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Federal Tax Research Updates

November 2017

Accounting

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...

 

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Section 2704 Regs Withdrawn; IRS Priority Guidance Lists More Regs on the Chopping Block: The IRS has withdrawn controversial regulations issued under Code Sec. 2704 which would have imposed major restrictions on valuation discount planning with respect to intra-family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.

 

August 2017

Accounting

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.

Cash Method Landfill Business Can Currently Deduct Estimated Future Cleanup Costs: The Tax Court held that an S corporation that operated a landfill and used the cash method of accounting was permitted to elect under Code Sec. 468 to currently deduct estimated reclamation, closure and post closure costs. The court also determined that the term "taxpayer" as used in Code Sec. 468 includes cash method taxpayers and was not limited to taxpayers using the accrual method. Gregory v. Comm'r, 149 T.C. No. 2 (2017). Read More...

C Corporations

IRS Delays Application of Sec. 385 Documentation Regulations by One Year: In Notice 2017-36, the IRS announced that it intends to amend Reg. Sec. 1.385-2, which provides rules for the preparation and maintenance of the documentation and information necessary for the determination of whether certain instruments will be treated as debt for federal tax purposes (i.e., the "documentation regulations"), to apply only to interests issued or deemed issued on or after January 1, 2019. This amendment has the effect of delaying the application of the documentation regulations by 12 months and is aimed at giving taxpayers adequate time to develop any necessary systems or processes to comply with such regulations.

Credits

IRS Issues Nonacquiescence in EITC Case; Says Court Didn't Consider Sec. 32(d): In AOD 2017-05, the IRS nonacquiesced to the decision in Tsehay v. Comm'r, T.C. Memo. 2016-200, in which the Tax Court held that (1) a taxpayer's filing status was married filing separately, rather than head of household as claimed by the taxpayer, or single as determined by the IRS, and (2) the taxpayer had qualifying children and therefore was entitled to the earned income tax credit (EITC). The IRS said the reason for its nonacquiescence was that the court's opinion failed to make note of the fact that Code Sec. 32(d) provides that a married taxpayer who does not file a joint return is not entitled to the EITC.

Deductions

Individual's Personal Loans to Failed Company Qualified for Bad Debt Deduction: The Tax Court held that the owner of a commercial lending business who made personal loans to a laundry business and recovered nothing on the loans was entitled to a bad debt deduction. In ruling that the individual was in the trade or business of lending, the court noted that the individual had, during a 14 year period, personally made at least 66 loans exceeding $24 million, which it found was more than sufficient when compared to the benchmark set in other cases. Owens v. Comm'r, T.C. Memo 2017-157. Read More...

Wealthy Corporate Executives Can't Deduct Billions of Losses from Sham Partnership: In BCP Trading and Investments, LLC v. Comm'r, T.C. Memo. 2017-151, the Tax Court held that a purported partnership, composed of wealthy executives, which used almost perfectly offsetting bets on foreign currency to pass more than $3.3 billion of tax losses through to its partners, who had contributed only $16.5 million to the partnership, was not a partnership for tax purposes. As a result of disregarding the partnership for tax purposes, the court held that the partners recognized gain or loss on the purchases and sales of the foreign currency themselves.

Couple Not Entitled to Child-Related Deductions and Credits, but Escape Penalties: In Woolsey v. Comm'r, T.C. Summary 2017-62, the Tax Court held that a couple's 38-year daughter was not a qualifying child and her children were not qualifying relatives for purposes of dependency exemption deductions and child tax credits and, thus, the couple was not entitled to such deductions and credits. However, because the couple was unaware that their daughter was claiming dependency deductions for her children on a joint tax return she was filing with a man whom the parents didn't know and with whom she had a common-law marriage, and because the parents had provided substantial support to the daughter and her children, the court found the couple was not liable for penalties assessed by the IRS because their tax deficiency was due to reasonable cause and good faith.

Ninth Circuit Rejects Marijuana Dispensary's Arguments for Business Expense Deductions: In Canna Care, Inc. v. Comm'r, 2017 PTC 345 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court decision denying business expense deductions to a corporation operating a marijuana dispensary in California. The court rejected the corporation's arguments that (1) Code Sec. 280E, as applied to the taxpayer, violated the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution, (2) Code Sec. 280E did not preclude state and local tax deductions, and (3) Code Sec. 280E did not preclude the corporation's net operating loss carryover deduction from 2005.

