Federal Tax Bulletin - Issue 88 - May 8, 2015

Senate Finance Committee Unanimously Approves Changes to Section 529 Plans

The Senate Finance Committee unanimously approved a bill that would make three key changes to Code Sec. 529, expanding the tax benefits provided by qualified tuition programs. The bill mirrors similar legislation that passed the House with overwhelming bipartisan support in February. S. 335 (4/29/2015).

Background

On April 29, the Senate Finance Committee approved S. 335, a bipartisan bill introduced by Chuck Grassley (R-Iowa) that would modernize college savings plans by making three key changes to Code Sec. 529. The bill mirrors similar legislation in H.R. 529, which passed the House by a 401-20 vote in February. S. 335 will now move to the full Senate for additional debate. The bill will need to be passed by both the Senate and the House and signed by the President before it becomes official law.

A qualified tuition program (QTP) under Code Sec. 529 (commonly referred to as a "qualified tuition plan" or "529 plan") is a program established and maintained by either a state (or an agency or instrumentality of a state) or an eligible educational institution under which a taxpayer can prepay, or contribute to an account that will be used to pay a designated beneficiary's qualified higher education expenses.

Qualified higher education expenses are expenses related to enrollment or attendance at any college, university, vocational school, or other postsecondary educational institution that is eligible to participate in a student aid program administered by the U.S. Department of Education. This includes most accredited public, nonprofit, and private postsecondary institutions.

Although contributions to a QTP are not deductible, a distribution to a designated beneficiary generally is not includible in the income of either the beneficiary or the taxpayer who made the contributions.

Modernization of 529 Plans

The bill would make three key changes to the way college savings plans operate under Code Sec. 529.

First, it would restore a temporary rule that had been in place during 2009 and 2010 which allowed qualified higher education expenses to include computer purchases for use by the beneficiary while enrolled in an eligible institution.

Second, it would remove outdated distribution aggregation requirements, considered a burden on plan administrators. Under prior law, distributions from QTPs were taxable and administrators were required to aggregate all distributions from 529 accounts in a single state with the same beneficiary for tax purposes. In 2001, the law was changed, providing that savings were taxed only before being placed in QTPs, and would not be taxed upon distribution. Because distributions for qualified expenses are no longer taxable under current law, the aggregation rules are outdated and would be removed by S. 335.

Third, the bill eliminates the tax and penalty on any refunds provided from colleges where the student has withdrawn from the school. Currently, if a student is refunded distributions used to pay for qualified expenses, the refunded amounts are subject to immediate taxation and an additional 10 percent penalty. S. 335 would eliminate this penalty and the tax on the distribution if the refund is recontributed to the beneficiary's QTP within 60 days.

If passed, the amendments to Code Sec. 529 made by S. 335 would apply to distributions made after Dec. 31, 2014.

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First Circuit Upholds 40% Penalty for Grossly Overvalued Historic Preservation Easement

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

Background

In 1999, Lorna Kaufman bought a single-family residence for herself and her husband Gordon in a historic preservation district in the South End neighborhood of Boston, MA. In 2003, she and her husband learned about a tax incentive program promoted by the National Architectural Trust (the Trust) allowing the couple to qualify for a charitable deduction if they granted the Trust a historic preservation easement on their home, which would restrict alterations to the property's facade.

The Trust recommended that the Kaufmans receive an appraisal of their easement from Timothy Hanlon, a certified professional appraiser who frequently worked with the Trust. Hanlon estimated that the burdens imposed by the grant of the easement would reduce the property's fair market value by 12 percent, and calculated the value of the easement to be $220,800.

Concerned that the reduction in the resale value of the property from the easement would outweigh the tax savings from the donation, the Kaufmans contacted Mory Bahar, a representative of the Trust. Bahar told the Kaufmans that he did not anticipate the easement would reduce the value of the property because properties in the historic preservation district were already subject to restrictions on alterations. The taxpayers were skeptical of Bahar's opinion, given his interest in convincing the couple to donate the easement.

