Document summaries for the week of May 29, 2017

C CORPORATIONS

No abuse of discretion in rejecting installment offer and refusing to consider economic hardship exception

In one of a group of cases involving corporations with the same president, the Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a proposed installment agreement from the operator of a rural nursing home facility and by not considering the taxpayer’s economic hardship argument. According to the court, the economic hardship exception does not apply to corporations, and the rejection of the taxpayer’s installment agreement was proper for either of the two reasons stated in the report: (1) The value of the taxpayer’s assets exceeded the underlying liability, and (2) the taxpayer was not in compliance with its federal employment tax deposit obligations. Crescent Manor, Inc., T.C. Memo. 2017-94 (5/31/17).

No abuse of discretion in rejecting installment offer and refusing to consider economic hardship exception

In one of a group of cases involving corporations with the same president, the Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a proposed installment agreement from the operator of a rural nursing home facility and by not considering the taxpayer’s economic hardship argument. According to the court, the economic hardship exception does not apply to corporations, and the rejection of the taxpayer’s installment agreement was proper for either of the two reasons stated in the report: (1) The value of the taxpayer’s assets exceeded the underlying liability, and (2) the taxpayer was not in compliance with its federal employment tax deposit obligations. Hennessey Manor Nursing Home, Inc., T.C. Memo. 2017-97 (5/31/17).

No abuse of discretion in rejecting installment offer and refusing to consider economic hardship exception

In one of a group of cases involving corporations with the same president, the Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a proposed installment agreement from the operator of a rural nursing home facility and by not considering the taxpayer’s economic hardship argument. According to the court, the economic hardship exception does not apply to corporations, and the rejection of the taxpayer’s installment agreement was proper for either of two reasons: (1) The value of the taxpayer’s assets exceeded the underlying liability, and (2) the taxpayer was not in compliance with its federal employment tax deposit obligations. Silvercrest Manor Nursing Home, Inc., T.C. Memo. 2017-96 (5/31/17).

No abuse of discretion in rejecting installment offer and refusing to consider economic hardship exception

In one of a group of cases involving corporations with the same president, the Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a proposed installment agreement from the operator of a rural nursing home facility and by not considering the taxpayer’s economic hardship argument. According to the court, the economic hardship exception does not apply to corporations, and the rejection of the taxpayer’s installment agreement was proper for  one of two reasons: (1) The value of the taxpayer’s assets exceeded the underlying liability, and (2) the taxpayer was not in compliance with its federal employment tax deposit obligations. Sulphur Manor, Inc., T.C. Memo. 2017-95 (5/31/17).

No abuse of discretion in rejecting installment offer and conducting Sec. 6330(c)(3)(C) balancing test

In one of a group of cases involving corporations with the same president, the Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a proposed installment agreement from the operator of a rural nursing home facility and in denying the taxpayer’s request to have its account put on currently-not-collectible status. The court also concluded that there was no material issue of fact whether the IRS officer properly balanced the need for the efficient collection of taxes with the taxpayer’s legitimate concern that any collection action be no more intrusive than necessary, and that the officer did not abuse her discretion in conducting a Sec. 6330(c)(3)(C) balancing test. Western Hills Residential Care, Inc., T.C. Memo. 2017-98 (5/31/17). 

INDIVIDUALS

Real estate activities in which neither spouse performed more than 750 hours are ruled passive

The Tax Court held that a couple’s rental real estate activities were passive since neither spouse qualified as a real estate professional. Neither spouse performed more than 750 hours during the tax years at issue in real property trades or businesses in which he or she materially participated. In addition, the court rejected other deductions taken by the couple due to lack of substantiation. However, the IRS conceded post-trial that Mrs. McNally was entitled to innocent-spouse relief from the couple’s resulting joint liabilities. The court upheld accuracy-related penalties against Mr. McNally. McNally, T.C. Memo. 2017-93 (5/30/17).

Repeated concealment of income by former IRS agent and wife results in $73,000 in fraud penalties

The Tax Court held that a couple’s repeated concealment of income by overstating deductions on their 2011–2013 tax returns exemplified a pattern of fraudulent behavior and that the couple were thus liable for fraud penalties of more than $73,000. The court noted that the husband had been an IRS agent for more than 29 years and judged the couple’s explanations for the deductions implausible and unpersuasive. Langer, T.C. Memo. 2017-92 (5/30/17).

Military disability award excludable without regard to subsequent employment

The Tax Court held that a taxpayer’s military disability retirement income was excludable from gross income. The court rejected the IRS’s request that the court apply a particular Veterans Affairs disability standard with the hindsight of the taxpayer’s subsequent career in computers but rather based its holding on the taxpayer’s knowledge at the time he was approved for the benefits. Keeter, T.C. Summ. 2017-36 (5/30/17).

