Estate Not Allowed a Deduction for Unpaid Gift Tax Related to a Net Gift

When a taxpayer has made a “net gift” within three years of the taxpayer’s death, how is that gift handled for purposes of the “gross up” rule for such gifts found in IRC §2035(a) and (b)?  In the case of Estate of Sommers v. Commissioner, 149 TC No. 8, the taxpayer argued that the estate should be allowed a deduction on the Form 706 for the gift tax that was paid by the donors.

There is a transfer tax advantage to making fully taxable gifts prior to the date a taxpayer dies and paying the gift tax.  Although the estate and gift taxes are now “unified” with the same rates being applied, the gift tax is not imposed on the amount that is actually used to pay the gift tax—rather that tax is removed from the pool of assets that will eventually be subject to the tax. 

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No Deduction Allowed for Premiums Paid to Related Entity in Microcaptive Structure

The IRS has recently indicated a level of “unhappiness” with the concept of a microcaptive insurance company, adding them to the agency’s “dirty dozen” tax scams list in 2015 and declaring them a transaction of interest in Notice 2016-66.  In the case of Avrahami, et al v. Commissioner, 149 TC No. 17 we have the first time the Tax Court scrutinized this particular structure.

Captive insurance companies have been recognized as legitimate insurance arrangements by the courts in several cases (see Rent-A-Center, Inc. v. Commissioner, 142 TC 1 and AMERCO & Subs. v. Commissioner, 96 TC 18) so long as certain criteria are met that distinguish the arrangement as insurance rather than merely establishing a “set aside” of funds for potential liabilities.  These cases have generally involved large entities with the resulting captive being itself a relatively large organization.

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Memorandum Disagrees With Observation That Certain Small Partnerships Effectively Have No Tax Return Filing Requirement

In Chief Counsel Advice 201733013 the IRS concluded there is not an exemption from filing a tax return for small partnerships under any of the below authorities:

  • IRC §6031;
  • IRC §6693; or
  • Revenue Procedure 84-35.

IRC §6031(a) imposes the requirement that each partnership must file an annual partnership return. IRC §6698 imposes a per month penalty when the partnership fails to file a return—and for 2017 returns that penalty amount is set at $200 per month.[1]  This penalty can be waived if the failure to file is due to reasonable cause. [2]

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ESOP Failed to Cover Employees of Related Corporation, Plan Disqualified

Qualified retirement plan provision in the IRC generally give controlling owner-employees a trade-off—they can benefit under the plan, but only to the extent that an appropriate benefit is offered to the “rank and file.” Not surprisingly, some owners, attempting to maximize their benefit and avoid the cost of funding for other individuals, have attempted to establish structures to “isolate” the rank and file outside of the organization whose employees are covered by the program while still obtaining their services. And, similarly not surprisingly, the law has provisions meant to address such structures.

This type of arrangement was challenged by the IRS in the case of Paza Staffing Services v. Commissioner, Docket No. 6881-12R and is the subject of an unpublished order and decision published on August 17, 2017.   The plan in question was an employee stock ownership plan (ESOP) established by a corporation controlled by Dr. Zapolanski.

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Tax Court Refuses to Take Birth Certificate Provided by Taxpayer as Proof of Age When Taxpayer Provided Issuing Agency with Date of Birth

Actress Helen Hayes is not often quoted in Tax Court proceedings, but this case the court referenced her statement that “age is not important unless you are a cheese” as an introduction to a case that dealt with a situation where age was important to more than cheese. The case of Omoloh v. Commissioner, T.C. Summ. Op. 2017-64.

The issue in this case arose because Mr. Omoloh had taken a distribution from an individual retirement account. The question was whether Mr. Omoloh was over age 59 ½ and thus not subject to the 10 percent additional tax on premature distributions from his IRA.

