Document Summaries for the Week of July 25, 2016

INDIVIDUALS

Puerto Rico resident exempt from federal income tax is still liable for self-employment tax

The Tax Court held that, although the taxpayer was a bona fide resident of Puerto Rico during 2010 and thus exempt from federal income tax, he was not exempt from U.S. self-employment tax. The court also concluded that the taxpayer did not have reasonable cause for failing to pay the self-employment tax even though he claimed he consulted a tax professional and found him liable for penalties under Secs. 6651(a)(1) and (2). Curet, T.C. Memo. 2016-138 (7/25/16).

Penalties of more than $100,000 assessed against couple refusing to file returns and pay taxes

The Tax Court held that a couple were liable for fraudulent failure to file penalties of more than $100,000 under Sec. 6651(f). The court noted that, despite repeated warnings by the court of the consequences of their positions, the couple refused to testify or to present any evidence concerning their income and deductions and, instead, presented only frivolous arguments denying their obligations to file tax returns and pay taxes on their income. Batsch, T.C. Memo. 2016-140 (7/26/16).

Court rejects claims of abuse by taxpayer seeking innocent spouse relief

The Tax Court held that the taxpayer was not entitled to innocent spouse relief under Sec. 6015(f) and that she instituted and maintained the request for relief primarily for delay and after her ex-husband had been granted relief under Sec. 6015(c) for deficiencies related to her business. The court concluded that the facts of the case belied the taxpayer’s contentions that she was abused by her ex-husband and that, as a result of that alleged abuse, she was not able to challenge certain erroneous items on the tax return at issue for fear of retaliation. Hardin, T.C. Memo. 2016-141 (7/26/16).

Former officers and spouse liable as transferees

The Tax Court held that a company became insolvent under Indiana law as a result of the company’s fraudulent transfers to two former company officers and the wife of one of those officers. As a result, each of them was liable for the company’s unpaid 2001 federal income tax deficiencies and related accuracy-related penalties. Weintraut, T.C. Memo. 2016-142 (7/27/16).

Prop. regs. address health insurance premium tax credit

The IRS issued proposed regulations to address certain issues under Sec. 36B relating to the health insurance premium tax credit. REG-109086-15 (7/25/16).

INTERNATIONAL

Payments to foreign entity were subject to 30% withholding and were not deductible interest

The Tax Court held that a domestic subsidiary’s payments to a foreign entity incorporated in a country that does not have a tax treaty with the United States were not bona fide portfolio interest payments, but were instead equity investments, and, thus, the entity’s parent company was not entitled to deduct the interest payments on its consolidated tax return. The court also concluded that the subsidiary was liable for a 30% withholding tax on the gross amount of the payments it made to the foreign entity. American Metallurgical Coal Co., T.C. Memo. 2016-139 (7/25/16).

Guidance issued on FATCA IGAs

The IRS provided guidance to jurisdictions that are treated as if they have an intergovernmental agreement in effect under the Foreign Account Tax Compliance Act and foreign financial institutions located in those jurisdictions. Announcement 2016-27 (7/29/16).

IRS PROCEDURE

POA does not have authority to request documents from a year outside his or her authority

The Office of Chief Counsel advised that a power of attorney (POA) with authority to represent the taxpayer for a specific tax year can request and receive return information of the taxpayer associated with the examination for that year but cannot request documents from another year just on the POA’s representation that they are relevant to that examination. Further, the Chief Counsel’s Office said, a POA acting under the authority of Form 2848, Power of Attorney and Declaration of Representative, does not have the authority to request third-party documents outside the context of an examination of the tax year of his or her authority such as those available to the taxpayer pursuant to Sec. 6103(e) (e.g., partnership or corporate returns). CCA 201631011 (7/29/16).

Court says IRS must produce documents relating to whistleblower case

With respect to an appeal by an individual of an IRS determination not to make an award to him for information he provided that led to the recovery of unpaid taxes and other amounts (i.e., a whistleblower award), the Tax Court granted the individual’s motion to compel the IRS to produce certain documents relating to the case. The court said it would not, in the context of this discovery dispute, decide the unsettled question of law as to when the IRS proceeds on the basis of information provided by a whistleblower. Whistleblower 11099-13W, 147 T.C. No. 3 (7/28/16).

Final regs. abolish filing requirement for Sec. 83(b) statement

The IRS finalized proposed regulations issued last year intended to make it easier for taxpayers to file their returns electronically by no longer requiring taxpayers making a Sec. 83(b) election to include a copy of the election statement with their tax return. T.D. 9779 (7/26/16) (see related news story).

IRS corrects Rev. Proc. 2016-34

The IRS issued a correction to Rev. Proc. 2016-34, which provided guidelines and general requirements for the development, printing, and approval of substitute tax forms. Announcement 2016-24 (7/25/16).