Document Summaries for the Week of April 11, 2016

CORPORATIONS

State Medicaid services provider is not a health insurance issuer under Sec. 9832(b)(2)

The Office of Chief Counsel advised that, for purposes of Sec. 162(m)(6), a non-risk-bearing entity providing services under a state Medicaid program did not have the risk-shifting or risk-distribution elements of insurance and consequently was not a health insurance issuer under Sec. 9832(b)(2). However, the Chief Counsel’s Office said, a risk-bearing entity that is licensed to engage in the business of insurance in a state, is subject to state law that regulates insurance, and has the risk-shifting or risk-distribution elements of insurance is a health insurance issuer under Sec. 9832(b)(2). CCA 201616008 (4/15/16).

ESTATES, TRUSTS & GIFTS

Estate liable for gift taxes on contribution by decedent’s revocable trust to dynasty trusts

The Tax Court held that a $29.9 million contribution by a decedent’s revocable trust to several trusts (dynasty trusts established for family members) with which the revocable trust had entered into split-dollar life insurance arrangements was a gift and, therefore, that the decedent’s estate was liable for gift tax deficiencies. According to the court, because the dynasty trusts received no additional economic benefit beyond life insurance protection, the revocable trust was the deemed owner of the life insurance contract by way of the special ownership rule under Regs. Sec. 1.61-22; thus, the economic benefit regime under Regs. Sec. 1.61-22, not the loan regime of Regs. Sec. 1.7872-15, applied. Estate of Morrissette, 146 T.C. No. 11 (4/13/16). 

INDIVIDUALS

Couple liable for tax on partnership income but not related penalties

The Tax Court held that while a couple were taxable on the husband’s distributive share of income from a partnership that was not actually distributed to the husband in 2011, they were not liable for the penalty for substantial understatement. The court found that the husband credibly testified that he viewed himself as an employee of the partnership and properly reported wages he received. In addition, he never received a Schedule K-1 from the partnership, the business had never before made a profit, and he relied on a professional tax return preparer to prepare his return. Lamas-Richie, T.C. Memo. 2016-63 (4/11/16).

Rates issued for valuing noncommercial flights on employer-provided aircraft

The IRS issued the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2016 for purposes of valuing noncommercial flights on employer-provided aircraft. Rev. Rul. 2016-10 (4/11/16).

Circumstances surrounding underpayment preclude innocent spouse relief

The Tax Court held that the taxpayer was not entitled to relief from joint and several liability under Sec. 6015(f) for any of the years at issue. No factor supported the requested relief, the court stated, and the totality of the circumstances surrounding whether the taxpayer’s had reason to know of the understatements on joint tax returns filed with her husband made clear that it would not be inequitable to deny her the relief sought. Arobo, T.C. Memo. 2016-66 (4/14/16).

IRS PROCEDURE

IRS could plead grounds not in a notice of deficiency issued to the taxpayer

The Tax Court held that Securities and Exchange Commission v. Chenery Corp., 318 U.S. 80 (1943), may restrict a reviewing court from relying on reasons not considered by an agency in its determinations, but only applies to matters that Congress has exclusively entrusted to the administrative agency.  Because Congress has expressly authorized the Tax Court to redetermine tax liabilities in a deficiency case, and the enactment of the Administrative Procedure Act did not disturb the regime for deficiency litigation, the IRS could plead grounds not in a notice of deficiency issued to the taxpayer. Ax, 146 T.C. No. 10 (4/11/16).

IRS updates administrative appeals process for cases docketed in Tax Court

The IRS superseded Rev. Proc. 87-24 and adopted the proposed revenue procedure issued in Notice 2015-72 to clarify and describe the practices for the administrative appeals process in cases docketed in the Tax Court. Rev. Proc. 2016-22 (4/11/16).

IRS can pursue collection where taxpayers failed to document alternatives

The Tax Court held that because a couple did not provide financial documentation that would allow the IRS to evaluate collection alternatives, the IRS could proceed with collection actions against them. Additionally, the court found that, under the math-error provisions of Sec. 6213(b)(1), the IRS properly disallowed certain tax credits claimed by the couple. Bean, T.C. Summ. 2016-16 (4/13/16).

IRS can assess restitution while motion to vacate sentence is pending

The Chief Counsel’s Office advised that the IRS is not prohibited from making a restitution assessment while the taxpayer has a motion pending under 28 U.S.C. Section 2255 to vacate, set aside, or correct a sentence. According to the Chief Counsel’s Office, the motion, if granted, would result in the taxpayer’s release; it would have no effect on the restitution ordered. CCA 201616011 (4/15/16).

Bank’s priority over tax lien is limited to original loan amount

The Office of Chief Counsel advised that, under Sec. 6323(h)(1), a bank was deemed to have a security interest only to the extent it had parted with money or money’s worth. As a result, the Chief Counsel’s Office said, the bank’s priority claim with respect to an IRS lien was limited to the original loan amount. CCA 201616010 (4/15/16).

IRS lacks discretion to accept a late Sec. 172(b)(3) election

The Office of Chief Counsel advised that the IRS does not have discretion to accept a Sec. 172(b)(3) election to waive a net operating loss (NOL) carryback that was not filed by the extended due date of the tax return reporting the NOL. Further, the Chief Counsel’s Office stated, the IRS does not consider requests for a letter ruling to make a late Sec. 172(b)(3) election because it has no authority to allow the taxpayer to make a Sec. 172(b)(3) election more than six months after the due date of the tax return, excluding extensions. CCA 201616009 (4/15/16).

Taxpayer liable for accuracy-related penalty for not exercising ordinary care

The Tax Court held that the taxpayer was liable for the Sec. 6662(a) accuracy-related penalty for an underpayment of tax due to a substantial understatement of income tax for 2010. The court found that the taxpayer did not exercise ordinary care and prudence when he understated his income tax and thus did not act with reasonable cause. Gilbert, T.C. Summ. 2016-17 (4/14/16).

Taxpayer liable for multiple penalties for fraudulent failure to file valid returns

The Tax Court held that, while the taxpayer submitted Forms 1040 or 1040X for 2001, 2003, and 2004, those returns were not valid, and his failure file timely returns for those years was fraudulent. Further, the court said, because the taxpayer did not pay any of his tax liabilities for those years and failed to present any evidence that would establish that his failure to pay was due to reasonable cause, he was liable for the addition to tax under Sec. 6651(f) for those years, as well as various other penalties. Green, T.C. Memo. 2016-67 (4/14/16).

IRS has discretion to deny couple’s interest abatement claim

The Tax Court upheld the IRS’s notices of final determination denying a couple’s claim under Sec. 6404 for abatement of interest on federal income tax liabilities for 2005 and 2006. According to the court, the couple failed to prove that any managerial or ministerial act by the IRS caused an unreasonable error or delay during the audit of their returns and, thus, the IRS did not abuse its discretion in denying their abatement request. Hornbacker, T.C. Memo. 2016-65 (4/14/16).

Taxpayer liable for various penalties for failing to timely file return and substantially understating his tax liability

The Tax Court held that the taxpayer was liable for a Sec. 6651(a)(1) addition to tax because he failed to timely file his return and did not establish that the failure was due to reasonable cause and not willful neglect. Likewise, the court said, the taxpayer was liable for a Sec. 6662(a) accuracy-related penalty for an underpayment of tax attributable to a substantial understatement of income tax because the IRS established that his understatement exceeded the greater of 10% of the tax required to be shown on the return or $5,000 and did not establish that he had reasonable cause and acted in good faith with respect to any portion of the underpayment. Philbrick, T.C. Memo. 2016-64 (4/13/16).