Document summaries for the week of May 3, 2021

ESTATES, TRUSTS & GIFTS

Tax Court rejects IRS valuation of Michael Jackson’s image and likeness at date of death

The Tax Court held that, while the management of pop icon Michael Jackson’s estate greatly increased the value of the estate after the singer’s death, the value of Jackson’s image and likeness for estate tax purposes had to be based on their value at the time of death. As a result, the court rejected the IRS’s $161,307,045 valuation of the singer’s image and likeness for estate tax purposes and concluded that the value was instead $4,153,912. Estate of Jackson, T.C. Memo. 2021-48 (5/3/21).

Chief Counsel addresses gift tax exam and QTIP

The Office of Chief Counsel, assisting with an exam of a gift tax return filed after an estate tax return for a decedent with a spouse and two children, advised that (1) the commutation of a trust for which an election under Sec. 2056(b)(7) was effective was a disposition of the surviving spouse’s qualifying income interest that was subject to Sec. 2519; (2) the distribution of all of the trust property to the surviving spouse constituted a transfer of the remainder interest and a gift by the remainder beneficiaries under Sec. 2511; (3) the commutation of the trust and the distribution of all of the trust property to the surviving spouse were separate gift transfers by the surviving spouse and the remainder beneficiaries that did not offset each other; (4) the value of the surviving spouse’s Sec. 2519 gift to the remainder beneficiaries was the fair market value of all of the interests in the trust less the present value of the qualifying income interest on the date of disposition (as determined under Sec. 7520); and (5) the value of the remainder beneficiaries’ gifts under Sec. 2511 to the surviving spouse was the value of their remainder interest in the trust. The Chief Counsel’s Office also addressed issues relating to certain trust property of the decedent that his spouse, as personal representative of the decedent’s estate, elected to treat as qualified terminable interest property (QTIP) under Sec. 2056(b)(7). CCA 202118008 (5/7/21).

INDIVIDUALS

IRS collection action sustained; couple’s tax deficiency was not discharged in bankruptcy

The Tax Court granted summary judgment to the IRS after sustaining its collection action with respect to a married couple’s income tax deficiency (plus interest thereon) for the 2003 tax year. In sustaining the Notice of Federal Tax Lien filed by the IRS, the court concluded that an IRS settlement officer did not abuse his discretion. The court also rejected the couple’s contention that their tax deficiency had been discharged in bankruptcy. Barnes, T.C. Memo. 2021-49 (5/4/21).

Failure to substantiate business and other expenses precludes their deduction

The Tax Court held that a taxpayer who conducted business as both a notary and a paralegal was not entitled to deductions taken on her 2015 tax return for certain business expenses, charitable contributions, and state and local taxes because she failed to adequately substantiate those deductions. While the taxpayer argued that her records were no longer available on account of circumstances beyond her control, the court refused to estimate allowable expenses after noting that the taxpayer failed to reasonably reconstruct her records. Chancellor, T.C. Memo. 2021-50 (5/4/21).

Dividends received by shareholder-employee of C corporation are subject to Sec. 1411 tax

The Office of Chief Counsel advised that dividend income received by an individual shareholder from a C corporation in which the shareholder was an employee was subject to the net investment income tax under Sec. 1411. According to the Chief Counsel’s Office, this conclusion would have been the same even if the C corporation had been closely held. The Chief Counsel’s Office also held that the taxpayer’s participation in the C corporation’s business as an employee was insufficient to meet an exception for dividend income derived in the ordinary course of the taxpayer’s trade or business that is not a passive activity of the taxpayer. CCA 202118009 (5/7/21). 

Attorney-professor not entitled to litigation costs

The Tax Court held that although a taxpayer substantially prevailed with respect to the amount in controversy, he was not entitled to reasonable litigation or administrative costs because the government’s position in the case was substantially justified under Sec. 7430(c)(4)(B). The taxpayer, an attorney and professor, deducted what the IRS said were nondeductible employee business expenses relating to his temporary visiting scholar position but that were mostly settled on appeal. The court nonetheless agreed with the IRS that the taxpayer had not established that all of his claimed expense amounts were ordinary and necessary expenses of a trade or business. Jacobs, T.C. Memo. 2021-51 (5/5/21).

INTERNATIONAL

Chief Counsel’s Office addresses liquidation of entity into a US subsidiary

The Office of Chief Counsel issued a two-sentence advice involving royalties and the liquidation of a “withdrawing participant” into a U.S. subsidiary. CCA 202118013 (5/7/21). 

IRS PROCEDURE

OPR announces disciplinary actions

The IRS Office of Professional Responsibility (OPR) announced recent disciplinary sanctions involving attorneys, CPAs, and enrolled agents. Announcement 2021-8 (5/3/21).

