Court of Appeals Reverses Tax Court on §965's Application to Receivables Created As Part of Transfer Pricing Closing Agreement

In the case of BMC Software Inc. v. Commissioner, 141 TC No. 5, reversed CA5, Case No. 13-60684, 115 AFTR 2d ¶2015-528, the Fifth Circuit Court of Appeals and the U.S. Tax Court had to consider whether there was an intent requirement imposed by the language of what would reasonably be seen as an anti-abuse provision.  The Tax Court ruled that since no “bad intent” requirement was found in the statute, the statute had to be applied mechanically even if both the IRS and the taxpayer agreed that there was no “bad faith” on the part of the taxpayer.  The Fifth Circuit disagreed with that conclusion.

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Tax Court Refuses to Consider Chief Counsel Advice Cited by Taxpayer in Deciding Case

In a case dealing with much the same issue as the Maines v. Commissioner (144 TC No. 8) case decided the preceding week, the Tax Court in Elbaz v. Commissioner, TC Memo 2015-49 found that a taxpayer was taxable under the tax benefit rule for a refundable state tax credit (the New York QEZE Credit for Property Taxes) even though the refund was of property taxes that had been paid by passthrough entities and not the taxpayers.  The Court did not find it relevant that the taxpayer claimed the IRS had taken an inconsistent position in a prior Chief Counsel Advice.

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List of What IRS Believes Doesn't Qualify as MPGE Activities for §199 Deduction Issued in Memorandum to Examiners

The IRS Large Business & International Division issued a memorandum outlining activities the division contends generally do not meet the definition of “manufactured, produced or grown” under §199 for computing the deduction for domestic production activities.  LB&I Memorandum LB&I-04-0315-001 provides a specific list of “non-qualifying” activities.

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Temporary Relief Extended for Nondiscrimination Testing for Closed Defined Benefit Plans, IRS Seeks Comments on a Permanent Solution

In Notice 2015-28 the IRS extended the temporary nondiscrimination relief provision described below for plan years beginning before 2017. The extension was granted because the IRS does not believe it will have final regulations in place to address this issue before the original expiration date that applied to plans years beginning on or after January 1, 2016.  The original notice is not other changed except for this extension of the time period for which it will apply.

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Preliminary Guidance Given Regarding Requirements for States Establishing ABLE Accounts

The ABLE Act, passed in December of 2015, added §529A to the Internal Revenue Code allowing for states to establish ABLE Accounts.  These tax advantaged accounts will be available to pay disability related expenses of qualified individuals.  If used in that manner the earnings of the account will never be subject to tax.

However the accounts must be enabled by the states who either establish such a program or contract with another state to establish such a program.  This will generally require enabling legislation to create the program, allow for the management of other state’s programs and/or allow a state to contract with another state to manage that state’s program.

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Taxpayer's Right to Make Up to 5% Substitution of Land Covered by Conservation Enough to Disqualify Charitable Deduction

The fact that the taxpayer didn’t retain the right to substitute entirely different property, but rather was limited to changing the boundaries of the conservation easement by no more than 5% did not get the taxpayer in the case of Balsam Mountain Investments, LLC, et al v. Commissioner, TC Memo-2015-43 a positive result.

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Real Property Foreclosure and Cancellation of Debt Audit Technique Guide Issued by IRS

The IRS issued a new Audit Technique Guide entitled Real Property Foreclosure and Cancellation of Debt Audit Technique Guide that is meant to provide guidance to agents who encounter issues involving foreclosures and/or cancellation of debt.  However, as is true of many other such guides, the guide also provides a reasonably useful primer on the tax treatment in this area and contains some hints about the National Office of the IRS’s thinking on certain issues that may not be clear.

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Innocent Spouse Relief Denied Based on Fact Taxpayer Would Have Discovered Errors Had She Looked at Reurn

In the case of Panetta v. Commissioner, TC Summary Opinion 2015-16, the Tax Court did not have sympathy for a taxpayer claiming innocent spouse relief when:

  • The underpayment arose from excess expenses claimed in the business she ran and
  • She failed to review the returns prepared by her ex-husband before they were filed
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Fifth Circuit Strikes Down Tax Court View that §1234A Eliminates Ordinary Loss on Abandonment of Capital Asset

In the view of the Tax Court (but not the Fifth Circuit) the taxpayer and the IRS didn’t understand the real issue, but the Tax Court sent them back to look at the issue in a different way, resulting in a potentially significant decision in the case of Pilgrim’s Pride Corporation v. Commissioner, 141 TC No. 17.  The case ended up turning on the issue of whether it is possible for a taxpayer to achieve an ordinary loss when abandoning a security under the current version of IRC §1234A.

While the decision has been overturned on appeal (Pilgrim’s Pride v. Commissioner, CA5, 115 AFTR 2d ¶ 2015-477, reversing 141 TC No. 17), it remains to be seen if the Tax Court will continue to apply this view of IRC §1234A outside the confines of the Fifth Circuit.

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Proposed Revenue Procedure That Would Provide Safe Harbor Slot Machine Session Treatment Issued by IRS

The IRS has proposed, via Notice 2015-21, an optional “safe harbor” method of determining slot machine sessions for purposes of tracking gambling wins and losses.  The notice contains a proposed revenue procedure that would be effective for tax years ending on or after its date of publication.  So it’s important to note the IRS is neither endorsing this method for returns currently being prepared, nor giving any assurance that this method will be respected for 2015.

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FEMA Issued Form 1099C Years After Actual Cancellation of Debt, Taxpayer Not Liable for Tax in Year IRS Questioned

Erroneous Forms 1099C continue to plague clients and they often come from sources that an adviser would think should know better.  In the case of Bacon v. Commissioner, TC Summary Opinion 2015-15 the offending issuer was, like in the case of Kleber v. Commissioner, TC Memo 2011-233, an agency of the United States government, though this time it was the Federal Emergency Management Agency (FEMA) rather than the U.S. Navy.

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Relief from Estimated Tax Penalties Provided for Farmers and Fishermen Unable to File 2014 Returns by March 1, 2015 Due to Erroneous Forms 1095-A

With the problems arising from the erroneous Forms 1095-As issued by the Department of Health and Human Services that was announced on February 20, the IRS advised taxpayers to hold off on filing returns until corrected forms were issued.  However, certain qualifying farmers and fisherman can qualify for relief from the general requirement to pay estimated taxes quarterly, being able to pay the entire balance due with their return without a penalty so long as it is filed on or before March 1 of the following year.

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Truck Dealer's Service Buildings Not Asset Class 57.1 Property, Required to Use 39 and Not 15 Year Recovery Period

In Chief Counsel Advice 201509029  the IRS disagreed with a taxpayer’s position that certain buildings on the taxpayer’s new and used heavy and medium-duty trucks and trailers sales and leasing facility qualified as 15 year property under asset class 57.1 of Revenue Procedure 87-56.  Assets in that classification qualify for a 15 year, rather than 39 year, life for purposes of depreciation.

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Late Election Relief Granted Where Partnership Tax Adviser Failed to Follow Through on Providing Guidance to LLC Members on Making Qualified Real Property COD Election

Sometimes events occur during an engagement that can cause an advisor to lose focus and fail to take into account issues the adviser knows about.  That appears to have been the case in a series of private letter rulings, each of which basically duplicates what is found in PLR 201509020.

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