Repayment of disability insurance benefits is deductible, but Social Security lump sum is taxable

A couple were entitled to deduct their reimbursement to MetLife of the husband’s disability insurance benefits required once he received a lump-sum Social Security disability payment covering the same period. However, the court also concluded that the couple were taxable on the Social Security payment, which they had not included in income. They were not liable for an accuracy-related penalty on the related underpayment of tax because of their reliance on tax professionals to prepare their returns. Nordloh, T.C. Summ. 2017-37 (5/30/17).

Taxpayer’s payment to wife of one-half of his bonus is not deductible as alimony

The Tax Court held that a taxpayer’s payment to his wife of one-half of a bonus he received from his employer was not subsequently deductible as alimony because it was not made under a divorce or separation agreement and the taxpayer did not prove that he and his ex-wife were living separately when the payments were made. The court also held that the taxpayer was liable for an addition to tax for failing to timely file his tax return, as well as an accuracy-related penalty. Mudrich, T.C. Memo. 2017-101 (6/1/17).

Testimony and spreadsheets at trial were not credible; vehicle expenses denied

The Tax Court held that, due to a lack of substantiation, a couple were not entitled to deduct car and truck expenses reported on their Schedule C, Profit or Loss From Business, and were liable for an accuracy-related penalty. The court found the wife’s testimony and the spreadsheets the couple produced at trial to not be credible evidence. Taylor, T.C. Memo. 2017-99 (6/1/17).

Taxpayer’s reliance on tax return preparer was reasonable; court rejects penalty assessment

The Tax Court held that a taxpayer who relied on her accountant to correctly calculate the capital gain on a stock sale and to timely file her return reporting that sale was not liable for an accuracy-related penalty. The court found that the taxpayer acted with reasonable cause and in good faith in failing to report the proceeds from the stock sale on her 2012 return because she believed those proceeds had been reported on her 2011 return, as her tax return preparer had assured her. Whitsett, T.C. Memo. 2017-100 (6/1/17). 

IRS PROCEDURE

Carbon dioxide sequestration inflation-adjustment factor for 2017

The IRS published the inflation-adjustment factor for the carbon dioxide sequestration credit under Sec. 45Q for calendar year 2017. Notice 2017-32 (5/30/17).

Sec. 45 inflation adjustments and reference prices

The IRS published the 2017 inflation adjustment factor and reference prices used to determine the availability of the Sec. 45 credit for electricity produced from qualified energy resources and refined coal and provided the credit amounts for renewable electricity production and refined coal production. Notice 2017-33 (5/30/17).

Chief Counsel’s Office discusses IRM provision dealing with levies

In a discussion about the timing of a levy, the Office of Chief Counsel noted that Internal Revenue Manual Section 5.1.19.4 (4) provides that “[p]roceeds received as a result of a levy that was served prior to the CSED [collection statute expiration date] may be applied to expired module(s).” According to the Chief Counsel’s Office, that provision only addresses proceeds that have posted after the CSED, not time-barred levies; thus, that provision covers situations where the levy was timely. CCA 201722027 (6/2/17).

Advice on restitution-based assessments requested from Chief Counsel

The Office of Chief Counsel was asked for advice regarding the correct determination of underpayment interest in the context of a restitution-based assessment. The Chief Counsel’s Office noted that the amount of taxes owed is the liability that is the subject of the restitution order, and the amount upon which interest accrues. CCA 201722026 (6/2/17).

PARTNERSHIPS

Only an individual who can bind a partnership under state law can sign return on partnership’s behalf

The Office of Chief Counsel confirmed that the IRS had an invalid tax matters partner (TMP) designation on an original return because the entity named was not a member of the partnership. The Chief Counsel’s Office also confirmed that only someone who has the ability under state law to bind a partnership can sign a return on its behalf and rejected the contention that the entity had no member-manager because no one was authorized to make management decisions. In that case, each member was a member-manager. CCA 201722025 (6/2/17).

TAX ACCOUNTING

Chief Counsel’s Office addresses calculation of intangible development costs

The Office of Chief Counsel advised that, with respect to the tax preference calculation of excess intangible development costs (IDCs) in Sec. 57, it  makes no sense to measure the amount of IDCs considered “excess” by a calculation including hedging transactions not related to the taxpayer’s oil and gas properties. In response to a question whether the calculation of net income from oil and gas under Regs. Sec. 1.613-5 should include hedging gains and losses, the Chief Counsel’s Office noted that while the term “net income from oil and gas” is used in Sec. 57(a)(2)(C) and is not defined by reference to Regs. Sec. 1.613-5, Regs. Sec. 1.613-5 is instructive in limiting the scope of the deductions from gross income from the property in calculating net income from oil and gas. CCA 201722028 (6/2/17).