Couple Can't Deduct CARDS Losses and Fees: In Curtis Investment Company, LLC v. Comm'r, T.C. Memo. 2017-150, the Tax Court held that a couple was not entitled to deduct losses and fees associated with Custom Adjustable Rate Debt Structure (CARDS) transactions because such transactions lacked economic substance. Further, the court concluded that the couple was liable for the 40 percent accuracy-related penalty due to a gross valuation misstatement.

Court Refuses to Dismiss Indictment Alleging Law Firm President Underreported Income: In U.S. v. Gibson, 2017 PTC 354 (D. Mass. 2017), a district court denied a motion to dismiss made by the president and managing director of a law firm who was indicted on charges that he and a CPA he had hired shared a common goal to underreport the law firm president's income for financial gain for multiple years, and that he and the CPA knowingly altered financial records and underreported the law firm's and the law firm's president's income for the purpose of achieving this goal. According to the indictment, the firm's president intentionally underreported the firm's income by more than $3.7 million, enabling him to underreport his personal income by more than $2.4 million.

No Deduction Allowed for Expenses Incurred in Abandoned Business Ventures: In Carrick v. Comm'r, T.C. Summary 2017-56, the Tax Court held that a taxpayer was not entitled to deductions for expenses relating to two business ventures on which he spent time but subsequently abandoned. The court said it was clear that the taxpayer was not "carrying on" a trade or business in the years at issue because carrying on a trade or business requires more than preparatory work such as initial research or solicitation of potential customers.

Taxpayer Can't Deduct Expenses of Vehicle Owned by His Wholly Owned Corp: In Drah v. Comm'r, T.C. Memo. 2017-149, the Tax Court held that a taxpayer, who worked as an independent contractor for FedEx, could not deduct depreciation, Code Sec. 179 expenses, and repairs and maintenance expenses relating to a vehicle used for the FedEx work because the vehicle was leased by a corporation incorporated by the taxpayer. The court noted that the corporation had presumably deducted the related lease expenses.

Employment Taxes

Employer Can't Withhold on Employee's FELA Judgment: In Loos v. BNSF Railway Company, 2017 PTC 355 (8th Cir. 2017), the Eighth Circuit affirmed a district court and held that the Railroad Retirement Tax Act (RRTA) does not require an employer to withhold tax from a judgment for lost wages obtained by an employee under the Federal Employers Liability Act (FELA). According to the court, the RRTA is unambiguous and does not include damages for lost wages within the definition of "compensation" and, therefore, regulations providing to the contrary receive no deference because it is the intent of Congress that controls.

Estates, Gifts, and Trusts

IRS Liens Have Priority Over Assets of Insolvent Estate: In U.S. v. Spiekhout, 2017 PTC 352 (S.D. Ind. 2017), a district court agreed with a magistrate judge's report which concluded that an IRS federal tax lien had priority to the assets of an insolvent estate. The court rejected the personal representative's argument that the magistrate judge erred in omitting facts relating to the personal representative's efforts in preserving the main estate asset after finding that such facts were irrelevant to the issue of priority and noting that the IRS had made clear that it would allow the representatives unreimbursed expenses to be paid ahead of the federal tax liens if documentation evidencing such expenses were provided.

Healthcare

Senate Rejects Multiple Healthcare Bills, Pulls Away from Obamacare Repeal: After narrowly clearing procedural hurdles to move healthcare legislation to the Senate floor, debate on various alternatives culminated in the defeat of three separate Obamacare repeal bills. Former presidential candidate John McCain (R-AZ) joined Susan Collins (R-ME), Lisa Murkowski (R-AK), and 48 Democrats in voting against the final bill, likely ending Congressional Republicans' efforts to repeal the Affordable Care Act (ACA) for the year. Read More...

IRS Issues Guidance on Information Reporting on Minimum Essential Coverage: In Notice 2017-41, the IRS provides health insurance issuers may, but are not required to, report 2017 coverage under a catastrophic plan enrolled in through an Exchange. Issuers reporting coverage under a catastrophic plan are not subject to information reporting penalties under Code Sec. 6721 and Code Sec. 6722 with respect to returns and statements voluntarily filed and furnished under this notice.

Income

Tribe's Per Capita Payments Aren't Earned Income: CCM 201729001, the Office of Chief Counsel advised that a Tribe's per capita payments of the Tribe's gaming revenues made pursuant to its revenue allocation plan paid to or on behalf of a child (as defined in Code Sec. 1(g)(2)) who is a member of the Tribe are not earned income of that child under Code Sec. 911(d)(2)(A) or (B). Consequently, these per capita payments are income that is not attributable to earned income under Code Sec. 1(g)(4)(A) and Code Sec. 1(g), Code Sec. 911, and the temporary and final regulations under those provisions do not provide any support for the position that these per capita payments to a member of Tribe who is a child are earned income for purposes of Code Sec. 1(g).

