Cases and Rulings
Chapter 16 pp. 607 - 684
2015 National Income
TAX Workbook™
Introduction
pp. 608 - 609
 20% accuracy-related penalty for
substantial understatement
 Exceptions to IRC §6662:
1.“Substantial authority” for position
or
2.“Reasonable basis” for position with
adequate disclosure on return
Standards of Authority
If Chance of
Winning Is:
▪ 0 - 5% =
▪ 20% =
▪ 33% =
▪ 40% =
▪ 50+% =
Your position is:
Frivolous
Reasonable Basis with Disclosure
Realistic Possibility (AICPA)
Substantial Authority (IRS)
More likely than not
 IRC §6694 Preparer Penalties
Substantial Authority
p. 609
Must believe that there is at least a 40%
chance of winning the case on its merits.
Substantial authority can exist for more
than one position relating to same item.
Code, regulations, IRS releases,
court cases, treaties,
congressional reports . . .
Reasonable Basis
pp. 609 - 610
 Less stringent standard than substantial.
 Some authority exists (20%) even if weight
of contrary authority is greater.
 Disclosure required to avoid penalty if have
only a reasonable basis.
 Disclosure on Form 8275 or 8275R.
Practitioner Note
p. 609
IRS Disclosure Standards
 IRS Revenue Procedure each year:
 2015 – Rev Proc. 2015-16, 2015-7 IRB 596
▪ Which provides that some items are considered
adequately disclosed on the return itself.
 2014 – Rev. Proc. 2014-15
 2013 - Rev. Proc. 2012-15
 2012 - Rev. Proc. 2011-15
 In addition, courts have ruled that alternate forms
of disclosure in the tax return itself may be
adequate to avoid IRC §§ 6662 & 6694 penalties.
Jurisdiction of Courts
pp. 610 - 611
 Tax Court has nationwide jurisdiction.
▪ Located in DC & travel to states.
▪ Regular (or TC) case v TC Memo case.
 District Court – Pay 1st ; File claim / suit for refund.
 Circuit court jurisdiction is geographic, except for
Federal Circuit; See map on page 610.
 Tax Court must follow appellate decisions only for
TPs within that court’s jurisdiction (Goldsen Rule)
 Other circuit’s opinion has authority.
Organization of the Internal Revenue Code
Fig 16.2; 16.3; 16.4 & 16.5
pp. 611 - 615
Pages 611 - 615
provide a list of the
IRC Chapters and
Regulation Sections.
Rulings and Cases Discussed
Elsewhere in Text
p. 607 - 608
Pages 607 - 608 provide a
list and index of the
Rulings and Cases and
where they can be found in
the Workbook (Text)
Reg-109187-11
p. 616
 Proposed Reg under §453B, IRC provides that:
 Gain or loss is not recognized on disposition of an
installment obligation if not recognized under another
Code Section.
▪ But, gain or loss is recognized on satisfaction of an
installment agreement, such as when holder transfers it
to the issuer for an equity interest in the issuer.
 Gain or loss is recognized when an installment agreement
is satisfied at other than face value or when obligation is
distributed, transmitted, sold or disposed of.
Field Attorney Advice
pp. 616 -617
 A nonexempt agricultural
cooperative did not make per unit
retains paid in money (PURPIM)
with respect to grain purchases by
a related LLC from the taxpayer’s
patrons for purposes of the
domestic production activity
deduction.
In re Wilson
52 BR 635 (Bankr. ND Calif, 2015)
p. 618
 TP filed 2008 tax return late in 2011 but did not pay the
liability & did have an extension to 10-15-2009.
 7-24-2012 TP filed for bankruptcy.
 Trustee paid the taxes but not the penalties.
 IRS assessed penalties under 6651(a)(1), IRC.
 TP argued penalties were “with respect to tax imposed” on
4-15-2009 filing date without extensions & so
dischargeable since more than 3-years prior to bankruptcy
petition.
 IRS argued penalties not dischargeable because the
10-15-2009 extension date was within 3-years of
bankruptcy petition………What
say yee?
In re Wilson
52 BR 635 (Bankr. ND Calif, 2015)
p. 618
 Federal taxes and penalties can be discharged if
they are “imposed with respect to a transaction or
event “ that occurred more than 3 years before
the bankruptcy petition.
 Court held the taxes and penalties are “imposed
with respect to a transaction or event” that
occurred on the due date for the return without
extensions………4-15-2009.
 Penalties were discharged by the Bankruptcy
Court.
