Tax Court Finds Economic Benefit Portion of Split-Dollar Regulations Valid

“While it would be nice if all tax shelters advertised as legitimate tax shelters were indeed legitimate, the fact of the matter is that not all marketed tax shelters are legitimate.”  That sentence outlines the basic problem for the taxpayers in the case of Our County Home Enterprises, Inc., et al v. Commissioner, 145 TC No. 1.

The case is yet another in a series of unsuccessful attempts by owners of closely held businesses to use a purported welfare benefit plan (promoted as “single employer plans” or “419(e) plans”) to use life insurance in such programs to provide cash and other benefits on an extremely tax advantaged basis to the owners of the businesses.

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LB&I Division Publishes 80% Threshold for Agents to Use in Determining Replacement of Major Component for Steam and Electric Generation Property

When the IRS issued the final regulations that took effect in 2014 for determining if amounts expended are to improve tangible property under Reg. §1.263(a)‑3, one of the key issues is whether there has been a replacement of a major component or substantial structural part of an asset [Reg. §1.263(a)‑3(k)(6)].  The IRS specifically rejected provided any sort of “percentage” test to be used to make such a determination.

However, in the Large Business and International Division’s memorandum LB&I‑04‑0315‑002 we discover that it’s not only practitioners that like numeric guidance.  This guidance is meant to give guidance to agents examining taxpayers who generate steam or electric power and are changing to a method of accounting for steam or electric generation property under Rev. Proc. 2013‑24. 

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Proposed Regulations (on Which Taxpayers May Rely Beginning with 2015 Returns) Remove Requirement to Attach Copy of §83(b) Election to Employee's Return

Citing electronic filing complications from having to submit the copy of a §83(b) election with the service provider’s return, the IRS has issued proposed regulations (REG-135524-14) that would modify Reg. §1.83-2(c) to remove the requirement that a copy of the election be submitted with the service provider’s tax return for the year in question.

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Medical Marijuana Facility Found Not to Have Other Business, All General Expenses Disallowed Under §280E

The taxation of medical marijuana clinics came back into the Tax Court in the case of Olive v. Commissioner, 139 TC No. 2, later appealed to the Ninth Circuit who affirmed the lower court.  In this case, in addition to reminding us of the Tax Court’s previous holding that IRC §280E holds to prevent the deduction of expenses other than costs of sales related to the operation of such a clinic (a position the Court put forward in the 2007 case of Californians Helping to Alleviate Med. Problems, Inc., 128 TC 173), the Court dealt with some additional items.

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Organization Operated Exclusively for Benefit of One Family, Exemption Retroactively Revoked

One of the “rules of thumb” for tax planning is that “smell counts” in any tax situation.  If the result just “looks bad” there’s a good chance that the courts will simply not allow it to stand.  This is doubly true with regard to §501(c)(3) charitable organizations that, while technically operated under principles that serve the public good, in reality always seem to benefit a very distinct, not so public, private group—like a single family.

That turned out to be the problem in the case of the Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc., v. United States, 2015 TNT 128-15.

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IRS Plans to Issue Regulations Prohibiting Defined Benefit Plans From Offering to Accelerate Annuity Payments Being Made to Satisfy Required Minimum Distribution Rules

In Notice 2015-49 the IRS announced that it proposes to amend the regulations related to required minimum distributions under IRC §401(a)(9) to provide a defined benefit plan will generally not be permitted to replace any annuity being paid with a lump sum payment or other accelerated form of distribution.  The IRS plans to make these regulations effective generally as of July 9, 2015.

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Substantial Compliance Not Sufficient to Save QDRO, But Order Correcting Deficiencies After Death Creates a Valid QDRO

In the case of Yale New Haven Hospital v. Nicholls v. Nicholls, No. 13-4725-cv, CA2, reversing in part, revising in part US DC Connecticut, No. 3:12-cv-01319-WWE, the Second Circuit Court of Appeals had to determine if benefits in four plans had been partially assigned to the decedent’s former spouse via Qualified Domestic Relations Order. 