International

IRS Uses U.S. - Canada Treaty as Leverage to Recover FBAR Penalty: A district court held that a provision in the U.S. - -Canada tax treaty under which Canadian tax authorities can withhold Canadian tax refunds from a U.S. citizen who owes a debt to the IRS is not unconstitutional. The IRS used the treaty as leverage against a U.S. citizen living in Canada who had refused to pay a penalty he owed to the IRS in the amount of $120,000 for not filing a Report of Foreign Bank and Financial Accounts for 12 years. Dewees v. U.S., 2017 PTC 366 (D. D.C. 2017). Read More...

IRS Extends Phase-in Period for Sec. 871(m) Regulations: In Notice 2017-42, the IRS provides taxpayers with additional guidance for complying with the final and temporary regulations issued under Code Secs. 871(m), 1441, 1461, and Code Sec. 1473. Specifically, the notice (1) extends the phase-in period provided in Notice 2016-76 for certain provisions of the regulations; and (2) states that the IRS intends to amend the regulations to delay the effective/applicability date of certain rules in the final regulations.

Swiss Entity Was "Treaty Shopping" and Thus Not Entitled to Treaty Benefits: In Starr International Company, Inc. v. U.S., 2017 PTC 383 (D. D.C. 2017), a district court held that a Swiss entity was not entitled to a reduction in the tax rate on its U.S. source dividends under the U.S. - Switzerland Treaty. The court concluded that the IRS, which denied the entity's request for a reduced tax rate on the basis that the entity was an on-paper resident of a treaty country and thus was "treaty shopping," had reasonably concluded that the company had established itself in a treaty jurisdiction with a principal purpose of obtaining treaty benefits.

Like-Kind Exchanges

IRS Rejects Tax Court's Decision in Est. of Bartell, Jr. v. Comm'r: In AOD 2017-06, the IRS nonacquiesced to the decision in Est. of Bartell, Jr. v. Comm'r, 147 T.C. 140 (2016), a like-kind exchange case that had a taxpayer-favorable outcome. According to the IRS, the nonacquiescence relates to the court's holding that the taxpayer's sale and acquisition of business property qualified as a like-kind exchange under Code Sec. 1031 even though 17 months before the purported exchange, an accommodating party facilitating the transaction acquired title to the replacement property and the taxpayer acquired the benefits and burdens of ownership of the property.

Passive Activities

Rental Real Estate Losses Limited by Passive Activity Loss Rules: In Hickam v. Comm'r, T.C. Summary 2017-66, the Tax Court concluded that (1) neither the taxpayer's mortgage brokerage services nor his loan origination services were performed in a real property trade or business within the meaning of Code Sec. 469(c)(7)(C); and (2) the hours the taxpayer spent performing his mortgage brokerage services and his loan origination services could not be counted for purposes of determining if the taxpayer met the real estate professional test. Accordingly, the court held that the taxpayer did not meet the definition of a real estate professional under Code Sec. 469(c)(7)(B) for the years at issue and thus his rental real estate losses were limited by the passive activity loss rules in Code Sec. 469.

Penalties

CPA Liable for Accuracy-Related Penalty for Failing to Properly Allocate Expenses: In Levine v. Comm'r, T.C. Summary 2017-60, the Tax Court held that a CPA who failed to substantiate vehicle expenses underlying disallowed Schedule C deductions for his financial services business beyond an uncorroborated statement that his computer hard drive crashed was liable for the Code Sec. 6662(a) accuracy-related penalty. The court found that the CPA, who had testified that allocating some of his expenses between personal and business activities required more time than he was willing to spend, had not met his burden of proving reasonable cause to avoid the penalty.

Tax Protester Fined $5,000 for Frivolous Appeal: In Nevius v. Comm'r, 2017 PTC 342 (8th Cir. 2017), the Eighth Circuit affirmed the Tax Court's dismissal of a taxpayer's petition, noting that the courts have repeatedly rejected the taxpayer's boilerplate tax-protester arguments. The court also granted the IRS's motion for sanctions in the amount of $5,000 as a result of the taxpayer's frivolous appeal.

Procedure

Company Wins Litigation Fees but Court Finds Legal Interns Time Is Only Worth $100 an Hour: In C1 Design Group, LLC v. U.S., 2017 PTC 358 (D. Idaho 2017), a district court awarded attorney's fees of almost $34,000 to a company that won a refund claim on the basis that it had reasonable cause for the untimely payment of excise taxes because a car accident involving the company's president led to financial difficulties which in turn lead to the late payment of taxes. However, in calculating the amount of attorney's fees, the court stated that the rate of $150 for legal intern time was excessive because the interns were law students and their time was only worth $100 per hour.