In re Fahey
779 F 3d 1 (1st Cir 2015)
- 619
pp. 618
 Failure to timely file State
income tax returns prevented
the discharge of State taxes
in bankruptcy.
Yuska v Cmmissioner
TC Memo 2015-77
p. 619
 A post bankruptcy petition
filing of a Notice of
Determination Concerning
Collection Actions violated
the bankruptcy automatic
stay.
Rev Proc 2015-37
pp. 619 - 620
 The IRS added a new area
to the list for which it will
not issue private letter
rulings.
Reg-107595-11
pp. 620 - 622
 The proposed Regulation
adds references to §1022 to
various basis rules.
Bell V Commissioner
TC Memo 2015-111
pp. 622 - 623
 Husband & wife formed a corporation & sold their sole
proprietorship to the corporation.
 Sales price was $250,000, payable at $10,000 monthly or
more at 10% interest.
 Purchase agreement signed but no note, collateral or
appraisal of asset values.
 Corporate stock was issued for $500 weeks later.
 Individuals reported sale of assets as long term capital
gain & corp amortized the purchase price over 5 years.
 IRS treated transfer as capital contribution to corporation,
installment payments as dividends & no amortization.
 Sale or ontribution of capital? What say yee?
Bell V Commissioner
TC Memo 2015-111
pp. 622 - 623
 The Court applied an 11-factor test to the facts.
 Some factors supported both arguments but weight was
on IRS side.
 A couple of key factors:
▪ Corp had no capital prior to sale.
▪ Thinly capitalized corp could not get loan elsewhere.
 The court concluded that:
▪ The transfer was a contribution of capital &d not a sale.
▪ The installment payments were distributions to the SHs.
▪ Earnings & profits exceeded distributions so the
distributions were dividends.
Letter Ruling 2015-22-001
p. 623
 Corporation failed to file & pay State taxes.
 State administratively dissolved the
corporation.
 Corporation was later reincorporated.
 IRS Ruling –
▪ Corporation was not terminated for
Federal tax purposes.
▪ Corporation liable for taxes based on
Federal status.
Coastal Heart Medical Group, Inc V Commissioner
TC Memo 2015-84
p. 614
 An LLC member could not
increase basis in an LLC
interest for a personal
guarantee of an equipment
lease where the rented
equipment was not LLC
property.
Reg-151416
p. 625
 Proposed regulations
prescribe the measurement
of a partner’s interest in IRC
§751 property (unrealized
receivables and substantially
appreciated inventory items)
and described the effect of
distributions.
Letter Ruling
pp. 625 - 626
 The IRC §83(b) election is
effective if the taxpayer filed
the election with the iRS
wihin 30 days of the date of
the transfer of property but
failed to attached the election
to the annual return.
Prop Tres Reg §1.183
p. 626
 The IRS has issued proposed
regulations allowing the IRC
§83(b) election to be made by
filing a written statement with
the IRS.
Methvin V Commissioner
TC Memo 2015-81 pp. 626 - 627
 The taxpayer received selfemployment (SE) income
from investments in oil
and gas ventures.
Eaglehawk Carbon, Inc. v US
122 Fed Cl 209 (20-15) p. 627
 S Corporations are entitled to
interest on overpayments of
taxes at the reduced interest
rate for corporate tax
overpayments exceeding
$10,000
McMillan V Commissioner
TC Memo 2015-109
p. 628
 A business deduction was
allowed for 50% of legal fees
from a suit involving the
taxpayer’s residence where
50% of the residence was
used for the taxpayer’s
business.
Olive V Commissioner
792 F.3d 1146 (9th Cir 2015)
p. 628
 Taxpayer operated a legal medical
marijuana dispensary in California.
 Taxpayer deducted the expenses.
 §280E provides an exception to §162 and
prohibits deduction of expenses of a
business trafficking in a controlled
substance.
 Marijuana is a controlled substance.
 Deduction disallowed.
Chief Counsel Advice 2015-31-016
p. 629
 State of Washington imposed a 25% excise tax on
marijuana which is legal in Washington.
 §280E prohibits deduction of expenses in dealing
with controlled substances like marijuana.
 However §164 provides taxes are deductible &
that any tax on disposition of property is a
reduction in the amount realized.
 Payment of tax is allowed to reduce amount
realized on the sale of property.
 Tax not considered a deduction but a reduction in
amount realized and so allowed.
