Document Summaries for the Week of March 7, 2016

C CORPORATIONS

Corporation sold subsidiary stock rather than stock in itself

The Tax Court held that a corporation sold stock of a subsidiary, rather than stock in itself, and rejected the corporation’s argument that, in executing the sale agreement, the parties to the agreement made a mutual mistake justifying reformation of the agreement. The court also held that the corporation was liable for an accuracy-related penalty under Sec. 6662(a). Makric Enterprises, Inc., T.C. Memo. 2016-44 (3/9/16).

Court denies summary judgment regarding alleged sale of intellectual property rights

The Tax Court denied an IRS motion for summary judgment relating to deficiencies from a corporation’s claimed sale as a capital asset of intellectual property rights, which the IRS argued were merely sublicensed. According to the court, summary judgment was inappropriate because substantial questions of fact remained unresolved. Mylan Inc., T.C. Memo. 2016-45 (3/10/16). 

 

ESTATES, TRUSTS & GIFTS

Estate is liable for unpaid interest on decedent’s 2003 gift tax liability

The Tax Court upheld a notice of federal tax lien for unpaid interest on a decedent’s federal gift tax liability. The court rejected the estate’s argument that the terms of the settlement did not provide for interest to be paid on the 2003 gift tax liability because the IRS is usually not authorized to waive interest. In addition, the estate’s inability to deduct the interest because the statute of limitation had run did not change the result. Estate of La Sala, T.C. Memo. 2016-42 (3/8/16).

 

EXEMPT ORGANIZATIONS

IRS notifies donors of organization’s Sec. 501(c)(3) qualification

The IRS notified donors that the Tax Court entered a stipulated decision that Academy of America, a Michigan nonprofit corporation, is recognized as a Sec. 501(c)(3) organization and is exempt from tax under Sec. 501(a) for tax years beginning July 1, 2001. Announcement 2016-11 (3/7/16).

 

INDIVIDUALS

Tax Court has no jurisdiction to review IRS decision letter

The Tax Court held that it lacked jurisdiction to issue a decision in the taxpayer’s case because the IRS Appeals office had not made a determination in the taxpayer’s case that could be appealed to the Tax Court. Under Sec. 6330(d)(1), the court had no authority to review an IRS decision letter sent to the taxpayer following an equivalent hearing and the IRS’s decision to proceed by levy to collect the penalty that it had imposed on the taxpayer for filing a frivolous return. Gafford, T.C. Memo. 2016-40 (3/7/16).

Taxpayer who failed to file a return also failed to make a mark-to-market election

A taxpayer who had not filed a tax return since 2005 failed to make a mark-to-market election in 2010 because he did not file a return, which is when the election must be made. Although the taxpayer did submit a notice of a mark-to-market election to his brokerage company in 2006, he never made a valid mark-to-market election. As a result, the court upheld the amounts the IRS assessed on the substitute return it filed and the penalties the IRS assessed. Spicko, T.C. Memo. 2016-41 (3/7/16).

Amounts received from former spouse are taxable alimony

The Tax Court held that amounts the taxpayer received from her former spouse were includible in her income as alimony despite her argument that she was fraudulently induced to sign the divorce decree. In addition, because the taxpayer’s current husband was a tax attorney, the taxpayer did not demonstrate that she acted with reasonable cause or in good faith when she failed to treat the payments as alimony, and the court upheld the IRS’s assessment of an accuracy-related penalty. Nuzum, T.C. Summ. 2016-9 (3/7/16).

Lawyer cannot deduct book-writing expenses and full amount of wages paid to children

The Tax Court held that, since the taxpayer did not prove that she conducted her book-writing activity with the profit motive required under Sec. 183, it was not an active trade or business at the close of 2008, and she was not entitled to take deductions on Schedule C for that activity. The court also held that the taxpayer could not deduct the full amounts she claimed she paid to her children for services rendered to her law practice, noting that no W-2s were issued, no payroll records were maintained, and no documentary evidence such as bank statements was presented. But, because the taxpayer proved she did in fact employ her children in her practice, the court allowed a deduction of $250 for each child. Fisher, T.C. Summ. 2016-10 (3/8/16).

Failure to meet strict substantiation rules for vehicle expenses precludes deduction

The Tax Court held that, because the taxpayer did not meet the strict substantiation requirements of Sec. 274(d), he could not deduct vehicle expenses related to his business. However, the court did allow some deductions for expenses related to the taxpayer’s business use of a cellphone. Jackson, T.C. Summ. 2016-11 (3/9/16).

No loss deduction allowed where taxpayer still could recover investment

The Tax Court held that, because the taxpayer could not prove intent or false representation by a co-worker who talked her into investing in his company, she could not show that she suffered a theft by false pretenses under California law and therefore was not entitled to claim a theft-loss deduction under Sec. 165(c). The court noted that the taxpayer might later be able to claim some sort of loss deduction, but because there was still a chance of recovering her investment, she could not yet claim any type of loss deduction. Riley, T.C. Memo. 2016-46 (3/10/16). 

 

INTERNATIONAL

IRS issues annual Sec. 911 housing exclusion amounts

The IRS issued its annual adjustments to the limitation on foreign housing expenses that may be excluded from income in 2016 under Sec. 911. The adjustments are made on the basis of geographic differences in housing costs in each location relative to housing costs in the United States. Notice 2016-21 (3/7/16).

 

IRS PROCEDURE

Couple’s lawyer must pay more than $7,000 for abusing judicial process

The Tax Court sanctioned a couple’s lawyer for violating rules of professional conduct and intentionally abusing the judicial process. Under Sec. 6673(a)(2), the court imposed a penalty of more than $7,000 on the lawyer, based on the amount of the IRS attorneys’ time it had taken to respond to the lawyer’s frivolous requests. May, T.C. Memo. 2016-43 (3/8/16).

Guidance issued on Secured Airport Terminals for aviation excise taxes

The IRS issued guidance on the criteria for designating a terminal within a secure area of an airport as a Secured Airport Terminal for purposes of the excise taxes on kerosene used in aviation. Notice 2016-15 (3/8/16).

IRS extends certification deadlines for work opportunity tax credit

The IRS announced that it is extending the time for employers to file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, for employees (other than those qualifying under the credit as long-term unemployed) hired from Jan. 1, 2015, to May 31, 2016, and for employees hired from Jan.1, 2016, to May 31, 2016, under the new category for the long-term unemployed. The new deadline is June 29, 2016. Notice 2016-22 (3/7/16) (see related news story).

IRS revises rules and specifications for substitute Form 941

The IRS issued as a revenue procedure the latest revision of Publication 4436, General Rules and Specifications for Substitute Form 941, Schedule B (Form 941), Schedule D (Form 941), and Schedule R (Form 941). Rev. Proc. 2016-16 (3/7/16).

 

PRACTICE & STANDARDS

Regulations issued on Joint Board for the Enrollment of Actuaries

The IRS issued regulations addressing the composition of the Joint Board for the Enrollment of Actuaries, which establishes standards and qualifications for persons performing actuarial services with respect to pension plans covered by the Employee Retirement Income Security Act of 1974. T.D. 9749 (3/7/14).

IRS announces recent disciplinary sanctions

The IRS Office of Professional Responsibility announced recent disciplinary sanctions involving attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. Announcement 2016-6 (3/7/16).

Newsletter Articles

SPONSORED REPORT

Year-End Tax Planning and What’s New for 2016

A look at year-end tax planning strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

PRACTICE MANAGEMENT

CPAs Contend With Tax ID Theft

Tax-related identity theft fraud remains a widespread problem that is often difficult for victims and their tax preparers to correct.