No Deductions Allowed to Taxpayer Since Business Had Not Yet Commenced

While the tax law allows deductions for expenses incurred in a trade or business, it does not allow a taxpayer to claim a current deduction while the taxpayer is merely investigating the possibility of entering into a trade or business.  In the case of Samadi v. Commissioner, TC Summary Opinion 2018-27 the Tax Court determined the taxpayer was in just such an investigatory stage and not actually conducting a trade or business.

Image copyright olivier26 / 123RF Stock Photo

Read More

IRS to Issue Guidance on SALT Workarounds, Raises Issue of Substance over Form

The IRS has now fired its first salvo in the SALT workaround controversy.  Notice 2018-54 announces the IRS’s intention to propose regulations to deal with some types of SALT workarounds.

In one sense this notice gives us little information about exactly what can and cannot pass muster when taxpayers make charitable contributions that reduce their state income taxes in an effort to shift from a nondeductible expense (state and local taxes in excess of $10,000) to fully deductible items (charitable contributions). But it does indicate that the IRS does not plan to sit by quietly and not issue guidance in this area.

Image copyright olegdudko / 123RF Stock Photo

Read More

Agreeing with the Ninth Circuit, DC Circuit Upholds IRS Position that SMLLC Partner Renders a Partnership Subject to TEFRA Procedures

In a TEFRA case that may have continuing implications under the new Centralized Partnership Audit Regime (CPAR) taking effect for partnership tax years beginning in 2018, the DC Circuit, following suit with a similar opinion last year from the Ninth Circuit, found that having a disregarded entity as a partner meant a partnership could not avoid being examined under the TEFRA partnership examination provisions.

The case, Mellow Partners v. Commissioner, Case No. 16-1454, CA DC appealed the Tax Court’s holding that the TEFRA audit provisions applied to a partnership where each partner held his interest in a single member LLC.

Image copyright netsay / 123RF Stock Photo

Read More

Penalty Limited to Maximum Amount Stated in Regulation Not Updated for Later Increase in Maximum Penalty

A U.S. District Court in the case of United States v. Colliot, Case No. 1:16-cv-01281, Western District of Texas, found that Treasury failure to update a regulation served the limit the amount of penalty the IRS could assess against an individual who willfully failed to report accounts on FBAR reports.

Image copyright garagestock / 123RF Stock Photo

Read More

IRS Updates Procedure for Obtaining Information on Deductible Contribution Status for Organizations

Revenue Procedure 2018-32 has been issued by the IRS to provide consolidated guidance for taxpayers to gain assurance that an organization they are making a charitable contribution to qualifies to receive tax deductible contributions.  This ruling consolidates and updates prior guidance found in several prior procedures.

The prior procedures that have been modified and superseded are:

  • Rev. Proc. 81-6, 1981-1 C.B. 620;

  • Rev. Proc. 81-7, 1981-1 C.B. 621;

  • Rev. Proc. 89-23, 1989-1 C.B. 844; and

  • Rev. Proc. 2011-25 I.R.B. 887

Image copyright ivelinradkov / 123RF Stock Photo

Read More

Taxpayer Did Not Act in Good Faith in Relying on Advice of Shelter Promoter, and Obtained No Advice from Accounting Firm

The question of whether a taxpayer had reasonably relied upon the advice of tax professionals when taking a tax position was the sole issue before the court in the case of RB-1 Investment Partners v. Commissioner, TC Memo 2018-64.

The taxpayers in the case had gotten into a Son-of-BOSS tax shelter in an attempt to shelter from tax the gain from the sale of their very successful concrete business.  While the taxpayers initially disputed the IRS’s disallowance of the benefits from the strategy, at this point the taxpayers had conceded that issue and now were only disputing the penalties in this case.

Image copyright goodluz / 123RF Stock Photo

Read More

Tuition Waiver Taxable to Former Employee When Used by Daughter 22 Years After It Was Granted

John Voigt worked for Tulane University in 1991, at which time he was laid off as part of a staff reduction.  As part of his severance package, John was entitled to a tuition waiver for himself or his dependents in the future if certain conditions were met.

In 2013, John’s daughter enrolled at Tulane and received the benefit of the tuition waiver for the spring and fall semesters.  In the case of Voight v. Commissioner, TC Summary Opinion 2018-25, the Tax Court had to decide if the value of that tuition waiver represented taxable income to John.

Image copyright calvste / 123RF Stock Photo

Read More

Officials Give Little New Information on Coming TCJA Guidance

Looking at the coverage we have from the American Bar Association Section of Taxation’s meeting in Washington on May 11 nothing earthshattering about the upcoming guidance on the Tax Cuts and Jobs Act seems to have emerged from that meeting.  However, Tax Analyst’s coverage did highlight some items.

