payroll Service's Embezzlement: In Kimdun Inc. v. U.S., 2016 PTC 313 (C.D. Cal. 2016), a taxpayer, who owned fast food franchises argued that because an outside payroll service embezzled money intended for the franchises' employment-tax obligations, she was not liable for penalties for failure to pay the taxes. A district court found the taxpayer liable, noting that the Supreme Court and Ninth Circuit have both held that a taxpayer may not avoid the adverse consequences of the failure of its agent to perform the taxpayer's responsibility to timely file and pay federal taxes.

Estates, Gifts, and Trusts

IRS Grants Extension of Time to Make Portability Election for DSUE Amount: In PLR 201631001, the IRS granted a taxpayer's request for an extension of time to make the Code Sec. 2010(c) election allowing a decedent's surviving spouse to take into account the decedent's deceased spousal unused exclusion (DSUE) amount. The IRS noted the decedent had not been required to file a return as the gross estate was less than the basic exclusion amount, and the estate discovered its failure to elect portability after the due date for making the election.

Exempt Organizations

Disregarded LLC's Employees Could Participate in Tax-Sheltered Annuity Plan: In CCA 201634021, the IRS Office of Chief Counsel (IRS) advised that although a single-member LLC was not eligible to sponsor a Code Sec. 403(b) plan, because it was a disregarded entity treated as a branch of its owner - a Code Sec. 501(c)(3) organization - its employees could participate in the owner's 403(b) plan. The IRS stated that the LLC's employers were required to participate to the extent necessary to comply with the universal availability requirement.

Environmental Charity's Large Scale Sales Led to UBTI: In TAM 201633032, the IRS National Office (IRS) ruled that an exempt organization's sale of books and other products was an unrelated trade or business under Code Sec. 513. The charity argued that the sales contributed to its exempt purpose of preserving the environment because it could encourage buyers to visit its centers or its educational websites, but the IRS disagreed, noting that the sales were conducted on a larger scale than was reasonably necessary for the performance of the charity's exempt functions.

Exempt Organizations' Claims of Discriminatory Scrutiny Not Moot: In True the Vote, Inc. v. IRS, 2016 PTC 290 (D.C. Cir. 2016), the D.C. Circuit affirmed a district court's ruling that a group of exempt organizations were not entitled to damages regarding their claims that the IRS subjected them to unequal treatment in examining their exempt status. However, the circuit court found that an examination of two of the organizations was not complete, leaving open the possibility of further discriminatory scrutiny from the IRS, and declined to dismiss the case as moot.

Exemptions - Personal and Dependency

Taxpayer Couldn't Claim Exemptions or Credits Where Son Wasn't a Qualifying Child: In Cook v. Comm'r, T.C. Summary 2016-36, the Tax Court held that a taxpayer was not entitled to dependency exemptions or an American Opportunity Tax Credit with regard to his son. The court found that the son was not the taxpayer's qualifying child under Code Sec. 152(c) because he lived with his mother for the majority of the year, and thus the taxpayer did not have a dependent for purposes of the exemption or credit.

Gross Income and Exclusions

Settlement for Disability Benefits Not Excludable as Damages for Sickness: In Braddock v. Comm'r, T.C. Summary 2016-46, the Tax Court held that a taxpayer could not exclude from income, under Code Sec. 104(a)(2), settlement proceeds from a lawsuit relating to the denial of his long-term disability benefits. Although the taxpayer's neuromuscular disease caused him a great deal of pain, the court concluded that his lawsuit was to recover benefits and was not in the nature of a claim for recovery for personal injuries or sickness as required by Code Sec. 104(a)(2).

Retention of Rights to Patent Precludes Capital Gain Treatment for Royalties: In Spireas v. Comm'r, T.C. Memo. 2016-163, the Tax Court determined that royalty payments an individual taxpayer received under a license agreement for his patents were taxable as ordinary income, rather than as capital gain. The court held that because the taxpayer retained the right to use his patents outside of the pharmaceutical field, he did not transfer "all substantial rights" to the underlying technology and thus the royalties were not eligible for capital gain treatment under Code Sec. 1235.

Settlement Proceeds from Workplace Discrimination Suit Not Excludable: In Tritz v. Koskinen, 2016 PTC 250 (C.D. Cal. 2016), a district court granted an IRS motion for summary judgment and dismissed a taxpayer's argument that settlement proceeds she received from a workplace discrimination suit against the USPS shouldn't be included in her income under Code Sec. 104(a)(2). The court found that the damages received in the settlement were for emotional distress, and that Code Sec. 104(a)(2) only excepts from income damages for physical injury or sickness.

California Taxpayers Affected by Gas Leak Can Exclude Reimbursements from Income: In Announcement 2016-25, the IRS announced that it will not require residents of southern California affected by the 2015 Southern California Gas Company (SoCal Gas) natural gas leak to include in income relocation and cleaning expense reimbursements paid by SoCal Gas.

Temporary Regs Issued on Lease of Investment Credit Properties: In T.D. 9776 (7/22/16), the IRS issued temporary regulations that provide guidance regarding the income inclusion rules under Code Sec. 50(d)(5) that are applicable to a lessee of investment credit property when a lessor of such property elects to treat the lessee as having acquired the property. The temporary regs also provide rules regarding income inclusion on the termination or disposition of a lease of such property.

Healthcare Taxes

2016 Monthly National Average Bronze Plan Premium Released: In Rev. Proc. 2016-43, the IRS provided the 2016 monthly national average premium for qualified health plans that have a bronze level of coverage for taxpayers to use in determining the penalty that applies to a taxpayer that fails to maintain minimum essential health coverage. The monthly national average bronze plan premium for 2016 is $223 per individual, up to a maximum of $1,115 for a shared responsibility family with five or more members. Accordingly, for 2016, the maximum yearly penalty is $2,676 for an individual and $13,380 for a family with five or more members.

Information Reporting

Guidance Issued on Reporting for Issuers of Catastrophic Health Plans: In REG-103058-16 (8/2/16), the IRS issued proposed regulations relating to information reporting of minimum essential coverage under Code Sec. 6055 for issuers of catastrophic health plans. Generally, health insurance issuers need not report on coverage in a qualified health plan if an individual enrolls through an exchange. The regulations narrow this exception to require issuers of catastrophic plans to report catastrophic plan coverage on Form 1095-B, effective for coverage in 2017 and returns and statements filed and furnished in 2018.

Innocent Spouse Relief

Taxpayer Reasonably Expected Ex to Pay Taxes, Granted Innocent Spouse Relief: In Simonetta v. Comm'r, T.C. Summary 2016-43, the Tax Court determined that a taxpayer was entitled to innocent spouse relief despite the fact she knew that her and her ex-husband's joint returns showed tax due when she signed the returns. The court found the ex-husband was not a credible witness, and held that the taxpayer had reasonably expected that he would pay the taxes.


Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-47, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

IRS Issues Interim Guidance on CPEO Certification Requirements: In Notice 2016-49, the IRS responded to comments that certain requirements in recently issued temporary regulations under Code Sec. 7705 and in Rev. Proc. 2016-33 may unnecessarily limit the ability of persons to apply for and maintain recognition as a certified professional employer organization (CPEO). The notice describes modifications to those requirements that will be made in final regulations and an update to the revenue procedure.

