Tax Research Briefs - Archived (June 2017 - March 2017)

June 2017

Accounting

Intangible Development Costs Shouldn't Include Hedging Gains and Losses: In CCA 201722028, the Office of Chief Counsel advised that, with respect to the tax preference calculation of excess intangible development costs (IDCs) in Code Sec. 57, it would not make sense to measure the amount of IDCs considered "excess" by a calculation including hedging transactions not related to the oil and gas properties of the taxpayer. Further, in response to a question as to whether the calculation of net income from oil and gas under Reg. Sec. 1.613-5 should include hedging gains and losses, the Chief Counsel's Office noted that while the term "net income from oil and gas" is used in Code Sec. 57(a)(2)(C) and is not defined by reference to Reg. Sec. 1.613-5, Reg. Sec. 1.613-5 is instructive in limiting the scope of the deductions from gross income from the property in calculating net income from oil and gas and thus such gains and losses shouldn't be included.

Court Invalidates Fee Requirement for Preparer Tax ID Numbers: A district court held that the IRS may require the use of preparer tax identification numbers (PTINs) but may not charge fees for issuing PTINs. The court found that the fee requirement was unlawful under Loving v. U.S., 2014 PTC 73 (D.C. Cir. 2014), which held that the IRS does not have the authority to regulate tax return preparers. The district Steele v. U.S., 2017 PTC 265 (D. D.C. 2017). Read More...

Applicable Federal Rates: June 2017 AFRs Issued: In Rev. Rul. 2017-12, the IRS issued the applicable federal rates for June 2017.

Bankruptcy

Court Doesn't Have Jurisdiction to Determine Income Tax Liability of Partners: In Capitol BC Restaurants, LLC v. Comm'r, 2017 PTC 282 (Bankr. Mass. 2017), the dispositive issue was whether the bankruptcy court had jurisdiction to determine, in a partnership's bankruptcy case, the income tax liability of its partners, where the partnership was seeking an adjustment of deductions and penalties imposed by the IRS pursuant to Bankruptcy Code Section 505(a) and where the partnership was not liable for any such income taxes because its partners were solely liable. The district court held that it lacked jurisdiction with respect to the provisions of Bankruptcy Code Section 505 because only non-debtor partners of the debtor partnership were liable for the taxes at issue.

Court Allows Additional Time for Determining If Trustee Can Claw Back Payment to IRS: In In re Colliau, 2017 PTC 286 (Bankr. W.D. Tex. 2017), a bankruptcy court denied summary judgment to both the debtor and the bankruptcy trustee where the trustee was seeking to claw back from the IRS estimated taxes paid by the debtor to the IRS the day before filing for bankruptcy. The court concluded that, since neither party addressed the calculation of the actual amount due on the date the payment was made, it was appropriate to allow the parties more time to address the fact of what was actually due on those dates.

Refund Denied Where Couple Was Not Mislead by Incorrect Year on IRS Assessment: In Habenicht v. U.S., 2017 PTC 280 (Fed. Cl. 2017), the Court of Federal Claims held that a couple was not entitled to a refund of the taxes they paid that were erroneously assessed for 1986. In reaching its conclusion, the court found that the incorrect year showing on the IRS assessment amounted to nothing more than a typographical error and that the couple was not misled by the error.

Filing Returns Late Preclude Discharge of Taxes in Bankruptcy: In In re Van Arsdale, 2017 PTC 253 (Bankr. N.D. Calif. 2017), a bankruptcy court held that a debtor's late filed 2001 tax return, which was filed after the IRS prepared a substitute for return (SFR) for the debtor, did not constitute a "return" for purposes of Bankruptcy Code Section 523(a)(1)(B). Thus, the debtor's 2001 federal tax liability was not dischargeable in bankruptcy.

Former IRS Agent and Wife Liable for $73,000 in Fraud Penalties: In Langer v. Comm'r, T.C. Memo. 2017-92, the Tax Court held that a couple's repeated concealment of income by overstating deductions on their 2011-2013 tax returns exemplified a pattern of fraudulent behavior and the couple was thus liable for fraud penalties of approximately $73,000. The court noted that the husband had been an IRS agent for more than 29 years and that the couple's explanations regarding the deductions taken on their returns were implausible and unpersuasive.

Debtor's Challenge to Iowa's Income Tax Statute Is Collaterally Estopped: In In re Yuska, 2017 PTC 237 (8th Cir. B.A.P. 2017), the Bankruptcy Appellate Panel for the Eighth Circuit held that a bankruptcy court did not err when it applied collateral estoppel to a debtor's claim regarding the constitutionality of Iowa's income tax statute and the Iowa Department of Revenue's assessment procedures because that same issue had been litigated before and decided by an administrative law judge. According to the court, the debtor's challenge to the income tax statute and the Iowa Department of Revenue's procedures were collaterally estopped.

Criminal

Criminal Prosecution Not Foreclosed by Prior Bankruptcy: In U.S. v. Yurek, 2017 PTC 291 (D. Colo. 2017), a district court rejected a couple's motions to stop a criminal federal tax prosecution on the basis that the alleged misconduct or wrongdoing underlying the criminal charges against them were already raised and resolved in their bankruptcy case and that, as a result, the subsequent criminal prosecution was foreclosed. The court cited the analysis in U.S. v. Ledee, 772 F.3d 21 (1st Cir. 2014) where the First Circuit noted that a taxpayer offered no support for his contention that the decision of a bankruptcy trustee or bankruptcy court to settle claims of misconduct in a bankruptcy case can estop the government from subsequently filing criminal charges.

Corporations

Domestic Parent Can't Net Interest Overpayment Against FSCs Underpayment: In Ford Motors v. U.S., 2017 PTC 258 (Fed. Cl. 2017), the Court of Federal Claims held that a corporate parent and a former foreign sales corporation (FSC) owned by that parent are separate entities and thus cannot net interest on the parent's tax overpayments with underpayment interest of the FSC. The court noted that Congress did not include a provision that would allow FSCs to be encompassed within a domestic corporation's consolidated return and the FSC rules are thus based upon an FSC's formation as a substantive foreign corporation, with a separate identity from any parent corporation within the United States.

IRS Can Foreclose on Properties Held by Nominee: In U.S. v. Acacia Corporate Management, LLC, 2017 PTC 250 (9th Cir. 2017), the Ninth Circuit affirmed a district court and concluded that a taxpayer held properties as the nominee of a couple who owed the IRS back taxes and that the IRS could foreclose on those properties to satisfy federal tax liens against the couple. The court found that the lower court did not err in finding that the couple retained possession of the properties and continued to enjoy the benefits of ownership of such properties.

Deductions

Online Gross Receipts Weren't MPGE: In CCM 201724026, the Office of Chief Counsel advised that none of a company's online gross receipts were derived from providing customers access to computer software that was manufactured, produced, grown, or extracted (MPGE) by the company in whole or in significant part within the United States for the company's customers direct use while connected to the online software. The Chief Counsel's Office also concluded that, in calculating its Code Sec. 199 deduction, the company improperly applied the "item" rule in Reg. Sec. 1.199-3(d)(1).

Bank Entitled to Deduct Interest on Loan Connected to STARS Transaction: A district court held that a bank was entitled to deduct the interest it incurred on a loan that was part of a structured trust advantaged repackaged securities (STARS) transaction. The court divided the transaction into two components, a trust structure and a loan, and found that the loan was not a sham transaction because it had substantial, nontax-related economic effects on the parties. Wells Fargo v. U.S., 2017 PTC 256 (D.C. Minn. 2017). Read More...

Investigation of Father's Death Did Not Have a Profit Motive: In Vest v. Comm'r, 2017 PTC 267 (5th Cir. 2017), the Fifth Circuit affirmed a Tax Court holding that a taxpayer's investigation of his father's alleged suicide, later discovered to be a murder, was not engaged in for profit. Although the taxpayer believed he might be able to eventually adapt his investigation into a book or movie, the Fifth Circuit agreed with the lower court that the taxpayer's efforts were the product of a personal desire to uncover the cause of his father's death, not an attempt to develop a business.

Couple Can Deduct Repayment of Disability Benefits, But SSD Payments Are Taxable: In Nordloh v. Comm'r, T.C. Summary 2017-37, the Tax Court held that a couple was entitled to deduct a required reimbursement of disability benefits paid to Met Life as a result of the husband's disability application being approved by the Social Security Administration and the husband receiving a lump-sum social security disability (SSD) payment relating to the years in which disability benefits had been received from Met Life. Additionally, the court also held that the couple was taxable on the payment of the lump-sum SSD benefits, which they failed to include in income, but were not liable for an accuracy-related penalty on the related underpayment of tax because of their reliance on tax professionals to prepare their returns.

Taxpayer Can't Deduct as Alimony a Part of Bonus Paid to His Wife: In Mudrich, T.C. Memo. 2017-101, the Tax Court held that a taxpayer's payment to his wife of one-half of a bonus he received was not deductible as alimony because it was not made pursuant to a divorce or separation agreement. In addition, because the taxpayer filed his return late, the court upheld an addition to tax, as well as an accuracy-related penalty, that had been assessed by the IRS.

Payments of Excess Alimony Aren't Deductible: In Bulakites v. Comm'r, T.C. Memo. 2017-79, the Tax Court held that an oral modification of a separation agreement, where the taxpayer agreed to pay his wife more than the written separation agreement called for, did not entitle the taxpayer to an alimony deduction in excess of the amounts specified in the written agreement. In addition, the court rejected the taxpayer's argument that Turbo Tax was responsible for mistakes in his return and upheld penalties assessed by the IRS.

Failure to Establish Basis in Certain Rights Precludes Tax Deductions: In Washington Mutual v. U.S., 2017 PTC 234 (9th Cir. 2017), the Ninth Circuit affirmed a district court's judgment that a taxpayer had failed to establish a reliable cost basis in certain rights for which it sought tax deductions and losses, in connection with the acquisition of certain failed savings and loan associations during the 1970s and 1980s, and thus was not entitled to a tax refund. The Ninth Circuit also held that the taxpayer had failed to establish that the taxpayer had permanently abandoned its right to operate in Missouri for purposes of an abandonment loss deduction.

Employee Benefits

Company's Stock Plan Is Not Tax Exempt Where Contribution Limits Were Exceeded: In DNA Pro Ventures, Inc. Employee Stock Ownership Plan v. Comm'r, 2017 PTC 232 (8th Cir. 2017), the Eighth Circuit affirmed the Tax Court and held that a closely held company's employee stock ownership plan (ESOP) was not a qualified pension, profit-sharing, or stock bonus plan under Code Sec. 401 and therefore the plan's income was not exempt from tax under Code Sec. 501. The court agreed with the Tax Court that the ESOP's 2008 contribution to the account of one of the owners substantially exceeded the Code Sec. 415 contribution limit and, thus, the ESOP was not a Code Sec. 401(a) qualified plan.