Case presented to Chief Counsel’s Office is not a Westbrooks case

The Office of Chief Counsel advised that a case it was asked to review was not governed by Westbrooks, 858 F.3d 317 (5th Cir. 2017), which involved restitution imposed for a tax offense. The Chief Counsel’s Office noted that in the restitution order in the instant case, the district judge wrote “---------------- is subject to an order of mandatory restitution under the MVRA” (Mandatory Victims Restitution Act of 1996 (Title II of the Antiterrorism and Effective Death Penalty Act of 1996, P.L. 104-132). CCA 202118020 (5/7/21).

Government cannot collect on restitution-based assessment until other victims are paid

The Office of Chief Counsel advised that another case was not subject to Westbrooks because restitution was imposed as an independent part of the taxpayer’s sentence pursuant to a plea agreement. According to the Chief Counsel’s Office, where there are victims other than the government, the government cannot collect on a restitution-based assessment until after the other victims have been paid. CCA 202118018 (5/7/21).

Chief Counsel’s Office determines case referred to it is not a Westbrooks case

The Office of Chief Counsel advised another case was subject to Westbrooks, stating that the activity for which the defendant in the instant case was convicted embraced conduct for all the years for which restitution was ordered, and restitution was mandatory under the MVRA. CCA 202118017 (5/7/21).

Case referred to Chief Counsel’s Office is not a Westbrooks case

In yet another non-Westbrooks case, the Chief Counsel’s Office advised that the IRS was obliged only to assess and collect restitution during the period of supervised release. The Chief Counsel’s Office determined that the case at issue was technically not a Westbrooks case because the district court had authority to impose restitution independently. CCA 202118015 (5/7/21).

Restitution not subject to limitations under Westbrooks

The Office of Chief Counsel advised that in another case, restitution was assessable and was not subject to the limitations described in Westbrooks. The Chief Counsel’s Office noted that the judgment in the instant case listed the restitution as a criminal monetary penalty as well as a condition of supervised release, and, normally, where restitution is listed as a criminal monetary penalty, it is imposed as an independent part of the sentence. CCA 202118012 (5/7/21).

Chief Counsel’s Office identifies issues with monetized installment sale transactions

In response to an analysis of “monetized installment sale” transactions, the Office of Chief Counsel advised that, because the transactions involved multiple promoters/subpromoters, they could be structured in various ways, raising many issues. In general, however, the Chief Counsel’s Office agreed that the theory on which promoters based such arrangements was flawed. CCA 202118016 (5/7/21).

Chief Counsel’s Office OK with taxpayer disclosing own tax return information

In a two-sentence status report, the Office of Chief Counsel said a taxpayer could disclose his or her own return information if the information was accurate. CCA 202118014 (5/7/21). 

Bank is not required to surrender amounts in taxpayer’s account that are deposited after IRS levy

The Office of Chief Counsel advised that a bank that has failed to honor an IRS levy is not required to surrender amounts in a taxpayer’s account that the taxpayer deposited on the same day as, but after the time at which, the levy was made. CCA 202118010 (5/7/21). 

PARTNERSHIPS

Reviewed-year partners are bound by adjustments

The Office of Chief Counsel advised that, unless a partnership elects to push out adjustments to its reviewed-year partners, the partners are not liable for any tax on the adjustments to the partnership’s partnership-related items (PRIs), and, under Regs. Sec. 301.6241-1(a)(6)(v)(E), nonrecourse debt that is shown, or required to be shown, on the partnership’s return, is a PRI. However, the Chief Counsel’s Office said, the partners are bound by the adjustments, and as a result, they may have to adjust their basis and capital accounts. CCA 202118019 (5/7/21).

TAX-EXEMPT ORGANIZATIONS

Organization formed to exhibit African art did not qualify for tax-exempt status

The Tax Court held that an entity organized as a Sec. 501(c)(3) not-for-profit to promote Tikar African art did not operate exclusively for an exempt purpose within the meaning of Sec. 501(c) and therefore had not met its burden of proving that the IRS’s determination to revoke its tax-exempt status was erroneous. The court stated that the organization stored its African artifacts in a warehouse in Texas and in the basement of a museum in Cameroon when it could have exhibited the artifacts and enhanced the public’s appreciation of Tikar culture by engaging in activities that furthered educational or otherwise tax-exempt purposes. Tikar, Inc., T.C. Memo. 2021-53 (5/6/21).

S CORPORATIONS

Remodeling business can’t deduct owner’s race car expenses

The Tax Court held that a taxpayer who owned an S corporation that operated a construction and remodeling business could not run income and expenses from his race car driving business through the S corporation. The court found that the evidence did not show that car racing was part of the construction and remodeling business. The court sustained the IRS’s denial of deductions for race car expenses for the years at issue. Berry, T.C. Memo. 2021-52 (5/5/21).