Document Summaries for the Week of Nov. 7, 2016

CORPORATIONS

Distribution of video programming packages do not qualify as film for Sec. 199 purposes

The IRS National Office advised that, for purposes of the Sec. 199 domestic production activities deduction, the sale by a distributor of a subscription package that includes multiple channels of video programming, or the signals necessary to distribute the package of video programming, is not a qualified film within the meaning of Sec. 199(c)(6) and Regs. Sec. 1.199-3(k)(1) and the gross receipts from those packages did not qualify as domestic production gross receipts under Sec. 199(c)(4)(A)(i)(II) and Regs. Sec. 1.199-3(k)(3). However, receipts from films the distributor itself actually produced and sold through those packages may qualify. TAM 201646004 (11/10/16).

EMPLOYEE BENEFITS

IRS provides more relief for Hurricane Matthew victims

The IRS provided relief to victims of Hurricane Matthew by permitting them easier access to their funds held in workplace retirement plans and in IRAs, from Oct. 4, 2016 (Oct. 3, 2016, for Florida), through March 15, 2017. Announcement 2016-39 (11/7/16).

IRS addresses treatment of leave-based donations to charities to aid Hurricane Matthew victims

The IRS provided guidance for income and employment tax purposes on the treatment of cash payments made by employers under leave-based donation programs for the relief of victims of Hurricane Matthew.  The IRS said that it will not assert that cash payments an employer makes to Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the Sec. 170(c) organizations for the relief of victims of Hurricane Matthew; and (2) paid to the Sec. 170(c) organizations before Jan. 1, 2018. Notice 2016-69 (11/10/16).

IRS issues guidance on corporate bond monthly yield curve

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 as to 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 2016-68 (11/10/16).

INDIVIDUALS

Cash-for-keys payment was part of proceeds in home foreclosure, not ordinary income

The Tax Court held that a couple’s receipt of $20,500 designated as a “cash-for-keys” incentive payment should be treated as part of the deed-in-lieu-of-foreclosure transaction the couple entered into. The court rejected the IRS’s position that the payment was ordinary income and calculated the gross proceeds from the transaction by adding the cash-for-keys payment to the amount of loan forgiven in the foreclosure. Bobo, T.C. Summ. 2016-74 (11/8/16).

Court upholds assessment of taxes and penalties on unreported income

The Tax Court held that the taxpayer was taxable on his Social Security benefits and had unreported income from interest, dividends, capital gain, and gambling. As a result, the court determined that the taxpayer was liable for taxes and accuracy-related penalties on the unreported income, as well as for penalties for underpayment of estimated tax. Kupersmit, T.C. Memo. 2016-202 (11/8/16).

Casino house players cannot deduct unsubstantiated gambling losses

The Tax Court held that a couple who worked for a casino as house players could not deduct gambling losses because they provided no evidence of their losses, such as a personal log of daily winnings and losses, win/loss statements, or bank records. The court said it was not satisfied with couple’s assertion that it was too difficult to maintain a log documenting their gambling winnings and losses. Pham, T.C. Summ. 2016-73 (11/8/16).

Taxpayer liable for tax deficiencies and multiple penalties for illegal cash-only business

The Tax Court held that a taxpayer, who refused to show up for his court case, was liable for tax deficiencies and accuracy-related penalties for three tax years in which he significantly underreported income from his business. In addition, because the taxpayer’s income was derived from the illegal duplication and sale of DVDs and CDs, and his business dealt exclusively in cash and kept no business records, the court upheld the IRS’s assessment of a fraud penalty for the three years at issue. Ballard, T.C. Memo. 2016-205 (11/9/16).

Taxpayer’s lawyer cannot be a “prevailing party”

The Tax Court held that, because Sec. 7430 permits only a “prevailing party” to receive an award of reasonable administrative costs, a lawyer who represented a taxpayer could not seek an award of administrative costs for himself. Thus, the court said that it lacked jurisdiction to hear the case. Greenberg, 147 T.C. No. 13 (11/9/16).

Court order attached to return did not satisfy requirements for taking dependency exemption and child tax credit

The Tax Court held that a couple was not entitled to a dependency exemption deduction or a child tax credit for a minor child despite a court order the couple attached to their 2010 tax return that specified that the wife was the custodial parent, but that for some reason did not mention the child being claimed (there were two children). Instead, the child was not the couple’s qualifying child because the child lived with the father more than six months that year and the couple did not attach Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, to their return. Lowe, T.C. Memo. 2016-206 (11/9/16).

