Examining Agent Abused Discretion by Refusing to Consider Late Rollover Relief Requested by Taxpayer

The IRS claimed that prior to the publication of Rev. Proc. 2016-47 those involved in the examination of a taxpayer’s return were barred from considering granting a waiver of the 60-day rollover period—the taxpayer had to have applied for a private letter ruling request for a waiver under Rev. Proc. 2003-16.  The Tax Court, ruling in the case of Trimmer v. Commissioner, 148 TC No. 14, did not find that the IRS was operating under any such restriction and ruled that the Tax Court had jurisdiction to consider whether the IRS had abused its discretion in refusing to grant such a waiver.

Mr. Trimmer suffered from major depressive disorder after a job he believed he had secured for himself to supplement his income after retiring from the New York Police Department fell through and he was unable to find substitute work.  Shortly after he began suffering from the disorder he received distribution checks from his retirement account.  He left the checks on his dresser at home for over a month and then deposited them into a regular, non-IRA bank account.

Image copyright iqoncept / 123RF Stock Photo

Read More

Extension of Variable Prepaid Forward Contracts Did Not Trigger Gain Recognition

Rev. Rul. 2003-7 provides that variable prepaid futures contracts (VFPCs) represent “open transactions” that are not subject to tax until the contract is finally settled and do not represent constructive sales of the stock under IRC §1259.  The case of Estate of McKelvey v. Commissioner148 T.C. No. 13 looks at whether an extension of the VFPC represents either a taxable settlement of the contract or a constructive sale of the related shares under IRC §1259, a question not previously addressed by the Tax Court.

Under a variable prepaid forward contract, a taxpayer agrees to pledge a certain amount of stock in exchange for receiving a payment of cash.  The contract provides that, at a specified date in the future the taxpayer will deliver either a number of shares of stock (either from the original pledged group or other shares the taxpayer has) or a cash payment.  The number of shares to be delivered varies over a specified range of shares, based on the price of the stock on the date the transaction is closed.  The shares that are pledged represent the maximum number that may need to be delivered.  As well, the party pledging the shares would retain the right to close out the contract at any time before the final settlement date, either by transferring shares or cash.

Image copyright iqoncept / 123RF Stock Photo

Read More

IRS Announces Its Disagreeement With Allowing Costs of Entire Development for Purposes of the Completed Contract 95% Test

In the case of Shea Homes, Inc. v. Commissioner, 142 TC No.3, the question of the scope of contracts of a homebuilder when making use of the completed contract method was the key issue.  And the IRS did not like the answer that either the Tax Court or the Ninth Circuit Court of Appeals gave, eventually releasing Action on Decision 2017-03 announcing the agency will not acquiesce in the decision, following it only on cases appealable to the Ninth Circuit that cannot be distinguished.

Image copyright flippo / 123RF Stock Photo

Read More

IRS Announces It Will Not Follow Court Decision Treating Retail Building as Placed in Service Before It Had Been Ready to Open

The concept of “placed in service” for purposes of beginning to deduct depreciation is often a tricky one to deal with in real life, and the date of placing an item in service may not be as simple to discern as some might believe.  Certainly, in the case of Stine, LLC v. United States, 115 AFTR 2d ¶ 2015-381, DC LA, the IRS’s view of a “bright line” test based on a when a building was open for business was rejected by the Court.  And, in 2017, the IRS returned the favor by rejecting the Court’s holding, announcing in Action on Decision 2017-02 that the agency does not acquiesce in the decision and will continue to take the position in a similar case that a retail building had not been placed in service when it reaches the state it did in this case.

The case involved a building which had been substantially completed and had a certificate of occupancy prior to December 31, 2008.  That date was important because the property was located in the “Go Zone” where qualified real property placed in service prior to that date would qualify for 50% bonus depreciation. 

Image copyright EyeMark / 123RF Stock Photo

Read More

Law Firm Members Not Allowed to Treat Income in Excess of Reasonable Compensation Guaranteed Payments as Not Self-Employment Income

Some additional guidance has emerged on the self-employment tax status of member-managers of an PLLC in the case of Castigliola, et al v. Commissioner, TC Memo 2017‑62. 

Like the members in the case of Renkemeyer, Campbell, & Weaver, LLP v. Commissioner, 136 TC 137 (2011) the individual members in this case were attorneys who practiced in a law firm.  However, unlike the attorneys in Renkemeyer, these attorneys did not claim that all income from the law firm was not subject to self-employment tax.

Rather, the attorneys had consulted with an experienced CPA well versed in tax matters and agreed to pay out guaranteed payments to each member that was equivalent to a reasonable salary for an attorney of that individual’s experience level in their locality.  The guaranteed payments were reported as self-employment income and self-employment tax was paid on those amounts.  To the extent the law firm had income in excess of the guaranteed payments, those amounts flowing out on the K-1s were treated as income not subject to self-employment tax.

