Filing partnership returns late now subjects the partnership to significant penalties.  Under IRC §6103 the partnership is penalized $195 per month per partner, up to a maximum of ten months, for each month or fraction of a month the partnership return is filed after the due date (including extensions actually granted).  However, no penalty applies if the partnership can show the failure is due to reasonable cause. [IRC §6698(a)]

In the case of In re: Refco Public Community Pool LP, Banktruptcy Court for the District of Delaware, Case No. 14-11216, 118 AFTR 2d ¶ 2016-5085 the bankruptcy plan administrator challenged the IRS’s claim for late filing penalties of $3,662,000 for the years 2005-2007.

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Delores Gragg in 2006 and 2007 was a licensed real estate agent who had sufficient hours in the real estate activity to be treated as a real estate professional under IRC §469(c)(7).  Based on that qualification alone, she and her husband took the position that she should be allowed to be treated as materially participating in the rentals and thus all losses be allowed in full on their returns without regard to Section 469.

However the Ninth Circuit Court of Appeals, considering this “automatic material participation” argument for the first time, rejected this view in the case of Gragg v. United States, Case No. 14-16053, CA9 affirming a decision of the U.S. District Court of Northern California.

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Since its original enactment, the like kind exchange provisions IRC §1031 has been allowed to apply to transactions for which there is not a direct exchange between parties of property.   Initially such transactions were expanded, first by judicial holdings and then explicitly by Congress [IRC §1031(a)(3)] to include deferred “forward” exchanges where the taxpayer does not simultaneously receive the replacement property from the party that acquires the relinquished property, but rather, with the use a qualified intermediary, acquires property from another party with the proceeds of the sale.

Later case law allowed for reverse deferred exchanges (referred to as reverse Starker exchanges in reference to a major Ninth Circuit case on the original forward exchanges) where the replacement property is acquired first and then the relinquished property is later sold.

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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.