Nonetheless, the Kaufmans decided to go forward with the easement donation. They spread the $220,800 deduction over 2003 and 2004, deducting $103,377 in 2003 and taking a carryover charitable contribution deduction of $117,423 in 2004. In 2009, the IRS issued deficiencies and penalties, disallowing the deductions and imposing a 40 percent gross valuation misstatement penalty.

The Kaufmans petitioned the Tax Court, which upheld the IRS's disallowance, holding that the easement was invalid as a matter of law because the conveyance did not comply with enforceability requirements in relevant regulations. The Kaufmans then appealed to the First Circuit, which found that the Tax Court erred in its evaluation of the regulations' enforceability requirements and vacated the decision.

On remand, the Tax Court found that the easement's value was zero. The court rejected Hanlon's appraisal methodology, instead finding the testimony of the IRS's expert persuasive. The IRS expert testified that the donation of the facade easement would not result in a diminution in property value, concluding that the easement was worthless. The tax court sustained the IRS's disallowance of the Kaufmans' charitable deduction and found the taxpayers liable for a 40 percent penalty for a gross valuation misstatement.

The Kaufmans again appealed to the First Circuit, challenging the Tax Court's finding that they were liable for the gross valuation misstatement penalty, but did not appeal the court's finding that the actual value of the easement was zero.

Analysis

A 20 percent accuracy-related penalty generally applies to any portion of an underpayment of tax that is attributable to a substantial valuation misstatement (Code Sec. 6662(a)). The penalty is increased to 40 percent in the case of a gross valuation misstatement, defined as an overstatement of 400 percent or more of the true value of any property claimed on a return (Code Sec. 6662(h)(1)). The value claimed on a return of any property with a correct value of zero is considered to be 400 percent or more of the correct amount, triggering the 40 percent gross valuation misstatement penalty (Reg. Sec. 1.6662-2(c)). There are exceptions to these penalties where the underpayment does not exceed a certain amount or where the taxpayer had reasonable cause and acted in good faith.

In the case of a substantial or gross valuation misstatement with respect to charitable deduction property, the reasonable-cause-and-good-faith exception does not apply unless the taxpayer can show that

(1) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser; and

(2) in addition to obtaining such appraisal, the taxpayer made a good-faith investigation of the value of the contributed property (Code Sec. 6664(c)(2)).

The Tax Court had found the Kaufmans liable for a 40 percent penalty for a gross valuation misstatement because the true value of the facade easement was zero. The tax court further determined that the "reasonable cause" exception did not apply because, although the reported value of the easement was based on a qualified appraisal made by a qualified appraiser, the Kaufmans had not made a good faith investigation of the easement's value.

The First Circuit Court agreed with the Tax Court's findings that the Kaufmans should have recognized obvious warning signs indicating that the appraisal was subject to serious question, and should have undertaken further analysis in response. After receiving Hanlon's appraisal, the taxpayers, expressly concerned that the easement might hurt the market value of the house, contacted Bahar for reassurance, and Bahar unequivocally told them that he did not expect the easement would decrease the home's value. The circuit court commented that this should have immediately raised red flags as to whether the value of the easement was zero, but the Kaufmans instead chose to move forward with the donation.

The Kaufmans argued that obtaining a qualified appraisal automatically constituted a good-faith investigation. The circuit court disagreed, however, noting that Code Sec. 6664(c)(2) explicitly sets forth two separate requirements that must be met in order for the reasonable cause exception to apply to a gross valuation overstatement. The court stated that the Kaufmans' reading of the statute would make the second requirement meaningless, violating the rule of statutory interpretation that no clause be rendered superfluous.

The circuit court also noted that simply obtaining an appraisal is not the same as reasonably relying on that appraisal, and determined that although the Kaufmans obtained a qualified appraisal, other facts, such as Bahar' evaluation that the easement restrictions were similar to local zoning restrictions, should have alerted them that it was not reasonable to rely on that appraisal.

Because the First Circuit agreed with the Tax Court's analysis, finding no clear error, the court upheld the imposition of the 40 percent gross valuation misstatement penalty.

