Partnership Interest Held in a Single Member LLC Precludes Qualification as a Small Partnership Under TEFRA Provisions

In Revenue Ruling 2004-88 the IRS held that if a single partner of a partnership is a disregarded entity (such as a single member LLC or a grantor trust), that partnership cannot qualify for an exemption from the TEFRA consolidated partnership audit rules under the provisions of IRC §6231(a)(1)(B)(i).  In the case of Seaview Trading, LLC, et al v. Commissioner, (CA9 2017), Case No. 15-71330 the Ninth Circuit Court of Appeals agreed with the IRS’s view expressed in that Revenue Ruling.

Robert Kotick and his father Charles Kotick formed Seaview Trading, LLC, which was taxed as a partnership.  Each of the Koticks held their interest in Seaview through a single member LLC that was treated as a disregarded entity. 

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Automatic Late Portability Election Relief Procedure Published by IRS

In Revenue Procedure 2017-34 the IRS published a simplified method to obtain permission for an extension of time under Reg. §301.9100-3 to file a Form 706 and elect portability without the need to apply for a private letter ruling and pay the associated fee.

Under IRC §2010 a surviving spouse may make an election to claim any lifetime transfer tax exclusion that was not used to reduce the estate tax on the deceased spouse.  This amount, known as the deceased spouse unused exclusion amount (DSUE) can end up being equal to the entire maximum lifetime transfer amount ($5,490,000 for 2017), especially if the deceased spouse left his/her entire estate to his/her spouse.

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Privilege Did Not Allow Tax Preparer to Avoid Answering Questions Regarding Client Under IRS Scrutiny

The IRS was investigating tax preparer Isana Radchik’s clients for tax related matters, including a potential failure to file foreign financial bank account reports and whether the proper amounts of federal tax liabilities.  In the case of United States v. Radchik, USDC NJ, Case No. 2:17-cv-01187, the question before the Court was whether the preparer could be required to respond to an IRS summons for information related to her work.

The taxpayer claimed two reasons why should not be required to respond to the IRS’s summons:

  • Under §7525 the information in question was protected by the tax practitioner privilege and
  • She asserted her own fifth amendment right against self-incrimination.I

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IRS Can Require PTINs for Tax Preparers, But Cannot Charge User Fees for Issuance and Renewal

The IRS has lost yet another battle in the United States District Court for the District of Columbia related to their attempts to expand regulation of tax preparers.  In the case of Steele, et al v. United States, USDC DC,119 AFTR 2d ¶2017-818, while the Court the IRS was justified in establishing the requirement that tax preparers obtain a practitioner tax identification number (PTIN)—but that the agency had no authority to impose a fee for issuing that number.

The IRS had lost previous cases in this venue regarding their attempt to set up a preparer testing system (Loving, 113 AFTR 2d ¶2014-867) as well as the attempt to apply Circular 230 rules to tax preparation (Ridgely, 113 AFTR 2d ¶2014-5249).

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Procedures to Maintain CPEO Status Released by IRS

In News Release IR-2017-103 the IRS announced that it has finally approved the first batch of certified professional employer organizations (CPEOs)   The legislation authorizing CPEOs was passed in late 2015 and the legislation originally targeted January 1, 2016 as the date employers could begin using such organizations.

However, the IRS took time to publish the rules under which an application could be made and to process such an application, so the program got off to a late start.  Now the IRS has issued notices of certification to 84 organizations.

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User Fees For Certain Rulings, Including Private Letter Rulings, Must Be Submitted via Pay.gov

The IRS has announced in IR-2017-102 that user fee payments will be made online for items such as letter rulings, closing agreements, and certain other rulings.  The payments will be made via the government’s Pay.gov website and the program begins on June 15, 2017.

The program will be phased in initially:

  • From June 15 to August 15 payments may be made either via Pay.gov or by a check or money order;
  • For payments made after August 15, the payments will only be accepted via Pay.gov.

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Even Though Advice Was Significantly in Error, Taxpayer Reasonably Relied on Tax Professional, No Penalty Due

The penalty for a substantial understatement of tax found at IRC §6662(b)(2) is triggered whenever a taxpayer faces a sufficiently large underpayment at the end of an examination.  A substantial understatement exists for an individual if the understatement is greater than the greater of:

  • $5,000 or
  • 10% of the tax required to be shown on the return for the taxable year.

Once the IRS establishes an underpayment that exceeds the thresholder, to escape the penalty, the taxpayer must meet one of the following criteria:

  • If the underpayment did not arise from a tax shelter (as defined at IRC §6662(d)(2)(C)) either:
    • There was or is substantial authority for the treatment of the item or
    • There was adequate disclosure (generally on a Form 8275 or Form 8275-R) and there exists or existed a reasonable basis for the position that gave rise to the underpayment (IRC §6662(d)(2)) or
  • There existed reasonable cause for the underpayment, the taxpayer acted in good faith (IRC  §6664(c)) and the underpayment did not arise from a tax shelter (again as defined at IRC §6662(d)(2)(C)).