Chief Counsel's Office Warns of Promoters Selling Certain Self-Funded Health Plans: In CCA 201719025, the Office of Chief Counsel advised that a benefit paid under an employer-provided self-funded health plan is includible in employee income because: (1) the employer-provided self-funded health plan does not involve insurance risk, and accordingly, is not insurance (nor does it have the effect of insurance) for federal income tax purposes (including Code Sec. 104(a)(3)); and/or (2) the ratio of the average amounts received by the employees for participating in health-related activities to the after-tax contributions by the employees demonstrates that the amounts received by the employees are attributable to contributions by the employer (and not employee after-tax contributions) so that the exclusion under Code Sec. 104(a)(3) does not apply. The Chief Counsel's Office warned that certain promoters are selling self-funded health plans and wellness plans and claiming that the benefits do not constitute income or wages and thereby reduce the employer and employee share of employment taxes with respect to employee remuneration.

Employment Taxes

Reliance on Employee and Outside CPA Doesn't Constitute Reasonable Cause for Late Taxes: In Deaton Oil Company, LLC v. U.S., 2017 PTC 254 (W.D. Ark. 2017), a district court held that a company had an obligation to timely remit employment taxes and the company's reliance on its agents - an employee and an outside CPA - did not constitute reasonable cause for its failure to remit those taxes. As a result, the court denied the company's request for a refund of penalties and interest paid on the late payment of such employment taxes.

Nursing Home Owner Owes $2.7 Million for Failing to Pay Employment Taxes: In U.S. v. Padron, 2017 PTC 242 (S.D. Tex. 2017), a district court granted an IRS motion for a default judgment against Nino's Home Health Care, Inc. and its owner for $2.7 million resulting from a failure to pay employment taxes for a nine year period. Further, with respect to the IRS's request for a permanent injunction against the taxpayers, the court noted that the question of what constitutes a sufficient basis for a permanent injunction is an unresolved question in the Fifth Circuit; however, the court found the injunction was necessary for the enforcement of the internal revenue laws and granted it.

Estates

Chief Counsel's Office Says That IRS Claims Should Be Paid First: In CCA 201723018, the Office of Chief Counsel advised that, with respect to a particular case, it appeared undisputed that the IRS's claim was superior to that of a competing creditor. Moreover, the Chief Counsel's Office argued, the case was one in which the federal insolvency statute, 31 U.S.C. Section 3713, arguably applied and, per that statute, claims of the United States should be paid first when a deceased debtor's estate is not large enough to pay all of the debtor's debts.

Healthcare

Senate Unveils Draft of Better Care Reconciliation Act of 2017; Retains Much of House Healthcare Bill: On Thursday, June 22, a month and a half after the House passed The American Health Care Act of 2017 (AHCA), the Senate released its version of a healthcare bill entitled Better Care Reconciliation Act of 2017 (BCRA). While the Senate hinted that they would rewrite the House bill, many of the provisions stayed the same or were watered down. Like the House bill, the BCRA repeals all of the Affordable Care Act's ("Obamacare") taxes except for the excise tax on high cost employer-sponsored health coverage, which would be delayed until 2025. H.R. 1628, Senate Draft (6-22-2017). Read More...

Income

$18 Million Payment Taxed in Year Received Rather Than Year Ordered Paid: In Herrmann v. U.S., 2017 PTC 293 (Fed. Cl. 2017), the Court of Federal Claims held that an $18 million payment by a partnership to a U.S. citizen living in England was not taxable in the year the payment was ordered to be paid but rather in the following year when the taxpayer received the payment. The court also rejected the IRS's argument that the payment was a partnership distribution because the $18 million was disproportionate to the taxpayer's actual ownership share of the partnership, thus supporting a finding that the distribution was for services performed outside the taxpayer's capacity as a member of the partnership.

Innocent Spouse

Taxpayer Entitled to Innocent Spouse Relief: In Mencias, T.C. Memo. 2017-109, the Tax Court held that a taxpayer was entitled to innocent spouse relief based on two factors - the fact that the taxpayer and her former spouse were divorced and the fact that the taxpayer received none of a refund her former spouse improperly claimed on the original return they filed, of which he was the sole beneficiary. According to the court, those factors outweighed the one factor weighing against relief - namely, whether the taxpayer knew or had reason to know her former spouse could not pay the balance of taxes due.

Tax Court Can't Consider Penalty Issue in Stand-Alone Innocent Spouse Proceeding: In Asad v. Comm'r, T.C. Memo. 2017-80, the Tax Court held that, in a stand-alone Code Sec. 6015 case which is independent of a deficiency proceeding, it only has authority to consider whether the innocent spouse relief provisions of Code Sec. 6015 are available and cannot consider issues other than Code Sec. 6015 relief. Thus, it could not rule on whether the taxpayers are liable for accuracy-related penalties.

IRS

In-Depth Article: IRS Issues Simplified Procedure for Obtaining Extension to Make Portability Election: The IRS issued a revenue procedure, effective June 9, 2017, which provides a simplified method for certain taxpayers to obtain an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The simplified method is to be used in lieu of the letter ruling process and no user fee is required for submissions filed under the revenue procedure. Rev. Proc. 2017-34. Read More...

IRS Did Not Abuse Its Discretion in Rejecting Nonprofit's Installment Agreement Request: The Tax Court held that an IRS settlement officer did not abuse his discretion in rejecting the installment agreement request of a nonprofit corporation that was delinquent in filing its Forms 990, Return of Organization Exempt from Income Tax, for the years at issue. The fact that the nonprofit had since filed late Forms 990 did not mean that the IRS had abused its discretion, because the filings were delinquent at the time of the request. First Rock Baptist Church Child Development Center v. Comm'r, 148 T.C. No. 17 (2017). Read More...

Partnerships

Tax Court Has Jurisdiction to Review Penalty on Partnership Adjustment: In McNeill v. Comm'r, 148 T.C. No. 23 (6/19/17), the Tax Court held that, under Code Sec. 6330(d)(1), the Tax Court has jurisdiction to review an IRS notice of determination when the underlying tax liability consists solely of a penalty that relates to an adjustment to a partnership item excluded from deficiency procedures by Code Sec. 6230(a)(2)(A)(i). According to the court, when Congress amended Code Sec. 6330 in 2006 - making the Tax Court the exclusive venue for review of CDP cases - its intent was not to preclude from review certain issues not subject to the Tax Court's deficiency jurisdiction.

Loss on Disposal of Partnership Interest Was Capital Loss: In Watts v. Comm'r, T.C. Memo. 2017-114, the Tax Court held that the IRS correctly recharacterized a couple's loss on the disposal of a partnership interest as a capital loss, rather than an ordinary loss. However, because the couple reasonably relied on their accountant to prepare their tax return, they were not liable for an accuracy-related penalty on the portion of the underpayment arising from the erroneous reporting of the sale of the partnership interest.

Partnership Return Can Only Be Signed By Individual Who Can Bind Partnership Under State Law: In CCA 201722025, the Office of Chief Counsel advised that the IRS had an invalid tax matters partner (TMP) designation on an original partnership tax return because the entity named as the TMP was not a member of the partnership. The Chief Counsel's Office also confirmed that only someone who has the ability under state law to bind a partnership can sign the partnership return on its behalf.

IRS Not Bound by Offer in Compromise with Modified Terms Even Though It Cashed Taxpayer's Check The Tax Court held that the statute of limitations had not expired with respect to assessing tax on a married couple's income from three S corporations because the relevant return was the couple's individual return, not the returns of the S corporations. The Tax Court also held that no valid settlement with the IRS arose when the couple sent a check for payment of their liabilities along with a Form 656-L, Offer in Compromise (Doubt as to Liability), which the couple heavily modified, even though the IRS deposited (but later refunded) the check that accompanied the Form 656-L. Whitesell v. Comm'r, T.C. Memo. 2017-84 (2017). Read More...

Passive Activities

Taxpayer's Improbable Hours Preclude Real Estate Professional Status: In Ostrom v. Comm'r, T.C. Memo. 2017-118 (6/19/17), the Tax Court held that a taxpayer who worked full time as an information technology specialist and who also owned four single-family residential properties in Las Vegas that she rented out and managed herself, was not a real estate professional and thus could not deduct all of her rental losses. The court said it would not accept the taxpayer's claims as to the hours she devoted to real property trades or businesses, finding that the number of hours that the taxpayer claimed she spent on tasks shown on a log sheet and calendar were improbable.

Penalties

Doctor Escapes Penalty for Inaccurate Returns by Proving Reliance on Return Preparer: The Tax Court held that a doctor was not liable for a 20 percent negligence penalty where she exercised ordinary business care and prudence by relying on her long-term tax return preparer, whom she believed to be a competent professional, to accurately report gain from a large stock sale on the appropriate year's tax return. The court concluded that where a taxpayer is completely unaware of a return preparer's numerous errors, those errors cannot be used retroactively to prove that the preparer is incompetent. Whitsett v. Comm'r, T.C. Memo. 2017-100. Read More...

Sixth Circuit Finds CEO Took Reasonable Steps to Ensure Payment of Payroll Taxes: The Sixth Circuit, in a case of first impression, rejected a district court's judgment and held that two corporate officers were not liable for unpaid payroll taxes under Code Sec. 6672 because they did not willfully fail to pay the taxes. The court applied a reasonable cause exception in finding that the officers believed the taxes were in fact being paid, and their belief was reasonable under the circumstances. Byrne v. U.S., 2017 PTC 239 (6th Cir. 2017). Read More...

Failure to Disclose Listed Transaction on Form 8886 Prevented Statute from Running: The Ninth Circuit reversed a district court and held that a taxpayer was not entitled to a refund of a penalty because the statute of limitations had not expired on his failure to disclose a listed transaction to the IRS. The court found that because the taxpayer never provided the required information on a completed Form 8886, the statute of limitations had not yet begun to run. U.S. v. May, 2017 PTC 241 (9th Cir. 2017). Read More...

