LB&I Division Issues Memorandum on Units of Property and Major Components for Mining Industry

The IRS Large Business & International Division has issued a memorandum (LB&I-04-0917-004) dealing with the classification of various types of mining equipment to determine units of property and major components under Reg. §1.263(a)-3(e).

The memo is meant to provide some consistently and eliminate confusion over what are units of property and major components of units of property for mining organizations.  However, since making use of definitions will likely change how an organization has been classifying items as units of property or major components, an entity wishing to make use of this provision will need to go through the procedures for a change of accounting method.

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IRS Withdraws Anti-Kerr Regulations

The IRS in FR Doc 2017-22776 made official the withdrawal of proposed regulations issued in August of 2016 (REG-163113-02) under IRC §2704 that would have effectively reversed the Kerr decision with regard to family limited partnerships.

The proposed regulations would have significantly changed the regulations under IRC §2704 in ways that would have rendered it much more difficult to create family limited partnerships that could give rise to significant transfer tax discounts.  The regulations specifically addressed issues that the Tax Court had noted in the Kerr decision when it decided for the taxpayer based on the IRS’s regulations for that section.

Most advisers considered these regulations dead following the elections in November of 2016.  The regulations were one of many studied by the IRS for possible withdrawal and, not surprisingly, were on the list of those the agency planned to withdraw when that study of regulations was completed.  This notice simply makes that withdraw official.

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Taxpayer Could Claim Earned Income Credit, But Apparently Not for Reason Tax Court Gave

There are some posts that bother me when I write them because Ithink there must be something I am missing.  But I've tried to find that in this case and haven't, so I'll take the risk (and keep your eyes open for a correction if I've actually missed something).

A married taxpayer generally can only claim an earned income credit if the taxpayer files a joint return per IRC §32(d).  As well, a taxpayer is not allowed to elect to file a joint return if the taxpayer has filed a separate return, has received a notice of deficiency and files a petition with the Tax Court per IRC §6013(b)(2)(B).

But what happens if the taxpayer in question had filed a return using a filing status other than married filing separately, in this case head of household?  Per the Tax Court in the case of Knez v. Commissioner, TC Memo 2017-205 that return did not constitute a “separate return” for these purposes and, thus, Ms. Knez could elect to file a joint return with her husband even after she had filed a Tax Court petition.

In the end it appears the Tax Court got to a “kind of” proper result (allowing the earned income tax credit) but likely via the wrong route, at least based on the facts given.

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IRS Does Not Agree S Corporation Restricted Stock Ownership Counts for Real Estate Professional

In a case discussed here in 2015 (Restricted Stock Interest Still Found to Constitute Ownership Interest for Qualifying as Real Estate Professional) an Arkansas U.S. District Court held that a taxpayer who held restricted stock that constituted greater than 5% of the stock of the corporation could count hours worked in that entity towards qualifying as a real estate professional.

As is discussed in the original article, so long as no Section 83(b) election is filed by the taxpayer, the restricted stock is treated for S corporation purposes as "not issued" and thus does not create second class of stock issues.  The IRS had argued that same provision meant that the stock had to be ignored for purposes of the 5% stock ownership rule for counting as real estate professional hours time spent working as an employee for the S corporation.  The court did not agree with the IRS and treated the individual as a real estate professional.

Now the IRS has announced the agency will not follow the result in this case in Action on Decision 2017-07.  In a footnote the agency described the specific issues the agency was disagreeing with.

Nonacquiescence relating to the holdings that: 1) mere possession of a stock certificate, disregarding other conditions, restrictions or limitations on the possessor’s rights regarding the stock, constitutes ownership for purposes of § 469(c)(7)(D)(ii); and 2) work performed by the taxpayer in a rental real estate activity for purposes of § 469(c)(7)(A) may also constitute work performed by the taxpayer in non-rental business activities of the taxpayer for other purposes of § 469.

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Interest Due Back from 2002 When Tax Exempt Determined in 2013 to be Retroactively Lost

The Tax Court ruled that when an entity has its tax-exempt status retroactively revoked, interest is due on any underpaid tax for the years that the entity now has a tax liability from the date a return would have been originally due for an entity that did not have exempt status.  In CreditGuard of America, Inc. v. Commissioner, 149 TC No. 17 the Tax Court rejected the taxpayer’s view that interest should not begin to run until the date it was finally determined the entity was not tax exempt.

The issue of the retroactive loss of the organization’s exempt status back to 2002 had previously been decided in a stipulated Tax Court decision entered on November 30, 2012, based on an examination the IRS had begun in 2003 but not concluded until February of 2012.  The total tax determined to be due from the taxpayer was $216,547.