Image copyright iqoncept / 123RF Stock Photo

Read More

Despite Entry of Judgment to Enforce Guaranty, Taxpayer Denied Basis in S Corporation Debt

The Courts generally look to an “actual economic outlay” that makes the taxpayer poorer in some objective fashion to allow the taxpayer to claim basis in debt for an S corporation.  In the case of Phillips v. Commissioner, T.C. Memo 2017-61, the taxpayer argued that the fact that judgments had been entered against her should give her the right to treat a portion of the debt as basis for claiming losses.

The taxpayer owned 50% of an S corporation that fell on hard times during the real estate crisis, defaulting on several loans which had been guaranteed by Sandra.  The banks sued to collect on the guarantees and obtain judgments against Sandra.  However, Sandra had not actually made any payments on the debts.

Image copyright samuraitop / 123RF Stock Photo

Read More

Private Collection Agency Assignments Begin, IRS Issues Description of Program and Scam Warning

The IRS announced the beginning of the use of private collection agencies to collect overdue taxes in News Release IR-2017-74.  The program, mandated by Congress in late 2015, requires the IRS to transfer certain overdue accounts to private collection agencies. 

The release begins by describing how the program will work, noting that the IRS will first notify the taxpayer that their account is being transferred to a private agency and will send along Publication 4518 to describe the process for the taxpayer in question.

Image copyright andreypopov / 123RF Stock Photo

Read More

Taxpayer Can Obtain Information on Payment of Tax By Contractors From the IRS in Employment Tax Dispute

In the case of the Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 the Tax Court had to consider the taxpayer’s request to obtain information from the IRS regarding other taxpayers, specifically if those taxpayers had reported income received from the Tribe on their income tax returns.  Or, as the IRS claimed, did the law (specifically IRC §6103) prevent the agency from disclosing such information about other taxpayers.

The question arose because the IRS had decided in an examination that the Tribe had failed to treat certain individuals as employees that were, in the agency’s view, truly employees.  While the Tribe is still contesting that fact, the Tribe sought information from the IRS to reduce the amount due. Specifically, the Tribe wished to know if contractors they had been unable to contact had paid their taxes.

Image copyright elnavegante / 123RF Stock Photo

Read More

Expenditures Required by Regulatory Agency to Obtain Approval for Merger Were Not Automatically Required to Be Capitalized

Should a corporation that was required to incur certain costs to obtain regulatory approval for a merger be required to capitalize those costs as facilitative costs under IRC §1.263(a)-5(a)?  In Chief Counsel Advice 201713010 the IRS National Office decided the answer was no.

Image copyright iqoncept / 123RF Stock Photo

Read More

Interim Guidance Issued for Taxpayers Electing to Claim Research Credit Against Payroll Taxes

The Protecting Americans from Tax Hikes Act of 2015 provided for a new way for certain businesses to receive the benefit of the research credit under IRC §41.  A qualifying small business may, in lieu of the income tax credit, receive a credit against the employer portion of social security taxes [IRC §41(h)].  The IRS has provided interim guidance on taking advantage of this provision in Notice 2017-23.

Image copyright alexraths / 123RF Stock Photo

Read More

No Evidence Any Services Were or Could Have Been Performed for Management Services Paid to Related Corporation

The taxpayer corporation in this case had claimed deductions in 2011-2013 for management fees of $120,000, $36,000, and $42,000.  In each year, Home Team had transferred funds to Sacer Cor as it had cash available to transfer, and the funds were initially recorded as loans to Sacer Cor.  At the end of the year, some or all of the loans were reclassified as management fees.

The Court noted that the fees were based solely on Home Team’s ability to pay rather than being payments for specifically invoiced services.  Also, Sacer Cor had no employees for the years in question, although two of the Sacer Cor shareholders were employees of Home Team and were paid a salary by that organization.  The Court noted that Home Team did not produce any evidence of any services provided by Sacer Cor.

Image copyright peshkova / 123RF Stock Photo

Read More

IRS Releases Proposed Revenue Procedure to Deal with Accounting Method Change Requests Related to FASB Revenue Recognition Standard

One of the key developments keeping those CPAs who specialize on the “accounting and auditing” (or A&A as we tend to refer to it) side of the profession jumping has been the soon to be implemented standard titled “Revenue from Contracts with Customers” FASB Accounting Standards Update 2014-09, which makes significant changes to revenue recognition, particularly the timing of such recognition of revenue. 

Of course, for those of us working in the tax arena, when you start talking about timing of recognition you realize that if any of this either does flow onto a tax return or a taxpayer reasonably would like to have it do so to keep tax and book the same in this area you realize you are dealing with an “accounting method” which would require IRS permission to change under IRC §446.  And we also realize the timing of the inclusion of an item of income is governed under the IRC by IRC §451.

The IRS has been aware of this potential problem as well, and now has released a proposed Revenue Procedure to allow for certain automatic changes in accounting methods.  This proposed procedure, on which the IRS is seeking comments, is found in IRS Notice 2017-17.

