42nd Annual Mississippi
Tax Institute
Mark D. Puckett, CPA, MST, PFS
BDO USA, LLP
Memphis, Tennessee
December 3, 2015
mpuckett@bdo.com
901-680-7608
Current Developments
in
Federal Income Taxation
Legislation, Practice and
Procedural Matters
Expired Tax Provisions
• Last year The 2014 Tax Increase Prevention
Act, the so-called “extender” bill was signed
by the President December 19, 2014
• The 2014 legislation retroactively extended
for one year many tax breaks that expired at
the end of 2013
• What about 2015???
Page 4
Expired Tax Provisions (Cont.)
• More than 50 expired tax provisions await action in
Congress
• The big hang-up – permanence in the tax code or a
two-year extension
• Presently, Republican lawmakers have made
determining which business – related provisions
could be made permanent their priority while
Democratic lawmakers are aiming at making tax
credits aimed at lower-income households
permanent their priority.
Page 5
Expired Individual Provisions Include
• $250 above-the-line deduction for classroom expenses paid
by teachers
• Option to take an itemized deduction for state and local
general sales taxes
• Tax-free distributions to charity from an IRA by taxpayers
age 70½ or older
• Exclusion of up to $2 million of discharged principal
residence indebtedness
• Deduction for mortgage insurance premiums deductible as
qualified residence interest
Page 6
Expired Business Provisions Include
• Research tax credit
• New markets tax credit
• Work opportunity tax credit
• 50% bonus depreciation and other beneficial
depreciation provisions
• Increase in asset expensing election up to $500,000
Page 7
Don’t Look for Tax Overhaul
This Year or Next
“Facing fast-approaching legislative deadlines and
soon to be preoccupied with the 2016 presidential
race, Congress is unlikely to take action on any
measures to overhaul the U.S. Corporate income
tax.”
Pamela Olson – former assistance secretary for tax policy with Treasury
speaking at the 2015 Pacific Rim Tax Institute in Palo Alto, CA 2-19-2015
(now with PWC in Washington)
Page 8
IRS Budget Woes
• The agency’s inflation – adjusted budget has been reduced
by about 17% between 2010 and 20151
• The IRS audited 0.57 percent of U.S. business in fiscal
2014, the lowest rate since 20052
• The IRS audited 0.86 percent of individual taxpayers in
fiscal 2014, the lowest rate since 20042
1
Taxpayer Advocate Service – 2014
Annual Report to Congress – Vol. 2
2 Bloomberg BNA Citing IRS statistics
released March 2, 2015
Page 9
IRS Budget Woes (cont.)
Who’s Minding the Store?
• 35.6 percent of phone calls went unanswered by
IRS customer service representatives
• 50 percent of pieces of correspondence were not
handled timely
• Virtually zero tax returns were prepared by IRS
walk-in sites
Source: Taxpayer Advocate Service – 2014
Annual Report to Congress – Vol. 2
Page 10
Decay in Taxpayer Service
The Taxpayer Advocate predicts:
• Millions of taxpayers will not be able to reach the IRS when
they need to
• Taxpayers will not get their math error notices corrected or
penalties abated – leading to incorrect assessments and
expensive downstream dispute resolution activities
• Unnecessary liens, levies and collection disputes will
intensify as taxpayer/IRS communication avenues break
down
Source: Taxpayer Advocate Service – 2014
Annual Report to Congress – Vol. 2
Page 11
TIGTA Report Faults IRS Handling of
Education Tax Credits1
• Treasury Inspector General of Tax Administration
report says IRS handed out $5.6 billion in potentially
erroneous education credits
• TIGTA reported that the agency has to do a lot more to
improve in this area and the appropriate processes are
still not in place
1TIGTA’s
report, “Billions of Dollars in Potentially Erroneous Education
Credits Continue to be Claimed for Ineligible Students and Institutions”
(No. 2015-40-027)
Page 12
Tax-Related Identity Theft
• Tax-related identity theft occurs when someone uses
your stolen Social Security number to file a tax return
claiming a fraudulent refund1
• About 2.4 million U.S. taxpayers’ names or Social
Security numbers appeared in falsified returns in 2013
– a nearly tenfold increase from 20102
• IRS estimates that about $5.8 billion was paid out in
2013 on returns it later determined were fraudulent3
1IRS
Taxpayer Guide to Identity Theft
2March 2015 report from the Treasury Inspector General for Tax Administration
3BNA Daily Tax Report, April 30, 2015
Page 13
10 Smart Things to Do While on
Hold with the IRS1
With call wait times exceeding an hour or more on the IRS
Practitioner Priority Service line, here are 10 suggestions to use
your time wisely:
1.
