Document Summaries for the Week of March 28, 2016

CORPORATIONS

Sec. 7507 precludes IRS from collecting tax liability

The Office of Chief Counsel was asked whether, in the case of a bank that has ceased to do business because of bankruptcy or insolvency, any tax may be assessed or collected that would diminish the assets necessary for the full payment of all the bank’s depositors when federal financial assistance (FFA) had been provided to the bank, which also reported taxable income unrelated to the receipt of FFA. According to the Chief Counsel’s Office, Regs. Sec. 301.7507-1(b)(4)(iii)  precludes application of Sec. 7507 only in cases where the item of income generating the tax liability is attributable to the FFA. CCA 201614035 (4/1/16). 

ESTATES, TRUSTS & GIFTS

Charitable contribution deduction affected by events after death

The Tax Court held that the value of an estate’s charitable contribution was less than the date-of-death fair market value of the bequeathed property because various events after the decedent’s death changed the nature and value of the property. Also, the court held that the IRS properly allocated a proportionate share of additional estate tax due to each of the specific bequests and reduced the charitable contribution deduction attributable to those bequests. Finally, the estate was held to be liable for an accuracy-related penalty. Estate of Dieringer, 146 T.C. No. 8 (3/30/16).

Statute of limitation on gift tax returns not open where prior-year gifts were understated

The Office of Chief Counsel advised that, for gift tax returns in which the taxpayer understated the amounts of his prior-year gifts, Sec. 6501(c)(9), which permits “any tax imposed by chapter 12 on such gift may be assessed … at any time,” does not apply. It applies only to property omitted from gift tax returns, not undervalued ones. In addition, the extended six-year statute for assessing tax due to substantial omission does not apply because the statute refers to current year gifts. Although there might be another ground to keep the statute open, such as fraud or tax evasion, those facts would have to be established. CCA 201614036 (4/1/16). 

EXEMPT ORGANIZATIONS

IRS announces revocation of exempt status

The IRS announced that it has revoked its determination that a Brooklyn, N.Y., organization qualifies as a tax-exempt organization under Secs. 501(c)(3) and 170(c)(2). Announcement 2016-13 (3/28/16).

INDIVIDUALS

Court upholds penalty assessments against return preparer for unsubstantiated deductions

The Tax Court held that the taxpayer, who owned a tax preparation business and a Peruvian restaurant, was not entitled to approximately $15,000 in deductions that he could not substantiate; but the court did allow, based upon its evaluation of the taxpayer’s credibility, deductions totaling $10,000 that had been denied by the IRS. The court also upheld the assessment of penalties, stating that as a preparer of federal income tax returns, the taxpayer knew that entries on a return must be properly substantiated and was clearly negligent when preparing and filing his own return for the year at issue. Arizaga, T.C. Memo. 2016-57 (3/28/16).

Taxpayers’ participation in nonqualified deferred compensation arrangement results in taxable income

The Tax Court held that the participation by companies owned by the taxpayers in a purported welfare benefit plan constituted a nonqualified deferred compensation arrangement under Sec. 402(b)(4). As a result, the taxpayers had to include in income vested accrued benefits and economic benefits from participating in the plan. Machacek, T.C. Memo. 2016-55 (3/28/16).

Income from intermittent sales of scrap metal is not subject to self-employment tax

The Tax Court held that intermittent sales of scrap metal by the taxpayer when he needed money to pay bills was not a trade or business and, thus, the income from the sales was not self-employment income subject to self-employment tax. According to the court, the phrase “carrying on a business” implies an occupational undertaking to which one habitually devotes time, attention, or effort with substantial regularity; but merely disposing of assets at intermittent intervals, without more, is not engaging in business. Ryther, T.C. Memo. 2016-56 (3/28/16).

Couple’s guarantee of loan to C corporation owned by their IRA was a deemed distribution of the IRA’s assets

The Tax Court held that a couple’s guaranties of a loan made to a newly formed C corporation that was acquired by an IRA into which the couple had rolled their tax-deferred retirement funds, and that had acquired an existing business, was a prohibited transaction that caused a deemed distribution of the IRA’s assets to the couple. The court also held that Sec. 6501(e) applied to extend the statute of limitation to six years because the couple’s reporting that the rollover was nontaxable was insufficient to advise the IRS of the nature and the amount of the unreported income flowing from the deemed distributions from the IRAs on account of the loan guaranties. Thiessen, 146 T.C. No. 7 (3/29/16).

