Omission of Gift from a Year Does Not Hold Statute Open for All Intervening Years Where Gift Tax May Be Understated

Under IRC §6501(c)(9) the IRS has an unlimited statute of limitation to assess gift taxes on a gift that is not reported on a gift tax return absent adequate disclosure, even if a Form 709 was filed for the year in question to report other gifts. 

However, what happens if the omitted gift does not create gift taxes in the year in question but the omission of that gift from the prior gifts on later returns causes the taxes for that year to be understated?  Does the IRS get an unlimited statute on those later returns to collect the tax that would have been due if the omitted gift had been included in the “prior gifts” portion of the gift tax calculation for those later years?

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Agreement on Application of Trust Terms Found to Allow Trust to Be Treated as QSST

Qualified Subchapter S Trusts (QSSTs) are one of the limited set of trusts that are eligible S corporation shareholders upon the election of the beneficiary to treat the trust in this manner.  However, such trusts must have terms that conform to requirements imposed by the law in order for the trust to be eligible, upon the beneficiary’s election, to be treated as such a trust.

In PLRs 201614002 and 201614003 the taxpayers were asking the IRS whether a binding, nonjudicial settlement under state law regarding the trust’s language could be used to solve what otherwise appeared to be problems with the terms of trusts for which an S election was desired.

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Estate Tax Deduction for Charitable Contribution Reduced Below Date of Death Value By Subsequent Actions of Family

Victoria Dieringer’s estate plan left her estate, consisting largely of a majority interest of stock in a closely held realty management company, to a trust and a few charitable organizations.  The trust provided that it would distribute the assets it received (which included all of the stock) to a qualified §501(c)(3) private foundation. 

However the IRS objected to the amount claimed as the deduction for the transfer to the private foundation on the estate tax return, arguing that the deduction should be for far less than the value of the stock on the date of Victoria’s death in the case of Estate of Dieringer v. Commissioner, 146 TC No. 8.

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In Information Letter IRS Confirms That a Plan Covering a Single Employee May Reimburse Private Insurance Premiums Without Violating ACA

In Information Letter 2016-006 the IRS reaffirmed that an employer does not run afoul of the penalties imposed on employer plans that reimburse private insurance coverage if such a plan covers only a single employee.

The letter was written in response to an inquiry by Representative Tom Price on behalf of a constituent asking whether he could continue to reimburse the medical insurance premiums of his only employee without running afoul of the Affordable Care Act (ACA).  More specifically the issue is avoiding the $100 per day penalty under IRC §4980D for having a plan that was in violation of market reform rules for employer sponsored group plans.

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Taxpayer Not Allowed to Use Step Transaction Doctrine to Escape Consequences of Prohibited Transaction With His IRA

Of the three issues raised in the case of Thiessen v. Commissioner, 146 TC No. 7, the first will likely evoke a sense of déjà vu in some readers.  And you will be right—the facts for the first issue (did the beneficiaries of two IRAs participate in prohibited transactions causing the entire IRA balances to be immediately taxable) are very similar to those the Tax Court had previously ruled upon in the case of Peek v. Commissioner, 140 TC 216 back in 2013.

However the taxpayer would introduce two defenses to the imposition of tax in this situation the court would view—but the Court would not use the step transaction doctrine to view the transaction in the taxpayer’s favor in these areas.

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Income from Sale of Scrap Metal Did Not Represent Self-Employment Income to Taxpayer

Thomas Ryther’s wholly owned corporation, Knight Steel, failed in 2004.  Knight Steel had been in the business of fabricating steel frames and in the process of doing so generated scrap steel which it simply piled up.  When Knight Steel passed through Chapter 7 on its way to the grave, the bankruptcy trustee abandoned that scrap steel because it appeared to be worthless.

Tom, however, who was financially challenged at this point, decided that since he had a large pile of scrap steel and needed money he’d look at whether he could get something for it.  And Tom discovered that, far from being worthless, there was a ready market for the scrap steel.  From 2004 to 2010 Tom sold various amounts of the steel to provide himself with cash.

