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Federal Tax Research Updates

February 2018

Charitable Contributions

Lower Court Reversed; Deduction for Trust's Property Donation Is Limited to Basis: The Tenth Circuit Court reversed a district court and held that a trust's deduction for its charitable donation of real property was the trust's basis in the property and not the fair market value. The Tenth Circuit rejected the district court's interpretation of Code Sec. 642(c)(1) and concluded that the deduction thereunder was limited the trust's adjusted basis in donated properties and that the unrealized appreciation in the donated property was not part of the trust's gross income as required under Code Sec. 642(c)(1), which permits a trust to deduct a charitable contribution only if it comes from the trust's gross income. Green v. U.S., 2018 PTC 6 (10th Cir. 2018). Read More...

Property

Tax Court Limits Real Estate Developer's Losses; Rejects Penalty Assessment: The Tax Court held that a individual who owned undeveloped land, sold custom built homes, and owned rental properties (1) had a capital, not ordinary, loss on the sale of property held for investment, (2) was entitled to deduct expenses as investment expenses under Code Sec. 212, and (3) was barred by the passive activity rules from deducting rental expenses because he did not materially participate in the business. However, the Tax Court determined that accuracy-related penalties did not apply because the taxpayer reasonably relied on his accountant to prepare his returns. Conner v. Comm'r, T.C. Memo. 2018-6. Read More...

January 2018

Accounting

NEW - In-Depth Analysis of Section 199A Deduction for Qualified Business Income: Become a Section 199A Expert with Parker's in-depth explanation and analysis of the new tax break, featuring dozens of original examples, planning tips, and insightful observations. Read More...

Three New TCJA Quick Reference PDFs Available: Parker's Quick Reference database now includes three detail-packed, downloadable guides for the Tax Cuts and Jobs Act of 2017 (TCJA). Arranged in an easily accessible table format, the guides provide the key rules, rates, amounts, and thresholds for more than 100 TCJA provisions.
1. TCJA Provisions Affecting Individuals
2. TCJA Provisions Affecting Businesses
3. TCJA - Deduction for Qualified Business Income
View Downloads

Bankruptcy

Bankruptcy Court Holds S Corporation Status Is Not Property for Bankruptcy Purposes: A bankruptcy court, in a case of first impression in the Fourth Circuit, held that a Chapter 11 debtor's S corporation status was not property for bankruptcy purposes and that the shareholders' prepetition revocation of the S election could therefore not be avoided as a fraudulent transfer. The court found that the debtor's S corporation status lacked all of the attributes of a property right except for the right to use it to pass through tax liabilities to shareholders and that feature alone was not sufficient for the S election to be treated as a property interest. Health Diagnostic Laboratory, Inc. vs. U.S., 2017 PTC 543 (Bankr. E.D. Va. 2017). Read More...

Bankruptcy Court Upholds IRS Position on Tax Lien: In In re Hutchinson, 2018 PTC 1 (Bankr. E.D. Calif. 2018), a bankruptcy court granted the government's motion to dismiss after holding that Bankruptcy Code Section 551 controls when a bankruptcy trustee avoids a lien and, if the trustee avoids an IRS lien, Code Section 551 authorizes the trustee to preserve the lien for the benefit of the estate's creditors. The court noted that the Bankruptcy Code precludes debtors from avoiding an IRS tax lien for penalties and, because the debtors in the instant case cannot avoid this lien, they cannot preserve it for their own benefit.

Deductions

District Court Holds That Settlement Proceeds Were Nontaxable, but Disallows Deduction of Legal Fees: A district court held that a taxpayer who settled a lawsuit against an accounting firm for failing to properly form an S corporation and an employee stock ownership plan, did not have to include $800,000 in settlement proceeds in income because the proceeds constituted a nontaxable return of capital. However, the taxpayer could not deduct the legal fees he incurred as business expenses because they were personal to him. The court also disallowed a deduction for the difference between the taxes paid as a result of the accounting firm's error and the settlement proceeds. McKenny v. U.S., 2018 PTC 2, (M.D. Fla. 2018). Read More...

Compensation

IRS Revises Covered Compensation Tables for 2018: In Rev. Rul. 2018-4, the IRS issued revised covered compensation tables that are effective January 1, 2018. These tables supersede the tables previously released in Rev. Rul. 2017-22. Rev. Rul. 2018-4.

Employee Benefits

IRS Issues Annual Procedure on Employee Plans and Tax-exempt and Government Entities: In Rev. Proc. 2018-4, the IRS issued an annual revenue procedure that provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements Office (Employee Plans Rulings and Agreements). It also details the types of advice that is available to taxpayers, and the manner in which such advice is requested and provided.

Exempt Organizations

Nonprofit Teaching Hospitals Subject to Income Tax on Fees from Third-Party Vendors: The Tax Court held that fees received by a nonprofit membership organization, whose members consist primarily of teaching hospitals operating in New Jersey, under contracts with third parties were not excluded from unrelated business taxable income as either (1) royalties under Code Sec. 512(b)(2), or (2) amounts received in a trade or business carried on primarily for the convenience of the organization's members under Code Sec. 513(a)(2). New Jersey Council of Teaching Hospitals v. Comm'r, 149 T.C. No. 22. Read More...

Founder of Association for Honest Attorneys Engaged in Excess Benefit Transactions: In Farr v. Comm'r, T.C. Memo. 2018-2, the Tax Court held that an attorney who formed a Code Sec. 501(c)(3) tax-exempt organization called Association for Honest Attorneys (AHA), and who made payments from AHA's bank account for her son's tuition to military school, vet bills, and to pay for the exhumation and DNA testing of her father's remains, was a disqualified person who engaged in excess benefit transactions with AHA. As a result, the court concluded that the taxpayer was liable for excise taxes under Code Sec. 4958 of approximately $79,000.

Foreign

Extended Limitations Period Did Not Apply to Omissions in Years Before Foreign Asset Reporting Applied: The Tax Court held that the IRS was barred by the three-year statute of limitations period from assessing deficiencies and accuracy-related penalties on a taxpayer's omission of income earned on foreign assets in years before the enactment of the foreign account reporting requirement in Code Sec. 6038D. The Tax Court found that the six year statute of limitations under Code Sec. 6051 for such omissions applies only to years for which there was a Code Sec. 6038D foreign asset reporting requirement. Rafizadeh v. Comm'r, 150 T.C. No. 1 (2018). Read More...

IRS Announces Intention to Issue Subpart F Regulations: In Notice 2018-7, the IRS announced that it intends to issue regulations for determining amounts included in gross income by a U.S. shareholder under the Subpart F rules of Code Sec. 951(a)(1). The notice describes the regulations the IRS intends to issue as well as the proposed effective dates of those regulations.

IRS Suspends Application of New Code Section 1446(f) for Certain Dispositions: In Notice 20128-8, the IRS announced the suspension of the application of new Code Sec. 1446(f) in the case of a disposition of certain publicly traded partnership interests. The notice provides background on new Code Sec. 864(c)(8) and Code Sec. 1446(f) and describes the revised timeline for the application of new Code Sec. 1446(f) to a disposition of certain interests in publicly traded partnerships.

Innocent Spouse

Taxpayer Qualifies for Innocent Spouse Relief: In Bishop v. Comm'r, T.C. Summary 2018-1, the Tax Court held that a taxpayer was entitled to innocent spouse relief with respect to the tax liability arising from the failure to report on a joint return a distribution from his former spouse's separately owned retirement account. The court concluded that, while the history of the withdrawals from the retirement account used by the taxpayer and his ex-spouse supported a conclusion that the taxpayer should have known about the distribution, there was no evidence that the taxpayer saw the bank records before the joint return was filed and his denials were not incredible, implausible or contradicted by direct evidence.

Court Denies Innocent Spouse Relief Where No Evidence Existed of Abuse or Financial Control: In Lessard v. Comm'r, T.C. Summary 2017-95, the Tax Court held that a taxpayer was not entitled to innocent spouse relief from her 2013 joint tax return liability after the court reviewed the relevant factors in Rev. Proc. 2013-34 and concluded that such factors did not favor relief for the taxpayer. The court noted that there was no evidence of abuse or exercise of financial control by the taxpayer's ex-husband and concluded that the taxpayer should have known of the understatement reflected on the joint return.

Partnerships

IRS Finalizes Rules on Opting Out of Centralized Partnership Audit Rules: The IRS issued a final regulation on who can elect out of the centralized partnership audit regime and the manner in which such election must be made. In the final rule, the IRS declined to expand the types of taxpayers eligible to make the opt-out election even though Congress authorized it to do so, saying that such an expansion would increase the IRS's burden with respect to auditing such taxpayers. T.D. 9829. Read More...

Penalties

Court Upholds 40 Percent Penalty after Charitable Deduction Is Denied: In Roth v. Comm'r, the Tax Court held that, with respect to a 40 percent penalty assessed on a couple with respect to a conservation easement charitable deduction that was subsequently denied, the IRS complied with the requirements of Sec. 6751(b) in assessing the penalty and the court found the couple liable for the penalty. The court also denied a deduction for the repayment of proceeds relating to a state tax credit that had been sold and had to subsequently be repaid as a result of the denial of the charitable deduction.

Tax Preparers

Tax Return Preparer Hit with 75 Percent Fraud Penalty: In Ankerberg v. Comm'r, T.C. Memo. 2018-1, the Tax Court held that a CPA, who prepared tax returns and underreported gross receipts and claimed excessive deductions on Schedules C, Profit or Loss from Business, was liable for the 75 percent fraud penalty under Code Sec. 6663. The court rejected the taxpayer's claim that various serious medical problems during the years at issue constituted reasonable cause for the deficiencies, instead finding that the taxpayer had not overcome the clear and convincing evidence of fraud.

Property Tax

Prepaid 2018 Real Property Taxes Are Deductible in 2017 If Assessed and Paid in 2017: The IRS is advising taxpayers that 2018 state and local real property taxes prepaid in 2017 may be deductible if the 2018 taxes are assessed in 2017. However, a prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. IR-2017-210. Read More...

December 2017

Accounting

IRS Issues January 2018 AFRs: In Rev. Rul. 2018-1, the IRS issued the applicable federal rates for January 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate.

Bankruptcy

Couple's Actions Precluded Tax Debt from Being Discharged in Bankruptcy: In Faulk v. Comm'r, T.C. Summary 2017-92, the Tax Court upheld an IRS determination to proceed with a collection action against a couple who had argued that their 2006 tax debt had been discharged in bankruptcy. In reaching its conclusion, the court found that the couple had filed their tax return for 2006 more than four years after it was due and more than two months after the date the couple filed their bankruptcy petition and thus, consistent with Section 523(a)(1)(B) of the Bankruptcy Code, it followed that their 2006 tax liability was not discharged in bankruptcy.

