Deductibility of legal expenses is always a tricky issue for tax purposes.  In the situation described in Private Letter Ruling 201536006 the litigation involved a potential infringement on a patent, with a key issue being whether the legal fees incurred represented a capitalizable payment in defense of title to the patent or an ordinary and necessary business expense arising from a dispute over whether there had been an infringement on the patent.

In Private Letter Ruling 201536005 the IRS granted an executrix, who was also the surviving spouse of the decedent,  the right to make a late portability election under IRC §2010.  By making that election, the estate of the surviving spouse will be able to take into account the decedent’s deceased spousal unused exclusion amount (DSUE).

Taxpayers were again beaten back in an attempt to broadly define a “capital asset” and a “sale of a capital asset” in order to gain access to the preferential capital gain tax rates in the case of Patrick v. Commissioner, 142 TC No. 5, affirmed on appeal by the Seventh Circuit Court of Appeals, Case No. 14-2190.

In this case the taxpayers were looking to get capital gain treatment for an amount they received as a reward for, effectively, turning in the husband’s employer through a qui tam complaint filed under the False Claims Act.

In Legal Advice Issued by Field Attorneys 20152201F the IRS conclude disclosures related to a gift were inadequate on the gift tax return that was filed by the taxpayer.  That is important because, under IRC §6501(c)(9) if there is inadequate disclosure of a gift on a gift tax return the statute of limitations stays open indefinitely.

By repossessing a personal residence the taxpayer had sold by taking an installment note, the taxpayer ended up losing access to the IRC §121 $500,000 exclusion of gain on the sale of a principal residence in the case of Debough v. Commissioner, 141 TC No. 17, affd CA8, 2015 TNT 168-11, No. 14-3036.

The case deals with the interplay of IRC §121 (the exclusion for the gain on the sale of a qualifying residence) and IRC §1038 (a provision that is meant to offer relief when a taxpayer repossesses real property).  Effectively the Tax Court concluded that IRC §1038’s provisions trump the relief provision of IRC §121 in this fact pattern.

Taxpayers operating a trade or business are authorized to deduct partially worthless bad debts under Internal Revenue Code §166(a)(2). But to do so the taxpayers must be able to show that they are writing off a debt that already has gone bad, rather than simply reserving against a potentially bad debt in the future.

The IRS has issued proposed regulations (REG-109813-11) on which taxpayers may rely for new tax years that would allow additional days to count toward establishing bona fide residency for certain taxpayers in a U.S. territory.

Those qualifying as a bona fide resident of the following U.S. territories under IRC §937 are treated differently under a number of tax provisions:

• Guam
• American Samoa
• The Northern Mariana Islands
• Puerto Rico
• The Virgin Islands [IRC §937(a)]

The IRS has issued temporary regulations dealing with allocation of W-2 wages for purposes of the domestic production activities deduction (DPAD) of IRC §199, along with proposed regulations dealing with that topic along with other issues related to DPAD.   The temporary regulations are found in TD 9731 while the proposed regulations were released in REG-136459-09.

How taxpayers should deal with changes in the determination of foreign taxes due for purposes of the foreign tax credit was discussed in Chief Counsel Email 201534013.  Specifically, the question arose regarding a taxpayer on the cash basis of accounting who has not elected to report the foreign tax credit on the accrual basis that faced an additional assessment of foreign tax related to a prior year.

The question of whether an arrangement was a partnership or was a commission arrangement was the issue before the United States Court for the Southern District of Texas in the case of United States v. Stewart, et al, 116 AFTR 2d ¶ 2015-5159.

An important fact in dealing with the foreign earned income exclusion is that, per Reg. §1.911-7(a)(2)(i)(D), a taxpayer who fails to file his/her return more than one year after the original due date is risking the loss of the ability to exclude that income if the IRS discovers the fact that no election was made.  In the case of McDonald v. Commissioner, TC Memo 2015-169 the taxpayer discovered she had made this costly mistake.

One significant tax law change contained in the Surface Transportation and Veterans Health Care Improvement Act of 2015 (STVHCIA) was the uniform reporting of basis for inherited assets.  The act added IRC §6035 to require that an estate required to file an estate tax return must provide information to the IRS and beneficiaries regarding the basis reported. 

Generally, the information must be provided to the IRS no later than by the earlier of 30 days after the date the Form 706 was required to be filed (including extensions, if any are granted) or 30 days after the Form 706 is actually filed by the estate.  The law does authorize the IRS to move that date forward.  The requirement applied to any estate that filed a return after July 31, 2015—which was the day this bill was signed into law.

In Notice 2015-57 the IRS has pushed the due date forward to February 29, 2016 for statements that would be due prior to that date under the 30 day rule found in the new law.

Does a county clerk need to issue a Form 1099MISC to attorneys when the clerk sends funds to an attorney in various circumstances?  For the situations considered in Chief Counsel Advice 201533012 the IRS’s answer was no.

Information returns must be issued by payors in certain situations when payments are made to various parties. 

The tax law doesn’t often work the way we like it to, and in the case of Tobias v. Commissioner, TC Memo 2015-164 the taxpayer’s argument that, when viewed as a whole he hadn’t really seen income from a series of transactions was not availing.

The taxpayer in this case was an attorney who held an inactive CPA license.  In 2003 the taxpayers had purchased an annuity for $228,800.  In order to buy the annuity the taxpayer had sold securities at a loss of $158,000.  The taxpayers continued to make contributions to the annuity through 2006 of $346,154. 

The Ninth Circuit in the case of Minnick v. Commissioner, 116 AFTR 2d ¶ 2015-5137, CA9, affirming TC Memo 2012-345 agreed with the Tax Court’s conclusion that in order to claim a deduction for a conservation easement under the provisions of IRC §170, holding that Reg. §1.170A-14(g)(2)’s requirement that any mortgage must be subordinated at the time of the gift.

IRC §1.170(b)(5)(A) permits a deduction for a conservation easement only if that interest is protected in perpetuity.  The IRS regulation interpreting this rule holds that the protected in perpetuity rule may only be satisfied (and thus a deduction allowed) only if the mortgage holder subordinates its rights in the property to the rights of the donee organization to enforce the conservation easement.