Document Summaries for the Week of March 27, 2017

CORPORATIONS

Management fees paid to corporation with the same shareholders were nondeductible dividends

The Tax Court held that a corporation was not entitled to deduct management fees paid to a related corporation with the same shareholders because those payments were not for services rendered and were therefore nondeductible dividends. In addition, the court upheld penalties because the corporation failed to prove that the deducted management fees were reasonable. Home Team Transition Management, T.C. Memo. 2017-51 (3/28/17).

Costs incurred to satisfy regulatory agency’s conditions for merger are not necessarily capitalized

The Office of Chief Counsel advised that, where a regulatory agency approves a company merger subject to certain conditions, the costs of activities undertaken in satisfaction of the conditions are not per se required to be capitalized under Regs. Sec. 1.263(a)-5 as amounts paid to facilitate a transaction. The Chief Counsel’s Office disagreed with the examining agent’s assertion to the contrary. CCA 201713010 (3/31/17). 

Guidance on taking R&D credit against payroll taxes

The IRS issued interim guidance on how eligible small businesses can take advantage of a new provision that allows them to apply part or all of their Sec. 41 research tax credit against their payroll tax liability, instead of their income tax liability. Notice 2017-23 (3/30/17) (see related news story).

EMPLOYEE BENEFITS

IRS issues monthly guidance on corporate bond yield curve and other rates

The IRS issued a notice on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2017-22 (3/27/17).

EXEMPT ORGANIZATIONS

IRS provides relief from Sec. 4975 excise taxes for certain prohibited transactions

In response to a recent presidential memorandum directing the Department of Labor (DOL) to reexamine the fiduciary duty rule, the IRS issued guidance providing relief from the Sec. 4975 excise taxes and the related reporting obligations to certain individuals engaged in prohibited transactions. The relief parallels similar relief provided by the DOL to these individuals in recently released DOL guidance. Announcement 2017-4 (3/27/17).

INDIVIDUALS

Wife entitled to innocent spouse relief with respect to losses from husband’s ranching business

The Tax Court held that the IRS failed to demonstrate that a taxpayer knew that her husband lacked the primary objective of making a profit with respect to a ranching business that generated losses deducted on the couple’s joint tax return but were disallowed. Thus, because the IRS failed to establish that the taxpayer had actual knowledge of the facts that caused the losses to be denied, the court concluded that she was entitled to innocent spouse relief under Sec. 6015(c) from joint and several tax liability relating to those losses. Harris, T.C. Summ. 2017-21 (3/30/17).

Taxpayer gets dependency exemption deductions for which she did not waive entitlement

The Tax Court held that a taxpayer was entitled to dependency exemptions and additional child tax credits for her three children she had claimed on her return. The Tax Court noted that, despite the fact that the children’s father was entitled to the dependency exemptions by a state court separation agreement, federal law trumped state law, and, because the taxpayer did not waive the dependency deductions under the noncustodial parent requirements of Sec. 152(e), she was entitled to them. McCutcheon-Cox, T.C. Summ. 2017-20 (3/30/17).

‘Vindictive’ husband fails to sway Tax Court to deny wife innocent spouse relief

The Tax Court determined that a taxpayer whose husband had mentally and physically abused her for years was entitled to equitable innocent spouse relief. In agreeing with the taxpayer and the IRS, the court rejected the husband’s argument that their returns were not valid because his wife did not consent to them and that his wife controlled her own bank account after they had separated, stating that his position in the case appeared “simply vindictive.” Okorogu, T.C. Memo. 2017-53 (3/30/17).

INTERNATIONAL

IRS did not act unreasonably in issuing regulations under Sec. 883(c)(1)

The Tax Court held that Sec. 883(c)(1) and its legislative history are silent as to how a foreign corporation’s ownership is determined for purposes of establishing whether the foreign corporation is entitled to the benefits of Sec. 883(a)(1) permitting certain gross income to be exempt from U.S. taxation. Consequently, the IRS was authorized under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), to fill that gap by issuing regulations, and it did not act unreasonably, arbitrarily, or capriciously when it interpreted that section in a way that precluded the foreign corporation from including bearer shares in determining the foreign corporation’s ownership. Good Fortune Shipping SA, 148 T.C. No. 10 (3/28/17).

IRS issues eighteenth Advance Pricing and Mutual Agreement program report

The IRS issued its annual Advance Pricing and Mutual Agreement (APMA) program report. This is the 18th report issued by the IRS and it describes the experience, structure, and activities of the APMA Program during calendar year 2016, excluding the application of the arm’s-length standard. Announcement 2017-3 (3/27/17).

IRS PROCEDURES

Restitution payments cannot precede deficiency procedures

The Tax Court held that a taxpayer who did not waive assessment restrictions on a proposed deficiency and penalty for tax year 1998 arising from criminal fraud could not reduce the deficiency and penalty before assessment by taking into account criminal restitution amounts he had remitted. However, the court held that, following entry of its final decision, the IRS would assess the deficiency, penalty, and interest and then credit the taxpayer’s account with the restitution as of the date of those payments. Rozin, T.C. Memo. 2017-52 (3/29/17).

Statute of limitation remains open for certain erroneous first-time abatements

The Office of Chief Counsel advised that reassessment of the Sec. 6651(a)(2) penalty for failure to pay the amount of tax shown on a return was not barred by the Sec. 6501(a) three-year statute of limitation where penalty amounts initially assessed less than 10 years previously were subject to an erroneous administrative first-time abatement. However, the 10-year limitation period on collection would preclude making a new assessment for amounts for which that period has run, the Chief Counsel’s Office advised. CCA 201713001 (3/31/17).

Procedures proposed for accounting method changes under revenue recognition standards

The IRS asked for comments on proposed procedures for requesting consent to make accounting method changes to reflect FASB’s new revenue recognition standards. Notice 2017-17 (3/29/17) (see related news story).

TAX ACCOUNTING

Notice requests comments on accounting method changes under new revenue recognition standards

The IRS requested comments on a proposed revenue procedure that would govern how a taxpayer may request consent to change a method of accounting for recognizing income when the change is made for the same tax year for which the taxpayer adopts the new financial accounting revenue recognition standards and the change is made as a result of, or directly related to, the adoption of the new revenue recognition standards. Notice 2017-17 (3/28/17) (see related news story).