For a discussion of charitable easement contributions, including for historical preservation purposes, see Parker Tax ¶84,155.25.

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Operating Agreement for Oil and Gas Interests Created Partnership; Income Subject to Self-Employment Tax

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

Background

For most of his professional life, David Methvin was the CEO of a computer company. In the early 1970s, Methvin acquired working interests in several oil and gas ventures, with his ownership ranging between 2 percent and 3 percent in each venture. These working interests were governed by a purchase and operation agreement entered into by Methvin and Egan Resources, Inc. (Egan). Read more...

  

IRS Rules on Tax Consequences of "Triple Drop and Check" Reorganizations

The IRS has addressed the tax consequences of a series of transactions where a parent corporation transferred all of its interests in a LLC through various subsidiaries, ending with the LLC electing to be treated as a disregarded entity. Rev. Rul. 2015-10.

Background

Under the facts of the revenue ruling, Parent, a corporation, owns all of the interests in LLC, a limited liability company taxed as a corporation. Parent also owns all of the stock of Sub1, which owns all of the stock of Sub2. Sub2 owns all of the stock of Sub3, and Sub3 owns all of the stock of Sub4. Sub1, Sub2, and Sub3 are each holding companies that are corporations.

For valid business purposes, and as part of a plan:

(1) Parent will transfer all of the interests in LLC to Sub1 in exchange for additional shares of voting common stock of Sub1 (Parent's transfer);

(2) Sub1 will then transfer all of the interests in LLC to Sub2 in exchange for additional shares of voting common stock of Sub2 (Sub1's transfer);

(3) Sub2 will next transfer all of the interests in LLC to Sub3 in exchange for additional shares of voting common stock of Sub3 (Sub2's transfer); and

(4) LLC will elect pursuant to Reg. Sec. 301.7701-3(c) to be disregarded as an entity separate from its owner for federal income tax purposes, effective no sooner than one day after Sub2's transfer (LLC's election).

Observation: This series of transactions, colloquially referred to as a "triple drop and check," effectively transfers Parent's interests in LLC to Sub3 by way of Sub1 and Sub2.

Following the transaction, Sub3 will, through LLC, continue to conduct the business conducted by LLC prior to the transaction.

Analysis

Code Sec. 351(a) provides that no gain or loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in Code Sec. 368(c)) of the corporation.

Code Sec. 368(a)(1)(D) provides that the term "reorganization" includes a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred.

A transfer of property may be respected as a Code Sec. 351 exchange even if it is followed by subsequent transfers of the property as part of a prearranged, integrated plan (Rev. Rul. 77-449).

The IRS noted that under the facts of the revenue ruling, even though Parent's transfer was part of a series of transactions undertaken as part of a prearranged, integrated plan involving successive transfers of the LLC interests, Parent's transfer satisfies the formal requirements of Code Sec. 351, including the requirement that Parent control Sub1 within the meaning of Code Sec. 368(c). Accordingly, the IRS ruled Parent's transfer is respected as a Code Sec. 351 exchange, and no gain or loss is recognized by Parent. Similarly, the IRS found Code Sec. 351 applies to Sub1's transfer, and no gain or loss is recognized by Sub1.

With regard to Sub2's transfer and LLC's election, the IRS stated that pursuant to Rev. Rul. 67-274, if an acquiring corporation acquires all of the stock of a target corporation in an exchange otherwise qualifying as a Code Sec. 351 exchange, and as part of a prearranged, integrated plan, the target corporation thereafter transfers its assets to the acquiring corporation in liquidation, the transaction is more properly characterized as a reorganization under Code Sec. 368(a)(1)(D).

Accordingly, the IRS determined that Sub2's transfer and LLC's election were more properly characterized as a reorganization under Code Sec. 368(a)(1)(D) than as a Code Sec. 351 exchange followed by a liquidation of the subsidiary under Code Sec. 332.