Compensation

Guidance Under Section 409A Issued for Pre-2009 Section 457A Deferrals: In Notice 2017-75, the IRS provides guidance on the application of Code Sec. 409A and Code Sec. 457A by addressing the transition provisions enacted as part of Code Sec. 457A, that generally provide that amounts deferred and attributable to services before January 1, 2009, that would otherwise have been subject to inclusion in income under Code Sec. 457A, are includible in gross income in the later of the last tax year beginning before 2018 or the date of vesting. The notice provides that service recipients may accelerate distributions to pay federal and state taxes on amounts includible in 2017 and later years without violating Code Sec. 409A.

Credits

Mixture of Butane and Gasoline Is Not an Alternative Fuel Mixture Qualifying for Credit: In Rev. Rul. 2018-2, the IRS ruled that a mixture of butane (or other gasoline blendstock as defined in Reg. Sec. 48.4081-1(c)(3)(i)) and gasoline is a mixture of two taxable fuels. As a result, the IRS concluded that it is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under Code Sec. 6426(e).

Deductions

Package of Films Licensed to Customers May Be an "Item" under Section 199: In Rev. Rul. 2018-3, the IRS ruled that a package of films licensed to customers in the normal course of business may be an item under Reg. Sec. 1.199-3(d)(1)(i) for purposes of determining the domestic production activities deduction under Code Sec. 199. According to the IRS, this holding does not affect the characterization of the property for any other purpose of the Code.

Court Denies Education Expense Deduction But Allows Education Credit: In Pemberton v. Comm'r, T.C. Summary 2017-91, the Tax Court held that a taxpayer could not take a deduction on his 2013 tax return for education expenses incurred in obtaining a jurisprudence degree because he had not met his burden of proving that the degree maintained or improved skills required by his employment as a tutor and test proctor. However, the court concluded that the taxpayer was entitled to a Lifetime Learning Credit equal to 20 percent of the first $10,000 in eligible tuition and related expenses that the taxpayer paid in 2013.

Speech Pathologist Can't Deduct Expenses Incurred for Master's Degree and Other Certificate: In Colliver v. Comm'r, T.C. Summary 2017-93, the Tax Court held that a medical speech pathologist did not qualify for an education expense deduction on her 2013 return because the tasks and activities that she was qualified to perform after earning a master's degree and a certificate of clinical competency (CCC) were significantly different from those she could perform before pursuing this education. The court noted that, before receiving her master's degree and CCC, the taxpayer could not work at a hospital and perform "barium swallow studies," tasks that she was eligible to perform after receiving her master's and CCC.

Taxpayer Can't Deduct as Alimony Employment-Related Bonus Payments to Ex-wife: In Koester v. Comm'r, T.C. Summary 2017-88, the Tax Court held that payments by a taxpayer to his ex-wife of an amount equal to a portion of an employment-related bonus that the taxpayer received in 2012 was not deductible as alimony. According to the court, there was no evidence that the obligation to make the payments, which were required under a divorce agreement, would have stopped if the taxpayer's ex-wife had died.

Taxpayer Can't Take Capital Loss on the Sale of Property to Ex-wife: In Stapleton v. Comm'r, T.C. Summary 2017-87, the Tax Court held that Code Sec. 1041(a) barred a taxpayer from recognizing a capital loss that he realized on a sale of property to his ex-wife. The court rejected the taxpayer's argument that a transfer of property between former spouses relates to the cessation of the marriage only where the transfer is made as consideration for an outstanding marital obligation, after concluding that neither Code Sec. 1041(a), the temporary regulation under that provision, nor the legislative history imposed such a restriction on applying Code Sec. 1041(c).

Father Can't Rely on Divorce Judge's Statement "Awarding" Him Benefits for Child: In Shvetsov v. Comm'r, T.C. Summary 2017-89, the Tax Court held that a divorced father was not entitled to head of household filing status and an earned income credit with respect to one of his children because he did not meet the applicable requirements. The court dismissed the taxpayer's argument that, in his divorce proceedings, a Washington State court judge assured him that he would be entitled to all of the federal tax benefits for one of his children and on that basis he had agreed to pay a certain amount of child support.

No Deduction Available for Disgorgement Payments Made for Violating Securities Law: In CCM 201748008, the Office of Chief Counsel advised that Code Sec. 162(f) prohibits a deduction under Code Sec. 162(a) for disgorgement payments made for violating a federal securities law. In reaching its conclusion, the Chief Counsel's Office cited the Supreme Court's decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), in which the Court held that because disgorgement payments are penalties and are not compensatory, no deduction is allowed.

Employment Taxes

Former Partners of Defunct Law Firm Liable for $700,000 in Trust Fund Taxes: In Spizz v. U.S., 2017 PTC 541 (S.D. N.Y. 2017), a district court concluded that two partners of a now defunct law firm were jointly liable for almost $700,000 of trust fund taxes after finding that the law firm had unencumbered assets available to pay down its outstanding employment tax liability and the failure of the partners to apply those assets toward the trust fund tax liabilities constituted willfulness. The court noted that while the Second Circuit, to which the case would be appealable to, had not settled on a definition of "unencumbered assets," the circuits that have addressed the issue have established a narrow rule that only a legal prohibition on the expenditures of funds renders assets encumbered.

Exclusions from Gross Income

Court Rejects Request for Partial Refund of Taxes of Non-Minister Housing Allowance: In Gaylor v. Mnuchin, 2017 PTC 564 (W.D. Wisc. 2017), a district court issued a supplemental ruling following its earlier holding that Code Sec. 107(2), which excludes a minister's housing allowance from the minister's gross income, violated the First Amendment. In the supplemental ruling, the court rejected the taxpayers' request for a partial refund of taxes they paid but which would have been reduced if they had been permitted to claim a housing allowance as an exclusion of income under Code Sec. 107(2).

Exempt Organizations

IRS Requests Comments on Excise Taxes on Certain Donor Advised Funds: In Notice 2017-73, the IRS issued guidance describing approaches that it is considering to address certain issues regarding donor advised funds (DAFs) of sponsoring organizations and requesting comments on those approaches. The IRS is considering developing proposed regulations under Code Sec. 4967 that would, if finalized, provide that: (1) certain distributions from a DAF that pay for the purchase of tickets that enable a donor, donor advisor, or related person under Code Sec. 4958(f)(7) to attend or participate in a charity-sponsored event result in a more than incidental benefit to such person under Code Sec. 4967; and (2) certain distributions from a DAF that the distributee charity treats as fulfilling a pledge made by a donor, donor advisor, or related person, do not result in a more than incidental benefit under Code Sec. 4967 if certain requirements are met.

Foreign

IRS Extending Qualified Securities Lender Regime for 2018 and 2019 Payments: In Notice 2018-05, the IRS said it is permitting withholding agents to apply in 2018 and 2019 the transition rules from Notice 2010-46, which addresses potential overwithholding in the context of securities lending and sale repurchase agreements and which provides a two-art solution to the problem of overwithholding on a chain of dividends and dividend equivalents. The IRS said it has decided to extend the qualified securities lender regime described in Notice 2010-46, Part III, but only for payments made in calendar years 2018 and 2019 and, during this period, it intends to consider whether additional guidance is appropriate to address the particular circumstances of foreign lenders of U.S. dividend-paying stocks.

Gross Income

Russian Student Must Include University Payments in Income: In Dovzhenok v. Comm'r, T.C. Summary 2017-86, the Tax Court held that payments made by Indiana University-Purdue University Indianapolis to a Russian citizen who held an F-1 student visa, and which totaled $18,917 during 2009 and $19,708 during 2010, were not exempt from federal income tax under the Russia - U.S. tax treaty. According to the court, the taxpayer failed to prove that he was the recipient of a grant, allowance, or other similar tax exempt-type of payment.

IRS Procedure

D.C. District Court Again Denies IRS the Right to Charge Fees for PTINs: In Steele v. U.S., 2017 PTC 568 (D. D.C. 2017), the U.S. District Court for the District of Columbia denied a motion by the IRS for a stay of the court's prior order enjoining the IRS from charging fees to issue a preparer tax identification number (PTIN). The court said the IRS had not presented any new information that would change the court's previous decision.

Court Rejects Argument That IRS Lacked Probable Cause in Levying Bank Account: In Certified Enters, Inc. v. U.S., 2017 PTC 547 (D. Mo. 2017), a district court rejected a corporation's motion for summary judgment with respect to a lawsuit in which it argued that the IRS lacked probable cause to levy on its bank accounts for a tax debt owed by a delinquent taxpayer that the IRS said was the alter ego of the corporation. The court noted that the Eighth Circuit, the circuit to which the case is appealable, has found that probable cause existed (without holding that it was necessary) where the IRS levied property on the basis of a single piece of evidence supporting a nexus between that property and the delinquent taxpayer.

IRS Extends Due Date for Furnishing Statements Relating to Health Insurance Coverage: In Notice 2018-6, the IRS announced that it is extending the due date for certain 2017 information-reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Code Sec. 6055 and for applicable large employers under Code Sec. 6056. Specifically, the IRS is (1) extending the due date for furnishing to individuals the 2017 Form 1095-B, Health Coverage, and the 2017 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2018, to March 2, 2018, and (2) extending good-faith transition relief from Code Sec. 6721 and Code Sec. 6722 penalties to the 2017 information-reporting requirements under Code Sec. 6055 and Code Sec. 6056.

Taxpayer Can't Collect Damages Relating to Refund and Delinquent Student Loan Debt Mixup: In Ivy v. Comm'r, 2017 PTC 567 (D.C. Cir. 2017), the D.C. Circuit dismissed a taxpayer's lawsuit after concluding that the taxpayer could not use Code Sec. 7433(a) to recover damages he claimed to have suffered as a result of a mix-up relating to a delinquent student loan debt and a tax refund due him on his 2011 income tax return. According to the court, Code Sec. 7433(a) waives the government's sovereign immunity only for damages suffered in connection with the collection of federal taxes, and the taxpayer's injury (if any) related to the collection of a student loan debt.

Court Refuses to Sustain Levy after Finding IRS Appeals Officer Abused His Discretion: In Credex, Inc. v. Comm'r, T.C. Memo. 2017-241, the Tax Court refused to sustain an IRS levy notice after finding that an IRS Appeals officer abused his discretion in a case involving a taxpayer's Federal Insurance Contributions Act (FICA) tax liabilities relating to periods in the mid- to late-1990s. The court found that the officer had not applied all of certain stipulated credits to the taxpayer's accounts and, because the officer's determination lacked a sound basis in law and fact, he had abused his discretion.

IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2017-25, the IRS issued the rates for interest on tax overpayments and underpayments for the first calendar quarter of 2018, beginning January 1, 2018. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 1 and one-half percent for the portion of a corporate overpayment exceeding $10,000, and 6 percent for large corporate underpayments.

Retirement Plans

IRS Updates Mortality Tables for Defined Benefit Pension Plans: In Notice 2018-2, the IRS issued updated mortality improvement rates and static mortality tables to be used for defined benefit pension plans under Code Sec. 430(h)(3)(A) and Section 303(h)(3)(A) of the Employee Retirement Income Security Act of 1974, as amended. These updated mortality improvement rates and static tables, which are being issued pursuant to the regulations under Code Sec. 430(h)(3)(A), apply for purposes of calculating the funding target and other items for valuation dates occurring during calendar year 2019.

IRS Lists Plan Qualification Requirements That Took Effect in 2017: In Notice 2017-72, the IRS issued the 2017 Required Amendments List for individually designed qualified retirement plans. The list identifies certain changes in qualification requirements that became effective in 2017 that may require a retirement plan to be amended in order to remain qualified, and establishes the date by which any necessary amendment must be made.

Tax Return Preparers

Court Grants Injunction Forbidding Individuals from Preparing Tax Returns: In U.S. v. CDP Accounting Services, P.C., 2017 PTC 539 (E.D. Mich. 2017), a district court granted a permanent injunction forbidding certain individuals that operated a tax return preparation business from ever engaging in the business of preparing income tax returns after finding that the individuals had filed numerous fraudulent returns that claimed false deductions and understated the amount of tax due. Several individuals for whom returns had been prepared testified that their tax returns contained deductions for made up expenses, such as a deduction for non-cash donations of more than $30,000 in one case.

November 2017

Accounting

IRS Issues December 2017 Applicable Federal Rates: In Rev. Rul. 2017-24, the IRS issued the applicable federal rates for December 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

32 Key Differences Between the House and Senate Tax Reform Bills: As the House votes to approve its tax reform bill (House Bill) and the Senate Finance Committee debates and amends its own bill (Senate Bill), there remain dozens of differences between the two proposals. Read More...

Parker's Explanation of the House Tax Reform Bill (TCJA 2017): On Thursday, November 2, 2017, the House released its long-awaited tax reform package in H.R. 1, Tax Cuts and Jobs Act (TCJA; "the Bill"). Most of the changes in the Bill would go into effect for tax years beginning after 2017. An in-depth explanation of the Bill's key provisions follows. Read More...

In-Depth: 2017 Year-End Tax Planning for INDIVIDUALS: The first installment of Parker's annual two-part series on year-end tax planning recaps 2017's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2017 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. Read More...

CPA Client Letters: Year-End Tax Planning For 2017:
2017 Year-End Tax Planning for INDIVIDUALS.
2017 Year-End Tax Planning for BUSINESSES.

IRS Issues November 2017 AFRs: In Rev. Rul. 2017-21, the IRS issued the applicable federal rates for November 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate, and are determined as prescribed by Code Sec. 1274.

Bankruptcy

No Discharge of Tax Debts in Bankruptcy for Couple with High Income, Extravagant Lifestyle: A bankruptcy court held that a married couple's tax debts were not dischargeable because the couple had intentionally failed to pay their tax debt while realizing millions in income and sustaining high levels of spending on personal items. The bankruptcy court was not persuaded that the couple's spending was necessary to earn income and found that they had intentionally made offers in compromise to delay collection on the debt. Feshbach v. U.S., 2017 PTC 482 (Bankr. M.D. Fla. 2017). Read More...

Compensation and Benefits,/

IRS Provides 15-Year Sec. 481 Adjustment Period for Elections under Sec. 404A: In Rev. Proc. 2017-59, the IRS modified Rev. Proc. 2015-13 to specify that the Code Sec. 481 adjustment period with respect to an election under Code Sec. 404A, relating to a deduction for certain foreign deferred compensation plans, is 15 tax years for a positive Code Sec. 481(a) adjustment and 15 tax years for a negative Code Sec. 481(a) adjustment. This revenue procedure is effective for Forms 3115 filed under Rev. Proc. 2015-13 on or after November 13, 2017.

Deductions

Alimony Deduction Disallowed for Lack of Unambiguous Termination Provision: In Logue v. Comm'r, T.C. Memo. 2017-234, the Tax Court held that a taxpayer was not entitled to an alimony deduction for payments made to his ex-wife in 2010 because (1) a marital settlement agreement signed by the taxpayer and his ex-wife did not contain an unambiguous provision terminating the taxpayer's obligation to pay his ex-wife in the event of her death, and (2) the obligation would not have terminated in the event of his ex-wife's death by operation of Texas law. The court also held that the taxpayer failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment of tax relating to the alimony deduction and was thus liable for an accuracy-related penalty.

Obtaining Life Insurance to Ensure Alimony Payments Doesn't Indicate Payments Would Terminate at Death: In Wolens v. Comm'r, T.C. Memo. 2017-236, the Tax Court concluded that a taxpayer was not entitled to an alimony deduction after finding nothing in the couple's divorce order indicating that the payments being made by the taxpayer would terminate on the death of his ex-wife. In reaching its conclusion, the court (1) did not view the taxpayer's agreement to cooperate with his ex-wife's obtaining life insurance on his life to secure payments to her as indicating that payments would terminate on her death, and (2) found that the section in the divorce order requiring lump-sum payments was a division of the couple's assets rather than support payments to the ex-wife.

Couple Can't Deduct Short-Term Capital Loss Upon Transfer of Personal Assets to S Corp: In Smith v. Comm'r, T.C. Memo. 2017-218, the Tax Court held that a couple was not entitled to a short-term capital loss relating to the dissolution of an S corporation into which they had transferred their personal assets of cash and marketable securities and which had, in turn, transferred such assets to a family limited partnership. The court found that the couple's receipt of the partnership interest in the dissolution of the S corporation and the couple's use of a substantially discounted value for the assets held by the partnership to be transactions lacking in economic substance and upheld penalties assessed by the IRS.

Employee Benefits

IRS Provides Guidance on Qualified Small Employer Health Reimbursement Arrangements: In Notice 2017-67, the IRS provides the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA) under Code Sec. 9831(d), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees. To be an eligible employer that may provide a QSEHRA, the employer must not be an applicable large employer, as defined in Code Sec. 4980H(c)(2) and the regulations thereunder (and, thus, may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year), and must not offer a group health plan (as defined in Code Sec. 5000(b)) to any of its employees.

Estates, Gifts, and Trusts

Chief Counsel's Office Rejects Appeal by Trust for Refund Relating to a Charitable Deduction: In CCM 201747005, the Office of Chief Counsel responded to a trust's appeal regarding a refund request involving a charitable distribution deduction that had been denied and concluded that Code Sec. 642(c)(1) requires that a charitable distribution must be made pursuant to the terms of a trust's governing instrument, and a court order modifying a will in the absence of a controversy involving the interpretation of the instrument is not "pursuant to the terms of the governing instrument." The Chief Counsel's Office thus rejected the trust's refund request, as well as its argument that the decisions in Crown Income Charitable Fund v. Comm'r, 8 F.3d 571 (7th Cir. 1993), and Brownstone v. U.S., 465 F.3d 525 (2d Cir. 2006), did not support a narrow interpretation of Code Sec. 642(c)(1).

Exclusions from Gross Income

Chinese Professor Not Exempt from U.S. Tax under U.S. - China Treaty: In Ye v. Comm'r, T.C. Memo. 2017-216, the Tax Court held that wages earned by an assistant professor, who was a Chinese citizen and a U.S. resident, were not exempt from U.S. tax under article 19 of the U.S. - China treaty since that provision only applies to persons who are temporarily present in the United States. The court rejected her argument that, at the time she filed the applicable tax returns, she was only "temporarily present" in the United States because a variety of contingencies could have resulted in her returning to China.

Gross Income

Employer's Purchase of Life Insurance Policy on Taxpayer Results in Imputed Income to Taxpayer: In Ramsay v. Comm'r, T.C. Memo. 2017-223, the Tax Court held that a taxpayer's taxable income included imputed income of $891 as a result of a former employer's purchase of a life insurance policy on the taxpayer. The court also held that it had jurisdiction to determine the taxpayer's liability for interest on the deficiency that resulted from not including the $891 in taxable income.

IRS Provides Guidance on Employer-Leave Based Donation Program for Wildfire Victims: In Notice 2017-70, the IRS advised that it will not assert that cash payments an employer makes to Code Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of the 2017 California Wildfires; and (2) paid to the Code Sec. 170(c) organizations before January 1, 2019. Similarly, the IRS said that it will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees, but noted that electing employees may not claim a charitable contribution deduction under Code Sec. 170 with respect to the value of forgone leave excluded from compensation and wages.

International

IRS Issues Hurricane Guidance Relating to Certain CFC Obligations Held by U.S. Persons: In Notice 2017-68, the IRS announced that, for purposes of Code Sec. 956, if a controlled foreign corporation (CFC) holds an obligation of a U.S. person, such obligation will be considered to satisfy the requirements of Code Sec. 956(c)(2)(C) and Reg. Sec. 1.956-2(b)(1)(v) to be excluded from U.S. property, if (1) the obligation was received in exchange for property that, if transported to the United States for temporary storage for safekeeping in anticipation of, or as a result of, Hurricane Irma or Hurricane Maria, would not cause a CFC to be treated as holding U.S. property pursuant to Notice 2017-55, and (2) the obligation ceases to be outstanding on or before March 31, 2018. An obligation of a U.S. person that does not meet the conditions in the preceding sentence may nevertheless be excludable from U.S. property under Code Sec. 956(c)(2)(C) and Reg. Sec. 1.956-2(b)(1)(v) depending on all of the facts and circumstances.

No Foreign Tax Credit Allowed Where Investment Is Treated as Debt, Not Equity: In Hewlett-Packard Company and Subs v. Comm'r, 2017 PTC 509 (9th Cir. 2017), the Ninth Circuit affirmed the Tax Court's holding that an investment by the taxpayer could not be treated as equity for which the taxpayer could claim foreign tax credits. While acknowledging a circuit split on the issue of whether the debt versus equity question is one of law, fact, or a mix of the two, the Ninth Circuit explained that the best way to read circuit precedent was that the test is "primarily directed" at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like, taking into account eleven factors set forth in A.R. Lantz Co. v. U.S., 424 F.2d 1330 (9th Cir. 1970).