Chief Counsel Advice 2014-39-001
pp. 629 -630
 Restaurants that are subject to
the uniform capitalization rules
should not be forced to use the
simplified production method for
allocating kitchen labor costs if
they implement a reasonable
facts and circumstances method
instead.
Chief Counsel Advice 2014-47-027
pp. 630 - 631
 A 52-53 week tax year is
deemed to end on December
31, 2017, for purposes of the
domestic production activities
deduction.
Letter Ruling 2015-28-026
p. 631
 Taxpayer convicted under federal law for
activities related to sale of an illegal product.
 Taxpayer sentenced to jail, fined and required to
pay restitution to the Government.
 Taxpayer paid and deducted restitution payment.
 §162 prohibits deduction of any fine or similar
penalty paid to a Government for the violation of
any law.
 Repayment was a deductible ordinary and
necessary business expense.
T.D. 9696
p. 631
 Final regulations provide safe
harbor for treating local
lodging expenses incurred
for attendance at a business
function as ordinary and
necessary business
expenses.
Central Motorplex, Inc V Commissioner
TC Memo 2014-207
p. 632 - 633
 Corporations’ president managed business, hired
and fired, etc.
 Corporation’s secretary-treasurer was in charge
of repair & maintenance of cars in inventory.
 Another worker was in charging of picking up,
delivering cars and securing plates & titles.
 Corporation treated all 3 as independent
contractors.
 IRS held they were employees.
 What say yee?
Central Motorplex, Inc V Commissioner
p. 632 - 633
 Officers of corporations who perform just minor
services for compensation are “statutory
employees”.
 President and Secretary-Treasurer were
employees by statute.
 Using common law factors court held third worker
was an employee since president had control over
worker, worker did not provide his own tools,
worker was paid monthly, etc.
Notice 2015-6
p. 633
 The IRS published a notice
of procedures for reporting
by employers of sick pay
paid by third payers.
Letter Ruling 2014-41-004
pp. 633 - 634
 Disability payments under a
county ordinance qualify as
worker’s compensation
payments that are excludable
from gross income.
McMillan v Commissioner
TC Memo 2015-109
pp. 634 - 635
 Taxpayer was engaged in training, showing &
breeding horses.
 In 6 years had receipts in 1 year and over
$154,000 in expenses.
 No horses had been bred and did not own any
horses in 2008 or 2009.
 IRS argued in 6th year (2009) taxpayer did not have
a going concern since he did not own, breed or
train horses & did not compete in any shows.
 Taxpayer said he trained horses in 2009 but lost
all his training records.
McMillan v Commissioner
TC Memo 2015-109
pp. 634 - 635
 Court considered the 9 factors to determine if a taxpayer is
engaged in the activity for a profit…..§183, IRC.
 Taxpayer’s intent is determinative.
1. Manner in which activity is carried on.
2. Expertise of TPs and advisors.
3. Time & effort expended by TPs on activity.
4. Will assets of activity increase in value.
5. Success of TP in this & other endeavors.
6. History of income and losses.
7. Amount of occasional profits.
8. Financial status of taxpayer.
9. Elements of personal pleasure.
McMillan v Commissioner
TC Memo 2015-109
pp. 634 - 635
 Court concluded the taxpayer was not engaged in
the activity for a profit & disallowed the expenses.
▪ Taxpayer spent little time in the activity.
▪ There were few or no assets to increase in
value.
▪ There were substantial losses & no profit years.
▪ Taxpayer enjoyed riding.
▪ No success in similar or other activities.
Wyatt V Commissioner
TC Summary Opinion 2015-31
p. 635
 TP doctor agreed to work in rural area for additional pay
from hospital.
 Additional compensation was treated as loans which
would be forgiven if the TP worked for an agreed period.
 Agreement required TP to repay the compensation if he
did not work for the agreed upon period.
 TP worked the agreed period and loans forgiven.
 Taxpayer argued the debt was nonrecourse, without any
collateral and so he was not personally liable for it and so
there was no cancellation of debt income.
 Court held TP was personally liable & so had cancellation
of debt income.
Chief Counsel Advice 2015-25-010
pp. 635 - 636
 LLC taxed as PS had 2 members.
 LLC obtained one loan from a bank and another
from a corporation.
 The 2nd loan was secured by 2nd deed of trust
subordinated to first bank loan, etc.
 Foreclosure of property paid off bank loan.
 2nd loan cancelled, LLC recognized cancellation of
debt income & passed through to members.