2.
3.
4.
5.
Organize your desktop
Read the Tangible Property Regs (TD 9636) – all 222 pages
Plan a beautiful and relaxing getaway
Do your timesheet…for the past six months
Take a nap
1by
Susan Allen, CPA, CITP, CGMA
AICPA Tax Section News, October 13, 2015
Page 14
10 Smart Things to Do While on
Hold with the IRS (Cont.)
6. Brainstorm process improvements for your
practice
7. Eat breakfast, and perhaps lunch and dinner too
8. Start (and perhaps finish) online holiday shopping
9. Burn some calories: jumping jacks, yoga, etc.
10.Browse the AICPA website
Page 15
OVDP will remain open for an
indefinite period
IR 2015-9, 01/25/2015
In a news release, the IRS has:
• Stated that the Offshore Voluntary Disclosure Program (OVDP) will
remain open for an indefinite period, i.e., until it announces otherwise
• Cautioned that avoiding U.S. taxes by hiding money or assets in
unreported offshore accounts remains a tax scam on its “Dirty Dozen”
list
• Cautioned that illegal scams can lead to significant penalties, interest,
and even criminal prosecution
Note: The National Taxpayer Advocates’ recently issue report to Congress was
highly critical of the IRS’s administration of the OVDP and its lack of fairness and
consistency as a voluntary settlement program.
Page 16
Tax Case Litigation Outcomes1
• Taxpayers prevail in whole or in part 16% of
the time overall
• Pro Se taxpayers prevail 10% of the time
• Represented taxpayers prevail 26% of the
time
1Taxpayer
Page 17
Advocate Service – 2014 Annual Report to Congress Vol. 1
Debt Discharge on Late Filed Returns
Mallo v. IRS., 774 F3d 1313, (CA10), 12/29/2014
• Taxes owed on late-filed returns cannot be discharged in
bankruptcy
• The 10th Circuit agreed with the 5th Circuit that previously
ruled similarly in In re McCoy, 666 F3d 924, (CA5), 2012
• The Court stated that the “plain and unambiguous language
of Section 523(a) [Bankruptcy Code of 2005] excludes from
the definition of return all late-filed tax forms, except
those prepared with the assistance of the IRS.”
Page 18
Suspended Corporation Can’t Petition Tax
Court
Medical Weight Control Specialist, TC Memo 2015-52, 03/18/2015
• Taxpayer corporation’s corporate privileges were suspended by the
State of California
• While its privileges were still suspended, the corporation received a
statutory notice of deficiency and thereafter, filed a Petition with the
Tax Court. The corporation filed for reinstatement but did so several
months after the statutory notice was received and the Tax Court
Petition was filed
• The IRS filed a motion to dismiss alleging that the corporation lacked
the capacity to sue
• Held – for the Government: The Tax Court held that the Sec. 6213(a)
90-day period cannot be tolled or suspended. The corporation lacked
the capacity to file during the 90-day period.
Page 19
Business Income and Deductions
New Accounting Method Change
Procedures Rev. Proc. 2015-13
• Exclusive procedures for automatic and advance consent
change in method of accounting
• Supersedes Rev. Proc. 2011-14 (prior mass automatic
change procedures) and Rev. Proc. 97-27 (longstanding
nonautomatic change procedures)
• New procedures for taxpayers under IRS exam enable Form
3115 requests to be filed at any time, with caveats
• Effective for Form 3115 applications filed on or after 1-162015 for a year of change ending on or after May 31, 2014
Page 21
New Accounting Method Change
Procedures Rev. Proc. 2015-13 (Cont.)
