Document Summaries for the Week of Nov. 16, 2015
District court upholds taxpayer’s deductions and credits in STARS transaction
A federal district court held that the IRS’s arguments that the taxpayer’s participation in a Structured Trust Advantaged Repackaged Securities (STARS) transaction lacked economic substance and that the taxpayer did not in substance actually pay foreign taxes were unpersuasive. In granting the taxpayer’s motion for summary judgment, the court found that the taxpayer properly claimed the foreign tax credits and the interest deductions and also was not liable for penalties the IRS assessed. Santander Holdings USA, Inc., No. 1:09-cv-11043 (D. Mass. 11/13/15).
Tax Court disallows losses generated by corporations on the contribution of option spreads to related LLCs
The Tax Court disallowed losses generated by C corporations that simultaneously entered into economically offsetting long and short options and then contributed the option spreads to related limited liability corporations (LLCs) taxed as partnerships. The court rejected the corporations’ argument that they were entitled to claim huge tax losses from their investments on their theory that the partnership bases in their LLC interests equaled the cost of the long-option premium unreduced by the offsetting short-option premium received. Ad Investment 2000 Fund LLC, T.C. Memo. 2015-223 (11/19/15).
Taxpayer’s contracts are not options
Where a taxpayer entered into contracts with a counterparty bank that referred to an index of assets specific to the transaction at issue, the IRS Office of Chief Counsel advised that the contracts, although labeled “options,” are not options for tax purposes. CCA 201547004 (11/20/15).
Final health care regulations issued
The IRS, the Employee Benefits Security Administration, and the U.S. Department of Health and Human Services jointly issued final regulations governing many aspects of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. T.D. 9744, 11/19/15) (see related news story).
Payments for health insurance coverage provided through a spouse’s group health plan excludible from income
The Office of Chief Counsel advised that an employer may exclude from an employee’s gross income payments for the cost of health insurance coverage provided through a spouse’s group health plan but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis and not through salary reduction under a Sec. 125 cafeteria plan. CCA 201547006 (11/20/15).
Foundation’s expenditures on radio messages were subject to excise tax
The Tax Court held that most of a foundation’s expenditures to produce and broadcast 30- and 60-second radio messages were attempts to influence legislation and were not educational. Thus, the foundation and the foundation manager were liable for Sec. 4945(a) excise taxes. The court also concluded that the taxpayers were liable for the additional excise tax under Sec. 4945(b) for failing to correct the taxable expenditures. Finally, the court rejected the taxpayers’ argument that the excise tax was unconstitutional under two recent Supreme Court decisions. Parks, 145 T.C. No. 12 (11/17/15).
Organization did not qualify as a Sec. 501(c)(3) organization
The Tax Court agreed with the IRS that the taxpayer did not operate exclusively for charitable purposes within the meaning of Sec. 501(c)(3). The taxpayer described its activities as providing alternative forms of entertainment to adult members of a certain area in Montana for the purpose of promoting adult sobriety, but, among other things, it did not limit participation to addicts with low income. Gamehearts, T.C. Memo. 2015-218 (11/17/15).
IRS announces organizations to which deductible contributions may not be made
The IRS revoked its determination that various listed organizations qualify as organizations contributions to which are deductible under Sec. 170. Announcement 2015-28 (11/16/15).
IRS notifies donors of declaratory judgments
The IRS served notice to donors that the Tax Court issued declaratory judgments that two organizations no longer qualified as organizations exempt from tax under Sec. 501(a) or as organizations contributions to which are deductible under Sec. 170. Announcement 2015-29; Announcement 2015-30 (11/16/15).
Private foundation’s transfers subject to excise tax
The IRS advised that first-tier excise taxes should be imposed under Sec. 4945 on a private foundation’s failure to distribute income for the years at issue because its transfers of funds to another private foundation are taxable expenditures and do not satisfy the exceptions in Sec. 4945(d)(4). TAM 201547007 (11/20/15).
Nurse cannot take unsubstantiated deductions and is not eligible for the American opportunity credit
The Tax Court held that the taxpayer, who worked as a visiting nurse, was not entitled to certain deductions due to lack of substantiation and was not entitled to the American opportunity credit. In addition, she was liable for the accuracy-related penalty because she had not substantiated her deductions and had misreported her self-employment income. Beaubrun, T.C. Memo. 2015-217 (11/17/15).
Proposed regs. make extensive changes to innocent spouse relief rules
Untimely filed petition precludes hearing by Tax Court
The Tax Court granted an IRS motion to dismiss a petition for lack of jurisdiction on the ground that the taxpayers did not file the petition within the time prescribed by Sec. 6330(d) or Sec. 7502. The court agreed with the IRS that a date affixed to the envelope containing the taxpayers’ petition by a U.S. Postal Service kiosk constituted a postmark for purposes of Sec. 7502 and that, because the postmark was beyond the 30-day period in which the petition was required to be filed, the petition was not timely mailed. Haddix, T.C. Memo. 2015-220 (11/18/15).