Guidance Issued on Changes to ITIN Program: In Notice 2016-48, the IRS explained the changes made to the Individual Taxpayer Identification Number (ITIN) program by the PATH Act, how the changes will be implemented, and the potential consequences to taxpayers who do not renew an ITIN when required.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-46, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

IRS Issues Code Section 45K Reference Price for 2015: In Notice 2016-43, the IRS published the reference price under Code Sec. 45K(d)(2)(C) for purposes of determining the amount of the enhanced oil recovery credit under Code Sec. 43, the marginal well production credit under Code Sec. 45I, and the percentage depletion in case of oil and natural gas produced from marginal properties under Code Sec. 613A. For calendar year 2015, the reference price is $44.39.

Nontaxable Exchanges

Drugstore's Use of Third Party Didn't Defeat Like-Kind Exchange Treatment: In Est. of Bartell, Jr. v. Comm'r, 147 T.C. No. 5 (2016), a drugstore assigned its rights to purchase property to an exchange-facilitator in anticipation of structuring a like-kind exchange. It leased the property from the facilitator until a new store had been built, then sold the existing store and used the proceeds to reacquire title to the property. The Tax Court held that the transaction qualified for nonrecognition treatment under Code Sec. 1031, finding the taxpayer did not engage in a self-exchange.


Extension of Code Section 754 Election Period Granted: In PLR 201630013, the IRS granted a partnership's request for an extension of time to file an election under Code Sec. 754 to adjust the partnership's basis pursuant to Code Sec. 743. The IRS noted that the partnership had adjusted the basis of partnership property as if there were a Code Sec. 754 election in effect and did not take any position inconsistent with such an election.


Penalties Not Applicable Where Partnership Was Unable to File Returns: In In re Refco Public Commodity Pool, L.P. 2016 PTC 281 (Bankr. D. Del. 2016), a bankruptcy court held that a partnership's failure to file returns for three years was due to reasonable cause and held that the partnership did not owe penalties under Code Secs. 6724 and 6698 for those years. The court found the partnership could not accurately prepare and file its returns because the partnership in which it had invested the vast majority of its assets refused to provide Schedule K-1s.


Corporation's Overpayment Incorrectly Applied to Owner's Criminal Liability: In U.S. v. Del'Andrae, 2016 PTC 300 (D. Utah 2016), a district court held that the IRS improperly applied a corporation's overpayments to interest on restitution payments its owner was required to make in connection with her conviction for tax evasion. The court found that although the corporation was originally liable for its corporate tax debt, the taxpayer's conviction shifted that liability to her and thus she, not her corporation, was required to pay the interest.

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).


JULY 2016

Applicable Federal Rates

July AFRs Issued: In Rev. Rul. 2016-17, the IRS issued the applicable federal rates for July 2016.

C Corporations

Prop. Regs Address Perceived Abuse of Corporate Spin-Off Provisions: In REG-134016-15 (7/15/16), the IRS released proposed regulations addressing issues raised in Notice 2015-59, in which it expressed concerns over abuse of the Code Sec. 355 corporate spin-off provisions. The proposed regs provide guidance on the requirement that such transactions cannot be primarily a device to distribute the earnings and profits of the corporations involved, and also the requirement that the corporations engage in an active trade or business immediately following the distribution. The IRS issued Notice 2015-59 last year in the wake of its much publicized decision not to rule on the tax consequences on Yahoo's intended spin-off of its stake in Alibaba (effectively killing the transaction). The proposed regs are effective when finalized.


Proposed Premium Tax Credit Regs Address Opt-Out Payments, Credit Eligibility: The IRS has issued proposed regulations relating to the health insurance premium tax credit and the individual shared responsibility provision. The proposed regulations (1) clarify that an employer's payments to an employee under an unconditional opt-out arrangement will increase an employee's required contribution for purposes of Code Secs. 36B and 5000A; (2) address the reconciliation of advance credit payments; (3) provide a new rule for determining benchmark plans where a taxpayer's family is not covered under one policy; and (4) provide for consistency in calculating premium assistance amounts where a taxpayer has a short coverage month. REG-109086-15. Read more...

Additional Transition Relief Provided Regarding the Work Opportunity Tax Credit: In Notice 2016-40, the IRS extends the transition relief provided in Notice 2016-22 for employers claiming the work opportunity tax credit (WOTC), as amended by the PATH Act. For individuals generally hired before August 31, 2016, employers now have until September 28 to submit the applicable forms to designated local agencies to request, under the 28-day deadline in Code Sec. 51(d), certification that the individual is a member of a targeted group.


No Interest Deductions Allowed for Payments on Girlfriend's Mortgage: In Jackson v. Comm'r, T.C. Summary 2016-33, the Tax Court determined that a taxpayer was not entitled to mortgage interest deductions under Code Sec. 163(h) for payments he made toward the mortgage on his girlfriend's house. The court found the taxpayer did not hold legal title to the property, was not obligated to make the mortgage payments, and did not have equitable or beneficial ownership of the property.

IRS Updates Areas Not Subject to Limitations on Convention Expenses: In Rev. Rul. 2016-16, the IRS updated the list of all geographical areas currently included in the North American area for purposes of the limitation of deductions under Code Sec. 274(h) for expenses incurred in connection with a convention, seminar, or similar meeting held outside the North American area.

Electricians Could Deduct Expenses for Clothes and Tools: In Haag v. Comm'r, T.C. Summary 2016-29, the Tax Court determined a married couple, who worked as electricians, were entitled to deductions for unreimbursed business expenses relating to work clothes and work tools. The court found that boots and overalls with a built-in tool belt were required for their employment and not generally suitable for personal wear, and that union electricians were required to purchase and maintain a basic set of tools.

Capitalized Interest Not Deductible by Cash Basis Taxpayers: In Slavin v. Comm'r, T.C. Summary 2016-28, the Tax Court determined that, as cash basis taxpayers, a married couple was not entitled to deduct unpaid interest that was capitalized into their mortgage's principal. The court noted the couple did not pay mortgage interest for the years at issue in cash or its equivalent, and that the mortgage modification agreements did not constitute interest payments but rather allowed the taxpayers to postpone the paying of interest.

Employment Taxes

Companies Properly Treated Stock Options as Taxable Under the RRTA: In Wisconsin Central Ltd. v. U.S., 2016 PTC 248 (N.D. Ill. 2016), a district court determined that railway companies were not entitled to employment tax refunds relating to taxes paid on employee stock options. The companies argued that they had improperly treated non-qualified employee stock options as "money remuneration" subject to taxes under the Railroad Retirement Tax Act (RRTA). The court disagreed, finding that the options were "money remuneration" as defined in Code Sec. 3231(e)(1), and that the original treatment was accurate.

Estates, Gifts, and Trusts

IRS Rejects Estate's Attempt to Retroactively Designate Trusts as IRA Beneficiaries: The IRS ruled privately that because a decedent had designated his estate as his IRA's beneficiary at the time of his death, the IRA had no "designated beneficiary" for purposes of Code Sec. 401(a)(9) and the assets had to be paid out over the applicable distribution period in Reg. Sec. 1.401(a)(9)-5. The IRS also determined that a state court's order retroactively amending the designation to list trusts as the beneficiaries was ineffective because retroactive reformations cannot change the tax consequences of a completed transaction. PLR 201628004. Read more...