• Still requires certain eligibility requirements to be met for filing
automatic Form 3115 (e.g., no final year of trade or business, no
5-year overall method, no 5-year same item change, no 381(a)
transactions)
• All Form 3115 copies previously sent to the IRS National Office
under duplicate filing requirements must now be mailed to the
IRS Ogden, UT office
• Election to recognize positive section 481(a) adjustment in the
year of change
• De minimis election for positive adjustments of less than $50,000
• Eligible acquisition transaction election (election statement
required)
Page 22
New Accounting Method Change Procedures
Eligible Acquisition Transaction Election
• Elect an accelerated 1-year section 481(a) adjustment period (rather
than 4 years) for all positive section 481(a) adjustments for the year of
change if an “eligible acquisition transaction” occurs
• Typically applies to the target in a transaction that files a Form 3115 to
correct an impermissible method
• Practical Benefits:
• No need for acquirer to inherit part or all of a positive section 481(a)
adjustment from target’s use of improper accounting methods
• Reduced need for acquirer to ensure it is compensated for the additional tax
obligation (e.g., indemnity provision or purchase price adjustment)
• Shift tax obligation entirely to target’s final tax year – target with NOLs that
may be limited following the transaction can use NOLs to offset adjustment
• Simplification and minimize disputes over unforeseen tax liabilities
Page 23
New Automatic Change Listing
Rev. Proc. 2015-14
• Complete updated list of automatic accounting method
changes – over 200 automatic accounting method changes
are available
• Revisions to some existing accounting methods
• Provides several new automatic changes:
•
•
•
•
Section 4.02, relating to changes for conformity election by a bank
Section 5.02, relating to changes to comply with section 163(e)(3)
Section 10.12, relating to railroad track structure expenditures
Section 11.13, relating to changes to the US ratio method by a
foreign person for section 263A
Page 24
New Automatic Change Listing
Rev. Proc. 2015-14 (Cont.)
• Provides several new automatic changes:
• Section 11.14, relating to changes to treat depletion as
an indirect costs for section 263A
• Section 23.02, relating to changes from the mark-tomarket method to a realization method
• Section 25.03, relating to changes in qualification as a
life/nonlife insurance company under section 816(a)
Page 25
Examples of Beneficial Automatic
Accounting Method Changes Having
Broad Application
•
•
•
•
•
•
•
Acceleration of prepaid expense deductions
Deferral of advance payments
Overall accrual-to-cash and cash-to-accrual
Software development costs
Impermissible to permissible depreciation or amortization
Timing of incurring medical IBNR expenses
Sales incentives, rebates, and allowances
Page 26
Examples of Beneficial Automatic
Accounting Method Changes Having
Broad Application (Cont.)
•
•
•
•
•
•
Section 263A UNICAP
Timing of incurring bonus liabilities
Timing of deducting deferred compensation
Bad debt allowances
Inventory valuation and identification methods
Tangible property regulations
Page 27
Rev. Proc. 2015-39, 7/30/2015 Ratable
Accrual Safe Harbor Method
To reduce controversy, Rev. Proc. 2015-39 provides a safe harbor to treat
economic performance as occurring ratably over the term of a qualifying
“Ratable Service Contract”
Ratable Service Contract:
1. Similar services provided on a regular basis;
2. Each occurrence of service provides independent value; and
3. Term does not exceed 12 months
Examples of ratable services:
• Landscaping maintenance
• Janitorial Service
• IT Support and software maintenance
• Subscriptions and dues
Page 28
Rev. Proc. 2015-39, Ratable Accrual
Safe Harbor Method
Benefits:
• Enables the deduction of the portion of the services provided within the 3 ½
month period following the prepayment date
• Applies to TPs that previously could not accelerate prepaid services because
the contract exceeded the 3 ½ month period
If 3 ½ month rule has been adopted:
• File an automatic #220 Form 3115
If 3 ½ month rule has not been adopted:
• File a nonautomatic Form 3115 to change to the 3 ½ month rule
• File an automatic #220 Form 3115 to change to the safe harbor method
Page 29
Tangible Property Regulations
• As background representatives of the IRS and
Treasury have stated in informal comments made
in public forums that they expect most taxpayers
to file a Form 3115 accounting method change
application
• Since the rules for UOP and the routine
maintenance safe harbor, for example, did not
previously exist, taxpayers cannot be compliant
without IRS consent via a Form 3115
Page 30
Rev. Proc. 2015-20, 02/13/2015
Small business taxpayers, including sole proprietors, may