Penalties

Ninth Circuit Upholds Sanctions on Attorney for Advancing Frivolous Positions: In MacPherson v. Comm'r, 2017 PTC 513 (9th Cir. 2017), the Ninth Circuit held that the Tax Court did not abuse its discretion in ordering an attorney to pay excess costs pursuant to Code Sec. 6673(a)(2) because he had counseled his taxpayer clients to maintain frivolous positions. The court found that, on behalf of his clients, the attorney had advanced a position contrary to established law and unsupported by fact and that he knew his position would be unsuccessful.

Late Filing Penalties Apply Even Where Return Shows a Refund: In Parekh v. Comm'r, T.C. Memo. 2017-227, the Tax Court held that a couple, who was owed a tax refund, was liable for late filing penalties because they did not establish a reasonable cause for filing their tax return 15 months late. The court noted that the couple had a history of filing their income tax returns late and seemed to believe that the filing deadlines were not important when they were expecting a refund.

Procedure

Letter from SSA Demonstrated Legitimate Question as to Whether Tax Liability Had Been Satisfied: In Gage v. U.S., 2017 PTC 523 (9th Cir. 2017), the Ninth Circuit reversed a district court's judgment that the IRS could, under Code Sec. 6334(e)(1), levy on a couple's principal residence for nonpayment of taxes. The court concluded that the receipt by a couple of a notice from the Social Security Administration informing the wife that the IRS would no longer take money out of her monthly social security payment because she no longer owed the IRS any money raised a genuine issue of material fact as to whether the underlying tax liability had been satisfied.

Corporation Can't Get Refund of Excise Tax Paid by Customers: In Worldwide Equipment of TN, Inc. v. U.S., 2017 PTC 521 (6th Cir. 2017), the Sixth Circuit affirmed a district court's dismissal of a corporation's refund claim because the requirement under Code Sec. 6416(a) that the corporation show that it made arrangements to avoid double payments by submitting written customer consent forms had not been met. The corporation had remitted a 12 percent federal excise tax collected from purchasers of its heavy duty trucks, and sought a refund from the IRS because, it claimed, the trucks qualified as exempted, "off-highway" vehicles under Code Sec. 7701(a)(48).

Sign Language Interpreters Aren't Required to Sign Non-disclosure Agreement: In CCA 201746025, the Office of Chief Counsel advised that a contract under which sign language interpreters operate, which holds them to all the criminal and civil penalties that apply to the unauthorized disclosure of tax data, was sufficient assurance to taxpayers that their confidential tax data is being adequately protected. According to the Chief Counsel's Office, there is no basis for an interpreter to be required to sign a non-disclosure agreement furnished by a taxpayer.

Court Affirms Conviction of Brothers Who Owned Strip Club Business That Kept Two Sets of Books: In U.S. v. Kiraz, 2017 PTC 499 (9th Cir. 2017), the Ninth Circuit affirmed the conviction of two brothers who engaged in a scheme to underreport a family-run strip-club business' income by failing to report door fees, which were charged for customer entry, and house fees, which were charged for working as a dancer. The court noted that the jury heard evidence that one of the brothers participated in a scheme to maintain two sets of books and that the other brother knowingly aided in that scheme.

Retirement Plans

No Deduction Allowed for UBTI Losses Sustained by Partnerships Held in Individual's IRAs: In Fish v. Comm'r, 2017 PTC 478 (2017), the Ninth Circuit affirmed the Tax Court and held that a taxpayer could not deduct on his personal return unrelated business taxable income (UBTI) losses sustained by two partnerships held in an individual retirement account (IRA). The court noted that, while IRAs are generally tax-exempt, they are subject to the taxes imposed by Code Sec. 511 on the UBTI of organizations in which they invest and there is no provision for the pass-through of UBTI losses to an IRA beneficiary's personal tax return.

IRS Provides Relief for Victims of Hurricane Maria and California Wildfires: In Announcement 2017-15, the IRS is providing relief to victims of Hurricane Maria and the recent California wildfires, which caused damage to Puerto Rico, the U.S. Virgin Islands, and parts of California. It permits easier access to funds held in workplace retirement plans and in individual retirement accounts, for the period beginning September or October 2017 and ending March 15, 2018.

IRS Provides Covered Compensation Tables for 2018 Plan Year: In Rev. Rul. 2017-22, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2018 plan year. For purposes of determining covered compensation for the 2018 year, the taxable wage base is $128,700.

Tax Accounting

Company Can Reduce Income Where It Did Not Meet All-Events Test for Accruing Income: In VHC, Inc. and Subsidiaries v. Comm'r, T.C. Memo. 2017-220, the Tax Court held that a corporation did not meet the all-events test for accruing income with respect to a particular client and thus could reduce its income by the amount previously accrued. The court found that the all-events test was not satisfied because the client had initiated a lawsuit contesting the amount it owed.

Tax Return Preparers

CPA Liable for Penalties for Understating Clients' Tax Liabilities: In John Q. Rodgers v. U.S., 2017 PTC 507 (C.D. Calif. 2017), a district court held that a CPA, who operated a tax preparation business, was liable for penalties under Code Sec. 6694 for willful or reckless understatements of liability on nine tax returns he prepared. The court agreed with the IRS that because the CPA did not make reasonable inquiries in situations in which the situations required him to do so, his conduct satisfied the requirements for the assessment of penalties.

 

October 2017

Accounting

Section 2704 Regs Withdrawn; IRS Priority Guidance Lists More Regs on the Chopping Block: The IRS has withdrawn controversial regulations issued under Code Sec. 2704 which would have imposed major restrictions on valuation discount planning with respect to intra-family transfers of family owned businesses. The IRS also issued its annual list of projects that it hopes to complete during the 12-month period from July 1, 2017, through June 30, 2018. Unlike in prior years, the list includes regulations which the IRS says it may remove or update because they impose excessive burdens on taxpayers or fail to provide clarity and useful guidance. 82 FR 48013 (10/16/17); IRS 2017-2018 Priority Guidance Plan. Read More...

Disaster Tax Relief Becomes Law; Provides Enhanced Casualty Loss Deductions and Other Tax Breaks to Hurricane Victims: Last week, the President signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act), providing multiple tax relief measures to victims of Hurricanes Harvey, Irma, and Maria. In addition to increasing the amount of deductions for personal casualty losses and making the deduction available to taxpayers who take the standard deduction, the Act also provides for employment-related tax credits, relaxes retirement plan rules, suspends limitations on charitable contributions, and makes it easier for taxpayers to meet income requirements for the earned income tax credit and the child tax credit. H.R. 3823. Read More...

Updated Hurricane Tax Relief Letters:
CPA Client Letter: Maria Disaster Tax Relief. Updated 10/2017
CPA Client Letter: Harvey Disaster Tax Relief. Updated 10/2017
CPA Client Letter: Irma Disaster Tax Relief. Updated 10/2017

In-Depth Article: GOP Releases Tax Reform Blueprint On September 27, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a nine-page framework for overhauling the tax code ("the framework"). The framework calls for: (1) modest cuts in individual tax rates, to be offset by the elimination of most itemized deductions, (2) repeal of the estate and generation skipping transfer taxes, (3) a maximum 25 percent tax rate on pass-through business income, and (4) a sharp cut in the top corporate tax rate to 20 percent, to be partially offset by elimination of corporate tax preferences. GOP Tax Framework. Read More...

IRS Issues October 2017 AFRs: In Rev. Rul. 2017-20, the IRS issued the applicable federal rates for October 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate, and are determined as prescribed by Code Sec. 1274.

Bankruptcy

IRS Too Late to Contest Bankruptcy Plan That Reduced Debtor's Tax Debt: In U.S. v. Brothers Materials Ltd, 2017 PTC 491 (S. D. Tex. 2017), a district court affirmed the judgment of a bankruptcy court which confirmed a debtor's Chapter 11 Bankruptcy Plan, which limited the amount the IRS could receive on a tax debt which it said the taxpayer owed. The court noted that the IRS did not object to the debtor's bankruptcy plan or directly appeal the confirmation order and that the time to make such a challenge had long since passed.

Debtor's Tax Liability as a Result of Fraudulent Transfers Isn't a Priority Claim: In In re Kardash, 2017 PTC 434 (M.D. Fla. 2017), a bankruptcy court granted summary judgment to a former minority shareholder and employee of a now-defunct company that owed more than $120 million in taxes and whose two controlling shareholders had siphoned substantially all of the cash out of the company and caused it to go bankrupt. The district court agreed with the debtor that his tax liability from a Tax Court judgment, as the result of his having received about $4.3 million of fraudulent transfers from the company, was not entitled to priority status because the liability arose under state fraudulent transfer law.

Capital Gains

Eleventh Circuit Affirms Tax Court: Sale of Media Company Lacked Valid Business Purpose: The Eleventh Circuit affirmed a Tax Court decision that former shareholders of a media company were liable as transferees for unpaid taxes on gains from the sale of the company's assets through a complex multistep transaction involving an intermediary and several other entities. The Eleventh Circuit concluded that the Tax Court correctly applied federal tax principles of substance over form in determining that the taxpayers were liable under state law for a fraudulent transfer. Shockley v. Comm'r, 2017 PTC 446 (11th Cir. 2017). Read More...

Credits

Volume Cap Available for Issuance of New Clean Renewable Energy Bonds: In Notice 2017-66, the IRS identified $379,549,691 of volume cap to be available for reallocation to public power providers (as defined in Code Sec. 54C(d)(2)) for authority to issue new clean renewable energy bonds under Code Sec. 54C for projects to be owned by public power providers. Interested public power providers must submit an application pursuant to the application requirements set forth in Notice 2017-66, including the deadline for submitting the application.

LB&I Directive Allows Credit for Increasing Research Activities If Certain Conditions Met: In LB&I Directive 04-0917-005, the IRS issued guidance on the credit for increasing research activities under Code Sec. 41 for taxpayers that expense research and development costs on their financial statements pursuant to Accounting Standards Codification (ASC) 730. The directive only applies to Large Business & International (LB&I) taxpayers (i.e. assets equal to or greater than $10 million) who follow U.S. GAAP to prepare their Certified Audited Financial Statements.

Couple's Tax Refund Decreased for Premium Assistance Payments Made on Dependent's Behalf: In Gibson v. Comm'r, T.C. Memo. 2017-187, the Tax Court held that advance payments of premium assistance tax credits were made on behalf of a couple's dependent son despite the son's assertions to the contrary. As a result, because the couple's income level made them ineligible for the premium assistance tax credit, their tax for the year at issue was increased and their tax refund correspondingly decreased.