 IRS said cancellation of debt income was income
from a sale…..Why would IRS argue this? And,
what is the answer?
Chief Counsel Advice 2015-25-010
pp. 635 - 636
 If the income was from a sale by the LLC the
members cannot use §108 exceptions to exclude
cancellation of debt from their individual income.
 Chief Counsel concluded that taxpayer had no
personal liability for the 2nd loan from the
corporation.
 Therefore the debt was nonrecourse and could not
be collected from the LLC.
 The cancellation was therefore not cancellation of
debt income but income from a sale or
disposition.
Domestic Production Activities Deduction
Large Business & International Directive
1-04-0315-001
pp. 636 - 637
 IRS provides information as to what is and what is
not Manufacturing, Producing, Growing or
Extracting (MPGE) for purposes of the Domestic
Production Activity Deduction.
 NOT MPGE are, for example:
▪ Cutting blank keys.
▪ Mixing base paint & color.
▪ Applying garnishments to a cake not baked
where sold.
▪ Etc.
T.D. 9725
pp. 637 - 638
 Final regulations provide guidance
under IRC §2010 and §2505 on the
estate and gift tax applicable exclusion
amount, the requirements for electing
portability of a deceased spousal
unused exclusion (DSUE) amount and
the rules for the surviving spouse’s
use of the DSUE amount.
Letter Ruling 2015-23-003
pp. 638 - 639
 An election to split gifts by a
husband and wife was
irrevocable where the time for
determining whether split gift
treatment was effective had
expired.
Frequently Asked Questions on
Estate Taxes
pp. 639 - 640
 The IRS will issue estate tax closing letters only
on request filed on or after 6-1-2015.
 It will take about 4-months to issue a requested
closing letter.
 For estate tax returns filed before 6-1-2015 no
request is needed & it will be 4 to 6 months for the
letter to be issued.
 See Fig 16.6, page 640 for estate returns filed
between 1-1-2015 and 6-1-2015 where a closing
letters will not be issued.
 Questions – Call IRS at 866-699-4083.
Fargo V Commissioner
TC Memo 2015-96
pp. 642 - 643
 The gain from the sale of
commercial property from
one of the taxpayer’s entities
to their other entity produced
ordinary income because the
taxpayer held the property for
sale in the ordinary course of
business.
Estate of Menges V Commissioner
114 AFTR 2d (RIA) 2014-6514
p. 643
 The beneficiary of an estate
could not claim the first-time
home buyer credit after
disclaiming her interest and
then acquiring the inherited
home from the other
beneficiaries.
Saenz V Commissioner
TC Summary Opinion 2015-6
pp. 643 - 644
 On 2011 return taxpayer claimed:
▪ An adult child as a dependent,
▪ The adult child’s daughter as a dependent,
▪ Earned income credit for both of above,
▪ Additional child credit for the above granddaughter.
 Both of above lived with and were supported by the
taxpayer from Jan 2011 to Aug 2011.
 After Aug 2011 both above lived with third party who
claimed to be adult child’s common law spouse.
 Third party agreed to be married to adult child 4-2012
when they signed their 2011 return.
 What do you want to know? Does TP get dependents?
Saenz V Commissioner
TC Summary Opinion 2015-6
pp. 643 - 644
 Was Adult Child married in 2011?
▪ TP cannot claim the adult child if she was married in
2011 since she filed a joint return for that same tax year.
▪ Adult child was not married in 2011.
▪ Taxpayer can claim adult child.
 Could the Adult Child claim her daughter as a dependent?
▪ An individual who can be claimed as a dependent
cannot claim a dependent.
▪ Since the adult child was a dependent of the TP she
cannot properly claim her daughter as a dependent.
▪ Taxpayer can claim the adult child’s child as a
dependent.
Kunkel V Commissioner
TC Memo 2015-71
pp. 644 - 645
 TPs claimed contribution deduction of $42,455
▪ Cash portion
( 5,140)
▪ Non-cash portion
$37,315
 TPs presented no receipts from charitable
organizations itemizing donations, valuing
items or saying the TPs did not receive any
benefit.
 TPs did present list of items with their FMV
determination but no basis of each item.
Kunkel V Commissioner
TC Memo 2015-71
pp. 644 - 645
Contribution Rules:
 Donations less than $250 require some sort of
documentation.
 Single donations in excess of $250 require
contemporaneous written acknowledgment from donee
stating the donor did not receive a benefit for the gift.
