Payment of Salary by Corporation Formed with IRA Funds to IRA Beneficiary Found to Be Prohibited Transaction by Both Tax Court and Eighth Circuit

An IRA-based rollover as a business startup style transaction produced disastrous consequences for the individual whose rollover was involved in the case of Ellis v. Commissioner, TC Memo 2013-245, affirmed CA8, 115 AFTR 2d ¶2015-805, No. 14-1310.

The issues in the case was whether the taxpayer had engaged in a prohibited transaction under IRC §4975 as part of his use of funds received from his previous employer’s 401(k) plan to have his IRA start a used car business.  If an IRA engages in a prohibited transaction, the entire balance of the account is deemed distributed to the IRA beneficiary and tax is triggered.

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Taxpayer Denied Late Rollover Relief Despite Medical Condition Due to Use of Funds to Pay Personal Bills

The IRS under IRC §408(d)(3)(l) has the authority to waive the 60 day period for the rollover of funds from one IRA account to another and, in Revenue Procedure 2003-16 one of the reasons enumerated by the IRS for granting such relief is if the taxpayer is prevented from completing the rollover due to medical issues.

So the taxpayer in PLR 201523025 should have been in good shape.  After taking a distribution that he planned to roll over to improve his return from one IRA account the taxpayer suffered a medical injury at work and was put on medical leave.  That leave period expired after the end of the 60 day period.  As well, he was caring for his disabled spouse at the time.  The IRS has quite often granted relief based on such facts.

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Entire $1,000,000 Paid at Beginning of Lease by Tenant to Reduce Future Rents Includable in Landlord's Income in Year Received

In the case of Stough v. Commissioner, 144 TC No. 16, the taxpayer was looking to argue that a payment of $1 million received during the year was either not rental income (being a reimbursement of construction costs) or, if it was rental income, it should have been reported over the entire 10 year life of the lease.  And if neither of those were true, at least the taxpayer should be able to avoid a substantial understatement penalty because the taxpayer had relied upon an experienced CPA to prepare the return in question.

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Guidance Requested By IRS on Dealing with FASB's Pending Changes to Revenue Recognition

CPAs on the “auditing and accounting” side of the profession have been studying FASB Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” since it’s issuance last year.  It turns out, though, that not only CPAs dealing with A&A issues have concerns—the IRS now has issued a notice asking for guidance of the impact of ASU 2014-09 on accounting methods for tax purposes in Notice 2015-40.

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Penalty Imposed By State Law For Untimely Payment of Final Wages is Not Subject to FICA, FUTA or Federal Withholding

If an employer is required by state law to made additional payments to an employee when their final wages are not paid within a specified time period is that payment subject to federal payroll taxes and/or federal withholding?  This is the issue addressed in Chief Counsel Advice 201522004.

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Officer of Parent of Member-Manager Corporation Included in Consolidated Return Must Sign Form 2848 for Partnership

The question of who is able to sign a Form 2848, Power of Attorney and Declaration of Representative is sometimes not a simple one to answer.  Chief Counsel Advice 201522005 looks at a fact pattern involving a LLC taxed as a partnership and a member manager that is an indirect subsidiary included in the consolidated return of a parent corporation—and you may find the IRS’s conclusion surprising.

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IRS Issues Final Late Filer Form 5500-EZ Relief for Filers of Plans Not Subject to Title I of ERISA

In Revenue Procedure 2015-32 the IRS replaced the temporary pilot relief program for 1-Participant plans that was created by Revenue Procedure 2014-32 with a permanent program for relief.  The revised program applies to applications submitted on or after June 3, 2015. 

One participant programs, because they are not covered by Title I of ERISA, are not eligible to participate in the Department of Labor’s Delinquent Filer Voluntary Compliance (DFVC) program that provides an option for relief from penalties for those plans. 

In Notice 2002-23 the IRS had provided that plans that obtained DFVC relief from the Department of Labor would automatically be exempted from penalties imposed by the IRC.  Thus, one participant plans (which generally should have filed Form 5500-EZ) had no method to automatically obtain relief from IRC penalties of the sorts that plans under the jurisdiction of the Department of Labor could obtain. 

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Welfare Benefit Plan Substantially Similar to Listed Transaction, Failure to Disclose Penalty Imposed for Four Years

The United District Court for the Western District of Wisconsin found that the taxpayer and his S Corporation had participated in a listed transaction requiring disclosure for four years in the case of Vee’s Marketing, Inc. v. United States, Docket No. 3:13-cv-00481.

Generally a taxpayer must file a Form 8886 for each year the taxpayer participates in a transaction that is the same or substantially similar to one the IRS has identified as a listed transaction. A failure to file the report will trigger a penalty, regardless of whether the taxpayer actually is found to have a deficiency arising from the transaction, in the amount of 75% of the tax savings claimed on the return based on the transaction. 

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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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