The taxpayer in the case of Exelon Corp. et al. v. Commissioner, 147 T.C. No. 9 had a major gain that it did not want to pay current tax on—almost $1.6 billion.  The gain would occur when an acquired entity disposed of its fossil fuel power plants. 

The taxpayer was approached with a potential solution—engage in a purported §1031 exchange.  The taxpayer acquired power plants from tax exempt public utility companies as the claimed replacement property, plants which they then leased back to those entities.  Referred to as a “sale in, lease out” (SILO) transaction, it was a packaged transaction sold to the taxpayer.

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An often contentious issue for taxpayers who have real estate is determining if a piece of property does or does not represent a capital asset when it is sold.  The case of Boree v. Commissioner, 118 AFTR 2d ¶ 2016­5207, CA11, No.14-15149 posed just such an issue.

There is no question that Mr. Boree initially acquired the land in 2002 with the intent to develop the land and sell the property as over 100 lots.  Such a plan will cause the lots to be treated as property held for sale in the ordinary course of business.

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Determination of what is alimony is known to be a contentious issue in taxes, especially because Congress in 1984 created a full independent federal definition by which payments are tested for classification as tax alimony, regardless of the intent of the parties or what state law may call a payment.  In the case of Leslie v. Commissioner, TC Memo 2016-171 the payments involved amount to $5,568,200.

These payments represented 10% of the fee the taxpayer’s former spouse received for his work as an attorney in litigation related to the failure of Enron.  There were three payments made, one for $4,000,000 in November of 2008, one for $1,560,000 in December of 2009 and a final payment of $8,200 made in June of 2010.

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The taxpayer in White v. Commissioner, TC Memo 2016-167 looked back to a 1919 IRS ruling in support of his position that his payments from a church was not taxable to him due to having taken a vow of poverty.  In what isa citation form that most taxpayer likely have never seen, the taxpayer cited O.D. 119, 1919-1 CB 82.

As the Tax Court noted:

In part, O.D. 119 stated: “A clergyman is not liable for any income tax on the amount received by him during the year from the parish of which he is in charge, provided that he turns over to the religious order of which he is a member, all the money received in excess of his actual living expenses, on account of the vow of poverty which he has taken.”

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The private inurement prohibition applies to an exempt organization, even if that organization is clearly serving an individual that would otherwise been a reasonable recipient of benefits from a charity.  The IRS pointed that out in denying an application for tax exempt status in PLR 201637017.

Private inurement is an issue for many potential organizations that a client may be motivated to form, as often a personal experience and a problem of a specific individual will be the genesis of the idea to form the organization.  But the regulations under §501(c)(3) provide a strict prohibition on “private inurement” as the IRS points out in the ruling:

Treas. Reg. Section 1.501(c)(3)-1(c)(2) states regarding the distribution of earnings that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

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An IRS memorandum discusses the potential facts that would and would not be relevant in determining if a taxpayer can have failure to file and failure to pay penalties abated for reasonable cause (CCA 201637012).

In this case a taxpayer had appointed a person to act under a durable power of attorney.  She later filed her tax return late for a year, subjecting her to failure to pay and failure to file penalties.  However, the holder of the power of attorney petitioned a state court for appointment of an Emergency Guardian and Conservator for the taxpayer because the power holder believed she suffered from dementia.  A court found that the taxpayer was an “incapacitated person.”

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A majority of a Tenth Circuit panel ruled, in the case of McNeill v. United States, CA10, No. 15-8095, that the managing partner in a TEFRA partnership was not barred, as a matter of law, from raising a reasonable cause/good faith penalty defense in his individual proceeding.  That was despite the fact that the IRS had rejected the defense when raised by the partnership, with Mr. McNeill as the Tax Matters Partner, in the examination of the partnership.

The District Court had dismissed the case, holding that Mr. McNeill was barred from raising this defense by TEFRA.  The Court did not use any judicial doctrine to bar this matter (such as res judicata, holding the matter had already been litigated), but rather found that TEFRA itself barred the defense.

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The taxpayers in the case of Wu v. United States, 118 AFTR 2d ¶2016-5154, CA 7 the taxpayers recognized they had made an error and made excess contributions to their IRAs in 2007, failed to grasp the error of their position for a number of years, and then withdrew the excess funds and earnings in 2010.  The taxpayers recognized that they owed an excess contribution tax of 6% (IRC §4973) for each year there remained an excess contribution.

But what they disputed was whether that excess contributions tax of 6% should apply to 2009 since they had withdrawn the funds by the unextended due date of their 2009 income tax return.  IRC §4973(b) provides that “any contribution which is distributed from the individual retirement account or the individual retirement annuity in a distribution to which section 408(d)(4) applies shall be treated as an amount not contributed.”

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A taxpayer that ended up buying back his S corporation stock from a corporation he had sold it to found the IRS was not willing to waive the requirement under IRC §1362(g) that the corporation would not be allowed to re-elect S status for five years (PLR 201636033).

In this case the individual, holder of 100% of the S corporation’s stock, sold the stock to another corporation.  The transfer of the shares to the corporation resulted in a termination of the corporation’s S status at that time.  Less than five years later the shareholder bought the stock back from the buyer—but now had a C corporation.

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How activities are grouped can have a major impact on a taxpayer’s ultimate tax liability under the passive activity regulations provided under IRC §469.  Generally, a proper grouping is governed by Reg. §1.469-4(c)(2).

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Following the Bobrow v. Commissioner (TC Memo 2014-21) decision, taxpayers discovered that, despite what the applicable IRS publication said, that once a taxpayer had completed a rollover from an IRA account the taxpayer had to wait another year to make a second rollover—even if that rollover came from a different IRA account.

But traditional IRAs aren’t the only type of tax advantaged account for which rollovers are allowed—Coverdell Education Savings Accounts (the accounts originally known as Education IRAs) are also eligible for rollover treatment found at IRC §530(d)(5) that is very similar to the language found at §408(d)(3)(B) the court opined on in the Bobrow case.  So do the same restrictions apply?

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Final regulations have been issued by the IRS (TD 9785) revising regulations under IRC §7701 for the definitions related to marriage as they apply to the Internal Revenue Code.  These regulations take into account the Supreme Court’s holdings on same sex marriage found in the cases of Obergefell v. Hodges (135 S. Ct. 2584 (2015)) and  Windsor v. United States (133 S. Ct. 2675 (2013)).

The final regulations generally reflect the revisions found in the proposed regulations (REG-148998-13) issued in October 2015.  Rather than revised the language throughout the regulations to remove the terms “husband” and “wife” the IRS decided to issue a broad clarifying definition in Reg. §301.7701-18.

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