 Non-cash contribution in excess of $500 require a Form
8283 be filed with the return which asks for FMV, cost or
basis, method for FMVs, etc for items of property.
 Non-cash contributions over $5,000 require Form 8283 and
an appraisal.
 Similar item of property must be aggregated to determine
if the gift(s) meet the $500 or $5,000 requirements.
Kunkel V Commissioner
TC Memo 2015-71
pp. 644 - 645
 Tax Court aggregated many similar
items so many values exceeded the
$500 and $5,000 limits for requiring
cost or basis, valuation method for the
FMVs, etc.
 The deduction was not allowed for the
non-cash items for which proof was
not presented.
Costello v Commissioner, TC Memo 2015-87 pp. 645 – 646
Mitchell V Commissioner, 775 F.3rd 1243 (10th Cir., 2015)
Bosque Canyon Ranch V Commissioner, TC Memo 2015– 130
Kaufman V Commissioner, 784 F.3rd 56 (1st Cir., 2015)
Pages 645 – 648 list 3 cases where a charitable contribution
deduction was not allowed for an easement because either:
▪ There was no qualified appraisal or
▪ A deed of trust was not subordinate to the easement or
▪ The grantors retained a right to change boundaries of
the easement.
And a 4th case Kaufman: Where the 40% accuracy related
penalty was imposed because the deduction was overstated
by more than 400% and the “historic easement” of the front
of the TPs home was worth zero.
The point: Dot the “I”s and cross the “t”s before claiming
contribution of an easement.
Copeland V Commissioner, TC
Memo 2014-226
pp. 648 - 649
 Cash basis taxpayer bought home in 1991 with mortgage
loan.
 2010 loan was modified and unpaid interest was added to
principle of the loan.
 Taxpayers claimed deduction for payment of interest.
 IRS disallowed and Tax Court agreed.
 Tax Court pointed out that interest will be deductible when
the loan is paid off.
 Court also noted that TPs would have had an interest
deduction if existing loan had been paid off from a loan
from a new lender.
Chief Counsel Advice
2014-51-027
p. 649
 Co-owners of residence and joint bank
account may deduct equal shares of
mortgage interest payment made from the
joint account.
 Co-owners of a house can both deduct their
share of interest even if one is not liable on
the mortgage.
Voss V Commissioner
796 F3d 1051 (9th Cir. 2015)
pp. 649 -651
 Unmarried co-owners can each
deduct interest on up to
$1,000,000 of home acquisition
debt and $100,000 of home
equity debt.
Phan V Commissioner
TC Summary Opinion 2015-1
p.651
 A taxpayer without legal title
to the residence could claim
a residential mortgage
interest deduction.
 Under California law an oral
agreement of ownership
provided for ownership.
Redisch V Commissioner
TC Memo 2015-95 pp.651 - 652
 TPs bought vacation home condo in 2004.
 2008 decided to rent condo & listed with real
estate firm.
 2009 decide to sell after no rentals for a year.
 2010 sold condo.
 2009 taxpayers deducted rental loss.
 2010 taxpayer claim an ordinary loss on sale.
 IRS held property not held for production of
income so disallowed rental loss and treated loss
from sale as a capital loss.
Redisch V Commissioner
TC Memo 2015-95 pp.651 - 652







Court considered:
Time occupied by taxpayer as residence.
Whether taxpayer abandoned personal use.
Character of property.
Taxpayer’s offers to rent.
Taxpayer’s offers to sell.
Court not convinced taxpayers had converted into
income producing property.
 Rental loss disallowed and loss on sale not
ordinary loss.
Van Malssen V Commissioner
TC Memo 2014-236
p. 652
 Taxpayers claimed losses from vacation condo.

▪
▪
▪
▪
2008 2009 2010
Days of occupied by TP
81
59
45
Days claimed as personal use 14
14
15
Rented by relative
7
Rented by rental company
10
8
7
 Expenses of personal residence are not
deductible.
 Dwelling is personal residence if personal use is
the greater of 14 days or 10% of the days rented at
FRV.
Van Malssen V Commissioner
TC Memo 2014-236
p. 652
▪
▪
▪
▪
2008 2009 2010
Days of occupied by TP
81
59
45
Days claimed as personal use 14
14
15
Rented by relative
7
Rented by rental company
10
8
7
 Court disallowed claimed rental losses.
 Taxpayers failed 14 day or 10% of use test:
▪ Taxpayers could not show that relative paid
FRV so relative’s time attributed to taxpayers.
