Document Summaries for the Week of March 6, 2017
Couple penalized for using C corporation to pay personal expenses
The Tax Court held that (1) a C corporation, which was owned by a husband and wife, was not entitled to deduct certain expenses for its 2012 and 2013 fiscal years beyond those the IRS allowed; (2) the couple failed to report, for 2011 and 2012, constructive dividend income from the C corporation attributable to its payments of their personal expenses for repairs to their personal residences, utilities, swimming pool maintenance, personal insurance policies, automobiles, health club dues, and restaurant meals; (3) the couple was not entitled to most itemized deductions claimed for 2011 and 2012 beyond those allowed by the IRS; and (4) the couple and their C corporation were liable for accuracy-related penalties. In so holding, the court found that the records kept by the couple and the C corporation were incomplete and often contradictory and, thus, most of the deductions were not properly substantiated. Luczaj & Associates, T.C. Memo. 2017-42 (3/8/17).
ESTATES, TRUSTS & GIFTS
Income tax withholding requirement applies to trust payments to Indian tribal members
The Office of Chief Counsel advised that the income tax withholding requirement of Sec. 3402(r) applies to payments from a trust established for the distribution of gaming revenues to Indian tribal members who are minors or legally incompetent. According to the Chief Counsel’s Office, this requirement applies to amounts paid from a trust that satisfies the safe harbor of Rev. Proc. 2011-56 in the year in which it is included in gross income and to all payments of revenue from the specified gaming activities. CCA 201710023 (3/10/17).
IRS announces revocations of tax-exempt status
For several organizations, the IRS announced that it has revoked its determination that the organizations qualify as organizations described in Secs. 501(c)(3) and 170(c)(2). Announcement 2017-2 (3/6/17).
No mortgage interest deduction allowed for alleged payments for girlfriend’s home
The Tax Court held that a taxpayer was not entitled to a mortgage interest deduction on property owned by his girlfriend where he failed to provide any evidence that he paid the mortgage interest at issue or had an equitable interest in the property. According to the court, without bank statements, receipts, other records, or testimony from the taxpayer or his girlfriend (other than a letter from the girlfriend that he had paid her $1,000 per month) to show that the taxpayer transferred any amounts to pay the mortgage or that he had an equitable interest in the property, the taxpayer could not carry his burden of proving he was entitled to the deduction. The court also noted that this was the second time the taxpayer had tried to claim mortgage interest deductions on the same property, albeit for a different tax year. Jackson, T.C. Summ. 2017-11 (3/6/17).
United States abode precludes taxpayer from excluding overseas wages from income
The Tax Court held that (1) the taxpayer was not a “qualified individual” entitled to exclude from income a portion of the wages that he earned overseas during 2010, 2011, and 2012 under the Sec. 911(a) foreign earned income exclusion; (2) the taxpayer was not entitled to deductions for unreimbursed employee business expenses for the same years; and (3) the taxpayer’s wife qualified for innocent spouse relief under Sec. 6015(c) for 2010 and 2011 because she did not have actual knowledge of the circumstances underlying her husband’s disallowed claims for unreimbursed employee expenses or the foreign earned income exclusion. The court determined that the taxpayer was not eligible for the foreign earned income exclusion because his abode was in the United States as a result of having numerous economic ties to the United States, maintaining a Florida driver’s license, owning and helping manage rental properties in Florida, and maintaining his status as a reserve deputy sheriff in Florida. Lock, T.C. Summ. 2017-10 (3/6/17).
Payments to Indian tribal members settling a contract dispute are not excludable from income
The Office of Chief Counsel concluded that there was any legal basis to exclude from Indian tribal members’ income certain payments to made to them from a settlement of contract litigation with the government. CCA 201710026 (3/10/17).
Interest rates remain the same for the second quarter of 2017
The IRS announced that interest rates will remain the same for the calendar quarter beginning April 1, 2017, as for the previous quarter. The rates will be 4% for overpayments (3% in the case of a corporation); 1.5% for the portion of a corporate overpayment exceeding $10,000; 4% for underpayments; and 6% for large corporate underpayments. Rev. Rul. 2017-6 (3/7/17).
IRS’s failure to pursue tax collection for seven years does not negate levy on taxpayers
While noting that the IRS’s nearly seven-year delay in collecting late taxes from a couple created hardships for them, the Tax Court nevertheless held that the IRS was not estopped from sustaining a proposed levy. The court said that, while it did not condone the IRS’s failure to pursue collection action between November 2007 and August 2014, the IRS by statute has 10 years from the date of assessment to collect a tax, and its collection action in this case was within that time frame. Paynter, T.C. Summ. 2017-12 (3/8/17).
All four elements of mitigation provisions must be met
The Office of Chief Counsel found that, while the IRS could clearly meet its burden in proving three of the four elements necessary to invoke the mitigation provisions in Secs. 1311–1314 against a taxpayer, it was not clear that the IRS could do so with respect to the fourth element. The Chief Counsel’s Office noted that the mitigation provisions were not drafted to be a general equitable remedy and that the specific mitigation elements must be met to invoke the provisions. CCA 201710029 (3/10/17).
Form SS-8 may be accepted only with an original signature
The Office of Chief Counsel concluded that the SS-8 program may accept only original signatures on Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The Chief Counsel’s Office noted that it had consulted with other attorneys and reviewed Internal Revenue Manual Sections 220.127.116.11.1(4) and 18.104.22.168.4(5), as well as Rev. Proc. 2017-1, Section 12.04, in reaching its conclusion. CCA 201710027 (3/10/17).
IRS must re-serve certain eFax levies
The Office of Chief Counsel advised that the IRS must re-serve certain levies served by eFax using non-eFax methods, that is, by mail, in person, or by traditional fax. The Chief Counsel’s Office noted that the only protocol required to confirm that banks consent to service by eFax is to consult the list on the IRS Small Business/Self-Employed Division website. CCA 201710025 (3/10/17).
Chief Counsel’s Office agrees that taxpayer is subject to income tax and TFRP assessments
The Office of Chief Counsel advised that both an income tax assessment and a trust fund recovery penalty (TFRP) assessment on an unspecified taxpayer was proper. The Chief Counsel’s Office also noted that hardship was not an issue in this situation. CCA 201710024 (3/10/17).
Chief Counsel’s Office addresses appropriate signatures for extensions of statute of limitation
The Office of Chief Counsel advised that, if the tax matters partner (TMP) of a TEFRA partnership is an entity, an extension of the statute of limitation must be signed by whoever has the authority under state law to sign for the TMP entity. The Chief Counsel’s Office noted that Regs. Sec. 301.6224(c)-2(b) identifies who signs settlement agreements for passthrough partners, which, for limited liability companies, is a manager under state law. CCA 201710028 (3/10/17).