Tom reported the amounts as ordinary income, but the IRS asserted that Tom should also pay self-employment tax on the amounts in question.  The Tax Court, in the case of Ryther v. Commissioner, TC Memo 2016-56, took up the question of whether Tom owed self-employment tax on this income.

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Interaction of Loss Disallowance Rules of §707 and Substantial Built in Loss Rules of §743(d) Discussed in Three IRS Private Letter Rulings

In a series of private letter rulings (PLRs 201613001, 201613002 and 201613003) the IRS issued a ruling on how to handle a situation where both the related party loss rules of IRC §707(b)(1)(a) and the substantial built-in loss rules of §743(d) applied to a transaction.

The cases involved the sale of a partnership interest to a grantor trust by a partnership in a transaction that triggered a disallowed loss to the seller under the related party rules of IRC §707(b)(1)(a). 

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Use of Old Form 3115 Allowed For Accounting Method Change Requests Filed on or Before April 20, 2016

The IRS announced that, for forms filed on or before April 19, 2016, the agency will generally accept either the current December 2015 version of Form 3115 or the prior December 2009 version of the form [Announcement 2016-14].  However, the use of the new form will be mandated in those situations where situations where the IRS has mandated the use of new form specifically in guidance published in the Internal Revenue Bulletin.

In the vast majority of cases the form is being filed to be granted automatic consent to a change in method of accounting under provisions promulgated by the IRS well before the December 2015 form was published, so this relief will cover the vast majority of filings, albeit only for a relative short period (on April 19 the new form will become mandated)

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Procedures for Referral of Docketed Tax Court Cases to Appeals Revised by IRS

The IRS has updated and revised the procedures for the use of Appeals for cases that are docketed before the Tax Court in Revenue Procedure 2016-22, revising Revenue Procedure 87-24.

As most practitioners are aware, cases where the taxpayer files a challenge to the IRS’s proposed assessment with the Tax Court are often referred back to Appeals in an attempt to resolve the matter without a need to go to Tax Court.

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Initial Filings for Forms 8971 Now Pushed Back to June 30, 2016 as IRS Grants Additional Delay

The initial due date for filing Forms 8971 has been pushed back for the third (and likely final) time by the IRS in Notice 2016-27.  The notice provides that both the statements to be furnished to the IRS (Forms 8971 and the Schedule As) and those to be provided to the beneficiaries (Schedule A) that are due prior to June 30, 2016 need not be provided to the IRS or the beneficiaries prior to that date.

The form is required to be filed by executors of estates who are required to file a return (as that term is defined in the proposed regulations issued in early March of 2016) if that return is filed after July 31, 2015.  The return is due 30 days after the earlier of the date the Form 706 is filed or when it was required to be filed (including extensions actually granted).  [IRC §6035 as added by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015]

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Tax Analysts Reports IRS Again Delays Due Date for First Forms 8971

Tax Analysts reported this afternoon that the IRS has delayed to June 30, 2016 (via Notice 2016-27) the due date for the initial batch of Forms 8971 from the March 31, 2016 date last set in Notice 2016-19.  The form is required to be filed by taxable estates that filed a Form 706 after July 31, 2015.  The form is due 30 days after the Form 706 is filed or by June 30, 2016, whichever is later.

The AICPA had requested that the IRS delay this date to give additional time to understand the proposed regulations issued earlier this month that are meant to guide the preparation of this form.

More information, including a link to the Notice, will be posted here once the IRS posts the Notice on their site.

Taxpayers Failed to Obtain Documentation That No Goods or Services Were Received By Time Return Was Filed, Thus No Charitable Deduction Could Be Allowed

Congress has provided that for certain tax deductions a taxpayer must produce documentation in a specified form, subject to very detailed rules, or no deduction will be allowed to the taxpayer regardless of any other information that might be available to justify the deduction. 

