The IRS has issued guidance (LB&I Memorandum  LB&I-04-0917-005) that allows certain large taxpayers to adopt a simplified method of determining qualified research expenditures (QREs) to be used in computing the credit for increasing research activities under IRC §41.  The method makes use of the entity’s audited financial statement’s amount of research and development expenditures reported as an expense under the provisions found in Financial Accounting Standards Codification ASC 730, Research and Development.

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The IRS announced a pilot program where it would accept private letter ruling requests on general federal tax consequences of transactions that aimed to be tax free distributions of corporate stock.  The transactions would be ones intended to qualify under IRC §§368(a)(1)(D) (“D” reorganizations) and 355.

The program, described in Rev. Proc. 2017-52, will run for 18 months after which the IRS will evaluate the program and whether it makes sense to terminate it, extend it or expand it.

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Clients who receive legal settlements often believe that because they have been awarded damages for a wrong that occurred the payment is not subject to income taxes.  But the tax law is not so simple.  The default under federal tax law, found at IRC §61(a), is that all items of income are taxable, with the burden falling on the taxpayer to point out an exception that applies in his/her case.

The case of Ritter v. Commissioner, TC Memo 2017-185, looks at an award received by a homeowner whose house was taken in a foreclosure proceeding.  The taxpayer received a payment related to a settlement between the lender and the government to deal with, as the Office of the Comptroller of the Currency labeled it, “deficiencies and unsafe or unsound practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s initiation and handling of foreclosure proceedings.”

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The IRS has issued proposed regulations that would allow employers to truncate social security numbers (SSNs) on the employee copies of Forms W-2 in REG-105004-16.  However, the IRS has announced that the option won’t be available for W-2s issued before December 31, 2018.

Prior to a change in the law found in the PATH Act, IRC §6051(a)(2) required the employee’s social security to be printed in full on the employee’s copy of Form W-2.  Due to concerns regarding identity theft, Congress changed the law to remove that requirement.  However, the law did not mandate the use of truncated numbers and the regulations continue to require use of the employee’s entire social security number.

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The IRS has yet again extended the relief it provided for Hurricane Harvey to cover Hurricane Irma.  In Notice 2017-52 the IRS has provided the same relief for employees and employers when a leave donation program to benefit victims of Hurricane Irma as Notice 2017-48, the details of which were covered in an earlier blog post.

Generally, an employer can allow employees to donate leave time of any sort to a program where the employer then pays an amount equal to the value of that time to a §170(c) charity to be used for relief for victims of either hurricane.  The IRS will not treat the payment as taxable income for the employee, but will treat the amount as compensation expense, rather than a charitable contribution, for the employer.

The payment to the charitable organization must be made before January 1, 2019.

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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.  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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