Document Summaries for the Week of Oct. 31, 2016
IRS targets micro-captive insurance transactions as tax avoidance or evasion
The IRS issued a notice describing a micro-captive transaction and its potential for tax avoidance or evasion. In this transaction, a taxpayer attempts to reduce the aggregate taxable income itself, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as a captive insurance company. Notice 2016-66 (11/1/16).
Business had corporate powers suspended and thus could not litigate case
The Tax Court held that, because the corporate powers of a business were suspended as a result of its failure to pay its California taxes, the business lacked the capacity to litigate the IRS collection proceedings against it. The court, therefore, dismissed the taxpayer’s case for lack of jurisdiction and upheld the IRS’s assessment of income and employment taxes and penalties for 2009 through 2013. Urgent Care Nurses Registry, Inc. T.C. Memo. 2016-198 (11/2/16).
IRS issues guidance on pension equity plans
The IRS issued a notice describing the applicability of the market rate of return limitation rules to a defined benefit plan that expresses a participant’s accumulated benefit as the current value of an accumulated percentage of the participant’s final average compensation, highest average compensation, or highest average compensation during a limited period of years (a type of plan often referred to as a pension equity plan or PEP). The notice addresses the application of the market rate of return limitation of Sec. 411(b)(5)(B)(i) and Regs. Sec. 1.411(b)(5)-1(d) to a PEP that provides for implicit interest. Notice 2016-67 (11/4/16).
IRS issues adjusted applicable dollar amount for determining PCORI fee
The IRS determined that the adjusted applicable dollar amount that applies for determining the Patient-Centered Outcomes Research Institute (PCORI) fee for policy years and plan years ending on or after Oct. 1, 2016, and before Oct. 1, 2017 is equal to $2.26. This adjusted applicable dollar amount was determined using the percentage increase in the projected per capita amount of the National Health Expenditures published by the Department of Health and Human Services in July 2016. Notice 2016-64 (11/4/16).
Taxpayer fails to substantiate deductions for cost of goods sold but other deductions were upheld
The Tax Court held that a taxpayer failed to substantiate certain amounts claimed as cost of goods sold and failed to establish that his mother was his qualifying relative for 2010. As for the taxpayer’s other deductions for various business expenses that the IRS challenged for lack of substantiation, the court found that they were actually mischaracterized reimbursements for expenses the taxpayer was contractually obligated to pay to a company in Cameroon that distributed the taxpayer’s special electric showerheads, which he paid in cash and provided receipts to substantiate. The Tax Court also upheld the IRS’s assessment of penalties to the extent there was an understatement after the taxpayer’s liability was recalculated. Besong, T.C. Summ. 2016-71 (11/3/16).
Salary that employee could have elected to receive can be treated as subject to substantial risk of forfeiture
The Office of Chief Counsel advised that the salary that an employee could have elected to receive as compensation can be treated as subject to a substantial risk of forfeiture under Sec. 409A through Dec. 31, 2017, if as part of the imposition of the service requirement through Dec. 31, 2017, the employer provides a matching contribution resulting in a 25% increase in the present value of the amount of deferred compensation. While Regs. Sec. 1.409A-1(d) generally provides that the addition of a risk of forfeiture is disregarded, the Chief Counsel’s Office said that the addition of a substantial risk of forfeiture is respected if the present value of the amount subject to the substantial risk of forfeiture is “materially greater” than the present value of the amount the service provider otherwise could have elected to receive absent the risk of forfeiture. CCA 201645012 (11/4/16)
Couple entitled to larger casualty loss deduction from tornado damage than the IRS allowed
The Tax Court held that a couple were entitled to a much larger casualty loss deduction for land damaged by a tornado than the IRS had allowed and, as a result, concluded that the couple were not liable for the accuracy-related penalty assessed by the IRS. In determining the value of the land and the amount of the casualty loss, the court noted that it is permissible to consider the landowner’s opinion of the land’s value because of the landowner’s unique knowledge of it. Coates, T.C. Memo. 2016-197 (10/31/16).
Final regs. issued on CFCs
The IRS issued final regulations under Secs. 954 and 956 that affect shareholders of controlled foreign corporations (CFCs), providing rules regarding the treatment as U.S. property of property held by a CFC in connection with certain transactions involving partnerships. T.D. 9792 (11/2/16) (see related news story).
Looking at a tax return is not the same as an examination
In a heavily redacted document, the Office of Chief Counsel advised that based on Rev. Proc. 2005-32, “looking at a tax return” (i.e., surveying it) is not an examination. Thus, while certain taxpayers have had their returns routinely looked at, the Chief Counsel’s Office said that many of the tax returns were not in fact audited and the repetitive audit procedures in IRM Section 18.104.22.168 only apply to individual returns without a Schedule C or Schedule F. CCA 201645013 (11/4/16).
Taxpayer was not liable for trust fund recovery penalties
The Tax Court held that a taxpayer was not liable for trust fund recovery penalties for 2008–2011 because a preponderance of evidence showed that she lacked decision-making authority over the restaurant’s operations. Except for a few weeks before the restaurant opened, the taxpayer had no involvement in its day-to-day affairs and spent most of her time taking care of her severely disabled son. Fitzpatrick, T.C. Memo. 2016-199 (11/2/16).
IRS announces expanded, improved identity theft safeguards
In preparation for the 2017 filing season, the IRS, state tax agencies, and industry partners announced expanded and improved tax return identity theft safeguards for the 2017 filing season, including “trusted customer” features that ensure the tax return is being filed by the real taxpayer. IR-2016-144 (11/3/16) (see related news story).
Tax professionals warned of more phishing schemes