Attempt to Use IRA Funds to Purchase Real Estate in Partnership with Controlled Entity Found to Create a Number of Prohibited Transactions

his time the party challenging a taxpayer’s claim that he had not engaged in a prohibited transaction with his IRA was not the IRS.  Rather the trustee and one creditor in the taxpayer’s bankruptcy case argued that the IRA was no longer a tax exempt IRA due to a violation of the prohibited transaction rules that took place in 2007, rendering the funds in the IRA available to be used to pay creditor’s claims.

In the case of In re: Kellerman the United States Bankruptcy Court for Arkansas, Docket No. 4:09-bk-13935, the Court agreed with the creditor’s that the taxpayer’s IRA had engaged in prohibited transactions, rendering the funds available to pay creditor’s claims.

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Impact on Statute of Limitations When Employer Files Wrong Federal Employment Tax Form (Forms 941 or 944) Discussed in Field Service Advice

Small businesses may find that their federal payroll tax filing form changes from year to year from Form 941 (filed quarterly) to Form 944 (filed annually).  While the Form 944 was meant to be a simplifying concession to small businesses, often business owners may not understand the notice they receive regarding which form should be filed or, just as possible, the notice may end up being lost in the mail.

So that begs the question—what impact does filing the wrong form have on the statute of limitations for the IRS to assess taxes?  IRS Field Service Advice 20152101F provides some answers to that question.

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Negative Easement Payments Found to Be Rental Income for Personal Holding Tax Purposes

Is paying a C corporation not to make use of property rental income?  The question arises in this case in order to determine if such payments potentially constitute personal holding company income under IRC §543 which could end up subjecting the corporation to the personal holding company tax under IRC §541 if it is determined to be a personal holding company pursuant to IRC §542.  Field Service Advice 20152102F attempts to answer this question.

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100,000 Taxpayers Had Transcripts Accessed by Criminals Who Created Accounts on IRS Get Transcript Website

The IRS on May 26, 2015 announced in a statement published on the agency’s web page that criminals had obtained access to information about 100,000 taxpayers via unauthorized use of the IRS’s “Get Transcript” application.  The information accessed included Social Security information, date of birth and street address.

The IRS has shut down the “Get Transcript” application pending a determination by the IRS about what modifications to the program should be made in order to strengthen security for the program.

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Bankruptcy Adequate Protection Payments Were Not Voluntary So IRS Not Required to Apply Payments to Trust Fund Taxes as Designated on Checks

A taxpayer’s attempt to designate her corporation’s adequate protection payments made in the corporation’s bankruptcy case failed in the case of Riggs v. Commissioner, TC Memo 2015-98. 

The taxpayer in this case had been the sole owner and president of a corporation that had run up significant payroll tax liabilities with the IRS.  The corporation ended up in bankruptcy and, although she attempted to start up a new corporation, the IRS found that corporation was a successor in interest to the tax liabilities, pulling it into the bankruptcy case that had been filed on behalf of the first corporation.  As well, the IRS found that Ms. Riggs, as President and sole shareholder of the corporation, was a responsible party who had willfully allowed trust fund taxes to go unpaid, finding her liable for the trust fund penalty under IRC §6672.

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Existence of §754 Election Does Not Impact Whether Change in Treatment of an Item is an Accounting Method Change

In Chief Counsel Advice 201521012 the IRS concluded that an adjustment of the treatment of an item will not cease to be required to be treated as a change in a method of accounting merely because the taxpayer was a partnership with an election under §754 in place that would have caused a change in the §743(b) adjustment had the new method of accounting been used in the past.

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Disability Pension Payments Converted to Taxable Amounts in Hands of Former Spouse Receiving Them Under a QDRO

Payments from a disability pension being paid to a former spouse under a qualified domestic relations order (QDRO) will not qualify for an exclusion from income pursuant to IRC §104(a)(1) per the ruling in PLR 201521009.  That will be true even if the amounts are excludable from income under that provision when paid to the original recipient of the payments.

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Plan Fiduciary May Be Held Liable for Failing to Properly Review Costs of Investment Options Offered

In the case of Tibble v. Edison Int’l, US Supreme Court No. 13-550, reversing and remanding in part 711 F.3d 1061 as revised in 729 F. 3d 1110 CA9 the United States Supreme Court looked at the period of time a plan fiduciary may be held liable for a breech of fiduciary duty related to the selection of investments made available to qualified plan participants.  The Supreme Court, in a unanimous opinion, found that the District Court and Ninth Circuit had applied too restrictive a standard in determining when the clock began running on the statute of limitations.

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Dispute Regarding Duty of Trustee to Advance Estate Funds to Pay Estate Taxes Due Shortly Is Not a Proper Issue for Federal Courts

The United States District Court in Arkansas determined it lacked jurisdiction to settle a dispute between siblings regarding the payment of $2 million in estate taxes on their mother’s estate in the case of Manley v. Devazier, 115 AFTR 2d ¶2015-712. 

In this the sister and brother were involved in the battle regarding payment of estate taxes related to life insurance.  Ms. Manley was appointed as executrix of her mother’s estate and is facing a tax bill of over $2 million.  Her brother, Mr. Devazier, was the trustee of their mother’s trust and, as trustee of the trust, received life insurance proceeds as an asset of the trust.

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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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