IRS Misapplied Taxpayer's Tax Payment and Abused Its Discretion: In Fagan v. Comm'r, T.C. Summary 2017-61, the Tax Court held that the IRS misapplied a taxpayer's payments of $2,900, an amount which exceeded the outstanding balance of the tax liability that the IRS said was owed. The court agreed with the taxpayer that his payments covered the amount due for 2011 and that the IRS abused its discretion in pursuing collection.

Property Transactions

Fifth Circuit Vacates Tax Court Holding Against Donors of Conservation Easements: The Fifth Circuit held that a homesite adjustment provision relating to conservation easements donated by two partnerships to charity did not prevent the grants of the conservation easements from satisfying the perpetuity requirement of Code Sec. 170(h)(2)(C) and thus did not prevent the grantors of these easements from taking charitable deductions. The court also rejected the Tax Court's finding that the entirety of the limited partners' contributions were disguised sales, and remanded the case to correct the amount of any taxable income resulting from the disguised sale. Bosque Canyon Ranch, L.P. v. Comm'r, 2017 PTC 367 (5th Cir. 2017). Read More...

Retirement

Royalty Payments Reclassified as Excess Roth IRA Contributions under Substance over Form Doctrine: The Tax Court recharacterized royalty payments to a partnership owned by a family's individual Roth IRAs as excess contributions to the Roth IRAs, thus finding the family members liable for the excise tax on excess contributions. The arrangement failed the substance over form test in Notice 2004-8 because the partnership was only a conduit to divert funds to the Roth IRAs. Block Developers, LLC v. Comm'r, T.C. Memo. 2017-142. Read More...

RICs and REITS

IRS Issues Guidance on Distributions by a Publicly Offered RIC or REIT: In Rev. Proc. 2017-45, the IRS issued permanent guidance regarding the application of Code Sec. 305 to a stock distribution by a publicly offered regulated investment company (RIC) or real estate investment trust (REIT). Where a publicly offered RIC or REIT permits its shareholders to elect to receive a portion of a distribution in cash or common stock, then any stock received under the election will be treated as a distribution of property to which Code Sec. 301 applies by reason of Code Sec. 305, so long as the amount of cash to be distributed in the aggregate to all shareholders under the election is not less than 20 percent of the aggregate declared distribution.

Tax-Exempt Organizations

Country Club Had UBTI and Was Liable for Negligence Penalties: In Losantiville Country Club v. Comm'r, T.C. Memo. 2017-158, the Tax Court held that a country club's nonmember sales activities were not entered into for profit, that such sales could not offset the club's investment income, and the club's investment income was unrelated business taxable income. The court also upheld the IRS's assessment of Code Sec. 6662(a) and (b)(1) accuracy-related penalties for negligence because the club failed to exercise due care in the preparation of its returns.

Tax Reform

Congress Moves Forward on Tax Reform; Border Adjustment Tax Dead: On July 27, House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX) issued a joint statement on tax reform. The statement primarily reaffirmed previously stated goals, such as providing tax relief to families and sharply lowering tax rates for businesses. The statement did, however, preclude one avenue for tax reform - indicating that a controversial border adjustment tax (BAT), previously advocated by Ryan and Brady, was off the table.

Tax Returns

Taxpayer Who Kept Spouse in the Dark Didn't File Valid Joint Return: In Edwards v. Comm'r, T.C. Summary 2017-52, the Tax Court held that a taxpayer did not file a valid joint return for himself and his then spouse for 2013. The court found that text messages and other evidence indicated that the spouse was unaware that the taxpayer had filed a joint return and had kept the refund from that return in order to compensate himself for the alleged failure of his spouse to contribute to household expenses.

 

July 2017

Accounting

IRS Targets Eight Regulations in Attempt to Reduce Regulatory Burden: In furtherance of Executive Order 13789, the Treasury Secretary has identified eight tax-related regulations that will be evaluated for possible amendment or repeal. Included in the eight regulations are (1) the temporary partnership liability regulations under Code Sec. 752, which significantly changed the rules relating to partnership disguised sales and the allocation of partnership liabilities; (2) the proposed regulations under Code Sec. 2704, which would impose major restrictions on valuation discount planning for transfers among family members of interests in family owned businesses; and (3) the final and temporary regulations under Code Sec. 385, which were a dramatic deviation from decades of debt/equity law. Notice 2017-38. Read More...