▪ Court moved some occupied days to personal
use days since it appeared taxpayer had more
personal use than working on condo.
Iglicki V Commissioner
TC Memo 2015-80
p 653
 Payment of a judgement
enforcing spousal support
arrears payments were not
eligible for an alimony
deduction
Cutler V Commissioner
TC Memo 2015-73 pp. 653 - 654
 Nonresident state income
taxes were deductible by a
partner in an LLC on Sch A
(Form 1040)
Obergefell v Hodges
p. 654
 The right to same-sex couples
to marry is protected by the 14th
Amendment to the US
Constitution and States may
not prohibit such marriages.
Ibrahim V Commissioner
788 F3d 834 (8th Cir 2015) p. 655
 A married taxpayer who
mistakenly filed under head
of household status may file
and amended return using
married filing joint status.
Elbaz V Comm, TC Memo 2015-49
Maines V Comm, 144 TC #8 (2015)
pp. 655 - 656
 State tax refunds are taxable
income where the taxpayers’
pass-through entity claimed a
deduction for State taxes.
Sewards V Commissioner
785 F 3d 131 (9th Cir 2015)
pp. 657 - 658
 Retirement benefits were
taxable to the extent the
amount was determined by
the taxpayer’s length of
service.
Campbell V US
13-55607 Fed Appx 697442 (9th Cir 2015)
p. 658
 Retirement benefits were
taxable to the extent the
amount was determined by
the taxpayer’s length of
service.
Speer V Commissioner
144 TC No 14 (2015)
pp. 658 - 659
 Payments for unused
vacation and sick leave
received by a retired police
officer upon retirement were
not excludible from income
as worker’s compensation
benefits.
Notice 2015-21
p. 659
 A proposed revenue
procedure provides a safe
haven method for reporting
wagering gains and losses.
Letter Ruling 2015-21-009
pp. 659 -660
 Accidental disability benefits
paid to former spouses of
state employees pursuant to
domestic relations order were
taxable income to former
spouses.
Prop. Tres Reg 1.529-1 et seq
pp. 660 - 661
 Proposed regulations were
issued to implement new
Achieving a Better Life
Experience (ABLE) accounts.
Reg-136018-13
p. 661
 Proposed regulations
provide methods for
adjusting applicable
federal interest rates for
tax exempt obligations.
Morehouse V Commissioner
769 F 3d 616 (8th Cir 2014)
pp. 662 - 663
 The Eighth Circuit Court of
Appeals ruled that
conservation reserve
program payments are not
self-employment income.
 IRS has non-acquiesced.
Revenue Ruling 2015-13
p. 663
 IRS has provided dates got
filing 2015 tax returns, with
special dates for
Massachusetts and Maine
taxpayers.
Notice 2015-57
pp. 663 -664
 Due dates for IRC §6035
statements of value that
are required to be filed
with the IRS or furnished
to beneficiaries are
delayed until February 29,
2016.
Reg-136676-13
p. 664
 Proposed Regulation
remove the 36-month
testing period for
information reporting of
discharge of
indebtedness income.
Field Attorney Advice 2015-10-02F
p. 665
 A motor freight carrier company
that paid independent operations
to haul freight on the company’s
trailers was not required to file
information returns under IRC
§6041 and was not a broker as
defined in IRC §6045.
Chief Counsel Advice
2015-19-029
pp. 665 - 666
Scenario #1:
 Preparer prepared amended returns for 3 years showing
understatement of liabilities due to willful or reckless
conduct.
 Preparer filed 1 of the returns and waited to see if refund
would be issued.
 No refund was issued.
 Preparer did not file the other returns.
 Taxpayer filed all 3 amended returns.
 Each return contained the preparer’s signature.
 §6694(b) preparer penalty can be asserted for all 3 years.
▪ Preparer prepared and signed all 3 returns.
Chief Counsel Advice
2015-19-029
pp. 665 - 666
Scenario #2:
 Preparer prepared amended return containing an
understatement of liability due to willful or
reckless conduct.
 IRS disallowed claimed refunds.
 IRS has only copy of amended return from the
preparer that was not signed by him.
 §6694(b) preparer penalty can be asserted.
▪ Preparer prepared a return containing an
understatement of liability due to willful or
reckless conduct and the return was filed.
Chief Counsel Advice
2015-19-029
pp. 665 - 666
Scenario #3:
 Preparer prepared amended return showing an
understatement of liabilities due to willful or
reckless conduct.