Exempt Organizations

Final and Temp Regulations Issued on Section 501(c)(4) Reporting Requirements: Final and temporary regulations have been issued relating to the requirement, added by the PATH Act, that tax-exempt organizations must notify the IRS of their intent to operate as a Code Sec. 501(c)(4) organization. Such organizations generally have 60 days from their formation to comply with the notification requirements. T.D. 9775. Read more...

Income Passed to Exempt Organization Through Owner's Will Wasn't UBTI: In PLR 201626004, the IRS ruled that an exempt organization's receipt of receivables from a legal services company that were passed through the common owner's will would not be treated as unrelated business taxable income (UBTI). The IRS noted that the receivables represented the company's share of unpaid balances of attorney's fees from legal services completed prior to the decedent's death, and that the organization was merely the distributee of the assets from the estate.

Gross Income and Exclusions

Insolvent Taxpayer Could Exclude COD Income from Overdrawn Bank Account: In Newman, Jr. v. Comm'r, T.C. Memo. 2016-125, the Tax Court determined that a taxpayer had cancellation of debt (COD) income when he overdrew his bank account, did not correct the negative balance, and the bank subsequently closed his account. However, the court found he was entitled to exclude the income under the Code Sec. 108(a)(1)(B) insolvency exception, because the amount of his insolvency exceeded his COD income.

IRS Failed to Account for Nontaxable Deposits from Taxpayer's Line of Credit: In Tzivleris v Comm'r, T.C. Summary 2016-26, the Tax Court determined that although a taxpayer had unreported income, the IRS understated the amount of nontaxable deposits when it analyzed thetaxpayer's bank accounts. The court accepted the taxpayer's testimony that he maintained a line of credit that he drew upon to provide operating capital for his business and concluded that a portion of the deposits in issue were attributable to advances from this line of credit.

Guidelines Issued on Exclusions Relating to Wrongful Incarceration: In IR-2016-88 (6/16/16), the IRS provides guidelines on how taxpayers can claim the new income exclusion under Code Sec. 139F, which allows taxpayers to exclude awards received in connection with a wrongful incarceration. The IRS states that taxpayers who in the past received payments related to their wrongful incarceration and included those payments in taxable income can now file a refund claim for any income tax paid.

Taxpayer Couldn't Claim Refund for Award Relating to Ex-Husband's Wrongful Incarceration: In In re Elkins, 2016 PTC 212 (Bankr. N.D. Ohio 2016), a bankruptcy court held that the income exclusion in Code Sec. 139F does not apply to the portion of awards a debtor received in connection with the wrongful incarceration of her ex-husband. The court stated that because the statute only applies to persons who were wrongfully incarcerated and not to beneficiaries of any resulting award, the debtor could not reopen her bankruptcy cases in order to file amended returns to claim refunds.

Information Reporting

Proposed Revisions to Forms 5500 Issued: In RIN-1210-AB63 (7/21/16), the IRS issued proposed changes to the Form 5500 Annual Return/Report series. The proposed revisions are intended to improve employee benefit plan reporting by (1) modernizing financial information filed regarding plans; (2) updating fee and expense information on plan service providers; (3) requiring reporting by all group health plans covered by Title I of ERISA; and (4) adding new questions regarding plan operations, service provider relationships, and financial management of the plan. The revisions, if adopted, generally would apply for plan years beginning on or after January 1, 2019.

Innocent Spouse Relief

No Innocent Spouse Relief for Taxpayer Complicit in Underreporting of Income: In Armour v. Comm'r, T.C. Memo. 2016-129, the Tax Court held that a taxpayer was not entitled to innocent spouse relief under Code Sec. 6015(f), finding that she was directly responsible for the underreporting of income with respect to her horse care and boarding business, and that, as the bookkeeper for her husband's residential remodeling business, she knew of the underreporting of income and excessive expense deductions attributable to that business.


IRS Advises on Which Interest-Free Period for Refunds Applies to Withholding Agents: In CCA 201625017, the IRS Office of Chief Counsel (IRS) advised that the 180-day interest free period in Code Sec. 6611(e)(4) for refunding overpayments should not be applied to withholding agents that make refund claims for amounts that they have paid from their own funds; instead the 45-day period of Code Sec. 6611(e)(1) applies. The IRS noted that where the withholding is actually applied, a refund or credit should be provided only to the beneficial owner or the taxpayer subject to withholding, and the 180-day period would apply.


New Law Allows Disclosure of Taxpayer Information to Investigate Missing Children Cases: On June 30th, President Obama signed in to law the Recovering Missing Children Act (H.R. 3209), which would allow the disclosure of tax returns and return information to state or local law enforcement agencies for use in federal investigations of missing or exploited child cases. Generally, under Code Sec. 6103, such information is confidential.

House Bill Cuts IRS Funding, White House Threatens to Veto: On July 7, the House passed an appropriations bill (H.R. 5485) for fiscal year 2017, setting the IRS's budget at $10.9 billion; the amount is $286 million less than the prior year and $766 million less than requested by the White House. The bill will need to be reconciled with the Senate's bill, which maintains the IRS's funding at $11.24 billion. The White House has threatened to veto the House's bill, stating that the reduction would hinder the IRS's ability to provide taxpayer services.


Taxpayers Could Bring Claim to Recover Portion of Refund Held by IRS: In Diamond Phone Card, Inc. v. U.S., 2016 PTC 240 (E.D.N.Y. 2016), a district court declined to dismiss the taxpayers' suit seeking to recover a portion of their refund for excise taxes. The taxpayers previously had been charged with structuring financial transactions to evade currency reporting requirements; as part of a plea deal to avoid jail time, they agreed to forfeit a portion of the refund. The court determined the taxpayers could continue with their suit to recover the remaining portion, which was still held by the IRS.

IRS's Withdrawal of Initial Notice Reset the Limitations Period: In Union Pacific Railroad Company v. U.S., 2016 PTC 241 (D. Neb. 2016), a district court determined that because the IRS withdrew its first notice disallowing a taxpayer's refund claim, the limitations period for the taxpayer to bring a refund suit did not begin until the IRS sent its second notice disallowing the claim, nine years after the first. Accordingly, the court found that the taxpayer's refund suit challenging the second notice was timely as it was filed two years after that notice.

Taxpayers Fraudulently Used Inmates' Information to File for Refunds: In U.S. v. Taylor, 2016 PTC 219 (11th Cir. 2016), the Eleventh Circuit confirmed convictions for taxpayers' participation in a "prison tax fraud scam." One taxpayer, who was incarcerated, would obtain identifying information from other inmates which he sent to his partner, who then used the information to file fraudulent tax returns and obtain tax refunds. The taxpayers also formed a sham legal research company, and would file false returns using information from inmates seeking the company's services.

Tax Liabilities Invalid Where IRS Couldn't Prove Taxpayer Got Deficiency Notice: In Buffano v. Comm'r, T.C. Memo. 2016-122, the Tax Court determined that because the IRS was unable to show that a notice of deficiency had been mailed to a taxpayer's correct address, nor could the IRS prove that the deficiency notice had been mailed to his last known address, collection actions could not be sustained and the liabilities the IRS sought to collect were invalidly assessed.