C Corporations

Minnesota Law Doesn't Allow Tax Court to Collapse Transactions in Transferee Liability Case: In Buckrey v. Comm'r, T.C. Memo. 2017-138, the Tax Court held that the sole owners of a corporation that partially redeemed the owners' shares of stock for the corporation's liquid noncash assets and then sold all its operating assets were not liable to the IRS under the Minnesota Business Corporations Act for subsequent taxes owed but not paid to the IRS because the owners did not receive a liquidating distribution from the corporation. According to the court, under the transferee liability provisions of Code Sec. 6901, the question of whether the Tax Court can or must recast a series of transactions is a question of state fraudulent transfer law and, the court noted, Minnesota law requires a transfer-by-transfer analysis and the Tax Court can thus not collapse the transactions at issue under a substance-over-form analysis.

Criminal

Court Affirms 70-Month Prison Sentence for Filing False Returns and Aggravated Identity Theft: In U.S. v. Hunter, 2017 PTC 324 (8th Cir. 2017), the Eighth Circuit affirmed the conviction of a tax return preparer on one count of conspiracy to defraud the United States by filing false income tax returns, nine counts of filing false claims for payment of tax refunds, and two counts of aggravated identity theft. In affirming the taxpayer's 70 month prison sentence, the court noted the taxpayer's involvement in the filing of 48 fraudulent income tax returns claiming $231,494 in refunds, which included the taxpayer's own return and the returns of 47 "filing coconspirators" who were relatives of the taxpayer, people who lived with the taxpayer's relatives, and people who knew the taxpayer through church.

Tax Return Preparer Must Turn Over Names of Clients for Whom Returns Were Prepared: In U.S. v. Leverett, 2017 PTC 325 (N.D. Ala. 2017), a district court entered a permanent injunction against a taxpayer under Code Sec. 7402, Code Sec. 7407, and Code Sec. 7408, and which enjoins the taxpayer from acting as a federal tax return preparer and operating or engaging in a business that prepares federal tax returns or related forms. In addition, the court ordered the taxpayer to produce within 30 days a list that identifies by name, social security number, address, e-mail address, telephone number, and tax period(s) all persons for whom she, Tax Money Now, Dynamic Tax Services, Dynamic Tax Solutions, Express Money Tax, and any other tax return preparation business in which she has a direct or indirect interest, prepared federal tax returns or claims for refund since January 1, 2014.

Deductions

Court Disallows Charitable Deduction for Alleged Donation of 20,000 Items to Goodwill: In Ohde v. Comm'r, T.C. Memo. 2017-137, the Tax Court held that a couple was not entitled to a $145,000 charitable contribution deduction for the alleged donation of more than 20,000 items to Goodwill. The court found the couple's allegations that they made such contributions implausible and upheld a 20 percent accuracy-related penalty.

Taxpayer's Explanation of Divorce Decree Plausible; Court Allows $10,000 Alimony Deduction: In Mcintee v. Comm'r, T.C. Summary 2017-48, the Tax Court held that a $10,000 payment that a taxpayer made to his soon-to-be ex-wife pursuant to a court stipulation and a final divorce decree was a deductible alimony payment. The court found the taxpayer's testimony to be a plausible explanation of what was intended in the stipulation and final divorce decree and also found the taxpayer to be a credible witness whose testimony was not contradicted by any other witnesses.

Legal Fees Only Deductible as a Miscellaneous Itemized Deduction: In Dulik v. Comm'r, T.C. Summary 2017-51, the Tax Court held that a couple could not deduct legal fees as an ordinary and necessary business expense relating to the husband's activity as a sole shareholder of an S corporation. The court concluded that the fees were deductible as a miscellaneous itemized deduction, subject to applicable limitations, since the fees related to a severance agreement with respect to a company the husband worked for prior to incorporating the S corporation.

Partnership Can't Deduct Contribution of Remainder Interest in Property to University: The Tax Court held that a partnership was not entitled to a deduction for the charitable contribution of a remainder interest in real property because it failed to substantiate the value of the property on its tax return. The partnership was liable for a gross valuation misstatement penalty because its valuation of the property exceeded the correct value by more than 400 percent and the partnership did not have reasonable cause for the misstatement. RERI Holdings I, LLC v. Comm'r, 149 T.C. No. 1 (2017). Read More...