 The amended return was not filed.
 IRS has only an unsigned copy of the return.
 §6694(b) preparer penalty should not be asserted.
▪ Return was not filed and there is no evidence
preparer signed the return.
Chief Counsel Advice
2015-19-029
pp. 665 - 666
Scenario #4:
 Preparer prepared amended return after the
period of limitations had expired.
 The amended return was filed.
 §6694(b) preparer penalty should not be
asserted.
Chief Counsel Advice
2015-20-010
pp. 666 - 667
 The IRS may abate penalties and interest
where the taxpayer has shown on an
amended return that the taxpayer owed less
taxes on the original return.
 Even if the amended return was filed more
than 3-years after the original return was
filed and the taxes were paid.
 The abatement is not limited to the paid
portion of the assessments.
WOW!
SBSE-04-9615-0045
p. 667
 Taxpayers who cannot obtain
a bank account due to
reasonable cause will not be
assessed the failure to
deposit penalty for not
making tax payments
electronically.
Musa V Commissioner
TC Memo 2015-58 pp. 667 - 668
 A civil fraud penalty was
imposed for failing to
maintain accurate sales and
wage records, filing false tax
forms, and underreporting
income on 5 years of income
tax returns.
Notice 2014-58
pp. 668 - 669
 Transaction similar rule of
law are defined for purposes
of the economic substance
doctrine.
Chief Counsel Advice 2015-22-005
pp. 669 -670
 For 2848 for an LLC should
be signed by an officer of a
parent corporation where the
subsidiary of a parent
corporation is the managerpartner of the LLC.
Notice 2015-38
p. 670
 The IRS updated the list of
designated private delivery
services for delivery of returns.
 Use of these services meets the
timely mailed or paid – timely filed
or paid requirement.
Gyorgy V Commissioner
p. 671
 An IRS notice of deficiency was
valid where it was mailed to the
taxpayer’s last known address
that appeared on the taxpayer’s
last filed return and the taxpayer
did not file a change of address
with the IRS.
Heckman V Commissioner
788 F3d 845 (8th Cir 2015)
pp. 671 - 672
 The 6-year statute of
limitations applied for a
notice of deficiency where
the taxpayer omitted taxable
income on a return.
Karagozian V Commissioner
595 Fed Appx 87 (2d Cir 2015)
pp. 672 - 673
 An employee may not apply
the doctrine of equitable
recoupment to use overpaid
employment taxes from prior
years to offset income tax in
a later year.
Butts V Commissioner
TC Memo 2015-74
pp. 673 - 674
 TPs could not get a refund of taxes where
the statute of limitations had expired on the
time for filing a refund.
 Hey…..Using the Chief Counsel Advice
2015-20-010, text page 666, could they ask
the IRS to refund any interest and penalties
attributable to the difference between what
they owed and what was assessed & paid?
TD 9727
p. 674
 The IRS has adopted final regulations
amending the regulations governing the
filing of refund claims.
▪ Form 1040X must be used to amended
individual income tax returns.
▪ Separate Form 941-X must be used to
amended each quarterly employment tax
return for FICA and withholding.
▪ Form 843 is used when there is no
alternative form.
North Central Rental & Leasing, LLC V US
779 F3d 738 (8th Cir 2015) pp. 674 - 675
 Sale of used equipment
and purchase of
replacement was not
entitled to like-kind
exchange treatment.
Marvel Enterprises, Inc V Commissioner
145 TC No 2 (2015)
pp. 675 - 676
 Cancellation of debt
income of members of a
consolidated group must
be first used to reduce
consolidated NOL of the
group.
Williams V Commissioner
TC Memo 2015-76
p. 676
 Taxpayers owned S Corporation that owned and operated
a real estate company.
 Taxpayers also owned a C Corporation that owned and
operated a medical practice.
 TPH worked for the medical clinic and materially
participated in its operations.
 Neither TP materially participated in the real estate
business and the taxpayers are not engaged in a real
property trade or business.
 The real estate company leased real property to the C
Corporation.
 Taxpayers reported rental income as passive on Sch E.
Williams V Commissioner
TC Memo 2015-76
p. 676
 IRS argued that since the taxpayers’ S corp was leasing
real property to the taxpayers’ C Corp the “self-rental” rule
is applicable.
 The “self-rental” rules leaves rental losses as passive but
re-characterizes rental losses to being nonpassive.
 Tax Court agreed with the IRS and held that the “selfrental” rule applied so the rental income was nonpassive.
