Document Summaries for the Week of June 13, 2016
IRS issues guidance on recovery of investment for payments received during phased retirement
The IRS issued guidance on how to determine the investment in the contract for calculating gross income from an annuity, endowment, or life insurance contract under Sec. 72 when an employee continues to work part time after retirement and receives a reduced portion of his or her retirement benefits from a defined benefit plan (called “phased retirement”) (Notice 2016-39) (6/13/16) (see related news story).
IRS issues monthly guidance on corporate bond yield curve and other rates
The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the notice provides guidance on the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2016-38 (6/13/16).
ESTATES, TRUSTS & GIFTS
Tax Court revises value of decedent’s limited partner interest
On the case’s remand from the Ninth Circuit, the Tax Court revised its valuation of a decedent’s 41% limited partner interest that the court had originally valued at $27,454,115. After eliminating any weight for the value of the partnership’s assets and applying a 3.5% partnership-specific risk premium, the court’s valuation changed to $13,954,730. Estate of Giustina, T.C. Memo. 2016-114 (6/13/16).
IRS lists organizations failing to meet Sec. 501(c)(3) requirements
The IRS revoked the tax-exempt status of three organizations for failure to meet the requirements of Sec. 501(c)(3). Individual donors’ contributions to the organizations are no longer deductible under Sec. 170. Announcement 2016-22 (6/13/16).
Sale of marital business to ex-wife qualifies for nonrecognition treatment under Sec. 1041
The Tax Court held that a taxpayer’s sale to his former wife of his interests in a business they previously owned and operated together qualified for nonrecognition treatment under Sec. 1041. According to the court, the sole purpose of the settlement agreement that formalized the sale was to transfer property “incident to the divorce” as that phrase is used in Sec. 1041. Belot, T.C. Memo. 2016-113 (6/13/16).
Funds diverted to pay for personal residence, motorcycles, and investments constitute taxable income to taxpayer
The Tax Court held that a taxpayer diverted approximately $1.5 million from his business to pay for the construction of a personal residence, and these funds thus constituted taxable income. The court also held that (1) other payments made by the taxpayer’s business for purchasing motorcycles and deposits in an investment account, among other items, were taxable income to the taxpayer; and (2) the taxpayer was liable for fraud penalties. Edwards, T.C. Memo. 2016-117 (6/15/16).
Couple’s failure to adequately review tax returns leads to accuracy-related penalties
The Tax Court held that a couple’s failure to review their tax returns was especially reckless, considering that the sizes of their returns and refunds grew significantly when they became clients of a new tax return preparer who the IRS said prepared their returns falsely or fraudulently with the intent to evade tax. The court said the couple should have made reasonable attempts to ascertain the correctness of new deductions that appeared on their returns, and it found the couple liable for accuracy-related penalties due to negligence or disregard of rules or regulations. Finnegan, T.C. Memo. 2016-118 (6/16/16).
IRS posts FAQs on the exclusion for wrongful incarceration damages
The IRS posted frequently asked questions on its website providing guidance on the new Sec. 139F exclusion from income for any damages and awards an individual receives as compensation for wrongful incarceration. Wrongful Incarceration FAQs (6/16/16) (see related news story).
Shareholders are not responsible for transferee tax liability
The Tax Court held on remand from the Ninth Circuit that a corporation’s shareholders were not liable for income taxes as transferees under Sec. 6901 because one of the two prongs of the test articulated in Stern, 357 U.S. 39 (1958), was not met. The Tax Court held that the state-law prong of the Stern test had not been satisfied. It was not necessary to analyze the federal-law prong of the test because both prongs needed to be met to find the shareholders liable as transferees, the court held. Slone, T.C. Memo. 2016-115 (6/13/16).
IRS extends work opportunity credit transition relief
The IRS has extended by three months the transition relief provided in Notice 2016-22 for meeting the 28-day deadline for employers to file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, for employees (other than those qualifying under the credit as long-term unemployed) hired from Jan. 1, 2015, to Aug. 31, 2016, and for employees hired from Jan. 1, 2016, to Aug. 31, 2016, under the new category for the long-term unemployed. Notice 2016-40 (6/17/16).
July 2016 AFRs Issued
The IRS issued the applicable federal rates for July 2016. Rev. Rul. 2016-17 (6/17/16).
Duty of consistency requires S corporation to report 2008 income in 2009
The Tax Court held that the duty of consistency required that $1,634,720 in gross receipts that an S corporation received in 2008 but reported for 2009 be recognized as income for tax year 2009 because, among other things, the S corporation had treated income from earlier years in the same manner. The court noted that the statute of limitation had expired on the 2008 tax year, and allowing the S corporation and its shareholders to recharacterize their income as belonging in 2008 would harm the IRS and allow the taxpayers to avoid tax on the income. Squeri, T.C. Memo. 2016-116 (6/15/16).