IRS Grants Estate Relief to Make Late Election to Claim Charitable Contribution in Prior Year

While PLR 201720003 is not really a major ruling—the IRS is merely granting an estate a right to make a late election—it does provide a reminder about the special rules that impact trusts and estates when claiming charitable contributions.  These rules are in some ways more restrictive than those imposed on other taxpayers, but in other ways they are far more generous.

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Court Accepts IRS's Reconstruction of Business Using Bank Deposits and Forms 1099K

In the case of Kahmann v. Commissioner, TC Summary Opinion 2017-35 the IRS was suspicious that the taxpayers had understated their gross income from their business for the year.  Some of this suspicion arose because the taxpayers failed to turn over bank statements for the business to the agent when they were requested. 

The agent was forced to issue summonses to banks where she was aware the taxpayers maintained at least three accounts. She obtained those accounts to be able to perform a bank deposits analysis, looking for unreported income.

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Organization Formed to Support "Community Journalism" Did Not Qualify for Exempt Status

In PLR 201720010 the IRS ruled the fact that an organization is not being operated to generate a profit and may be providing services to organizations that are themselves performing charitable and educational purposes does not mean the organization providing the services can qualify as a §501(c)(3) organization.  The organization in question was therefore denied its request to be granted §501(c)(3) status.

The organization had changed its proposed purpose a few times as it attempted to assist in the development of community oriented independent journalism initiatives.  Originally the organization had planned to develop open source software to be used by such organizations, but such software became available from other sources. 

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Tax Court Finds §2036(a)(2) Triggers Inclusion in Estate

The Tax Court again agreed with the IRS that a family limited partnership arrangement (FLP) had run afoul of IRC §2036(a), the IRS’s most successful route to undo such planning due to “bad facts.”  But, in the case of Estate of Powell v. Commissioner, 148 TC No. 18 the Tax Court, for the first time since it proposed a “lack of real fiduciary duties” theory for invoking IRC §2036(a)(2) in the case of Estate of Strangi v. Commissioner¸ TC Memo 2003-145 that the Court invoked that provision, rather than the general “implied life estate” theory under IRC §2036(a)(1) to unwind the plan.  Also, the majority opinion also provided that IRC §2043 served to limit the inclusion in the estate to only the excess value of the assets transferred over the interest received.

The plan in this case was very much a “deathbed” plan, with the transfers occurring one week before Nancy Powell died.  As well, at the time of the transfers Nancy was incapacitated as well as terminally ill, so her son, acting under a Power of Attorney (POA), formed the partnership with himself as general partner and then transferred Nancy’s assets into the partnership in exchange for a 99% limited partnership interest.   On that same day, her son, again acting under the POA, transferred Nancy’s limited partnership interest to a charitable lead annuity trust (CLAT).

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Ninth Circuit Panel Finds Statute for IRS to Assess Listed Transaction Disclosure Penalty Does Not Start Unless Form 8886 Filed

The Ninth Circuit Court of Appeals reversed a District Court decision that determined the IRS had acted too late in attempting to assess a penalty in the case of May v. United States, CA9, Case No. 15-16599.  In a 2-1 split decision the panel decided that the one statute found in IRC §6501(c)(10)(A) does not begin to run until a taxpayer files a Form 8886 with the IRS, regardless of whether the IRS is already in possession of the information that is provided in that form.

The District Court found that the IRS had attempted to assess the penalty for failure to disclose a listed transaction more than one year after the IRS agent examining the taxpayer came into possession of information that would justify the imposition of the penalty.

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CEO and President, Relying on Work of Outside Auditor, Reasonably Believed Trust Fund Taxes Had Been Paid

The Sixth Circuit Court of Appeals in the case of Byrne v. United States, CA6, No. No. 2:06-cv-12179 had to decide if the president and CEO had acted recklessly in not insuring that trust fund taxes had been deposited when they were aware of issues with the quality of work performed by the controller.  If they had, they would be liable personally for the undeposited trust fund taxes under IRC §6672.

Any responsible person may be held personally liable by the IRS for unpaid trust fund taxes (that is, federal income taxes and FICA taxes withheld from employee’s paychecks) if the IRS can show that individual either:

  • Had actual knowledge that the taxes had not been paid and had the ability to pay the taxes (even if that meant not paying other bills) or
  • Recklessly disregarded known risks regarding a failure to pay such trust fund taxes.