make a change in accounting method on a prospective basis
and avoid filing a 3115
• Small businesses having assets totaling less than $10
million, or
• Small business having 3-year average annual gross receipts
totaling $10 million or less preceding the year of change
The catch: Prior year “audit protection” does not apply to taxable years
beginning prior to January 1, 2014
Page 31
FAQs Shed New Light on Tangible Property
Regulations de Minimus Safe Harbor
Election
www.irs.gov/businesses/small-businesses-&-self-employed/tangibleproperty-final-regulations
• The de minimus safe harbor election allows many businesses to do away
with capitalizing and depreciating many lower cost assets
• The FAQs clarify that the de minimus safe harbor election is not a
change in accounting method and no Form 3115 is required
• The FAQs also explain the rules for the treatment of materials and
supplies costs
Page 32
Increase in De Minimus Safe Harbor Limit
Notice 2015-82, 11/24/2015
• To reduce the compliance burden to account for business asset
purchases taxpayers can elect to currently deduct expenditures for the
purchase of tangible property that would otherwise have to be
capitalized
• Taxpayers without “applicable financial statements” were limited to
$500 per invoice or per item
• After numerous comments from the tax community, the IRS raised the
expensing limit to $2,500 per item
• Effective for costs incurred for tax years beginning on or after Jan. 1,
2016, although the Notice specifically states that the IRS will not
pursue this issue for amounts not exceeding the $2,500 threshold for
years beginning after Dec. 31, 2011
Page 33
When is a Building Considered
“Placed in Service”???
Stine, LLC v. USA, 115 AFTR 2d 2015-637, (DC LA), 01/27/2015
• Certificates of occupancy had been obtained before year end for two
newly completed retail store buildings allowing them to receive
equipment, shelving, racks, and merchandise
• However, certificates of occupancy to allow customers to enter the
building had not been issued
• Held – for the taxpayer: the Court stated that “…there is no
requirement that a building be open for business for it to be placed in
service for purposes of a depreciation allowance.” Buildings were
substantially complete and fully functional to house and secure
shelving, racks, and merchandise
Page 34
11th Circuit affirms the District Courts denial
of research credits for funded contracts
Geosyntec Consultants, Inc., 115 AFTR 2d 2015-644, (CA11),
01/29/2015
• Geosyntec claimed research credits for a number of contracts which
were denied by the IRS. The contracts were cost-plus arrangements
subject to a maximum, or so-called “capped contracts.”
• The regulations allocate the research credit to the party that bears the
financial risk of failure of the research to produce the desired product
or result. See Fairchild Indus., 76 AFTR 2d 95-7707, (CA Fed Cir),
11/29/1995, Reg 1.41-2(e)(2)
• Held-for the Government: The Court concluded that the relevant
inquiry was whether payment was contingent on success of the
research. Since the relevant contracts were funded contracts entitling
Geosyntec to payment regardless of success, Geosyntec was ineligible
to claim the research credits.
Page 35
Research Credit for Internal Use Software
REG – 153656-03, Prop. Reg. 1.41-4, 1/20/2015
• Sec. 41(d)(4)(E) excludes most computer software from the
research credit if developed primarily for a Company’s own
internal use
• Proposed regulations define internal use software and
allow a research credit for certain internal use software if
it satisfies the high threshold of innovation test
• Also included are rules for software that is developed for
both internal use and non-internal use and a safe harbor for
determining if any of the development cost are qualified
research expenditures
Page 36
Exclusion of Partners Debt
Cancellation Income
AOD 2015-001, 02/03/2015
• In an Action on Decision, the IRS announced its non-acquiescence with
four Tax Court Cases that dealt with a partner’s debt cancellation
income
• According to the IRS, the Tax Court’s rulings were
inconsistent with the structure of Sec. 108 and
Congressional intent which applies only to partners who are
debtors in bankruptcy
• See: Garcia, Jose, TC Memo 2004-147
Mirarchi, Ralph, TC Memo 2004-148
Price, Chester, TC Memo 2004-149
Martinez, Jose Est., TC Memo 2004-150
Page 37
Disguised Payment for Services
Proposed Regulations
REG-115452-14
• The IRS issued proposed regulations establishing a test
based on Sec. 707(a)(2)(A) legislative history to determine
when a partnership distribution or allocation arrangement
will be treated as a disguised payment for services.
• Uses a six factor test of which significant entrepreneurial
risk as to the amount and fact of payment is given the most
weight.
