Election to Currently Deduct Future Landfill Cleanup Costs Under §468 Not Limited to Accrual Basis Taxpayers

IRC §468 allows electing taxpayers who, among other things, operate landfills to claim a current deduction for costs that will be incurred once the landfill is closed to clean up the site.  But the IRS argued in the case of Gregory v. Commissioner, 149 TC No. 2 that this election was restricted to taxpayers who used the overall accrual method of accounting for tax purposes.

IRC §448’s language allows a deduction to a taxpayer who elects the application of the provision. The taxpayers argued that nowhere in the statute did Congress restrict the taxpayers who could make this election to those using the overall accrual basis of accounting and that, based on the plain language of the statute, they should be allowed to take a deduction for such future clean-up costs regardless of the fact they reported their income and deductions generally on the cash basis of accounting.

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Washington State Enacts Use Tax Tattletale Bill with Very Low Threshold

The state of Washington has upped the ante regarding the risk to businesses who don’t pay attention to individual state laws requiring reporting on sales to residents of a state by a business with no connection with the state.  Washington’s governor signed into law Washington H.B. 2163, a “tattletale” use tax bill that is triggered whenever a remote seller in a year has more than $10,000 in gross sales to Washington state residents.

A “tattletale” bill does not attempt to require remote sellers to collect sales tax for the state on their remote sales.  Rather the bill requires that such sellers take various steps to “turn in” such buyers to the state and “motivate” the buyers to comply with their use tax obligations.  The law will often require some form of notice to potential buyers of their use tax obligations, along with later reports given at the end of the year to both the buyers (listing items they bought for which use tax would be due) and the state in question.

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IRS Will Not Follow Case That Allowed Taxpayer Filing Married Filing Separate to Claim Earned Income Tax Credit

In the case of Tsehay v. Commissioner, TC Memo 2016-200, the Tax Court held that a taxpayer with a filing status of married filing separately nevertheless was eligible to claim an earned income tax credit under IRC §32.  However, the IRS in Action on Decision 2017-05 (AOD 2017-05) announced that the agency will not acquiesce in this decision.

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Failure to Report Basis of Property Donated Fatal to Charitable Contribution

Details matter when claiming a charitable deduction under IRC §170—and failing to follow all of the requirements will most often trigger a complete disallowance of the deduction.  That’s true even of a claimed $33 million deduction in the case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.

In this case the LLC, being taxed as a partnership, purchased a remainder interest in property for $2.95 million in March 2002.  In August 2003, the LLC assigned its interest to a university, a §501(c)(3) organization.  The Form 1065 reported a noncash charitable contribution of $33,019,000 from this donation.

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IRS Issues Final Regulations on Streamlined Applications for §501(c)(3) Exempt Organization Status

The IRS has adopted as final regulations the proposed regulations issued in June of 2014 that allowed for a streamlined application for tax-exempt status under IRC §501(c)(3) in T.D. 9819.  These same regulations were issued in 2014 as temporary regulations which, with the issuance of the same regulations in final form, are now withdrawn.

The streamlined application process takes place entirely online, with the organization filling in Form 1023-EZ online at http://www.pay.gov.

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No Taxable IRA Distribution Where Taxpayer Had Funds Wired to Buy Stock That Custodian Later Refused to Accept

In the case of McGaugh v. Commissioner, Case No. 13665-14, CA7 the taxpayer had wired funds from his IRA account to purchase stock which we expected to be held in his IRA account.  However, the taxpayer’s IRA custodian refused to accept the share certificate that was received.  The IRS took the position that this resulted in a taxable distribution to the taxpayer from the IRA account.

The Tax Court decided that the taxpayer had not actually or constructively received a distribution from his IRA. (TC Memo 2016-28)  The IRS, not happy with this result, appealed the case to the Seventh Circuit Court of Appeals.

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Eighth Circuit Agrees With Two Other Circuits That Failure to Obtain Subordination Before Donation Dooms Conservation Easement Deduction

In the case of RP Golf LLC v. Commissioner, Case No. 16-3277, CA8 the taxpayer was hoping the Eighth Circuit Court of Appeals would override the Tax Court’s ruling and go against two of its sister Circuits to find that a conservation easement deduction was not barred merely because a mortgage on the property was not subordinated to the rights of the charity prior to the date of the transfer.

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Full Deduction Allowed to Hockey Team for Meals Provided to Players at Away Games

The Tax Court refused to go along with the IRS’s view of strictly interpreting the provisions under IRC §274(n)(2)(B), allowing a full deduction for meals provided by the Boston Bruins NHL hockey team to players and employees traveling with the team at away games in the case of Jacobs v. Commissioner, 148 TC No. 24.

In order to get a 100% deduction for meals provided to employees, rather than only 50%, IRC §274(n)(2)(B) provides a full deduction is allowed “in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relating to de minimis fringes)…”

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IRS Begins Issuing PTINs Without Charge, But Reserves Right to Charge Later

The IRS has begun again issuing PTINs after suspending such issuance immediately losing the ability to charge fees for PTINs in the case of Steele, et al v. United States, (US DC District of Columbia).  The announcement, along with a series of Q&As on the issue, was posted to the IRS website (“IRS Reopening Preparer Tax Identification Number (PTIN) System”).

The IRS is not charging for a PTIN issuance at this time, but the Q&As reserve the possibility that those receiving a “free” PTIN at this time might be required to pay for it later.

