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Federal Tax Research Updates

September 2017


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.


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.


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.


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...


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).


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 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...


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.


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


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.


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.


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.


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.


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).


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.


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.


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...


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...


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


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.


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.


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.


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...


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.


IRS Launches Country-by-Country Reporting Pages on In IR-2017-116, the IRS announced the launch of Country-by-Country Reporting pages on, 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'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...


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...


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.


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.


June 2017


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

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

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


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

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

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

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

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

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


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


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

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


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

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

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

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

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

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

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

Employee Benefits

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

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

Employment Taxes

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

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


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


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


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

Innocent Spouse

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

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


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

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


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

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

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

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

Passive Activities

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


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

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

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

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


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

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

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

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

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

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


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

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


May 2017


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


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


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


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


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


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

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

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

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

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

Employee Benefits

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

Estates, Gifts, and Trusts

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

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


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

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

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

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

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


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

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


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


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

Innocent Spouse

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


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


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


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


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

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

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

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

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

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

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

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


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

Tax Reform

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

Tax Exempt Organizations

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



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