Lamas V Commissioner
TC Memo 2015-59
pp. 676 - 677
 Taxpayer owned an interest in two family corporations
involved in real estate development.
 Taxpayer managed operation of both corps.
 Taxpayer worked 691 hours @ year for one or both corps
& materially participated for more than 500 hours @ year.
 Taxpayer thus worked 1,191 hours for the two
corporations.
 If the businesses are an “appropriate economic unit” the
hours of the two businesses can be aggregated to then
determine whether there is “material participation” &, if so,
losses may be nonpassive.
Lamas V Commissioner
TC Memo 2015-59
pp. 676 - 677
 Court found the 2 Corps were an
“appropriate economic unit” after
considering:
1. Similarities & differences in type of
business.
2. Extent of common control.
3. Extent of common ownership.
4. Geographical location.
5. Interdependence of businesses.
Lamas V Commissioner
TC Memo 2015-59
pp. 676 - 677
 Since the businesses are an appropriate
economic unit the hours spent at each can
be combined.
 Since the taxpayer spent more than 500
significant participation hours on the
activity and more than 100 in each business
he meets one of the seven tests for material
participation.
 Since the TP materially participated in the
activity the losses are nonpassive.
Sabolic V Commissioner
TC Memo 2015-32








pp. 677 - 678
2009 – 2011 TP was a bartender in a casino.
Employer had tip records from charges.
TP kept record of all tips received.
Both records presented to IRS & Tax Court.
IRS computed tips based on formulas.
IRS pointed to errors & inconsistencies.
TP explained differences.
Tax Court accepted TP’s records.
Ellis V Commissioner
787 F3d 1213 (8th Cir 2015) pp. 678 - 679
 Payment of compensation to
the taxpayer by an LLC
owned by the taxpayer’s selfdirected IRA was a prohibited
transaction.
Announcement 2014-32
p. 679
 IRA distributions in 2014 rolled over is
disregarded for purposes of
determining whether 2015 distribution
can be rolled over provided 2015 is
from or to a different IRA.
 A 2014 rollover to 2015 is not a
rollover.
Letter Ruling 2015-23-019
pp. 679 - 680
 Distributions from a marital
trust could be rolled over to
the trustee’s IRA without
income tax.
Letter Ruling 2015-10-060
p. 681
 TP was receiving equal monthly
distributions that meant the 10% tax on
early withdrawals did not apply.
 IRA custodian made error and made
two distributions in one month.
 The error is not subject to the 10% tax.
Specht V US, 115 AFTR 2d 2015-357
(S.D. Ohio 2015)







pp. 681 - 682
Decedent died & TP hired attorney to help with Estate.
Attorney had brain cancer.
TP knew Estate tax return was due 9-30-2009.
No return filed or payment made until Jan 2011.
IRS asserted late filing & pay penalties.
TP argued relying on attorney was reasonable cause.
Court held reliance on attorney was valid regarding legal
questions but not for filing.
 Court noted TP had been sent info on required filing and
had missed other things.
 Penalty sustained…………….See Boyle, Sup Court
Annual Filing Season Program
p. 682
 The IRS posted information
on the Annual Filing Season
Program on its website.
Boneparte V Commissioner
TC Memo 2015-128
pp. 682 - 683
 TP full-time Government employee.
 Stayed each night at casino hotel where he
gambled.
 Also gambled on racehorses & other casinos.
 Filed return not showing gambling activity.
 When IRS exam started TP filed amended return
listing $25,000 in gambling losses and gambling
related expenses on Sch A and $25,000 in
gambling income on Sch C.
 Taxpayer claimed to be a professional gambler.
Boneparte V Commissioner
TC Memo 2015-128
pp. 682 - 683
 To be a gambling professional must be engaged
in activity for a profit……§183, IRC.
 Court found TP did not gamble with intent to make
a profit & disallowed gambling related expenses
because:
▪
▪
▪
▪
▪
▪
No records of activity & none used to win more.
TP had no expertise and no experts to help.
No history of success in similar business.
No evidence of history of profits or losses.
Losses offset income from other sources.
TP enjoyed gambling.
Program Manager Technical Assistance
Letter 2014-18
pp. 683 - 684
 Failure to include required
forms for reporting foreign
assets on Form 1040, 1041 or
706 means the statute of
limitations is open until 3-years
after required information is
provided.
Chapter 16 – Rulings & Cases