Document Summaries for the Week of Dec. 26, 2016

CORPORATIONS

Corporation is subject to accumulated earnings tax in spite of lack of liquidity

The Office of Chief Counsel advised that because a closely held C corporation permitted its earnings and profits to accumulate, and because consent dividends could have been used by the corporation and its sole shareholder to divide or distribute those earnings and profits, the corporation was subject to the accumulated earnings tax in spite of its lack of liquidity and lack of control over the partnerships in which it invested. The Chief Counsel’s Office noted that there was prima facie evidence that the corporation was formed to avoid income tax with respect to its shareholder. CCA 201653017 (12/30/16).

 

INDIVIDUALS

Expenses were not incurred in an active trade or business and thus are not deductible

The Tax Court held that the taxpayer was not entitled to a deduction for tax-preparation fees and certain items identified as business expenses under Sec. 162(a). The court agreed with the IRS that the expenditures were not ordinary and necessary expenses of an active trade or business for the 2009 tax year because the taxpayer and her husband had used the business entity to which the expenses were related as a vehicle to claim various personal, living, or family expenses as business deductions. Moyer, T.C. Memo. 2016-236 (12/27/16).

Court warns taxpayer of penalties for future frivolous positions

The Tax Court held that an IRS settlement officer satisfied the applicable verification requirements of Sec. 6330 and did not abuse her discretion in sustaining a notice of intent to levy against the taxpayer. The court stated that because this was the taxpayer’s first case before the Tax Court, it would not impose a penalty but that the taxpayer could expect a penalty in a future case if she persisted in maintaining the same frivolous and meritless positions she had maintained with the IRS and the court. Snodgrass, T.C. Memo. 2016-235 (12/27/16).

Investment consultant cannot assign to his S corporation income earned in personal capacity

The Tax Court held that a financial consultant who developed investment portfolios for clients could not assign income received from Linsco/Private Ledger Financial Services and MassMutual Financial Group to his wholly owned S corporation. The court noted that the contracts signed by the taxpayer with both entities explicitly stated that there was no employer-employee relationship, and thus the income had to be reported on the taxpayer’s Schedule C, Profit or Loss From Business, as self-employment income subject to self-employment tax. Fleischer, T.C. Memo. 2016-238 (12/29/16).

 

IRS PROCEDURE

Court sustains lien for unpaid trust fund penalties from operating a nursing home

The Tax Court upheld the IRS’s filing of a notice of federal tax lien regarding unpaid Sec. 6672 trust fund penalty liabilities for various tax periods from 2004 through 2010 that resulted from the operation of a nursing home by an S corporation that was wholly owned by the taxpayer. The court concluded that the IRS settlement officer’s determination to sustain the lien was not an abuse of discretion. Jewell, T.C. Memo. 2016-239 (12/29/16).

IRS did not abuse its discretion in rejecting taxpayer’s proposed installment agreement

The Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a taxpayer’s proposed installment agreement and sustaining a notice of federal tax lien. The court noted that, in calculating the taxpayer’s ability to pay, the settlement officer used all expense numbers provided by the taxpayer and found that the taxpayer’s monthly income over his expenses exceeded the taxpayer’s proposed monthly installment by more than $800. Pitner, T.C. Memo. 2016-237 (12/29/16).

Sec. 1274A inflation-adjusted amounts issued for 2017

The IRS provided the 2017 inflation-adjusted dollar amounts for qualified debt instruments under Sec. 1274A. Rev. Rul. 2016-30 (12/27/16).

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