Document Summaries for the Week of Nov. 30, 2015
Organization files declaratory judgment suit
The IRS gave notice to potential donors that an organization listed in the announcement recently filed a timely declaratory judgment suit under Sec. 7428 challenging revocation of its status as an eligible donee under Sec. 170(c)(2). Sec. 7428(c) protects donors for up to $1,000 in donations during the period between the date the revocation notice is published in the Internal Revenue Bulletin and the date a court first determines the organization is not described in Sec. 170(c)(2). Announcement 2015-27 (11/30/15).
Tax Court rejects argument that AMT does not apply to commercial airline pilots
The Tax Court upheld the IRS’s assessment of alternative minimum tax (AMT) on a commercial airline pilot. In doing so, the Tax Court rejected the pilot’s argument that the AMT does not apply to individuals in his line of work, particularly international airline pilots, because it fails to take into account the type of expenses (e.g., unreimbursed employee expenses) that pilots are obliged to incur in their profession. Vargas, T.C. Summ. 2015-69 (11/30/15).
Couple is subject to taxes and penalties on early retirement plan distributions
The Tax Court held that a couple was liable an accuracy-related penalty for failing to report distributions of $80,685 from qualified retirement accounts. The court rejected the couple’s argument that they had reasonable cause for failing to report the retirement plan distributions because they relied on a tax return preparer to prepare their returns, since they did not prove they provided the preparer with all the pertinent information and failed to review the completed return before it was filed. Yguico, T.C. Memo. 2015-230 (11/30/15).
Court disallows business expenses due to lack of substantiation
The Tax Court disallowed a taxpayer’s business expense deductions for wages, travel, meals, and entertainment due to lack of proper substantiation and upheld the IRS’s assessment of an accuracy-related penalty. The court noted that the taxpayer admitted to claiming meal expense deductions both by specific items and at per diem rates, while offering no evidence to show that he did not duplicate expenses. Besaw, T.C. Memo. 2015-233 (12/3/15).
No losses allowed for taxpayer’s photography business or film production expenses
The Tax Court held that the taxpayer did not engage in his photography business with the intent to make a profit and thus was not entitled to deduct losses from that business. In addition, the court disallowed a deduction for film production costs because the taxpayer did not make the required election to treat those costs as deductible. Kantchev, T.C. Memo. 2015-234 (12/3/15).
Contemporaneously created index cards save business mileage deductions
The Tax Court held that a taxpayer who traveled for business adequately substantiated that he had business mileage expenses for the year at issue through the index cards he created contemporaneously for all clients, but it did reduce the number of miles he was permitted to deduct. Although the IRS objected to the index cards’ being entered into evidence, the court found the taxpayer’s testimony that he prepared them while he was in the car travelling to his clients credible. Charley, T.C. Memo. 2015-232 (12/2/15).
Lack of substantiation precludes most business expense deductions; penalties allowed
The Tax Court disallowed many of a couple’s business-related expenses due to lack of substantiation; but did permit more in U.S. Postal Service expenses than the IRS had allowed for the couple’s direct mail newsletter business. However, because the couple did not provide any evidence that they acted with reasonable cause and in good faith, the court upheld the accuracy-related penalty the IRS imposed if it was determined that the couple had a substantial understatement once the tax due was calculated. Newhouse, T.C. Summ. 2015-71 (12/2/15).
IRS announces tax relief for Corinthian Colleges students
Students who took out federal student loans to finance attendance at schools owned by the now-defunct Corinthian Colleges Inc. and whose loans are discharged under the Department of Education’s Defense to Repayment or Closed School discharge processes will not have to recognize income as a result of that debt discharge. Rev. Proc. 2015-57 (12/3/15) (see related news story).
Taking care of dying wife negates most of tax penalty
The Tax Court held that a taxpayer who was busy taking care of his dying wife had reasonable cause for failing to timely file his tax return and to pay the tax due. However, the court also determined that the taxpayer was not excused from the estimated tax penalty under Sec. 6654. Ibarra, T.C. Summ. 2015-70 (11/30/15).