Deductions

Failure to Subordinate Mortgages Precludes Conservation Easement Deduction: The Tax Court held that the grant of a facade easement by the owner of a building was not a qualified conservation contribution because the mortgages on the building were not properly subordinated to the donee's right to enforce the conservation purposes of the easement. In finding for the IRS, the Tax Court declined to follow the First Circuit's decision in Kaufman v. Shulman, 2012 PTC 204 (1st Cir. 2012), which held that a mortgagee's priority claim to extinguishment proceeds did not cause a conservation contribution to fail to qualify as such under Code Sec. 170(h). Palmolive Building Investors, LLC v. Comm'r, 149 T.C. No. 18 (2017). Read More...

Taxpayer's Travel Expenses Were Incurred While Away from Home: In Barrett v. Comm'r, T.C. Memo. 2017-19, the Tax Court held that Las Vegas was the tax home of a video producer, who lived in Las Vegas but traveled to Washington, D.C. to perform services for a client, and thus the producer was entitled to deduct travel expenses incurred while away from his tax home. However, because the taxpayer did not properly substantiate many of his expenses, he was limited to deducting those expenses the IRS had already allowed and was also subject to penalties for failing to substantiate many of the deductions taken on his return.

Uncle Gets Dependent Deduction and Child-Related Credits; Education Credit Reduced: In Ochoa v. Comm'r, T.C. Summary 2017-78, the Tax Court held that a taxpayer could take a dependency exemption deduction and a child and earned income tax credit with respect to his nephew, and could also file as head of household. However, the court also stated that, while the taxpayer was entitled to an education credit for the year at issue, he could not include expenses for tools used in a weekly workshop in calculating the credit because such expenses did not constitute fees paid to an eligible education institution.

Taxpayer Can't Deduct Costs to Commute to Construction Site: In Tiller v. Comm'r, T.C. Summary 2017-76, the Tax Court held that a taxpayer could not deduct vehicle expenses attributable to the daily round trip mileage between his employer's office and his normal construction job worksite because such expenses were nondeductible commuting expenses. However, after considering the taxpayer's lack of sophistication regarding tax matters, the complexity of the tax laws governing commuting expenses, and the fact that the taxpayer had lost his original mileage logs, the court found that the taxpayer had shown reasonable cause and that he acted in good faith with respect to the portions of the underpayments attributable to the disallowed commuting expenses and thus was not liable for the related penalties.

Disaster Relief

IRS Explains Income and Employment Tax Treatment of Disaster-Related Leave Based Donations: In Notice 2017-62, the IRS provides income and employment tax guidance on the treatment of cash payments made by employers under leave-based donation programs for the relief of victims of Hurricane and Tropical Storm Maria. According to the IRS, it will not assert that cash payments an employer makes to Code Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of Hurricane and Tropical Storm Maria; and (2) paid to the Code Sec. 170(c) organizations before January 1, 2019.

Low-Income Housing Units May Be Offered to Hurricane Victims: In IR-2017-165, the IRS announced that it is providing temporary relief from certain requirements of the Internal Revenue Code to allow owners and operators of low-income housing projects located anywhere in the United States and its possessions to provide temporary emergency housing to individuals who are displaced by a major disaster from their principal residences, regardless of income. This special relief, which is detailed in Rev. Proc. 2014-49 and Rev. Proc. 2014-50 authorizes owners and operators, in conjunction with agencies and issuers, to disregard the income limits, transience rules and certain other restrictions that normally apply to low-income housing units when providing temporary emergency housing to displaced individuals.

IRS Provides Limited Waiver of Fuel Penalty Due to Hurricane Irma: In IR-2017-157, the IRS announced that it will not impose a penalty on certain uses of certain adulterated fuels that do not comply with applicable Environmental Protection Agency regulations, in response to shortages of ultra-low sulfur diesel fuel caused by Hurricane Irma. This relief is effective from September 13, through September 22, 2017, or until such dyed diesel reserves are exhausted, whichever is earlier.

Fuel Penalty Waiver Extended for Fuel Sold or Used on Florida Highways: In IR-2017-159, in response to continued shortages of undyed diesel fuel caused by Hurricane Irma, the IRS extended its waiver of penalties for dyed diesel fuel when such fuel is sold for use or used on the highway in the state of Florida. The extension is effective from September 6, through October 6, 2017.

Employee Benefits

Monthly Guidance on Corporate Bond Yield Issued: In Notice 2017-63, 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).

Static Mortality Tables for Defined Benefit Pension Plans Issued: In Notice 2017-60, the IRS issued the mortality table to be used for purposes of determining minimum present value under Code Sec. 417(e)(3) and Section 205(g)(3) of the Employee Retirement Income Security Act of 1974 for distributions with annuity starting dates that occur during stability periods beginning in the 2018 calendar year. The mortality table is a modified unisex version of the mortality tables specified under Sec. 430(h)(3)(A), which have been revised pursuant to Sec. 430(h)(3)(B) for plan years beginning in 2018.

IRS Issues Procedure for Requesting Approval to Use Plan-Specific Mortality Tables: In Rev. Proc. 2017-55, the IRS issued procedures by which the sponsor of a defined benefit plan that is subject to the funding requirements of Sec. 430 may request approval from the IRS for the use of plan-specific substitute mortality tables in accordance with Code Sec. 430(h)(3)(C) and Reg. Sec. 1.430(h)(3)-2. The procedure is an update of Rev. Proc. 2008-62, which was issued in conjunction with final regulations under Code Sec. 430(h)(3)(C) that were published on October 6, 2008.

IRS Provides Automatic Approval for Certain Funding Method Changes: In Rev. Proc. 2017-56, the IRS updates Rev. Proc. 2000-40 to take into account the provisions of Code Sec. 430, which was enacted as part of the Pension Protection Act of 2006. The revenue procedure provides automatic approval for certain changes in funding method used for single-employer defined benefit plans for calculations described under Code Sec. 430.

IRS Issues Procedures for Requesting Approval for a Change in Funding Method: In Rev. Proc. 2017-57, the IRS updates Rev. Proc. 2000-41 to take into account the enactment of subsequent legislation. The revenue procedure sets forth the procedure for obtaining IRS approval for a change in the funding method used for a defined benefit plan and also sets forth the procedure for obtaining approval of the IRS to revoke an election relating to interest rates pursuant to Code Sec. 430(h)(2)(D)(ii) or Code Sec. 430(h)(2)(E) and the corresponding sections of ERISA.

Employment Taxes

Social Security Administration Announces 2018 Social Security Wage Base: The Social Security Administration has announced that the maximum wage base for the OASDI (social security) portion of FICA and the Self-Employment Tax for 2018 is $128,700, an increase of $1,500 over last year's amount.

University's Medical Residents Are Subject to FICA: In University of Utah v. U.S., 2017 PTC 433 (D. Utah 2017), a district court granted summary judgment to the government and denied a university's request for a refund of Federal Income Contributions Act (FICA) taxes with respect to certain medical residents. In siding with the government, the court rejected the university's claims that the medical residents are exempt from FICA tax because they are "students" under an agreement between the State of Utah and the Commissioner of Social Security.

Excise Taxes

IRS Grants Temporary Relief Regarding Tax on Undyed Diesel Fuel Removed From Milwaukee Terminals: In Notice 2017-59, the IRS provides rules that claimants seeking a refund for certain fuel excise taxes must follow to submit a refund claim pursuant to temporary relief provided in Notice 2017-30. A claimant may submit a refund claim for the Code Sec. 4081(a)(1) tax imposed on undyed diesel fuel and kerosene for fuel that is (1) removed from a Milwaukee terminal; (2) entered into a Green Bay terminal within 24 hours of removal from that Milwaukee terminal; and (3) subsequently dyed and removed from that Green Bay terminal.

Exclusions from Gross Income

Provision Excluding Clergy Housing Allowance from Income Is Unconstitutional: In Gaylor v. Mnuchin, 2017 PTC 470 (W.D. Wisc. 2017), a district court held that Code Sec. 107(2), which provides that a minister of the gospel can exclude a housing allowance from gross income, is unconstitutional because its purpose and effect is to provide financial assistance to one group of religious employees without any consideration for secular employees who are similarly situated to ministers. Thus, the court concluded that Code Sec. 107(2) violates the establishment clause of the First Amendment.

Foreign

FinCEN Provides FBAR Relief to California Wildfire Victims: In a Notice issued October 19, 2017, FinCEN announced that California wildfire victims in affected areas of California have until January 31, 018, to file their Report of Foreign Bank and Financial Accounts (FBAR) report for the 2016 calendar year. The FBAR for calendar year 2016 would otherwise have been due October 15, 2017.

CEO Did Not Willfully Fail to File Accurate FBAR by Reporting Only One of Two Swiss Bank Accounts: A district court held that an individual who had two Swiss bank accounts and failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to one of them was not liable for the penalty for willful failure to file an FBAR under 31 U.S.C. Section 5321. The court defined willfulness for purposes of the FBAR penalty as a knowing or reckless violation of the statute and concluded that the taxpayer's conduct did not rise to the level of egregiousness that was found in other cases where the FBAR violation was found to be willful. Bedrosian v. U.S., 2017 PTC 431 (E.D. Pa. 2017). Read More...

Canadian Citizen's Unemployment Compensation Not Exempt under Tax Treaty: The Tax Court held that a Canadian citizen who worked in the United States and later collected U.S. unemployment compensation was not exempt from U.S. income tax on the unemployment compensation under the tax treaty between the Canada and the United States. The Tax Court found that the compensation did not fall under the treaty exemption for salary, wages or other remuneration derived from employment and was taxable in the United States because it arose there. Guo v. Comm'r, 149 T.C. No. 14 (2017). Read More...

IRS Intends to Amend Sec. 987 Regulations: In Notice 2017-57, the IRS announced its intention to amend the regulations under Code Sec. 987 to defer the applicability date of the final regulations under Code Sec. 987. The final regulations under Code Sec. 987 were identified in Notice 2017-38 as significant tax regulations requiring additional review pursuant to Executive Order 13789.

IRS Gives Hurricane Relief to Certain Controlled Foreign Corporation Moving Property to U.S.: In Notice 2017-55, the IRS advised that, in response to the damage caused by Hurricane Irma and Hurricane Maria, including in the Commonwealth of Puerto Rico and the U.S. Virgin Islands, certain controlled foreign corporations (CFCs) may need to transport Code Sec. 1221(a)(1) property located in affected areas to the United States for safekeeping. As a result, the notice provides relief for such property that would otherwise constitute United States property and be subject to unfavorable tax rules in Code Sec. 956.

Corporation Can't Deduct Foreign Taxes Paid in Connection with STARS Transaction: In Wells Fargo & Co. v. U.S., 2017 PTC 429 (D. Minn. 2017), a district court held that, under the sham-transaction doctrine, a corporation could not deduct foreign taxes that it paid in connection with a Structured Trust Advantaged Repackaged Securities (STARS) transaction. The court had previously denied the corporation a foreign tax credit for such taxes.