Court Affirms Sentencing of Taxpayer Who Targeted ATF Agents With Phony 1099s: In U.S. v. Petrunak, 2017 PTC 225 (7th Cir. 2017), the Seventh Circuit affirmed a district court's holding that the taxpayer, who was a pyrotechnician and had owned a pyrotechnic and aerial fireworks business regulated by the Alcohol, Tobacco, Firearms, and Explosives (ATF), targeted two ATF agents who he blamed for the demise of his company by mailing them and the IRS fictional IRS Forms 1099 alleging he had paid the ATF agents each $250,000. The Seventh Circuit also affirmed the district court's calculation of the appropriate prison sentence for the taxpayer.

Procedure

Court Addresses Issue of Whether Filing Form 1040 Tolls Statute on Unfiled Form 945: A bankruptcy court held that, because a business owner's individual income tax returns were not part of the record in the case, it could not resolve the question of whether the owner's Forms 1040 contained enough data to calculate his Form 945, Annual Return of Withheld Federal Income Tax, liability with respect to subcontractors he hired for his business. As a result, the court could not determine whether the individual's failure to file Form 945 meant that the IRS had unlimited time to assess withholding tax liability on the business owner. Quezada v. IRS, 2017 PTC 285 (W.D. Tex. Bankr. 2017). Read More...

IRS Not Immune from Tax Prep Business Lawsuit: In Snyder v. U.S., 2017 PTC 288 (9th Cir. 2017), the Ninth Circuit held that, with respect to a tax preparation business's assistance in a sting operation aimed at catching people filing for fraudulent tax refunds, 28 U.S.C. 2680 does not confer absolute immunity on the IRS and does not bar the tax preparation business's claims for negligence, conversion, and failure to restore things wrongfully acquired. The operation involved using millions of the business's dollars as bait under the promise of reimbursement, which did not happen, and the revocation of one of business's electronic tax filing privileges, which forced it into bankruptcy.

No Relief Available Where IRS Letter Gave Wrong Date for Filing Tax Court Petition: A taxpayer could not rely on an IRS letter which incorrectly stated the date for filing a petition with the Tax Court to contest the denial of innocent spouse relief. According to the court, the 90-day deadline in Code Sec. 6015(e)(1)(A) for filing a petition with the Tax Court is a jurisdictional requirement and a taxpayer's failure to comply with it deprives the Tax Court of the authority to hear the case, even if equitable considerations would support extending the prescribed time period. Rubel v. Comm'r, 2017 PTC 230 (3d Cir. 2017). Read More...

Taxpayer Who Failed to Answer IRS Interrogatories Must Pay IRS Costs: In U.S. v. Quebe, 2017 PTC 246 (S.D. Ohio 2017), a district court held that a taxpayer, who had asserted that he was entitled to a research tax credit and who the court found had not satisfactorily complied with court orders to answer IRS interrogatories on the matter, had to pay the IRS's fees and expenses caused by the taxpayer's failure to comply with the court's orders. The court also put the taxpayer on notice that failure to comply with court orders could result in the imposition of additional sanctions, including, but not limited to, the entry of default judgment against the taxpayer.

Court Denies Higher Litigation Award for IRS Taking an Unusually Litigious Position: In Fitzpatrick v. Comm'r, T.C. Memo. 2017-88, the Tax Court held that a taxpayer was entitled to an award of administrative and litigation costs under Code Sec. 7430 in the amount of $179,000, after prevailing over the IRS in a trust fund recovery penalty action. However, with respect to the taxpayer's claim that she was entitled to an award calculated at a rate higher than the statutory rate because the IRS was unusually litigious, the court concluded that the IRS taking an unusually litigious position was not a special factor supporting enhanced recovery.

Taxpayer Can Proceed Against IRS in Wrongful Disclosure of Tax Return Info Suit: In Fattah, Jr. v. U.S., 2017 PTC 244 (E.D. Pa. 2017), a district court rejected an IRS argument that a taxpayer, who had been convicted of willfully failing to pay taxes and who had filed an action against the IRS for wrongful disclosure of tax return information, could not prove he sustained damages as a result of the wrongful disclosure. According to the court, material factual disputes precluded summary judgment on the taxpayer's claim for damages as a result of the wrongful disclosure.

Whistleblowers

Tax Court Clarifies the Term "Amount in Dispute" in Calculating Whistleblower Award: In Smith v. Comm'r, 148 T.C. No. 21 (2017), a case of first impression, the Tax Court held that, with respect to the threshold that must be met in making a whistleblower award, the term "amounts in dispute" referenced in Code Sec. 7623(b)(5)(B) is the total amount of the liability that the IRS proposed with respect to a taxpayer's examination that was begun using the information provided by a whistleblower and is not limited to the part of the collected proceeds attributable to the whistleblower's information or specific allegations. In the instant case, the court concluded that the $2 million threshold of Code Sec. 7623(b)(5)(B) was met, and the whistleblower's award should be determined under Code Sec. 7623(b).

Case Dismissed Where Petitions to Tax Court Weren't Timely Filed: In Myers v. Comm'r, 148 T.C. No. 20 (2017), the Tax Court held that each of four letters sent to a whistleblower from the IRS Whistleblower's Office constituted an appealable determination for purposes of Code Sec. 7623(b)(4) and thus the whistleblower had 30 days from the receipt of those letters to file a petition with the Tax Court to appeal a whistleblower award. Because the whistleblower had ample opportunity to timely file a petition, yet filed his petition significantly more than 30 days after receiving the actual notice, the Tax Court found the petition at issue to be untimely and thus dismissed the case.

May 2017

Accounting

IRS Updates Automatic Accounting Method Change Procedures: The IRS updated Rev. Proc. 2015-35, the revenue procedure for requesting automatic IRS consent for an accounting method change. The new procedure modifies, clarifies, and obsoletes certain sections of Rev. Proc. 2015-13, as modified and clarified by Rev. Proc. 2016-29, and adds three new automatic accounting method changes. Rev. Proc. 2017-30. Read More...

Bankruptcy

Tax Debts Were Not Dischargeable in Bankruptcy; Late Returns Were Not Returns for Bankruptcy Purposes: In a case of first impression, the Third Circuit held that an individual's late Form 1040s, filed after the IRS assessed deficiencies, were not an honest and reasonable effort to comply with the tax law and therefore did not constitute returns. The tax debts were for tax liabilities for which no return was filed, so they were not dischargeable in bankruptcy. Giacchi v. IRS, 2017 PTC 215 (3d Cir. 2017). Read More...

Corporations

IRS Removes No-Rule Position for Certain Sec. 355 or Sec. 361 Transactions: In Rev. Proc. 2017-38, the IRS has deleted Section 5.01(4) of Rev. Proc. 2017-3, removing the no rule position concerning whether Code Sec. 355 or Code Sec. 361 apply to a corporation's distribution of stock or securities of a controlled corporation in exchange for, and in retirement of, any putative debt of the distributing corporation if such debt is issued in anticipation of the distribution.

Credits

Wages Earned by a Prisoner in a State Hospital Are Ineligible for EITC: In Skaggs v. Comm'r, 148 T.C. No. 15 (4/26/17), the Tax Court held that wages received by a taxpayer during the time he was confined to a state hospital while serving a prison term were excluded in determining eligibility for the earned income tax credit (EITC) because, under Code Sec. 32(c)(2)(B)(iv), income earned while an inmate in a penal institution is excluded in determining eligibility for the EITC. The court rejected the taxpayer's argument that the hospital was not a penal institution and that, while he was at the state hospital, he ceased to be an inmate.

Criminal

Enhanced Prison Sentence Applies to Business Owner Implicated in Structured Deposits: In U.S. v. Nguyen, 2017 PTC 178 (5th Cir. 2017), the Fifth Circuit affirmed an above-guideline prison sentence for a business owner found guilty of aiding and assisting in the preparation of a false and fraudulent tax return. The court said the increased prison sentence, which resulted from the taxpayer's probation officer advising the court that the IRS had found almost $5 million in structured deposits made by third parties to bank accounts registered to the taxpayer or his family members and for which the taxpayer had not faced charges, was appropriate under the circumstances.

Deductions

Court Calls Taxpayer's Arguments "Heavy on Chutzpah"; Duty of Consistency Prevents Additional Deductions: The Tax Court held that a restaurant owner who underreported his employees' wages for years that were outside of the three-year assessment period could not later amend his returns to increase the amount of wages he paid in order to claim additional deductions. The duty of consistency prevented him from taking a contradictory position after the statute of limitations had run in order to change a previous representation to the detriment of the IRS. Musa v. Comm'r, 2017 PTC 200 (7th Cir. 2017). Read More...

Federal Circuit Vacates Claims Court Decision on Timing of Investment Scheme Loss; Couple Gets Second Shot at Arguing for Deduction: The Federal Circuit vacated a decision by the Federal Claims Court, which had held that a couple did not prove that their loss from an investment scheme occurred in 2004 and, thus, rejected their refund claim. The court rejected the lower court's interpretation of Reg. Sec. 1.165-1(d)(3) as setting forth two different standards that had to be met in order for a taxpayer to take a theft loss deduction. Adkins v. U.S., 2017 PTC 218 (Fed. Cir. 2017). Read More...

IRS Issues 2018 Inflation Amounts for HSAs: In Rev. Proc. 2017-37, for calendar year 2018, the IRS provides the inflation adjusted amounts for health savings accounts (HSAs). The annual limitation on deductions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,450; the annual limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $6,900. For calendar year 2018, a "high deductible health plan" is defined under Code Sec. 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,650 for self-only coverage or $13,300 for family coverage.

No Deduction Allowed For Expenses Incurred in Obtaining E.M.B.A. Degree: In Creigh v. Comm'r, T.C. Summary 2017-26, the Tax Court held that a taxpayer could not deduct $59,000 for tuition, fees, and associated education expenses relating to her attendance and graduation from an executive master of business administration (E.M.B.A.) program because the program qualified her for a new trade or business. The court also held that the taxpayer's general statements that she and her husband relied on their accountant to properly prepare their return was not sufficient to prove reasonable cause and good faith for the disallowed deductions and, thus, the couple was liable for accuracy-related penalties.

Taxpayer Can't Claim Dining Room as Principal Place of Business: In Wilson v. Comm'r, T.C. Summary 2017-25, the Tax Court held that a taxpayer who operated a landscape design business, which he ran from his home, was not entitled to a deduction for legal and professional services relating to litigation regarding the ownership of and possessory right to his residence. In rejecting the taxpayer's argument that his dining room was exclusively used on a regular basis as the principal place of business for his landscape design business, the court said that the fact that the taxpayer may have used the dining room for business purposes for some portion of the time was insufficient to allow any deduction attributable to that use.