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Guidance Provided to Hospitals on Publication of Provider Lists as Part of Financial Assistance Policy

Notice 2015-46 provides guidance to charitable hospitals on how to comply with the requirement in Reg. §1.501(r)‑4(b)(1)(iii)(F) that a hospital must include a provider list in its financial assistance policy (FAP).   The list must include all providers, other than the hospital itself, that deliver care in the facility and specify whether the individual providers are or are not covered by the FAP.

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Pump and Dump Scheme Did Not Equate to Theft, So Loss on Shares was Capital Rather Than Ordinary

In the case of Greenberger, et al v. Commissioner, 115 AFTR2d ¶2015-844, US DC ND Ohio, No. 1:14-cv-01041 the issue is not whether the taxpayers had incurred a deductible loss—the IRS agreed that was so.  Rather the question was the nature of the loss.

Specifically the issue was whether the loss represented a theft loss (deductible as an ordinary loss under IRC §165 or was rather a capital loss that could only offset other capital gains or be slowly absorbed against $3,000 of other income each year.

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Fact Refund Claim Is Still Sitting in Taxpayer's Account as a Credit for a Future Year Does Not Allow IRS to Revise Amount of Refund Allowed

In Chief Counsel Email 201526007 the IRS addressed the issue of whether the IRS retained the right to supplement or amend a refund claim due to the fact that a credit from that claim is remains available for use in the taxpayer’s account.

While emails generally only give us one side of the conversation (and thus often omit significant facts), it appears an IRS employee was wondering about the ability to supplement or amend a prior protective refund claim on which the IRS had acted by allowing a claim and then crediting it to the taxpayer’s account to be used for future taxes.  Thus a change in the allowed claim would flow directly to the balance that was available to be applied against the taxpayer’s tax liability in a period that was still open.

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Penalty Relief Available for Taxpayers Who Fail to Make Tax Deposits by Electronic Means Due to Inability to Obtain a Bank Account

The IRS has issued a memorandum that outlines relief available for taxpayers unable to comply with the electronic tax deposit requirements for taxes and thus are subject to a potential penalty of 10% of such taxes under IRC §6656.  In SBSE-04-0615-0045 the IRS has provided guidance to its employees regarding reasonable cause penalty relief for taxpayers unable to obtain a bank account in time to make the deposit.

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Supreme Court Rules Health Care Credits Available to Individuals in Federal Exchanges

While obtaining conflicting results in different Circuit Courts of Appeal on matters occurs from time to time, it’s not often the conflicting decisions are issued on the same day.  But this is what occurred with regard to the validity of IRS regulations for the premium tax credit under IRC §36B.

The Court of Appeals for District of Columbia found that the regulations were invalid in the case of Halbig, et al. v. Burwell, CA DC, 114 AFTR 2d ¶ 2014-5068.  However, the Fourth Circuit concluded that the regulations were valid in the case of King v. Burwell, 114 AFTR 2d ¶ 2014‑5071.

When this occurs, the Supreme Court often steps in and, in a case of this importance, is virtually forced to do so.  In its decision in the appeal of the Fourth Circuit decision the Court, in a 6-3 decision, decided that the Fourth Circuit was correct—the regulations were valid, though the exact logic of the opinion suggests that the issue actually had to be decided by the United States Supreme Court (King v. Burrell, USSC, No. 14-114, 115 AFTR 2d ¶2015-841)

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Failure to Provide Factual Support for Claimed Disability Costs Taxpayer Change of Avoiding 10% Addition to Tax

While in update courses we tend to discuss the nuances of the law, in real world tax return and IRS examination contexts our client’s problems most often are not the law, but rather the lack of records and documentation to establish the client’s right to a claimed tax benefit.  That certainly was the problem in the case of Trainito v. Commissioner, TC Summary Opinion 2015-37.

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