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Tax Court Rejects First Circuit's View of Limits on Need to Subordinate Mortgages for Conservation Easement

The Tax Court, in the case of Palmolive Building Investors LLC et al. v. Commissioner, 149 TC No. 18, refused to follow the holding of the First Circuit Court of Appeals in the case of Kaufman v. Commissioner.  The Court continued to very strictly apply the subordination requirement in Reg. §1.170A-14(g), finding that the taxpayer in this case had not managed to satisfy the perpetuity requirement of IRC §170(h)(5).

The First Circuit and the Tax Court had disagreed on the extent to which a mortgage must be subordinated to meet the requirements of Reg. §1.170A-14(g)(2).  That regulation provides:

(2) Protection of a conservation purpose in case of donation of property subject to a mortgage.

In the case of conservation contributions made after February 13, 1986, no deduction will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

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Exclusion from Income of Minister's Housing Allowance Found Unconstitutional

Back in 2014 the Seventh Circuit Court of Appeals sidestepped the question of whether the allowance of an exclusion for a housing allowance for a minister of the gospel under IRC §107(2) was barred by the U.S. Constitution.  But the method the panel used to sidestep left an obvious route for the issue to come back—and now it has returned to the Courts.

Originally in the case of Freedom from Religion Foundation, Inc. v. Lew, 114 AFTR 2d, ¶2014-5425 issued in November of 2014 the panel found that the organization suing to bar ministers from receiving an exclusion from income for housing allowances did not show any harm to the organization.  The panel noted that the organization had not attempted to receive a similar exclusion for its employees from the IRS.  So, it was the organization that voluntarily treated the payments as taxable to its employees rather than the IRS denying that treatment.

At the time I had noted that the obvious next step was for the organization to ask for such treatment and then come back to Court if the IRS did not allow the claim.  The case of Gaylor, et al v. Mnuchin, et al, W.D. Wisconsin, Case No. 3:16-cv-00215 brings the matter back to the courts.  And, in fact, the case is back before the very trial judge that, in the original case, had found that IRC §107(2) violated the U.S. Constitution.  Not surprisingly, since the Seventh Circuit never actually dealt with that question (disposing of the case on a standing issue), the judge came to the same conclusion this time.

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Signature No Longer Required When Making IRC §754 Election

Under proposed regulations on which taxpayers may rely upon immediately, elections made by partnerships under IRC §754 will no longer have to be signed by a partnership representative (REG-116256-17; 82 F.R. 47408-47409, October 12, 2017).  The current regulations require that the election be signed, which has created issues with electronically filed partnership income tax returns.

In certain situations, a partnership may elect to adjust the basis of partnership property upon the occurrence of certain actions, such as a transfer of a partnership interest (as provided for in IRC §743) or upon distributions of property (as provided for in IRC §734).

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Relief Provisions Enacted by Congress for Hurricanes Harvey, Irma and Maria

Special tax relief for victims of Hurricanes Harvey, Irma and Maria was enacted into law in the  Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823).  Section V of the Act, which also reauthorized Airport and Airway Trust Fund, contains the provisions related to Hurricane Relief.  The bill was signed into law by President Trump on September 29, 2017.

The provisions offer relief targeted specifically to the three hurricanes rather than making broader revisions to the law.   Thus, unless indicated in the bulleted list, the provisions are limited to those living in the affected declared disaster areas.

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Comments on the Tax Reform Framework of the Big 6

On September 27, 2017 the “Big Six” released the “Unified Framework for Fixing Our Broken Tax Code” that contained some details on the proposal.  The framework, which runs for 9 pages, is a bit more detailed than earlier statements, but still omits many details necessary to determine the impact of the proposal on specific taxpayers.  The first three pages of the framework contain mainly a vague description of the goals and justifications for the program, with only the final six pages giving actual information about steps to be taken.

By contrast, the initial proposal issued by the Treasury Department during the Reagan Administration that began the process the resulted in the Tax Reform Act of 1986 ran for over 400 pages. 

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Parents Found to Be on the Hook for Son's Advance Premium Credit When He Was Claimed as a Dependent

Advisers often have the “is Junior still a dependent” conversation with clients when a child approaches or reaches adulthood.  Parents often insist that they have met the requirements to claim the child, presuming that doing so will give them a significant tax break. 

In the case of Gibson v. Commissioner, TC Memo 2017-187, the taxpayers discovered that there are now additional risks beyond simply losing a dependency exemption on exam when a parent claims a child as a dependent—a potential need to repay advance premium credits under IRC  §36B when the IRS doesn’t decide to challenge the exemption.