Employee Benefits

Railroad Retirement Tax Applies to the Value of Stock Options: In Wisconsin Central Ltd. v. U.S., 2017 PTC 216 (7th Cir. 2017), the Seventh Circuit affirmed a district court and held that the excise tax levied by the Railroad Retirement Tax Act on railroad employees' wages also applies to the value of stock options exercised by employees. According to the court, the fact that cash and stock are not the same thing doesn't make a stock-option plan any less a "form of money remuneration" than cash.

Estates, Gifts, and Trusts

Estate Can't Deduct Interest on Loan Used to Pay Estate Taxes: The Eleventh Circuit affirmed the Tax Court's holding that an estate was not permitted to take an interest deduction on a loan it used to pay its tax liabilities where it had sufficient liquid assets to pay the taxes. The court also concluded that the Tax Court properly valued the estate by taking into account certain redemption agreements that had not yet been consummated. Estate of Koons v. Comm'r, 2017 PTC 201 (11th Cir. 2017). Read More...

Estate Can't Recover Attorney's Fees After Victory over IRS: In Est. of Hake v. U.S., 2017 PTC 219 (M.D. Pa.), a district court denied an estate's request to recover attorney's fees and costs under Code Sec. 7430 after the estate was found not liable for penalties assessed by the IRS when the executors filed the estate's tax returns late. The court found that the IRS's position drew substantial support from case law construing a Supreme Court decision and, therefore, was both justified to a degree that could satisfy a reasonable person and had a reasonable basis both in law and fact.

Foreign

No Foreign Tax Credit Allowed for U.K. Taxes Refunded: In Sotiropoulos v. Comm'r, T.C. Memo. 2017-75, the Tax Court held that repayments of U.K. income tax that a taxpayer received during 2003-2005 represented previously paid foreign tax that was "refunded in whole or in part" within the meaning of Code Sec. 905(c)(1)(C). As a result, the taxpayer was not entitled to the foreign tax credits she had taken on her return for such taxes. T.C. Memo. 2017-75.

Court Rejects U.K. Citizen's Argument That FBAR Rules Are Ambiguous: In Little v. U.S., 2017 PTC 224 (S.D. N.Y.) a district court rejected a taxpayer's argument that the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and foreign bank account reports (FBARs), when read in conjunction with the U.S./U.K. Tax Treaty (the "Treaty"), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law. The court found that none of the relevant statutes or regulations, whether read in isolation or together, or in conjunction with the Treaty, were so ambiguous that they could properly be found unconstitutionally vague as applied to the prosecution of the taxpayer for failing to file income tax returns and FBARs.

Court Refuses to Dismiss FBAR Case Involving Penalty of More Than $2 Million: In U.S. v. Toth, 2017 PTC 213 (D. Mass. 2017), a district court rejected a taxpayer's motion to dismiss a case filed by the IRS to collect a civil penalty of more than $2 million from the taxpayer for her alleged failure to timely report her financial interest in, and/or her signatory or authority over, a foreign bank account. In rejecting the taxpayer's motion, the court noted that the IRS had set forth factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under the Foreign Bank Account Reports (FBAR) rules in 31 U.S.C. Section 5314.

Questions Exist as to Whether CEO Willfully Failed to File an Accurate FBAR; Summary Judgment Denied: A district court denied summary judgment and held that a question of fact existed as to whether an individual willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to one of his two Swiss bank accounts. According to the court, the taxpayer's testimony regarding the information provided to him by his long-time CPA and what exactly he did with that information, if anything, would be relevant to a determination of his intent. Bedrosian v. IRS, 2017 PTC 180 (E.D. Pa. 2017). Read More...

Ex-Marine Missed Filing Deadline for Election to Exclude Foreign Earned Income: In Redfield v. Comm'r, T.C. Memo. 2017-71, the Tax Court held that a former soldier in the U.S. Marines, who suffered memory loss and post-traumatic stress disorder, could not claim a foreign earned income exclusion for wages earned in Afghanistan because he had not timely filed an election with respect to the exclusion. The court rejected his contention that he met an exception to the general rule because he filed his Form 1040, with Form 2555, and paid the income tax due, before the IRS discovered that he failed to elect the exclusion.

Healthcare

House Passes Health Care Bill by Slim Margin; Senate Hints That It Will Rewrite the Bill: On May 4, 2017, the House passed The American Health Care Act of 2017 (AHCA) by a vote of 217 - 213. The bill would repeal all of the Affordable Care Act's (ACA) tax provisions except for the "Cadillac tax" on high cost employer-sponsored health plans. Most of the tax changes would be effective beginning in 2017 or 2018, but the repeal of the individual and employer mandates would be retroactive to January 1, 2016. The bill would replace the ACA's means-tested premium tax credit with an age-based health insurance credit. H.R. 1628 (May 4, 2017). Read More...

IRS Adjusts Indexes for Certain Affordable Care Act Provisions: In Rev. Proc. 2017-36, which is effective for tax years and plan years beginning after 2017, the IRS provides indexing adjustments for certain provisions under Code Sec. 36B, relating to the premium tax credit under the Affordable Care Act (ACA), and Code Sec. 5000A, relating to the penalty imposed on individuals who do not maintain essential healthcare coverage under the ACA. The revenue procedure also updates the required contribution percentage in Code Sec. 36B(c)(2)(C)(i)(II), which is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Code Sec. 36B.

Income

Ninth Circuit Affirms That Settlement Is Taxable; No Exception to Penalty Applies: In Mojarro v. Comm'r, 2017 PTC 188 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court holding that, with the exception of $1,500 paid for medical treatment for a taxpayer's emotional distress, a $250,000 settlement received by the taxpayer was not made on account of physical injuries or physical sickness and was therefore not excludable from the taxpayer's gross income. The court also found that the Tax Court did not clearly err in concluding that the taxpayer failed to produce sufficient evidence that he acted with reasonable cause and in good faith, and thus properly concluded that the taxpayer was ineligible for the penalty exception under Code Sec. 6664(c)(1) for his substantial underpayment of income tax.

Individuals

Most of Inherited Annuity Is Taxable: In Harrell v. Comm'r, T.C. Memo. 2017-76, the Tax Court held that a taxpayer, who was the beneficiary of her father's estate, could exclude from income a very minor portion of a New York City Employees' Retirement System annuity that she inherited from her father. Further, the court found that the taxpayer and her husband were not entitled to a deduction for any expenses paid or incurred for the funeral or the administration of her father's estate because such expenses are nondeductible personal or family expenses. Harrell, T.C. Memo. 2017-76.

Innocent Spouse

Knowledge of Spouse's Unreported Income Precludes Innocent Spouse Relief: In Wilson v. Comm'r, T.C. Memo. 2017-63, the Tax Court held that, because a taxpayer who requested innocent spouse relief had actual knowledge of her deceased spouse's unreported income and would not suffer economic hardship by paying the deficiency assessed by the IRS, it would not be inequitable to deny innocent spouse relief under Code Sec. 6015(f). The court noted that the taxpayer's income was well above 250 percent of the federal poverty guidelines, the threshold for determining if economic hardship exists.

IRS

IRS Clarifies 2015 Changes to Section 179 Expensing and Bonus Depreciation: In a new revenue procedure addressing certain provisions enacted in 2015, the IRS provides rules for making a Code Sec. 179 election on an amended return, clarifies how the Code Sec. 168(k)(5) election relating to additional depreciation for certain plants interacts with the Code Sec. 179 election; and discusses the types of air conditioning or heating units that qualify as Code Sec. 179 property. Rev. Proc. 2017-33. Read More...

Partnerships

Tax Court Has Jurisdiction over Penalty Relating to Inconsistent Partnership Reporting: The Tax Court rejected arguments by a partner in a partnership that it lacked jurisdiction over a penalty relating to the partner's inconsistent reporting of partnership items and thus deficiency procedures did not apply. According to the court, since there were no adjustments to partnership items, deficiency procedures applied to the penalties asserted by the IRS. Malone v. Comm'r, 146 T.C. No. 16 (2017). Read More...

Penalties

Taxpayer Again Dodges $40 Million Penalty Relating to Transaction Ideas He Sold: In U.S. v. Canada, 2017 PTC 228 (N.D. Tex. 2017), a district court upheld a bankruptcy court decision that a taxpayer was not liable for $40 million in penalties assessed by the IRS because the taxpayer failed to register certain transaction ideas as tax shelters. According to the district court, considering the specific facts and circumstances of the case, and given the complexity of the statutes in question, the lack of and lack of clarity in the existing authority, and the taxpayer's own investigation into his registration responsibilities, the bankruptcy court was correct in finding that it would be unfair to penalize the taxpayer for what appeared to have been an honest mistake of law based on his reasonable, good faith effort to comply.

Procedure

Earlier Tax Penalty Challenge Precludes Later Challenge in CDP Hearing: In Our Country Home Enterprises, Inc. v. Comm'r, 2017 PTC 214 (7th Cir. 2017), the Seventh Circuit affirmed the Tax Court and held that a taxpayer could not challenge its liability for a tax penalty in a collection due process (CDP) hearing after having unsuccessfully challenged its liability for that penalty in an administrative hearing before the IRS Office of Appeals. In an issue of first impression, the Seventh Circuit concluded that under Code Sec. 6330(c)(4)(A)'s plain language, because the taxpayer raised the issue of its liability in a prior hearing before the Appeals Office and participated meaningfully in that hearing, the earlier liability challenge precluded the later one.

Marijuana Dispensary's Lawsuit Is Barred by AIA and DJA: In The Green Solution Retail, Inc. v. U.S., 2017 PTC 212 (10th Cir. 2017), the Tenth Circuit affirmed a district court and held that, because the IRS's investigation of a marijuana dispensary's business records is an "activity leading up to" an assessment, a lawsuit filed by the dispensary was filed for the purpose of restraining any such assessment and was therefore barred by the Anti-Injunction Act (AIA) and the Declaratory Judgment Act (DJA). The court rejected the dispensary's attempt to enjoin the IRS from obtaining information related to its initial findings that the dispensary is dispensing marijuana in violation of the Controlled Substances Act and is thus ineligible for deductions under Code Sec. 280E.

Court Denies Medical Marijuana Dispensary's Request to Postpone Audit: In High Desert Relief, Inc. v. U.S., 2017 PTC 208 (D. N.M. 2017), a district court denied a medical marijuana dispensary's request for a stay aimed at postponing an IRS audit. The petition seeks to quash an administrative summons issued to Southwest Capital Bank and asserts that the IRS is abusing its authority under its civil audit power to conduct essentially a criminal investigation of the Controlled Substances Act and that such an inquiry is outside the U.S. Tax Code and outside of the civil and even criminal authority of the IRS.

