Document Summaries for the Week of Sept. 7, 2015
Final regs. on required minimum contributions for single-employer pension plans
ESTATES, TRUSTS & GIFTS
IRS proposes rules on gifts and bequests from expatriates
Organization files declaratory judgment suit
The IRS gave notice to potential donors that the organization Foundation for Harmony and Happiness recently filed a timely declaratory judgment suit under Sec. 7428 challenging revocation of its status as an eligible donee under Sec. 170(c)(2). Announcement 2015-24 (9/7/15).
Suspense period eliminated for exemption application information requests
In a memo to employees of IRS Exempt Organizations Determinations group, the director of Exempt Organizations Rulings and Agreements advised that if an organization does not respond to an information request by the designated due date, it will have failed to establish that it meets the applicable requirements. EO Determinations will then close the case without making a determination and will not refund any user fee paid. The former 90-day suspense period has been eliminated. TEGE-07-0915-0022 (9/8/15)
Taxes and penalties upheld against couple engaged in a pattern of tax evasion
The Tax Court upheld IRS tax and penalty assessments against a couple who omitted items of income from their tax returns. The court concluded that the omissions were part of a pattern of intent to evade taxes. Hill, T.C. Memo. 2015-172 (9/8/15).
Taxpayers cannot deduct losses from C corporation on personal returns
The Tax Court held that the taxpayers’ business, which engaged in buying and reselling sporting, concert, and other tickets, was a C corporation, and the taxpayers, therefore, were not entitled to deduct the corporation’s business losses on their personal returns. Further, the court said the IRS met its burden of production as to accuracy-related penalties, and the taxpayers did not establish any defense to those penalties. Rochlani, T.C. Memo. 2015-174 (9/8/15).
Chiropractor cannot deduct cost of Microsoft Xbox 360 and Nintendo Wii and other expenses
The Tax Court sustained almost all of the IRS’s adjustments to a Minnesota chiropractor’s tax return. The IRS thought the chiropractor’s deductions for things such as a Microsoft Xbox 360, Nintendo Wii, and numerous pieces of hair-salon equipment, as well as claimed deductions for driving tens of thousands of miles throughout Minnesota and the Dakotas, were “a stretch,” and the Tax Court agreed. Laudon, T.C. Summ. 2015-54 (9/8/15).
Taxpayers not entitled to rental real estate losses
The Tax Court held that the taxpayers were not entitled to a deduction for a loss from their rental real estate activity and were liable for the Sec. 6662(a) accuracy-related penalty. In upholding the penalty, the court observed that the taxpayers offered no evidence establishing that they gave their return preparer all necessary and accurate information, such as records to substantiate the time spent in their rental real estate activity, and thus they could not prove that they acted with reasonable cause and in good faith. Farris, T.C. Summ. 2015-53 (9/8/15).
Attorney cannot deduct losses realized inside his IRA
The Tax Court held that a semiretired patent attorney was not entitled to a deduction for portfolio losses realized inside his individual retirement account (IRA). A loss from IRA investments is only available when all amounts from all IRA accounts have been distributed and the total distributions are less than any unrecovered bases in the accounts. Fish, T.C. Memo. 2015-176 (9/10/15).
Taxpayers cannot use open transaction doctrine to avoid reporting interest income
The Tax Court held that, even assuming that the taxpayers suffered fraud and would not be able to recover loans made to their daughter’s company, the open transaction doctrine did not support the taxpayers’ argument that payments received in 2010 were not interest income, but were instead a return of capital. Friedman, T.C. Memo. 2015-177 (9/10/15).
Taxpayer did not have discharge of debt income in 2011
The Tax Court held that the taxpayer did not have any discharge of indebtedness in 2011 and therefore had no income from the discharge. According to the court, the IRS failed to prove any significant, bona fide collection activity that would indicate an active creditor and thus failed to rebut the presumption that an identifiable event discharging the taxpayer’s debt had occurred in 2008, 36 months after the taxpayer made her last payment on the debt. Clark, T.C. Memo. 2015-175 (9/9/15).