Property Transactions

Abandonment Loss Allowed for Leasehold: Improvements Upon Couple's Eviction from Store The Tax Court held that a couple can take an abandonment loss for leasehold improvements left behind when they were evicted from a store they had been leasing. The couple could also take a loss on property repossessed by the bank and sold at auction. Chowdhury v. Comm'r, T.C. Summary 2016-31. Read more...

Retirement Plans

Prop Regs Issued on Tax-Exempt Entities' Deferred Compensation Plans: In REG-147196-07 (6/22/16), the IRS issued proposed regulations under Code Sec. 457 regarding the taxation of compensation deferred under plans established and maintained by state or local governments or other tax exempt organizations. The regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules, and are generally effective when finalized.

RICs and REITs

Income From Parking Garage Were Rents From Real Property: In PLR 201628020, the IRS ruled that income a real estate investment trust (REIT) derived in connection with parking lease rents and storage fees from a parking garage qualified as rents from real property for purposes of Code Sec. 856(d). The IRS also ruled that the taxpayer's share of rents with respect to tenants did not fail to qualify as rents from real property merely because the tenants received parking services from using the garage.

Casino Boats Were Real Property for REIT Purposes: In PLR 201628009, the IRS ruled that dockside casino barges qualified as real property and as real estate assets for purposes of Code Sec. 856(c). The IRS noted that the barges were designed and constructed to remain permanently in place for the entirety of their useful life, were connected to land-based utilities, and did not include propulsion systems.

JUNE 2016


June AFRs Issued: In Rev. Rul. 2016-13, the IRS issued the applicable federal rates for June 2016.


Tax Payment on Behalf of Ponzi Scheme Inventor Must Be Returned by IRS: A district court held that the IRS had to return a tax payment made on behalf of a bankrupt company's owner. The court found that the payment was not made in good faith or for value. In re DBSI, Inc., 2016 PTC 191 (D. Idaho 2016). Read more...

Bankruptcy Estate, Not Shareholders, Liable for Taxes from Sale of S Stock. A bankruptcy court held that taxes due as the result of the sale of S corporation stock was a liability of the bankruptcy estate and not a liability of the debtors who had owned the stock. In re Medley, 2016 PTC 173 (Bankr. M.D. Ala. 2016). Read more...

C Corporations

Defunct Corporation Couldn't Challenge Deficiencies: In Allied Transportation Inc. v. Comm'r, T.C. Memo. 2016-102, the Tax Court dismissed a corporate taxpayer's petition for redetermination of its deficiencies for lack of jurisdiction because the taxpayer's corporate charter had been revoked a decade ago, and thus it lacked legal capacity to bring the case.


IRS Issues Inflation Adjustment Factors for Certain Energy-Related Credits: In Notice 2016-34, the IRS published the inflation adjustment factor and reference prices for 2016 for the renewable electricity production credit, the refined coal production credit, and the Indian coal production credit under Code Sec. 45. The inflation adjustment factor for 2016 for qualified energy resources and refined coal is 1.5556. The inflation adjustment factor for Indian coal is 1.1934. The reference price for 2016 for facilities producing electricity from wind is 4.50 cents per kilowatt hour. The reference prices for fuel used as feedstock, relating to refined coal production, are $31.90 per ton for 2002 and $53.74 per ton for 2016. The reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy have not been determined for 2016.

Estates, Gifts, and Trusts

IRS Advises on Disclosure of Estate Return Information: In CCA 201621014, the IRS Office of Chief Counsel (IRS) advised that under Code Sec. 6103(e)(1), the only people other than the administrator, executor, or trustee of the estate who can request the estate's return information are heirs at law, next of kin, beneficiaries under the will and, generally, donees of property. The IRS stated that in order to be entitled to the return information, the person must establish that they have a material interest that will be affected by the information requested.

Gross Income and Exclusions

IRS Rules on Calculation of Timeshare Seller's Interest for Installment Obligation: In PLR 201622007, the IRS ruled that the applicable federal rate to be used under the Code Sec. 453(l)(3) installment method to calculate the amount of a timeshare seller's interest for an installment obligation for a tax year is determined under Code Sec. 1274(d)(1) by treating such weighted average maturity as the term of the installment obligation.


Taxable Income Includes Cash Rewards and Premium Reimbursements under Wellness Programs: Employers may not exclude from an employee's income cash rewards for participating in a wellness program, nor may they exclude reimbursements of premiums for participating in such programs made by salary reduction through a cafeteria plan. CCA 201622031. Read more...

Liens and Levies

IRS Wasn't Required to Serve Creditor with Levy Notice; Wrongful Levy Suit Dismissed: In Insurance Company of the West v. Employment Development Department, 2016 PTC 184 (C.D. Cal. 2016), a district court determined the fact that the IRS did not serve a third party creditor with a notice of levy on the debtor's property did not excuse the third party's failure to timely file a wrongful levy suit. The court stated there was no requirement for the IRS to give notice to third-party claimants, and the third-party had been put on notice of the levy when it was filed in the bankruptcy action.


Late Filed Petition Considered Timely Due to Winter Storm: In Guralnik v. Comm'r, 146 T.C. No. 15 (2016), the Tax Court held that, where a taxpayer's petition was not received within the Code Sec. 6330 thirty day limit after an IRS determination, the taxpayer could not avail himself of the "timely mailed timely filed" rule in Code Sec. 7502(f) because he did not use a designated delivery service. However, because the clerk's office was closed on the thirtieth day due to a winter storm, and the petition was filed on the first accessible day after it opened, the court held the petition was timely filed.

IRS's Good Faith Reliance on Search Warrant Side-Stepped Issue of Unlawful Search: In U.S. v. Ganias, 2016 PTC 186 (2d Cir. 2016), a taxpayer appealed his conviction for tax evasion, arguing that the IRS retained non-responsive data on mirrored hard drives acquired pursuant to a search warrant in violation of the Fourth Amendment, and that evidence acquired in a later search of that data should have been suppressed. Because the court found that the IRS relied in good faith on the subsequent search warrant, it determined it did not need to decide whether the IRS violated the Fourth Amendment, and affirmed the judgment of the district court.

Property Transactions

Taxpayer Met Requisite Hours to be a Real Estate Professional; Passive Loss Rules Not Applicable: The Tax Court held that the hours a part-time ski instructor spent in connection with her real estate activities met the requirements under Code Sec. 469 in order qualify her as a real estate professional. Because the IRS failed to timely challenge the character of the hours, and conceded the issue of her material participation in the rental activities, the court determined the passive activity loss limitations did not apply. Moon v. Comm'r, T.C. Summary 2016-23. Read more...

Taxpayer's Fractional Interest in Rental Property Wasn't an Interest in a Business Entity: In PLR 201622008, the IRS ruled that if a taxpayer sold a tenancy-in-common interest in property to a new co-owner, an undivided fractional interest in the property would not constitute an interest in a business entity under Reg. Sec. 301.7701-2(a) for purposes of qualification of the interests as eligible relinquished property under Code Sec. 1031(a).


Post-Retirement Distributions under Deferred Comp Plan Subject to Self-Employment Taxes: The Eleventh Circuit held that post-retirement distributions by Mary Kay, Inc. to a former Mary Kay consultant were taxable as self-employment income because the payments were deferred compensation derived from her former Mary Kay business. In reaching it conclusion, the court drew distinctions between the post-retirement payments received by the Mary Kay consultant and those received by insurance salespeople. Peterson v. Comm'r, 2016 PTC 181. Read more...

