In emailed advice (Chief Counsel Email 201727008), the IRS Chief Counsel’s office discussed the limitation on the use of Form 941-X, specifically looking at what qualifies as “administrative error” for which the Form 941-X can be used to address issues on prior year’s payroll tax reports related to federal income tax withheld.

People do make mistakes, and at time those errors involve payroll tax issues, including tax withholding.  Form 941-X was created to allow employers to deal with some errors—but the form has very specific limitations on its use.  As a practical matter, once a year has ended and the employee has been given a W-2, the consequences of, say, overwithholding or underwitholding federal income taxes gets “passed on” to the employee since that number is claimed as a credit on the employee’s own income tax return.

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Whether a taxpayer can claim a deduction for legal expenses generally depends on the origin of the claim giving rise to the legal expense.  This means that even if the legal expense might arguably have an impact on one activity (say, a new trade or business the taxpayer is establishing) it will not be deductible as part of that activity if the claim originated elsewhere.  The case of Dulik v. Commissioner, TC Summ. Op. 2017-51 deals with this issue.

In this case the taxpayer was negotiating a separation agreement from his former employer.  In doing so he paid $26,781 in legal fees related to various issues in negotiating that agreement, specifically looking to get removed from the agreement a reference to a secrecy agreement he had signed with a predecessor of his current employer which contained a non-compete agreement.

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A participant in a qualified employer retirement plan may, if the plan allows it, borrow funds from the plan.  However, such borrowing is subject to a number of specific provisions in federal law and regulations.  Violation of the provisions regarding repaying the loan results in its treatment as a distribution from the plan, taxable to the participant.  That’s true even though the participant remains liable to repay and does actually repay the loan to the plan.

In the case of Frias v. Commissioner, TC Memo 2017-139 there was little question the written terms of the loan had not been followed—but the failure had been due to a failure by the employer to fulfill its obligation to withhold the payment from Ms. Frias’s checks she received while was on maternity leave.

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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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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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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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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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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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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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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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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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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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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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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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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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