Private Delivery Service List Updated and Rules for Proving Date of Mailing for PDSs Outlined

The IRS has updated the list of private delivery services that are eligible for the “timely mailing” protection found in IRC §7502 in Notice 2015-38.

IRC §7502 governs the methods taxpayers can use to be treated as timely filing documents with the IRS when they do not arrive at the related service center on or before the last date for filing the document.  Generally the rule provides that the postmark date on a document mailed to the IRS will be considered the date of delivery of the document to the IRS or date of payment for payments. [IRC §7502(a)]

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IRS Plans to Revise Rules on Withholding Reported on Form 1042-S to Limit Credit for Withheld Taxes to Amounts Actually Deposited by Withholding Agents

The IRS announced in Notice 2015-10 that the agency plans to issue regulations that will deny refunds to individuals subject to the foreign withholding rules under IRC §§1441-1443 (chapter 3) or §§1471 and 1472 (chapter 4) if the withholding agent fails to deposit the taxes that are withheld.  The IRS justifies this change by noting that the IRS is aware some withholding agents have failed to pay the taxes due and that because the party from whom the tax was withheld and, in some cases, the withholding agent, are outside the United States, the IRS may not be able to recover the taxes if it pays the refund.

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Reliance on Appraisal Alone Not Sufficient to Get Reasonable Cause Relief from Gross Valuation Misstatement Penatly

The question of what qualifies for the “reasonable cause” exception to the gross valuation misstatement penalty under IRC §6662(h)(1) was the issue before the First Circuit in the case of Kaufman v. Commissioner, Docket No. 14-1863, CA1, affirming TC Memo 2014-52.  This was the second time the Kaufmans had appealed an adverse Tax Court decision on this issue to the First Circuit, but the result wasn’t as favorable this time.

The Tax Court, on remand, determined that the value of the facade easement was zero and, given that, went on to decide that the taxpayers were subject to the penalty due to a gross valuation misstatement given the proper value was zero.  Finally, and the issue we are interested in at this point, the court found that the taxpayers did not qualify for the relief granted to taxpayers from the penalty under the reasonable cause relief provision for this penalty found at IRC §6664(c).

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Taxpayer Taxable on IRA Distribution Despite Following Father's Wishes that Siblings Receive Part of Account Balance Left to Him

The situation the taxpayer faced in the case of Morris v. Commissioner, TC Memo 2015-82 is one that will be all too familiar to many of us—a case of a taxpayer doing something unaware of the negative tax consequence.  It also is a case of a client reading more into advice received than the adviser expected the taxpayer would do—and, again, with negative consequences.

The result in this case should not be surprising to any tax adviser reading this—Elroy was the primary and sole beneficiary of his father’s IRA.  Elroy received a distribution of his father’s IRA as he was the sole beneficiary of the IRA.  But his father had indicated that he wanted a portion of the IRA to be shared with Elroy’s two siblings, so he paid checks to them for $37,000.

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Holder of Small Interest in Oil and Gas Working Interest Found Subject to Self-Employment Tax Despite Being "Merely" an Investor

A taxpayer’s liability for self-employment tax related to income from working interests in oil and gas wells was the issue in the case of Methvin v. Commissioner, T.C. Memo 2015-81.

This is not a case of David being out there drilling for oil—rather, he had simply been acquiring working interests in several oil and gas ventures as investments.  His interests were never more a small amount in each venture.  David’s interactions were basically to invest funds and then receive his checks for his share of revenues less expenses.  He did not perform any services with regard to the wells.

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Mere Eligibility for CHIP "Buy-In" Program Will Not Prevent Taxpayer from Qualifying for Premium Tax Credit

Some states provide for a “buy-in” to the equivalent of the state’s Children’s Health Insurance (CHIP) program by individuals who have income exceeding the eligibility levels for the actual CHIP program.  A question had arisen about whether such individuals would be disqualified from eligibility for the premium credit under IRC §36B due to having access (albeit often at full, unsubsidized cost) to a CHIP-like program.

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NOL Created By Foreign Tax Treatment Change Did Not Benefit from Extended Statute

Dealing with the interaction of various statute of limitation rules can be complex that it appears at first and, in the situation described in Chief Counsel Advice 201517005, the IRS concluded that the taxpayer could not take full advantage of amending a return to change from claiming a foreign tax credit to claiming a deduction for foreign tax paid when that change to the prior return created a net operating loss required to be carried back.