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IRS Warns Agents Against Using IRS Website FAQs to Sustain Positions in Exam

Not all IRS documents are created equal, and only certain documents are binding on the agency.  Those binding documents do not include items published on the IRS’s website in most cases, as the IRS Small Business/Self-Employed (SB/SE) Division reminded its agents in SBSE-04-0517-0030.  The memorandum gives guidance on the level of reliance that should be placed on frequently asked questions (FAQs) posted on the IRS website—and the answer is, by default, none.

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IRS Grants Estate Relief to Make Late Election to Claim Charitable Contribution in Prior Year

While PLR 201720003 is not really a major ruling—the IRS is merely granting an estate a right to make a late election—it does provide a reminder about the special rules that impact trusts and estates when claiming charitable contributions.  These rules are in some ways more restrictive than those imposed on other taxpayers, but in other ways they are far more generous.

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Court Accepts IRS's Reconstruction of Business Using Bank Deposits and Forms 1099K

In the case of Kahmann v. Commissioner, TC Summary Opinion 2017-35 the IRS was suspicious that the taxpayers had understated their gross income from their business for the year.  Some of this suspicion arose because the taxpayers failed to turn over bank statements for the business to the agent when they were requested. 

The agent was forced to issue summonses to banks where she was aware the taxpayers maintained at least three accounts. She obtained those accounts to be able to perform a bank deposits analysis, looking for unreported income.

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Organization Formed to Support "Community Journalism" Did Not Qualify for Exempt Status

In PLR 201720010 the IRS ruled the fact that an organization is not being operated to generate a profit and may be providing services to organizations that are themselves performing charitable and educational purposes does not mean the organization providing the services can qualify as a §501(c)(3) organization.  The organization in question was therefore denied its request to be granted §501(c)(3) status.

The organization had changed its proposed purpose a few times as it attempted to assist in the development of community oriented independent journalism initiatives.  Originally the organization had planned to develop open source software to be used by such organizations, but such software became available from other sources. 

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Tax Court Finds §2036(a)(2) Triggers Inclusion in Estate

The Tax Court again agreed with the IRS that a family limited partnership arrangement (FLP) had run afoul of IRC §2036(a), the IRS’s most successful route to undo such planning due to “bad facts.”  But, in the case of Estate of Powell v. Commissioner, 148 TC No. 18 the Tax Court, for the first time since it proposed a “lack of real fiduciary duties” theory for invoking IRC §2036(a)(2) in the case of Estate of Strangi v. Commissioner¸ TC Memo 2003-145 that the Court invoked that provision, rather than the general “implied life estate” theory under IRC §2036(a)(1) to unwind the plan.  Also, the majority opinion also provided that IRC §2043 served to limit the inclusion in the estate to only the excess value of the assets transferred over the interest received.

The plan in this case was very much a “deathbed” plan, with the transfers occurring one week before Nancy Powell died.  As well, at the time of the transfers Nancy was incapacitated as well as terminally ill, so her son, acting under a Power of Attorney (POA), formed the partnership with himself as general partner and then transferred Nancy’s assets into the partnership in exchange for a 99% limited partnership interest.   On that same day, her son, again acting under the POA, transferred Nancy’s limited partnership interest to a charitable lead annuity trust (CLAT).

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Ninth Circuit Panel Finds Statute for IRS to Assess Listed Transaction Disclosure Penalty Does Not Start Unless Form 8886 Filed

The Ninth Circuit Court of Appeals reversed a District Court decision that determined the IRS had acted too late in attempting to assess a penalty in the case of May v. United States, CA9, Case No. 15-16599.  In a 2-1 split decision the panel decided that the one statute found in IRC §6501(c)(10)(A) does not begin to run until a taxpayer files a Form 8886 with the IRS, regardless of whether the IRS is already in possession of the information that is provided in that form.

The District Court found that the IRS had attempted to assess the penalty for failure to disclose a listed transaction more than one year after the IRS agent examining the taxpayer came into possession of information that would justify the imposition of the penalty.

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CEO and President, Relying on Work of Outside Auditor, Reasonably Believed Trust Fund Taxes Had Been Paid

The Sixth Circuit Court of Appeals in the case of Byrne v. United States, CA6, No. No. 2:06-cv-12179 had to decide if the president and CEO had acted recklessly in not insuring that trust fund taxes had been deposited when they were aware of issues with the quality of work performed by the controller.  If they had, they would be liable personally for the undeposited trust fund taxes under IRC §6672.

Any responsible person may be held personally liable by the IRS for unpaid trust fund taxes (that is, federal income taxes and FICA taxes withheld from employee’s paychecks) if the IRS can show that individual either:

  • Had actual knowledge that the taxes had not been paid and had the ability to pay the taxes (even if that meant not paying other bills) or
  • Recklessly disregarded known risks regarding a failure to pay such trust fund taxes.

