Document Summaries for the Week of Aug. 17, 2015


Taxpayer did not intentionally fail to file Forms W-2 and W-3

While the evidence was insufficient to establish that a corporation actually filed Forms W-2 and W-3 with the Social Security Administration, the Tax Court concluded that the evidence did establish that the corporation did not intentionally disregard its filing obligation for those forms. Therefore,  the corporation was not liable for the Sec. 6721(e) penalty for  intentional disregard of the filing requirement. Hom, T.C. Summ. 2015-49 (8/17/15)

Company did not properly characterize intercompany referral fee income

In a field attorney advice, the IRS Office of Chief Counsel advised that a company did not properly characterize its controlled foreign corporations’ intercompany referral fee income, which it should have included in foreign base company sales income. FAA 20153301F (8/14/15)

Excess loss policies do not qualify as insurance

The IRS Office of Chief Counsel advised that 10-year excess loss policies provided by the taxpayer’s captive insurance companies do not qualify as insurance for federal tax purposes. As a result, the taxpayer must accrue income from premiums when they are due or paid, whichever happens first, but cannot accrue liabilities from claims until those claims are paid. CCA 201533011 (8/14/15)



Donee liability for donor’s unpaid gift tax and interest is capped by amount of gift

The Fifth Circuit held that a donee’s liability for a donor’s unpaid gift tax and interest is capped by the amount of the gift, thus reversing a district court’s judgment to the extent that it imposed liability upon the donee beyond the value of the gifts. The court also reversed the district court’s judgment that the estate’s executor breached his fiduciary duties under state law by distributing property from the estate before paying anything toward certain unpaid gift taxes. Marshall, No. 12-20804 (5th Cir. 8/19/15)

IRS delays estate basis reporting requirements

The IRS is delaying new basis reporting requirements until Feb. 29, 2016, for estates that otherwise would be required to furnish statements to the IRS and beneficiaries before that date. Notice 2015-57 (8/21/15) (see related news story)



Taxpayers liable for taxes and penalties on unreported distributions from retirement plans

The Tax Court held that a couple were taxable on unreported distributions from their retirement plans. Additionally, the court agreed with the IRS that the taxpayers were liable for the 10% additional tax on early distributions and the accuracy-related penalty. Adams, T.C. Memo. 2015-162 (8/17/15)

Payments received by ex-wife do not constitute alimony

The Tax Court concluded that payments to the taxpayer did not constitute alimony because the taxpayer’s divorce agreement did not, as required by Sec. 71(b)(1)(D), eliminate “liability [of the payer spouse] to make any such payment for any period after the death of the payee spouse.” Since the payments were not alimony taxable to the taxpayer, she was also not liable for the accuracy-related penalty. Crabtree, T.C. Memo. 2015-163 (8/17/15)

Court denies taxpayer’s Schedule C deductions

The Tax Court held that the taxpayer was not engaged in a profit-seeking trade or business during 2009 and that he also failed to substantiate expenses underlying deductions claimed on his Schedule C. Pouemi, T.C. Memo. 2015-161 (8/17/15)

Uncooperative taxpayer liable for multiple penalties

Noting that several badges of fraud were present and that the taxpayer was consistently uncooperative with the courts and the IRS, the Tax Court held that the taxpayer was liable for multiple tax-related penalties as a result of years of large income tax deficiencies. Putnam, T.C. Memo. 2015-160 (8/17/15)

Couple liable for tax and penalties relating to withdrawal from a variable annuity contract

The Tax Court held that a couple were taxable on a withdrawal from a variable annuity contract. Further, the court found the couple liable under Sec. 72(q) for a 10% penalty for a premature distribution from that annuity contract and the accuracy-related penalty. Tobias, T.C. Memo. 2015-164 (8/18/15)

Taxpayer entitled to dependency exemption for common law spouse

The Tax Court held that the taxpayer was entitled to a dependency exemption deduction for an individual listed on his return as his common law spouse. The IRS stipulated to, and the court accepted as evidence of the taxpayer’s entitlement to the deduction, a document titled “Affidavit of Dependency” signed by the common law spouse in which she stated that during the tax year in question she lived in the taxpayer’s home, she had gross income of less than $3,500, and the taxpayer provided more than half of her support. Shimanek, T.C. Memo. 2015-165 (8/19/15)



Cash-basis taxpayer cannot credit additional foreign taxes to prior year

The Office of Chief Counsel addressed the proper application of Sec. 905(c) when an individual taxpayer that claims foreign tax credits on the cash basis is assessed and pays additional foreign income tax for a prior tax year. The Office of Chief Counsel advised that for a cash-basis taxpayer, the additional foreign tax is creditable only in the tax year in which the tax is actually paid, and not in the prior tax year to which the foreign tax relates. CCA 201534013 (8/21/15)



IRS data breach larger than previously announced

The IRS announced that hackers who got into its Get Transcript system may have stolen the information of as many as 334,000 taxpayers, a much larger number than previously reported. IRS Statement (8/17/15) (see related news story)

Applicable federal rates for September 2015

The IRS posted the applicable federal rates for various income tax purposes for September 2015. Rev. Rul. 2015-19 (8/19/15)

Funds not requested within 9 months of levy cannot be returned to taxpayer

The Office of Chief Counsel advised that the IRS could not return certain funds to the taxpayer because the taxpayer did not request the return of those funds within nine months of the date of a levy. It also said it disagreed with the decision in Volpicelli, 777 F.3d 1042 (9th Cir. 2015), in which the Ninth Circuit held that the limitation period set by Sec. 6532(c) is not jurisdictional and may be equitably tolled. It would not support applying equitable tolling in the taxpayer’s situation. CCA 201534008 (8/21/15)

Statute extension not valid where signing LLC member was not a member-manager

The Office of Chief Counsel advised that a statute-of-limitation extension signed by a member of a California LLC did not extend the statute for other partners of the LLC because that member was not a “member-manager” under Regs. Sec. 301.6231(a)(7)-2. CCA 201534009 (8/21/15)

Taxpayer cannot voluntarily repay nonerroneous interest netting to obtain greater benefit

The Office of Chief Counsel advised that a taxpayer cannot voluntarily repay the benefit of nonerroneous interest netting in order to realize a greater benefit by netting periods with a greater interest differential than the periods for which netting was previously applied. CCA 201534012 (8/21/15)

County clerk not required to file Forms 1099 to report garnishment, foreclosure proceeds

The Office of Chief Counsel advised that a county clerk of court is not required to issue (1) a Form 1099, Miscellaneous Income, to an attorney when the court sends a debtor’s garnished funds to a creditor’s attorney; (2) a Form 1099 to an attorney who is refunded his or her client’s money at the end of a case; and (3) a Form 1099-S, Proceeds From Real Estate Transactions, on foreclosure real estate transactions. CCA 201533012 (8/14/15)



Chief Counsel clarifies why outside basis is a partnership item

The Office of Chief Counsel clarified the reason outside basis in a partnership is a partnership item when a partnership makes a Sec. 754 election: Because the partnership itself needs to determine its partners’ outside bases to redetermine the partnership’s own inside basis for the partnership’s tax year in which a Sec. 754 election is made. CCA 201534010 (8/21/15)

No right to consistent settlement with respect to penalties

Citing Regs. Sec. 301.6224(c)-3(b), the Office of Chief Counsel advised that Sec. 6224(c) does not extend rights to consistent settlement for penalties where the settlement is based on partner-level defenses/matters. CCA 201534011 (8/21/15)

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