Another couple discovered that the documentation rules for charitable contributions are very strict in the case of Haag v. Commissioner, TC Summary Opinion 2016-29. This case dealt with both cash and noncash contributions, along with other deduction items the IRS disputed. But our key matter of interest will be for the charitable contributions, since the strict documentation rules are very difficult for taxpayers to comply with, but the Courts feel compelled to enforce those rules since Congress passed them.

The issue involved both cash and noncash contributions. The cash contributions related to the standard situation clients often assert in making a certain amount of weekly contributions to a church. Though we are not told so in this case, quite often the taxpayer will claim they put cash into an offering plate.

The IRS has issued proposed regulations dealing with deferred compensation arrangements of state and local governments or tax exempt organizations subject to IRC §457 in REG-147196-07. The regulations deal with numerous issues related to such programs, but most interest is concentrated on how the rules apply “substantial risk of forfeiture” for programs subject to IRC §457(f).

457 plans are divided into “eligible” plans (§457(b) plans) and ineligible plans (§457(f) plans). Eligible plans work much like traditional qualified retirement plans in terms of when an employee is taxed on the amounts, taking place only when the amounts are distributed to the employee. However, participants in §457(f) plans pay tax when the amounts are no longer subject to a substantial risk of forfeiture, regardless of when the participant will actually receive any funds from the plan.

Not heeding the advice of both an attorney and CPA firm proved costly to the taxpayers in the case of the Estate of Richard L. Marshall et al. v. Commissioner, T.C. Memo. 2016-119. The case involved a situation where the taxpayers were shareholders in a corporation whose major business activity became the pursuit of a claim against the U.S. Bureau of Reclamation. The corporation had previously been involved in construction jobs, but that activity ended when one of key shareholders was permanently disabled following a stroke.

The IRS has extended the time periods provided originally in Notice 2016-22 (see earlier coverage in Procedures for Obtaining Work Opportunity Credit Certifications for 2015 and Early 2016 Hires Outlined by IRS) to deal with the extension of the Work Opportunity Credit passed by Congress as part of the Protecting Americans from Tax Hikes Act of 2015.

Now the relief applies to employees hired on or before August 31, 2016 so long as the application is submitted on or before September 28, 2016.

The Tax Court in the case of Finnegan v. Commissioner, TC Memo 2016-118 a question the court had dealt with before in the 2007 case of Allen v. Commissioner, 128 TC No. 4. If the taxpayer hires a “less than fully ethical” tax preparer that, in an effort to gain and retain business, prepares returns that fraudulently understate the taxpayer’s tax, can the IRS use the fraud rule to argue that the statute of limitations on that return never closes—even if the taxpayer was never aware of the fraudulent nature of the return?

In Allen the Tax Court held that the answer was yes—a fraudulent return keeps the statute open even if the taxpayer him/herself did not have the required fraudulent intent in filing the return to evade the payment of tax. So you’d expect this would be a simple question for the Court to answer—but in the interim a federal appeals court in the case of BASR Partnership v. United States, CA FC (2015), 116 AFTR 2d ¶2015-5100 had rejected that view in dealing with flow through items from a partnership return where there had existed fraudulent intent at the partnership level.

The IRS discovered that an S corporation had been “holding back” a large number of checks received in the fourth quarter of its tax year and not depositing them until January of the following year and, not surprisingly being on the cash basis of accounting, not reporting that income until it was deposited in the bank account. Given that the income was constructively received in the earlier year, the IRS issued notices of deficiency that required the taxpayers to pick up that income in the earlier year.

However while the IRS removed the January deposits that were from checks received in the prior year in two of the three years for which it issued notices, the IRS left the January deposits in gross receipts for the first year under exam. The taxpayers in Squeri, et al v. Commissioner, TC Memo 2016-116 protested that the IRS could not do that.

Transfer of property incident to a divorce that is covered by IRC §1041 is a nonrecognition transaction, with each spouse getting a carryover basis, even if the transaction otherwise appears to be a sale. The taxpayer in the case of Belot v. Commissioner, TC Memo 2016-113 argued that this nonrecognition provision should apply in his case.

IRC §1041(a) provides:

(a) General rule

No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

PLR 201624003 reminds us that when it comes to S corporations, the “check the box” regulations can be more complicated than they first appear.

Under the check the box provisions found at Reg. §301.7701-3 an entity that is not automatically classified as a corporation is allowed to elect whether to be treated as a corporation or, if it has one owner, a disregarded entity or, with two or more owners, a partnership. Since, once an entity elects to be treated as a corporation under check the box it is treated as a corporation for the entire IRC (IRC §7701 applies “for purposes of this title” which means the entire Internal Revenue Code found at Title 26 of the United States Code), if the entity is otherwise eligible it may elect to be treated as an S corporation.

The Court of Appeals for the Federal Circuit overturned a decision of the Federal Court of Claims in the case of Nacchio et ux v. Commissioner, Nos. 2015-5114, 2015-5115 and held that the taxpayer was barred from either claiming a credit under §1341 (the claim of right section) or a deduction under IRC §165 for repayment of gains received due to insider trading.

He had paid tax on a gain of over $44 million on the sale of stock of a public company of which he was the CEO. He was indicated on charges of insider trading with regard to these sales and eventually was convicted of the charges. In addition to paying a $19 million fine he was required to forfeit the net proceeds of his insider trading on which he had earlier paid tax.

In CCA 201624021 the IRS considered whether the success-based fee safe harbor election under Revenue Procedure 2011-29 is available to a taxpayer to allocate success-based fees between actions that facilitate a transaction (expenses which must be capitalized) and those that do not (and may be currently be expensed) when the taxpayer elects to treat a stock sale as an asset sale under IRC §338(h)(10).

The election under IRC §338(h)(10) treats an acquisition of the stock of a target corporation as the purchase of the underlying assets from the acquired corporation, with the acquired corporation recognizing a gain immediately before the transaction. 

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).