The IRS thus ruled that a transaction in which (1) a parent corporation transfers all of the interests in its limited liability company that is taxable as a corporation to the first subsidiary in exchange for additional stock, (2) the first subsidiary transfers all of the interests in the limited liability company to the second subsidiary in exchange for additional stock, (3) the second subsidiary transfers all of the interests in the limited liability company to the third subsidiary in exchange for additional stock, and (4) the limited liability company elects to be disregarded as an entity separate from its owner for federal income tax purposes effective after it is owned by the third subsidiary, is properly treated for federal income tax purposes as two transfers of stock in exchanges governed by Code Sec. 351 followed by a reorganization under Code Sec. 368(a)(1)(D).

Observation: In Rev. Rul. 2015-9, the IRS addressed the tax consequences of a similar series of transactions involving foreign corporations, revoking Rev. Rul. 78-130. There, the IRS ruled a transaction in which (1) a domestic corporation transfers all of the stock of its foreign operating subsidiary to its foreign holding company subsidiary in exchange for additional stock, (2) the foreign operating subsidiary and three foreign subsidiaries of the foreign holding company transfer substantially all of their assets to a newly-formed foreign subsidiary of the foreign holding company in exchange for stock of the new subsidiary, and (3) the subsidiaries that transfer their assets are liquidated, is properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary's stock in an exchange governed by Code Sec. 351 followed by reorganizations under Code Sec. 368(a)(1)(D).

For a discussion of corporate reorganizations, see Parker Tax ¶ 46,500.

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IRS Clarifies Timing of Refund Claims for Foreign Tax Deductions and Credits

The IRS Office of Chief Counsel advised that a taxpayer's refund claim, stemming from returns amended to deducted foreign taxes instead of taking a credit for those taxes, was outside the time limit allowed for such refunds. CCA 201517005.

Background

A taxpayer filed an amended return and a refund claim, changing his election from taking a credit for foreign taxes paid under Code Sec. 901 to deducting the foreign taxes under Code Sec. 164.

The additional deduction significantly reduced the taxpayer's income, resulting in a Net Operating Loss (NOL) for the year the amended return was filed. At the same time the return was amended, the taxpayer also filed an amended return for his tax year two years prior to the first amended return in order to carry back and apply the NOL.

An IRS Senior Technician reviewing the taxpayer's refund claim requested the IRS Office of Chief Counsel's (IRS) advice as to whether a claim for refund of tax paid for year 2 is timely filed under Code Secs. 6511(d)(2) or (d)(3), where an amended return is filed in year 13 claiming a deduction, in lieu of a credit, for foreign taxes paid in year 4, the timely election to deduct foreign taxes in year 4 results in an NOL for year 4, and the claim for refund for year 2 is also filed in year 13 based on an NOL carryback from year 4 to year 2.

The following example illustrates the timeline described in the CCA:

Example: In 2015, Bill filed an amended return and a refund claim for 2006. On the amended return, Bill changed his election in order to deduct creditable foreign taxes under Code Sec. 164, in lieu of taking the credit under Code Sec. 901. This new deduction, for foreign taxes paid or accrued, significantly reduced Bill's 2006 income, resulting in a NOL for that year. At the same time Bill filed the amended return for 2006, he also filed an amended return for 2004, carrying back the NOL from 2006 to 2004.

Analysis

A taxpayer is entitled to a foreign tax credit for foreign taxes paid or accrued (Code Sec. 901(a)). Alternately, taxpayers may deduct foreign taxes paid pursuant to Code Sec. 164(a).

Code Sec. 6511(d)(2)(A) provides that when a claim for refund relates to an overpayment attributable to an NOL carryback, in lieu of the three-year period of Code Sec. 6511(a), the period ends three years after the time prescribed by law for the filing of the return for the tax year of the NOL which results in the carryback.

Code Sec. 6511(d)(3)(A) provides that if a claim for credit or refund relates to an overpayment attributable to a tax paid for which credit is allowed under Code Sec. 901, in lieu of the three-year period of Code Sec. 6511(a), the period is ten years from the date prescribed for the filing of the return for the taxable year in which the foreign tax was actually paid or accrued.

