Foreign Earned Income Exclusion Election Filed After SFR Issued Is Not Valid

In the case of Redfield v. Commissioner, TC Memo 2017-71 the Tax Court was presented with a taxpayer that the Court clearly respected.  Mr. Redfield had served as a Marine, with tours of duty in Afghanistan, tours from which, in the words of the Court, “he emerged far from unscathed…”  But, unfortunately for Mr. Redfield, these considerations did not change the application of the rules regarding the time by which a taxpayer must file an election to claim the foreign earned income exclusion under IRC §911(a)(1).

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Either of Two Computations of Maximum Plan Loans Deemed Acceptable by IRS

The IRS Tax Exempt and Government Entities division has published guidelines (TEGE-04-0417-0016) for agents to use to determine if the rules of IRC §72(p)(2) have been followed regarding the maximum amount an employee may borrow from a qualified retirement plan.

Under IRC §72(p)(1) a loan to a plan participant is to be treated as a taxable distribution to the participant.  However, if the loan meets the requirements of IRC §72(p)(2) it will not be treated as a taxable distribution.  Obviously, since an employee isn’t likely to want a loan on which he/she pays tax on and then still must repay, plans that offer loans generally have terms that require the loan to comply with the provisions of IRC §72(p)(2).

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IRS Publishes Terminal Charge and SIFL Mileage Rates for January-June 2017

In Rev. Rul. 2017-10 the IRS has published the terminal charge and standard industry fare level mileage rates for the first six months of 2017.  These rates are used under Reg. §1.61-21(g)’s rule for valuing noncommercial flights on an employer-provided aircraft. 

The rates are revised every six months, and these rates cover flights occurring between January 1, 2017 and June 30, 2017.

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Taxpayer's Claim of Working Nearly 13 Hours Each Day Found Not Credible, Denied Real Estate Professional Status

While it is not impossible to qualify as a real estate professional under IRC §469(c)(7) if the taxpayer has a non-real estate full time job, it certainly is going to be difficult.  The limited number of hours in the year created a credibility problem for the taxpayer in Penley v. Commissioner, TC Memo 2017‑65, causing the Tax Court to find he had proven he qualified as a real estate professional.

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2017 Revision of Comprehensive List of Automatic Accounting Method Changes Issued by IRS

In what now appears to be an annual event, the IRS has released a revised comprehensive list of accounting method changes in Rev. Proc. 2017-30.  The new ruling replaces Rev. Proc. 2016‑29, issued approximately one year earlier.

The document is 337 pages long in the original PDF format published by the IRS.  The significant changes section begins on page 325 and continues through to page 330 of the document.  The new revenue procedure is effective for a Form 3115 filed on or after April 19, 2017 for a year of change ending on or after August 31, 2016.

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Examining Agent Abused Discretion by Refusing to Consider Late Rollover Relief Requested by Taxpayer

The IRS claimed that prior to the publication of Rev. Proc. 2016-47 those involved in the examination of a taxpayer’s return were barred from considering granting a waiver of the 60-day rollover period—the taxpayer had to have applied for a private letter ruling request for a waiver under Rev. Proc. 2003-16.  The Tax Court, ruling in the case of Trimmer v. Commissioner, 148 TC No. 14, did not find that the IRS was operating under any such restriction and ruled that the Tax Court had jurisdiction to consider whether the IRS had abused its discretion in refusing to grant such a waiver.

Mr. Trimmer suffered from major depressive disorder after a job he believed he had secured for himself to supplement his income after retiring from the New York Police Department fell through and he was unable to find substitute work.  Shortly after he began suffering from the disorder he received distribution checks from his retirement account.  He left the checks on his dresser at home for over a month and then deposited them into a regular, non-IRA bank account.

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Extension of Variable Prepaid Forward Contracts Did Not Trigger Gain Recognition

Rev. Rul. 2003-7 provides that variable prepaid futures contracts (VFPCs) represent “open transactions” that are not subject to tax until the contract is finally settled and do not represent constructive sales of the stock under IRC §1259.  The case of Estate of McKelvey v. Commissioner148 T.C. No. 13 looks at whether an extension of the VFPC represents either a taxable settlement of the contract or a constructive sale of the related shares under IRC §1259, a question not previously addressed by the Tax Court.

