At first glance the payments made by the taxpayer in the case of Quintal v. Commissioner, TC Summary Opinion 2017-3 would appear to be deductible alimony—but last minute changes made to the divorce documents would end up changing the nature of the payments in the view of the Court.

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In the case of United States v. Liddle, 119 AFTR 2d ¶2017-381 (USDC, ND CA) the CEO of two different companies that each had failed to remit trust fund taxes argued that while he was clearly a responsible person for purposes of the trust fund penalty, he should not be liable because he had acted with reasonable cause.

Some Circuit Courts of Appeal have taken the position that a responsible person may be relieved of liability for the trust fund recovery penalty under IRC §6672 based on a reasonable cause defense.

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Normally employees who have employer paid health insurance (or who pay for such insurance via §125 cafeteria plans) do not include either the premiums nor the medical costs paid by the policy as income.  But in Chief Counsel Advice 201703013 we are reminded that this treatment will not apply for payments from fixed indemnity health plans.

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While most practitioners likely think of the tax percentage of completion method of accounting as something only affecting construction contractors, in fact such provisions can impact other types of contracts under certain conditions. In the case of Basic Engineering, Inc. v. Commissioner, TC Memo 2017-26 the key issue was whether the contract the taxpayer had was really not a construction contract and, if not, whether it would still be required to be accounted for under the percentage of completion method of accounting for tax purposes.

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Edward Flume was looking at penalties for failing to file Forms 5471 from 2001 through 2009, with the total penalties the IRS was looking to collect over that time amounting to $110,000.  In the case of Flume v. Commissioner, TC Memo 2017-21 the taxpayer argued as one defense that he should be excused from any penalties based on reasonable cause for reliance on a tax professional.

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The IRS had released proposed regulations (REG-136118-15) that explain how the IRS proposes to implement the centralized partnership audit regime adopted as part of the Bipartisan Budget Act of 2015.  The provisions contained in that bill created a new audit arrangement for partnerships which, by default, will have a tax imposed at the end of an audit on the partnership to take into account any adjustments that would have increased partners’ taxes had the items been reported on the original return as is being proposed in the audit.

The new centralized regime takes effect for tax years beginning on or after January 1, 2017, though partnerships under exam for years beginning after November 2, 2015 and before January 1, 2018 may elect to have these provision apply.

A case that presented the reverse situation that the Tax Court decided in the 2011 case of Renkemeyer, Campbell & Weaver, LLP v. Commissioner on the issue of the self-employment tax liabilities of members of LLC was decided in the case of Hardy v. Commissioner, TC Memo 2017-16.

The case involved a surgeon that had purchased a 12.5% interest in an LLC that operated a surgery center.  The surgeon did not actively participate in the management or operation of the center, but only performed a minority of his surgeries in the center, on similar terms as he worked in centers and hospitals in which he had no ownership interest.

(And, yes, this is the same case as covered in the other entry I wrote this day, but dealing with an additional issue.)

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A Technical Advice Memorandum issued by the IRS after the audit ended was cited by the Tax Court to the IRS’s detriment in the case of Hardy v. Commissioner, TC Memo 2017-16. The issue involved was whether a surgeon materially participated in a surgical center in which he owned a minority interest—with the IRS at court pushing for finding that the surgeon had to combine that activity with his regular medical practice for purpose of determining material participation.

The surgeon this case is a plastic surgeon, specializing in pediatric reconstructive surgery, who operated on patients in his office and in some local hospitals.  The surgery must take place outside of his office if the surgery requires general anesthesia.  The doctor was finding that at times he was having difficulty obtaining space at the local hospitals for his procedures due to a limited number of available operating rooms.

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In AM 2017-011 the IRS National Office was asked whether the IRS should enter into closing agreements with certain entities that discovered they had not included nonqualified deferred compensation as wages subject to FICA/Medicare tax when there was no substantial risk of forfeiture of the rights to the amount.

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In response to a letter ruling request, the IRS ruled in PLR 201701002 that the income to be received by a private operating foundation were related to the organization’s exempt purpose.  Thus, the foundation would not be subject to either the unrelated business income tax nor the excess business holdings tax.

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In Notice 2017-3 the IRS has set the maximum values for 2017 for employer provided vehicles under which the cents per mile method (Reg. §1.61-21(e)) or fleet-average valuation rule (Reg. §1.61-21(d)) may apply.

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The IRS continues its apparent push to get out of the business of issuing closing letters for estates by issuing guidance in Notice 2017-12 that states that estates and their authorized representatives can request an account transcript in lieu of a closing to confirm that an IRS examination of the estate is completed and closed.

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The IRS has provided information on the de minimis error safe harbor information reporting provisions added by the PATH Act in 2015 in Notice 2017-9. 

The PATH Act added provisions (found in IRC §§6721 and 6722) that remove penalties for not providing revised returns to the IRS and taxpayers.

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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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