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IRS Addition of Payroll Tax Liability That Was Subject of OIC to Going Concern Value of Business Was Not Reasonable

In the case of W. Zintl Construction, Inc. v. Commissioner, TC Memo 2017-119 the taxpayer in question was a corporation with a rather significant unpaid payroll tax liability ($6,563,263 to be exact).  The corporation was seeking an offer in compromise with regard to these taxes.  The IRS settlement officer (SO) determined that the offer was not to be accepted.  In doing so he considered the going concern value of the business as a whole and then added back the underlying payroll tax liability.

The taxpayer took its case to the Tax Court, arguing that a going concern value should not be used against the business itself, as opposed to that of the owner of the business.  The Tax Court disagreed with this view, but also determined the settlement officer had improperly computed the going concern value when he added back to that value the payroll tax liability.

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Corporation's Activities and Costs Render Rental Not §1362 Passive Income

If a S corporation has any accumulated earnings and profits, its S status is at risk due to “excess passive income” if it incurs such income for three straight years under IRC §1362(d)(3).  While rentals can generate such passive income, a rental does not provide such passive income if it is deemed to be derived in the active trade or business of renting property (Reg. §1.1362-2(c)(5)(ii)(B)(2)).  In PLR 201725022, the taxpayer asked the IRS to find that the rental income being received by a C corporation would not be treated as “passive income” if the corporation elected S status.

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Latest Phishing Email to Target Tax Professionals Uses Spoofed Emails from Education Providers

In the latest phishing scam aimed at tax professionals, the IRS warns that a fake email issued in the name of a professional education provider for preparers is making the rounds (Security Summit Warns of New Phishing Email Targeting Tax Pros, IR-2017-111). 

Unfortunately, the internet’s system for handing electronic mail was never designed with security in mind, and it is relatively trivial to “fake” a from address to make a message appear to come from a legitimate source.  No access is needed to the systems or servers of the spoofed organization in order to pull off this fraud which makes it even more difficult to deal with.  Also, it is also trivial to “borrow” graphics from legitimate web sites and to make the email look just like an actual email from the organization.

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Corporation Liable for Payroll Taxes Left Unpaid by PEO

When an employer decides to use a third party from which to lease employees, the employer does not escape liability for the payroll taxes if they remain unpaid even if the employer makes the payment.  This was the issue the IRS was looking at in Chief Counsel Advice 201724025

In this case the taxpayer had hired an outside professional employer organization (PEO) to manage its payroll.  Although the company had paid the PEO for the payroll and the amount that was due on the payroll taxes, the PEO failed to pay the payroll taxes.  The corporation discovered this fact on exam.

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Disaster Relief Delay for Actions Does Not Provide for Relief from Penalties or Interest for Acts With Due Date Before Disaster

IRC §7508A allows the IRS, for taxpayers affected by a federally declared disaster, terrorist, or military action, to delay for up to one year the period for performing certain acts under the IRC and, in such cases, disregarding such period for the imposition of interest, penalties, etc. related to that act.  In Chief Counsel Email 201723023, the question raised was whether who had failed to, say, file a return before the disaster took place would have penalties and interest waived for the period in question.

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Mescalero Case Does Not Require IRS to Disclose Information on Returns Filed Outside of Tax Court Proceeding

Earlier this year we analyzed the Tax Court's decision in Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 (See Taxpayer Can Obtain Information on Payment of Tax By Contractors From the IRS in Employment Tax Dispute).  In that case, a taxpayer facing potential liability for failing to withhold taxes from individuals reclassified as employees was able to convince the Tax Court that the IRS needed to provide the taxpayer with information regarding whether individuals they had been unable to located had reported the income on their return.  If that was the case, the tribe was not liable for the income taxes it had failed to withhold from those individuals.

The IRS Chief Counsel’s office reacted shortly after the Mescalaro decision in an email (Chief Counsel Email 201723020), indicating that in its view this case does not grant taxpayers facing such liability may not require the IRS to provide worker tax information during the exam.  Rather the agency’s position is that the case only holds that such disclosure may be required by the Court during discovery, not that employers facing potential liability have the right to obtain that information directly from the service immediately upon the issue being raised in exam.

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On Second Attempt, IRS Publishes Proposed Regulations for BBA Partnership Audit Regime Taking Effect Next Year

The IRS, after pulling back a version in January in light of President Trump’s executive order limiting the issuance of new regulations, has finally released the important proposed guidance on the implementation of the revised partnership audit regime enacted as part of the Bipartisan Budget Act of 2015.  This version was published in the Federal Register on June 14, 2017. [REG-136118-15]. 

This second pass is little changed from the version the IRS was set to release in January of 2017.  Aside from fixing minor typographical errors in the original, this version removes a single example that dealt with the imputed underpayment and added some additional discussion in the preamble of the issues the IRS continues to consider regarding tiered partnerships and these regulations.

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ESOP Participants Accrued Compensation Found Not Deductible Until Paid

The Tax Court found, in the case of Petersen v. Commissioner, 148 TC No. 22, found that participants in an ESOP that owned shares of an S corporation were related individuals for purposes of the deduction deferral rules of IRC §267(a)(2).

IRC §267 generally requires deferring a deduction by a taxpayer to a “related person” until such time as the income in includable in income of the related person.  Thus, if a calendar year accrual basis taxpayer has accrued but unpaid compensation in existence at December 31 payable to a cash basis related person, no deduction will be allowed until the following year when the cash basis related person, having received payment, includes that amount in income.

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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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