Court Rejects Medical Marijuana Dispensary's Request to Amend Judgment: In Alpenglow Botanicals, LLC v. U.S., 2017 PTC 209 (D. Colo. 2017), a district court rejected a motion by a medical marijuana dispensary to alter or amend a judgment rendered against it on December 1, 2016, and consider newly raised arguments. The taxpayer's arguments dealt with the application of Code Sec. 280E and the subsequent denial of deductions for the taxpayer's business expenses.

Tax Attorney Disbarred After Seeking Nude Pictures in Exchange for Tax Prep: The Tax Court announced that it had disbarred a tax lawyer who had lost his Arizona license as a result of seeking nude pictures of a client in exchange for preparing her tax return. After reviewing text messages exchanged between the lawyer and the client, the court concluded that the lawyer had not shown good cause why he should not be suspended, disbarred or otherwise disciplined. Tax Court Press Release.

Taxpayer Not Poor Enough to Qualify as Indigent in Attempt to Recoup Refunds: In Woodburn v. IRS, 2017 PTC 198 (W.D. Wash. 2017), a district court held that a taxpayer, who was trying to compel the IRS to process tax refunds she claimed she was owed, did not qualify to proceed with a court challenge in forma pauperis because she failed to provide sufficient evidence of her indigency. The court noted that the taxpayer had $18,000 in home equity and, while she had substantial monthly expenses and negligible savings, her employment provided her with a monthly salary of $1,500 and an additional annual salary of $14,400.

Court Asks If Earlier Proceeding Tolls Statute with Respect to Later Court Proceeding: In U.S. v. Est. of Chicorel, 2017 PTC 199 (E.D. Mich. 2017), a district court addressed an IRS argument that a proof of claim it had filed constituted a "proceeding in court" within the meaning of Code Sec. 6502(a) that tolled the running of the statute of limitations period. The court did not grant summary judgment with respect to this issue, finding that neither the IRS nor the taxpayer had addressed why an earlier, timely proceeding in court would toll the statute with respect to a later, separate proceeding in court, saying that the language of the statute appears to toll only the period during which such tax may be collected by levy.

Duty of Consistency Correctly Applied by Tax Court: In Musa v. Comm'r, 2017 PTC 200 (7th Cir. 2017), the Seventh Circuit held that the Tax Court correctly applied the duty of consistency when it held that a restaurant owner was estopped from claiming additional deductions aimed at offsetting the consequences of a fraud he perpetrated on the IRS. The court rejected the taxpayer's claim that he should have been allowed additional deductions on his individual income tax returns based on amended employment tax returns that he filed and for which the statute of limitations had run on the IRS's ability to collect the correct amount of employment taxes.

Retirement

Retired Police Officer Granted Hardship Waiver for Late Retirement Rollover; Major Depression Was a Condition Qualifying for a Waiver: The Tax Court granted a hardship waiver to a retired police officer who, due to a major depressive disorder, failed to roll over his pension distributions to a qualified retirement account within 60 days. Because the distributions were nontaxable, the additional 10 percent tax on early distributions did not apply. Trimmer v. Comm'r, 148 T.C. No. 14 (2017). Read More...

Tax Reform

Trump Administration Releases Outline of Tax Reform Plan: Last week, the Trump administration released a one-page outline of a tax reform plan which includes, among other things, a large reduction in corporate taxes, a reduction in the number of individual tax brackets and individual tax rates, the elimination of the estate tax, the repeal of the 3.8 percent net investment income tax and the alternative minimum tax, and the imposition of a territorial tax system to level the playing field for American companies. A detailed blueprint of the plan is expected by early summer. Trump Tax Outline (4/26/17). Read More...

Tax Exempt Organizations

Nonprofit Hospital Was a Corporation for Purposes of Calculating Interest Rate on Overpayments: The Seventh Circuit Court of Appeals affirmed a district court ruling that a nonprofit hospital was a corporation for purposes of determining the interest rate on a refund for an overpayment of tax. The court rejected the hospital's argument that a nonprofit corporation is not a corporation under Code Sec. 6621. Medical College of Wisconsin Affiliated Hospitals, Inc. v. U.S., 2017 PTC 192 (7th Cir. 2017). Read More...

April 2017

Accounting

Proposed Revenue Procedure Addresses Changes Relating to New FASB Standards: The IRS issued proposed guidance on procedures for requesting consent to change an accounting method where the change is made as a result of, or directly related to, the adoption of new financial accounting standards relating to the accounting for revenue from contracts with customers. For many entities, the new standards are effective for annual reporting periods beginning after December 15, 2018; however, for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans, the standard are effective for annual reporting periods beginning after December 15, 2017. Notice 2017-17. Read More...

Bankruptcy

Individual's Claim of Exemption in Bankruptcy Did Not Shield EITC Refund from IRS Offset: After noting an apparent conflict in the Bankruptcy Code with respect to whether a tax credit can be shielded from the IRS in bankruptcy, a bankruptcy court held that the IRS could offset an individual's refund resulting from application of the earned income tax credit against the individual's tax liability for a prior year. The court also ruled that it had jurisdiction over the individual's action for a refund because sovereign immunity was waived. In re Benson vs. U.S., 2017 PTC 159 (Bankr. W.D. Va. 2017). Read More...

Individual Can Ask Bankruptcy Court for Innocent Spouse Relief; Relief Not Limited to Tax Court: The U.S. Bankruptcy Court for the Southern District of Texas held that it had jurisdiction over an individual's claim for innocent spouse relief, rejecting the IRS's contention that the issue could only be decided in the Tax Court. However, the individual first had to file a Form 8857, Request for Innocent Spouse Relief, and wait for the earlier of a final IRS determination or the passage of six months before the court could decide the issue. In re Pendergraft vs. U.S., 2017 PTC 141 (Bankr. S.D. Tex. 2017) Read More...

Supreme Court Denies Cert In Case Involving Discharge of Taxes in Bankruptcy: In Justice v. U.S., 2017 PTC 146 (S. Ct. 2017), the Supreme Court declined to hear an appeal of an Eleventh Circuit decision (2016 PTC 127 (11th Cir. 2016)) in which the lower court concluded that a taxpayer's late-filed Forms 1040 did not qualify as tax returns under the test in Beard v. Comm'r, 82 T.C. 766 (1984), because they did not evince an honest and reasonable effort to comply with the tax law. As a result, the taxpayer's tax liability was not dischargeable in bankruptcy.

Corporations

Shareholders Failed to Take Reasonable Precautions in Structuring Sale of Corp: In Makric Engerprises, Inc. v. Comm'r, 2017 PTC 147 (5th Cir. 2017), the Fifth Circuit upheld a Tax Court determination that a corporation did not have reasonable cause to avoid an accuracy-related penalty, and that there was no mutual mistake and thus no remedy of reformation of a $16.5 million stock purchase transaction, where the stock purchase agreement at issue unambiguously required the sale of a taxpayer's wholly owned subsidiary rather than the sale of the taxpayer's stock. The court noted that it's important that taxpayers take reasonable precautions to ensure that they determine their tax liability properly, and for a $16.5 million dollar purchase, the taxpayer failed to show that the Tax Court clearly erred in determining that the taxpayer did not take such precautions.

Court Leaves Door Open on Hardship Relief for Corps Facing Collection Actions: In Lindsay Manor Nursing Home, Inc. v. Comm'r, 148 T.C. No. 9 (2017), the Tax Court held that an IRS settlement officer was correct in not considering economic hardship relief with respect to collection actions against a corporation operating a nursing home because the regulation offering such relief (i.e., Reg. Sec. 301.6343-1(b)(4)(i)) is limited to individual taxpayers. However, the court left the door open as to whether Code Sec. 6434(a)(1)(D), the Code section under which the regulation was issued, could allow economic hardship relief for corporations, saying that Congress's intent on the issue when it enacted the provision was unclear.

Corporation Can't Deduct Management Fees Paid to Related Corporation: In Home Team Transition Management v. Comm'r, T.C. Memo. 2017-51, the Tax Court held that a corporation which operated a nursing home was not entitled to deduct management fees paid to a related corporation with the same shareholders because the payments were really nondeductible dividends. The court also upheld penalties against the corporation because it failed to meet its burden of showing that the management fees it had deducted were for services rendered and/or were reasonable within the meaning of Code Sec. 162.

Criminal

Organizer of Time-Share Donation Scheme Must Turn Over Client Information: In U.S. v. Tarpey, 2017 PTC 158 (D. Mont. 2017), a district court ordered the organizer of a time-share donation scheme, in which the organizer prepared at least 5,000 false and fraudulent timeshare appraisals, to identify and collect the names, addresses, e-mail addresses, phone numbers, and social security or other tax identification numbers of all timeshare owners for whom he prepared a timeshare appraisal since 2010 and to turn such information over to the government. The court also ordered him to distribute by mail or email a copy of a final judgment of permanent injunction barring him from preparing any property appraisals to be used in connection with federal taxes to each of those timeshare owners.

Refund Rate of Tax Return Preparer's Clients Were Well Above Others in That Zip Code: In U.S. v. Williams, 2017 PTC 132 (6th Cir. 2017), the Sixth Circuit affirmed a district court and held that the conviction of a tax-return preparer on the charge of filing false tax returns was adequately supported by the evidence presented at trial. The court noted that 99 percent of the taxpayer's clients received refunds, compared to 71 percent of taxpayers in the zip code in which the taxpayer operated.

Court Upholds 27-Month Prison Sentence for Chiropractor Guilty of Tax Fraud: In U.S. v. Tran, 2017 PTC 136 (6th Cir. 2017), the Sixth Circuit affirmed a 27-month prison sentence handed down to a licensed chiropractor after he pled guilty to tax fraud and structuring currency transactions. The court rejected the taxpayer's appeal of the imposition of an enhancement in the sentence, saying the taxpayer had previously waived his ability to challenge the enhancement.

Wife of Former Jenkens & Gilchrist Attorney Can't Keep Fraud Proceeds: U.S. v. Daugerdas, 2017 PTC 128 (S.D. N.Y. 2017), a district court dismissed a taxpayer's petition asserting an interest in assets preliminarily forfeited by her husband, former Jenkens & Gilchrist attorney Paul Daugerdas, upon his conviction of conspiracy to defraud the United States and various other crimes relating to a vast fraudulent tax-shelter scheme. The court concluded that the taxpayer did not obtain a vested interest in the property until after her husband, who was sentenced to 15 years in prison, committed his fraud whereas the government had a vested interest from the date the fraud was perpetrated.

