Charitable contribution deductions for trusts and estates are subject to unique rules that are discussed in Private Letter Ruling 201611002.  The conclusions of this ruling aren’t at all surprising, but it does provide a good review of the topic, including the differences between “accounting” and “tax” definitions for trusts.

The trust was the beneficiary of an IRA of a decedent who established the trust.  The trust provided that the IRA is to be distributed to a charitable organization.  That raises a tax concern since the trust is a taxable entity and the IRA, rather than being left directly to the tax exempt charity, had been left to the trust which was to distribute the IRA to that organization.

Congress has reinstated the higher level of exclusion for employer provided transit benefits under IRC §132(f) the last three times the provision has expired, but did so only at or after the end of the year following the expiration of the provision. 

Employers who had structured their programs to limit their assistance to the amount that was provided for in the Code during the year in question, but which retroactively was raised by Congress, may wonder if they could make a payment to reimburse those employees who had paid additional costs out of pocket during those years and exclude them from income.  If the employers have read the explanations of these laws provided by the Joint Committee on Taxation which indicates that Congress intended to allow such reimbursements when it passed these bills, then the question becomes of even more interest.

One day after the Tax Court invoked the Danielson case to reject a taxpayer’s attempt to argue substance over form to restructure an agreement for tax purposes in Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44, the Court turned down the IRS’s attempt to argue the same case should block a taxpayer from arguing a transaction represented a sale of its interests in rights to a chemical compound.

In the case of Mylan, Inc. and Subsidiaries v. Commissioner, TC Memo 2016-45 the IRS was arguing for summary judgement, based on the Danielson decision, that the taxpayer had to treat its transaction as a license agreement generating ordinary income and not a sale of its rights generating capital gains.

Details matter in tax law, especially when the taxpayer was involved in setting up the details.  In the case of Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44 a failure to make sure that the right corporation was sold as part of the agreement proved very expensive to the taxpayers—in the amount of $2,839,780.

There were two corporations involved in this matter—one of which was a holding company (Makric Enterprises, Inc.) whose only asset was the stock of a wholly owned subsidiary (Alpha Circuits, Inc.).  A third party became interested in buying the business conducted by Alpha.

In June the IRS extended the dates for both hiring and applying for certification in Notice 2016-40.

With spring training underway in Arizona (where this author lives), it's appropriate to have a baseball tie in to a tax development, so we turn to one of the great insights given to us by a player of the sport:

“It’s like déjà vu all over again.”

The above quote, attributed to Yogi Berra, is appropriate to the IRS returning again to dealing with the mess left by Congress’s late in 2015 decision to retroactively extend the Work Opportunity Credit. The IRS has issued another notice to “clean up” problems created by Congress’s delay in extending expired code provisions, waiting until late December to pass the Protecting Americans from Tax Hikes Act of 2015 (PATH), just as the Congress did one year earlier. 

In Notice 2016-22 the IRS provided procedures to be used for employers that hired individuals that retroactively qualify as “targeted” individuals during the period where the work opportunity credit under IRC §51 had expired. 

Accrual basis taxpayers who receive advanced for the sale of goods prior to the actual sale of such goods may, under Reg. §1.451-5, defer recognition of such income until the earliest of:

• The year in which the income would be properly accruable under the taxpayer’s method of accounting for tax purposes;
• The year in which the income is recognized for financial statement purposes; or
• The end of the second year following the year of receipt. [Reg. §1.451-5(b)1, (c)]

But what about a taxpayer who sells gift cards which can be deemed for either goods sold by the taxpayer or services the taxpayer sells?  That situation exists in many contexts, as retailers often offer for sale, in addition to products, servicesFor instance, appliance/electronics stores offer, in addition to the goods, various extended warranty, delivery, repair and installation services.  In TAM 201610017 the National Office advised that such entities may make use of a partial deferral.

In Notice 2016-23 the IRS has asked for comments on the new partnership audit regime imposed by the Bipartisan Budget Act of 2015.  The new regime replaces the TEFRA partnership audit regime with one that not only unifies the examination of the income, expense and credit items of the partnership at the partnership level (rather than requiring an examination of each partner) as was true of the TEFRA regime, but also defaults to computing and collecting a tax assessment at the partnership (rather than individual partner) level as part of the exam.

The system is mandated for tax years beginning on or after January 1, 2018, but taxpayers may elect to use the system for tax years beginning November 2, 2017.

March 23 Update:  The IRS has announced in Notice 2016-27 that the first forms will now be due on June 30, 2016, and not March 31, 2016 as originally provided in Notice 2016-19 that accompanied these proposed regulations.

Coming up on the second extended due date for the first filings of Form 8971, the “consistent basis reporting” form required to be filed by estates that filed a Form 706 that showed tax due after July 31, 2015 that would have been due on or before March 31, 2016, the IRS has released proposed regulations (REG-127923-15) and a temporary regulation (TD 9757) that provide guidance for the initial filings, as well as other filings due before the publication of final regulations.

In the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 Congress added new IRC §6035.  The provision imposed two reporting mandates on estates in order to prevent estates from paying estate tax based on one claimed value and then later having heirs claim a higher basis in the asset for income tax reporting, arguing that the estate’s value was in error or, more likely, just betting that the IRS would never actually discover the discrepancy.

One of the more confusing areas of the tax law involves the mitigation provisions found at IRC §§1311-1314.  The case of Costello v. Commissioner, TC Memo 2016-33 deals with the potential application of these provisions to a trust and its beneficiaries that arose when the IRS made an assessment on the examination of the trust that it later agreed was in error.

The question of how much detail the IRS must provide in making an adjustment under IRC §482 was the issue decided by the Tax Court in the case of Guidant, LLC v. Commissioner, 146 TC No. 5.

IRC §482 is meant to deal with cases where taxpayers may be tempted to use transactions between related entities to manipulate a tax result by having the transactions take place under terms that are markedly different than would result from a true arms-length transaction between unrelated parties.

Taxpayers may form related entities for various purposes, some tax related and some not tax related.  But they may try and assign expenses between the various entities for reasons that don’t appear to have support based on the facts of the case, often in order to achieve a tax advantage.  But under the tax law a business deduction under IRC §162 is only allowed to an entity to the extent the expense represents an ordinary and necessary business expense of the entity claiming the deduction.

The Tax Court found that was not the case for certain expenses claimed in the case of Key Carpets, Inc. v. Commissioner, TC Memo 2016-30.

The IRS posted information on its website, “IRS Compliance Questions on the 2015 Form 5500-Series Returns,” indicating that certain portions of the 2015 Form 5500 series forms should not be completed.

The limited reach of the financial disability tolling provisions added by Congress to §6501 was again highlighted in the case of McAllister v. United States, US Court of Federal Claims, No. 1:13-cv-01026.

IRC §6511(h) provides an exception to the general statute of limitations provisions under §6511 for filing a claim for refund in cases of financial disability.  In April of 2015 the IRS, in Chief Counsel Memorandum 201515019 (which we discussed in an article posted back in April of 2015), concluded that the provision did not extend the general rule for when a taxpayer must file a claim for refund from years losses are carried to from a “financial disability” year.