The IRS in a memorandum issued by the Small Business Self Employed Division (SBSE-05-0416-0016) has outlined how the agency will approach requests for offers in compromise for businesses that cultivate and sell marijuana in states where state law makes such activities lawful.

The memorandum will supplement procedures found in the Internal Revenue Manual at IRM 5.8.5 (Offers in Compromise—Financial Analysis) and 5.8.7 (Offers in Compromise, Return, Terminate, Withdraw, and Reject Processing).

Under IRC §162, generally deductions are allowed for “ordinary and necessary” business expenses.  However, the IRS is known to pay special attention to any such expenses paid to related parties, which was the IRS’s concern in the case of H. W. Johnson, Inc. v. Commissioner, TC Memo 2016-95.  In this case the IRS was questioning both compensation paid to two corporate officers and payments made for “administration fees” to an LLC owned by the same two officers.

While the IRS believed the amounts were not justified in either case, the Tax Court did not agree, finding instead that the corporation had justified the amounts paid as reasonable ordinary and necessary expenses.

In the case of Kunkel, et, al v. Commissioner, Case No. 15-2232, the Seventh Circuit affirmed the Tax Court’s decision in the case of Hartland Management Services, et al v. Commissioner, TC Memo 2015-8. 

The a majority of the panel from the Third Circuit Court of Appeals determined that the Tax Court had misapplied the all events test in the case of Giant Eagle, Inc. v. Commissioner, Case No. 14-3961, CA3, reversing  TC Memo 2014‑146.

When the IRS issued the list of automatic accounting method changes as a separate Revenue Procedure in Revenue Procedure 2015-13 in early 2015 rather than as an appendix to the general Revenue Procedure in accounting method changes, the clear implication was that this would allow the IRS to issue a comprehensive list of changes on a more regular basis.  Revenue Procedure 2016-29 is the first time the IRS takes advantage of this structure, creating a comprehensive list of automatic changes, update for new automatic changes issued since Revenue Procedure 2015-13, superseding that procedure and incorporating changes made since the issuance of that procedure.

Following the issuance of Revenue Procedure 2015-13, the IRS had issued modifications/additions to the automatic list in Revenue Procedures 2015-33 and Revenue Procedure 2016-1.  Thus to obtain the complete list of automatic changes and current rules an adviser would need to check Revenue Procedure 2015-13 along with those changes.  

The IRS has issued temporary (TD 9768, Regs. §§301.7705-1T and 301.7705-2) and proposed regulations (REG-127561-15, Proposed Regs. §§31.3511-1, 301.7705-1 and 301.7701-2) that will govern the Certified Professional Employer Organization (CPEO) program that Congress enacted as IRC §7705 at the end of 2014 as part of the ABLE Act of 2014.  The program, which was supposed to begin accepting applicants in the summer of 2015 will actually begin accepting applications on July 1, 2016.

As part of the release of the regulations, the IRS also announced the agency’s intent to release a pair of Revenue Procedures, one outlining the application process to become a PEO and another detailing the ongoing requirements to maintain certification.

If a partnership owns an LLC it treats as a disregarded entity under the check the box rules, may partners of the partnership be treated as employees of the disregarded entity, receiving a W-2 and obtaining certain tax beneficial fringe benefits open to employee but not partners?  The IRS says the answer has always been no, but since some read the existing regulations otherwise the agency has issued Temporary Regulation §301.7701-2T(e)(8)(i) (TD 9766) and an identical proposed regulation (REG-114307-15).

The “check the box” provisions found in Reg. §301.7701-2 were created to deal with state law entities that had no direct equivalent under federal law (with the prime example being limited liability companies (LLCs)).  Under those rules, the taxpayer elects to treat the entity “as if” it was an entity the IRC has a treatment for, picking from a list that depends on the number of owners.  

The IRS had denied §6015(f) innocent spouse relief to Joseph Boyle in the case of Boyle v. Commissioner, TC Memo 2016-87 since the interest and penalties from which he sought relief were directly related to income from his sole proprietorship.  But the Tax Court did not agree given the facts of the case.

The trust in the case of Alterman Trust v. Commissioner, 146 TC No. 14 had prevailed in its case against the IRS in its previous case (TC Memo 2015-231) and now sought an award of attorney’s fees under Section 7430.

The issue to be decided was when the trust’s net worth was to be measure to determine if the trust was simply “too large” to be awarded the fees under IRC Section 7430.  While Section 7430 allows for an award of costs if the taxpayer is the prevailing party, has exhausted administrative remedies, has not unreasonably protracted the proceedings and has claimed reasonable costs, Section 7430(c)(4)(A)(ii) imposes an interesting quirk in the definition of “prevailing party.”

Although we don’t for sure how the issue managed to slip through the cracks, many advisers will have sympathy for the situation that gave rise to the need to request late QSST election relief and treatment of termination of S status as inadvertent in PLR 201618003

In the situation in question an existing S corporation had among its shareholders two trusts, each of which had timely an election to be a qualifying Subchapter S trust (QSST)under IRC §1361(d)(2).  

In Revenue Procedure 2016-28 the IRS provided updated numbers for 2017 for health savings accounts and the related high deductible health plans.

Details make a difference when attempting to qualify for a tax benefit, and a taxpayer who thought his conservation easement language complied with that found in the regulations discovered that the Tax Court noted a difference.  In the case of Carroll v. Commissioner, 146 TC No. 13 the issue involved what happens if the easement is extinguished due to circumstances outside the taxpayer’s control.

The IRS has granted educational institutions a one-year reprieve from penalties if they fail to provide information on the amounts actually paid to the institution for the year in question on Form 1098-T and rather provide information solely on the amounts billed to the student.  Announcement 2016-17 provides this short term relief from the law change enacted as part of the Protecting Americans from Tax Hikes Act of 2015.

As part of a package of provisions meant to reign in unauthorized claims for the American Opportunity Tax Credit and Lifetime Learning Credit, the Congress removed the option for educational institutions to report the amounts billed for tuition to a student on Form 1098-T in lieu of reporting the amounts actually paid by the student during the year.  The credits in question are only available for amounts actually paid during the year in question, though not surprisingly many taxpayers simply used the amount on that form to claim the credit, even if the actual payment was made in a different year.

California’s law requiring providing the California Attorney General with an unredacted list of donors was held constitutional by the Ninth Circuit, but less than a year later a District Court in the same Circuit found that the ruling only found the law not “facially unconstitutional” but that using an “as-applied” test the law was unconstitutional, granting again an injunction against its enforcement.

But, as we’ll describe below, the rulings are not as contradictory as they might appear when reading just the headlines.

Wendell Wilson lived in Mexico and was an engineer on ocean going container ships during the years in question.  In the case of Wilson v. Commissioner, TC Summary Opinion 2016-19 the issue was whether and to what extent Mr. Wilson was eligible for the foreign earned income exclusion under IRC §911(a)(1)

Should a surviving spouse be able to make use of an unused credit carryforward of her former spouse?  That question was posed in the case of Vichich v. Commissioner, 146 TC No. 12—and, as the Court noted, this wasn’t a question the Court had considered before.

The credit in this was the minimum tax credit under §53.  The minimum tax credit generally relates to a minimum tax paid in a prior year that is related to differences between the regular tax and the alternative minimum tax (AMT) that will reverse in later.  In this case William Vichich has exercised incentive stock options (ISOs) granted to him by his employer in 1998.

Clarifying examples meant to provide guidance to private foundations with regard to program-related investments have been issued by the IRS in TD 9762, adding the examples at the end of Reg. §53.4933-3(b).  The examples generally are the same as those found in the proposed regulations with one example clarified based on comments received.