The IRS advised the Senior Technician that the taxpayer's refund claim was not timely. The IRS noted the claim for refund of tax paid with respect to the second amended return was the result of an NOL from the first amended return. It found the timeliness of the claim for refund was governed by Code Sec. 6511(d)(2) because it was attributable to an NOL carryback. Thus, the applicable period had expired three years after the due date of the original return for the first amended return, which was six years prior to when the taxpayer had requested a refund.

Even if the claim for refund was viewed as attributable to foreign taxes paid, the IRS determined the ten-year period under Code Sec. 6511(d)(3) was only available for refunds attributable to foreign tax credits and did not apply to refunds attributable to deductions for creditable foreign taxes.

For a discussion on net operating losses, see Parker Tax ¶ 99,100.

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Taxpayer Can't Claim Former Foster Son's Daughter as Qualifying Child

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

Background

Jean Cowan is the former guardian of Marquis Woods. Marquis was born in 1986 to a mother addicted to drugs and was brought to live with Cowan when he was six weeks old. He has lived with her continuously since then, and in 1991, Cowan was appointed as his legal guardian.

When Marquis turned 18 in 2004, Cowan's guardianship ended by operation of state law. Despite the termination of the guardianship, Marquis continued to live with, and to be supported by Cowan; she regards Marquis as her son, and he regards her as his mother. However, Cowan never officially adopted Marquis. Cowan claims she did not know there was a legal distinction between guardianship and adoption, and did not know adult adoption was a possibility.

Marquis fathered a daughter in 2006, and Marquis and his daughter continued to live with Cowan, who provided most of the support for the household.

For 2011, Cowan reported adjusted gross income of $13,920, claimed dependency exemption deductions for both Marquis and his daughter, and claimed the EITC, CTC, and head of household filing status on the basis of the daughter's putative status as Cowan's grandchild and, thus, qualifying child under Code Sec. 151(c).

The IRS disallowed Cowan's dependency exemption deduction for the daughter, EITC, CTC, and head of household filing status.

Analysis

An individual is allowed an exemption deduction for each dependent, defined as a qualifying relative or a qualifying child (Code Sec. 151(c)). An individual can be a qualifying relative even if not literally a relative of the taxpayer, but lives with the taxpayer and is a member of the taxpayer's household (Code Sec. 152(d)(2)(H)).

In addition, taxpayers are entitled to claim EITC (Code Sec. 32) and CTC (Code Sec. 24) for a qualifying child. Under Code Sec. 152(c), a qualifying child must be the taxpayer's child or a descendant of the taxpayer's child. Further, a "child" is defined as a son, daughter, stepson, or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer (Code Sec. 152(f)(1)(A)).

A taxpayer qualifies for head of household filing status if the taxpayer is unmarried, has paid more than half the cost of keeping up a home for the year, and a qualifying person has lived with the taxpayer for more than half the year (Code Sec. 2(b)).

The IRS conceded that Marquis was a "qualifying relative" and that Cowan was entitled to a dependency exemption deduction for him. But it maintained that the daughter was not a qualifying child for Cowan, and that she was therefore not eligible for a dependency exemption, EITC, CTC, or head of household status.

The Tax Court reasoned that whether the daughter was Cowan's "qualifying child" in 2011 turned on whether Marquis was Cowan's "eligible foster child" under Code Sec. 152(f). Cowan argued that Marquis, her former ward, was still her foster child because they continue their relationship and hold each other out as parent and child, and therefore he was her "eligible foster child." By this thinking, the daughter, as a descendant of her child, was a qualifying child.

However, the Tax Court pointed out that, under Code Sec. 152(f)(1)(C), an eligible foster child is an individual who is "placed" with the taxpayer by a court order. Marquis was "placed" with Cowan from 1991 until he turned 18 in 2004, at which point her guardianship ended by court order. The court found Marquis was no longer Cowan's eligible foster child because she could no longer show that he was placed with her by court order. Consequently, the court concluded that Marquis was not her eligible foster child and was thus not her "child" as defined in Code Sec. 152(f). As a result, his daughter could not be Cowan's "qualifying child" by virtue of being the descendent of her child.

