The IRS has yet again bailed out the Congress after a new law imposed a deadline for taking action that was simply unworkable (in this case, for calendar year plans 90 days after the law was enacted).  In Notice 2017-20 the IRS has granted relief from notices that were required to be given to employees eligible to be covered by a qualified small employer health reimbursement arrangement (QSEHRA), a requirement added by the 21st Century Cures Act that enacted December 13, 2016.

An employer with fewer than 50 employees who does not offer group plan to any employees is eligible to establish a qualified small employer health reimbursement arrangement. [IRC §9831(d)]  However, an employer establishing such an arrangement is required to give written notice to all eligible employees at least 90 days before the beginning of a year for which a QSEHRA is provided.  [IRC §9831(d)(4)]

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The IRS and the taxpayer in the case of Estate of Kollsman v. Commissioner, TC Memo 2017-40 had wildly different values that each ascribed to two paintings.  In the view of the estate the paintings in question were valued at $500,000 and $100,000 respectively.  But the IRS position was that the paintings were far more valuable, arguing at trial that the proper values were $2,100,000 and $500,000 respectively.

One reason the IRS was skeptical of the estate’s value was the that the more valuable of the two paintings was sold 3 ½ years later for a $2,100,000 hammer price and a full price paid by the buyer of $2,434,500, well above the estimated $500,000 value.

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The IRS announced in News Release IR-2017-41 that it has now made available lists of approved exemption applications that were obtained using Form 1023-EZ, Streamlined Application for Recognition of Exemption.

The information, provided in the form of an Excel spreadsheet, provides approved applications by year beginning with mid-2014 when the streamlined form was first released.  The IRS will release updated information quarterly.

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Whenever taxpayers are paying for services between related entities the same interests control, the IRS is known to be skeptical of the reality of the arrangement.  The IRS questioned just such an arrangement in the case of Kauffman v. Commissioner, TC Memo 2017-38.

The taxpayer in this case was a realtor and cinematographer who operated several single member LLCs (all of which were treated as disregarded entities) and a C corporation.  The IRS was questioning payments made from one of the LLCs to the C corporation of $191, 000 for “consulting fees” and $75,000 in “commissions and fees.”

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The taxpayer in the case of Scheurer v. Commissioner, TC Memo 2017-36 claimed that he either had a large business bad debt loss or a partnership loss related to funds that he stated he had advanced to a business being operating by a friend of his.  Unfortunately for Mr. Scheurer, the Tax Court did not accept either claim.

Mr. Scheurer had a friend, Kevin Zinn, who was planning to start a robo-call operation, marketing his company’s services to individuals with high credit card debt.  For a fee, the organization (Continental Financial Services, referred to as CFS) would contact the individual’s bank and attempt to negotiate a lower interest rate.  If a prospect agreed to hire CFS, the prospect would be charged an upfront fee that would be charged to the prospect’s credit card,

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Most often taxpayers who attempt to claim reasonable cause for late filing of a return due to reliance on a tax professional don’t succeed in their case.  But the result was different for the taxpayer in the case of Estate of Hake v. United States, No. 1:15-cv-01382, US District Court, MD PA.

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The general rule is that income from the cancellation of debt is included in a taxpayer’s gross income. [IRC §61(a)(12)]  However, IRC §108 provides various exclusions from income for cancellation of debt if certain requirements are met.  One of those exclusions, found at IRC §108(a)(1)(B), provides for excluding from income cancellation of debt to the extent the taxpayer is insolvent at the time the debt is discharged.

The taxpayers in the case of Schieber v. Commissioner, TC Memo 2017-32 argued that they were insolvent at the time GMAC Mortgage had cancelled debt of $448,671.  The debt was secured by a piece of property (the Stockdale Highway property) that was not the taxpayer’s principal residence. 

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What do you do about filing a joint return if your spouse refuses to sign the return and insists on filing married filing separate? Generally you are out of luck and must file married filing separate. But in the case of Moss v. Commissioner, TC Memo 2017-30 the taxpayer contended that his spouse wasn’t competent to file a return and that he should be allowed to sign the return on her behalf.

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In the case of Foxx v. United States, U.S. Court of Federal Claims, No. 1:15-cv-01266 the IRS had assessed a penalty against a tax preparer, claiming he had failed to exercise proper due diligence in reporting over $18,000 from an auto detailing business that caused a taxpayer to qualify for the earned income tax credit.  When the IRS examined the taxpayer’s return, the taxpayer admitted she had no such business and, thus, was not eligible to have received the credit.

The IRS had assessed a penalty against Dr. Foxx under IRC §6694(b) for “willful or reckless conduct” in preparing the tax return.  Dr. Foxx argued that he has simply relied upon the representations of the taxpayer about her income.  So the key question became whether Dr. Foxx’s actions were sufficient to show an exercise of proper due diligence.

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The IRS clarified on its website (6-Month Extension Period for Calendar Year C Corporations) that the agency has exercised its authority under IRC §6081(a) and will grant calendar year C corporations that timely file a Form 7004 a six-month extension of time to file their calendar year tax return.  Thus, the extended due date for such corporations will move to October 15 instead of the originally scheduled September 15 due date.  The revised due dates are reflected in revised instructions for Form 7004 that the IRS has posted.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 had modified the due dates and extended due dates for various entities, effective for tax years beginning in 2016.  For C corporations the original due of such returns were generally pushed back one month, which would also serve to push back the extended due date by one month.

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In the case of Smyth v. Commissioner, TC Memo 2017-29 it seems everyone believed that the just result would have been to allow the taxpayer to keep the refund she had received that was now at risk due to actions of her less than responsible (or apparently wholly honest) son.

The IRS pointed out at trial that it did not defend the justice of the result it was seeking.  Ms. Smyth was assisted by counsel who volunteered to help generally at calendar call, was moved by her testimony and entered an appearance for her after trial.  The judge deciding the case also noted that it is impossible to accept the result the IRS sought in the case was just—that is, “to send money meant to help those who care for small children to someone who spent it on drugs instead.”

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The fact that the IRS had granted the taxpayer’s position on three prior returns that his military retirement was not subject to tax did not require the IRS to accept that same position on a later return.  The case of Taylor v. Commissioner, TC Summary Opinion 2017-4 dealt with this issue of how much reliance a taxpayer can place on the IRS’s acceptance of a return position in an earlier year.

The taxpayer in this case had retired from the Army after completing the length of time necessary to qualify for retirement in 2002.  Although he did not separate due to disability, he did file an application with the VA in 2002 for compensation for service related disabilities.  He was awarded such compensation which was not reported by the VA to the IRS, which he did not report as taxable on his return for the year in question (2010) and which the IRS was not arguing was taxable compensation to him.

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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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