Deductions

Tax Court Rejects Amortization Deduction for Mortgage Points: In Singh v. Comm'r, T.C. Summary 2017-19, the Tax Court held that a taxpayer was not entitled to a $4,000 deduction for mortgage points because he did not demonstrate to the court that his refinancing was in connection with the purchase or improvement of his personal residence. The court also concluded that the taxpayer was not entitled to amortize points relating to a loan from a private lender where the loan was for an indefinite period.

Fees for Nuclear Waste Removal Aren't Deductible Under Code Sec. 172(f): In Nextra v. U.S., 2017 PTC 149 (S.D. Fla. 2017), a district court denied summary judgment to a power company seeking a refund of taxes in connection with payments made to the Department of Energy for nuclear waste disposal. The court rejected the taxpayer's argument that the fees paid to DOE qualified as decommissioning expenses, leading to deductions under Code Sec. 172(f) for specified liability losses and net operating loss carrybacks.

Employment Taxes

Architectural Firm Owner Is Responsible Person Liable for Employment Tax Penalties: In Commander v. U.S., 2017 PTC 161 (D. N.J. 2017), a district court held that a 50-percent owner of an architectural firm, who was one of two officers and one of two managing members of the company, was a responsible person with respect to the firm's nonpayment of employment taxes. According to the court, the taxpayer either knew or ought to have known that there was a grave risk that the withholding taxes were not being paid, and, therefore, when he paid other creditors, he acted with reckless disregard for whether the employment taxes had been paid.

Penalty Imposed for Failing to Properly Monitor Employment Tax Payments: In Gann v. U.S., 2017 PTC 138 (Fed. Cl. 2017), the Federal Claims Court held that an imposition of a trust fund penalty on the taxpayer was proper in light of the taxpayer's reckless disregard of the potential for a failure by his company to pay FICA taxes and the subsequent failure to pay such taxes. The court rejected the taxpayer's argument that the IRS's internal policies regarding how it applies payments when a taxpayer has a mix of past and current liabilities is a "gotcha" scheme that entraps the unwary taxpayer and inequitably results in the assessment of penalties.

Foreign

Tax Court Rejects IRS Adjustments to Amazon's Cost Sharing Arrangement: In Amazon.com, Inc. & Subs v. Comm'r, 148 T.C. No. 8 (2017), the Tax Court held that, in evaluating a cost sharing arrangement (CSA) between a U.S. parent company and its Luxembourg subsidiary, the use by the IRS of a discounted cash-flow methodology to determine that the subsidiary should've made a buy-in payment of more than $3 billion, as opposed to the $255 million actually paid, was arbitrary, capricious, and unreasonable. Furthermore, the court found that the IRS's determination that 100 percent of costs captured in one important cost center should be allocated to intangible development costs (IDCs) to be an abuse of discretion. The court concluded that the taxpayer's comparable uncontrolled transaction method, with certain adjustments, was the best method to determine the requisite buy-in payment and the taxpayer's cost-allocation method, with certain adjustments, provided a reasonable basis for allocating costs to IDCs.

Regs Under Sec. 883 Are Valid; Foreign Corp Can't Escape U.S. Tax: In Good Fortune Shipping SA v. Comm'r, 148 T.C. No. 10 (2017), the Tax Court rejected a foreign corporation's assertion that, because it was not described in Code Sec. 883(c)(1), it was entitled under Code Sec. 883(a)(1) to exclude certain income from gross income and, thus, U.S. tax. The Tax Court held that regulations under Code Sec. 883 were valid and precluded the foreign corporation from taking into account, in establishing ownership of another foreign corporation, certain shares that were issued in bearer form.

Income

Payments to Disbarred Lawyer Were Compensation, Not Gifts: In Alexander v. Comm'r, T.C. Summary 2017-23, the Tax Court held that payments by a lawyer to a disbarred lawyer for legal help with a class action lawsuit were compensation and not a nontaxable gift. The court also upheld the IRS's assessment of accuracy-related penalties on the taxpayer.

Innocent Spouse Relief

Wife Who Prepared Joint Tax Returns Isn't Entitled to Innocent Spouse Relief: In Yancey v. Comm'r, T.C. Memo. 2017-59, the Tax Court held that a taxpayer failed to establish that she was entitled to innocent spouse relief with respect to tax deficiencies relating to joint tax returns she prepared and on which she incorrectly took deductions for her then-husband's gambling losses. The court noted that the taxpayer was aware of her former husband's gambling addiction and outstanding gambling debts and that, at the time she signed the returns at issue, she had no mental or physical health problems which prevented her from being able to understand the content of those returns.

IRS

IRS Nonacquiesces to Several Court Decisions: In I.R.B. 2017-15 (4/10/17), the IRS stated that it does not acquiesce to the following decisions: (1) Stine, LLC v. U.S., 2015 PTC 477 (W.D. La. 2015), in which a district court allowed a company to take accelerated depreciation deductions with respect to GO ZONE property; (2) Shea Homes, Inc. and Subs. v. Comm'r, 2016 PTC 323 (9th Cir 2016), in which the Ninth Circuit affirmed a Tax Court decision allowing a real estate developer to use the completed contract method; and (3) Scott Singer Installations, Inc. v. Comm'r, T.C. Memo. 2016-161, in which the Tax Court held that payments by an S corporation to its sole shareholder were repayments of loans and not wages subject to employment taxes.

Penalties

Wife Escapes Liability for Fraud Penalties with Respect to Husband's Illicit Business: The Tax Court held that the wife of a taxpayer, who ran a business which specialized in the unauthorized duplication of copyrighted works and who significantly underreported his 2008 and 2009 business income, was not liable for the 75 percent fraud penalty for 2008 and 2009. Further, the court concluded that neither the husband nor the wife was liable for the fraud penalty for 2010 because the deficiency for that year was a run-of-the-mill deficiency arising from a failure to substantiate expenses underlying claimed deductions, and not the existence of fraud. Ballard v. Comm'r, T.C. Memo. 2017-57. Read More...

Lawyers in Professional Limited Liability Company Subject to Self-Employment Tax: The Tax Court held that Lawyers who were members of a professional limited liability company were functionally the equivalent of general partners and thus could not avail themselves of the exception in Code Sec. 1402(a)(13) and exclude certain partnership distributions from self-employment income. However, the court also concluded that the lawyers were not subject to income tax on unidentified amounts in a trust account and were not liable for accuracy-related penalties. Castigliola v. Comm'r, T.C. Memo. 2017-62. Read More...

Second Circuit Reverses Imposition of Accuracy-Related Penalty; IRS Did Not Obtain Supervisory Approval: The Second Circuit held that a taxpayer should have been permitted to raise as a defense to the imposition of an accuracy-related penalty by the IRS the fact that the IRS failed to obtain the written supervisory approval required under Code Sec. 6751 before assessing the penalty. The court also registered its disapproval with a divided 2016 Tax Court opinion which reached the opposite conclusion on the same issue, possibly signaling a shift in how much the courts will scrutinize IRS procedures used in assessing penalties against a taxpayer. Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017). Read More...

Procedure

No Refund Where Taxpayer Failed to Designate Liability to Which Overpayments Related: In Warfield v. U.S., 2017 PTC 165 (D. Mass. 2017), a district court held that a taxpayer's tax overpayment to the IRS, which the taxpayer intended to be credited to a prior year tax liability that arose when the IRS issued her an erroneous refund, were instead properly credited to an outstanding tax liability relating to her husband's business. The court found that, because the taxpayer did not indicate the liability as to which she intended the tax return overpayments to be credited, she could not later claim that it was a different liability than the one to which the IRS credited the payments.

IRS Rejection of Taxpayer's OIC Was Reasonable in Light of Her Collection Potential: In Lloyd v. Comm'r, T.C. Memo. 2017-60, the Tax Court held that the IRS did not abuse its discretion in rejecting a taxpayer's offer in compromise because it was less than the taxpayer's reasonable collection potential (RCP), which was calculated by the IRS and based solely on the taxpayer's net income. In calculating the taxpayer's RCP, the IRS determined that the taxpayer's reported monthly expenses, which included almost $7,000 per month for housing and $1,600 a month for the lease of a Lexus, exceeded the applicable local standards by more than $1,000 per month and that the taxpayer was not entitled to a deviation from those standards.

Summonses on Bank to Provide Attorney's Records Aren't an Abuse of Judicial Process: In Clements v. U.S., 2017 PTC 168 (W.D. Tex. 2017), a district court rejected an attorney's request to quash summonses served on his bank for records relating to an IRS investigation concerning the attorney's tax returns, as well as documents filed in the attorney's bankruptcy case. The court noted that Code Sec. 7602 grants the IRS wide latitude to summon an individual or third party to testify and produce documents relevant to any inquiry regarding tax liability and the attorney did not establish that the enforcement of the summonses would amount to an abuse of the judicial process.

Court Refuses to Increase Judgment Against IRS for Violating Code Sec. 6103: In Aloe Vera of America, Inc. v. U.S., 2017 PTC 163 (9th Cir. 2017), the Ninth Circuit held that a district court did not clearly err in determining that a group of taxpayers failed to meet their burden of proving by a preponderance of the evidence that the IRS had caused actual damages in a case in which the IRS was found responsible for providing Japan's taxing authority with information about the taxpayers that the IRS knew to be false and that violated Code Sec. 6103. Thus, the district court's award and judgment was affirmed in significant part; however, the district court did reverse and remand the case with instructions to slightly amend the award of statutory damages for two of the individuals involved.

Tax Court Precluded Taxpayer's from Presenting Their Position in a Meaningful Way: In Keenan v. Comm'r, 2017 PTC 150 (9th Cir. 2017), the Ninth Circuit vacated and remanded a Tax Court decision which the Ninth Circuit said had essentially precluded the taxpayers from presenting their position to the Tax Court in any meaningful way. The taxpayers had sought to aside a stipulation regarding the applicability of a penalty under Code Sec. 6662 relating to a prior Tax Court decision.

IRS Can Obtain Bank Records of Medical Marijuana Business: In High Desert Relief, Inc. v. U.S., 2017 PTC 162 (D. N.M. 2017), a district court held that a summons issued to a bank, where a business engaged in the legal distribution of marijuana in New Mexico had its accounts, was issued in connection with the investigation of an offense connected with the administration or enforcement of the internal revenue laws (Code Sec. 280E) and the IRS was not abusing its civil audit power to conduct a criminal investigation into whether the taxpayer was violating the Controlled Substance Act (CSA). With respect to the taxpayer's argument that federal criminal drug laws with respect to state-legal marijuana sales are "dead letter" law, the court cited Feinberg v. Comm'r, 2015 PTC 459 (10th Cir. 2015), in which the Tenth Circuit recently signaled that the CSA is not a "dead letter" law with regard to the prosecution of parties involved in the manufacture and distribution of medical marijuana.