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Split Fifth Circuit Panel Finds a Limited Ability to Substitute Land Was Not Fatal to Conservation Easement Deduction

In a split decision, the Fifth Circuit Court of Appeals reversed and remanded the Tax Court’s 2015 opinion in the case of BC Ranch II, LP et al v. Commissioner, Case No. 16-60068 and 16-60069. All the judges on the panel agreed that the Tax Court had erred in deciding that the entire amount paid by limited partners for their interests represented disguised sales and in deciding that a valuation penalty applied. But the panel split on a key question of whether the partnership had complied with the requirements to obtain a charitable contribution for the donation of a conservation easement, with a majority finding the Tax Court had erred in determining the contribution did not qualify for a deduction.

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IRS Will Not Grant Any Additional Time for Colleges to Report Tuition Paid on Form 1098-T

Previously, we reported that the IRS had issued a second one-year extension of time for colleges and universities to comply with the requirement to report tuition actually paid, rather than the amount billed, on Form 1098-T.  (See Additional Penalty Relief Granted to Educational Institutions Who Continue to Reports Amoufnts Billed Rather Than Paid on Form 1098-T)  But it appears that the colleges request for yet another extension will fall on deaf ears.

Tax Analysts reported in an article dated Aug. 15, 2017 that the National Association of College and University Officers (NACUBO) had been told by IRS officials that the agency will not grant any additional time to the educational institutions to comply with the reporting requirement added by 2015’s Protecting Americans from Tax Hikes Act (PATH).

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No Deduction for Employee Who Failed to Submit Expenses for Reimbursement by Employer

Taxpayers who seek deductions for employee business expenses will find the deduction barred if the taxpayer cannot show that he/she was not entitled to reimbursement from his/her employer for the expenses shown on the Form 2106.  This was the issue that tripped up the taxpayer in the case of Howard v. Commissioner, T.C. Summ. Op. 2017-65.

Employees are considered to be in a trade or business and thus are allowed a deduction for expenses incurred in pursuit of that trade or business if the expenses are “ordinary and necessary” expenses.[1]  However, if the employer offers to reimburse the expenses (such as via an expense reimbursement policy), but the employee does not take the employer up on the offer no deduction is allowed.  The expense in that case would not be “necessary” as the taxpayer had a source of reimbursement.

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Employee Could Not Deduct Commissions Paid on Same Day Sale from Stock Option Exercise as Ordinary Loss

In the case of Hann v. United States, Court of Federal Claims Case No. 15-20T, the taxpayer in question was seeking to claim an ordinary loss from aportion of the underwriting commissions paid when he elected to participate an initial public offering (IPO) of his employer’s stock. 

Under the terms of participation, Mr. Hann had to agree to dispose of the same proportion of all stock and stock rights he held as the primary shareholders were selling, which required him to exercise his vested and exercisable stock options to comply with that requirement if he wanted to participate. 

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Moneylending Was a Business for Taxpayer, So Debt Was a Business Bad Debt

In the case of Owens v. Commissioner, TC Memo 2017-157, the issue to be decided involved a $9.5 million bad deduction claimed as a business bad debt an individual who took the position he was in the trade or business of lending money.  The IRS argued that he wasn’t in the business of lending money, that the debts in question were not actually debts and, even if they were, the loan did not become worthless in the year he claimed the loss.

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IRS Announces Will Not Acquiesce in Like Kind Exchange Decision

The IRS has announced that it will not acquiesce with regard to a Tax Court decision that dealt with reverse like-kind exchanges under Section 1031 in Action on Decision AOD 2017-06.

The decision in question involved the issue of whether the benefits and burdens test was appropriate to be applied to a Section 1031 exchange.  The case, Estate of George H. Bartell Jr. et al. v. Commissioner, 147 TC No. 5 was previously discussed on this site in an article dated August 11, 2016.

Benefits and Burdens Test Does Not Apply in Case of Reverse §1031 Exchange

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Minority Shareholder Subject to Transferee Liability Repayment Even Though Not Aware of Fraudulent Nature of Payments

The Eleventh Circuit panel hearing the appeal in the case of Kardash, Sr. v. Commissioner, Case No. 16-14254, CA11 agreed that Mr. Kardash was not a villain and, in many ways, was a victim along with the IRS of a “the fraud conducted by his friends and coworkers at FECP, Ralph Hughes and John Stanton.”