IRS Delays Start Date for U.S. Financial Institutions to Collect Foreign TINs: In Notice 2017-46, the IRS provides guidance for financial institutions required to collect taxpayer identification numbers (TINs) and dates of birth under temporary regulations or a Model 1 Intergovernmental Agreement (IGA). With respect to U.S. financial institutions, the notice delays the start date of the requirement to collect foreign TINs for account holders to January 1, 2018, provides a phase-in period for obtaining foreign TINs from account holders documented before January 1, 2018, and narrows the circumstances in which a foreign TIN is required.

Healthcare

IRS Will Reject Tax Returns Which Don't Address Healthcare Coverage: In the ACA Information Center for Tax Professionals on IRS.gov, the IRS announced that for the upcoming 2018 filing season, it will not accept electronically filed tax returns, and may delay the processing of paper returns, where the taxpayer does not address the health coverage requirements of the Affordable Care Act (ACA).In accordance with the requirements of the ACA, and to avoid refund and processing delays when filing 2017 tax returns in 2018, taxpayers should indicate whether they and everyone on their return had coverage, qualified for an exemption from the coverage requirement or are making an individual shared responsibility payment.

IRS Expands Exemptions from Mandate to Provide Contraceptive Coverage: In T.D. 9828 and T.D. 9827, the IRS issued final regulations, effective on October 6, 2017, which expand exemptions for certain entities and individuals, whose health plans are subject to a mandate of contraceptive coverage through the Patient Protection and Affordable Care Act, to deny such coverage where they have a religious or moral objection to providing such coverage. According to the preamble, the regulations (1) do not alter the discretion of the Health Resources and Services Administration, a component of the United States Department of Health and Human Services, to maintain the guidelines requiring contraceptive coverage where no regulatory recognized objection exists; (2) provide certain morally objecting entities access to the voluntary "accommodation" process regarding such coverage; and do not alter multiple other federal programs that provide free or subsidized contraceptives for women at risk of unintended pregnancy.

IRS Issues Adjusted Applicable Dollar Amounts for Purposes of Fee Imposed by Secs. 4375 and 4376: In Notice 2017-61, the IRS provides the adjusted applicable dollar amount to be multiplied by the average number of covered lives for purposes of the fee imposed by Code Sec. 4375 and Code Sec. 4376 for policy years and plan years that end on or after October 1, 2017, and before October 1, 2018. Code Sec. 4375 imposes a fee on the issuer of a specified health insurance policy for each policy year ending after September 30, 2012, and before October 1, 2019, while Code Sec. 4376 imposes a fee on the plan sponsor of an applicable self-insured health plan for each plan year ending after September 30, 2012, and before October 1, 2019.

Senate Shelves Graham-Cassidy Healthcare Bill: After Senator Susan Collins (R-Maine) said she would vote "no" on the Graham-Cassidy healthcare bill, which would repeal Obamacare, Senate leaders admitted that they did not have the votes to pass the legislation and have put it aside for the time being. However, Senator Mitch McConnell (R-Ky) also announced that Republicans have not given up on repealing Obamacare, but for now, will move on to overhauling the tax code.

Individuals

Relationship with Boyfriend Doesn't Entitle Taxpayer to Tax Benefits for His Grandchildren: In Sharp v. Comm'r, T.C. Memo. 2017-208, the Tax Court held that the two biological grandchildren of a taxpayer's live-in boyfriend were not qualifying children with respect to the taxpayer for purposes of (1) taking a dependency deduction; (2) taking the earned income credit; (3) taking a child tax credit; and (4) using the head-of-household filing status. The court rejected the taxpayer's argument that her boyfriend was her common law husband and, thus, his son was her stepson and each of his two children satisfied the necessary relationship requirement entitling the taxpayer to the tax benefits relating to those children.

Involuntary Conversions

Drought-Stricken Farmers and Ranchers Have More Time to Replace Livestock: In Notice 2017-53, the IRS has extended the replacement period under Code Sec. 1033(e) for livestock sold on account of drought in specified U.S. counties. The IRS lists the counties for which exceptional, extreme, or severe drought was reported during the 12-month period ending August 31, 2017.

Partnerships

Only General Partner or Member-Manager Can Be a Tax Matters Partner: In CCA 201742025, the Office of Chief Counsel cited Reg. Sec. 301.6231(a)(7)-1(b)(1) in advising that, to be a tax matters partner (TMP), a person has to be a general partner at some time during the tax year for which the designation is made or a general partner at the time the designation is made. According to the Chief Counsel's Office, for purposes of a limited liability company, a general partner is a member-manager and, thus, the member would need to be a manager either at some point during the tax year at issue or at the time the designation is made.

IRS Prop. Reg. Removes Signature Requirement for Sec. 754 Elections: In REG-116256-17 (10/12/17), the IRS issued Prop. Reg. Sec. 1.754-1(b)(1), which taxpayers may rely on immediately, which removes the signature requirement in Reg. Sec. 1.754-1(b)(1) for making a Code Sec. 754 election. The change is the result of the IRS receiving numerous requests for 9100 relief with respect to unsigned Code Sec. 754 election statements, especially where returns have been filed electronically.

Penalties

IRS Cannot Add Interest and Penalties to Criminal Restitution Award: The Tax Court, in a case of first impression, held that the IRS may not assess and collect interest and penalties on a restitution award in a criminal conviction for failure to pay tax. The Tax Court found that restitution is treated as if it were a tax, but only for the limited purpose of allowing the IRS to create an account receivable against which the restitution can be credited. Klein v. Comm'r, 149 T.C. No. 15 (2017). Read More...

Procedure

Taxpayer Gets New Trial After Lower Court Judge Conveyed Guilt of Taxpayer to Jury: In U.S. v. El-Bey, 2017 PTC 485 (7th Cir. 2017), the Seventh Circuit granted a new trial to a taxpayer who had been convicted of mail fraud and making false claims to the IRS after seeking $1.8 million in tax refunds to which he was not entitled and receiving $600,000 from the IRS which he used to buy a house and numerous cars. The court found that statements by the lower court in the presence of the jury conveyed that the taxpayer was guilty or dishonest and impaired the taxpayer's credibility in the eyes of the jury.

Failure to Allow Notice and Comment Period Invalidates Reg on Inversion Transactions: A district court held that the issuance of Reg. Sec. 1.7874-8T violated the Administrative Procedures Act (APA) because the IRS and the Treasury Department did not follow the notice-and-comment procedure required by the APA when they issued the regulation. Because the regulation was unlawfully issued, the court set aside the regulation. Chamber of Commerce v. I.R.S., 2017 PTC 456, 2017 PTC 455 (W.D. Tex. 2017). Read More...

IRS Introduces Pilot Program for Certain Sec. 355 Ruling Requests: In Rev. Proc. 2017-52, the IRS (1) introduces an 18-month pilot program expanding the scope of letter rulings available from the IRS to include for a period of time rulings on the tax consequences of a distribution of stock, or stock and securities, of a controlled corporation under Code Sec. 355; (2) provides procedures for taxpayers requesting these rulings; and (3) clarifies procedures for taxpayers requesting rulings on significant issues relating to these transactions. The revenue procedure applies to all ruling requests postmarked or, if not mailed, received by the IRS after September 21, 2017.

Tax Reform

Budget Approved by House and Senate Clears Way for Possible Tax Reform: On October 25, the House voted 216 to 212 to approve a budget resolution that had passed the Senate the week before (51 to 49). The resolution paves the way for tax reform by making it possible for tax legislation to pass the Senate with a simple majority (as opposed to the normal 60 vote supermajority required to avoid a filibuster). Kevin Brady (R-TX), Chairman of the House Ways and Means Committee has said that he plans to release the text of his proposed tax bill on November 1.

Treasury Department Hints at Possible Repeal of More Than 200 Regulations: On October 4, 2017, the Treasury Department released a report on planned upcoming actions that it believes will reduce the burden imposed by eight tax regulations identified earlier this year (see PFTB 2017-07-11). The Treasury Department also announced that it is continuing to work to identify additional regulations for modification or repeal by evaluating significant regulations issued recently and initiating a comprehensive review of all regulations, regardless of when they were issued. According to the report, this comprehensive review has already identified over 200 regulations that the Treasury Department believes should be repealed, beginning in the fourth quarter of 2017.

Tax-Exempt Organizations

Interest Runs From Date Corporate Return Was Due, Not Date Exempt Status Was Revoked: In Creditguard of America, Inc. v. Comm'r, 149 T.C. No. 17 (2017), the Tax Court, in an issue of first impression, held that the revocation of an entity's tax-exempt status required restoring the IRS to the position it would have occupied if the entity had never enjoyed tax-exempt status during the year at issue. As a result, the entity was liable for interest beginning on the date its corporate tax return would have been due and not, as the entity had argued, the date on which the IRS issued the final determination revoking the entity's tax-exempt status.

Transferee Liability

Transferee Liability Case Can't be Dismissed Until Amount of Liability Is Agreed Upon: In Schussel v. Comm'r, 149 T.C. No. 16 (2017), the Tax Court held that, because a taxpayer's liability as a transferee was assessed, paid, and collected in the same manner and subject to the same provisions and limitations as a deficiency in tax, a dismissal of a petition for redetermination of transferee liability, just like a dismissal of a petition for redetermination of a deficiency, for any reason other than lack of jurisdiction, requires that the court enter a decision as to the amount of the liability. In so holding, the court cited its decision in Est. of Ming v. Comm'r, 62 T.C. 519 (1974), and ordered the taxpayer and the IRS to submit an agreed stipulated decision document.

Tax Return Preparers

IRS Reminds Preparers and Enrolled Agents to Apply for PTINs by December 31, 2017: In IR-2017-180, the IRS reminded the nation's more than 727,000 federal tax return preparers, as well as all enrolled agents regardless of whether they prepare returns, that they must renew their Preparer Tax Identification Numbers (PTINs) for 2018 before the end of the year because all current PTINs will expire December 31, 2017. There is no fee for obtaining or renewing a PTIN and individuals can either (1) register online at irs.gov/ptin; or (2) file a paper Form W-12, IRS Paid Preparer Tax Identification Number Application and Renewal, which is available for paper applications and renewals, and takes four to six weeks to process.

Tenth Circuit Dismisses Challenge to IRS's AFSP Program: In Rivera v. IRS, 2017 PTC 426 (10th Cir. 2017), the Tenth Circuit affirmed a district court's dismissal of a tax preparation firm's class-action complaint against the IRS challenging its voluntary Annual Filing Season Program (AFSP) and the IRS's investigation of the firm and audits of tax returns prepared by the firm. According to the court, the firm did not have standing to pursue its challenge of the AFSP.

