Document Summaries for the Week of Nov. 6, 2017

CORPORATIONS

Clean renewable energy bond applications sought

The IRS invited public power providers (as defined in Sec. 54C(d)(2)) to submit applications for an allocation of the available authority (volume cap) to issue new clean renewable energy bonds under Sec. 54C to finance qualified renewable energy facilities. Notice 2017-66 (11/6/17).

Rules issued on claims for temporary relief from undyed diesel fuel tax for certain fuel removals

The IRS provided rules claimants must follow to submit a claim for refund pursuant to the temporary relief provided in Section 3.02 of Notice 2017-30. A claimant may submit a refund claim for the Sec. 4081(a)(1) tax imposed on undyed diesel fuel and kerosene used for fuel that is (1) removed from a Milwaukee terminal; (2) entered into a Green Bay terminal within 24 hours; and (3) subsequently dyed and removed from the Green Bay terminal. Notice 2017-59 (11/6/17).

ESTATES, TRUSTS & GIFTS

Related taxpayers are liable as transferees for companies' tax liabilities

The Tax Court held that a group of related taxpayers—an estate, an exempt trust, a nonexempt trust, and the heir to a company that owned two bowling alleys—were subject to transferee liability under the Tennessee Uniform Fraudulent Transfer Act on the basis of constructive fraud because they received distributions from the bowling alley company without giving reasonably equivalent value in exchange for the distributions. Because those distributions resulted in the company's insolvency and the nonpayment of federal tax liabilities, the Tax Court held that the taxpayers were liable as transferees for the federal income tax liabilities, interest, and a penalty assessed on the company. Billy F. Hawk, Jr., GST Non-Exempt Marital Trust, T.C. Memo. 2017-217 (11/6/17).

Chief Counsel opines on deathbed purchase of a remainder interest in transferred property

The Office of Chief Counsel advised that, where the purchase of a remainder interest in transferred property in which a donor has retained an annuity occurs on the donor’s deathbed during the term of the annuity, the remainder does not replenish the donor’s taxable estate and thus does not constitute adequate and full consideration in money or money’s worth for gift tax purposes. Additionally, a note given in exchange for property that does not constitute adequate and full consideration in money or money’s worth for gift tax purposes is not deductible as a claim against the estate. CCA 201745012 (11/9/17). 

INDIVIDUALS

Mother not liable for COD income when her son failed to repay a truck loan on which she was a secondary obligor

The Tax Court held that, because a mother who cosigned on a truck loan for her son was merely the secondary obligor on the loan, her net worth was not increased over what it would have been if the original transaction had never occurred. Thus, the court concluded that the mother was not liable for cancellation-of-indebtedness income after her son stopped making payments on the loan and the loan was forgiven. Bullock, T.C. Memo. 2017-219 (11/6/17).

Chinese professor cannot exclude U.S. wages from income under U.S.–China treaty

The Tax Court held that wages earned by an assistant professor, who was a Chinese citizen and a U.S. resident, were not exempt from U.S. tax under Article 19 of the United States–China treaty, since Article 19 applies only to persons who are "temporarily present" in the United States. The court noted that the taxpayer's career goal was to become a U.S. college professor and, thus, rejected her argument that, at the time she filed the applicable tax returns, she was only "temporarily present" in the United States because a variety of contingencies could have resulted in her returning to China. Ye, T.C. Memo. 2017-216 (11/6/17).

Court denies short-term capital loss to couple on dissolution of wholly owned S corp.

The Tax Court held that a couple were not entitled to a short-term capital loss on the dissolution of their wholly owned S corporation into which they had transferred personal assets of cash and marketable securities and that had, in turn, transferred such assets to a family limited partnership. The court found that the couple's receipt of the partnership interest upon the dissolution of the S corporation and the couple's use of a substantially discounted value for the assets distributed to them by the partnership were transactions that lacked economic substance. Smith, T.C. Memo. 2017-218 (11/6/17).

Taxpayer cannot file joint return after filing return using married-filing-separately status

The Tax Court (1) held that a taxpayer could not amend her original 2010 tax return to claim the filing status of married filing jointly after she and her husband had filed separate returns claiming married-filing-separately status and the husband had received a notice of deficiency; (2) held that the taxpayer received $84,956 of benefits from the Social Security Administration, $14,269 of which were taxable; and (3) sustained a proposed IRS levy on the taxpayer. The court concluded that an IRS settlement officer (SO) did not abuse her discretion in rejecting the taxpayer’s request for an offer-in-compromise as a collection alternative because the SO had informed the taxpayer that she had to submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, Form 656, Offer in Compromise, and supporting financial documentation, but the taxpayer failed to do so. Butler, T.C. Summ. 2017-82 (11/9/17).

Tax Court allows business owner’s deduction for contract labor costs after credible testimony

The Tax Court held that a taxpayer, who operated a cleaning and maintenance business, was entitled to deduct labor costs for contract laborers that she reported on her returns, after finding the taxpayer’s testimony to be honest, forthright, and credible. However, because the taxpayer could not substantiate numerous other business-related deductions, the Tax Court denied those deductions to the extent they exceeded amounts allowed by the IRS and also sustained accuracy-related and late-filing penalties. Duket, T.C. Summ. 2017-84 (11/9/17).

Sisters cannot deduct expenses for trip to South Africa as a charitable contribution

The Tax Court denied most of a charitable contribution deduction taken by two sisters, who formed a limited liability company (LLC) to operate a dress shop, for expenditures relating to a trip to South Africa, where the sisters donated several dresses to a local township, because the sisters did not provide testimony or other evidence establishing that the local township was an organization eligible to receive tax-deductible contributions and the sisters failed to establish that their visit to South Africa involved no significant element of personal pleasure, recreation, or vacation. The court also sustained the IRS’s assessment of an accuracy-related penalty under Sec. 6662 because, the court said, the sisters incorrectly characterized a number of trade or business expenses as cost of goods sold on the LLC’s tax returns and were also unable to substantiate significant amounts of the LLC’s purported expenses.  Fleming, T.C. Summ. 2017-83 (11/9/17).

Business owner cannot deduct repayment of loan

The Tax Court held that a taxpayer, who borrowed $22,000 to provide operating funds for her architecture/construction business, could not deduct the repayment of loan principal since loan proceeds are not taxable income when they are received. Thus, the court sustained the IRS’s determination that the taxpayer was liable for a tax deficiency for the disallowance of the deduction. Zollinger, T.C. Summ. 2017-81 (11/9/17).    

Korean Airlines pilot not subject to self-employment tax, but does not qualify for Sec. 911 exclusion

The Tax Court held that a U.S. citizen, who worked as a pilot for Korean Airlines, was not entitled to the Sec. 911 foreign earned income exclusion for 2011 and 2012 because he was not a bona fide resident of South Korea for those years. However, the court rejected the IRS’s argument that the taxpayer was subject to self-employment taxes because, the court found, even though the taxpayer signed an agreement that said he was an independent contractor, he was properly classified as an employee. Hudson, T.C. Memo. 2017-221 (11/8/17). 

TAX ACCOUNTING

Company did not meet all-events test for accruing income and can therefore reduce its income by that amount

The Tax Court held that a family-controlled holding company did not meet the all-events test for accruing income and could thus reduce its income by the improperly accrued amounts. However, the court denied bad debt deductions for amounts owed to the company, because, the court said, the company did not establish that the amounts became wholly worthless in the year at issue. VHC, Inc., T.C. Memo. 2017-220 (11/7/17).