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CCA Outlines When Refunds Created by OVDP Filings Can Be Offset Against Tax Due

In Chief Counsel Advice 201719026 the IRS looked at what happens to taxpayers who, under terms of the Offshore Voluntary Disclosure Program (OVDP), find that there is a refund due on one of the prior year returns filed under the program.  The key question was whether any such refund could be offset against other taxes due or refunded to the taxpayer.

The OVDP program was created in 2009 to allow a method for taxpayers with previously undisclosed foreign bank accounts to come into compliance voluntarily.  Under the terms of the program a taxpayer must disclose all such offshore accounts and file original or amended returns reporting the income for the most recent eight years of returns whose due date has passed.  The taxpayer also gives consent for the IRS to assess tax for all those years as part of the program regardless of whether the period for assessment generally under IRC §6501 has run.

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Divorce Decree Splitting Ex-Spouse's Liability for Prior Taxes Did Not Control Innocent Spouse Relief

In the case of Asad and Akel v. Commissioner, TC Memo 2017-80 the IRS agreed each of the now divorced spouses should be liable for only a portion of the tax due, each qualifying for innocent spouse relief under IRC §6015 for tax liabilities arising from rental properties owned by the other spouse.

However, the taxpayers in this case, while accepting that neither should be liable for the entire balance due, argued that rather than using the allocation the IRS arrived at based on the ownership of the properties leading to the tax liability, each should be relieved of 50% of the liability.  That is, they proposed to split the tax evenly.

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IRS Adds Direct Link to Get Transcript to View Your Tax Account Information Page

The IRS has made available transcripts on its “View Your Tax Account Information” page for taxpayers.  This page, found at, allowed taxpayers to view their payoff amount if there are unpaid taxes, the balance of tax due for each year for which taxpayers owed taxes and 18 months of payment history.

In a page update on May 8 ,2017 the IRS added the option to get various Form 1040 series transcripts via the Get Transcript tool without having to log in again

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Return Filed After IRS Assessment Did Not Allow for Tax Debt to Be Discharged in Bankruptcy

The Third Circuit Court of Appeals declined to decide if a late filed return would automatically fail to constitute returns for bankruptcy purposes in the case of In re Thomas Giacchi v. United States, CA3, No. 15-3761, deciding the taxpayer’s attempt at filing a valid return for bankruptcy purposes fell short for other reasons.

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2015 (BAPCPA) that added the definition of a “return” to the Bankruptcy Code, the question has arisen about whether a late filed return could ever constitute a tax return where the balance of unpaid tax could be discharged in bankruptcy (after meeting various other requirements).

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Deposit May Not Transferred from One Person Potentially Subject to Transferree Liability to Another Person Ultimately Found Liable for the Same Tax

Under IRC §6603 a taxpayer who believes a tax may be imposed against him/her in the future, but for which has not yet been assessed, may make a cash deposit with the IRS which will serve to stop the running of any interest on that tax at the date of the deposit if that tax is later assessed.  One such way a taxpayer might wish to make a deposit would be in a case where the taxpayer believed he/she potentially could be subject to transferee liability.

In the case of transferee liability, an individual becomes liable for another taxpayer’s tax based on certain transfers that were made to that person.  In essence, the transferee received assets which the law views as depriving the taxpayer that owed the tax of the ability to pay that tax.  In some cases, there may be multiple potential “transferees” that could be found liable. 

In Field Attorney Advice 20171801F the issue was whether a person who made such a deposit could direct the IRS to apply some or all of that deposit against the liability of another person found liable for the same liability?  And, if the person can direct the transfer, can an attorney-in-fact (that, is, a representative named a Form 2848, Power of Attorney and Declaration of Representative) for that person make that direction?.

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Petition to Challenge IRS Denial of Innocent Spouse Relief Filed Too Late Despite Filing on Date Provided for in IRS Correspondence

If the IRS erroneously informs a taxpayer that the last day for filing a Tax Court petition is later than the actual deadline (90 days after the IRS mailed its determination of final relief in this case as provided in IRC §6015(e)(1)(A)), does that extent the time the taxpayer has to file with the Tax Court?  In the case of Rubel v. Commissioner, CA3, No. 16-3526, the Third Circuit Court of Appeals ruled that the answer is no—the Tax Court lacks jurisdiction to hear the case once the 90-day period expires, despite the erroneous information provided by the IRS.