Because, the Tax Court determined that under Code Sec. 152(c), the daughter was not Cowan's qualifying child, the court held Cowan was not entitled to a dependency exemption, EITC, or CTC. The court further held that because neither Marquis nor the daughter were qualifying persons for purposes of Code Sec. 2(b), Cowan could not file as a head of household.

Observation: Cowan may have been able to salvage the dependency exemption for Marquis' daughter if she had argued that the daughter was a "qualifying relative." That status can exist where the person has the same principal place of abode as the taxpayer and is a member of the taxpayer's household during the entire taxable year. Although the daughter lived with Cowan for only 11 months in 2011, the regulations allow an exception to the full-year requirement for temporary absences due to special circumstances. However, since Cowan did not try to argue that the daughter was a qualifying relative, the court did not address the issue.

For a discussion of the earned income credit, see Parker Tax ¶102,100. For a discussion of the child tax credit, see Parker Tax ¶ 100,700.

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IRS Announces HSA Inflation Adjustment Amounts for 2016

The IRS has provided the 2016 inflation adjusted amounts for health savings accounts. Rev. Proc. 2015-30 (5/5/15).

Within limits, an eligible individual can deduct the amount he or she contributes to a health savings account (HSA) in computing adjusted gross income on Form 1040. The limits on the amount that may be contributed are announced each year and are adjusted for inflation.

In addition, to be an eligible individual for a month, an individual must be covered under a high deductible health plan (HDHP) on the first day of that month. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. The out-of-pocket expense limitation is announced each year and is also adjusted for inflation.

The IRS has now announced the 2016 HSA limitations. For calendar year 2016, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,350 (no change from 2015). For calendar year 2016, the annual limitation on deductions for an individual with family coverage under a high deductible health plan is $6,750 (up from $6,650 for 2015).

For calendar year 2016, a high deductible health plan is defined as a health plan with an annual deductible that is not less than $1,300 (no change from 2015) for self-only coverage or $2,600 (no change from 2015) for family coverage, and under which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 (up from $6,450 for 2015) for self-only coverage or $13,100 (up from $12,900 for 2015) for family coverage.

For a discussion of heath savings accounts, see Parker Tax ¶81,100.

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Taxpayer Can't Deduct Back-Alimony Paid Pursuant to State Court's Final Judgement

The Tax Court held that because a taxpayer's spousal support payments were made pursuant to a state court's final money judgement, his liability for the payments would persist after his death and therefore could not be considered alimony. Iglicki v. Comm'r, T.C. Memo. 2015-80.

Background

David Iglicki and his wife Christie separated in 1999. Their separation agreement required Iglicki to pay $735 per month in child support to his former wife, but did not require him to pay any alimony to her unless he defaulted on his obligations under the agreement. If he defaulted, he would become obligated to pay $1,000 per month in alimony.

Iglicki moved to Colorado in 2002. Shortly thereafter, he defaulted on his obligations under the separation agreement and began incurring alimony obligations. In 2003, Iglicki's former wife filed suit in the District Court of El Paso County, Colorado, to enforce the separation agreement and divorce decree. In 2008, she filed a verified entry of judgment with the El Paso district court, declaring that Iglicki owed her $22,838 in child support arrears and a total of $64,156 in spousal support arrears.

In 2010, Iglicki made $50,606 in payments to his former wife. The payments, which were garnished from his wages, included $11,256 for child support. Iglicki claimed a deduction for $39,350 of alimony payments on his 2010 return, but his ex-wife reported only $13,441 of alimony income on her 2010 return. In 2012, the IRS determined a deficiency of $10,479 and assessed an accuracy-related penalty.