RICs and REITs

Exchange of Partnership Interests for REIT Shares Is Not a Transfer to an Investment Company: In PLR 201622001, the IRS ruled that taxpayer partners' transfers of interests in their partnerships to an REIT in exchange for shares in the REIT would not be treated as a transfer to an investment company within the meaning of Code Sec. 351(e).

Tax Exempt Organizations

IRS Reduces Application Fee for Exemption Requests Submitted on Form 1023-EZ: The IRS has reduced the application fee for Code Sec. 501(c) exemption requests submitted on Form 1023-EZ from $400 to $275 for applications submitted on or after July 1, 2016. Rev. Proc. 2016-32. Read more...

Tax Preparation

Tax Preparer Escapes Fraud Penalty; Requisite Intent Not Found: The Tax Court held that a tax return preparer and his wife were not liable for fraud penalties because the IRS did not prove that either of the taxpayers filed any return for the years at issue intending to conceal, mislead, or otherwise prevent the collection of tax. Although the IRS determined that many of the couple's business expenses were inflated because of a lack of substantiation and an inability to show the requisite business purpose, the Tax Court declined to find that this fact, standing alone, established a fraudulent pattern of conduct. Ericson v. Comm'r, T.C. Memo. 2016-107. Read more...


Prepaid Taxes Not Credited to Future Liability until First Year Return Is Processed: In CCA 201621010, the IRS Office of Chief Counsel (IRS) stated that, while Code Sec. 6513(b) provides that amounts withheld are deemed paid by the taxpayer as of the due date of the return for that year, the fact that the amount was "paid" did not mean it would automatically be applied to the taxpayer's outstanding liability for the year in issue. Instead, the IRS advised that prepaid amounts for a given year are not deemed credited to a tax liability for another year until the time the return for the first year is processed and the credit is applied.


MAY 2016


June AFRs Issued: In Rev. Rul. 2016-13, the IRS issued the applicable federal rates for June 2016.

IRS Advises on Timing for Including Deferred Revenue Following Stock Acquisition: In CCA 201619009, the IRS Office of Chief Counsel advised that a taxpayer that has deferred recognizing revenue into income under Rev. Proc. 2004-34 and subsequently has all of its stock acquired by an unrelated corporation that, for financial accounting purposes, writes down the associated deferred revenue liability to its fair value as of the date of the acquisition, generally must include the advance payment in its gross income in the year of receipt.

IRS Updates List of Automatic Changes for Accounting Methods: The IRS has issued a revised list of automatic changes to which the automatic change procedures of Rev. Proc. 2015-13 apply. Rev. Proc. 2016-29. Read more...


IRS Updates Guidance on Facility Construction for Renewable Energy Credit: In Notice 2016-31, the IRS extends and modifies the continuity safe harbor to apply to qualified facilities placed in service generally before January 1, 2017, and provides additional guidance regarding the application of the safe harbor and the physical work test for purposes of the Code Sec. 45(a) renewable electricity production credit, as extended by the PATH Act. The notice also clarifies the application of the 5 percent safe harbor to retrofitted renewable energy facilities.

Veteran Denied Education Credit where Tuition was Covered by GI Bill: In Lara v. Comm'r, T.C. Memo. 2016-96, the Tax Court denied a veteran's claimed American Opportunity Tax Credit, finding he paid no qualified tuition and expenses to which a credit would apply. The taxpayer had qualified for tax-free educational benefits under the Post-9/11 GI Bill which covered his tuition and related expenses in their entirety.

IRS Publishes 2016 Adjustment Factors for Certain Energy-Related Credits: The IRS has published in the Federal Register (81 Fed. Reg. 25,760 (4/29/16)) the inflation adjustment factors and reference prices for calendar year 2016 for the renewable electricity production, refined coal production, and Indian coal production credits as required by Code Sec. 45.

Student Entitled to Education Credit in Year Loans were Received: Terrell v. Comm'r, T.C. Memo. 2016-85, the Tax Court held that a student correctly claimed the American Opportunity Credit for the year in which her student loan was disbursed. Although the university charged a portion of the taxpayer's 2011 spring semester tuition to her account in 2010, she did not receive the loan proceeds used to pay the tuition until early 2011. The court stated that she was treated as having paid those expenses in 2011 and, as a cash basis taxpayer, that was the proper year for her to claim the credit.


Taxpayer Couldn't Deduct Law School Tuition as a Business Expense: In Santos v. Comm'r, T.C. Memo. 2016-100, a taxpayer claimed deductions for his law school tuition and fees on his Schedule C, relating to his tax and financial planning business. The Tax Court held that the taxpayer was not entitled these deductions because the cost of a law degree is a nondeductible expense under Reg. Sec. 1.162-5(b)(1), as it qualifies taxpayers for a new trade or business.

Advances to Corporation Only Deductible if Loans or Stock Became Worthless: In Aleamoni v. Comm'r, T.C. Summary 2016-21, the Tax Court held that taxpayers weren't entitled to currently deduct as business expenses advances made to a C corporation in which they held a 50 percent interest. The court noted that if the advances were construed as loans or as capital contributions, the taxpayers may be entitled to deductions in the future to the extent the loans or stock became worthless.

Clothing Sales Rep Couldn't Deduct Expenses for Required Apparel: In Barnes v. Comm'r, T.C. Memo. 2016-79, the Tax Court held that a taxpayer wasn't entitled to deductions for unreimbursed employee expenses the taxpayer incurred to purchase and maintain clothing for his job. The taxpayer, a sales representative for Ralph Lauren, was required to wear the company's apparel while on the job. Because the clothing was suitable for general or personal wear, the court denied the deductions under Code Sec. 262.

Deduction for Conservation Easement Denied for Failure to Subordinate Mortgages: In RP Golf, LLC v. Comm'r, T.C. Memo. 2016-80, the Tax Court held that a partnership was not entitled to a deduction for a contribution of a conservation easement because its conservation purpose was not protected in perpetuity. The partnership failed to provide for subordination of preexisting mortgages, and thus the easement could be extinguished in foreclosure.


Employee May Claim Foreign Tax Credit for Taxes Paid by Employer: In CCA 201617009, the IRS Office of Chief Counsel (IRS) advised that, where an employer pays an employee's foreign income tax liability, the employee may still elect to claim a foreign tax credit under Code Sec. 901. The IRS noted that under Reg. Sec. 1.901-2(f)(2), the creditable foreign tax is considered paid by the person on whom foreign law imposes legal liability (i.e. the employee) even if another party to a direct or indirect transaction with the taxpayer agrees, as a part of the transaction, to assume the taxpayer's foreign tax liability.


Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-33, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2016-29, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2).

IRS Issues Regulations on CPEO Certifications: In T.D. 9768 (5/6/16), the IRS issued final and temporary regulations under Code Sec. 7705 regarding the requirements a person must satisfy in order to become and remain a certified professional employer organization (CPEO). The regs apply on and after July 1, 2016, which is the date the IRS will begin accepting applications for CPEO certification.


House Bill Allows Disclosure of Taxpayer Information to Investigate Missing Children Cases: On May 10th, the House passed the Recovering Missing Children Act (H.R. 3209), which would allow the disclosure of tax returns and return information to state or local law enforcement agencies for use in federal investigations of missing or exploited child cases. Generally, under Code Sec. 6103, such information is confidential.

