The IRS has released a Revenue Procedure (Revenue Procedure 2016-33) that outlines how organizations will apply for Certified Professional Employer Organization (CPEO) status. The CPEO status, added by the Tax Increase Prevention Act of 2014, is meant to address an issue that arises when PEOs collect payroll taxes from employers but fail to pay those taxes over to the government.

Normally in such a situation the organization that hired the PEO remains on the hook for the payroll taxes, even if they were the victim of a fraud perpetrated by the PEO to walk off with payroll taxes. See the case of City Wide Transit, Inc. v. Commissioner, CA2, 2013-1 U.S.T.C. ¶50,211, reversing TC Memo 2011-279, 3/1/13.

The taxpayer in the case of Udeobong v. Commissioner, TC Memo 2016-109 complained that the IRS was assessing tax on income he had previously reported.  But, as the Tax Court noted, while that might be true it wasn’t going to be relevant in his case.

The taxpayer in this case had received payments from Cigna before 2005 for Medicaid reimbursement payments in his Schedule C business and had paid tax on those payments.  Later (but before 2010), a dispute arose with Cigna regarding whether the taxpayer was entitled to certain payments and he returned the payments to Cigna.

In the case of Garalnik v. Petitioner, 145 TC No. 15 the question was a simple one at this point—had Felix managed to file his petition with the Tax Court to challenge the IRS’s Notice of Determination Concerning Collection Actions in a timely manner.  While this issue involved a court filing, the same basic rules govern timely filing in other contexts.

The issue involves the “timely mailing” rule of IRC §7502 and/or the simple timely delivery requirement for his petition under IRC §6330(d)(1).  In the end, Felix did not meet the requirements of the timely mailing but, due to a storm that rendered actual delivery impossible on the actual due date, the Court allowed the filing was timely under Tax Court Rule 25(a).  

The IRS argued that a pattern of fraud they claimed to see in a preparer’s clients returns indicated that the preparer should be subject to the fraud penalty for understatements on his own return in the case of Ericson v. Commissioner, TC Memo 2016-107.  However, the Tax Court was not impressed with the IRS’s evidence in the case, though it did find the taxpayer liable for the general accuracy related penalty.

In Revenue Procedure 2015-31 the IRS has made permanent, with some changes, the pilot program it created in Revenue Procedure 2014-32 for a late reporting relief program for certain retirement plans not eligible to participate in the Department of Labor’s Delinquent Filer Voluntary Compliance (“DFVC”) program.  Generally these plans are “one-participant” and foreign plans.

Under Reg. §301.7701-3(c)(1)(iv) an LLC that makes an election to change its classification may not, without IRS approval, change its classification again within 60 months of that change of classification.  However, this rule does not apply to the entity’s initial classification.  In that case, the organization could change its classification to an acceptable alternative at any time without IRS approval, even if that was less than 60 months after the initial classification.

In PLR 201622020 the situation involved an LLC that was formed but which sat dormant from its formation until it finally acquired assets at a later date.  This LLC now wished to be taxed as an organization taxed as a corporation, but asked the IRS to allow it to treat this election as an initial election and not a change of classification that would trigger the 60 month waiting period before a change of classification could be undertaken without IRS approval.

As a tax-exempt organization it’s a bad situation to lose your exemption for a failure to file the required tax forms for three consecutive years.  But, as the association that requested reinstatement of their status as a §501(c)(6) organization discovered in PLR 201622033, it’s worse to discover that the IRS believes you never really were qualified to be treated as such an organization.

Whether or not certain payments made to employees who participated in an employer’s wellness program was discussed in CCA 201622031.

The memorandum was looking at programs that attempted to differentiate themselves from the program described in Revenue Ruling 2002-3.

In Revenue Procedure 2016-32 the IRS announced a reduction in the 2016 user fee for certain exempt organization applications effective July 1, 2016.

The fee for organizations filing Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code will be reduced from $400 to $275. 

Since the Supreme Court had changed how the validity of a regulation was determined in the case of Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011), the taxpayer in Santos v. Commissioner, TC Memo 2016-100 decided to challenge a regulation on the books since 1967.

Mr. Santos, an enrolled agent with a master’s degree in taxation, decided to attend law school, graduating in 2011 and was admitted to practice law in the state of California in 2014.  Mr. Santos sought to claim a deduction for the $20,275 he had paid in 2010 for tuition and fees in attending law school.

Treaties between the United States and other countries provide for special rules that will potentially override the standard tax treatment found in the Internal Revenue Code.  The taxpayer in the case of Cole v. Commissioner, TC Summary Opinion 2016-22 believed he had found a provision that would remove from tax the gain on sale of stock he had disposed of following becoming a permanent resident of Israel.

Mr. Cole in the year in question was both a United States citizen and a permanent resident of Israel.  He had purchased shares of Neogen Corporation prior to moving to Israel.  After moving to Israel he sold those shares for a net gain of $114,947.

In the case of Terry v. Commissioner, TC Memo 2016-88, the taxpayer was disputing paying $550 in taxes that represented the increase in taxes shown as due on the amended return he had filed. 

That might seem usual, since Mr. Terry had admitted he had understated his 2011 taxes by $550.  However, Mr., Terry pointed out that his original return had shown a refund due of $1,745 and, in fact, the IRS had not yet sent those funds to him or applied them against taxes for another year.

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.