Analysis

Code Sec. 215(a) allows a taxpayer a deduction for alimony or separate maintenance payments paid during the tax year. Code Sec. 71(b)(1) sets forth a four-pronged test to determine if a payment is alimony:

(1) the payment must be received pursuant to a divorce instrument;

(2) the divorce instrument must not designate the payment as one that is not includible in income;

(3) the payor and payee must not still live together; and

(4) there must not be a liability to continue making payments after the payor's death. All four of the requirements must be met for the payment to be considered deductible alimony.

The IRS conceded that Iglicki's payments to his ex-wife met the second and third requirements of Code Sec. 71(b)(1), but argued that the payments did not meet the first and fourth requirements, and thus could not be considered alimony payments.

The Tax Court noted Colorado law treats payments made to satisfy future alimony obligations differently from payments made to satisfy alimony arrears. Future alimony obligations terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree. By contrast, an order enforcing alimony arrears becomes a final money judgment, which is not affected by the death of either the payor or the payee.

The court found that since the verified entry of judgment was issued to assist the ex-wife in collecting past due but unpaid alimony, it was treated as a final money judgment against Iglicki. As such, under Colorado law, Iglicki's liability would not be affected by the death of either himself or his former wife.

Because Iglicki's liability was based on a judgement under which he would remain liable for the unpaid alimony arrears after his death, the Tax Court determined that the payments failed the fourth requirement under Code Sec. 71(b) and could not be considered alimony. The court thus held Iglicki was not entitled to an alimony deduction under Code Sec. 215(a) for the payments, sustaining the IRS's deficiency determination and imposing an accuracy-related penalty.

For a discussion of taxation of alimony and separate maintenance payments, see Parker Tax ¶ 14,220.

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National Football League Abandons Tax Exempt Status

In a letter to the U.S. House of Representatives, NFL Commissioner Roger Goodell expressed the League's plans to file returns as a taxable entity for its 2015 fiscal year.

Letter Announcing Intention to Drop Exempt Status

The NFL has been a tax exempt organization since the 1940s, but will give up this exempt status beginning in 2015. In an April, 28 letter, NFL Commissioner Roger Goodell informed league owners and presidents that an internal committee had voted to have the league office and Management Counsel file returns as taxable entities for its 2015 fiscal year, which started earlier this month.

Goodell remarked that the effects of the NFL's tax exempt status had repeatedly been mischaracterized, pointing out that the income generated through licensing, sponsorships, television rights, and ticket sales is earned by the 32 teams in the league, which are all taxable entities. Goodell noted this would remain the case, and the NFL's change in filing status would not affect its business. Giving up its tax exempt status, Goodell claimed, would eliminate the distractions caused by this mischaracterization.

Goodell sent a copy of the letter to members of the House of Representatives, informing them of the NFL owners' decision to abandon their exempt status.

Observation: Although the IRS has extensive procedures for requesting tax exempt status in place, it does not have procedures for requesting that exempt status be terminated. In order to electively terminate its tax exemption, the NFL will likely need to amend its organizational documents in a manner that would disqualify it from exempt status. This could be as simple as changing its statement that it is not organized for profit, to say that it is organized for profit.

Congressional Opposition to Exempt Status

Congress amended Code Sec. 501(c)(6) in the 1960s to add professional football leagues, confirming the NFL's exempt status. However, in recent years, multiple legislators have questioned that exemption, introducing legislation to revoke the NFL's tax-favored status.

In 2014, Senator Cory Booker (D-N.J.) introduced the Securing Assistance for Victims' Empowerment (SAVE) Act to bar professional football leagues from qualifying for exempt status under Code Sec. 501(c)(6), planning to use the tax savings generated for domestic violence prevention.

Also in 2014, Dave Camp, the former House Ways and Means Committee Chair, proposed to eliminate exemption for professional sports leagues in his tax reform plan, the Tax Reform Act of 2014.

In March of 2015, House Oversight and Government Reform Committee Chair Jason Chaffetz (R-Utah) and ranking minority member Elijah E. Cummings (D-Md), sent a letter to Goodell requesting information on the NFL's operations as an exempt organization. The letter noted that the IRS has recognized that professional sports leagues are inherently different from other 501(c)(6) organizations, such as business leagues and chambers of commerce.