Liens and Levies

Taxpayer Could Challenge Deficiency Where Wife Didn't Forward Levy Notice: In Yasgur v. Comm'r, T.C. Memo. 2016-77, the Tax Court held that a taxpayer was entitled to challenge his underlying liability because he did not intentionally avoid a notice of levy. The court found the taxpayer's estranged wife, who lived at the taxpayer's last known address and would generally forward his mail, neglected to alert him of the notice until three months after delivery.


Temp Regs Clarify Self-Employment Tax Obligations Where a Partnership Owns a Disregarded Entity: The IRS has issued temporary regulations clarifying that, if a partnership is the owner of a disregarded entity, the partners in the partnership are subject to the same self-employment tax rules as partners in a partnership that does not own a disregarded entity. The regulations are aimed at correcting a misinterpretation by some taxpayers that partners in a partnership that owns a disregarded entity can participate in certain tax-favored employee benefit plans. T.D. 9766. Read more...


Final Regs Issued on Penalty Relating to Reportable Transactions: In T.D. 9764 (4/28/16), the IRS issued final regulations relating to the penalty under Code Sec. 6708 on material advisers who fail to make available lists of advisees with respect to reportable transactions.


Tax Court Could Correct Typo in Taxpayer's Consent to Extend Limitations Period: In Kunkel v. Comm'r, 2016 PTC 162 (7th Cir. 2016), a Circuit Court found no abuse of discretion where the Tax Court reformed a couple's Form 872, Consent to Extend the Time to Assess Tax, to correct a typo indicating the wrong tax year to be extended. The court noted that if it honored the original form it would have the effect of reducing the time available to make an assessment, which was an absurd result. Accordingly, IRS deficiency notices were timely.

Taxpayer Entitled to Larger Refund, Court Corrects Error: In Stine LLC v. U.S., 2016 PTC 156 (W.D. La. 2016), a district court granted a taxpayer's motion to correct an error in its earlier ruling as to the amount of a refund due to the taxpayer. The court found that it had incorrectly granted the taxpayer a refund of only Gulf Opportunity Zone depreciation deductions disallowed by the IRS, rather than a refund for the depreciation deductions and for claims predicated on loss carrybacks related to those deductions.

Special Timing Rule Precluded Trust's Request for Award of Litigation Costs: In Alterman Trust v. Comm'r, 146 T.C. No. 14 (2016), the Tax Court denied a trust's petition for an award of litigation costs, finding the trust's net worth exceeded the $2 million limitation under Code Sec. 7430. The court rejected as unsupported the trust's argument that it met the net worth requirements on the date it filed the petition, noting that a special timing rule under Code Sec. 7430(c)(4) requires trusts to meet the net worth requirement on the last day of the tax year involved in the proceeding.

Retirement Plans

Safe-Harbor for Cash Balance Plans with Whipsaw Provisions Addressed: In CCA 201617006, the IRS Office of Chief Counsel advised that cash balance plans with a single-sum distribution that is determined as the present value of the participant's accrued benefit using the Code Sec. 417(e)(3) actuarial assumptions (colloquially known as whipsaw provisions) are generally eligible for the safe harbor rule for plans with indexed benefits under Code Sec. 411(b)(5)(E) and Reg. Sec. 1.411(b)(5)-1(b)(2).

Rollover Requirement Not Waived Where Taxpayer Used IRA Funds for a Short Term Loan: In PLR 201618016, the IRS denied a taxpayer's request for a waiver of the 60-day rollover requirement with respect to a distribution from his IRA, ruling the amount was required to be included in his income. The taxpayer had used the distribution as a short-term interest-free loan to make a business investment, which the IRS stated was not consistent with the intent of Congress to allow portability between eligible plans.

Regulations Issued on Suspension of Benefits for Plans in Critical Status: In T.D. 9765 (4/28/16) and T.D. 9767 (5/5/16), the IRS amended regulations under Code Sec. 432(e)(9) to reflect changes made by the Multiemployer Pension Reform Act of 2014. The regulations affect active, retired, and deferred vested participants and beneficiaries of multiemployer plans that are in critical and declining status as well as employers contributing to, and sponsors and administrators of, those plans. The regulations are effective on April 28, 2016, and May 5, 2016, respectively.

Tax-Exempt Bonds

Median Gross Income Figures for Use by Bond Issuers Released: In Rev. Proc. 2016-26, the IRS issued guidance with respect to the U.S. and area median gross income figures that are to be used by issuers of qualified mortgage bonds and issuers of mortgage credit certificates in computing the income requirements described in Code Sec. 143(f).

Tax Exempt Organizations

California Can't Compel Controversial Nonprofit to Disclose Donor Information: A district court held that the state of California cannot compel a controversial nonprofit to disclose the donor information it reports to the IRS on Schedule B of its Form 990. The court concluded that the California Attorney General's Schedule B disclosure requirement was unconstitutional as it applied to the nonprofit. Americans for Prosperity Foundation v. Harris, 2016 PTC 147 (C.D. Cal. 2016). Read more...


APRIL 2016


May AFRs Issued: In Rev. Rul. 2016-11, the IRS issued the applicable federal rates for May 2016.

Accounting Methods

IRS Confirms Audit Protection on Repair Reg Account Method Changes: In CCA 201614037, the IRS Office of Chief Counsel (IRS) advised that if a taxpayer timely filed a Form 3115, Application for Change in Accounting Method, for 2014 to change its method of accounting for non-incidental materials and supplies under Rev. Proc. 2015-14, and properly included the limited Code Sec. 481(a) adjustment, then the audit protection provided in Rev. Proc. 2015-13 applied and the IRS could not require the taxpayer to change its method of accounting for its non-incidental materials and supplies costs incurred prior to the year of change.

C Corporations

IRS Finalizes Anti-Loss Importation Rules: In T.D. 9759 (3/28/16), the IRS issued final regulations that prevent erosion of the corporate tax base when a person transfers property to a corporation and the result would be an importation of loss into the federal tax system. The regulations apply to nonrecognition transfers of loss property to corporations in liquidations under Code Sec. 322 and in transactions described in Code Sec. 362(a).

Compensation and Fringe Benefits

IRS Issues SIFL Rates for First Half of 2016: In Rev. Rul. 2016-10, the IRS provided the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2014. The SIFL rates may be used in valuing noncommercial flights on employer-provided aircraft.


Early Tuition Payment Prevents Student from Claiming Educational Credit: In McCarville v. Comm'r, T.C. Summary 2016-14, the Tax Court disallowed a student's claimed American opportunity credit for qualified tuition expenses paid in December for his spring semester the following year, noting that under Reg. Sec. 1.25A-5(e)(1) cash method taxpayers must claim the American opportunity credit for the year expenses were actually paid.


Private Jet Service's Avoidable Losses Indicated Lack of Profit Motive: In Hoffmann v. Comm'r, T.C. Memo. 2016-69, the Tax Court determined a taxpayer's jet service activity was not engaged in for profit, finding all nine factors under Reg. Sec. 1.183-2(b) weighed against a profit motive. The court noted that the taxpayer's contracts with the provider of aircraft he intended to lease for private flights allowed him to cause the provider to reacquire his interests in the aircraft. Accordingly, the pervasive losses he incurred in retaining the aircraft despite the business' failure were avoidable.