IRS properly determined omissions from gross income by using a bank deposits analysis

The Tax Court held that the IRS properly determined omissions from the taxpayer’s gross income by using a bank deposits analysis. With respect to deductions taken by the taxpayer, the court concluded that, with certain exceptions, the taxpayer produced no receipts for office expense, repairs and maintenance, and supplies, and thus the IRS had correctly disallowed Schedule C expenses totaling over $106,000. Rey, T.C. Memo. 2016-58 (3/29/16).

Industry Issue Resolution Program submission procedures posted

The IRS described procedures for taxpayers and other entities under the jurisdiction of the Large Business and International, Small Business and Self Employed, and Tax Exempt and Government Entities operating divisions to submit issues for consideration under the IRS’s Industry Issue Resolution Program. Rev. Proc. 2016-19 (3/28/16).

Specifications issued for printing substitute Forms W-2c and W-3c

The IRS published specifications for the private printing of red-ink substitutes for the most recent revisions of Forms W–2c, Corrected Wage and Tax Statement, and W–3c, Transmittal of Corrected Wage and Tax Statements. The procedure will be published as the next revision of Publication 1223, General Rules and Specifications for Substitute Forms W–2c and W–3c. Rev. Proc. 2016-20 (3/28/16).

INTERNATIONAL

Risk-weighted assets are a reasonable method for apportioning supportive expenses only in limited circumstances

The Chief Counsel’s Office was asked whether foreign persons who are asserting that they are permitted to use the relative value of risk-weighted assets (RWA) as a reasonable key for apportioning deductions for supportive expenses under Regs. Sec. 1.861-8 were correct.  In limited circumstances, it could be established that using RWA relative values is a reasonable method for apportioning the costs of certain specific activities. CCA 201614031 (4/1/16). 

IRS PROCEDURE

IRS provides state population figures

The IRS provided population figures for the 50 states, the District of Columbia, Puerto Rico, and the other insular areas for purposes of determining the 2016 calendar-year state housing credit ceiling under Sec. 42(h), the private activity bond volume cap under Sec. 146, and the private activity bond volume limit under Sec. 142(k). Notice 2016-24 (3/28/16).

Court rejects taxpayer’s interest abatement request

The Tax Court upheld the IRS’s rejection of a taxpayer’s request for an abatement of interest in the amount of $87 because the amount had already been credited to her account and the taxpayer’s position was not authorized by either Sec. 6404 or Sec. 6611(d). Kappos, T.C. Memo. 2016-59 (3/31/16).

Taxpayer repaid more in misappropriated funds to business associate than IRS determined

Contrary to an IRS agent’s analysis, the Tax Court held that the taxpayer repaid more of the amounts he misappropriated from a business associate than the agent determined he had misappropriated in that tax year, and thus did not have additional income and tax liability for that year. Because the taxpayer did not have a deficiency in his federal income tax for the year, the fraud penalty and the accuracy-related penalty asserted by the IRS did not apply. Senyszyn, 146 T.C. No. 9 (3/31/16).

Disallowance of partnership’s capital losses and ordinary losses did not require partner level determinations

The Office of Chief Counsel agreed that the disallowance of capital losses and ordinary losses reported by a partnership were computational adjustments that did not require partner level determinations. According to the Chief Counsel’s Office, this includes any carryovers of those amounts. CCA 201614034 (4/1/16). 

TAX ACCOUNTING

Taxpayer qualifies for audit protection on automatic change of tax treatment of materials and supplies

The Office of Chief Counsel advised that a taxpayer would have audit protection under Rev. Proc. 2015-14 for an accounting method change the taxpayer made to deducting non-incidental materials and supplies in the tax year they are used or consumed for amounts paid or incurred before Jan. 1, 2014. CCA 201614037 (4/1/16).

IRS revenue officer can request taxpayer’s credit report

The Office of Chief Counsel advised that an IRS revenue officer’s (RO) request for, and use of, a credit report to determine whether a taxpayer is experiencing a financial hardship is permissible under the Fair Credit Reporting Act. Furthermore, the RO’s transmission to the Taxpayer Advocate Service of the financial determination that refers to or contains the credit report does not violate Sec. 6103. CCA 201614032 (4/1/16).

IRS issues auto depreciation limits for 2016, revises limits for 2015

The IRS issued guidance regarding the limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2016, amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2016, and revised depreciation limitations and lessee inclusion amounts for passenger automobiles that were first placed in service or first leased by the taxpayer, respectively, during 2015 and to which the additional first-year depreciation deduction under Sec. 168(k) applies. The IRS updated these amounts following the extension of the additional first-year depreciation deduction by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. Rev. Proc. 2016-23 (4/1/16) (see related news story).