Document Summaries for the Week of Sept. 26, 2016
Economic substance doctrine prevents subsidiary from being eligible for DRD
The Office of Chief Counsel advised that the subsidiary of a corporation was not eligible for a dividends-received deduction (DRD) under Sec. 245 with respect to funds distributed from a regulated investment company (RIC) to the subsidiary via its wholly owned lower-tier subsidiary. Both subsidiaries and the RIC had the same common parent corporation. According to the Chief Counsel’s Office, the DRD was disallowed under the economic substance doctrine, regardless of whether the literal requirements of Sec. 245 and other Code sections at issue were technically satisfied. CCA 201640018 (9/30/16).
Prior ruling based on Rev. Rul. 75-539 was incorrect, Chief Counsel’s Office says
The Office of Chief Counsel advised that an August 2015 memorandum relying on Rev. Rul. 75-539 to advise the IRS to deny refund claims filed by a school district relating to contributions made by public school officials was not correct. In response to a request for reconsideration, the Chief Counsel’s Office concluded that no explicit or analogous guidance addresses the federal tax consequences under the particular facts given. CCA 201640015 (9/30/16).
IRS updates EPCRS
The IRS issued a revenue procedure that updates the comprehensive system of correction programs that are intended to satisfy the requirements of Sec. 401(a), 403(a), 403(b), 408(k), or 408(p) for sponsors that have not met these requirements for a period. This system, the Employee Plans Compliance Resolution System (EPCRS), permits plan sponsors to thereby continue to provide their employees with tax-favored retirement benefits. Rev. Proc. 2016-51 (9/29/16).
ESTATES, TRUSTS & GIFTS
Estate can take theft loss for money lost in Madoff Ponzi scheme
The Tax Court granted a motion for summary judgment from an estate, holding that it was entitled to a theft loss deduction under Sec. 2054 for amounts lost in the Bernard L. Madoff Ponzi scheme. The court rejected the IRS's arguments that the estate was not entitled to the deduction because the estate did not incur the theft loss during its settlement and because the actual owner of the assets invested in the scheme was a limited liability company owned mostly by the decedent, which had invested all of its money with Madoff. Estate of Heller, 147 T.C. No. 11 (9/26/16).
IRS allows QTIP election for estates that make portability election
The IRS issued guidance that allows an executor to make a QTIP election when the executor has also elected portability of the deceased spouse's unused estate tax exemption. Rev. Proc. 2016-49 (9/28/16) (see related news story).
Limited partnership assets are includible in decedent’s estate; failure to report prior gifts results in penalties
The Tax Court held that (1) the value of assets that a decedent transferred to a limited partnership was includible in the value of his gross estate under Sec. 2036(a); (2) the decedent’s estate was not entitled to discount the value on the alternate valuation date of partnership assets that were includible in the decedent’s gross estate under Sec. 2036(a); and (3) amounts contributed to a number of Sec. 529 accounts in the decedent’s lifetime were taxable gifts. The court also upheld underreporting and accuracy-related penalties because the taxable gifts had not been reported when made and gift tax had not been paid. Estate of Beyer, T.C. Memo. 2016-183 (9/29/16).
IRS notifies donors of declaratory judgment suit
The IRS notified potential donors that an organization has recently filed a timely declaratory judgment suit under Sec. 7428, challenging revocation of its status as an eligible donee under Sec. 170(c)(2), which permits individual donors to make contributions of up to $1,000 from the date that the notice of revocation is published in the Internal Revenue Bulletin until a court first determines that an organization is not described in Sec. 170(c)(2). Announcement 2016-35 (9/26/16).
IRS notifies donors of stipulated decision
The IRS notified donors that, on Feb. 1, 2016, the Tax Court entered a stipulated decision that, effective Jan. 15, 2016, the Foundation for Harmony and Happiness of Santa Barbara, Calif., is not qualified as an organization described in Sec. 501(c)(3), is not exempt from taxation under Sec. 501(a), and is not an organization described in Sec. 170(c)(2). Announcement 2016-36 (9/26/16).
IRS notifies donors of stipulated decision
The IRS notified donors that on April 21, 2016, the Tax Court entered a stipulated decision that, effective Aug. 21, 2016, the America Housing Foundation of Amarillo, Texas, is not qualified as an organization described in Sec. 501(c)(3) and is not exempt from taxation under Sec. 501(a). Announcement 2016-37 (9/26/16).
