IRS Revises EPCRS Guidance for Employee Elective Deferral Failures

The IRS has issued revisions to the Employee Plans Compliance Resolution System (“ECPRS”) in Revenue Procedure 2015-28, modifying Revenue Procedure 2013-12. 

ECPRS is a program that allows for correction of plan failures.  As the IRS outlines in the introduction to the program found in Rev. Proc. 2013-12, it is meant to allow retirement plans that are intended to comply with §§401(a), 403(a), 403(b), 408(k) or 408(p) but which have failed to meet the requirements of those provision to correct the errors that will allow the plans to continue to offer tax-favored benefits.

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Contingency Found Related to Ex-Spouse and Not Child, Thus Payments Deductible as Tax Alimony

In the case of Wish v. Commissioner, TC Summary Opinion 2015-25 the taxpayer was paying funds to his former spouse as part of their divorce decree.  Not surprisingly the key question was how much of the payments made constituted deductible alimony under IRC §215 which, in turn, depends on whether the payments would be treated as alimony income by the recipient under IRC §71.

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Clauses in Trust Did Not Render Crummey Withdraw Right Illusory

The IRS lost in its attempt to claim a taxpayer’s attempt at providing a Crummey power to trust beneficiaries failed to grant a present interest in the case of Mikel v. Commissioner, TC Memo 2015-64.  The IRS’s claim was that there were effectively restrictions imposed on the beneficiary’s withdrawal rights that meant they had no real present interest.

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No De Minimis Exception Under Small Partnership Rules for 0.02% Interest Held by Passthrough Entity

The taxpayers in the case of Brumbaugh and Holifield v. Commissioner, TC Memo 2015-65 argued that an extremely small interest of a partnership held by an LLC (0.02%) should not cause the partnership to be subject to the TEFRA audit procedures, but rather qualify for the small partnership exception to those rules found in IRC §6231(a)(1)(B)(i).

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Transfer of State Credits Found to Be a Disguised Sale

The third time was not a charm for the taxpayer in the case of SWF Real Estate, LLC, et al. v. Commissioner, TC Memo 2015-63.  As was true in the case of Virginia Historic Tax Credit Fund 2001 v. Commissioner, 693 F.3d 146, CA4 reversing TC Memo 2009-295 and Route 231, LLC v. Commissioner, TC Memo 2014-30 the issue involved whether individuals who paid money to become “partners” that received tax credits from the state of Virginia had really simply bought credits in a disguised sale under IRC §707(a)(2).  And, as was eventually found in the prior cases, the Court determined the answer was yes.

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Taxpayer Failed to Exercise Ordinary Business Care and Prudence in Determining if Required to File FBAR Reports

In the case of Moore v. United States, US DC WD Washington, Docket No. 2:13-cv-02063, 2015 TNT 64-13 a taxpayer was found to be subject to civil penalties for failure to file FBAR reports on his foreign bank accounts, though the Court did not yet decide whether the IRS had abused its discretion in failing to reduce or waive the penalty, finding the IRS had not produced evidence of the reasoning it had for denying relief.

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Penalty Under §6694 May Be Assessed Against Preparer Up to Three Years After Meritless Refund Claim Filed

The IRS addressed the period during which a penalty may be assessed against a preparer under IRC §6694 for having prepared a claim for refund that contained a meritless position in Chief Counsel Advice 201514008.  As well the memo addressed the statute of limitations for the preparer to claim a refund of such a penalty.

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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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