In the case in question the IRS had denied Nancy’s request for innocent spouse relief on January 4, 2016 for two tax years and on January 13, 2016 for another tax year.  The date 90 days from those dates were April 4, 2016 for the first two years and April 12, 2016 for the final year.

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North South Spinoff Found to Be Tax Free by IRS

In Rev. Rul. 2017-9 the IRS ruled on two different transactions involving three related corporations, one of which gives the IRS position on “North-South” spinoff transactions that the IRS had placed on its no rule list in 2013.  

The first situation, and the one which proves to be the most taxpayer friendly, involved three related corporations involved in a North-South spinoff.  P, the parent corporation, owns 100% of D, what will eventually be the distributing corporation in this arrangement.  D owns 100% of C, a corporation whose stock the taxpayer wishes to transfer upstream to P.

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IRS Releases Inflation Adjusted Individual Affordable Care Percentages for 2018

In Revenue Procedure 2017-36 the IRS provided the 2018 inflation adjusted amounts for provisions related to the individual health care mandate and credit rules under the Affordable Care Act for 2017. 

Matters are clearly in flux, as the IRS published this table on the same day that the House of Representatives passed the American Health Care Act of 2017 and sent it on to its fate in the United States Senate.  But, for now, these numbers are scheduled to be in effect for 2018.

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Where Taxpayer Failed to Report Items on Partnership K-1, IRS Could Assert Negligence Penalty in Partner Level Proceeding

Although the TEFRA Partnership audit rules are now living on borrowed time, cases looking at new issues continue to arise under those rules, and many involve concepts that likely will carry over to the new partnership audit regime.  One such issue arose in the case of Malone v. Commissioner, 148 TC No. 16.

Congress in 1997 modified the TEFRA partnership audit rules to bring certain issues involving penalties applicable to partnership items under the TEFRA rules where the matter had to be decided in a partnership proceeding, and not in proceedings for individual partners.

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Fact that Taxpayer Might Have to Repay Taxes Received Back From UK Did Not Make the Payment Not a Refund

In the case of Sotiropoulos v. Commissioner, TC Memo 2017-75 argued that amounts she received from the United Kingdom for claims she submitted related to what the UK government was claiming in UK courts as tax shelters were not tax refunds.  She noted that the UK government was challenging those shelters in court and she believed it was likely she would need to repay those funds.

When a taxpayer claims a foreign tax credit under IRC §905(c)(1), she is required to notify the IRS of any later refund of some or all of the taxes used to compute the credit pursuant to IRC §905(c)(3), normally by filing an amended return.

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Laboratory Found Not to Be Health Service Business For §1202 Stock Purposes

The exclusion for gain from the sale of qualified §1202 stock now is at 100% for stock acquired after September 27, 2010 so long as the taxpayer holds it for five years.  But a number of businesses are excluded from issuing such favored stock.  In PLR 201717010 the IRS looks at whether a taxpayer’s business would cause it to fail the test.

The potential benefit of §1202 is one of the reasons a small business might still consider forming as a C corporation (S corporation stock does not qualify for §1202 treatment) if it can otherwise meet the requirements, which will include a limit on gross assets, an “active business” test and the business cannot be on the list of “prohibited” businesses found at IRC §1202(e)(3).

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Foreign Earned Income Exclusion Election Filed After SFR Issued Is Not Valid

In the case of Redfield v. Commissioner, TC Memo 2017-71 the Tax Court was presented with a taxpayer that the Court clearly respected.  Mr. Redfield had served as a Marine, with tours of duty in Afghanistan, tours from which, in the words of the Court, “he emerged far from unscathed…”  But, unfortunately for Mr. Redfield, these considerations did not change the application of the rules regarding the time by which a taxpayer must file an election to claim the foreign earned income exclusion under IRC §911(a)(1).

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Either of Two Computations of Maximum Plan Loans Deemed Acceptable by IRS

The IRS Tax Exempt and Government Entities division has published guidelines (TEGE-04-0417-0016) for agents to use to determine if the rules of IRC §72(p)(2) have been followed regarding the maximum amount an employee may borrow from a qualified retirement plan.

Under IRC §72(p)(1) a loan to a plan participant is to be treated as a taxable distribution to the participant.  However, if the loan meets the requirements of IRC §72(p)(2) it will not be treated as a taxable distribution.  Obviously, since an employee isn’t likely to want a loan on which he/she pays tax on and then still must repay, plans that offer loans generally have terms that require the loan to comply with the provisions of IRC §72(p)(2).

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