Document Summaries for the Week of Dec. 19, 2016

CORPORATIONS

Company must recapture grant funds relating to therapeutic discovery project

The Tax Court held that a company was not entitled to a cash grant related to investments in a therapeutic discovery project certified under Sec. 48D that was made after calendar 2010 because the company was not certified to make qualified investments after that year. Further, the court required the company to recapture grant funds attributable to estimated qualified investments that exceeded actual investments made during the 2010 tax year. Silver Medical, Inc., 147 T.C. No. 18 (12/19/16).

Tax treatment of banks’ total loss-absorbing capacity instruments

The IRS issued a revenue procedure stating that it will treat certain instruments that provide total loss-absorbing capacity (TLAC) for banks as indebtedness for federal tax purposes. Rev. Proc. 2017-12 (12/19/16).

 

EMPLOYMENT TAXES

Sec. 3508 case law eliminates distinction between tangible and intangible consumer goods

The Office of Chief Counsel advised that Sec. 3508, which treats direct sellers and real estate agents as nonemployees, no longer distinguishes between tangible and intangible consumer products as formerly provided in Prop. Regs. Sec. 31.3508-1(g)(3). The Chief Counsel’s Office noted that, in Cleveland Institute of Electronics, Inc., 787 F. Supp. 741 (N.D. Ohio 1992), the IRS argued that consumer products were limited to tangible products, as stated in the proposed regulations, but the court rejected this argument, pointing out that excluding sellers of intangible consumer products would defeat Sec. 3508’s purpose of reducing the number of employment tax controversies. CCA 01652020 (12/23/16).

 

EXEMPT ORGANIZATIONS

Amended Form 990 does not satisfy substantiation requirements for donor’s contribution

The Tax Court held that the filing of an amended Form 990, Return of Organization Exempt From Income Tax, by a Sec. 501(c)(3) donee organization, which aimed to fulfill the substantiation requirements for a donor that had taken a $64.5 million charitable deduction for a donation to the organization, did not meet the contemporaneous written acknowledgment (CWA) requirement of Sec. 170(f)(8)(A). The court rejected the donor’s argument that the amended Form 990 eliminated the need for a CWA. The donor argued that Sec. 170(f)(8)(D) provides that the CWA requirement does not apply to a contribution if the donee organization files a return, but the court said that Sec. 170(f)(8)(D) is not “self-executing” and the IRS has not issue the required regulations to make it operative. 15 West 17th Street LLC, 147 T.C. No. 19 (12/22/16).

 

INDIVIDUALS

Law allows combat-injured veterans to recover improperly withheld taxes

Legislation extends the statute of limitation to allow combat-injured veterans to file amended returns to reclaim amounts improperly withheld from certain severance payments. Combat-Injured Veterans Tax Fairness Act of 2016, H.R. 5015 (12/21/16) (see related news story).

Final regs. issued on premium tax credit

The IRS issued final regulations covering various issues related to the Sec. 36B health insurance premium tax credit. T.D. 9804 (12/19/16).

Settlement payment from hotel company was taxable income

The Tax Court held that a $3,000 legal settlement that a taxpayer received from Wyndham Hotel Group LLC after alleging violations of the Telephone Consumer Protection Act (TCPA) was taxable income. After considering the purpose of the TCPA (to restrict the use of automated phone calls) and the terms in the settlement agreement, the court found that Wyndham did not intend to pay the taxpayer for any physical injury or sickness. Arkow, T.C. Summ. 2016-87 (12/20/16).

Costs of Wharton MBA are deductible as unreimbursed employee expenses

The Tax Court held that a taxpayer (1) was not engaged in a real estate trade or business activity and thus could not take related deductions claimed on Schedules C, Profit or Loss From Business, for the years in issue, but (2) could deduct the costs of his MBA program at the Wharton School of the University of Pennsylvania for 2010 and 2011 as unreimbursed employee expenses. Further, because the taxpayer was sophisticated and understood complex laws in areas such as finance, the court concluded that he did not act with reasonable cause and good faith in deducting his real estate expenses and was thus liable for accuracy-related penalties. Long, T.C. Summ. 2016-88 (12/20/16).

