In Chief Counsel Advice 201742022 the IRS considered whether certain arrangements related to a church’s §403(b)(9) retirement plan amount to loans to the employer prohibited under Reg. §1.403(b)-9(a)(2)(i)(C).

Reg. §1.403(b)-9(a)(2)(i)(C)’s exclusive benefit rule provides the following requirement for a program to be considered a valid IRC §403(b)(9) retirement account:

(C) The assets held in the account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries (and for this purpose, assets are treated as diverted to the employer if there is a loan or other extension of credit from assets in the account to the employer).

Image copyright mirco1 / 123RF Stock Photo

The Tax Court found that, in the case of Partyka v. Commissioner, TC Summ. Op. 2017-79, that while the taxpayer had sustained a theft loss that was properly deductible in 2012, the taxpayer had not taken sufficient care to obtain proper values for the property stolen, assessing the accuracy related penalty of 20% under IRC §6662 in addition to the tax due.

This case involves a combination of the sale of household furnishing and the rental of a residence to a tenant who ended up giving the taxpayer a check that bounced to pay for the furnishings and initial rent.  The tenant did not make good on the amount due, so the taxpayers undertook proceedings to evict the tenant.

Image copyright pixelsaway / 123RF Stock Photo

The IRS Large Business & International Division has issued a memorandum (LB&I-04-0917-004) dealing with the classification of various types of mining equipment to determine units of property and major components under Reg. §1.263(a)-3(e).

The memo is meant to provide some consistently and eliminate confusion over what are units of property and major components of units of property for mining organizations.  However, since making use of definitions will likely change how an organization has been classifying items as units of property or major components, an entity wishing to make use of this provision will need to go through the procedures for a change of accounting method.

Image copyright tomas1111 / 123RF Stock Photo

The IRS in FR Doc 2017-22776 made official the withdrawal of proposed regulations issued in August of 2016 (REG-163113-02) under IRC §2704 that would have effectively reversed the Kerr decision with regard to family limited partnerships.

The proposed regulations would have significantly changed the regulations under IRC §2704 in ways that would have rendered it much more difficult to create family limited partnerships that could give rise to significant transfer tax discounts.  The regulations specifically addressed issues that the Tax Court had noted in the Kerr decision when it decided for the taxpayer based on the IRS’s regulations for that section.

Most advisers considered these regulations dead following the elections in November of 2016.  The regulations were one of many studied by the IRS for possible withdrawal and, not surprisingly, were on the list of those the agency planned to withdraw when that study of regulations was completed.  This notice simply makes that withdraw official.

Image copyright simoniya / 123RF Stock Photo

There are some posts that bother me when I write them because Ithink there must be something I am missing.  But I've tried to find that in this case and haven't, so I'll take the risk (and keep your eyes open for a correction if I've actually missed something).

A married taxpayer generally can only claim an earned income credit if the taxpayer files a joint return per IRC §32(d).  As well, a taxpayer is not allowed to elect to file a joint return if the taxpayer has filed a separate return, has received a notice of deficiency and files a petition with the Tax Court per IRC §6013(b)(2)(B).

But what happens if the taxpayer in question had filed a return using a filing status other than married filing separately, in this case head of household?  Per the Tax Court in the case of Knez v. Commissioner, TC Memo 2017-205 that return did not constitute a “separate return” for these purposes and, thus, Ms. Knez could elect to file a joint return with her husband even after she had filed a Tax Court petition.

In the end it appears the Tax Court got to a “kind of” proper result (allowing the earned income tax credit) but likely via the wrong route, at least based on the facts given.

Image copyright amasterpics123 / 123RF Stock Photo

In a case discussed here in 2015 (Restricted Stock Interest Still Found to Constitute Ownership Interest for Qualifying as Real Estate Professional) an Arkansas U.S. District Court held that a taxpayer who held restricted stock that constituted greater than 5% of the stock of the corporation could count hours worked in that entity towards qualifying as a real estate professional.

As is discussed in the original article, so long as no Section 83(b) election is filed by the taxpayer, the restricted stock is treated for S corporation purposes as "not issued" and thus does not create second class of stock issues.  The IRS had argued that same provision meant that the stock had to be ignored for purposes of the 5% stock ownership rule for counting as real estate professional hours time spent working as an employee for the S corporation.  The court did not agree with the IRS and treated the individual as a real estate professional.