Taxpayer Moonlighting as a Hair-Braider Operated Her Business for Profit: In Delia v. Comm'r, T.C. Memo. 2016-71, a taxpayer ran a small hair-braiding salon out of a mall kiosk when she wasn't working at her full-time job as an event planner. Although the salon was never profitable, due in large part to the financial crisis that began in 2008, the Tax Court determined the taxpayer engaged in this activity with the genuine (if optimistic) intent to earn a profit, and allowed deductions for her business expenses.

Manufacturer Who Mined Raw Materials Must Make Two Separate Depletion Calculations: In FAA 20161401F, IRS Field Attorneys (IRS) advised that, where a taxpayer both mined raw minerals for sale and for use in manufacturing, two different percentage depletion allowance calculations under Code Sec. 611 should be performed: one for the mineral the taxpayer sold, and one for the rest that it processed and manufactured before selling. The IRS stated the latter calculation would be based on the representative market or field price of the minerals.

Estates, Gifts, and Trusts

Sons Thwart Deceased Mother's Intended Charitable Contributions: In Estate of Dieringer v. Comm'r, 146 T.C. No. 8 (3/30/16), the Tax Court held that an estate's charitable contribution of stock in a closely held corporation was less than the date-of-death fair market value of the bequeathed property. The decedent's sons had redeemed voting shares in the corporation and modified redemption agreements after the decedent's death but prior to the transfer of the stock, which resulted in an alteration of the value of the decedent's intended donation.

Trust Distributions Were Returns of Property, Not Gifts: In PLR 201613007, the IRS ruled that contributions of property to a trust were not completed gifts because the grantor had retained a testamentary power to appoint the trust property to any person other than his estate or creditors. Accordingly, the IRS determined any distribution from the trust to the grantor was a return of his property, not a gift.

Excise Tax

IRS Issues Regs on Highway Vehicle Excise Taxes: In REG-103380-05 (3/31/16), the IRS issued proposed regulations relating to the Code Sec. 4051 excise tax imposed on the sale of highway tractors, trailers, trucks, and tires; the use of heavy vehicles on the highway; and the definition of highway vehicle related to these and other taxes. The proposed regulations reflect changes to the Code since 1982.

Exempt Organizations

Final Regs on Program-Related Investments Issued: In T.D. 9721 (4/21/16), the IRS issued final regulations that provide guidance to private foundations on program-related investments exempt from the Code Sec. 4944(a) excise tax on jeopardizing investments. The final regulations, which provide a series of examples illustrating investments that qualify as program-related investments under Code Sec. 4944(c), are effective on April 25, 2016.

Medical Marijuana Distributer Denied Exempt Status: In PLR 201615018, the IRS ruled that a medical marijuana dispensary did not qualify for tax-exempt status under Code Sec. 501(c)(3) because its primary purpose of distributing medical marijuana was illegal under federal law and thus furthered substantial nonexempt purposes.


Advance Pricing and Mutual Agreement Report Issued: In Announcement 2016-12, the IRS issued its annual report on advanced pricing agreements (APAs) and the Advance Pricing and Mutual Agreement (APMA) Program.


IRS Can't Accept Late Filed Waivers of NOL Carryback Period: In CCA 201616009, the IRS Office of Chief Counsel (IRS) advised that the Service did not have the discretion to accept an election to waive the net operating loss (NOL) carryback period that was not filed by the extended due date of the tax return which reported the NOL. The IRS noted that the taxpayer may still be able to carryback the NOL if amended returns were filed within the Code Sec. 6511(d)(2) limitation period.

IRS Issues Requirements for Substitute Form W-2c and Form W-3c: In Rev. Proc. 2016-20, the IRS states the requirements regarding the preparation and use of substitute forms for Form W-2c, Corrected Wage and Tax Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements.


Taxpayer Who Made No Partnership Contributions Couldn't Deduct Losses: In Hastings v. Comm'r, T.C. Memo. 2016-61, the Tax Court held that taxpayers were not entitled to a deduction for losses their partnership sustained. The court noted that the taxpayers had made no contributions to the partnership and could not otherwise prove they had basis in the partnership, and thus Code Sec. 704(d) prevented them from deducting the loss.


Court of Federal Claims Could Hear Refund Suit for Bank Secrecy Act Penalties: In Norman v. U.S., 2016 PTC 138 (Fed. Cl. 2016), the Court of Federal Claims declined to dismiss a taxpayer's suit seeking a refund for penalties assessed against her under the Bank Secrecy Act, finding it had jurisdiction to hear her claims. The court noted that, contrary to the IRS's arguments, federal district courts don't have the exclusive jurisdiction over cases involving penalties.

No Penalties for Invalid TINs Where Withholding Agents Have No Knowledge of Error: In CCA 201615012, the IRS Office of Chief Counsel advised that the Service generally should not impose penalties for any invalid Taxpayer Identification Numbers (TIN) reported on a Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, found upon audit, unless the withholding agent knew or should have known that the TINs on the Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), were incorrect.


IRS Could Raise New Issues Not Addressed in Deficiency Notice: In Ax v. Comm'r, 146 T.C. No. 10 (2016), the Tax Court held that the IRS could file an amended answer that raised new arguments not originally stated in the notice of deficiency that disallowed taxpayers' deductions for premiums paid to a captive insurance company. The court found that neither the Administrative Procedure Act nor Supreme Court precedent barred the IRS from raising new issues, and found that allowing the IRS to do so would not result in unfair prejudice.

Retirement Plans

IRS Allows Broad Definition of Excludable Employees for Qualified Plan Testing Purposes: In CCA 201615013, the IRS Office of Chief Counsel advised that an employer could treat the population of otherwise excludable employees for purposes of coverage testing under Code Sec. 410(b)(4)(B) as including employees participating in the plan who had not satisfied the Code Sec. 410(a)(4) period applicable to them (i.e. through the earlier of the date 6 months after the participant attained age 21 and completed 1 year of service, or the first day of the first plan year after the participant attained age 21 and completed 1 year of service).

IRS Withdraws Portion of Prop. Regs Regarding Plans with Grandfathered Employees: In Announcement 2016-16, the IRS announced it is withdrawing a portion of the proposed regulations in REG-125761-14 (1/29/16) relating to nondiscrimination requirements applicable to certain retirement plans providing additional benefits to grandfathered groups of employees. The withdrawn provisions relate to the application of a nondiscriminatory classification test and the satisfaction of Code Sec. 410(b) by a rate group.

Tax Practice

Tax Court Announces Changes to Practice and Procedure: In a March 28, 2016, press release, the Tax Court announced that it has adopted interim amendments to its Rules of Practice and Procedure, relating to legislation enacted toward the end of 2015. The amendments affect interest abatement claims, jurisdiction after the filing of a bankruptcy procedure, and rules of evidence.

March 2016


In- Depth Article - IRS Issues Proposed Regs on Estate Basis Reporting; AICPA Pushes for Deadline Extension: Just weeks before an initial filing deadline, the IRS has issued proposed regulations that provide guidance regarding the basis consistency requirements under Code Sec. 1014(f) for reporting property acquired from a decedent, and the reporting requirements under Code Sec. 6035 with respect to the value of such property. REG-127923-15.

March AFRs Issued: In Rev. Rul. 2016-7, the IRS issued the applicable federal rates for March 2016.


