Document summaries for the Week of April 17, 2017

C CORPORATIONS

Stock that did not participate in corporate growth was nonqualified preferred

The Office of Chief Counsel advised that, with respect to whether a taxpayer is entitled to a long-term capital loss on the sale of certain Class A stock of the taxpayer’s subsidiary, the answer turns in part on whether the stock is nonqualified preferred within the meaning of Sec. 351(g)(2)(A). Based on the facts presented, the Chief Counsel’s Office concluded that the stock did not participate in corporate growth to any significant extent and was, therefore, nonqualified preferred within the meaning of Sec. 351(g)(2)(A). CCA 201716045 (4/21/17).

 

INDIVIDUALS

Knowledge of spouse’s unreported income precludes innocent spouse relief

The Tax Court held that a taxpayer was not entitled to innocent spouse relief where she had actual knowledge of her deceased spouse’s unreported unemployment compensation income and where she would not be subject to economic hardship if relief was not granted. The court noted that the taxpayer’s annual salary was $107,000 and that her monthly income exceeded her reasonable basic monthly living expenses by more than $300. Wilson, T.C. Memo. 2017-63 (4/17/17).

Failure to make upfront estimated tax payment leads to levy on taxpayer

The Tax Court granted an IRS motion for summary judgment and sustained a proposed levy on the taxpayer, who worked as a self-employed investigator for law firms. The court noted that the taxpayer and an IRS settlement officer (SO) had agreed on a partial-pay installment agreement in which the taxpayer would make a $1,865 upfront payment of his estimated taxes and, when he did not make the payment, the SO acted reasonably in rejecting a collection alternative and closing the case. Allen, T.C. Memo. 2017-64 (4/17/17).

Taxpayer spent more time in corporate job than on real estate activities; loss deductions disallowed

The Tax Court held that a taxpayer did not qualify as a real estate professional and, as a result, was not entitled to a deduction for passive activity losses from his real estate activities. According to the court, the taxpayer worked at least 2,194 hours at his full-time job at a corporation, and claimed he also worked 2,520 hours on real estate activities, but his substantiation of those hours was questionable. Penley, T.C. Memo. 2017-65 (4/17/17).

No sale or exchange occurred in variable prepaid forward contracts transactions

The Tax Court held that no sale or exchange of property occurred where a taxpayer entered into variable prepaid forward contracts, for which he received prepaid cash payments, and subsequently extended the settlement dates on which he was to deliver variable quantities of stock to the investment companies involved in the transaction. According to the court, the open transaction treatment afforded to the original contracts under Rev. Rul. 2003-7 continues until the transactions are closed by the future delivery of stock; and, the transactions did not result in constructive sales of stock pursuant to Sec. 1259. Estate of McKelvey, 148 T.C. No. 13 (4/19/17).

Tax Court rejects IRS denial of hardship waiver to taxpayer who failed to timely roll over retirement distributions

The Tax Court held that the IRS’s Examination division had the authority to consider a request by a taxpayer, who suffered from a major depressive disorder after retiring from the New York City Police Department, for a hardship waiver after the taxpayer failed to timely roll over two distributions from his retirement accounts into another qualified retirement account within the requisite 60-day period. In the facts and circumstances of this case, the court concluded that it would be “against equity or good conscience,” within the meaning of Sec. 402(c)(3)(B), to deny the taxpayer’s request for a hardship waiver; thus, the two distributions were excludable from the taxpayer’s gross income. Trimmer, 148 T.C. No. 14 (4/20/17).

Taxpayer liable for frivolous position penalty after filing document with ‘tax-protester gibberish’

The Tax Court held that a taxpayer was liable for penalties for failing to timely pay the tax shown on a return prepared by the IRS after the taxpayer failed to prepare and file a return himself. Additionally, calling a document filed by the taxpayer “tax-protester gibberish,” the court found that the taxpayer was liable for a Sec. 6673(a)(1) penalty of $1,500 for taking a position that was frivolous or groundless and instituting and maintaining a case primarily for delay. Murray, T.C. Memo. 2017-67 (4/20/17). 

 

IRS PROCEDURE

Whistleblower cannot collect where IRS exam did not result in collected proceeds

The Tax Court granted summary judgment to the IRS, holding that a whistleblower, who provided information regarding another taxpayer’s failure to withhold and pay over taxes for 2006 through 2008, was not entitled to an award for those years because the IRS examination of the taxpayer did not result in collected proceeds. The court also rejected the whistleblower’s allegation that improvements to the taxpayer’s recordkeeping system after 2008 resulted in collected proceeds and the whistleblower was thus eligible for an award as a result. Whistleblower 16158-14W, 148 T.C. No. 12 (4/17/17).

IRS invites comments on priority guidance plan

The IRS asked for recommendations for items that should be included in its 2017-2018 Priority Guidance Plan. Notice 2017-28 (4/21/17).

Treasury to review tax regulations

The Treasury Department was directed to review “significant” tax regulations issued in 2016 and 2017 to determine if the regulations cost too much, are too complex, or exceed the IRS’s statutory authority. Presidential Executive Order on Identifying and Reducing Tax Regulatory Burdens (4/21/17) (see related news story).

 

TAX ACCOUNTING

May 2017 AFRs issued

The IRS issued the applicable federal rates for May 2017. Rev. Rul. 2017-11 (4/18/17).

IRS updates list of bank deposit interest information automatic exchange countries

The IRS updated the list of countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under Regs. Secs. 1.6049-8(a) and 1.6049-4(b)(5). The revenue procedure adds three countries (Belgium, Colombia, and Portugal) to the list. Rev. Proc. 2017-31 (4/17/17).

Newsletter Articles

SPONSORED REPORT

CPEOs provide peace of mind around payroll services

The creation of these new IRS-certified service providers for small businesses clarifies some issues around traditional professional employer organizations.

PRACTICE MANAGEMENT

2016 Best Article Award

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”