Now the IRS has announced the agency will not follow the result in this case in Action on Decision 2017-07.  In a footnote the agency described the specific issues the agency was disagreeing with.

Nonacquiescence relating to the holdings that: 1) mere possession of a stock certificate, disregarding other conditions, restrictions or limitations on the possessor’s rights regarding the stock, constitutes ownership for purposes of § 469(c)(7)(D)(ii); and 2) work performed by the taxpayer in a rental real estate activity for purposes of § 469(c)(7)(A) may also constitute work performed by the taxpayer in non-rental business activities of the taxpayer for other purposes of § 469.

Image copyright happystock / 123RF Stock Photo

The Tax Court ruled that when an entity has its tax-exempt status retroactively revoked, interest is due on any underpaid tax for the years that the entity now has a tax liability from the date a return would have been originally due for an entity that did not have exempt status.  In CreditGuard of America, Inc. v. Commissioner, 149 TC No. 17 the Tax Court rejected the taxpayer’s view that interest should not begin to run until the date it was finally determined the entity was not tax exempt.

The issue of the retroactive loss of the organization’s exempt status back to 2002 had previously been decided in a stipulated Tax Court decision entered on November 30, 2012, based on an examination the IRS had begun in 2003 but not concluded until February of 2012.  The total tax determined to be due from the taxpayer was $216,547.

Image copyright iqoncept / 123RF Stock Photo

The Tax Court, in the case of Palmolive Building Investors LLC et al. v. Commissioner, 149 TC No. 18, refused to follow the holding of the First Circuit Court of Appeals in the case of Kaufman v. Commissioner.  The Court continued to very strictly apply the subordination requirement in Reg. §1.170A-14(g), finding that the taxpayer in this case had not managed to satisfy the perpetuity requirement of IRC §170(h)(5).

The First Circuit and the Tax Court had disagreed on the extent to which a mortgage must be subordinated to meet the requirements of Reg. §1.170A-14(g)(2).  That regulation provides:

(2) Protection of a conservation purpose in case of donation of property subject to a mortgage.

In the case of conservation contributions made after February 13, 1986, no deduction will be permitted under this section for an interest in property which is subject to a mortgage unless the mortgagee subordinates its rights in the property to the right of the qualified organization to enforce the conservation purposes of the gift in perpetuity.

Images copyright kharlamova / 123RF Stock Photo

Back in 2014 the Seventh Circuit Court of Appeals sidestepped the question of whether the allowance of an exclusion for a housing allowance for a minister of the gospel under IRC §107(2) was barred by the U.S. Constitution.  But the method the panel used to sidestep left an obvious route for the issue to come back—and now it has returned to the Courts.

Originally in the case of Freedom from Religion Foundation, Inc. v. Lew, 114 AFTR 2d, ¶2014-5425 issued in November of 2014 the panel found that the organization suing to bar ministers from receiving an exclusion from income for housing allowances did not show any harm to the organization.  The panel noted that the organization had not attempted to receive a similar exclusion for its employees from the IRS.  So, it was the organization that voluntarily treated the payments as taxable to its employees rather than the IRS denying that treatment.

At the time I had noted that the obvious next step was for the organization to ask for such treatment and then come back to Court if the IRS did not allow the claim.  The case of Gaylor, et al v. Mnuchin, et al, W.D. Wisconsin, Case No. 3:16-cv-00215 brings the matter back to the courts.  And, in fact, the case is back before the very trial judge that, in the original case, had found that IRC §107(2) violated the U.S. Constitution.  Not surprisingly, since the Seventh Circuit never actually dealt with that question (disposing of the case on a standing issue), the judge came to the same conclusion this time.

Image copyright aquir / 123RF Stock Photo

Under proposed regulations on which taxpayers may rely upon immediately, elections made by partnerships under IRC §754 will no longer have to be signed by a partnership representative (REG-116256-17; 82 F.R. 47408-47409, October 12, 2017).  The current regulations require that the election be signed, which has created issues with electronically filed partnership income tax returns.

In certain situations, a partnership may elect to adjust the basis of partnership property upon the occurrence of certain actions, such as a transfer of a partnership interest (as provided for in IRC §743) or upon distributions of property (as provided for in IRC §734).

Image copyright belchonock / 123RF Stock Photo