Taxpayer Materially Participated in Activity, Investor and Work Not Customarily Done by Owner Exceptions Did Not Apply

The IRS has lost again on the question of material participation for a taxpayer helping the family business deal with the financial crisis of 2008.  In the case of Lamas v. Commissioner, TC Memo 2015-59, the issue was whether the taxpayer had materially participated in businesses in 2008 where the taxpayer’s share of losses generated multi-million refunds from a net operating loss carryback.

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CPA Not Able to Show Request for Appeal Mailed, Taxpayer Unable to Challenge Trust Fund Penalty Validity at Colleciton Hearing

A CPA’s inability to prove that he had timely mailed an appeal to the IRS regarding the issue of whether this taxpayer was truly liable for a trust fund recovery penalty proved a major problem for the taxpayer in the case of Smith v. Commissioner, TC Memo 2015-60.

In late October of 2010 the IRS sent Letter 1153, Trust Funds Recovery Penalty Letter, to Mr. Smith proposing to assess the penalty against him for unpaid employment taxes of a partnership in which he had been a partner.  Mr. Smith faxed the letter to his CPA who was with a firm with 5 partners and over 40 staff members.

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Payment Under Deferred Prosecution Agreement Argued in IRS Memo to Be Nondeductible Despite DOJ's Intent to Use it Pay Restitution to Victims

The taxpayer referred to in Chief Counsel Email 201513003 argued that the payment he was making under a Deferred Prosecution Agreement (DPA) represented a deductible payment under IRC §162(a).  The taxpayer argued that the Department of Justice planned to use the funds to pay restitution to those the DOJ alleged had been defrauded by the taxpayer and thus should represent a business expense.

The IRS, in this email, disagreed with that view, arguing that IRC §162(f) prohibited the deduction. 

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2014 Return Paper Filing Mandated for Airline Employees Taking Advantage of Expansion of IRA Rollover Program

The paper income tax return makes a comeback—at least for certain airline employees affected by a change found in P.L. 113-243.  In Announcement 2015-13 the IRS provided guidance on reporting rollovers authorized by this act that requires individuals claiming the benefits of this law change for a 2014 payment to file their tax return in paper form.

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Corporation With Rights Suspended Under California Law Unable to File Tax Court Petition Even Though Certain Corporate Rights Later Retroactively Restored

The corporation in the case of Medical Weight Control Specialist v Commissioner, TC Memo 2015-52 found it could not have its day in Court because its corporate privileges had been suspended by the state of California during the 90 day period available for it to file a challenge of an IRS in Tax Court.  This was held to be the case even though the corporation had issued to it by the state a certificate of reviver and certificate of relief from contract voidability later that, in the corporation’s view retroactively reinstated its right to bring the suit initially.

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Tax Phone Scams Now Impersonating Both the IRS and State Taxing Agencies

n press release TIGTA 2015-01 J. Russell George, Treasury Inspector General for Taxpayer Administration (TIGTA) warned of the threat of phone scams where the individual claims to represent the Internal Revenue Service in order to defraud individuals.  Now the California Board of Equalization has issued a separate warning in News Release 27-15-G to taxpayers that a similar scam is taking place for California state taxes.

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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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