One particularly nasty area that requires detailed documentation or the deduction is entirely disallowed is found for charitable contributions in excess of $250.  That provision blocked entirely any potential deduction for the taxpayer in the case of French v. Commissioner, TC Memo 2016-53.

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Taxpayer's Injuries Did Not Move Tax Court to Find That Her Horse Operation Had a True Profit Motive

Taxpayers who are doing well in one endeavor may wish to engage in an endeavor they enjoy generally, but which arguably could be conducted with an eye towards making a profit.  When taxpayers continue to engage in such activities despite a lack of actual profit, the IRS quite often turns to Section 183 to deny the taxpayer’s the ability to claim such losses.

Such was the issue in the case of Kaiser v. Commissioner, T.C. Summ. Op. 2016-13.  Linda Kaiser ran a successful financial consulting and insurance business, but she had an interest in training Hanoverian horse.  The Court noted that she was “competent dressage rider and from 1998 to 2014 she owned between one and four horses.

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Membership Exempt Organization Tripped Up by Gross Revenue from Nonmembers Test

An issue that often arises in the area of exempt organizations is that they are governed by a number of special rules that, if violated, will cause an organization to lose its exempt status.  And often these organizations, as circumstances change, end up taking actions that run smack into these problems.

This was case for the organization whose loss of exempt status is detailed in PLR 201612014.  The organization was organized as a social organization under IRC §501(c)(7) to provide trap shooting, hunter safety and clubhouse activities to its members.

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Decedent Had Implied Retained Estate for Partnership Established Solely for Tax Reasons, So Entire Value Included in Her Taxable Estate

The most successful method the IRS has developed to attack claimed discounts in family limited partnerships continues to be to claim the transactions, as actually undertaken by the decedent and the family members, ran afoul of the provisions of IRC §2036(a).  In the case of Estate of Holliday v. Commissioner, TC Memo 2016‑51 the IRS again succeeded in bring the assets back into the decedent’s estate using this same provision of the law

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Blue Book Indicates Congress Has Left It Up to the IRS Whether Disregarded Entity Partners Will Block Any Election Out of New Partnership Audit Regime

The Joint Committee on Taxation published its Blue Book (General Explanation of Legislation Enacted in 2015) for tax laws passed in 2015, and it gives some insight into the limited extent of statutorily mandated “acceptable” partners that Congress decided should enable a partnership to elect out of the new partnership audit regime when it comes into full effect for tax years beginning on or after January 1, 2018.

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Taxpayer Penalized $40,000 for Failure to Disclose Participation in Transaction Despite Fact The Issue of Legitimacy of Deduction Still to Be Decided

Taxpayers who participate in a listed transaction or one similar to a described listed transaction and fail to disclose such participation face a penalty under IRC §6707A regardless of whether or not the transaction ends up resulting in a true understatement of tax.  And “similar” is interpreted broadly, as the taxpayer in the case of Vee’s Marketing, Inc. v. United States, CA7, Case No. 15-2441 discovered.

The penalty under §6707A for failure to disclose such a transaction is 75% of the claimed reduction in tax shown on the return (regardless of whether or not that deduction is ultimately found justified or not).  A minimum penalty of $5,000 for a natural person or $10,000 for any other taxpayer is triggered regardless of the level of savings, with the penalty similarly capped at $100,000 for a natural person and $200,000 for other taxpayers regardless of the claimed level of tax reduction.  The minimums and maximums are set at a lower figure for transactions that are “reportable transactions” rather than listed transactions (reportable transactions are defined by statute, not by direct IRS identification).

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Trust Allowed Charitable Deduction for IRA Distribution Immediately Paid to Charity

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.

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Joint Committee Report Got It Wrong, As Congress Failed to Authorize Lump Sum Reimbursement of Retroactively Increased Transit Benefit

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.

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Court Finds Modification to Sublicense May Be a Sale, Does Not Agree with IRS That Taxpayer is Blocked from Arguing the Point

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.

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