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Another California Corporation With Retroactively Restored Rights Has Tax Court Petition Thrown Out

The IRS appears to have recognized that corporations who have tax issues with the IRS may also have problems with state taxing agencies.  The IRS also noticed that, in California, the Franchise Tax Board has the right to suspend a corporation's powers, rights and privileges for failure to pay California state taxes. 

One of the lost privileges is the privilege to file suit, an issue we have previously discussed in our post last month on Medical Weight Control case.  The fact that the taxpayer had its corporate status retroactively restored was ruled, by the Tax Court, did not serve to retroactively grant a right to file suit in Tax Court.

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Calendar and Log Book Formed Adequate Records to Support 100% Business Use for Two Autos

Under IRC §274(d) taxpayers are denied any deduction for certain expenses if they do not maintain adequate contemporary documentation to support the expense, even if it is obvious that the taxpayers must have incurred the expense and the amount of expense could be reasonably estimated.  This rule was put into the IRC to override the “Cohan” rule, so called due to the case involving George M. Cohan where the Second Circuit ruled that documentation is not needed if it is clear a taxpayer incurred an expense and it can be reasonably estimated [Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

The IRS claimed in the case of Ressen v. Commissioner, TC Summary Opinion 2015‑32 that the taxpayer’s records documenting his use of two vehicles, for which he claimed a 100% business use deduction on each, was inadequate.  However the Tax Court did not agree with the IRS on this issue.

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Flight Attendant Based in Hong Kong Could Not Exclude All Earnings As Foreign Earned Income

If a U.S. citizen is a flight attendant based out of Hong Kong, can she exclude all of her income using the foreign earned income exclusion under IRC §911?  The taxpayer in the case of Rogers v. Commissioner, Docket No. 13-1241, CA DC Circuit took that position—but neither the Tax Court nor the Court of Appeals for the DC Circuit agreed with her.

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IRS Issuance of Notice of Determination Concerning Collection Action Violated Automatic Stay

The issuance by the IRS of a Notice of Determination Concerning Collection Action following the filing of a bankruptcy petition by the taxpayer was held by the Tax Court to be in violation of the automatic stay imposed by the Bankruptcy Code under 11 USC §362(a).  Therefore, in the case of Yuska v. Commissioner, TC Memo 2015-77, the Tax Court held that, given no valid notice being issued, it had no current jurisdiction in the case.

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Unlike Taxpayer in 1988 Case, Payments Received for Accrued Sick Leave Were Not Excludable Workers Compensation

Subtle differences in facts can be very important when attempting to apply the opinion in a prior court decision to a client’s current situation.  This is rather clearly illustrated by looking at the result in the case of Speer v. Commissioner, 144 TC No. 4 and contrasting his result with the result in a case he was relying upon, Givens v. Commissioner, 90 TC 1145.

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Financial Disability Suspension of Statute of Limitations Does Not Apply to Net Operating Loss Special Statute Rules

A person who is unable to manage their financial affairs due to a disability has the statute of limitations for claiming refunds suspended generally under §6511(h).  However, in Chief Counsel Advice 201515019 the IRS National Office concluded that the suspension is limited in one very important way—it does not suspend the special extended period for filing a net operating loss claim under IRC §6511(d)(2).

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Tax Court Accepts Taxpayer's Reconstruction of Travel Hours to Push Over 750 Hour Real Estate Professional Limit

Taxpayers who have tried to reconstruct log showing they met the qualified real estate professional requirements have generally fared poorly in Tax Court.  But in the case of Leyh and O’Neill v. Commissioner, TC Summary Opinion 2015-27 the Tax Court accepted the reconstructed records—but there are key facts that make this case different from the earlier taxpayer failures.

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Partner Not Able to Deduct Taxes Imposed by States in Which He Performed no Services as a Business Deduction

The taxpayer in the case of Cutler v. Commissioner, TC Memo 2015-73 argued that because his only connection with various states that were imposing an income tax on him was that he owned an interest in a partnership that operated in those states, he should be able to deduct that taxes paid to those states in computing adjusted gross income, rather than being limited to deducting the taxes as an itemized deduction.

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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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