Innocent spouse relief denied
Weighing all the facts and circumstances, the Tax Court was not persuaded that it would be inequitable to deny a taxpayer innocent spouse relief under Sec. 6015(f). Considering that the taxpayer knew or had reason to know that her husband would not or could not pay the tax liabilities reported on their returns, and in the absence of economic hardship, the court concluded that innocent spouse relief was not appropriate. Hall, T.C. Memo. 2015-221 (11/19/15).
Taxpayers not eligible for new qualified plug-in electric drive motor vehicle tax credit
The Tax Court held that the taxpayers were not eligible for a new qualified plug-in electric drive motor vehicle tax credit for 2009 of $6,497 under Sec. 30D. According to the court, the taxpayers did not place their Spark NEV-48 EX in service in 2009. Trout, T.C. Summ. 2015-66 (11/19/15).
Taxpayers not eligible for new qualified plug-in electric drive motor vehicle tax credit
The Tax Court held that the taxpayers were not eligible for a new qualified plug-in electric drive motor vehicle tax credit for 2009 of $6,253 under Sec. 30D. According to the court, the taxpayers did not place their Spark NEV-48 EX in service in 2009. Podraza, T.C. Summ. 2015-67 (11/19/15).
Taxpayers not entitled to loss allegedly sustained on towing contract with Los Angeles
The Tax Court held that the taxpayers’ wholly owned limited liability company that was taxed as a partnership did not sustain an $800,000 loss in 2009 with respect to a towing contract with the city of Los Angeles. The court also held that the taxpayers were liable for Sec. 6662 accuracy-related penalties for 2009. Steinberg, T.C. Memo. 2015-222 (11/19/15).
IRS to issue guidance on corporate inversions structured to avoid Sec. 7874
The IRS intends to issue regulations that will address transactions that are structured to avoid the purposes of Sec. 7874 by: (1) requiring the foreign acquiring corporation to be subject to tax as a resident of the relevant foreign country to be considered as having substantial business activities in that country; (2) disregarding certain stock of the foreign acquiring corporation in “third-country” transactions; and (3) clarifying the definition of nonqualified property for purposes of disregarding certain stock of the foreign acquiring corporation. Notice 2015-79 (11/19/15) (see related news story).
Court agrees with IRS’s tax computations after settlement agreement
The Tax Court agreed with the IRS’s computations of the taxpayer’s tax liability after a settlement agreement had been reached between the taxpayer and the IRS. Thus, despite the taxpayer’s objections, the court granted the IRS’s motion for entry of decision and entered a decision consistent with the IRS’s tax computations, which the court determined to be correct in all respects. McMullen, T.C. Memo. 2015-219 (11/16/15).
Payments to taxpayer are not exempt from levy
The Office of Chief Counsel advised that certain payments received by a taxpayer were not exempt from levy as public assistance payments under Sec. 6334(a)(11) because they were not made to a recipient of public assistance. The Chief Counsel’s Office also noted that the statute of the state involved did not take precedence over the IRS’s authority to levy. CCA 201547005 (11/20/15).
IRS to issue additional guidance relating to comments on proposed ABLE regs.
The IRS issued guidance explaining how it intends to respond to comments noting that the following three requirements for qualified Achieving Better Life Experience (ABLE) programs in recent proposed regulations would create significant barriers to the establishment of such programs: (1) the requirement to establish safeguards to categorize distributions from ABLE accounts; (2) the requirement to request the taxpayer identification number of each contributor to an ABLE account; and (3) the requirements for disability certifications, particularly, the requirement to process disability certifications with signed physicians’ diagnoses. Notice 2015-81 (11/20/15).
December 2015 AFRs issued
The IRS issued the applicable federal rates for December 2015. Rev. Rul. 2015-25 (11/20/15).
IRS provides safe harbor for expenditures to remodel or refresh a retail establishment or a restaurant
The IRS provided certain taxpayers engaged in the trade or business of operating a retail establishment or a restaurant with a safe harbor method of accounting for determining whether expenditures paid or incurred to remodel or refresh a qualified building are deductible under Sec. 162(a), must be capitalized as improvements under Sec. 263(a), or must be capitalized as the costs of property produced by the taxpayer for use in its trade or business under Sec. 263A. The revenue procedure also provides procedures for obtaining automatic consent to change to the safe harbor method of accounting it permits. Rev. Proc. 2015-56 (11/19/15) (see related news story).