Whistleblower’s Tax Court petition was timely filed after IRS mailed determination letter to wrong address

The Tax Court held that the Director of the Whistleblower Office properly exercised his authority when he denied a taxpayer’s claim for a whistleblower award. But, the court concluded that the IRS determination letter as originally mailed to the taxpayer was invalid because it was not mailed to the taxpayer’s last known address and the taxpayer did not actually receive it; thus, the taxpayer timely filed his Tax Court petition because he filed it within 30 days of the date on which the notice of determination was remailed to him. Whistleblower 26876-15W, 147 T.C. No. 12 (11/9/16).

Innocent spouse relief denied where taxpayer received substantial benefit from unpaid tax liabilities

The Tax Court held that it would not be inequitable to deny a taxpayer innocent spouse relief because she knew or should have known that her ex-husband would not or could not pay the tax liabilities when the tax returns were filed. Further, the court noted, the taxpayer received substantial benefit from the unpaid tax liabilities, beyond normal support, and she had not been in compliance with the income tax laws for the tax years following the tax years at issue. Zhang, T.C. Summ. 2016-76 (11/9/16).

IRS removes 3-year testing period for COD reporting

The IRS finalized a proposed rule issued in 2014 removing the three-year nonpayment testing period from the list of “events” for determining when debt had been discharged for purposes of issuing Form 1099-C, Cancellation of Debt, to taxpayers. T.D. 9793 (11/9/16) (see related news story).

IRS PROCEDURE

IRS settlement officer did not abuse her discretion in proceeding with collection actions

The Tax Court held that an IRS settlement officer did not abuse her discretion when she determined that notices of federal tax lien filings for 2006 and 2012 were appropriate collection actions with respect to a taxpayer’s outstanding income tax liabilities. The court stated that the taxpayer could not point to any relevant statutes, regulations, or provisions of the Internal Revenue Manual that the settlement officer had violated or failed to take into account. Dean, T.C. Memo. 2016-203 (11/8/16).

Tax Court dismisses late-filed petition for innocent spouse relief

The Tax Court granted an IRS motion to dismiss a case involving innocent spouse relief for lack of jurisdiction on the ground that the Tax Court petition was not timely filed within the periods prescribed by Sec. 6015(e)(1)(A). The court acknowledging that the result was inequitable, as the taxpayer filed her petition believing in good faith that it was timely, and her opportunity to file another petition then expired. However, the court said, it was constrained by the statute. Vu, T.C. Summ. 2016-75 (11/8/16).

No abuse of discretion found where IRS refused to accept an OIC

The Tax Court held that the IRS Appeals Office appropriately verified that the income tax owed by a couple had been properly assessed. Further, the court said, the IRS did not abuse its discretion in declining to accept a $40,000 offer in compromise to settle tax and penalties totaling nearly $2.2 million, noting that a year earlier, the couple had acknowledged their assets exceeded $8 million. Estate of Duncan, T.C. Memo. 2016-204 (11/8/16).

IRS carried burden of showing a deficiency notice was properly mailed; Tax Court suit dismissed

The Tax Court held that the IRS carried its burden of showing that a deficiency notice was properly mailed to the taxpayer, and that once the IRS establishes that a deficiency notice was mailed, it is immaterial that the taxpayer did not receive it within the 30-day period in which he had to file a petition challenging the notice in Tax Court. Thus, the court dismissed the taxpayer’s case for lack of jurisdiction. Woody, T.C. Memo. 2016-201 (11/8/16).

Guidance on use of 2017 mortality tables under Sec. 7702

The IRS issued rules interpreting the reasonable mortality charge requirement in Sec. 7702(c)(3)(B)(i). The notice provides safe harbors regarding the use by taxpayers of the 1980, 2001, or 2017 Commissioners’ Standard Ordinary mortality and morbidity tables to determine whether mortality charges are reasonable. Notice 2016-63 (11/7/16).

IRS issues specifications for substitute Forms W-2 and W-3

The IRS issued specifications for the private printing of red-ink substitutes for the 2016 Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements. The revenue procedure will be produced as the next revision of Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3. Rev. Proc. 2016-54 (11/7/16).