The non-profit corporation in United States v. Detroit Medical Center, CA6, Case No. 15-1279, received a refund of payroll taxes along with interest on that overpayment from the IRS.  However, the organization was dismayed to find that it had been interest at a lower rate than it had expected to be paid.

The IRS noted the group of hospitals was organized as a corporation under corporate law and paid the lower rate of interest provided in IRC §6621(a)(1) for a “large corporation.” 

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As we are all aware, the Internal Revenue Code imposes penalties for the late filing of a tax return (IRC §6651(a)(1)) as well as for the late payment of taxes due on a return (IRC §6651(a)(2)).  The penalty does not apply, though, in either case if the failure is due to “reasonable cause and not due to willful neglect.”  In the case of Rogers v. Commissioner; T.C. Memo. 2016-152 the Tax Court found that the taxpayer had such reasonable cause when she mistakenly believed she was not required to file a return, and such a mistaken belief was found to be reasonable in her case.

As the Court notes in this case, “reasonable cause” is inherently very much a facts and circumstances situation and merely believing no return is required to be filed is not sufficient in and of itself—rather, the taxpayer must have arrived at this conclusion via a good faith effort to determine his/her responsibilities under the tax law.  But the taxpayer’s overall situation and their level of sophistication are taken into account to see if the taxpayer’s conduct meets the reasonableness standard.

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In order to claim deductions related to a trade or business, the taxpayer must be able to show not just that the expenditures were incurred by the taxpayer for a legitimate trade or business reason, but also that the trade or business in question has actually begun operation.  The IRS was not disputing that the taxpayer had an honest intent to operate a trade or business for which she incurred expenses, but rather that the business had not commenced operations in the case of Tizard v. Commissioner, T.C. Summ. Op. 2016-42.

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In an email, the Chief Counsel’s office considered the employment status of an adult companion sitter (Chief Counsel Email 201633034).  The email was in regard to information to be contained in training materials, likely for either IRS agents or programs like VITA where volunteer preparers would be trained.

As the proposed training materials explain:

Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled.

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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).