Failure to Provide Requisite Information on Form 1040 Precludes Refund Claim: In Kiselis v. U.S., 2017 PTC 126 (Fed. Cl. 2017), the Court of Federal Claims held that where a taxpayer was aware of the tax liability the IRS had assessed against him based on distributions reported by third-party financial institutions, but failed to report the distributions on his Form 1040, the taxpayer failed to exhibit an honest and reasonable intent to provide the requisite information. As a result, the court concluded that the Form 1040 submitted by the taxpayer did not constitute a valid return and that the court did not, thus, have jurisdiction over the taxpayer's refund claim.

Taxpayers Limited to $1,000 Award for IRS Unauthorized Disclosure of Their Tax Information: Minda v. U.S., 2017 PTC 144 (2d Cir. 2017), the Second Circuit affirmed a district court and held that the taxpayers were limited to an award of statutory damages of $1,000 as a result of the IRS's unauthorized disclosure of their tax information to an unrelated third party. The court also affirmed the lower court's decision that the taxpayers were not entitled to punitive damages.

Whistleblower's Identity Protected, at Least for the Time Being: In Whistleblower 12568-16W v. Comm'r, 148 T.C. No. 7 (3/22/17), the Tax Court held that a whistleblower, who is moving ahead with an action involving a taxpayer that may have avoided a tax liability in excess of $3 billion, can proceed anonymously. While recognizing the whistleblower's concern that if his or her identity were disclosed, there would be a risk of retaliation, physical harm, social and professional stigma, and economic distress, the court said that, at some point in the proceedings, it may be in the public's best interest to know the identity of any individuals involved in the proceedings.

S Corporation

Individual Denied S Corporation Basis Increase for Unpaid Judgments on Real Estate Foreclosures: The Tax Court held that an S corporation shareholder could not increase her basis by the amount of judgments against her resulting from her guarantees on foreclosed real estate owned by the S corporation because she made no payments on the judgments. Her claims for passthrough loss deductions and net operating loss carrybacks resulting from the purported basis increases were denied, but she was not liable for an accuracy-related penalty. Phillips vs. Comm'r, T.C. Memo. 2017-61. Read More...

March 2017

Accounting

Obamacare Repeal Moves to House Floor; Ultimate Passage Uncertain: On March 16, The House Budget Committee approved The American Health Care Act (AHCA) 19-17, clearing the way for a vote by the full House later this week. The bill would repeal the Affordable Care Act's (ACA) individual and employer mandates retroactive to January 1, 2016, and replace the means-tested premium tax credit with age-based health insurance credits. Beginning in 2018, it would also repeal most of the taxes used to fund the ACA, including the 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax. American Health Care Act Read More...

Applicable Federal Rates: In Rev. Rul. 2017-8, the IRS issued the applicable federal rates (AFRs) for April 2017.

OMB Directive Offers Interim Guidance on Regulatory Cap; Dearth of New IRS Guidance Continues: The Office of Management and Budget (OMB) has provided guidance to assist the Treasury Department, the IRS, and other government agencies in implementing the President's regulatory cap (aka, the "two-for-one regulation order"). Despite the OMB guidance, the IRS has yet to issue any new regulations or substantive revenue rulings, procedures, or notices under the new administration. Read More...

Accounting Methods

IRS Will Not Acquiescence in Fifth Circuit Farming Syndicate Decision: In AOD 2017-01, 2017-7 IRB 868, the IRS stated that it will not acquiesce in the Fifth Circuit's holding in Burnett Ranches, Ltd. v. U.S., 2014 PTC 249 (5th Cir. 2014) that a limited partnership was not a farming syndicate for accounting method purposes because the sole shareholder of a limited partner S Corporation actively participated in the farming business. (For further discussion of this decision, see the June 6, 2014 Issue of Parker's Federal Tax Bulletin.) A nonacquiescence means that the IRS will not follow the holding nationwide, but will recognize the precedential impact of the opinion on cases arising within the same (Fifth) Circuit.

Bankruptcy

Bankruptcy Trustee Can't Require Tax Refunds Used for Child Support to be Paid to Her Instead: In In re Gibson, 2017 PTC 120 (Bankr. N. D. Ill. 2017), a bankruptcy court overruled a bankruptcy trustee's objection to a debtor's plan where the plan did not require the debtor to pay future tax refunds to the trustee. The court rejected the trustee's assertion that the half of the debtor's tax refund which is paid for child support should instead be paid to the bankruptcy estate.

Amicus Brief Couldn't Sway Supreme Court to Hear Bankruptcy Discharge Case: The Supreme Court declined to hear an appeal of a Ninth Circuit case affirming a district court's decision that had reversed a bankruptcy court holding, which had been favorable to the taxpayer. The Court was apparently unswayed by an amicus brief filed on behalf of the taxpayer which argued that, because the circuits are divided on the issue of the dischargeability of tax debts, the ability of debtors to discharge tax debt in a bankruptcy will depend upon their geography, leading to disparate treatment of debtors and an inconsistent application of federal bankruptcy law. In re Smith, 2016 PTC 249 (9th Cir. 2016), cert. denied (2/21/17); Amicus Brief in re Smith. Read More...

Credits

Court Allows Some Income from Cosmetology Business for EITC, Despite Thin Documentation: In Lopez v. Comm'r, T.C. Summary 2017-16, the Tax Court rejected the IRS's decision to zero out Schedule C gross receipts where the taxpayer failed to provide bank records or other contemporaneous documentation supporting claims she earned $17,800 and $17,581 from her cosmetology business in the 2012 and 2013, respectively. While noting that the claimed receipts were suspiciously close to amounts that would maximize the taxpayer's earned income tax credit (EITC), the court concluded that notarized statements from her clients established that she had at least 12 regular, paid customers. Accordingly, the court held that the taxpayer's gross receipts from the business were $10,000 for each of the years at issue.

Criminal

CPA's Prison Sentence Vacated Due to Tax-Loss Dispute Which Affected Sentencing: In U.S. v. Johnson, 2017 PTC 119, the Third Circuit affirmed a CPA's conviction on six counts of aiding and assisting in the preparation of false federal income tax returns in violation of Code Sec. 7206. However, the court vacated and remanded for resentencing the sentence of 48 months in prison handed down by the district court because the lower court failed to resolve a tax-loss dispute or disclaim reliance on disputed calculations which figured into the calculation of the prison term.

Deductions

Court Denies Mortgage Interest Deduction Relating to Home Owned by Girlfriend: In Jackson v. Comm'r, T.C. Summary 2017-11, the Tax Court held that a taxpayer could not deduct mortgage interest of more than $14,000 that he said he paid to his girlfriend so she could make the mortgage payments on a home they both shared but that she owned. Without bank statements, receipts, other records, or testimony, the court said that the taxpayer could not carry his burden of proving he was entitled to the deduction.

Foreign Students' Tax Home Was the U.S. for Summer Work Program; Travel Deductions Denied: In Liljeberg, et al v. Comm'r, 148 T.C. No. 6, the Tax Court held that several full-time foreign students visiting the U.S. to participate in the State Department's Summer Work Travel Program (SWTP) were not "away from home in the pursuit of a trade or business" for purposes of Code Sec. 162(a)(2), because none of them maintained residences in their home countries for business purposes while working in the U.S. The court was not swayed by the fact that the students had entered the U.S. on nonimmigrant visas that effectively required them to maintain a residence in a foreign country. The IRS conceded prior to trial, however, that the taxpayers were entitled to deduct fees paid for their visas and for participation in the SWTP as unreimbursed employee expenses.

No Moving Expense Deduction Where New Job Started Four Months after Move: In Anderson v. Comm'r, T.C. Summary 2017-17, the Tax Court determined that a taxpayer's employment began on the date his paid work activities began (four months after he moved), not when he executed his employment contract, and not when he helped his new employer prepare materials highlighting his background for dissemination to clients, and engaged in unpaid training activities. Accordingly, the court held that he was not a full-time employee at his new place of employment for at least 39 weeks during the one-year period beginning with his arrival in the general location of his new principal place of work, as required by Code Sec. 217(c)(2)(A).

Retired Naval Officer Intended to Defraud Government in Tax Scheme: In Omega Forex Group, LC v. U.S., 2017 PTC 119 (D. Utah 2017), a district court held that a taxpayer - a college graduate, a retired naval officer of 20 years, and a private dentist with a practice that produced revenues of several hundred thousand dollars per year was not entitled to pass through losses from a partnership that allegedly engaged in foreign currency speculation. The court found that the taxpayer intended, by clear and convincing evidence, to defraud the United States of rightfully owed taxes for the years at issue.

Mortgage Interest Deduction Denied Where Taxpayer Failed to Show Improvements Were Made: In Kauffman v. Comm'r, T.C. Memo. 2017-38, the Tax Court held that a taxpayer was not entitled to certain mortgage interest deductions where he could not produce evidence showing that the interest was incurred as acquisition indebtedness used to improve his residence. In addition, because the taxpayer did not maintain sufficient records to substantiate most of the expenses underlying deductions disallowed by the IRS, and because the disallowed deductions were directly attributable to the taxpayer's failure to maintain adequate records, the court upheld the accuracy-related penalties assessed by the IRS.

Lump Sum Payments to Former Spouse Are Not Alimony: In PLR 201706006, the facts indicated that a taxpayer was required under a court judgment to make lump sum and annual payments of "alimony" to a former spouse. The IRS ruled that the lump sum payments did not constitute deductible alimony under Code Sec. 71(b) and Code Sec. 215(a). To be deductible as alimony, the payments must meet the requirements in Code Sec. 71(b)(1), and the second requirement was not met because there was an express designation in the court judgment that the lump sum payments were not includible in the former spouse's income. Conversely, the couple agreed that the annual alimony payments authorized by the judgment would be taxable to the former spouse and deductible by the taxpayer, which meant that such payments qualified as deductible alimony for federal income tax purposes.

Employment Taxes

Fourth Circuit Affirms Prison Terms for Couple That Diverted Employment Taxes: In U.S. v. Carden, 2017 PTC 83 (4th Cir. 2017), the Fourth Circuit affirmed the 72 month and 60 month prison sentences handed down to a husband and wife, respectively, for diverting employment tax payments from their payroll service company to their own accounts. The couple's payroll service company received money from small companies for the purpose of making payroll payments to the clients' employees and remitting the employees' payroll tax withholdings to the IRS.