Under a variable prepaid forward contract, a taxpayer agrees to pledge a certain amount of stock in exchange for receiving a payment of cash.  The contract provides that, at a specified date in the future the taxpayer will deliver either a number of shares of stock (either from the original pledged group or other shares the taxpayer has) or a cash payment.  The number of shares to be delivered varies over a specified range of shares, based on the price of the stock on the date the transaction is closed.  The shares that are pledged represent the maximum number that may need to be delivered.  As well, the party pledging the shares would retain the right to close out the contract at any time before the final settlement date, either by transferring shares or cash.

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IRS Announces Its Disagreeement With Allowing Costs of Entire Development for Purposes of the Completed Contract 95% Test

In the case of Shea Homes, Inc. v. Commissioner, 142 TC No.3, the question of the scope of contracts of a homebuilder when making use of the completed contract method was the key issue.  And the IRS did not like the answer that either the Tax Court or the Ninth Circuit Court of Appeals gave, eventually releasing Action on Decision 2017-03 announcing the agency will not acquiesce in the decision, following it only on cases appealable to the Ninth Circuit that cannot be distinguished.

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IRS Announces It Will Not Follow Court Decision Treating Retail Building as Placed in Service Before It Had Been Ready to Open

The concept of “placed in service” for purposes of beginning to deduct depreciation is often a tricky one to deal with in real life, and the date of placing an item in service may not be as simple to discern as some might believe.  Certainly, in the case of Stine, LLC v. United States, 115 AFTR 2d ¶ 2015-381, DC LA, the IRS’s view of a “bright line” test based on a when a building was open for business was rejected by the Court.  And, in 2017, the IRS returned the favor by rejecting the Court’s holding, announcing in Action on Decision 2017-02 that the agency does not acquiesce in the decision and will continue to take the position in a similar case that a retail building had not been placed in service when it reaches the state it did in this case.

The case involved a building which had been substantially completed and had a certificate of occupancy prior to December 31, 2008.  That date was important because the property was located in the “Go Zone” where qualified real property placed in service prior to that date would qualify for 50% bonus depreciation. 

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Law Firm Members Not Allowed to Treat Income in Excess of Reasonable Compensation Guaranteed Payments as Not Self-Employment Income

Some additional guidance has emerged on the self-employment tax status of member-managers of an PLLC in the case of Castigliola, et al v. Commissioner, TC Memo 2017‑62. 

Like the members in the case of Renkemeyer, Campbell, & Weaver, LLP v. Commissioner, 136 TC 137 (2011) the individual members in this case were attorneys who practiced in a law firm.  However, unlike the attorneys in Renkemeyer, these attorneys did not claim that all income from the law firm was not subject to self-employment tax.

Rather, the attorneys had consulted with an experienced CPA well versed in tax matters and agreed to pay out guaranteed payments to each member that was equivalent to a reasonable salary for an attorney of that individual’s experience level in their locality.  The guaranteed payments were reported as self-employment income and self-employment tax was paid on those amounts.  To the extent the law firm had income in excess of the guaranteed payments, those amounts flowing out on the K-1s were treated as income not subject to self-employment tax.

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Despite Entry of Judgment to Enforce Guaranty, Taxpayer Denied Basis in S Corporation Debt

The Courts generally look to an “actual economic outlay” that makes the taxpayer poorer in some objective fashion to allow the taxpayer to claim basis in debt for an S corporation.  In the case of Phillips v. Commissioner, T.C. Memo 2017-61, the taxpayer argued that the fact that judgments had been entered against her should give her the right to treat a portion of the debt as basis for claiming losses.

The taxpayer owned 50% of an S corporation that fell on hard times during the real estate crisis, defaulting on several loans which had been guaranteed by Sandra.  The banks sued to collect on the guarantees and obtain judgments against Sandra.  However, Sandra had not actually made any payments on the debts.

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Private Collection Agency Assignments Begin, IRS Issues Description of Program and Scam Warning

The IRS announced the beginning of the use of private collection agencies to collect overdue taxes in News Release IR-2017-74.  The program, mandated by Congress in late 2015, requires the IRS to transfer certain overdue accounts to private collection agencies. 