Image copyright damedeeso / 123RF Stock Photo

Read More

Corporation Does Not Have Access to Economic Hardship Relief to Avoid Imposition of Levy

Can a corporation suffer economic hardship that would justify relief from an IRS levy under IRC §6343(a)(1)(D), or does the nature of economic hardship limit its application to individuals?  The IRS’s view, implicit in Reg. §301.6343-1(b)(4)(i), is that only individuals should be treated as being able to suffer economic hardship as the section refers to it.  The taxpayer in the case of Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 TC No. 9 argued the law did not allow for such a limited view..

Image copyright madmaxer / 123RF Stock Photo

Read More

Small Business/Self-Employed Taxpayer Fast Track Settlement Program Made Permanent

The IRS has established a new Fast-Track Settlement program for small businesses in Revenue Procedure 2017-25.  The program, referred to as the Small Business/Self Employed Fast Track Settlement program (SB/SE FTS), had previously been a pilot program, initially established by Announcement 2006-61, later extended and modified by Announcements 2008-110 and 2011-5.  The program deals with taxpayers under the authority of the Small Business/Self Employed (SB/SE) division of the IRS.

Image copyright vasabii / 123RF Stock Photo

Read More

IRS Details Revised Rules for Obtaining Employee Consents for FICA/RRTA Tax Refunds

In Revenue Procedure 2017-28 the IRS clarified rules related to obtaining employee consents when an employer request a refund of overpaid FICA and RRTA taxes.  The procedure makes minor changes to the draft ruling issued along with Notice 2015-15.

The new procedure applies to consents requested on or after June 5, 2017.  Employers who have already issued requests for consents prior to that date will not need to send out new consent requests and it will not affect the validity of any consents received after that date that were requested prior to June 5.  Employers may still rely on the proposed revenue procedure found in Notice 2015-15 for consent request issued prior to June 5, 2017.

Image copyright binaryproject / 123RF Stock Photo

Read More

OPR Has No Authority Over Tax Preparation or Opinion Services Offered by Disbarred Attorney

The case of Sexton v. Hawkins, US DC Nevada, Case No. 2:13-cv-00893 asked the question of whether the IRS Office of Professional Responsibility had jurisdiction over a disbarred attorney who was suspended from practice before the IRS for actions related to return preparation and writing a tax memorandum that took place during his suspension period.  The disbarment and suspension took place after Mr. Sexton plead guilty to four counts of mail fraud and one count of money laundering.

Despite being disbarred and suspended, the plaintiff in the case continued to offer tax services.  In particular, he offered services to a Ms. Kern for whom he assisted in preparing her 2010 and 2011 income tax returns and whom he offered to send a written memorandum analyzing her tax options. 

Image copyright photoman / 123RF Stock Photo

Read More

Taxpayer Discovers the Dangers of Relying on a Postage Meter Applied Postmark

The question of a taxpayer being able to establish timely mailing of a document when a private postage meter is used was considered in the case of Grimm v. Commissioner, TC Memo 2017-44.

IRC §7502 is what many professionals refer to as the “timely mailing equals timely filing” rule, but the rule isn’t quite so simple.  Rather, under IRC §7502(a) a document is deemed filed timely if the postmark applied by the United States Postal Service shows a date on or before the deadline for filing.  If a postmark is not applied by the U.S. Postal Service then the IRS is granted the authority to write regulations outlining whether and if such other postmark may be treated as evidence of timely filing

Image copyright abluecup / 123RF Stock Photo

Read More

Students Participating in State Department Summer Work Program Denied Travel Deductions Despite Limitations Contained in Visas

The Tax Court considered the arguments that the unique circumstances of participants in a State Department sponsored summer work travel program show allow them to claim a deduction for their expenses for travel to and from the United States.  The Tax Court decided, in the case of Liljeberg, et al v. Commissioner, 148 TC No. 6, that these circumstances did not justify allowing the deduction, instead applying the regular limitation that a taxpayer can only deduct travel to and from his/her tax home under U.S. tax law.

Image copyright icholakov / 123RF Stock Photo

Read More

Racing Team May Treat Individual Auto Parts, Rather Than Entire Racing Car, as Unit of Property for Disposition Purposes

As a tax professional if a client has a car that is acquired by the business, you’d probably automatically consider that car a single unit of property for purposes of the capitalization rules under Regs. §§1.263(a)-1 to 3 and for purposes of determining a disposition of property.  But in PLR 201710006 the IRS, faced with a unique situation, allowed the car to be broken down so that each part became a separate unit of property.

The unique fact was that the taxpayer in question was an organization that built a championship racing car entry and assembled a racing crew to compete in a racing series.  In this racing circuit the team doesn’t generally look at their asset as a single finished automobile.

Image copyright 36clicks / 123RF Stock Photo

Read More