IRA disbursements to pay fines and restitution were includible in income
The Tax Court held that funds dispensed from the taxpayer’s IRAs to pay the taxpayer’s fines and restitution were includible in his income. The fact that the taxpayer did not receive the funds or receive a benefit from them, and that the withdrawals were involuntary, did not excuse the failure to include the distributions in income because they were constructively received. Rodrigues, T. C. Memo. 2015-178 (9/10/15).
IRS eliminates Appeals arbitration program
The IRS announced the elimination of the Appeals arbitration program due to a general lack of demand for arbitration and the fact that use of the arbitration program as a tool to settle disputes had not proved to be successful. The IRS also obsoleted Rev. Proc. 2006-44, which formally established the Appeals arbitration program. Rev. Proc. 2015-44 (9/8/15).
Court denies litigation costs where IRS position was substantially justified
Although the Tax Court granted the taxpayers’ motion for partial summary judgment in a trial earlier this year (see prior coverage), the court agreed with the IRS that its interpretation of certain trust provisions at issue in the case was substantially justified. Since the IRS’s litigating position was substantially justified, the taxpayers were not entitled to litigation costs under Sec. 7430. Mikel, T.C. Memo. 2015-173 (9/8/15).
IRS did not abuse its discretion in proceeding with levy action
The Tax Court held that, because the IRS Appeals Office properly verified that the requirements of applicable law and administrative procedure were met in processing the taxpayer’s case, and the taxpayer did not offer a collection alternative (such as an installment agreement or an offer in compromise) or otherwise challenge the appropriateness of the collection action, the IRS did not abuse its discretion in determining to proceed with a proposed levy action. Haben, T.C. Summ. 2015-55 (9/8/15).
IRS will not accept checks of $100 million
The IRS announced that, beginning Jan. 1, 2016, it will start returning checks for more than $99,999,999 to the originator because the Federal Reserve will not accept them. Announcement 2015-23 (9/7/15).
CPA liable for preparer penalties for failing to include his identifying number on returns
The Tax Court held that a CPA was liable for the Sec. 6695(c) penalty for failing to include an appropriate identifying number on 90 returns that he prepared for compensation. The court rejected the CPA’s argument that his failure to include his full Social Security number on those returns was the result of his fear of identity theft and thus was based on reasonable cause and not due to willful neglect because he could have obtained a preparer tax identification number to use instead. Anyanwu, T.C. Summ. 2015-56 (9/9/15).
Bond issuer granted relief under Sec. 7805
The National Office granted a request by an issuer of bonds for relief under Sec 7805(b) from the retroactive application of a ruling issued in TAM 201334038 (May 9, 2013). TAM 201537023 (9/11/15).
Lack of regulations should not preclude vessel operator’s application for nonrecognition
The Chief Counsel’s Office advised that the IRS should consider a qualifying vessel operator’s application for nonrecognition of gain under Sec. 1359 (allowing tax-free exchanges of qualifying vessels), even though regulations have not yet been issued under Sec. 1359(b)(2) advising the time and manner in which the application can be made. According to the Chief Counsel’s Office, the regulations contemplated under Sec. 1359(b)(2) specify how, not whether, the statute will apply. CCA 201537021 (9/11/15).
Amounts paid to municipal district for infrastructure are real estate development costs
The Office of Chief Counsel advised that an S corporation in the business of developing real estate can treat amounts advanced to a special municipal district to construct infrastructure for the development project as, in substance, costs of developing its real property, even though the amounts advanced were loans to the district evidenced by bonds. The corporation must treat any repayments from the district, however, as a reduction of cost or income and not as tax-exempt interest under Sec. 103, no matter if the repayments are designated as interest or principal. CCA 201537022 (9/11/15).