Tax court chides IRS for saying taxpayer should have relied on advice of state official rather than return preparer
The Tax Court held that a taxpayer was not entitled to a dependency deduction and a child tax credit because the children for whom the deductions were claimed were not qualifying children. The taxpayer was the noncustodial parent and his ex-wife refused to sign a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. With respect to the IRS assessment of a penalty, the court disagreed with the IRS's suggestion that the taxpayer should have relied on the advice of a Louisiana official rather than his return preparer and found that, because the taxpayer was not proficient in tax matters and had acted in good faith in preparing his tax return, he was not liable for the accuracy-related penalty. Kennedy, T.C. Summ. 2016-61 (9/26/16).
Failure to substantiate deductions leads to liability for accuracy-related penalty
The Tax Court held that a majority of business deductions taken by the taxpayer were not substantiated and thus were not deductible. Further, because the taxpayer did not furnish complete and accurate information to the CPA who prepared his return, he failed to establish that his reliance on the CPA constituted "reasonable cause" and "good faith," and he was therefore liable for the accuracy-related penalty under Sec. 6662(a). Cole, T.C. Summ. 2016-63 (9/27/16).
Taxpayer cannot deduct noncash charitable contributions
The Tax Court refused to rely on a taxpayer's claimed substantiation documents and held that the taxpayer was not entitled to deduct certain claimed noncash charitable donations of furniture, clothing, and appliances. Spencer, T.C. Summ. 2016-62 (9/26/16).
IRS updates SIFL rates for noncommercial flights
The IRS issued the Standard Industry Fare Level formula valuation rates for noncommercial flights on employer-provided aircraft for the period July 1 through Dec. 31, 2016. Rev. Rul. 2016-24 (9/26/16).
Special per-diem rate for travel issued for 2016–2017
The IRS provided the 2016–2017 special per-diem rates, including the transportation industry meal and incidental expenses rates, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Notice 2016-58 (9/27/16) (see related news story).
Taxpayers’ calamities did not excuse them from penalties for unreported income
The Tax Court held that (1) unpaid balances of loan amounts that a taxpayer borrowed from her Sec. 403(b) qualified employer retirement plan were deemed distributions of taxable income subject to a 10% additional tax, and (2) the taxpayer and her husband also had other unreported income, including a distribution from their Sec. 529 qualified tuition program that was also subject to a 10% additional tax. While the court was sympathetic about calamities the couple had suffered, including the death of the taxpayer’s father, threatened foreclosure on the couple’s personal residence, and their son’s contracting cancer, the court concluded that those difficulties did not constitute reasonable cause for an underpayment of federal income tax within the meaning of Sec. 6664(c). Martinez, T.C. Memo. 2016-182 (9/28/16).
Taxpayer failed to report retirement income; penalty upheld
The Tax Court held that a taxpayer failed to report retirement income of $39,650. Further, because the taxpayer failed to establish that she relied on the informed advice of a competent tax professional, she could not demonstrate reasonable cause for the failure to report the income, and the court found her liable for an accuracy-related penalty under Sec. 6662(a). Hill, T.C. Summ. 2016-64 (9/29/16).
IRS notice advises taxpayers of revisions and corrections to Rev. Proc. 2016-1
The IRS has issued a notice advising taxpayers of revisions to the requirements for the reduced user fee for substantially identical letter rulings set forth in Section 15.07(2) of Rev. Proc. 2016-1. The notice also corrects the amount of the user fee for Foreign Insurance Excise Tax Waiver Agreements stated in Appendix A of Rev. Proc. 2016-1. Notice 2016-59 (9/27/16).
IRS adds provision on RICs to no-rule revenue procedure
The IRS supplemented Rev. Proc. 2016-3 by adding to the list of topics on which the IRS ordinarily will not rule a provision relating to the treatment of a corporation as a regulated investment company (RIC) under Sec. 851. Under the provision, the IRS will ordinarily not rule on any issue relating to the treatment of a corporation as a RIC under Sec. 851 and related provisions that requires a determination of whether a financial instrument or position is a security as defined in the Investment Company Act of 1940. Rev. Proc. 2016-50 (9/27/16).
Taxpayer failed to prove deficiency notice was not mailed to her; IRS can proceed with collection action
The Tax Court held that while a taxpayer bore the ultimate burden of proving that the IRS did not mail a deficiency notice, the IRS proved to the court that the notice had been sent by certified mail. Therefore, the IRS could proceed with the collection action. Garrett, T.C. Memo. 2016-179 (9/26/16).