Payments to Related Company for Product Development Were Constructive Dividends to Common Owner: The Tax Court determined that payments one company paid to a related company to develop a "hand washing monitoring system" were not deductible and were instead constructive dividends to the company's common owner. Deductions were allowed for the portion of the payments relating to expenses for information technology services. Key Carpets, Inc. v. Comm'r, T.C. Memo. 2016-30.


IRS Provides Transition Relief Regarding Changes to the Work Opportunity Tax Credit: The IRS has issued guidance and transition relief for employers claiming the work opportunity tax credit (WOTC), as extended and expanded by the Protecting Americans from Tax Hikes (PATH) Act. Notice 2016-22.


No Theft Loss Where Couple Can't Prove Year They Abandoned Arbitration Claim: Because a couple did not produce objective evidence that they abandoned an arbitration claim in 2004, they were not entitled to a theft loss in that year for investment losses suffered in a pump-and-dump scheme. Adkins v. U.S., 2016 PTC 79 (Fed. Cl. 2016).

Stock Warrants Were Deductible When Exercised: In PLR 201610006, the IRS ruled that, because stock warrants issued to service provider corporations as an incentive for performance did not have an ascertainable fair market value on the grant date, were not actively traded on an established market, and were not exercisable immediately, under Reg. Sec. 1.83-7(a) the issuing company could recognize the warrants as an expense only when they were exercised, rather than when they become exercisable.

Taxpayer Could Deduct Portion of Unsubstantiated Wages She Paid Her Children: In Fisher v. Comm'r, T.C. Summary 2016-10, the Tax Court disallowed as unsubstantiated an attorney's claimed deductions for wages she paid her children for work done around her office. However, the court was convinced that the children did in fact perform services, and held that the attorney could deduct $250 of wages for each child for each year based on their ages, a generalized description of their duties, and generalized statements as to the time spent in the office.


IRS Issues Proposed Regs on Estate Basis Reporting; AICPA Pushes for Deadline Extension: Just weeks before an initial filing deadline, the IRS has issued proposed regulations that provide guidance regarding the basis consistency requirements under Code Sec. 1014(f) for reporting property acquired from a decedent, and the reporting requirements under Code Sec. 6035 with respect to the value of such property. REG-127923-15 (3/4/16).


Supreme Court Declines to Review Decisions on STARS Transactions: The Supreme Court has denied certiorari in Salem Financial, Inc. v. U.S., 2015 PTC 158 (Fed. Cir. 2015) and in Bank of New York Mellon Corporation v. Comm'r, 2015 PTC 243 (2nd Cir. 2015), two cases which held that structured trust advantaged repacked securities (STARS) transactions lack economic substance. For now, the decisions of the appellate courts stand, but practitioners have noted that if the decision in Sandanter Holdings USA, Inc. v. U.S., 2015 PTC 412 (D. Mass. 2015), finding that such transactions do have economic substance, is upheld on appeal, it will create a circuit split which could prompt the Supreme Court to address the issue.

IRS Can Adjust Transfer Prices Prior to Determining True Separate Income: In Guidant LLC v. Comm'r, 146 T.C. No. 5 (2/29/16), the Tax Court held that, when making transfer pricing adjustments under Code Sec. 482, the IRS was not required to always determine the true separate taxable income of each controlled taxpayer in a consolidated group contemporaneously, and could aggregate related transactions instead of making specific adjustments to each type of transaction.

Foreign Tax Restrictions No Longer Apply to Cuba: In Rev. Rul. 2016-8, the IRS added Cuba to the list of countries to which the foreign tax restrictions under Code Secs. 901(j) and 952(a)(5) do not apply. Thus, taxpayers may claim the foreign tax credit for income taxes paid to Cuba, and may defer income earned in Cuba through a controlled foreign corporation.

IRS Provides 2016 Foreign Housing Adjustments: In Notice 2016-21, the IRS issued its annual adjustments to the limitation on housing expenses that may be excluded from income in 2016 under Code Sec. 911. While the notice is effective for tax years beginning on or after January 1, 2016, a taxpayer may elect to apply the 2016 adjusted housing limitations to his or her tax year beginning in 2015.


Refundable Portions of State Tax "Credits" Included in Income: In Rivera v. Comm'r, T.C. Memo. 2016-35, the Tax Court held that taxpayers had to include in income portions of refundable state tax "credits" received from participating in a New York economic development program. The court noted that, despite the state's characterization of the refunds as credits, the tax overpayments the taxpayers received from refunds of state income tax were "undeniable accessions to wealth," and thus were income to the taxpayers.


Law Firm's Delayed Challenge of IRS Levy Deprived Court of Jurisdiction: In Garrity, Levin and Muir, LLP v. U.S., 2016 PTC 87 (D. Mass. 2016), a district court dismissed a case for lack of jurisdiction because the taxpayer's law firm failed to challenge a levy on escrowed funds on the taxpayer's behalf within the applicable nine month limitation period of Code Sec. 7426.


IRS Seeks Comments on New Partnership Audit Procedures: In Notice 2016-23, the IRS requested public comments regarding the implementation of the new partnership audit regime enacted as part of the Bipartisan Budget Act (BBA) of 2015 (Pub. L. 114-74, 11/2/15). The BBA repealed the current TEFRA partnership audit procedures and replaced them with a centralized partnership audit regime that, in general, assesses and collects tax at the partnership level.


Taxpayer Liable for Enhance Accuracy Related Penalty for Listed Transaction: In Polowniak v. Comm'r, T.C. Memo. 2016-31, the Tax Court determined a taxpayer was liable for an enhanced accuracy related penalty under Code Sec. 6662A for an understatement attributable to a listed transaction. The taxpayer's S corporation had transferred amounts to a corporation owned by his Roth IRA in connection with his performance of personal services. The court determined the transactions resulted in excess contributions to the Roth IRA, and were substantially similar to the listed transaction in Notice 2004-8.


First Circuit Holds Fifth Amendment Doesn't Protect Bank Secrecy Act Documents: In U.S. v. Chen, 2016 PTC 85 (1st Cir. 2016), the First Circuit joined seven other circuits (the Second, Third, Fourth, Fifth, Seventh, Ninth, and Eleventh Circuits) in holding that taxpayers must comply with an IRS summons for documents he or she is required to keep under the Bank Secrecy Act because such documents are subject to the Required Records Doctrine under the Fifth Amendment.

Taxpayers Entitled to Pre-Assessment Determination of Liabilities: In Romano-Murphy v. Comm'r, 2016 PTC 94 (11th Cir. 2016), the Circuit Court, in an issue of first impression, held that a taxpayer who filed a timely protest was entitled to a pre-assessment determination of her liability by the IRS under Code Sec. 6672. The court determined the IRS erred in not providing the taxpayer with such a determination and remanded the case to determine whether the IRS's error was harmless.


Taxpayer Must Recognize Gain Where Transaction Was Sale of Subsidiary's Stock: In Makric Enterprises Inc. v. Comm'r; T.C. Memo. 2016-44, the Tax Court held that a stock purchase agreement unambiguously required the sale of a wholly owned subsidiary and that therefore the taxpayer was barred from contending that the transaction was, in substance, the sale of the parent company. Accordingly, the court determined the parent company recognized gain on the sale and upheld deficiencies and accuracy-related penalties.



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