The proposed regulations on new §199A are scheduled to be released by June 30 per the IRS Priority Guidance plan, most recently updated on May 9.  But in a Real Estate session at the ABA’s Conference, Bryan Rimmke, attorney-adviser, Treasury Office of Tax Legislative Counsel did not commit to indicating that taxpayers will be able to rely on that initial guidance. In the Tax Analysts coverage, Mr. Rimmke noted “the agency is grappling with the same complex issues under section 199A as practitioners.”[1]  Advisers will need to pay attention when the proposed regulations are issued whether or not they are accompanied by “taxpayers can rely” language.

Image copyright flynt / 123RF Stock Photo

Read More

Connecticut Enacts Two Separate SALT Workaround Provisions, Including Mandatory Passthrough Tax With Offsetting State Tax Credit

The workarounds for the TCJA enacted limits on state and local taxes (SALT) have now expanded into another state, with Connecticut adding its workaround to those already passed by New York and New Jersey.  Connecticut Substitute Bill SB 11contains two different SALT workarounds.

The first workaround is a property tax credit based one, very similar to the one enacted by New Jersey earlier in May.  The bill authorizes municipalities to provide a property tax credit to those donating to a “designated community supporting organization.”  The credit could not exceed the lesser of:

  • The amount of property tax owed or

  • 85% of the donation to the designated community supporting organization.

The funds received by the organization will be made available to the municipality as a grant equal to the funds received under the program.

Image copyright olegdudko / 123RF Stock Photo

Read More

Automatic Change Revenue Procedure Released for Accounting Method Changes Related to Adoption of ASC 606

The same week as the IRS released the annual revised general purpose automatic method change list revenue procedure the agency decided to release the revenue procedure outlining how taxpayers may request a change of accounting method related to the GAAP changes taking place under ASC 606, Revenue from Contracts with Customers.  The change procedures are contained in Revenue Procedure 2018-29.

While this procedure is generally good news, it most clearly does not mean that the IRS is going allow the use of methods provided under ASC 606 without regard to whether the method is otherwise allowable under the IRC.  The taxpayer will have to make its own determination regarding whether or not conforming tax and book methods in their situation is actually allowed under the IRC.

In the second paragraph of the procedure the IRS notes that this procedure does not deal with the other major GAAP/tax accounting method issue for 2018 found in the new revenue conformity provision at IRC §451(b) and (c) added by the Tax Cuts and Jobs Act, noting the agency is working on additional guidance to deal with that issue.

Image copyright iqoncept / 123RF Stock Photo

Read More

Taxpayer Had No Asset to Sell, Income Was Ordinary

In the case of Pexa v. United States, Case No. 2:16-cv-00994, U.S. District Court, Eastern District of California the taxpayer was attempting to defend his treatment of termination payments for his termination payments received from Farmers Insurance as long term capital gain income.  The District Court had this matter before it on appeal from the Bankruptcy Court, which had ruled against the taxpayer.

Mr. Pexa had been involved first as an insurance agent and, eventually, a district manager for Farmers Insurance.  When he was promoted to district manager he was no longer allowed to sell insurance, rather now being in charge of recruiting, training, and supervising agents.  As such, he sold his agency to his sister in 1998, with a note payable over 20 years. 

Image copyright tashatuvango / 123RF Stock Photo

Read More

2018 Revision of Comprehensive List of Automatic Changes Released with a Promise TCJA Method Change Procedure to Come Later

The IRS has updated the long (now 333 pages) document listing all of the automatic accounting method changes in Revenue Procedure 2018-31. This is the document that outlines the changes that can be made by attaching a Form 3115, Application for Change in Accounting Method, to the taxpayer’s tax return for the year of change (along with a copy to the IRS processing center in Covington, KY) rather than going through the process of applying for approval of the change and awaiting the IRS’s decision.

If you were hoping to see automatic change procedures outlined for changes added by the Tax Cuts and Jobs Act (TCJA), those are not in this document.  There were a few changes made to prior automatic changes (such as those impacting IRC §263A) to get ready for the new small business changes, but none of the small business changes, nor the revenue conformity change required for some businesses by IRC §451(b) as revised by TCJA are found in this document.

Image copyright kritchanut / 123RF Stock Photo

Read More

Savings Account Held by Son as Nominee, Must Be Counted in Calculation of Solvency for Debt Discharge Exclusion

In the case of Hamilton v. Commissioner, TC Memo 2018-62, the taxpayer had excluded from income cancellation of indebtedness of $158,511.  The taxpayers claimed they qualified for the insolvency exclusion under IRC §108(a)(1)(B), with liabilities in excess of assets at the time of the discharge of $165,871.  But the IRS objected that they had omitted from their calculation of insolvency a significant asset—a savings account held by their son that had been funded by the taxpayers and which the taxpayers regularly used to pay personal expenses.