In January Chairman Chaffetz had also introduced H.R. 547, the Properly Reducing Overexemptions (PRO) for Sports Act, with the purpose of eliminating the 501(c)(6) tax-exemption for professional sports leagues with annual revenues over $10 million, providing estimated tax savings of $109 million over the next decade.

Implications of Change in Exempt Status

Forbes notes that the loss of the tax breaks are minimal, only costing the NFL a little more than $10 million each year. By way of perspective, the annual revenue of the league and its franchises is believed to exceed $9 billion.

Bloomberg points out that revoking the NFL's 501(c)(6) status will actually provide some benefits to the league, such as ending disclosure requirements which provided the public with information on Goodell's salary. The NFL Commissioner received $35 million in salary and bonuses in 2013, drawing public criticism.

The NFL will not be the only professional sports organization without exempt status. Major League Baseball (MLB) voluntarily revoked its exemption in 2007, and the National Basketball Association (NBA) has never been tax exempt.

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IRS Updates Designated Private Delivery Services for Timely Filing Rule

The IRS has updated the list of designated private delivery services for purposes of the timely mailing treated as timely filing/paying rule. Notice 2015-38.

In Notice 2015-38, the IRS released an updated list of the designated private delivery services (PDSs) for purposes of the timely mailing treated as timely filing/paying rule of Code Sec. 7502. The notice also provides rules for determining the postmark date for these services, and provides a new address for submitting documents to the IRS with respect to an application for designation as a designated PDS. These changes are effective May 6, 2015.

Background

Code Sec. 7502(f) authorizes the IRS to designate certain PDSs for the timely mailing treated as timely filing/paying rule of Code Sec. 7502. Under Code Sec. 7502(a), if any document which must be filed by a certain date is delivered by U.S. mail after that date, the date of the U.S. postmark stamped on the envelope is deemed to be the date of delivery. This "mailbox rule" applies only in cases where the document is actually received by the IRS after the statutory period.

Updated PDSs

Effective May 6, 2015, the list of designated PDSs is as follows:

FedEx:

(1) FedEx First Overnight

(2) FedEx Priority Overnight

(3) FedEx Standard Overnight

(4) FedEx 2 Day

(5) FedEx International Next Flight Out

(6) FedEx International Priority

(7) FedEx International First

(8) FedEx International Economy

UPS:

(1) UPS Next Day Air Early AM

(2) UPS Next Day Air

(3) UPS Next Day Air Saver

(4) UPS 2nd Day Air

(5) UPS 2nd Day Air A.M.

(6) UPS Worldwide Express Plus

(7) UPS Worldwide Express.

The IRS notes that only the specific delivery services enumerated in this list are designated delivery services for purposes of Code Sec. 7502(f). FedEx and UPS are not designated with respect to any type of delivery service not enumerated in this list (such as UPS Ground), and the IRS cautioned taxpayers that merely because a delivery service is provided by FedEx or UPS, it does not mean that the service is designated for purposes of the timely mailing treated as timely filing/paying rule of Code Sec. 7502.

Delivery services by DHL Express were originally designated PDSs pursuant to Notice 2004-83. However, since the publication of Notice 2004-38, DHL Express substantially altered or discontinued its delivery services within the U.S., and the services listed in the notice are no longer provided and thus are no longer designated PDSs.

Special Rules for Determining Postmark Date in the Case of a PDS

For each PDS designated in Notice 2015-28, the delivery service electronically records the date on which an item was given to it for delivery, which is treated as the postmark date for purposes of Code Sec. 7502. The postmark date for an item delivered after the due date is presumed to be the day that precedes the delivery date by an amount of time that equals the amount of time it would normally take for an item to be delivered under the terms of the specific type of delivery service used (for example, two days before the actual delivery date for a two-day delivery service). Taxpayers who wish to overcome this presumption must provide information that shows that the date recorded in the delivery service's electronic data base is on or before the due date, such as a written confirmation produced and issued by the delivery service.