 

September 2017

Accounting

CPA Sample Client Letter: Harvey Disaster Tax Relief: Dear Client, As our community works to recover from Hurricane Harvey, I’m writing to make you aware of several tax relief measures announced by the Internal Revenue Service (IRS) in response to the disaster. Read More...

CPA Sample Client Letter: Irma Disaster Tax Relief: Dear Client, As our community works to recover from Hurricane Irma, I’m writing to make you aware of several tax relief measures announced by the Internal Revenue Service (IRS) in response to the disaster. Read More...

IRS Provides Safe Harbor for Accounting Practice Used by Regulated Utilities: In Rev. Proc. 2017-47, the IRS provides a safe harbor concerning inadvertent or unintentional uses of a practice or procedure that is inconsistent with Code Sec. 50(d)(2) and Code Sec. 168(i)(9), which require regulated utilities to use the Normalization Rules. If the safe harbor applies, the IRS will not assert that a taxpayer's inadvertent or unintentional use of a practice or procedure that is inconsistent with Code Sec. 50(d)(2) and Code Sec. 168(i)(9) constitutes a violation of the Normalization Rules.

IRS Issues September 2017 AFRs: In Rev. Rul. 2017-17, the IRS issued the applicable federal rates for September 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Credits

IRS Publishes Reference Price and Credit Amount for Determining Section 45I Credit: In Notice 2017-51, the IRS provides the applicable reference price for qualified natural gas production from qualified marginal wells during tax years beginning in calendar year 2016 for the purpose of determining the marginal well production credit (MWC) under Code Sec. 45I. The notice also provides the credit amount used for purposes of determining the MWC for tax years beginning in calendar year 2016.

Deductions

Big Game Hunter Limited to Using Comparable Sales Valuation Method to Value Trophy Donations: In Gardner v. Comm'r, T.C. Memo. 2017-165, the Tax Court held that a big game hunter had to use the comparable sales method to calculate his charitable donation deduction for the contribution of his less desirable hunting trophy specimens to an ecological foundation. The court rejected the taxpayer's theory that replacement cost was more appropriate because the items he donated were pristine specimens of excellent provenance that would be ideal for museum study and research.

Court Finds Enough Evidence to Estimate Coin Collector's Cost of Goods Sold: In Mileham v. Comm'r, T.C. Memo. 2017-168, the Tax Court held that a taxpayer, who bought and sold coins and also participated in exchange transactions for which he prepared handwritten split invoices showing both purchases and sales, did not substantiate his costs of goods sold and did not maintain adequate books and records. However, while the IRS determined the taxpayer's costs of goods sold by effectively disregarding purchases made through the exchange transactions, the court found that there was sufficient evidence to estimate the taxpayer's costs of goods sold by using his markup over cost.

Retired Officer Can't Deduct Losses from Collecting and Selling Law Enforcement Badges: In Grago v. Comm'r, T.C. Summary 2017-67, the Tax Court held that a retired law enforcement officer, who engaged in the activity of collecting and selling law enforcement patches and badges, was not engaged in a trade or business activity during the year at issue because he did not conduct the activity in a businesslike manner and did not engage in the activity with the requisite profit objective. Thus, he was not entitled to deduct losses from the activity for tax purposes.

De Facto Contemporaneous Written Acknowledgment Satisfied Donation Substantiation Rules: In Big River Development, L.P., T.C. Memo. 2017-166, the Tax Court held that a partnership satisfied the substantiation requirements in Code Sec. 170(f)(8) with respect to its donation of a conservation easement and thus was entitled to a charitable deduction for the easement. While the partnership did not receive from the donee organization a timely letter of the sort that normally acts as a contemporaneous written acknowledgment (CWA), the court said that the partnership nevertheless satisfied the statutory substantiation requirements because the deed of easement constituted a de facto CWA.

Farm Owners Not Exempt from Deduction Limit for Conservation Easement Contribution: The Tax Court held that the owners of a farm were not "qualified farmers" under Code Sec. 170(b) because neither the sale of farm property nor the sale of development rights in the property were activities included in the trade or business of farming as defined by Code Sec. 2032A. The individual owners were therefore limited under Code Sec. 170(b) to a charitable contribution deduction of 50 percent of their respective contribution bases in the conveyed conservation easement. Rutkoske v. Comm'r, 149 T.C. No. 6 (2017). Read More...

C Corps

Owner of Fast Food Restaurants Can't Revise Merger Transaction After Deal Closes: In Tseytin v. Comm'r, 2017 PTC 387 (3d Cir. 2017), the Third Circuit affirmed the Tax Court and held that the owner of a number of fast food restaurants that entered into a merger deal could not restructure the transaction to obtain better tax results after the deal closed. The court cited the Danielson rule in holding that, absent proof of mistake, fraud, undue influence, duress, or the like, which would be recognizable under local law in a dispute between the parties to an agreement, a taxpayer generally will be held to the terms or form of an agreement entered into.

Deductions

District Court Denies Deductions for Losses from Bad Real Estate Deal: A district court held that a couple who invested in a real estate development that later turned out to be fraudulent were not entitled to refunds for losses sustained directly and through a partnership. According to the court, the couple did not meet the deductibility requirements provided in Rev. Proc. 2009-20, failed to show that there was no reasonable expectation of recovery in the year the losses were discovered, and did not satisfy the procedural requirements to bring a refund action for the partnership losses. Hamilton v. U.S., 2017 PTC 415 (N.D. Ind. 2017). Read More...

Losses Relating to Child's Pageant Activity Aren't Deductible: In Lopez v. Comm'r, T.C. Memo. 2017-171, the Tax Court held that a couple could not deduct losses attributable to their child's pageant activity because the prize winnings earned by the child were includible in her gross income and only she could deduct expenses related to that income. However, because the couple hired an accountant to help with their returns, they had reasonable cause and acted in good faith with respect to their deductions and, thus, were not liable for the accuracy-related penalties.

No Educational Credit Allowed for Tuition to "Canine Clippers" Trade School: In Martin v. Comm'r, T.C. Summary 2017-73, the Tax Court held that a couple was not entitled to an education credit for amounts paid for their daughter's tuition where they produced no evidence showing that the daughter (1) was enrolled in college at least half time, or (2) was enrolled at a particular college for at least one academic period. The court also said the couple failed to show, with respect to their daughter's attendance at a trade school called "Canine Clippers," that Canine Clippers was an eligible educational institution.

Scientist Failed to Meet Requirements Necessary to Deduct $8.55 Million as Partially Worthless Bad Debt: In Rutter v. Comm'r, T.C. Memo. 2017-174, the Tax Court held that the IRS did not abuse its discretion in determining that a world-renowned scientist in the field of biotechnology was not entitled to a deduction of $8.55 million for a partially worthless debt for 2009. The court concluded that, even if the taxpayer established that his advances to a company behind which he was the driving force constituted debt, and that this debt was a business debt, he did not meet the requirements in Code Sec. 166(a)(2) and Reg. Sec. 1.166-3(a)(2)(iii) for deducting a partially worthless bad debt.

Employee Benefits

IRS Provides Hurricane Relief in Connection with Certain Employee Benefit Plans: In Notice 2017-49, the IRS, the Department of Labor's Employee Benefits Security Administration (EBSA), and the Pension Benefit Guaranty Corporation (PBGC) are providing relief in connection with certain employee benefit plans because of damage caused by Hurricane Harvey and Hurricane Irma. The relief includes a relaxation of the rules for the dates by which contributions to such plans must be made.

IRS Provides Model Amendments for Certain Defined Benefit Plan Documents: In Notice 2017-44, the IRS provides model amendments that a sponsor of a qualified defined benefit plan may use to amend its plan document to offer bifurcated benefit distribution options to participants in accordance with final regulations issued under Code Sec. 417(e). The model amendments are aimed at helping stakeholders in light of the changes to the determination letter program that are set forth in Rev. Proc. 2016-37.

Temporary Nondiscrimination Relief Extended for Closed Defined Benefit Plans: In Notice 2017-45, the IRS extended the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5 by making that relief available for plan years beginning before 2019 if the conditions of Notice 2014-5 are satisfied. The IRS noted that, while proposed regulations relating to nondiscrimination requirements for closed plans were published in January of 2016, the regulations will most likely not be finalized in time for plan sponsors to make plan design decisions based on the final regulations before expiration of the relief provided under Notice 2014-5 (as last extended by Notice 2016-57) and thus it is appropriate to extend the relief provided under Notice 2014-5 for an additional year.

Estate and Gift Taxes

Tax Court: Individual's Sale of Personal Residence to Parents was Part Sale, Part Gift: The Tax Court held that an individual's sale of a personal residence to his parents, in which he discharged two mortgages but received no cash or other property, was a sale in part and a gift in part. The individual's amount realized was the amount of the liabilities discharged, and his gain was determined by subtracting from that amount his basis and settlement costs and excluding $250,000 of the gain under Code Sec. 121. Fiscalini v. Comm'r, T.C. Memo. 2017-163. Read More...

Exemptions

Native American Treaties Exempt Gravel Sales from Income Tax: In a case of first impression, a district court held that a Seneca Nation member who sold gravel removed with permission from Seneca Nation land plausibly stated a claim that the income from the sale was exempt from tax under two Native American treaties. The court noted that although exemptions generally must be clearly expressed to be valid, an exemption could be found by liberally interpreting the treaties. Perkins v. U.S., 2017 PTC 363 (W.D.N.Y. 2017). Read More...

Foreign Transactions

Sixth Circuit Rejects FATCA and FBAR Challenges by Senator Rand Paul and Others: The Sixth Circuit upheld a district court ruling that several individuals, including Senator Rand Paul (R-KY), did not have standing to sue the U.S. government to enjoin it from enforcing the Foreign Account Tax Compliance Act (FATCA), the intergovernmental agreements (IGAs) entered into with foreign governments under FATCA, and the foreign bank account reporting (FBAR) requirement under the Bank Secrecy Act. According to the court, none of the individuals had alleged an actual or imminent injury traceable to the U.S. government and redressable by the court. Crawford v. U.S., 2017 PTC 388 (6th Cir. 2017). Read More...

Gross Income

South Korean Airline Pilot Not Eligible for Foreign Earned Income Exclusion: In Acone v. Comm'r, T.C. Memo. 2017-162, the Tax Court held that a pilot who worked for a South Korean airline company was not a "qualified individual" for purposes of the foreign earned income exclusion in Code Sec. 911(a) and thus could not exclude amounts from gross income as foreign earned income. The court concluded that the taxpayer was not a "qualified individual" because his "abode" was within the United States for purposes of Code Sec. 911(d)(3) and because he was not a "bona fide resident" of South Korea for purposes of Code Sec. 911(d)(1)(A).