The release begins by describing how the program will work, noting that the IRS will first notify the taxpayer that their account is being transferred to a private agency and will send along Publication 4518 to describe the process for the taxpayer in question.

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Taxpayer Can Obtain Information on Payment of Tax By Contractors From the IRS in Employment Tax Dispute

In the case of the Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 the Tax Court had to consider the taxpayer’s request to obtain information from the IRS regarding other taxpayers, specifically if those taxpayers had reported income received from the Tribe on their income tax returns.  Or, as the IRS claimed, did the law (specifically IRC §6103) prevent the agency from disclosing such information about other taxpayers.

The question arose because the IRS had decided in an examination that the Tribe had failed to treat certain individuals as employees that were, in the agency’s view, truly employees.  While the Tribe is still contesting that fact, the Tribe sought information from the IRS to reduce the amount due. Specifically, the Tribe wished to know if contractors they had been unable to contact had paid their taxes.

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Expenditures Required by Regulatory Agency to Obtain Approval for Merger Were Not Automatically Required to Be Capitalized

Should a corporation that was required to incur certain costs to obtain regulatory approval for a merger be required to capitalize those costs as facilitative costs under IRC §1.263(a)-5(a)?  In Chief Counsel Advice 201713010 the IRS National Office decided the answer was no.

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Interim Guidance Issued for Taxpayers Electing to Claim Research Credit Against Payroll Taxes

The Protecting Americans from Tax Hikes Act of 2015 provided for a new way for certain businesses to receive the benefit of the research credit under IRC §41.  A qualifying small business may, in lieu of the income tax credit, receive a credit against the employer portion of social security taxes [IRC §41(h)].  The IRS has provided interim guidance on taking advantage of this provision in Notice 2017-23.

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No Evidence Any Services Were or Could Have Been Performed for Management Services Paid to Related Corporation

The taxpayer corporation in this case had claimed deductions in 2011-2013 for management fees of $120,000, $36,000, and $42,000.  In each year, Home Team had transferred funds to Sacer Cor as it had cash available to transfer, and the funds were initially recorded as loans to Sacer Cor.  At the end of the year, some or all of the loans were reclassified as management fees.

The Court noted that the fees were based solely on Home Team’s ability to pay rather than being payments for specifically invoiced services.  Also, Sacer Cor had no employees for the years in question, although two of the Sacer Cor shareholders were employees of Home Team and were paid a salary by that organization.  The Court noted that Home Team did not produce any evidence of any services provided by Sacer Cor.

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IRS Releases Proposed Revenue Procedure to Deal with Accounting Method Change Requests Related to FASB Revenue Recognition Standard

One of the key developments keeping those CPAs who specialize on the “accounting and auditing” (or A&A as we tend to refer to it) side of the profession jumping has been the soon to be implemented standard titled “Revenue from Contracts with Customers” FASB Accounting Standards Update 2014-09, which makes significant changes to revenue recognition, particularly the timing of such recognition of revenue. 

Of course, for those of us working in the tax arena, when you start talking about timing of recognition you realize that if any of this either does flow onto a tax return or a taxpayer reasonably would like to have it do so to keep tax and book the same in this area you realize you are dealing with an “accounting method” which would require IRS permission to change under IRC §446.  And we also realize the timing of the inclusion of an item of income is governed under the IRC by IRC §451.

The IRS has been aware of this potential problem as well, and now has released a proposed Revenue Procedure to allow for certain automatic changes in accounting methods.  This proposed procedure, on which the IRS is seeking comments, is found in IRS Notice 2017-17.

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Corporation Does Not Have Access to Economic Hardship Relief to Avoid Imposition of Levy

Can a corporation suffer economic hardship that would justify relief from an IRS levy under IRC §6343(a)(1)(D), or does the nature of economic hardship limit its application to individuals?  The IRS’s view, implicit in Reg. §301.6343-1(b)(4)(i), is that only individuals should be treated as being able to suffer economic hardship as the section refers to it.  The taxpayer in the case of Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 TC No. 9 argued the law did not allow for such a limited view..

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