The IRS has issued guidance on how it deal with the new rules on Individual Taxpayer Identification Numbers (ITINs) that were contained in the Protecting Americans Against Tax Hikes Act of 2015 (PATH) in Notice 2016-48.

The IRS is authorized under IRC §6109 to issue identification numbers for taxpayers and request information from such taxpayers.  Generally these ITINs are issued to taxpayers who are not eligible to receive a social security number (SSN) and are used for tax matters in lieu of the social security number.

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This article is a revision of the article originally published in June to take into account the revisions later made by Notice 2016-49 to the requirements for the program.

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.

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The IRS has released temporary regulations (TD 9780) implementing the revised partnership examination procedures adopted as part of the Bipartisan Budget Reconciliation Act of 2016 (BBA).  While the rules are not mandatory until years beginning on or after January 1, 2018, partnerships may elect to come under the rules for tax years beginning after November 2, 2015 and before January 1, 2018. [Section 1101(g)(4) of the BBA]

The proposed regulations are meant to provide information on making the election to come under the rules early.

The IRS has issued proposed regulations governing limiting the use of certain liquidation restrictions in reducing the value of property for gift and estate purposes in REG-163113-02.  These regulations attempt to breathe life back into IRC §2704 that was part of the “Chapter 14” provisions Congress added in 1990s.

The “Chapter 14” provisions were Congress’s attempt in 1990 to eliminate the use of what they viewed as “artificial” valuation discounts by taxpayers in estate planning—effectively looking at items such as family limited partnerships.  However the law and the implementing regulations proved rather ineffective in practice, as planners, taxpayers and state legislatures combined to make the provisions effectively toothless.

One of the trickier areas to understand is when a taxpayer may or may not claim a trade or business deduction for education related expenses. In the case of Kopaigora v. Commissioner, TC Summary Opinion 2016-35 the IRS believed the taxpayer had not incurred deductible education expenses—but the Tax Court disagreed.

While ordinary and necessary expenses related to a trade or business are generally deductible under IRC §162, education expenses pose a couple of concerns. First, they must be expenses incurred once one is actually engaged in the trade or business in question (otherwise they won’t meet the general §162 requirements) and they cannot be personal in nature (which would run afoul of the prohibition of deducting such expenses found in IRC §262).

We revisit a situation with an employee of the International Monetary Fund and self-employment taxes in the case of Sisson v. Commissioner, TC Memo 2016-143—but in this case the employee is not facing confirmation of a nomination for U.S. Treasury Secretary.

Mr. Sission, like former Treasury Secretary Timothy Geither, was an employee of the International Monetary Fund—and even though he is an employee, his payments for services as subject to self-employment tax rather than FICA and Medicare tax. 

In Action on Decision 2016-02 the IRS decided to acquiesce in the result in the case of Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), rev'g Sophy v. Commissioner, 138 T.C. 204 (2012).

The original decision was reported last year on this site (Home Mortgage Debt Amount Limitation Applies on a Per Residence, and Not Per Taxpayer, Basis per Tax Court, But Ninth Circuit Overrules and States It Is a Per Taxpayer Limit).  That case had looked at whether unmarried individuals who jointly owned a residence each were allowed to claim home mortgage interest deductions on up to $1.1 million of debt, or whether that $1.1 million limitation applied on a per residence basis.

The IRS has released a draft copy of the 2016 Form 8867, Preparer’s Due Diligence Checklist, for use the preparing 2016 returns.  One key difference is that the form now applies not only when a preparer is preparing a return claiming the Earned Income Tax Credit, but will also apply in 2016 to any returns claiming the Child Tax Credit or the American Opportunity Tax Credit, expanded coverage mandated by the Protecting Americans from Tax Hikes Act of 2015.

The form consists of a checklist of due diligence steps required to be undertaken by a preparer when preparing a return where the taxpayer claims eligibility for one of these credits.  A preparer who fails to comply with these requirements risks a $510 penalty for each failure. [IRC §6695]

The case of Arriondo v. United States, USDC SD Texas, Case No. 4:14-cv-02734 illustrates the dangers posed even to someone without an ownership interest in the company for unpaid withholding taxes under IRC §6672. In this case a taxpayer who was the CEO, president, treasurer and director of a company was found liable for the unpaid trust fund taxes due to a failure to inquire about the possibility of unpaid payroll taxes once he became aware the company was in financial difficulty and for paying other bills (including the salaries of employees) during the short period from the date he became aware of the unpaid taxes until the company filed bankruptcy.

In the summer of 2015 the IRS published proposed regulations (REG-135524-14) that were to remove the requirement at attach a copy of a §83(b) election with the service provider’s return.  The IRS has now issued those regulations in final form (TD 9779).  The regulations modify Reg. §1.83-2(c) to remove the requirement that a copy of the election be submitted with the service provider’s tax return for the year in question.

The proposed regulations had provided that taxpayers may elect to rely on these regulations for any property transferred on or after January 1, 2015 pending the issuance of final regulations.

The question of which taxpayer may claim a deduction under §199 when it can be argued that one contracted with the other to perform a “qualified activity” can become complicated. In Chief Counsel Advice 201630015 the question arose about whether a professional sports league might be eligible to claim the deduction for a “qualified film” for game broadcasts conducted by a network under its contract.

The IRS argued before the Tax Court that in order to be treated as incurring “geological and geophysical expenses” that are eligible for preferential treatment under IRC §167(h) the taxpayer must actually own oil and gas interests. However the Tax Court did not accept that view, allowing the treatment to the taxpayer in the case of CGG Americas, Inc. v. Commissioner, 147 TC No. 2.vv

The Seventh Circuit Court of Appeals decided that the IRS had not abused its discretion in denying an attorney’s request for abatement of interest, reversing the decision of the Tax Court in the case of King v. Commissioner, Case No. 15-2439, CA 7, 2016 TNT 141-12.

The taxpayer in this case had asked for an abatement of interest related to employment tax liabilities after the IRS had initially indicated they would grant him an installment agreement to pay his unpaid payroll taxes, but later determined that he was not eligible for such an agreement. The taxpayer claimed that had he known the IRS would not grant an installment payment plan he would have paid the balance earlier, avoiding the interest from that date until he actually paid the tax.

Field Attorney Advice 20162901F points out that even adjustments that take the position that a purported TEFRA partnership was not actually a partnership or that certain individuals weren’t partners still has the statute of limitations for tax against the partners potentially lengthened by the TEFRA partnership statute of limitations found at IRC §6229.

In the case of Tricarichi v. Commissioner, T.C. Memo. 2016-132 the Tax Court was asked to decide whether Ohio state law or federal law applied to the computation of interest owed for an individual found to have transferee liability under federal tax law. In an earlier case (T. C. Memo 2015-201) the Tax Court had found Michael liable for taxes due following a “Midco” transaction.

Roughly summarized, a “Midco” transaction involved the sale of a corporation owned by a shareholder who would sell his stock to a third party. In turn, that party would sell the assets of the corporation and use those assets to finance the purchase from Michael, leaving little or no assets in the corporation to pay the resulting corporate income tax. While the buyers claimed to have a way to offset that gain, the Courts have found in a number of cases that the shareholder should have realized the result was too good to be true and imposed transferee liability when the “offset” is later found invalid and a large corporate tax liability exists for a corporation with no remaining assets. Michael was one of those found to have such liability.