Couple liable for taxes and penalties on failure to report husband’s partnership income

The Tax Court held that a couple was liable for income tax on the husband’s full distributive share of partnership income for the year at issue, and any payment of partnership expenses by the husband was a contribution to capital. While finding that the husband was entitled to deduct his share of the partnership’s expenses, the court nonetheless also concluded that the couple was liable for an accuracy-related penalty for an underpayment attributable to a substantial understatement of income tax for their failure to report the partnership income. Mack, T.C. Memo. 2016-229 (12/19/16).

Distribution from IRA of inherited amount to stepson was taxable and subject to penalty

The Tax Court held that, while the taxpayer’s probate attorney failed to counsel her on the full tax ramifications of paying $110,000 that she inherited from her deceased husband to her stepson from her own IRA, the distribution from her IRA was taxable income to her and subject to the 10% penalty tax on early distributions. The court also found her liable for a penalty for failing to file her return on time but held that she was not liable for the 20% accuracy-related penalty under Sec. 6662 because she had reasonable cause for substantially understating her income tax for the year at issue. Ozimkoski, T.C. Memo. 2016-228 (12/19/16).

Wages earned in Afghanistan were not excludible from income under Sec. 911

The Tax Court held that wages a former U.S. Army soldier earned in Afghanistan while working for a defense contractor as an atmospheric manager were not excludable from gross income under Sec. 911(a) because Afghanistan was not his tax home for the year at issue. However, the court found that the taxpayer was liable for only one of the three penalties assessed by the IRS—the penalty for failing to timely file his return—because he reasonably relied on the advice of a professional in preparing the return. Qunell, T.C. Summ. 2016-86 (12/19/16).

Taxpayer not entitled to unsubstantiated deductions of sole proprietorship

The Tax Court held that over $70,000 of expenses reported on a taxpayer’s Schedule C for a sole proprietorship were not deductible because the taxpayer failed to substantiate them. Because the taxpayer did not keep accurate records, the court also upheld penalties assessed by the IRS. Sioui, T.C. Summ. 2016-85 (12/19/16).

Incarceration during the year does not prevent taxpayer from taking dependency exemption deduction

The Tax Court held that the taxpayer was entitled to (1) a dependency exemption deduction for a minor child who lived with his girlfriend; (2) head-of-household filing status; (3) an earned income tax credit; and (4) an additional child tax credit for tax year 2013; however, he was not entitled to a dependency exemption for his girlfriend because he did not show she was a qualifying relative by establishing that he provided over one half or her support. In addition, given that the taxpayer was paroled during the year at issue, the court found that the taxpayer’s incarceration did not prevent him from satisfying the residency requirement of Sec. 152(c)(1)(B) for taking a dependency exemption for his child. Binns, T.C. Summ. 2016-90 (12/22/16).

Most of a taxpayer’s deductions are disallowed

The Tax Court held that a taxpayer was not entitled to deduct as charitable contributions unreimbursed expenses he incurred in connection with a North Carolina soccer tournament or for most of his charitable contributions because he failed to provide adequate substantiation. The court also found that the taxpayer was not entitled to deduct unreimbursed business expenses that his employer would have reimbursed or expenses incurred by his bankrupt corporation. He was entitled to deduct his job search expenses to the extent he provided adequate substantiation, however. Finally, the court upheld penalties for late filing, saying that a computer malfunction and data loss was not reasonable cause. Brown, T.C. Summ. 2016-89 (12/21/16).

Guaranteeing notes of S corporations does not give taxpayer basis to take losses

The Tax Court held that a taxpayer’s role as comaker or guarantor of certain notes of S corporations that he owned did not entitle him to claim basis in the debt and thus did not give him basis to report losses from the S corporations on his personal tax returns. Similarly, the taxpayer’s wife did not prove that she had basis in certain limited liability companies and thus was not entitled to deduct losses from those businesses. Hargis, T.C. Memo. 2016-232 (12/21/16).

