Massachusetts and Maine Taxpayers Will Have 2015 Forms 1040 Due on April 19, But Estimated Payments Due on April 18

The IRS provided deadlines for filing 2015 income tax returns in Revenue Ruling 2015-13, taking into account the fact that the IRS no longer requires income tax returns to be filed with the Service Center in Andover, Massachusetts.

The issue arises due to the fact that April 15 in 2016 will fall on the third Friday in April.  This sets in motion a series of issues, since the District of Columbia will recognize Emancipation Day (normally a formal holiday in the District celebrated on April 16) on April 15 since the 16th falls on a Saturday.

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Interest and Penalties Paid in Prior Two Years May Be Abated by IRS Even Though Amended Return Reducing Tax Filed After Statute Expired on Claiming Refund of Taxes

In emailed advice (Chief Counsel Email 201520010) the IRS concluded that the agency had the authority to abate interest and penalties in a situation where the penalties and interest had been paid and an amended return was filed after the date on which the statute of limitations for claiming a refund of taxes on the year in question had expired.

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Property Never Truly Converted to Rental by Taxpayers, Losses Disallowed as Losses Incurred on Personal Use Asset

The Tax Court found a taxpayer had not managed to convert a property from personal use to being held for profit in the case of Redisch v. Commissioner, TC Memo 2015-95.

Generally under IRC §262(a) no deduction is allowed for any personal, living or family expenses, though a deduction is allowed under IRC 212(2) for “management, conservation or maintenance of property held for the production of income.”  Similarly, while IRC 165(a) allows a deduction for a loss sustained during the year (such as due to disposing of an asset), the deduction is only allowed per IRC §165(c) if it is incurred in a trade or business, in a transaction otherwise entered into for profit or arises from a casualty or theft.

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Regardless of Taxpayer's Actual Intention to Start Business, Expenses of Investigating a Business That Taxpayer Unable to Actually Start Not Deductible

In the case of Castillo v. Commissioner, TC Summary Opinion 2015-35, the taxpayer had spent substantial sums in a plan to import electrical generators from Taiwan and use them to construct wind turbines he planned to sell to farmers in Montana.  His expenditures included the purchase of a used Cessna 336 Skymaster aircraft which required substantial repairs.

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State's Requirement for List of Donors from §501(c)(3) Charity Did Not Violate First Amendment or Federal Law

In the case of Center for Competitive Politics v. Harris, 115 AFTR 2d ¶ 2015-703, CA9, No. 14-15978 the Ninth Circuit Court of Appeals affirmed a District Court’s denial of the plaintiff’s request for a preliminary injunction requiring providing to the California Attorney General an unredacted list of donors from Schedule B, Form 990 of a §501(c)(3) organization.

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Failure to Notify Debtor that Accepting Debt Compromise Could Lead to Taxes Not a Deceptive Practice on Part of Collection Agency

A debt collection agency did not mislead debtors by failing to inform them that compromising a debt could have tax consequences according to the Second Circuit Court of Appeals in the case of Altman v. J.C. Christensen & Associates, Inc., 2015 TNT 94-13, CA2, No. 14-2240.  Thus there was no basis for the claim that the collector had violated the Fair Debt Collections Practices Act (FDCPA).

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Expiration of Statute of Limitations on Collection of Outstanding Debt Found Not to Have Caused Discharge of Indebtedness for Federal Tax Purposes

In the case of Johnston v. Commissioner, TC Memo 2015-91, the IRS argued that the taxpayer failed to report cancellation of debt income in 2007, leading to a tax liability.

The question of whether a debt has been cancelled for the purposes of federal tax law depends on the showing that a debt will never be repaid, taking into account any identifiable event that establishes this fact.  The Tax Court cited the case of Cozzi v. Commissioner, 88 T.C. 435 to support the above analysis.

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No Fees Awarded Despite Qualifying Offer Because Matter was Conceded by the IRS Before Trial, Resuling in a Settlement

Update - see our discussion of Ninth Circuit's reversal of a similar case in July of 2015, two months after the Tax Court issued this opinion

A taxpayer that makes a “qualifying offer ” in a tax dispute may receive an award of litigation costs if a judgment in the case subject to litigation ends up being less than the amount of qualifying offer.  The case of Angle v. Commissioner, TC Memo 2015-92, looks at this issue in a tax matter that ended up with multiple proceedings (four cases, including this one).

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Effect of Acquisition of Employer During 1 Year ISO Holding Period on Employee Discusssed

The treatment of incentive stock options that have been exercised when the employer is acquired during the one year period following exercise of the options is discussed in Chief Counsel Advice 201519031.  The key issue is whether the transfer of the shares in the employer for interests in the acquiring company will constitute a disqualifying disposition.  And, as with all good tax questions, the answer is “it depends.”

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Preparer Penalty Can Apply Even if Client Doesn't File the Return in Question

The IRS looked into the application of the preparer penalties under §§6694 and 6701 in various circumstances in Chief Counsel Advice 201519029.  The memo was produced to answer queries about whether the IRS is able to assert the §6694 penalty in two cases, as well as whether it was appropriate to assert either penalty under §6694 or the penalty for aiding and abetting under §6701 in another situation.

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Zero Determined Not to Represent a Liability for Purposes of C Corporation Required Estimated Tax Payments Based on Prior Year's Taxes

Does filing a tax return that reflects a tax liability of $0.00 represent the filing of “a return for a preceding taxable year showing a liability for tax”—or, to put it simply, is $0 a liability for tax?  That was the issue that the U.S. District Court for the Central District of California addressed in the case of Cal Pure Pistachios, Inc. v. United States, 115 AFTR 2d ¶2015-643.

The issue was whether the taxpayer, a C corporation, could escape a penalty for underpayment of estimated taxes using the “prior year’s tax” exception under IRC §6655(d).

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Deferred Compensation Arrangement Out of Compliance with §409A Could Not Be Successfully Amended in Year of Vesting

In Chief Counsel Advice 201518013 the IRS decided that an employer’s attempt to reform a non-qualified deferred compensation plan that failed to comply with the time and form of payment requirements of IRC §409A(a), even though the plan was revised to contain compliant language prior to date in the tax year where the taxpayer no longer had a substantial risk of forfeiture. 

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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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