In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.  Following Hurricane Irma, the IRS in Announcement 2017-13 expanded the relief to cover those impacted by Hurricane Irma.

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When new provisions are added to the IRC, it takes a few years for the first court cases to begin to appear on the issues raised by the new provision.  We are now beginning to see the first cases that look at the of the portability rules found in IRC §2010(c), beginning with case of the Estate of Minnie Lynn Sower v. Commissioner, 149 TC No. 11.

The portability rules, first added to the law in 2010 and made a permanent part of the law in 2012, are meant to allow a surviving spouse to have the use of any unused exclusion amount from the deceased spouse’s estate, so long as the deceased spouse’s estate files an election to make that amount available to the surviving spouse. [IRC §2010(c)(4)]

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A qualified retirement plan can provide for loans to be made to participants under the terms of the plan if the plan provisions comply with the requirements under IRC §72(p)(2).  The loan must require repayment within five years, have payments made at least quarterly, and there must be a level amortization (that is, equal payments).  If a participant fails to comply with the terms of the loan, the balance is deemed distributed to the participant.

Reg. §1.72(p)-1, Q&A 10 allows a plan to include a “grace period” to allow participants to correct missed payments.  Under these provisions a missed payment must be corrected by the end of the calendar quarter after the calendar quarter in which the missed payment took place.  While a plan does not have to allow for a grace period, most plans will provide for this since otherwise any sort of problem would trigger a deemed distribution to the beneficiary.

In Chief Counsel Memorandum 201736022 the IRS looks at two situations to determine if the grace period rules have been complied with.

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In the case of Hamilton v. United States, USDC Northern District of Indiana, Case No. 1:15-cv-00303 a couple was attempting to invoke Revenue Procedure 2009-20 to claim a theft loss related to a failed investment scheme.

The Hamiltons had invested in a program where their credit would be used, along with the credit of others, to finance a development.  As the Court described the arrangement:

In 2006, plaintiffs Robert and Joan Hamilton were approached with an investment opportunity in a real estate development project in North Carolina known as the Grandfather Vista Development. The investment was portrayed as the means by which the developers were financing the development. For $500,000, investors could purchase a 10-acre lot within the development site from the developers. They would also simultaneously execute a buy-back agreement effective one year after the date of purchase, by which the developers would repurchase the lot at a price of $625,000. The developers personally guaranteed the buy-back agreements, and apparently represented to buyers that they had over $100 million in net worth, meaning they portrayed the investment as nearly risk-free. In addition, the buyers would not need to put substantial amounts of cash into the investment; instead, they would finance the investment through bank loans secured by the lots they were purchasing. The developers also agreed to pay the interest on those loans over the one-year period they would be outstanding. Thus, for a small down payment, the investors believed they would receive large, guaranteed returns after one year. As the Hamiltons explain it, they “understood that in exchange for using [their] credit to procure loans from pre-arranged banks, [they] would be repaid within a year with a significant return.”

The Hamiltons took the bait, although some might have worried that this deal sounded too good to be true.  For instance, it might raise some questions why the developers, if they were truly as financially sound as they asserted, would be forced to use such a high cost program to provide only short-term financing.  The Court pointed this out in a footnote, stating “[i]t is unclear how the developers explained their willingness to pay a twenty-five percent interest rate if they had such substantial assets to offer as security.”

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The IRS in Notice 2017-48 provided guidance on the use of leave-based charitable donation programs that employers can use to provide Hurricane Harvey relief.  Under such programs, employees give up certain amounts of vacation, sick or personal leave in exchange for which the employer makes a cash donation to a qualified charitable organization for Hurricane Harvey relief.

Normally such an arrangement would arguably be taxable to the employee, followed by a charitable contribution deduction for the employee or, in the alternative, that the payments are charitable contributions of the employer which would be subject to the appropriate limits on charitable contribution deductions.  This notice provides that the IRS will not assert that position for programs that meet the requirements of this notice.

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The Tax Court is a court of limited jurisdiction, which means it can only hear cases that the Internal Revenue Code provides that it can hear.  In Chief Counsel Advice 201735021 the issue was whether a payroll tax examination was a worker classification exam, as the Tax Court has the right to hear cases regarding employee classification under IRC §7436(a), but does not have jurisdiction to hear a case where the issue is whether certain payments represented disguised compensation to employees.

In this case, the IRS was examining an S corporation which, for some years in question, had used a professional employer organization (PEO) for its payroll.  Under the agreement with the PEO, all individuals working for the taxpayer, including the officers of the corporation, were treated as employees of the PEO and received paychecks from that organization. 

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Due dates for tax returns don’t change very often—so rarely that most taxpayers likely assume they simply won’t. But Congress in 2015 proved that such dates can be changed and that Congress is willing to do so, changing several dates. Matters are tougher when Congress moves the due date forward, as they did for partnerships.

Many partnerships, unaware of that requirement, either filed their Form 1065 or their request for an extension on Form 7004 after March 15, but on or before April 15, this year.  Notice 2017-47 provides relief from late filing penalties for partnerships in that situation who meet the requirements provided for in the notice.

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The daughter of the taxpayers in the case of Lopez v. Commissioner, TC Memo 2017-171 competed in several beauty pageants beginning at the age of nine.  She won several events and received cash prizes, totaling $1,325 and $1,850 in the two years at issue in the case and her parents deposited her winnings in a savings account for her future college education expenses.

Competing in such contests require incurring many expenses, as the parents discovered.  The taxpayers paid $21,732 and $15,445 of such expenses in the two years under examination.  The parents did not take reimbursement for any of the expenses from their daughter’s savings accounts.

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Note; On April 2, 2019 the Second Circuit reversed the Tax Court in this case. See Second Circuit Reverses Tax Court, Removing "Black Hole" for Claiming Refunds.

Taxpayers who fail to timely their tax returns will sometimes tell advisers that it doesn’t matter because they are sure they are overpaid.  That’s fine—except that any overpayment can be lost if the taxpayer waits too long to timely file the return.

In the case of Borenstein v. Commissioner, 149 TC No. 10, the taxpayer discovered a way to lose a refund that probably will be new to most readers.

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In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.

The general relief is described in the notice as follows:

…[A] qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey, to an employee or former employee whose principal residence on August 23, 2017, was located in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (“FEMA”) because of the devastation caused by Hurricane Harvey or whose place of employment was located in one of these counties on that applicable date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date.

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One of the traditions of tax season for advisers is filing extensions for taxpayers on April 15.  The case of Laidlaw, et ux. et al v. Commissioner, TC Memo 2017-167 deals with a problem when the IRS claimed not to have received an extension that the taxpayer’s adviser claimed to have filed.

The taxpayers filed their tax returns for 2005 at the extended due date of October 16, 2006.  The taxpayers had filed Forms 4868 for each of the prior three years—but the IRS did not have a record of receiving one for 2005.  The forms were not sent by certified or registered mail, but rather the taxpayer’s adviser testified that he sent them in by regular mail.

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In the arena of tax law, often minor differences in a situation may create major differences in how a situation is evaluated for tax purposes.  What a taxpayer must show to demonstrate an activity was entered into with an intention to make a profit is one of those areas where there are different tests depending on the situation.

Specifically, a not for profit organization seeking to offset unrelated business taxable income from one activity with losses from another unrelated business activity faces a very different hurdle to show that the second activity was entered into with the intent to make a profit.  This issue was discussed recently in the case of Losantiville Country Club v. Commissioner, TC Memo 2017-158.

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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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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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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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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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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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