Document summaries for the week of June 12, 2017

C CORPORATIONS

Online gross receipts did not qualify for Sec. 199

The Office of Chief Counsel advised that none of a taxpayer’s online gross receipts were derived from providing customers access to computer software that was “manufactured, produced, grown, or extracted” (MPGE) by the taxpayer in whole or in significant part within the United States for the customers’ direct use under Regs. Sec. 1.199-3(i)(6)(iii). The Chief Counsel’s Office also concluded that, in calculating its Sec. 199 deduction, the taxpayer improperly applied the “item” rule in Regs. Sec. 1.199-3(d)(1). CCA 201724026 (6/16/17).

Third party contracted to perform employment tax obligations is not the statutory employer

The Office of Chief Counsel advised that a third party that a taxpayer contracted with to perform its employment tax obligations is not the “statutory employer” under Sec. 3401(d)(1), with the result that the taxpayer is not relieved of the employment taxes at issue. Further, the Chief Counsel’s Office said, the taxpayer was not entitled to relief under Section 530 because that provision applies only to disputes over worker classification, which was not at issue here. CCA 201724025 (6/16/17). 

INDIVIDUALS

Settlement proceeds for sexual harassment and gender discrimination are not excludable

The Tax Court held that a couple could not exclude from gross income under Sec. 104(a)(2) proceeds that the wife received under a settlement with her employer. The court concluded that the settlement proceeds were compensation for damages the wife suffered on account of sexual harassment and gender discrimination and that no portion of the settlement represented damages on account of personal injury or physical sickness. Devine, T.C. Memo. 2017-111 (6/13/17).

Insurance salesman liable for self-employment tax and penalties; business deductions disallowed

The Tax Court held that a taxpayer who sold insurance as an independent contractor and failed to report over $900,000 of nonemployee compensation could not, under Sec. 1402(k), exclude those earnings from self-employment tax. Further, because the taxpayer made no attempt to distinguish between commission advances and loan proceeds used to pay personal expenses and those used to pay business expenses that might permit a deduction, the court disallowed his business deductions and upheld penalties the IRS assessed. Geneser, T.C. Memo. 2017-110 (6/12/17).

Change in taxpayer circumstances does not preclude levy

The Tax Court held that an IRS settlement officer did not abuse his discretion in proceeding with a levy on the taxpayer. The court rejected the taxpayer’s argument that, due to a series of changed circumstances that occurred after the administrative process was completed, the IRS should have accepted his installment agreement in lieu of the levy. Snow, T.C. Summ. 2017-38 (6/12/17).

Court dismisses whistleblower claim for info IRS received before enactment of Sec. 7623(b)

The Tax Court held that, because a whistleblower provided information that formed the basis for his whistleblower claim before the enactment of Sec. 7623(b), it lacked the authority to review the IRS’s determination to deny that claim. As a result, the court granted the IRS’s motion to dismiss for lack of jurisdiction. Whistleblower 19860-15W, T.C. Memo. 2017-112 (6/13/17).

Charitable easement deduction denied where perpetuity requirement was not met

The Tax Court denied a charitable deduction for an easement contribution because, under New York state law, the deed created a conservation easement, which was not effective until it was recorded, and that did not occur in 2004, the date the easement donation was claimed. In addition, there was a possibility—which was not so remote as to be negligible—that because (1) the benefits of the easement deed would be unenforceable by the charitable organization’s successors, or (2) someone might purchase the property without notice of the easement and record that conveyance before the easement was recorded, the perpetuity requirements of Sec. 170(h)(2)(C) and Sec. 170(h)(2)(C)(5)(A) were not met. Ten Twenty Six Investors, T.C. Memo. 2017-115 (6/15/17).

Taxpayer barred from challenging tax liability as part of administrative review process

The Tax Court held that a taxpayer who did not file a petition for redetermination with the Tax Court under Sec. 6213(a) was barred from challenging the amount of his underlying tax liability for 2010 as part of the administrative review process. In addition, the court found that the IRS Appeals Office did not abuse its discretion in determining to proceed with a proposed levy action against the taxpayer. Shum, T.C. Summ. 2017-40 (6/15/17).

Car racing activity was not engaged in for profit

The Tax Court held that a couple’s car racing activity constituted an activity not engaged in for profit and thus denied their loss deductions. The couple failed the three-out-of five years profit test as well as the facts and circumstances test. The court also held that the couple were liable for an accuracy-related penalty under Sec. 6662(a) because they did not present any evidence that they had reasonable cause for the understatement. Stettner, T.C. Memo. 2017-113 (6/14/17).

Taxpayers had a capital loss on the disposal of their partnership interest

The Tax Court held that the IRS correctly recharacterized a couple’s loss on the disposal of a partnership interest as a capital loss, rather than an ordinary loss. However, the court said that because the couple reasonably relied on their accountant to prepare their tax return, they were not liable for an accuracy-related penalty. Watts, T.C. Memo. 2017-114 (6/14/17).

Couple and C corporation liable for deficiencies and penalties

The Tax Court held that a C corporation, which was wholly owned by a husband and wife, did not provide any evidence, including credible testimony, that it made a reasonable attempt to ascertain the correctness of certain equipment lease expenses it reported on its tax return, as well as vehicle expenses for the couple’s personal automobiles. In addition, the C corporation was subject to tax at 35% because it was a personal service corporation. Both the corporation and the couple were liable for tax deficiencies and related penalties. Zia-Ahmadi, T.C. Summ. 2017-39 (6/14/17). 

IRS PROCEDURE

IRS does not have immunity from suit in return preparer sting operation

The Ninth Circuit reversed a district court’s dismissal of an action on immunity grounds that had been brought by tax preparation and advance-refund businesses against the IRS under the Federal Tort Claims Act. It remanded the case for further proceedings. The case involves an IRS sting operation aimed at catching people who file fraudulent tax returns. Snyder & Assocs. Aquisitions LLC, No. 15056011 (9th Cir. 6/16/17).

Results of Phase III allocation round of Sec. 48B qualifying gasification project announced

The IRS announced the results of the Phase III allocation round under the qualifying gasification project program of Sec. 48B and confirmed that no additional allocation rounds will be conducted. This announcement modifies and supersedes Announcement 2016-34. Announcement 2017-6 (6/12/17).

July 2017 AFRs issued

The IRS issued the applicable federal rates for July 2017. Rev. Rul. 2017-14 (6/16/17).

PARTNERSHIPS

IRS proposes centralized partnership audit rules

The IRS issued proposed regulations that implement the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, P.L. 114-74. REG-136118-15 (6/13/17) (see related news story).

S CORPORATIONS

Stock held by ESOP is owned by beneficiaries; company’s payroll deductions deferred

In a case of first impression, the Tax Court held that an entity holding S corporation stock for the benefit of participants in an employee stock ownership plan (ESOP) was a “trust” within the meaning of Sec. 267(c) and that Sec. 267(c)(1) thus deemed the stock held by the trust to be owned by the trust’s beneficiaries (i.e., the S corporation employees who participated in the ESOP). The court also concluded that the S corporation and the ESOP-participating employees were deemed by Sec. 267(e) to be related persons for purposes of Sec. 267(b), and Sec. 267(a) accordingly operated to defer the S corporation’s deductions for accrued but unpaid payroll expenses to the year the pay was received by the ESOP employees and includible in their gross income. Petersen, 148 T.C. No. 22 (6/13/17).