Just in time for the program to get underway, the IRS provided details on the rules for maintaining Certified Professional Employer Organization (CPEO) status under IRC §7705 in Revenue Procedure 2017-14.

If a business uses a CPEO to handle its payroll for a qualifying worksite, the business will not be held liable for the unpaid payroll taxes (including trust fund taxes) should the CPEO fail to properly make the payments when due.  That is an exception to the general rule that continued to hold the employer liable for such taxes even if, unbeknownst to the employer, the payroll service had not paid the taxes—even if the payroll had been involved in a scheme to simply steal the funds from the employer.

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A tax that many CPAs in practice may not have run into recently was the subject of Chief Counsel Advice 201653017—the accumulated earnings tax imposed by IRC §531.  While the tax technically applies to any C corporation, in reality it is only asserted against small privately held C corporations.  Since small, privately held C corporations have been rarely seen in most practices since the passage of the Tax Reform Act of 1986 and the repeal of the General Utilities doctrine, the IRS has not had many chances to assert this tax and many CPAs have never seen the tax asserted.

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Nontax rules often require that those performing certain services (such as selling investment products) be licensed to do so.  Quite often that license is held in the name of an individual.  In the case of Fleischer v. Commissioner, TC Memo 2016-238 a person in just such a position wanted to form an S corporation in which to conduct his investment advisory business in order to reduce his exposure to self-employment taxes.

When he did so he did not attempt to have the corporation he formed become licensed to perform the services in question.  He already had entered into an agreement with Linsco/Private Ledger Financial Services (LPL) as a representative prior to forming the corporation.  He did not have his contract with LPL revised to recognize his S corporation, Fleischer Wealth Plan (FWP), although he began treating the income he received from LPL as corporate income.

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The IRS adopted final regulations (TD 9806) on determining the ownership of a passive foreign investment company (PFIC), reporting requirements for shareholders of PFICs to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund and on an exception to the requirement for certain shareholders to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

These regulations adopt proposed regulations that were issued in December of 2013 with certain changes.  As well, the related temporary regulations are removed.  The changes are effective December 28, 2016.

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In PLR 201652029 the IRS was asked to grant an organization a tax exemption under §501(c)(3).  The organization was one formed to grant annual scholarships to graduating seniors of a particular high school who met certain criteria.

Initially this seems like a reasonable request since the organization’s purpose was to further education, and it was going to grant scholarships based on merit-based criteria.  But it turns out that criteria caught the IRS’s attention when the IRS looked at applying those criteria to what had actually taken place in the past.

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In Notice 2017-10 the IRS has identified certain syndicated conservation easement transactions as listed transactions for purposes of Reg. §1.6011-4(b)(2) and IRC §§6011 and 6112.

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Merely being a guarantor of a rather large outstanding partnership debt was not sufficient to allow a deduction for losses flowing through from a partnership in the case of Hargis v. Commissioner, TC Memo 2016-232.

The case involved a question of proving basis both in S corporations in which the husband was a shareholder and basis in LLCs taxed as partnerships in which the wife was a partner.  The S corporation issue was fairly simple—the debts did not flow directly from the husband to the S corporation, so there was no basis provided by the debt.

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The IRS has extended a special eligibility rule for taxpayers making an automatic change of accounting method by one year in Notice 2017-6. 

Taxpayers were required to make various changes in their accounting methods to comply with the revised tangible property regulations that took effect in 2014.  However, some of these taxpayers have discovered they need to make additional changes to comply with those regulations they had not noticed previously.

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The tax law may be “unfair and unjust” but that doesn’t allow a taxpayer to ignore the law to arrive at what he may believe is a more just result.  That’s the key lesson the case of Walter S. Mack Jr. et ux. v. Commissioner, T.C. Memo. 2016-229 provides.

Mr. Mack was a partner in a law firm.  He received K-1s from two law firm related partnerships for 2011 that showed total income of $479,473.  However, he only reported income of $75,000 from the partnerships on his Form 1040 for that year. 

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Organizations that wish to qualify as a tax-exempt organization under IRC §501(c)(3) must serve a public rather than private interest pursuant to Reg. §1.501(c)(3)-1(d)(ii).  That issue tripped the application of the organization that is the subject of PLR 201651016.

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Charitable contributions are complicated with regard to trusts.  In Chief Counsel Advice 201651013 the question involved a modification of a trust that allowed the distribution of trust assets to a charity. 

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It has taken awhile (twenty-four years to be exact), but Congress enacted a relief provision to deal with the fact that the Department of Defense had been withholding taxes on lump-sum severance payments to combat-injured veterans despite that income being found to be excludable from taxable income under IRC §104(b)(3).  The bill, the “Combat-Injured Veterans Tax Fairness Act of 2016” H.R. 5015 was signed into law on December 16.

In the case of St. Clair v. United States, 778 F. Supp. 894 (E.D. Va 1991) these one-time lump sum severance payments were held to be excludable from taxable income.  However, per a Tax Analysts news article describing the bill, the Defense Finance and Accounting Service said an error with its payment system caused taxes to be improperly withheld from 14,000 veterans receiving these payments.

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In the case of Community Education Foundation v. Commissioner, T.C. Memo. 2016-223 the taxpayer was contesting the IRS’s revocation of the organization’s tax exempt status under IRC §501(c)(3).  The IRS was not alleging that the organization carried on something that wasn’t in line with its exempt purpose, but rather simply that the organization was actually carrying on any purpose.

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The IRS has published on its website a notice reminding businesses of the changes in due dates for information returns this year along with more significant penalties (Increase in Information Return Penalties, IRS Website).

Last year, as part of the Protecting Americans Against Tax Hikes Act (PATH), Congress moved forward the due date for certain information returns and increased the penalties applicable to such returns.  To assist the IRS in combating refund fraud, the due date for selected information returns to be filed with the government is moved forward to January 31.

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A construction contract requiring grading and soil compaction of the area for building foundations for houses was found to qualify for completed contract treatment in Technical Advice Memorandum 201650014.

Under IRC §460, the general rule is that long term construction contracts must be reported under the percentage of completion method (PCM) for tax purposes.  However, under IRC §460(e)(1)(A) a home construction contract does not require the use of PCM and the contractor may instead use the completed contract method of accounting.

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In Chief Counsel Email Advice 201650017 the IRS confirmed what had been strongly hinted at in private letter rulings issued that allowed late portability elections under IRC §2010—that relief is not available to estates if a Form 706 was otherwise required to be filed but the estate did not do so.

The IRS has traditionally taken the position that its authority to grant taxpayers relief to make elections after their due date is limited to elections whose date is set by regulations.  If a date is set by statute, the IRS position is that the agency lacks the authority to grant relief.

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