Fact Taxpayer Received Full and Adequate Consideration, Not Whether Recipient Provided It, Was Determinative That No Gift Had Taken Place

The summer of 1972 had the break-in at the Watergate office complex in Washington DC on June 17.  While that event is now the subject of history books, an event that took place just over a month later just recently was the featured issue in tax litigation.  In the case of Estate of Redstone v. Commissioner, 145 TC No. 11 the issue became whether or not a gift had taken place back in 1972, a gift the IRS now sought to collect gift tax on.  Since no gift tax return had been filed, the statute remained open for the IRS to assess and attempt to collect the tax it claimed was due.

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Estate Never Had Been Given Advice on Due Date, No Reasonable Cause Found for Late Filing

An estate argued that it should be excused from late filing penalties because it had relied on the advice of an attorney—but the court in the case of West, et al v. Koskinen, 2015 TNT 203-11 (USDC Eastern District Virginia) determined that, in fact, there had been no advice received from the attorney on this matter.

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Taxpayer Fails to Show Procedures in Revenue Procedure 99-17 Followed in Prior Year, No Current Year Use of Mark To Market Allowed for Trading Business

If a taxpayer is a trader and properly elects under IRC §475(f) to use the mark to market treatment, the gains and losses from the trading activity are treated as ordinary, rather than capital, gains and losses.  Of particular significance is that losses in excess of gains will not be subject to a $3,000 annual limitation.

In the case of Poppe v. Commissioner, TC Memo 2015-205 the question at hand was whether, in fact, Mr. Poppe had ever properly made the election in question.

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IRS Announces 2015/2016 PCORI Fee

An annual fee to fund the “Patient Centered Outcome Research Institute” (the PCORI fee) is imposed on either:

  • The issuer of a specified health insurance policy for each policy year ending after September 20, 2012 and before October 1, 2019 [IRC §4375]
  • A sponsor of an applicable self-insured health plan each plan year ending after September 20, 2012 and before October 1, 2019 [IRC §4376]
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No Actual Tax Partnership Existed, All Income Taxable to Entity That Per Agreement Was to Receive 30% of Income

In the case of DJB Holding Corporation v. Commissioner, 116 AFTR 2d ¶ 2015-5313, CA9, the Ninth Circuit Court of Appeals upheld a Tax Court decision that since no partnership existed, the entire income that had been reported on the partnership return should instead be reported on the return of the claimed 30% partner of the operation, a C corporation.

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Non-Compete Agreement Was Not Properly Taxable to Partnership, Since It Bound Corporation and Two Employees Only

While the case of DJB Holding Corporation v. Commissioner, 116 AFTR 2d ¶ 2015-5313, CA9, principally involved the issue of the lack of existence of a purported partnership (which is discussed elsewhere), there was another issue of interest.

The taxpayers in question had sold the assets of a C corporation owned by a partnership that was itself owned by two S corporations that the individuals controlled via ESOPs.  The agreement had provided that $3.4 million of the sales price represented an agreement not to compete.

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Counseling Taxpayer that Suboptimal Tax Laws are Still Valid Tax Laws, Court Upholds Imposition of Payroll Taxes on Deferred Compensation Taxpayer Will Never Receive

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.

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Taxpayer Needs to Choose Paying Tax on Income or Having IRA Overfunded

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.

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ESOP Disqualified Due to Failure to Comply with Law and Plan Document

[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.

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Telling IRS Agent of Intention to File a Claim Did Not Constitute an Informal Claim

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.

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IRS Publishes Revised Payroll Tax Exam Procedures

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.

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Taxpayer Failed to Show in Business of Loaning Money or That Debts Totally Worthless

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.

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