Document Summaries for the Week of May 30, 2016
IRS issues procedures to apply to become a Certified Professional Employer Organization
The IRS posted the detailed procedures for submitting an electronic application to become a certified professional employer organization. Rev. Proc. 2016-33 (6/3/16).
Small tax-exempt organization application fee cut
The IRS announced a reduction in the fee for applying for tax-exempt status on Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Starting July 1, the fee will be lowered from $400 to $275. Rev. Proc. 2016-32 (5/31/16) (see related news story).
Return preparer and wife liable for accuracy-related, but not fraud penalties
The Tax Court held that a tax return preparer and his wife were liable for accuracy-related penalties because they did not properly substantiate or show the business purposes of some of their business expenses. However, the court concluded the couple were not liable for the fraud penalties the IRS assessed because the IRS's attempt to prove a pattern of fraud by pointing to four returns the taxpayer prepared for his clients, out of 2,500 returns he prepared during those years, was not sufficient. Ericson, T.C. Memo. 2016-107 (6/1/16).
Taxpayer fails to substantiate most deductions; penalties assessed
The Tax Court held that the taxpayer had not filed a valid return for 2010 because he and his wife had not signed it. In addition, except for proof the taxpayer paid $12,500 in alimony, he did not establish that he personally incurred and paid any Schedule A expenses or Schedule C expenses deducted on this invalid return. Further, the court concluded that the taxpayer was not entitled to deductions for self-employed health insurance and dependency exemptions for his two daughters and was liable for Sec. 6651 additions to tax. Levi, T.C. Memo. 2016-108 (6/2/16).
Taxpayer must include in income payments taxed but not retained in prior years
The Tax Court held that Medicaid reimbursement payments the taxpayer received from Cigna Government Benefits must be included in his income for 2010 irrespective of whether they represented payments that had been taxed but not retained in prior years. The court concluded that, because the taxpayer demonstrated neither reasonable cause nor good faith for his underpayment of tax, even though he claimed it was reasonable to assume that the payments had already been taxed, he was liable for the substantial understatement penalty. Udeobong, T.C. Memo. 2016-109 (6/2/16).
Chief Counsel's Office rejects alternative view for calculating QRPBI
The Office of Chief Counsel advised that, to calculate discharged debt that can be excluded from income, the formula for the qualified real property business income (QRPBI) exclusion limitation in Sec. 108(c)(2) and Regs. Sec. 1.108-6(a) begins with the total fair market value (FMV) of the single item of real property for which the discharged debt is QRPBI, and then that total is reduced by the sum of all other debts that are secured by, and QRPBI with respect to, that item of real property. The Chief Counsel's Office rejected the taxpayer's suggested alternative that the net FMV is the FMV of the single item of real property to which the discharged debt is QRPBI, reduced by the amount of other debt secured by that property but that is QRPBI with respect to any item of real property the taxpayer held. CCA 201623009 (6/3/16).
German resident's tax refund suit dismissed
The Court of Federal Claims dismissed a case involving a German resident's tax refund suit/claim for damages for unlawful IRS collection activities for failure to prosecute and ordered the taxpayer to pay court costs. The dispute concerned liens and levies imposed for tax liabilities arising in various years between 1992 and 2001, which the court dismissed because the plaintiff refused to make himself available for a deposition and stated that he did not intend to appear at trial. Topsnik, No. 14-275T (Fed. Cl. 5/31/16).
IRS does not have discretion to abate frivolous return penalty of an incompetent taxpayer
The Office of Chief Counsel advised that the IRS does not have the discretion to abate the Sec. 6702 frivolous filer penalty because the taxpayer is mentally incompetent. However, the Chief Counsel's Office stated, the taxpayer's representative or guardian may request a reduction in the frivolous return penalty under Sec. 6702(d) and Rev. Proc. 2012-43. CCA 201623010 (6/3/16).
Government shutdown for snowstorm extends Tax Court petition deadline
The Tax Court held that, where a taxpayer's Tax Court petition could not be delivered on the last date prescribed by law because government offices were shut down as a result of a snowstorm, the principles of Fed. R. Civ. P. 6(a)(3) applied. As a result, the taxpayer's petition was considered timely filed when it was filed on the first day the Tax Court reopened for business after the government closure. Guralnik, 146 T.C. No. 15 (2016).
FINRA is a corporation or other entity when performing federally mandated duties
The Office of Chief Counsel advised that the Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that is a "corporation or other entity serving as an agency or instrumentality" of the government of the United States for purposes of Regs. Sec. 1.162-21(a)(3) (prohibiting deduction of fines or penalties) when it is performing its federally mandated duties under the Securities Exchange Act of 1934, 15 U.S.C. Section 78a et seq. Those duties, the Chief Counsel's Office noted, include conducting enforcement and disciplinary proceedings relating to compliance with federal securities laws, regulations, and FINRA rules. CCA 201623006 (6/3/16).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.