Under IRC §61(a)(12), a discharge of indebtedness is specifically called out as a type of gross income subject to tax.  However, IRC §108 provides that, in a number of specific circumstances, a taxpayer is able to exclude from income some or all of the discharge.

Image copyright flynt / 123RF Stock Photo

Read More

IRS Modifies Safe Harbor RBIG and RBIL Calculations for Section 382 Due to TCJA Changes to Bonus Depreciation

In Notice 2018-30 the IRS has modified certain safe harbor calculations for recognized built in gain (RBIG) and recognized built in loss (RBIL) as it relates to limitations under IRC §382.  The IRS has revised guidance found in Notice 2003-65 to modify the safe harbor rules found in the IRC §§338 and 1374 approaches described in that ruling.

IRC §382 serves to limit the ability to “buy losses” in an existing corporation, limiting the corporation’s ability to claim pre-ownership change losses against post-change taxable income.  That ability is limited by the §382(b) limitation for each taxable year.

Image copyright convisum / 123RF Stock Photo

Read More

Small Businesses Warned About Risk of Identity Theft

The IRS, state taxing agencies and members of the nation’s tax industry in IRS News Release IR-2018-111 described a rising problem with identity theft aimed at small businesses and steps that are being taken to combat it.

The release begins by noting that the problem has been increasing recently:

In the past two years, the Internal Revenue Service has noted a sharp increase in the number of fraudulent filings of Forms 1120, 1120S and 1041 as well as Schedule K-1. The fraudulent filings apply to partnerships as well as estate and trust forms.

Image copyright pixelbliss / 123RF Stock Photo

Read More

Taxpayers Fails to Show They Reasonably Relied Upon Tax Advice

In the case of Keenan v. Commissioner, TC Memo 2018-60, the taxpayers argued that they should not face penalties under IRC §6662.  They argued they had reasonably relied on the advice of their CPA and attorney/insurance agent in claiming a deduction of over $3,000,000 related to a Benistar 419 plan.

The taxpayers were back in court after the Ninth Circuit Court of Appeals had sent the case back down to the Tax Court to consider the taxpayer’s claims that their situation was different enough from that of the taxpayers in the Curcio case to justify a different result.  The taxpayers, who were one of many taxpayers facing proposed disallowance of deductions for Benistar 419 plans, had agreed to be bound by the result of a set of test cases involving similarly situated taxpayers that were all part of the Curcio decision.

Image copyright racorn / 123RF Stock Photo

Read More

Organization Operated for Commercial, Not Exempt, Purpose

In the case of Abovo Foundation, Inc. v. Commissioner, TC Memo 2018-57, the taxpayer was asking the Tax Court to rule that the organization qualified as a §501(c)(3) tax-exempt organization. The Tax Court, siding with the government, found that the entity failed to qualify.

The organization’s stated purpose was summarized as follows in the opinion:

Abovo's primary purpose would be to deliver quality management consulting services to medical providers and advance Government programs through patient safety initiatives. Its quality management services would include “defining, identifying, analyzing, measuring and controlling systems and processes to ensure desirable outcomes”. In addition, Abovo would provide “uplifting services for the elderly and veterans”, housing for low-income individuals, and internal auditing services.

Image copyright everythingpossible / 123RF Stock Photo

Read More

Oklahoma Governor Decides to Veto Most Recent Tattletale Bill

Oklahoma Governor Mary Fallin has vetoed the expansion of Oklahoma’s out of state tattletale provision to require reporting to the state and creating penalties that had been found in SB 337 discussed here previously.  Note that she had previously signed legislation imposing more stringent tattletale responsibilities on marketplace and certain other remote sellers (HB 1019 passed as part of the Second Special Session and signed into law on April 10, 2018).

The Oklahoma legislature remains in session and, at least in theory, could override this veto.  We will keep an eye on this legislation to see if there is any further activity in this area.

Image copyright happystock / 123RF Stock Photo

Read More

IRS Delays Third Party Purchase of Life Insurance from Insured Reporting Rules Added by TCJA

The IRS has issued Notice 2018-41 which delays the requirement to file reports on certain sales of life insurance policies mandated by TCJA until the IRS issues final regulations on the provision.

An information return will need to be filed by each person who acquires a life insurance policy in a reportable policy sale under IRC §6050Y for sales completed after December 31, 2017.  A “reportable policy sale” is defined at IRC §101(a)(3)(B) as:

…[T]he acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in such life insurance contract. For purposes of the preceding sentence, the term “indirectly” applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract.

Image copyright rawpixel / 123RF Stock Photo

Read More