Document summaries for the week of Nov. 20, 2017
Chief Counsel’s Office responds to request for advice on ESOP plan language
The Office of Chief Counsel was asked several questions about an employee stock ownership plan (ESOP), including whether the plan may include plan language providing for a trustee, fiduciary, and/or administrator to transfer employer securities in an S corporation and assets attributable to those securities back to the ESOP if (1) the ESOP previously transferred those securities and related assets to prevent a nonallocation year, under the “transfer method” described in Regs. Sec. 1.409(p)-1(b)(2)(v)(A), from the account of a participant who was a disqualified person (or was reasonably expected to become a disqualified person as described in Sec. 409(p) (i.e., a disqualified person) to a non-ESOP plan of the employer or a separate portion of the ESOP that is not an ESOP; and (2) the transfer back to the ESOP will not a cause a nonallocation year or a prohibited allocation in a nonallocation year for purposes of Sec. 409(p). The Chief Counsel’s Office concluded that the transaction would likely cause both the ESOP and the non-ESOP portion of the plan to violate Regs. Sec. 1.401(a)(4)-4 and, as a result, any plan language providing for such a scenario was not appropriate. CCA 201747007 (11/24/17).
ESTATES, TRUSTS & GIFTS
Chief Counsel’s Office assists in drafting response to protest by a trust whose refund claim was rejected
In response to a trust’s protest regarding the denial of a refund claim involving the trust’s charitable distribution deduction, the Office of Chief Counsel advised that Sec. 642(c)(1) requires that a charitable distribution must be made pursuant to the terms of the governing instrument, and a court order modifying a will in the absence of a controversy involving the interpretation of the instrument is not “pursuant to the terms of the governing instrument.” The Chief Counsel’s Office rejected the trust’s argument that the decisions in Crown Income Charitable Fund, 8 F.3d 571 (7th Cir. 1993), and Brownstone, 465 F.3d 525 (2d Cir. 2006), did not support a narrow interpretation of Sec. 642(c)(1), and replied that its interpretation of Sec. 642(c)(1) is a plain language reading of the statute that case law supported. CCA 201747005 (11/24/17).
Court upholds collection action after taxpayer fails to respond to IRS 'last chance' letter
The Tax Court granted an IRS motion for summary judgment and sustained a proposed collection action against a taxpayer who failed to pay her 2014 tax liability. The court noted that the taxpayer had failed to participate in a scheduled collection due process hearing and failed to respond to a "last chance" letter sent by the IRS. Copper, T.C. Memo. 2017-231 (11/20/17).
Taxpayer liable for AMT after failing to provide proof that AMT was miscalculated
The Tax Court held that a taxpayer was liable for a $2,058 tax deficiency after failing to pay the alternative minimum tax (AMT) assessed on his 2014 tax return. The court rejected the taxpayer's argument that the AMT was incorrectly calculated after the taxpayer failed to provide any proof of a miscalculation. Phillips, T.C. Memo. 2017-230 (11/20/17).
Collection action sustained; court rejects assertion that couple did not have to provide financial information
The Tax Court granted an IRS motion for summary judgment and sustained a proposed collection action against a couple who filed their 2005 tax return late and reported taxable income of almost $30.8 million and a tax liability of almost $2.2 million. The court noted that the couple's assertion that they were not required to submit any financial information because their intended offer in compromise would be based on effective tax administration was incorrect and that they were required to submit such information. Potts, T.C. Memo. 2017-228 (11/20/17).
Couple can deduct losses from ranch operations
The Tax Court held that a couple's ranching activity was engaged in for profit under Sec. 183 and thus the couple could deduct losses from the ranch operations. However, the court said it was not declaring the ranch a for-profit activity ad infinitum and that, if the ranch's future losses could not be reined in, the profit motive behind the ranch operations could again be questioned before the court. Welch, T.C. Memo. 2017-229 (11/20/17).
IRS provides safe harbor for deducting concrete foundation repairs
The IRS provided guidance to individuals regarding the federal income tax treatment of amounts paid to repair damage to their personal residences resulting from deteriorating concrete foundations caused by the presence of the mineral pyrrhotite. Rev. Proc. 2017-60 (11/22/17).
Applicability of Moline Properties to S corporations
The Office of Chief Counsel advised that, after certain conference calls in which discussions were held on the decision in Morton, 98 Fed. Cl. 596 (2011), and its effect of excluding wholly owned or majority-owned S corporations from precedent set by Moline Properties, 319 U.S. 436 (1943), and based on additional analysis, the IRS should reject the Morton holding and continue to assert that Moline Properties applies to S corporations, regardless of the degree of ownership. According to the Chief Counsel’s Office, there is no support of the Morton theory of the nonapplicability of Moline Properties and the decision in Deputy v. DuPont, 308 U.S. 488 (1940), to S corporations in prior case law or elsewhere and, further, there is no justification for treating S corporations differently from C corporations, except to the extent there is specific authorization for doing so under the Code or other precedential authority. CCA 201747006 (11/24/17).