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CCA Outlines When Refunds Created by OVDP Filings Can Be Offset Against Tax Due

In Chief Counsel Advice 201719026 the IRS looked at what happens to taxpayers who, under terms of the Offshore Voluntary Disclosure Program (OVDP), find that there is a refund due on one of the prior year returns filed under the program.  The key question was whether any such refund could be offset against other taxes due or refunded to the taxpayer.

The OVDP program was created in 2009 to allow a method for taxpayers with previously undisclosed foreign bank accounts to come into compliance voluntarily.  Under the terms of the program a taxpayer must disclose all such offshore accounts and file original or amended returns reporting the income for the most recent eight years of returns whose due date has passed.  The taxpayer also gives consent for the IRS to assess tax for all those years as part of the program regardless of whether the period for assessment generally under IRC §6501 has run.

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Divorce Decree Splitting Ex-Spouse's Liability for Prior Taxes Did Not Control Innocent Spouse Relief

In the case of Asad and Akel v. Commissioner, TC Memo 2017-80 the IRS agreed each of the now divorced spouses should be liable for only a portion of the tax due, each qualifying for innocent spouse relief under IRC §6015 for tax liabilities arising from rental properties owned by the other spouse.

However, the taxpayers in this case, while accepting that neither should be liable for the entire balance due, argued that rather than using the allocation the IRS arrived at based on the ownership of the properties leading to the tax liability, each should be relieved of 50% of the liability.  That is, they proposed to split the tax evenly.

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IRS Adds Direct Link to Get Transcript to View Your Tax Account Information Page

The IRS has made available transcripts on its “View Your Tax Account Information” page for taxpayers.  This page, found at https://www.irs.gov/uac/view-your-tax-account, allowed taxpayers to view their payoff amount if there are unpaid taxes, the balance of tax due for each year for which taxpayers owed taxes and 18 months of payment history.

In a page update on May 8 ,2017 the IRS added the option to get various Form 1040 series transcripts via the Get Transcript tool without having to log in again

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Return Filed After IRS Assessment Did Not Allow for Tax Debt to Be Discharged in Bankruptcy

The Third Circuit Court of Appeals declined to decide if a late filed return would automatically fail to constitute returns for bankruptcy purposes in the case of In re Thomas Giacchi v. United States, CA3, No. 15-3761, deciding the taxpayer’s attempt at filing a valid return for bankruptcy purposes fell short for other reasons.

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2015 (BAPCPA) that added the definition of a “return” to the Bankruptcy Code, the question has arisen about whether a late filed return could ever constitute a tax return where the balance of unpaid tax could be discharged in bankruptcy (after meeting various other requirements).

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Deposit May Not Transferred from One Person Potentially Subject to Transferree Liability to Another Person Ultimately Found Liable for the Same Tax

Under IRC §6603 a taxpayer who believes a tax may be imposed against him/her in the future, but for which has not yet been assessed, may make a cash deposit with the IRS which will serve to stop the running of any interest on that tax at the date of the deposit if that tax is later assessed.  One such way a taxpayer might wish to make a deposit would be in a case where the taxpayer believed he/she potentially could be subject to transferee liability.

In the case of transferee liability, an individual becomes liable for another taxpayer’s tax based on certain transfers that were made to that person.  In essence, the transferee received assets which the law views as depriving the taxpayer that owed the tax of the ability to pay that tax.  In some cases, there may be multiple potential “transferees” that could be found liable. 

In Field Attorney Advice 20171801F the issue was whether a person who made such a deposit could direct the IRS to apply some or all of that deposit against the liability of another person found liable for the same liability?  And, if the person can direct the transfer, can an attorney-in-fact (that, is, a representative named a Form 2848, Power of Attorney and Declaration of Representative) for that person make that direction?.

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Petition to Challenge IRS Denial of Innocent Spouse Relief Filed Too Late Despite Filing on Date Provided for in IRS Correspondence

If the IRS erroneously informs a taxpayer that the last day for filing a Tax Court petition is later than the actual deadline (90 days after the IRS mailed its determination of final relief in this case as provided in IRC §6015(e)(1)(A)), does that extent the time the taxpayer has to file with the Tax Court?  In the case of Rubel v. Commissioner, CA3, No. 16-3526, the Third Circuit Court of Appeals ruled that the answer is no—the Tax Court lacks jurisdiction to hear the case once the 90-day period expires, despite the erroneous information provided by the IRS.

In the case in question the IRS had denied Nancy’s request for innocent spouse relief on January 4, 2016 for two tax years and on January 13, 2016 for another tax year.  The date 90 days from those dates were April 4, 2016 for the first two years and April 12, 2016 for the final year.

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