Expenses for Meals Provided to Professional Hockey Team While Away from Home Were Fully Deductible: The Tax Court held that the owners of a professional hockey team could fully deduct the cost of pregame meals provided to team players and team personnel while the team was away from home. While the deduction for meal expenses under Code Sec. 274 is generally limited to 50 percent, the team's pregame meals qualified for the exception for de minimis fringe benefits. Jacobs v. Comm'r, 148 T.C. 24 (2017). Read More...

Daily Stock Trader Can Deduct Related Expenses Except Unsubstantiated Home Office Deduction: In Crissey v. Comm'r, T.C. Summary 2017-44, the Tax Court held that a taxpayer, who had more than 500 stock trades during the year at issue and received most of his earned income from daily stock trading, had an active trade or business and any deductions from that activity could be used to determine adjusted gross income. However, because the taxpayer could not substantiate the costs of operating his home or the specific portion of his home that was exclusively dedicated to the trading activity, no home office deduction was allowed.

Employee Benefits

IRS Revises Procedures for Applying for Approval of a Suspension of Multiemployer Plan Benefits: In Rev. Proc. 2017-43, the IRS revised procedures for applying for Treasury Department approval of a suspension of benefits under a multiemployer defined benefit pension plan that is in critical and declining status under Code Sec. 432(e)(9). Effective for applications submitted on or after September 1, 2017, the revenue procedure modifies and supersedes Rev. Proc. 2016-27 and is intended to facilitate the Treasury Department's review in light of its experience in processing benefit suspension applications.

Employment Taxes

S Corporation Liable for Employment Taxes Not Paid by Professional Employer Organization: The Chief Counsel's Office advised that an S corporation that hired a professional employer organization (PEO) to fulfill the S corporation's employment tax obligations was liable for the employment taxes that the PEO failed to pay. Had the S corporation used a certified PEO instead, it would not have been liable for the unpaid taxes. CCA 201724025. Read More...

IRS Clarifies Way to Correct Administrative and Non-Administrative Withholding Tax Errors: In CCA 201727008, the Office of Chief Counsel advised that, generally, an employer may correct non-administrative errors for federal income tax withholding on an adjusted employment tax return only if the errors are discovered in the same calendar year the employer paid the wages and, for an over collection, an employer may correct federal income tax withholding only if the employer also repaid or reimbursed the employees in the same year. Further, the Chief Counsel's Office said, only transposition or basic math errors, such as addition, subtraction, and multiplication computations, in which the amount reported on Form 941, line 3 (federal income tax withheld from wages, tips, and other compensation), doesn't agree with the amount withheld from an employee's wages are considered administrative errors.

PEOs Were Statutory Employers and Have Standing to File for Employment Tax Refunds: In Paychex Business Solutions, LLC v. U.S., 2017 PTC 295 (M.D. Fla. 2017), a district court held that a group of professional employer organizations were the statutory employers of their clients' employees and thus had standing to sue the IRS for refunds of overpaid social security taxes relating to those employees. The court rejected the IRS argument that the PEOs lacked standing to sue because they did not have a financial interest in the amounts sought to be refunded due to the client companies reimbursing them for the amounts they paid in social security taxes.

Healthcare

Senate Begins Floor Debate on Healthcare; New "Skinny" Obamacare Repeal Plan Seen as Leading Contender for Passage: On Tuesday afternoon, the Senate approved 51 to 50 a "motion to proceed" on Obamacare repeal legislation, clearing the way for floor debate and voting on several competing healthcare bills. A few hours later the Senate rejected the Better Care Reconciliation Act (BCRA), the repeal-and-replace plan Republicans had been developing for months. The Senate is now expected to move on to voting on a range of alternatives, including a "clean" Obamacare repeal along the lines of the one it passed in 2015, and a new "skinny" repeal plan set to make its debut later this week. Read More...

Income

Proceeds from Settlement with Home Depot Are Includible in Taxpayer's Gross Income: In Maciujec v. Comm'r, T.C. Summary 2017-49, the Tax Court held that, while a taxpayer may have suffered physically as a result of battery committed against her at her job at Home Depot, there was no indication in a settlement agreement she signed with Home Depot or in the record as a whole that she was compensated for a physical injury or physical sickness, or emotional distress attributable thereto, and thus the proceeds from the settlement with Home Depot were includible in gross income. The court noted that the complaint that the taxpayer filed against Home Depot did not allege that she suffered any physical injury or physical sickness as a result of the conduct of Home Depot or its employees, but did state that as a proximate result of the actions underlying the complaint, the taxpayer suffered "loss of income, wages and other pecuniary losses" and "mental anguish, embarrassment, humiliation, and emotional distress," and that damages received for such injuries are not excludible from income under Code Sec. 104(a).

