The Court of Federal Claims concluded something all of us learned early on—“suboptimal tax laws are still valid tax laws” in upholding the taxation of deferred compensation in 2004 for a taxpayer that was clear even when included in the employee’s income would never be paid in the case of Balestra v. United States, 113 AFTR 2d ¶2014-887.

The taxpayer in this case was a pilot for an airline who retired in 2004.  The airline in question entered bankruptcy in 2002.  In 2004 Mr. Balestra retired from the airline.

In IRS Information Letter 2015-0026 a taxpayer discovered that sometimes when the IRS changes its mind in what appears to be a taxpayer favorable fashion, taking advantage of that relief may introduce its own complications, in this case triggering the excess contributions tax of IRC §4973.

In this case the taxpayer had received Medicare waiver payments as a caregiver.  In Notice 2014-7 the IRS had determined that such payments were excludable from income and allowed taxpayers to amend their returns to take advantage of this change in position.

[Revision - February 5, 2016.  At the request of the taxpayers involved we have removed the names of the individuals from the Tax Court opinion paragraph cited below.]

A number of bad consequences will follow from the IRS finding that a purportedly qualified retirement plan wasn’t actually qualified.  In such a case the trust will generally be treated as a taxable entity rather than a tax exempt one.  As such, the IRS does not often take this drastic step, but it did in the case of DNA Pro Ventures, Inc. v. Commissioner, TC Memo 2015-195.

The corporation argued that the IRS action was an abuse of discretion in this case, but the Tax Court did not agree.

In Chief Counsel Advice 201540012 the IRS held that a corporation had not made a proper informal refund claim and thus the statute of limitations had expired.

The situation involved a dispute between a corporation and the taxing agency of a foreign government. The IRS, referring to years by “Y” and numbers indicated that the questions involved years Y1, Y2 and Y3.  In year Y12 the corporation settled the dispute with the foreign government.

In SBSE-04-0915-0058 on “Procedures for Required Filing Checks and Scope of Employment Tax Examinations” the IRS outlined revised procedures to be followed by agents conducting payroll tax examinations.

The four-page memo contains changes that will be made to the Internal Revenue Manual IRM 4.23.3.7.4.  Agents are instructed to follow the memorandum in the interim until those changes are placed in the manual.

Fred Cooper lent money to various individuals, including specifically Wolper Construction, Inc. a real estate development business.  In the case of Cooper v. Commissioner, TC Memo 2015-191 the Tax Court had to decide if Mr. Cooper could take a deduction for a bad debt in either 2008 or 2009.

IRC §166 governs the deduction of bad debts for taxpayers.  Differing rules apply depending on whether the debt in question is a business bad debt or is not one.  Generally business bad debts represent ordinary losses and a deduction can be claimed on a debt that becomes partially worthless.  A nonbusiness bad debt is deductible as a short term capital loss and for entities other than corporations per Reg. §1.166-5(a)(2), only deductible in the year in which the debt becomes wholly worthless.

The taxpayer in the case of American Milling, LP v. Commissioner, TC Memo 2015-192 argued that the Tax Court lacked jurisdiction to hear the case where the IRS would ultimately push a tax assessment down to a real taxpayer.

In the case of Precision Dose v. United States, 116 AFTR 2d ¶ 2015-5272, the United States District Court for the Northern District of Illinois, Western Division looked into whether a company qualified for the domestic production deduction under IRC §199.

An IRS Tax Court victory in the case of Morehouse v. Commissioner, ( original decision at 14 TC No. 16), was overturned on appeal in a split decisions by a panel of the Eighth Circuit in Case No. 13-3110, 114 AFTR 2d ¶ 2014-5340.  

The case in question involved whether payments received under the U.S. Department of Agriculture’s Conservation Reserve Program (CRP) represented income subject to the self-employment tax.  

The attorney for the taxpayer in the case of Tilden v. Commissioner, TC Memo 2015-188 prepared the petition for the taxpayer’s Tax Court case on the last day for the petition to be filed.  The petition was sent to the IRS via certified mail.

So far all appears well, except the attorney used an online postage service (Stamps.com) to print the certified mail postage and supporting documents.  That’s not itself a problem except that the rules regarding “timely filing” provide protection not simply for filing by certified mail.

The Tax Court, expanding on its earlier decision in the case of Estate of Belmont v. Commissioner, 144 TC No. 6, found that an estate which did not (unlike Belmont) end up spending a portion of the funds supposedly set aside for charity still failed to meet the requirements of §642(c) to have permanently set aside funds for charity due to a pending legal dispute.

In the case of Estate of DiMarco v. Commissioner, T.C. Memo. 2015-184 the Court found that the estate was aware of a potential contest by both the end of the tax year where it attempted to claim to have set aside the funds and by the date the return was actually filed.  The potential dispute over the estate could reasonably be expected to require an expenditure of estate funds and it more than than remotely possible that the expenditure could be substantial.

Final regulations (TD 9739) have been published by the IRS detailing the requirements for a transaction to be deemed a tax free F reorganization under the provisions found at IRC §368(a)(1)(F).

An “F” reorganization is defined as “a mere change in identity, form, or place of organization of one corporation, however effected.” [IRC §368(a)(1)(F)]  A corporation that is the survivor of an F reorganization takes over all of the attributes of its predecessor and is, for all practical purposes, treated as the same corporation as the predecessor for federal tax purposes.

The IRS has provided in final regulations (TD 9740) that a private foundation may rely in good faith in making a determination that a foreign organization is a charitable organization that is not itself a private foundation by relying in good faith upon written advice from any of the following tax practitioners:

• Attorney
• Certified Public Accountant
• Enrolled Agent

who are subject to IRS regulation via Circular 230 (traditional Circular 230 practitioners).

S corporation have always had issues with the risk of becoming a C corporation by accident. One of the key problems for an S corporations is the risk of having excess passive income (as defined by §1362(d)(3)(C)(i)) if the S corporation is determined to have accumulated earnings and profits as of the end of the tax year. If the corporation has such excess passive income for three straight years, the S election terminates at the end of the third year. [IRC §1362(d)(3)]

Generally, excess passive income is defined as the corporation having passive investment income in excess of 25% of its gross receipts for 3 consecutive years.  Despite the use of the word “passive” the income being discussed here is not generally income related to the passive activity rules of IRC §469.  Rather, passive income is generally defined as gross receipts from royalties, rents, dividends, interest, and annuities. [IRC §1362(d)(3)(C)(i)]  Various special exceptions apply to the inclusion of these types of income, most importantly related to rents derived in the active trade or business of renting property. [IRC Reg. §1.1362-2(c)(5)(ii)(B)(2)]

The fact that the IRS waives a penalty in one year does not require that the IRS must waive the penalty in a later year was the holding of the United States District Court of the District of South Dakota in the case of Battle Flat, LLC v. United States, Docket No. 5:13-cv-05070 (2015 TNT 184-15).

The issue in this case involved a partnership that filed its returns late for a number of years. 

The IRS in Notice 2015-63 provided updated special per diem effective for the period from October 1, 2015 to September 30, 2016.  These special rates include the rate for the special transportation industry meals and incidental expenses (M&IE) rate, the rate for the incidentals-only deduction and the rates and list of high-cost localities for purposes of the high-low substantiation method.