Document Summaries for the week of Feb. 28, 2022

EMPLOYMENT TAXES

Trust fund recovery penalties cannot be challenged at Collection Due Process hearing

The Tax Court held that, with respect to a taxpayer's failure to collect and pay over employment taxes owed by a company he owned, a Letter 1153, Proposed Trust Fund Recovery Penalty, that was properly served and received by the taxpayer constituted a prior opportunity to challenge an underlying liability for trust fund recovery penalties (TFRPs), and, therefore, a failure to appeal it prohibited the same challenge at a Collection Due Process hearing. In addition, the Tax Court held that the IRS did not abuse its discretion in sustaining a Notice of Federal Tax Lien filing against the taxpayer with respect to the TFRPs at issue. Kazmi, T.C. Memo. 2022-13 (3/1/22).

ESTATES, TRUSTS & GIFTS

Tax Court rejects IRS positions on decedent's split-dollar life insurance arrangements

The Tax Court held that, with respect to split-dollar life insurance arrangements that were part of a decedent's estate, Regs. Sec. 1.61-22 governed only the gift tax consequences of those arrangements and not the estate tax consequences. The court further held that (1) as of the date of her death, the decedent possessed a receivable created by the arrangements, which was only the right to receive the greater of premiums paid or the cash surrender values of the life insurance policies when they were terminated; (2) Sec. 2036(a)(2) and Sec. 2038 did not require inclusion of the policies' cash surrender values because the decedent did not have any right, whether by herself or in conjunction with anyone else, to terminate the policies and only the irrevocable trust created as part of the arrangements had that right; and (3) Sec. 2703 applied only to property interests that the decedent held at the time of her death, and, because there were no restrictions on the split-dollar receivable, Sec. 2703 was inapplicable. Estate of Levine, 158 T.C. No. 2 (2/28/22).

INDIVIDUALS

Tax Court redetermines reasonable comp for company's founder and CEO

The Tax Court held that reasonable compensation for the founder, CEO, and shareholder of a corporation that focused on land grading and excavation services was $3,681,269 for tax year 2015 and $1,362,831 for tax year 2016, which was less than the amounts deducted on the corporation's tax returns. The court did not uphold penalty assessments for 2015 because it found that the corporation had reasonable cause for its tax return position but did uphold the penalties for 2016 after noting that only the Seventh Circuit supported the corporation's position in that year, i.e., that it could rely exclusively on the independent-investor test in determining reasonable compensation. Clary Hood, Inc., T.C. Memo. 2022-15 (3/2/22).

Failure to make a qualified offer precludes taxpayer from recouping litigation costs

The Tax Court held that a taxpayer's offer to settle her tax liabilities, where the offer reserved the right to claim innocent spouse relief under Sec. 6015, was not a qualified offer under Sec. 7430(g)(1)(B) and Regs. Sec. 301.7430-7(c)(3) because it did not specify the offered amount that, if accepted, would fully resolve her income tax liability. The court also held that, because the taxpayer's offer was not a qualified offer and the IRS's position in the case was substantially justified, the taxpayer was not entitled to litigation costs under Sec. 7430. Lewis, 158 T.C. No. 3 (3/3/22).

IRS PROCEDURE

Couple cannot deduct tax depreciation with respect to marijuana business

The Tax Court held that a couple, who reported passthrough income from a medical marijuana business licensed under the laws of Colorado, were not entitled to use tax depreciation methods for inventory production assets under either Sec. 263A or Sec. 471, due to the application of Sec. 280E. The court noted that the legislative intent of Sec. 280E, which precludes taxpayers from deducting any expense related to a business that consists of trafficking in a controlled substance, remains unchanged, and its prohibitions apply in full force to state-sanctioned medical marijuana businesses. Lord, T.C. Memo. 2022-14 (3/1/22).

TAX ACCOUNTING

Refundable minimum tax credit is not prorated for short year

The Office of Chief Counsel was asked whether a tax-exempt entity's refundable minimum tax credit for its short tax year had to be prorated under Sec. 53(e)(4) as a result of the taxpayer making an election under Sec. 53(e)(5). The Chief Counsel's Office concluded that the taxpayer is entitled to a refund of 100% of the refundable minimum tax credit and thus no proration of the credit is required. CCA 202209012 (3/4/22).