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IRS Publishes Revised Special Per Diem Rates for Period from October 1, 2017 to September 30, 2018

The IRS in Notice 2017-54 provided updated special per diem effective for the period from October 1, 2017 to September 30, 2018.  These special rates include the rate for the special transportation industry meals and incidental expenses (M&IE) rate, the rate for the incidentals-only deduction and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The special transportation industry rates for 2017-2019 are $63 for any locality of travel in the continental United States and $68 for any locality of travel outside the continental United States.  These rates are the same as applied in the prior year.  The general rules for qualifying to use these rates and how to use them are found in Section 4.04 of Revenue Procedure 2011-47.

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Taxpayer Found Not to Have Willfully Filed Erroneous FBAR Report

For the IRS the case of Bedrosian v. United States, US DC ED Pa, Case No. 2:15-cv-05853 was ultimately a loss—but the Court did agree that the test for “willfulness” for failing to file a Federal Bank Account Reporting (FBAR) form is whether he “knowingly or recklessly” failed to file the report (the general civil standards for willfulness) rather than whether there was a voluntary, intentional violation of a known legal duty.  The court just found the IRS failed to show that the deficiencies in filing his 2007 return was done knowingly or recklessly.

The case was yet another IRS attempt to obtain large penalties for issues related to offshore accounts that the taxpayer had not properly reported, in this case looking for over $1,000,000 in penalties for the failure.

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LB&I Division Announces Method for Using ASC 730 Research Costs to Determine Qualified Research Expenditures for Research Credit

The IRS has issued guidance (LB&I Memorandum  LB&I-04-0917-005) that allows certain large taxpayers to adopt a simplified method of determining qualified research expenditures (QREs) to be used in computing the credit for increasing research activities under IRC §41.  The method makes use of the entity’s audited financial statement’s amount of research and development expenditures reported as an expense under the provisions found in Financial Accounting Standards Codification ASC 730, Research and Development.

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IRS Sets Up 18 Month Pilot Program for Issuing Certain Ruling Requests on Tax Free Distributions of Stock

The IRS announced a pilot program where it would accept private letter ruling requests on general federal tax consequences of transactions that aimed to be tax free distributions of corporate stock.  The transactions would be ones intended to qualify under IRC §§368(a)(1)(D) (“D” reorganizations) and 355.

The program, described in Rev. Proc. 2017-52, will run for 18 months after which the IRS will evaluate the program and whether it makes sense to terminate it, extend it or expand it.

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Entire State of Georgia Eligible for Filing Due Relief Due to Hurricane Irma

In News Release 2017-156 the IRS extended the same type of due date relief to those impacted by Hurricane Irma in Georgia that it did to those affected in Florida, Puerto Rico and the U.S. Virgin Islands.

The only significant difference is the starting date of the relief--this one covers due dates and payments that occurred beginning on September 7, 2017.  That will include the extended business returns that were due on September 15, 2017 and the extended individual returns due on October 16, 2017.  Similarly, the estimated tax deposits due on September 15, 2017 and January 15, 2018 are also covered.  All of these items will now have a due date of January 31, 2018.

The IRS also extended the same 15 day payroll tax deposit extension for payments coming due after September 7 through the end of the 15 day period.

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Payment from Qualified Settlement Fund For Foreclosure Irregularities Is Fully Taxable to Recipient

Clients who receive legal settlements often believe that because they have been awarded damages for a wrong that occurred the payment is not subject to income taxes.  But the tax law is not so simple.  The default under federal tax law, found at IRC §61(a), is that all items of income are taxable, with the burden falling on the taxpayer to point out an exception that applies in his/her case.

The case of Ritter v. Commissioner, TC Memo 2017-185, looks at an award received by a homeowner whose house was taken in a foreclosure proceeding.  The taxpayer received a payment related to a settlement between the lender and the government to deal with, as the Office of the Comptroller of the Currency labeled it, “deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings.”

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Change of Heart by Husband Resulted in Conflict of Interest for Representative

Representing a married couple always brings with it the risk that the interests of the two parties won’t be in alignment, creating a conflict of interest issue.  That may be true even when the adviser reasonably concludes that both spouses agree to a course of action, that initial “waiver” of the conflict does not serve to ensure that the same conflict won’t again become a problem in the engagement.

The case of Gebman v. Commissioner, TC Memo 2017-184 deals with issues that arose for an attorney representing a client before the Tax Court, but similar issues and problems can arise for CPAs well before a tax dispute ends up in court, so a review of what happened in this case is useful for all practitioners.

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