Horse-breeding activity was not conducted for profit; IRS disallows losses

The Tax Court held that a taxpayer’s horse-breeding, training, showing, and sales operation was an activity “not engaged in for profit” under Sec. 183, and thus the taxpayer was not entitled to deduct losses from the activities. The court also found the taxpayer liable for penalties for failing to file her returns on time, as well as accuracy-related penalties, and rejected her arguments that she had reasonable cause  because she relied on a CPA to prepare her returns. Hylton, T.C. Memo. 2016-234 (12/22/16).

Couple entitled to easement contribution deduction; penalty assessments rejected

The Tax Court held that a couple were entitled to a deduction for a qualified conservation easement contribution although in a lesser amount than  originally claimed. The court also rejected the IRS’s assessment of penalties because, it said, the couple made “a good faith investigation of the value of the contributed property.” McGrady, T.C. Memo. 2016-233 (12/22/16).

Sports promoter hit with numerous penalties for failing to file multiple years of tax returns

The Tax Court held that a sports promoter, who failed to file returns for numerous years and failed to show up at trial, was liable for various penalties, including penalties for failing to file returns, penalties for underpayment of tax, and penalties for underpayments attributable to fraud. The court noted that the taxpayer (1) failed to maintain adequate books and records; (2) received substantial cash withdrawals; (3) structured his cash withdrawals so that each withdrawal was less than $10,000 in an attempt to avoid certain federal reporting requirements; (4) knew that he was required to file returns but willfully did not ; (5) consistently and substantially understated income; (6) had pled guilty to tax evasion for his 2004 taxes and to  bank and wire fraud; (7) and refused to cooperate with the IRS’s counsel to prepare this case for trial or to settle it. Peake, T.C. Memo. 2016-231 (12/21/16).

 

INTERNATIONAL

IRS issues base period T-bill rate for the period ending Sept. 30, 2016

The IRS set forth the base period T-bill rate for the period ending Sept. 30, 2016, and issued a table of factors compounded daily for taxpayers with short or alternative tax years. Sec. 995(f) requires the IRS to annually publish a base period T-bill rate with which shareholders of an interest charge domestic international sales corporation (IC-DISC) calculate the interest due on their IC-DISC-related deferred tax liability for the year. Rev. Rul. 2017-1 (12/19/16).

 

IRS PROCEDURE

Change to installment agreement fees finalized

The IRS issued final regulations, increasing the fee charged to taxpayers who enter into installment agreements with the Service, starting Jan. 1, 2017. T.D. 9798 (12/19/16).

IRS timely mailed deficiency notices against couple that engaged in excess benefit transactions

The Tax Court held that the IRS timely mailed valid notices of deficiency for 2008 and 2009 to a couple that engaged in excess benefit transactions under Sec. 4958 and were thus subject to excise taxes. The court also found that the IRS’s levy to collect unpaid assessments against the couple could proceed. Archer, T.C. Memo. 2016-230 (12/19/16).

IRS updates guidance on user fee exemptions for certain IRS determination letters

The IRS issued guidance under Sec. 7528(b)(2) relating to an exemption from the requirement to pay a user fee for certain requests to the IRS for determination letters with respect to the qualified status of pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans maintained by small employers. The notice was issued as a result of changes made to the determination letter program and remedial amendment period rules set forth in Rev. Proc. 2016-37. Notice 2017-1 (12/19/16).

Guidance issued on definitions of “chassis” and “body” for retail excise tax purposes

The IRS issued guidance providing interim definitions of the terms “chassis” and “body” for purposes of the retail excise tax on heavy trucks, trailers, and tractors imposed by Sec. 4051(a) and for purposes of applying the safe harbor provision in Sec. 4052(f)(1). The notice also requests comments on these interim definitions. Notice 2016-81 (12/19/16).

