Letters Explain Maximum HSA Contributions for Year Taxpayer Enrolls in Medicare

Contributions can no longer be made by individuals who are otherwise eligible to contribute to Health Savings Accounts beginning with the first month the individual is eligible for benefits under title XVIII of the social security act (otherwise known as Medicare).  [IRC §223(b)(7)]  In Information Letters 2016-0014 and 2016-0003 the IRS addressed the maximum contributions for individuals who enroll in Medicare during the year.

As the provision requires a taxpayer to be eligible for benefits and one of basic requirements to be eligible is that the taxpayer must register of Medicare—so merely attaining age 65 is not, by itself, enough to trigger the limitation.  If an individual has otherwise equivalent coverage (perhaps provided by an employer for employee that is working upon attaining age 65) the person can still be eligible to make a contribution.

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Letter to Bankers States That Erroneous Employer HSA Contributions May Be Refunded in More Situations Than Just the Two Mentioned in Notice 2008-59

Tax Analysts published a copy of the letter from the IRS to officials at UMB Bank and the American Bankers Association in Tax Notes Today on April 8 that explained that Notice 2008-59’s list of conditions under which an employer may take back a contribution to an employee’s HSA is not an exclusive list of such situations. (2016 TNT 68-9)

If an employer has provided for contributions to be made to eligible employee’s HSAs under Section 223, a problem arises if the contribution is, in fact, in error and excessive.  IRC Section 223(d)(1)(E) provides that a taxpayer’s balance in an HSA is nonforfeitable.  Notice 2008-59 provided two conditions under which an employer could recover an erroneous payment.

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IRS Offers In Person Cash Payment of Taxes at Certain 7-Elevens

After last year dealing with taxpayers who wanted to pay taxes of over $100,000,000 with a check by telling them that “old” method could no longer be used for such payments (Announcement 2015-36), the IRS has now dealt with yet another “old school” method of paying taxes—using cash.

Taxpayers now can pay their taxes in cash and buy a Slurpee or Big Gulp at the same time, as the IRS announced the availability of an option to pay your tax bill in cash at certain 7-Eleven convenience stores in News Release IR-2016-56.

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IRS Announces Disagreement With Case That Allowed Exclusion of Tax Advice Damage Award That Caused Taxpayer to Deviate from Lifetime Plan

The issue of the taxable status of awards received by a taxpayer from his tax adviser was addressed in the case of Cosentino v. Commissioner, TC Memo 2014-186.  While the Tax Court granted the taxpayer a victory, the IRS has announced nonacquiesence with regard to this case (AOD 2016-01).

A key issue when a taxpayer receives a damage award related to negligent tax advice is whether the amounts received will be taxable income to the taxpayer or not.  Generally when a taxpayer receives questionable tax advice, the taxpayer will file a claim against the adviser and argue for damages for taxes, interest and penalties.  The argument for the tax payment generally is based on the claim that if the taxpayer had known the action the adviser was suggesting would not have led to the claimed tax savings, the taxpayer would have taken other actions to reduce his taxes.

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Tax Court's Statements in Prior Case That a Guilty Plea to Tax Evasion Mandates a Deficiency Finding Held to Be "Mere Dicta" When Court Confronted With Evidence That Did Not Support Such a Finding

Tax advisers who look over tax cases and read opinions need to be careful about the level of reliance they place on statements made by the court in the case that do not directly impact the ultimate decision.  Merriam Webster’s online dictionary defines dicta as “a judge's expression of opinion on a point other than the precise issue involved in determining a case.”

In the case of Senyszyn v. Commissioner, 146 TC No 9, the Tax Court ended up ultimately ruling in the opposite manner to a rather clear statement the Court had made in the case of Anderson v. Commissioner, T.C. Memo. 2009-44.

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IRS Announces Depreciation and Lease Inclusion Amounts on Vehicles for 2016

In Revenue Procedure 2016-23 the IRS released the limits on depreciation for vehicles subject to the limitations of §280F(d)(7)(B)(i) for items placed in service in 2016, as well as the revised limits for 2014 for autos qualifying for bonus depreciation under IRC §168(k).  The latter revisions were needed since Congress retroactively extended the bonus depreciation in the Protecting Americans from Tax Hikes Act, signed into law on December 18, 2015.

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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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