Innocent Spouse Relief

Vacations While Taxpayer Aware of Unpaid Liabilities Preclude Innocent Spouse Relief: In Swanson v. Comm'r, T.C. Summary 2017-46, the Tax Court rejected a taxpayer's request for innocent spouse relief with respect to unpaid tax liabilities. The court noted that the taxpayer and her husband took vacations to Mexico and Florida while she was aware of their financial difficulties and said that, while it was possible that the taxpayer's income was at or below the applicable guidelines for granting innocent spouse relief, she failed to provide evidence of her share of living expenses and did not explain why she could not sell some of her assets to pay the tax liabilities due.

Second Circuit Confirms That 90-Day Period to File Innocent Spouse Petition Is Jurisdictional: In Matuszak v. Comm'r, 2017 PTC 312 (2d Cir. 2017), the Second Circuit affirmed a Tax Court decision and held that the 90-day period, specified in Code Sec. 6015(e)(1)(A), in which a taxpayer must file a petition for innocent spouse relief is jurisdictional and may not be tolled for equitable reasons. The court thus upheld the dismissal of the taxpayer's petition seeking innocent spouse relief as untimely.

International

IRS Launches Country-by-Country Reporting Pages on IRS.gov: In IR-2017-116, the IRS announced the launch of Country-by-Country Reporting pages on irs.gov, the content of which is intended to enhance transparency for tax administrations by providing them with information to conduct high-level transfer pricing risk assessments. The document provides background information on Country-by-Country Reporting, frequently asked questions and other helpful resources, including a list of jurisdictions that have concluded Competent Authority Arrangements with the United States.

Polish Doctor Can't Use Treaty to Avoid Taxes on Hospital Income: In Klubo-Gwiezdzinska v. Comm'r, T.C. Summary 2017-45, the Tax Court held that payments that a doctor, who is a Polish citizen, received from a hospital were not exempt from federal income tax under the tax treat with Poland. The court rejected the doctor's argument that she was the recipient of "a grant, allowance, or award" as specified under the treaty or that she was exempt because the hospital is a teaching hospital and therefore a recognized educational institution, the income from which qualified under the treaty as being exempt from U.S. income taxes.

IRS

IRS's Computation of Taxpayer's Reasonable Collection Potential Wasn't Reasonable: The Tax Court held that an IRS settlement officer's rejection of a corporation's offer in compromise solely on the basis of his calculation of reasonable collection potential that used the corporation's going-concern valuation, but disregarded completely its tax liability, was not reasonable. According to the court, the going-concern value is intended to give some indication of what a third party might pay to buy a corporation, but no third party would buy a corporation without taking into account the corporation's unpaid tax liability. W. Zintl Construction, Inc. v. Comm'r, T.C. Memo. 2017-119. Read More...

IRS Procedure

IRS Updates Guidelines and General Requirements for 2017 Substitute Tax Forms: In Rev. Proc. 2017-40, issued guidelines and general requirements for the development, printing, and approval of 2017 substitute tax forms. According to the IRS, approval of such forms will be based on these guidelines and, after review and approval, submitted forms will be accepted as substitutes for official IRS forms.

Interest-Abatement Claim Was Rightfully Excluded from CDP Hearing: In Day v. Comm'r, 2017 PTC 314 (9th Cir. 2017), the Ninth Circuit affirmed a Tax Court order sustaining a proposed levy on a couple and held that a couple's interest-abatement claim for a particular tax year was rightfully excluded from a collection due process (CDP) hearing because the couple failed to raise the claim properly during the CDP hearing and support it with evidence and because the couple signed a Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, which waived their right to contest the assessment and collection of their tax year deficiency for the year at issue and any interest provided by law. The Second Circuit also held that the Tax Court properly upheld the denial of the couples' requests for a face-to-face CDP hearing because there is no right to a face-to-face CDP hearing and the couple failed to raise any relevant, non-frivolous reasons to disagree with the proposed levy.

Tax Exempt Organizations

IRS Finalizes Streamlined Process for Applying for Sec. 501(c)(3) Nonprofit Status: The IRS finalized temporary and proposed regulations that have applied since July 1, 2014, and that allow the IRS to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under Code Sec. 501(c)(3). The regulations, which were finalized without substantive changes, apply on and after July 1, 2014. T.D. 9819 (6/30/17). Read More...