IRS identifies syndicated conservation easement transactions as listed transactions

The IRS issued a notice alerting taxpayers and their representatives that certain transactions involving the syndication of conservation easements that purport to give investors charitable deductions that significantly exceed their investment are tax avoidance transactions. The notice identifies a specific transaction, and substantially similar transactions, as listed transactions under Regs. Sec. 1.6011-4(b)(2) and Secs. 6111 and 6112, and alerts persons involved with these transactions that certain responsibilities may arise from their involvement. Notice 2017-10 (12/21/16).

Do not concede case due to filing of wrong form, Chief Counsel’s Office advises

The Office of Chief Counsel recommended that a case not be conceded simply because a Form 872-H, Consent to Extend the Time to Assess Tax on a Trust, was used instead of a Form 872, Consent to Extend the Time to Assess Tax. According to the Chief Counsel’s Office, as only the husband extended the statute, but not the wife, the extension is only valid against the husband. CCA 201652023 (12/23/16).

Understating gross income because of understating basis is an omission from gross income

In a heavily redacted Chief Counsel Advice, the office advised that, with respect to a question about overstated basis and Sec. 6501(e), Congress amended Sec. 6501(e)(1) to provide that an understatement of gross income due to an overstatement of unrecovered cost or other basis is an omission from gross income (which extends the statute of limitation to six years instead of three). This applies, the Chief Counsel’s Office stated, even if the overstatement of basis is not in regard to a sold asset. CCA 201652022 (12/23/16).

Certain return pages relating to a whistleblower claim should be withheld

The Office of Chief Counsel advised that, based on its review of an email it received regarding a specific whistleblower claim, certain related pages of a taxpayer’s return should be withheld in full under FOIA exemption 3/Sec. 6103(a). For the remaining pages, the specific references to a specific whistleblower claim should also be redacted as return information. CCA 201652021 (12/23/16).

Chief Counsel’s Office addresses TEFRA statute extension questions

In response to a question about extending the TEFRA statute of limitation, the Office of Chief Counsel advised that if, in the example being addressed, Jane Smith was the tax matters partner (TMP) for earlier tax years, she may sign the Form 921-P, Consent Fixing Period of Limitation on Assessment of Income and Profits Tax, for those years. If she was not, then the TMP for the earlier years would need to sign Forms 921-P unless the partnership provides written authorization for Jane Smith to sign. CCA 201652019 (12/23/16). 

 

TAX ACCOUNTING

January 2017 AFRs issued

The IRS issued the applicable federal rates for January 2017. Rev. Rul. 2017-2 (12/19/16).

IRS updates accounting change rules relating to utilization of final tangible property regs

The IRS issued a notice extending the waiver of the eligibility rule set out in Section 5.01(1)(f) of Rev. Proc. 2015-13 (which was clarified and modified by Rev. Proc. 2015-33 and modified by Rev. Proc. 2016-1) that was provided under Rev. Proc. 2016-29 for making certain automatic changes in accounting methods. Specifically, the IRS extends this eligibility rule waiver for one year to any tax year beginning before Jan. 1, 2017, for taxpayers making certain automatic changes to utilize the final tangible property regulations under Sec. 162(a) and Sec. 263(a) and for making certain automatic changes to depreciation and dispositions under Sec. 168. Notice 2017-6 (12/20/16) (see related news story).

Proposed regs. issued on LIFO inventory pools

The IRS issued proposed regulations that relate to the establishment of dollar-value, last-in, first-out (LIFO) inventory pools by certain taxpayers that use the inventory price index computation (IPIC) pooling method. REG-125946-10 (12/19/16).

Newsletter Articles

SPONSORED REPORT

Keeping client information safe in an age of scams and security threats

A look at the Dirty Dozen tax scams and ways to protect taxpayer information.

PRACTICE MANAGEMENT

Tax software survey

Results of the annual survey are in, as more than 3,800 CPA tax preparers tell how their return preparation software worked for them during this year’s busy season.