Subsidiary Corporation Is Successor Employer for Wage Limitation Purposes: In PLR 201706010, the IRS concluded that a subsidiary corporation qualified as a successor employer for purposes of the annual wage limitations under Code Secs. 3121(a)(1) and 3306(b)(1) for wages paid to persons becoming employees of the subsidiary following a corporate reorganization. The predecessor-successor rule in these Code sections is an exception to the general rule that a new contribution and benefit base applies to the second employer.

Estate Tax

District Court Bucks the Trend of Penalizing Estates for Relying on Expert's Advice: A district court went against the grain of several recent court decisions and held that an estate was not liable for a late filing penalty where the estate's executors filed the estate tax return late based on their tax attorney's advice. In reaching its conclusion, the court noted that other courts had ruled the opposite way on substantially similar facts but said it was obliged to follow precedent set by the circuit court to which the case was appealable. Estate of Hake v. U.S., 2017 PTC 74 (M.D. Pa. 2017). Read More...

Foreign

Taxpayer's Ties to U.S. Preclude Excluding Income Earned Overseas from Gross Income: In Lock, II v. Comm'r, T.C. Summary 2017-10, the Tax Court held that a taxpayer who worked for a private security company as a personal security specialist and who provided protection for U.S. Department of State personnel and other high-ranking U.S. government officials in Iraq was not entitled to exclude from income a portion of the wages he earned while overseas. The court concluded that the taxpayer's tax home was the United States because he had strong family, personal, and economic ties to the United Stated, including rental properties he maintained, as well as maintaining his status as a Florida deputy.

IRS Provides 2017 Foreign Housing Adjustments: In Notice 2017-21, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911 for specific locations for 2017. The adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. While the notice is effective for tax years beginning on or after January 1, 2017, a taxpayer may elect to apply the 2017 adjusted housing limitations contained in the notice to his or her tax year beginning in 2016.

Rev. Proc. Addresses Eligibility Rules for Certain Individuals in Foreign Countries: In Rev. Proc. 2017-26, the IRS provides information to any individual who failed to meet the eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting those requirements for 2016 tax year. The only country listed was South Sudan.

Healthcare

ACA Program Tax Is Nondiscriminatory and Applies Evenly to Public and Private Health Plans: In State of Ohio v. U.S., 2017 PTC 78 (6th Cir. 2017), Ohio and several of its political subdivisions and public universities filed suit against the federal government alleging that the federal government had illegally collected certain monies from the state in order to supplement the Transitional Reinsurance Program of the Affordable Care Act (ACA). They argued that the mandatory payment scheme under that program applied only to private employers and not to state and local government employers and requested refunds of all payments made on its behalf and a declaration that the program would not apply to the state in the future. The Sixth Circuit disagreed and held that the tax imposed under the program was a nondiscriminatory tax applied evenly to public and private group health plans and application of the program to Ohio did not violate the intergovernmental tax immunity doctrine.

Income

Cellular Towers and Cable Distribution Systems Are Like Kind Property: In PLR 201706009, the IRS ruled that cellular towers that a communications services provider uses in its business are of like-kind to cable telecommunication signal distribution property that it intends to receive in exchange for the cellular towers. After noting that state law property classifications are not the sole basis for determining whether the towers and the cable distribution systems are like kind property, the IRS found the property qualified for Code Sec. 1031 treatment because the towers and the cable distribution systems (1) transmit or support the transmission of telecommunication signals across distances; (2) are not used for other activities; and (3) are, or are intended to be, permanently affixed to land.

Quick Way to See Whether Social Security Benefits Are Taxable: In Tax Tip 2017-13, the IRS provides the following short-cut to find out whether taxpayers must pay taxes on their social security benefits. First, add one-half of the taxpayer's social security income (which should appear on Form SSA-1099, Social Security Benefit Statement) to other income, including tax-exempt interest. Then, compare that amount to the applicable base amount, which depends on filing status: (1) $25,000 for taxpayers who are single, head of household, qualifying widow(er) with a dependent child, or married filing separately and lived apart from their spouse for all of 2016; (2) $32,000 for taxpayers who are married filing jointly; and (3) $0 for taxpayers who are married filing separately but lived with their spouse at any time during the year. If the total is more than the base amount, some of the benefits may be taxable.

IRS

Taxpayer Had No Legitimate Expectation of Privacy in Records Held by CPA: A district court denied a motion to suppress all evidence relating to tax records the IRS obtained from a taxpayer's CPA. The court rejected the taxpayer's argument that Code Sec. 7609 and the Code of Professional Conduct for CPAs conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. U.S. v. Galloway, 2017 PTC 80 (E.D. Calif. 2017). Read More...

Substance-Over-Form Doctrine Doesn't Authorize IRS to Reclassify Transfers from DISC to Roth IRAs: The Sixth Circuit reversed the Tax Court and held that, because a corporation used a domestic international sales corporation and Roth IRAs for their congressionally sanctioned purposes - tax avoidance - the IRS had no basis for recharacterizing transactions involving the transfer of funds from the DISC to the Roth IRA accounts. Nor, the court said, did the IRS have any basis for recharacterizing the law's application to the transactions at issue. Summa Holdings v. Comm'r, 2017 PTC 58 (6th Cir. 2017). Read More...

IRS Gears Up to Report Unpaid Taxes to State Dept; Revocation or Denial of Passports Could Result: The IRS announced that it will begin certifying seriously delinquent tax debts to the State Department in early 2017. As a result, any taxpayer such a debt could have his or her passport revoked or the State Department could refuse to issue or renew a passport to that individual. IRS Website. Read More...

IRS Sends Earned Income Credit Letters to Some Return Preparers: In the e-News for Tax Professionals Issue 2017-6, the IRS said it is sending (1) Letter 4858 to return preparers who completed 2016 returns claiming the earned income tax credit (EITC) but who may not have met the required due diligence requirements; and (2) Letter 5364 to return preparers who completed two or more 2016 paper returns claiming the EITC, American Opportunity Tax Credit, or Child Tax Credit/Additional Child Tax Credit without including Form 8867, Paid Preparer's Due Diligence Checklist.

IRS Updates Information on Low Income Taxpayer Clinics: In the January 2017 revision of Publication 4134, Low Income Taxpayer Clinic List, the IRS provided an updated list of low-income taxpayer clinics by state, city, name, telephone number, and languages served. These clinics provide assistance to low income taxpayers who need assistance in resolving a tax dispute with the IRS, or who speak English as a second language and need help understanding their rights and responsibilities. The IRS website (search term "Information for Taxpayers Seeking LITC Services") summarizes the eligibility requirements based on annual income and size of the taxpayer's family.

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2017-18, 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).

Some e-Services Account Holders Need to Revalidate Identity: In an "Important Update about Your e-Services Account" posted to its website, the IRS stated that it had previously mailed Letter 5903, e-Services Account Validation, asking the recipient to revalidate their identity within 30 days, either online or by phone. The e-Services registration accounts of those who fail to do so within 30 days are suspended for security purposes. To restore access, they need to contact the e-Services Help Desk and successfully revalidate their identity.

Taxpayers Should Be Prepared to Validate Identity When Calling the IRS: In IR-2017-32, the IRS noted that mid-February marks the agency's busiest time of the year for telephone calls. Before calling about a personal tax account, taxpayers should have the following information: social security numbers (SSNs) and birth dates for persons listed on the tax return, individual taxpayer identification numbers (ITIN) for those without an SSN, filing status, prior year tax return, copy of the tax return in question, and any letters or notices from the IRS. If calling about someone else's account, callers should have verbal or written authorization to discuss the account; the ability to verify the other person's name, SSN/ITIN, tax period, and form; and a current, completed, and signed Form 8821, Tax Information Authorization, or Form 2848, Power of Attorney and Declaration of Representative.

Penalties

IRS Failed to Prove Restaurant Owner's Father Was a Responsible Person: In Shaffran v. Comm'r, T.C. Memo. 2017-35, the Tax Court held that a taxpayer was not a responsible person with respect to the nonpayment of employment tax liabilities by a restaurant partially owned by his son. As a result, the taxpayer was not liable for the trust fund recovery penalties (TFRP) that had been assessed against him. The court noted that the IRS agent in charge (1) did not secure the restaurant's bank records or make any attempt to interview the individuals against whom she was proposing TFRPs; (2) failed to determine whether the taxpayer willfully failed to remit employment taxes to the IRS; and (3) made her recommendation to assess TFRPs against the taxpayer on the basis of the limited information she had collected during a brief investigation.

Procedure

IRS Announces Interest Rates for Second Quarter of 2017: In Rev. Rul. 2017-6, the IRS announced that interest rates on tax overpayments and underpayments will remain the same for the calendar quarter beginning April 1, 2017. The 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.

Third-Party Must Turn Over Documents That Might Help Taxpayer Fight Tax Charges: In U.S. v. Reynolds, 2017 PTC 89 (N.D. Ill. 2017), a district court held that subpoenas served by a taxpayer on a third party were valid and that the third party must turn over the requested documents, including the third-party's tax returns and cancelled checks. The taxpayer who served the subpoenas is facing charges that he willfully failed to file tax returns for various years. The court noted that if the requested materials show that monies paid to the taxpayer were business expense advances and not income, then it is more likely that the taxpayer's failure to file income tax returns was not willful.

Property Transactions

Dentist Qualifies as Real Estate Professional; Rental Real Estate Losses Are Deductible: The Tax Court held that a dentist's logs of real estate activities, as well as testimony from various witnesses, established that he spent the requisite amount of time on real estate activities to qualify as a real estate professional. Accordingly, he was entitled to deduct his rental real estate losses against the income from his and his wife's dental practice. Zarrinnegar, T.C. Memo. 2017-34. Read More...

Retirement Plans

IRS Rules on Taxation of IRA Distributions Following Change of Beneficiary Designation: In PLR 201706004, the IRS ruled that, following a state court order changing a decedent's IRA beneficiary designation from a never-created inter vivos trust to the decedent's surviving spouse, there was no designated beneficiary of the IRA under Code Sec. 401(a)(9) because the spouse was not the beneficiary on the date of the decedent's death. Since the decedent died before the required beginning IRA distribution date and without a designated beneficiary, the IRS concluded that the entire interest in the IRA must be distributed using the five-year rule in Code Sec. 401(a)(9)(B)(ii). Under this rule, amounts payable by the IRA to the surviving spouse in years 1following the year of death are not required minimum distributions and are eligible for rollover by the surviving spouse.

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