The IRS finalized regulations (TD 9771) that were issued in proposed form back in 2011(Proposed Reg. §1.108-9, REG-154159-09,  4/13/11) regarding cancellation of debt relief provisions for bankruptcy and insolvency found in IRC §108 as they relate to grantor trusts and disregarded entities (generally single member LLCs).

The IRS had indicated when the proposed regulations were issued that some taxpayers had attempted to interpret the provisions granting relief to taxpayers who had a discharge of indebtedness involving insolvency or bankruptcy as applying at the disregarded entity level rather than at the level of the taxpayer treated as the owner of the disregarded entity.

The tax laws are complicated and, at times, the results are not what a taxpayer might like. The combination of these two facts cause some taxpayers to start “opinion shopping” when they receive an answer they don’t like. In the case of Mallory v. Commissioner, TC Memo 2016-110, the taxpayers ended up casting about for someone who would tell them what they wanted to hear.

The Mallories had purchased a single premium variable life insurance policy on Mr. Mallory for $87,500 in 1987. The policy provided that Mr. Mallory could borrow from the carrier and the loan would be secured by the policy, with any unpaid interest on the loan being added to the loan amount. Beginning in 1991 Mr. Mallory took advantage of this “tax free” source of funds, eventually taking out cash of over $133,000 by the end of 2001.

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.