Taxpayers escape transferee liability tax
The Tax Court held that because the taxpayers took steps to ensure that the IRS was paid what it was due—even though those steps were ultimately unsuccessful—the taxpayers were not liable for the Sec. 6901 transferee tax. In addition, the Tax Court concluded that, because the taxpayers did not receive a transfer from the company they sold, direct transferee liability could not be established. John M. Alterman Trust, T.C. Memo. 2015-231 (12/1/15).
Taxpayer not entitled to collection alternative
The Tax Court held that an IRS settlement officer did not abuse her discretion in concluding that the taxpayer was not entitled to a collection alternative and in sustaining the IRS’s notice of federal tax lien. The court noted that the taxpayer declined to participate in the collection due process hearing; refused to submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and financial information needed to consider a collection alternative; offered no specific proposal for a collection alternative; and had not complied with his ongoing federal tax obligations. Silva, T.C. Memo. 2015-229 (11/30/15).
IRS will not reconsider tax refund after expiration of two-year period under Sec. 6532
The IRS Office of Chief Counsel advised that no tax refund is allowed if the two-year period under Sec. 6532(a)(1) for filing a refund suit has expired, unless the taxpayer has filed suit within that period or the taxpayer and the IRS have executed a Form 907, Agreement to Extend the Time to Bring Suit, within the statute of limitations. According to the Chief Counsel’s Office, reconsideration after the mailing of the notice of disallowance does not extend the two-year period. CCA 201549029 (12/4/15).
Bankruptcy stays 90-day period after which IRS can make an assessment
The IRS Office of Chief Counsel advised that, if a taxpayer files for bankruptcy on the last day of the taxpayer’s 90-day period to petition the Tax Court under Sec. 6213(a), the 90-day period is suspended. Thus, the IRS cannot make an assessment against the taxpayer until the period specified in Sec. 6213(f) has run. CCA 201549028 (12/4/15).
Publication 1 required for Form 8300 examinations
The IRS Office of Chief Counsel advised that Publication 1, Your Rights as a Taxpayer, is required for Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, examinations because the phrase “the determination or collection of any tax” as used in the statute includes penalties under Secs. 6721 and 6722 for failing to file Forms 8300, as these penalties are assessable penalties that are treated as a tax. The Chief Counsel’s Office cited Sec. 6671, rules for application of assessable penalties. CCA 201549026 (12/4/15).
Rules issued for tribal economic development bonds with a “draw-down” loan structure
The IRS issued special rules regarding the process for allocation of the available amount of national volume cap for tax-exempt tribal economic development bonds under Sec. 7871(f) for bonds issued under a “draw-down” loan structure in which the lender advances funds for the loan on different dates. Notice 2015-83 (12/4/15).
Sec. 467 rental agreement did not provide specific allocation of fixed rent
The Office of Chief Counsel advised that a taxpayer’s Sec. 467 rental agreement did not provide a specific allocation of fixed rent as required in Regs. Sec. 1.467-1(c)(2)(ii)(A)(2) where it included a provision stating that the Sec. 467 loan balance was reduced to zero upon any termination of the lease. In that situation, the Chief Counsel’s Office stated, the taxpayer should be accounting for its rents in accordance with the rent payment schedule in the rental agreement. CCA 201549027 (12/4/15).
Prior letter ruling on treatment of acquired and developed software costs continues to apply
The Office of Chief Counsel advised that the principles and conclusions of Letter Ruling 200236028, which addressed the income tax consequences of the purchase, development, and implementation of enterprise resource planning software acquired by a taxpayer from a third party as well as acquired computer hardware, continue to apply. Some taxpayers have argued that the promulgation of Regs Sec. 1.263(a)-4 means that Letter Ruling 200236028 no longer applies, but the IRS disagrees. CCA 201549024 (12/4/15).