Taxpayer cannot avoid accuracy-related penalty by blaming tax prep software
The Tax Court granted the IRS's motion for summary judgment, upholding an IRS tax deficiency assessment for a taxpayer's failure to report $28,629 of unemployment income and $75 received from a health savings account. The court also found the taxpayer liable for the accuracy-related penalty under Secs. 6662(a) and (b)(2), rejecting her argument that her online tax preparation software did not reference the unemployment income and thus she had reasonable cause for avoiding the penalty. Hill, T.C. Memo. 2016-181 (9/27/16).
Taxpayer failed to prove IRS error or delay, and IRS refusal to abate interest was not an abuse of discretion
The Tax Court held that the IRS did not abuse its discretion in determining not to abate, under Sec. 6404(e), interest for the taxpayers' 2009 and 2010 tax years. The court said that the taxpayers failed to carry their burden of establishing any unreasonable error or delay attributable to an officer or an employee of the IRS's performing a ministerial act or a managerial act within the meaning of Sec. 6404(e). Lesende, T.C. Memo. 2016-178 (9/26/16).
IRS announces results of qualifying advanced coal project program
The IRS disclosed the certification resulting from the 2012–2013 Phase III allocation round of the qualifying advanced coal project program of Sec. 48A. Announcement 2016-33 (9/26/16).
Carbon dioxide sequestration credit inflation-adjustment factor
The IRS published the inflation-adjustment factor for the carbon dioxide sequestration credit under Sec. 45Q for calendar year 2016. Notice 2016-53 (9/26/16).
IRS clarifies definition of real property for REITs
The IRS issued final regulations that clarify the definition of real property for purposes of the real estate investment trust provisions of the Code. T.D. 9784 (9/26/16).
Sole owner of LLC liable for employment taxes on wages paid before 2009
The Tax Court held that the sole member of a limited liability company (LLC) was liable for the payment of employment tax liabilities of the LLC for tax periods ending before Jan. 1, 2009, because the sole member and the LLC itself were considered a single taxpayer or person who is personally liable for purposes of employment tax reporting before Jan. 1, 2009. The court further held that the IRS did not abuse its discretion in upholding the collection action against the sole owner. Heber E. Costello, LLC, T.C. Memo. 2016-184 (9/29/16).
Taxpayer barred by limitation statute from amending return; IRS can address errors in open year
The Office of Chief Counsel advised that the taxpayer was barred by Sec. 6511 from amending a prior-year tax return to reduce its taxable income by the aggregate amounts of the special loss discount account (SLDA), which included amounts from closed years that were incorrectly taken into income over certain tax years. According to the Chief Counsel’s Office, the IRS can make adjustments in an open year to address errors that occurred in accounting for Sec. 847 in closed years. CCA 201640017 (9/30/16).
IRS should consider fraudulent failure-to-file penalty or penalty on erroneous claims for refund for false returns
The Office of Chief Counsel advised that returns that falsely claimed Form 1099-OID, Original Issue Discount, income and tax withholding would likely be held by a court to be valid returns, even if they contain a frivolous position and claim refunds based on overstated withholding. As an alternative position, the Chief Counsel’s Office said, any notice of deficiency should treat the returns as invalid and determine a fraudulent failure-to-file penalty under Sec. 6651(f) or a Sec. 6676 penalty on erroneous claims for refund or credit. CCA 201640016 (9/30/16).
Franchisee operating a restaurant is not a limited partner exempt from self-employment tax
The Office of Chief Counsel was asked whether a franchisee who was the operating manager, president, and CEO of a partnership that operates restaurants was a limited partner exempt from self-employment tax under Sec. 1402(a)(13) on his distributive share of the partnership’s income. The Chief Counsel’s Office, citing the decision in Renkemeyer, Campbell & Weaver, LLP, 136 T.C. 137 (2011), as well as legislative history, concluded that the franchisee was not a limited partner in the partnership because he operated as a service partner in a service partnership. CCA 201640014 (9/30/16).
Change in accounting method on amended return was not valid
The Tax Court held that a taxpayer's allowable deduction for legal fees was $12,007, and not the $77,823 he reported on an amended return. The court also held that the taxpayer's change in accounting method from the cash method to the accrual method, which was made on the amended return, was not a valid accounting method change because he did not file a Form 3115, Application for Change in Accounting Method, or comply with any automatic change procedures. Mills, T.C. Memo. 2016-180 (9/27/16).
Guidance issued on extension of replacement period for livestock sold on account of drought
The IRS provided guidance regarding an extension of the replacement period under Sec. 1033(e) for livestock sold on account of drought in specified counties. Notice 2016-60 (9/30/16).
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.