Document summaries for the week of June 19, 2017

EMPLOYEE BENEFITS

Deferred compensation plans do not meet Sec. 409A requirements

In determining whether a deferred compensation arrangement involving a U.S. taxpayer that manages certain funds and a foreign corporation that pays the taxpayer for investment advisory services meets the requirements that apply to back-to-back arrangements under Regs. Sec. 1.409A-3(i)(6), the Chief Counsel’s Office advised that it did not because Regs. Sec. 1.409A-3(i)(6) provides that the amount of the payment under the ultimate service recipient plan may not exceed the amount of the payment under the intermediate service recipient plan. Therefore, the plan fails to meet the requirements of Sec. 409A because the plan provision providing for a payment to the U.S. taxpayer in the event of a participant’s separation from service before vesting is an impermissible payment event. The IRS also ruled that where the amounts of payments made under a plan differed from the amounts provided for by the plan, the plan was not operated in accordance with Sec. 409A(a)(2)(A). The IRS also explained that where an employee separated from service and was due an accelerated payout from a plan, but the amount was not paid and the employee did not include it in income, the plan was not operated in accordance with Sec. 409A(a)(2). CCA 201725027 (6/23/17). 

INDIVIDUALS

Notices showing a zero balance did not prove taxpayer had no liability

The Tax Court held that, even though Notices CP21E and account transcripts issued to the taxpayer showed a zero balance, those documents did not prove that the taxpayer had no liability for 2010 or 2011; rather, the court said, they showed that no liability had yet been assessed. The Tax Court also admonished the taxpayer for engaging in tactics that seemed intended primarily to delay and warned that continuing such tactics could result in penalties. Fleming, T.C. Memo. 2017-120 (6/20/17).

Taxpayer cannot challenge tax liability subsequent to Tax Court’s decision

The Tax Court held a taxpayer’s challenge to his underlying tax liability was immaterial because a prior Tax Court opinion conclusively established his federal income tax liability for each subject year and Sec. 6330(c)(2)(B) barred him from challenging his underlying tax liability during a collection due process proceeding or in the Tax Court. The court also concluded that an IRS settlement officer did not abuse her discretion in sustaining a collection action against the taxpayer. Roudakov, T.C. Memo. 2017-121 (6/20/17). 

Failure to conduct film festival activity in businesslike manner precludes loss deduction

The Tax Court held that a taxpayer did not conduct a film festival activity in a businesslike manner and he did not engage in the activity with the requisite profit objective during 2013. Consequently, the court sustained the IRS’s determination that the taxpayer (1) was not entitled to a $32,057 deduction for the net loss from that activity that he reported on Schedule C and (2) was liable for an accuracy-related penalty. Zudak, T.C. Summ. 2017-41 (6/19/17).

Taxpayer does not qualify as real estate professional

The Tax Court held that a taxpayer who worked full time as an information technology specialist and who also owned four single-family residential properties that she rented out but which she failed to elect to treat as a single activity was not a real estate professional and thus could not deduct all of her rental losses. The court found the taxpayer’s claims as to the hours she devoted to real property trades or businesses improbable. Ostrom, T.C. Memo. 2017-118 (6/19/17).

Court rejects taxpayer’s request for innocent spouse relief

The Tax Court held that a taxpayer was not eligible for innocent spouse relief because she knew the losses claimed on her joint return were fictitious and she benefitted from them. According to the court, the taxpayer was liable for the deficiency at issue, as well as the accuracy-related penalty. Conrad, T.C. Memo. 2017-116 (6/19/17).

Minister cannot take deductions relating to ministry and book-writing activities

The Tax Court held that a minister could not take deductions for his ministry and book-writing activities where he offered no credible evidence to establish a profit motive for his ministry and the book-writing activities. The court noted that the minister did not charge for services he performed as a minister and did not prove that he had any income from his alleged book-writing activity. Even if the court conceded that the minister had a profit motive, he also failed to substantiate his expenses and was liable for an accuracy-related penalty. Lewis, T.C. Memo. 2017-117 (6/19/17).

Court decries taxpayer’s presentation of expenses using ‘shoebox method’

The Tax Court denied many business expense deductions taken by a taxpayer due to lack of substantiation; however, the court did allow a few deductions, including a deduction for website design. The court noted that, while the taxpayer provided hundreds of receipts for various expenses that were arranged in four three-ring binders for trial, the presentation of the taxpayer’s expenses was tantamount to the “shoebox method” of substantiating them, and, the court said, it would not sort through the voluminous evidence to decide whether the taxpayer substantiated each and every claimed expense. Venuto, T.C. Memo. 2017-123 (6/22/17).

Court-ordered restitution is subject to Treasury secretary’s authority in Sec. 6201

The Office of Chief Counsel advised that court-ordered restitution is subject to the Treasury secretary’s assessment authority in Sec. 6201(a)(4). In addition, the Chief Counsel’s Office advised that underpayment interest under Sec. 6601 begins to accrue from the last date or dates prescribed for payment of the liability that is the subject of the restitution order and that the assessment in the case at issue was not barred by the prohibition on overcompensation of the government. CCA 201725026 (6/23/17).

IRS PROCEDURE

Rejection of company’s OIC on the basis of a calculation of reasonable collection potential was unreasonable

The Tax Court held that the IRS’s rejection of a construction company’s offer in compromise solely on the basis of an IRS calculation of reasonable collection potential (RCP) that used the company’s going concern valuation but disregarded completely its tax liability was not reasonable. As a result, the court remanded the case to the IRS Office of Appeals to have it redetermine the company’s RCP. W. Zintl Construction, Inc., T.C. Memo. 2017-119 (6/19/17).

IRS accepting 2017 ITIN renewals

The IRS announced that it is now accepting renewal applications for the individual taxpayer identification numbers (ITINs) set to expire at the end of 2017. IR-2017-109 (6/21/17).

PARTNERSHIPS

Sales of waste collection businesses were franchise sales, and gain on the sales was capital gain

The Tax Court held that sales of municipal waste collection businesses by three related partnerships qualified as sales of franchises under Sec. 1253 and thus resulted in capital gains treatment, not ordinary income treatment as the IRS had argued. The contracts met the definition of franchises under Sec. 1253, and the partnerships neither retained any significant interests in the contracts after the sales nor received any contingent payments, so the transactions were not excluded from capital gains treatment under the statute. Greenteam Materials Recovery Facility Partnership, T.C. Memo 2017-122 (6/21/17).

If partnership has a U.S. partner, IRS consent is necessary to name foreign partner as TMP

The Office of Chief Counsel advised that  a foreign partner is not prohibited from being a tax matters partner (TMP) if the partner is otherwise eligible. The only prohibition is that if there is a U.S. partner that is eligible to be a TMP, then the foreign partner cannot be named as the TMP without the IRS’s consent as provided in Regs. Sec. 301.6231(a)(7)-1(b)(2). CCA 201725028 (6/23/17).

Tax Court has jurisdiction to review penalty on partnership adjustment

The Tax Court held that, under Sec. 6330(d)(1), as amended by the Pension Protection Act of 2006, it has jurisdiction to review an IRS notice of determination when the underlying tax liability consists solely of a penalty that relates to an adjustment to a partnership item excluded from deficiency procedures by Sec. 6230(a)(2)(A)(i). According to the court, when Congress amended Sec. 6330 in 2006—making the Tax Court the exclusive venue for review of Collection Due Process cases—its intent was not to preclude from review certain issues not subject to the Tax Court’s deficiency jurisdiction. McNeill, 148 T.C. No. 23 (6/19/17).