But the Court found that, ultimately, Mr. Kardash ended up with funds that rightly belonged to the IRS and that IRC §6109, relying on applicable Florida state law, required him to pay those funds over to the IRS under the law of transferee liability.

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Proceeds from Sale of Land Used for Farming Is Not Income From Farming or Ranching for Purpose of Expanded Conservation Easement Deduction

In the case of Rutkoske, Sr. et al v. Commissioner, 149 TC No. 6, the Tax Court was asked to consider what types of income counted as “gross income from the trade or business of farming” for purposes of gaining access to the increased deduction for qualified conservation easements of property used in agriculture or livestock production under IRC §170(b)(1)(E)(iv).

Normally a deduction for a qualified conservation easement is limited to 50% of the taxpayer’s income after reduction for other charitable contributions.[1]  However, that limit rise to 100% for the contribution of property used in agriculture or livestock production by a qualified farmer or rancher.[2]

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Another Phishing Scam Makes the Rounds Attacking Tax Professionals

The IRS posted a Security Summit Alert in News Release IR-2017-126 regarding a new phishing scheme that has been reported to the agency that attempts to get usernames and passwords from tax professionals for their tax software provider accounts.  Unfortunately, one of the IRS’s suggestion to keep from getting caught arguably misses the mark and may make users more likely to fall for such scams.

Phishing is the attempt to get users to disclose various types of confidential information by using an email that appears to be legitimate.  The technique works around users who believe problems only occur if they open emails from “unknown” senders or who are simply harried and see what, on the surface, appears to be a reasonable request.

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Legal Memorandum Outlines How to Apply Research Credit Against Specific Payroll Tax Deposit Liabilities

One of the modifications to the research credit that was made as part of the Protecting Americans Against Tax Hikes Act of 2015 was to allow certain qualified small businesses to elect to claim the credit against employer social security, rather than income taxes.  In Legal Advice Issued by IRS Chief Counsel AM 2017-003 the IRS outlined issues related to when the elected credit would be used to offset employer social security tax deposit liabilities and the extent of the offset.

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Colorado Publishes Rules for Sellers to Comply with Tattletale Use Tax Reporting

The Colorado Department of Revenue has published an emergency rule (Rule 39-21-112(3.5)) to implement Colorado’s “tattletale” use tax reporting requirement for sellers who have more than $100,000 of sales into Colorado and do not collect Colorado sales tax.  The law in question is the one that was upheld by the Tenth Circuit Court of Appeals in the case of Direct Marketing Association v. Brohl, CA10, Case No. 12-1175, 2/22/16, cert denied.

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Structure Used By Shareholder to Hold S Shares Terminated S Status Instantly Upon Shareholder's Death

In Private Letter Ruling 201730002 we find a situation where a taxpayer’s death instantly terminated the S corporation in which he owned a 100% interest.  The structure he created to hold the S corporation stock set up a situation in which the S election’s validity continued only so long as the shareholder remained alive.

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Congressional and Administration Officials Release Statement on Tax Reform

A Joint Statement on Tax Reform was released on July 27, 2017 by House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX).  The statement provides a very basic outline of the basic ideas that the “Big 6” (a reference to the above group that has cropped up in the tax press) have determined to attempt to include in the tax reform bill that Congress expects to begin work on shortly.

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IRS Outlines Steps to Be Taken to Battle Increase in Business Related Tax Identity Theft

The IRS has issued a news release (IR-2017-123) updating what is happening with both individual and business related identity theft, as well as a fact sheet (FS-2017-10) outlining steps to be taken to combat an increase the agency has noted in identity theft from businesses and estates.

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Deemed Distribution Took Place on Last Day of Prior Year, Not Date Plan Administrator Sent Letter of Distribution to Participant

There was no question that the taxpayer in the case of Gowen v. Commissioner, TC Summ. Op. 2017-57 had defaulted on the loan he received from his former employer’s 401(k) plan and, as well, that he did not correct the default prior to the cure period allowed under the plan.  But the taxpayer argued that the actual deemed distribution did not take place in 2012, the year the deemed distribution was reported by the plan custodian on a Form 1099R, but rather at some point in 2013.

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