Healthcare

Obamacare Repeal Is Back: Senate Gears up for Final 2017 Repeal Push: Over the past two weeks, momentum has been building among Senate Republicans to make a final attempt to repeal the Affordable Care Act ("Obamacare") before the federal government's fiscal year ends on September 30 (realistically, the last day in 2017 the Senate could pass a bill on a party-line vote). The bill under consideration, Graham-Cassidy, would retain many of Obamacare's taxes and regulations, but would radically restructure its premium subsidies. Graham-Cassidy is generally considered to be the only viable Senate healthcare proposal left standing after the chamber voted down three other bills in July. Read More...

Taxpayers Had to Repay ACA Advance Premium Tax Credit Due to Increase in Income: The Tax Court held that a married couple who received a Code Sec. 36B advance premium tax credit, which was paid directly to their health insurance provider to reduce their monthly premiums, had to repay the full amount of the credit because an increase in their income made them ineligible for it. However, the Tax Court determined that a penalty for the underpayment did not apply because the couple reported their increase in income to the state insurance exchange, never received a Form 1095-A, Health Insurance Marketplace Statement, and were not the actual recipients of the payments. McGuire v. Comm'r, 149 T.C. No. 9 (2017). Read More...

National Average Premium Rates Issued for Bronze Level Health Plans: In Rev. Proc. 2017-48, the IRS provides the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges. The procedure, which is effective for tax years ending after December 31, 2016, are used by taxpayers to determine their maximum individual shared responsibility payment under Code Sec. 5000A(c)(1)(B) and Reg. Sec. 1.5000A-4.

IRS

IRS Offers Relief for Partnerships and REMICS That Missed New Return Due Dates: The IRS is providing penalty relief to partnerships and real estate mortgage investment conduits (REMICs) that filed certain untimely returns or untimely requests for extension of time to file those returns as a result of changes to tax return due dates that were made by the Surface Transportation Act of 2015. The relief is granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, 1066, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Notice 2017-47. Read More...

IRS Grants Tax Relief to Hurricane Victims; Retirement Plan Rules Relaxed: The IRS announced that Hurricane Irma victims have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments. The IRS also announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. IR-2017-150; Announcement 2017-13. Read More...

IRS Announces Tax Relief for Victims of Hurricane Harvey: The IRS announced that Hurricane Harvey victims in parts of Texas have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments. The IRS also announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families. IR-2017-135 (8/28/17); IR-2017-138 (8/30/17); Announcement 2017-11. Read More...

Penalties

IRS Barred by Statute of Limitations from Assessing Tax and Penalties Nine Years after Merger: The Tax Court held that the IRS was barred by the statute of limitations from assessing tax and penalties on a corporation that was merged into a new corporation almost nine years before the notice of deficiency was issued. The Tax Court found that under Beard v. Comm'r, 82 T.C. 766 (1984), the surviving corporation's return for the year at issue qualified as a return for the merged corporation's short tax year, thus triggering the three year period of limitations for assessments. New Capital Fire, Inc. v. Comm'r, T.C. Memo. 2017-177. Read More...

IRS Waives Diesel Fuel Penalty in Texas and Florida: In IR-2017-142 and IR-2017-149, the IRS announced that, in response to shortages of undyed diesel fuel caused by Hurricane Harvey and Hurricane Irma, respectively, it is waiving the penalty when dyed diesel fuel is sold for use or used on the highway in the state of Texas. The relief is effective as of August 25, 2017, for Hurricane Harvey and September 6, 2017, for Hurricane Irma.

Levy Against Tax Preparer Who Failed to Satisfy Due Diligence Rules Sustained: In Mohamed v. Comm'r, T.C. Summary 2017-69, the Tax Court sustained a proposed levy action against a CPA who operated a tax return preparation business. The levy related to penalties owed by the CPA as a result of his failure to satisfy earned income tax credit due diligence requirements.

Procedure

Court Rejects Request to Close Down Dentist's Practice Over Unpaid Taxes: In U.S. v. Moore, DMD PA, 2017 PTC 401 (D. N.J. 2017), a district court denied a request by the government for injunctive relief aimed at closing down the practice of a dentist who owed income and employment taxes, saying the request was overly broad and premature, and would cut off the dentist's only real chance to repay his and the practice's liabilities. The court found that, even though the government had demonstrated the dentist's history of noncompliance, it had not demonstrated that his conduct warranted the proposed injunction.

Third Circuit Erred in Concluding Company Couldn't Establish Negligence Against CPA Firm: In DDRA Capital, Inc. v. KPMG, LLP, 2017 PTC 408 (3d Cir. 2017), the Third Circuit held that a district court erred in concluding that a corporation could not establish proximate cause for purposes of negligence claims against an accounting firm, which the corporation said had directed it into a transaction known as Short Option Strategy (SOS) that the accounting firm knew was illegal. The corporation argued that, but for misrepresentations by the firm and one of its partners that the SOS transaction was legal and would survive IRS scrutiny, they would have pursued other tax strategies for which they would have paid no penalties or interest, no fee to the accounting firm, and possibly less in taxes.

Ninth Circuit Affirms 30-Month Sentence of Former IRS Agent Who Solicited Bribes: In U.S. v. Hurley, 2017 PTC 409 (9th Cir. 2017), the Ninth Circuit affirmed the conviction and 30-month prison sentence of a former IRS agent, who was found guilty of soliciting and receiving bribes and illegal gratuities from an individual he was auditing. According to the court, a rational jury could find that the payments received by the former IRS agent from the individual he was auditing influenced the official act of the tax audit and induced the agent to violate his official duties.

Court Did Not Err in Accepting Schizophrenic's Guilty Plea: In U.S. v. Anderson, 2017 PTC 416 (11th Cir. 2017), the Eleventh Circuit held that a district court did not err by accepting a guilty plea from individual who suffers from schizophrenia, but controls it with medication. The individual had admitted in writing that he cashed thousands of fraudulently obtained tax refund checks in amounts totaling over $7 million dollars, had received approximately 20 percent of the face value of the checks, and had spent the money buying real property and multiple luxury cars.

Related Entities Must All Pay 15 Percent of Penalty In Order for Court to Hear Their Case: In DAC Management, LLC v. U.S., 2017 PTC 419 (N.D. Ill. 2017), a district court granted an IRS motion to dismiss two cases in which taxpayers were seeking a determination that they were not liable for civil penalties assessed against them under Code Sec. 6700. The court held that, while the law requiring an individual and the entities he owns to all pay the exact same penalty on the exact same income as a precondition to challenging the assessment of a Code Sec. 6700 penalty may well be unlawful, because all the entities involved in the case did not pay the required 15 percent of the penalties assessed against them, the court lacked jurisdiction to hear the case.

IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2017-18, the IRS issued the rates for interest on tax overpayments and underpayments for the fourth calendar quarter of 2017, beginning October 1, 2017. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 1 and one-half percent for the portion of a corporate overpayment exceeding $10,000, and 6 percent for large corporate underpayments.

Chief Counsel's Office Discusses Representations Covered by POAs: In CCM 201736012, the Office of Chief Counsel advised that a Form 2848, Power of Attorney and Declaration of Representative, which lists only a specific tax return, does not cover representation for penalties, payments, and interest relating to other returns, regardless of whether other returns are attached to the return specified in the Form 2848. Further, Forms 2848 that only list a specific return cover representation for penalties, payments, and interest related only to that specific tax return, and not to other returns that may be filed separately.

Late Filing of Tax Return Precludes Recovery of $32,000 Tax Overpayment: In a case of first impression, the Tax Court held that a taxpayer was not entitled to a refund shown on a late-filed tax return because the three-year lookback period specified in Code Sec. 6512(b)(3) did not apply. The court also held that, because the taxpayer did not file her income tax return before the IRS issued a notice of deficiency and did not pay her tax liability within two years of the mailing of the notice of deficiency, the two-year lookback period likewise did not apply. Borenstein v. Comm'r, 149 T.C. No. 10 (2017). Read More...

Tenth Circuit Vacates Judgment Allowing IRS to Sell Property Owned by Taxpayer's Corporation: In Geophysical v. U.S., 2017 PTC 384 (10th Cir. 2017), the Tenth Circuit vacated a district court judgment allowing the IRS to enforce a lien, as well as an order permitting the IRS to sell two properties owned by a taxpayer's company in order to satisfy the lien. The court concluded that the district court had granted the judgment without providing the taxpayer and the taxpayer's company an adequate opportunity to respond to the IRS's assertion that the company held title to the properties as the taxpayer's alter ego or nominee.

IRS Not Barred by Statute of Limitations from Enforcing 2002 Assessment Against an Estate: In U.S. v. Est. of Chicorel, 2017 PTC 389 (E.D. Mich. 2017), a district court held that the IRS was not barred by the statute of limitations from enforcing a 2002 assessment against an estate. The court concluded that the government initiated a timely proceeding in court within the meaning of Code Sec. 6502(a) by submitting its proof of claim to a Michigan probate court and the estate's personal representative, and that tolled the statute of limitations with respect to the instant proceeding and, by implication, any subsequent proceeding regardless of how many years later it may be filed.

Court Won't Overturn Jury Verdict Awarding Refund to Taxpayers Who Relied on Tax Advisors: In Ervin v. U.S., 2017 PTC 394 (W.D. Ky. 2017) a district court declined to overturn a jury verdict which found that the taxpayers were entitled to a refund of a valuation misstatement penalty and penalty interest payments paid to the IRS as a result of disallowed tax losses. The court found that the taxpayers had established to the jury's satisfaction a reasonable cause defense in which they claimed to have had relied in good faith upon the advice of competent tax advisors such as the accounting firm of BDO Seidman.

Trustee Was Foundation's Alter Ego and Is Personally Liable for Taxes: In U.S. v. Williams, 2017 PTC 398 (M.D. N.C. 2017), a district court entered a default judgment for the United States against a foundation that sought and received over $600,000 in fraudulent tax refunds, which were then used by the foundation's trustee for personal purposes, such as paying off a car loan and mortgage. The court agreed with the IRS that the trustee was the foundation's alter ego and was personally liable for its tax liabilities.

Tax-Exempt Organizations

IRS Issues Guidance for Tax Practitioners Preparing Written Advice Relating to Private Foundations: In Rev. Proc. 2017-53, the IRS provides guidelines that qualified tax practitioners may use for preparing written advice on which a private foundation or sponsoring organizations of donor advised funds ordinarily may rely in making a good faith determination that a grantee is a qualifying public charity in order that the grant will be considered a qualifying distribution that does not require expenditure responsibility in order to not be a taxable expenditure.. The procedure modifies and supersedes Rev. Proc. 92-94.

 

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