Penalties

Court Refuses to Entertain Couple's Additional Exceptions to 10% Early Withdrawal Penalty Tax: In Prichard v. Comm'r, T.C. Memo. 2017-136, the Tax Court held that a couple was not excepted from the 10-percent penalty tax imposed by Code Sec. 72(t)(1) where they received a distribution from their retirement plan and did not meet any of the exceptions to the tax that are enumerated in Code Sec. 72(t)(2). The court rejected the couple's argument that it should add the following two exceptions to those enumerated in Code Sec. 72(t)(2): an exception where there is reasonable cause for a taxpayer to make a withdrawal from an individual retirement plan and an exception where the taxpayer uses the retirement distribution to pay outstanding federal and/or state income tax liabilities.

Failure to Properly Supervise Unqualified Employee Precludes Abatement of Penalties: In Xibitmax, LLC v. Comm'r, T.C. Memo. 2017-133, the Tax Court held that a company that failed to timely pay its employment taxes was liable for penalties under Code Sec. 6651(a)(1), Code Sec. 6651(a)(2), and Code Sec. 6656. In affirming the penalties assessed by the IRS, the court noted that (1) the company was by no means disabled from ensuring it was meeting its statutory duties; (2) the company was not rendered incapable of filing employment tax returns by a series of factors largely beyond its control; and (3) the company basically failed to meet its obligations because it relied on an unqualified part-time employee and the supervision of the output and quality of the employee's work product was a factor wholly under the company's control.

40 Percent Gross Valuation Misstatement Penalty Applies on Inflated Contribution: In Fakiris v. Comm'r, T.C. Memo. 2017-126, the Tax Court held that a commercial real estate owner and developer could not carryover charitable contribution deductions for the years at issue in connection with a purported gift of a theater building and was liable for a 40 percent gross valuation misstatement accuracy-related penalty for the portions of underpayments attributable to those carryover deductions. The court also assessed a 20 percent penalty for an underpayment of tax relating to unreported interest income of almost $30,000.

Court Rejects Taxpayer's Reliance on "Outlier" Fifth Circuit Decision: A district court denied a taxpayer's motion to dismiss felony charges that he violated Code Sec. 7206(1) when he made false statements on Form 433-A regarding the transfer of assets for less than full value. The court found that a Fifth Circuit decision the taxpayer was relying on, U.S. v. Levy, 533 F.2d 969 (5th Cir. 1976), was an outlier and that many other courts have since disagreed with the result and the rationale of that decision. U.S. v. Yurek, 2017 PTC 292 (D. Colo. 2017). Read More...

Procedure

Taxpayer Can Bring Refund Suit under Sec. 6213(a) in District Court: In Walcott, 2017 PTC 322 (D. Colo. 2017), a district court rejected a magistrate judge's holding that a refund suit under Code Sec. 6213(a) must be brought in the Tax Court. The district court also agreed with the taxpayer that Code Sec. 6213(a) contemplates a proceeding by which a taxpayer can seek a refund of funds that were collected by a levy in violation of that provision's terms, even if the IRS has successfully mooted any companion claim for prospective injunctive relief.

Retirement

Firefighter Is Taxable on Disability Retirement Converted to a Service Retirement: The Tax Court held that disability retirement payments, which the taxpayer excluded from income as amounts received under a statute similar to workmen's compensation, should have been included in the taxpayer's income because they were paid from a state retirement pension and the payments were determined by reference to the taxpayer's age and length of service. Similarly, when such payments were converted to a service retirement allowance, they were also taxable. Taylor v. Comm'r, T.C. Memo. 2017-132. Read More...

Tax Credits

Brown Grease Mixed with Diesel Fuel Doesn't Qualify for Alternative Fuel Credit: In Affordable Bio Feedstock, Inc. v. U.S., 2017 PTC 311 (M.D. Fla 2017), a district court held that a taxpayer who combined a cooking byproduct called "brown grease" with diesel fuel, refined the mixture to remove impurities, and then sold the end product for use as fuel was not entitled to the tax credit available for "alternative fuel." According to the court, a mixture of brown grease and diesel fuel is not an "alternative fuel" as that term is defined in Code Sec. 6426(e)(2).

Tax Payments

IRS Addresses Allocation of Estimated Tax Payments Where Separate Returns Are Filed: In CCA 201727007, the Office of Chief Counsel advised that estimated tax payments made in a separate declaration are the separate property of the spouse making the declaration and, for those estimated tax payments made in a joint declaration of estimated tax for a year in which the taxpayers wind up filing separate returns, the taxpayers may allocate the payment in any consistent manner that they may agree upon. Citing Rev. Rul. 76-140, the Chief Counsel's Office also noted that, if the taxpayers cannot agree, the payment is allocated between them in proportion to the tax liability reported on the separate tax return for the current year.

 

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