• Effective when published as final.
Page 38
Partner’s Distributive Shares When
Interests Change
TD 9728
• Regulations modify and finalize the varying interest rules
contained in the 2009 proposed regs.
• These regulations carry out the provisions of Sec. 706(d) as
added by the Deficit Reduction Act of 1984 (P.L. 98-369) to
clarify that the varying interests rule applies to the
disposition of a partner’s entire interest in the partnership
as well as the disposition of less than a partner’s entire
interest.
• Effective for partnership’s tax years beginning or after
8/3/15.
Page 39
Partnership Audit Provisions Streamlined
Bipartisan Budget Act of 2015
• The Act replaces the current TEFRA uniform audit and electing
large partnership rules.
• The Act prescribes a streamlined single set of rules for auditing
large (100 or more partner) partnerships and their partners at the
partnership level (Sec. 6221-6241, as amended).
• Any adjustment to partnership income, gain, loss, deduction, or
credit is determined at the partnership level. Similarly, any tax or
penalties attributable to such adjustment is assessed and collected
at the partnership level.
• The new rules generally apply to partnership tax years that begin
after December 31, 2017 with an option to apply these rules to
years beginning after November 2, 2015 (Act Sec. 1101(g)).
Page 40
Highway Act Changes Business Return
Due Dates
Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015 (H.R. 3236), 07/31/15
Beginning in 2016:
• Partnership and S corporation returns are due March 15th.
• C corporation’s returns are due April 15th (except fiscal
year C corps with June 30 year-ends the change is deferred
for 10 years, i.e., 2026).
• Some extended due dates were revised.
• FinCEN (FBAR) Reports are now due April 15th with
extensions permitted until October 15th.
Page 41
Consolidated Returns – Proposed Regulations
Provide Guidance for “Day of” Transactions
REG – 100400-14, 03/06/2015
• Proposed regulations provide guidance under Reg. 1.1502-76
which prescribes rules for determining the taxable period in
which taxable items of a corporation are reported when a
member joins or leaves a consolidated group
• A “next day rule” will mandatorily apply to specific
extraordinary items
• An “end of day rule” must be used for items that arise
simultaneously with the event that causes the corporation’s
change in status
• Takeaway: the new guidance prohibits parties from picking and
choosing on which return the tax items are to be reported
Page 42
Final Rules on F Reorganizations
TD 9739, 09/21/2015
• Final regulations provide guidance on qualifying for
an F reorganization.
• Involves tax-free changes in a corporation’s
identity, form, or place of organization
transactions.
• Effective for transactions occurring on or after
9/21/15.
Page 43
Temporary Regulations Cover Allocation of
Sec. 199 Wages in Short Tax Years and in
Acquisitions or Dispositions
TD 9731, 08/26/2015 (Temporary and Proposed)
• Since the manufacturer's deduction under Sec. 199 is
limited by employees W-2 wages, guidance was needed to
properly determine the wages attributable to short taxable
periods.
• Effective for tax years beginning 8/26/15 but may be
applied for open tax years for which the statute had not
expired before 8/27/15.
Page 44
Portion of Bonus to Physician
Recharacterized as a Nondeductible
Dividend
Midwest Eye Center, S.C. v. Comm., TC Memo 2015-53, 03/23/2015
• A sole shareholder and medical director was paid a $2 million bonus after he
had to increase his workload when one surgeon quit and another reduced his
hours.
• The IRS disallowed $1 million and recharacterized that amount as a
nondeductible dividend and also assessed an accuracy-related penalty of
$62,000.
• Held – for the Government: the Corporation taxpayer failed to provide any
evidence of comparable salaries or any supporting methodology as to how the
bonus was determined as related to the services rendered. The Sec. 6662(a)
penalty was upheld.
Note: Compare to Pediatric Surgical Associates, TC Memo 2001-81, 04/02/2001
Page 45
Company held liable for failing to properly
withhold FICA on nonqualified deferred
compensation
Davidson v. Henkel Corp, 115 AFTR 2d 2015 – 369, (DC MI),
01/06/2015
• Company failed to properly withhold FICA taxes on employees’
nonqualified deferred compensation (NQDC) plan benefits
• Company did not follow the rule that wages are subject to FICA
tax under the “special timing rule” for NQDC
• “Special timing rule” requires that amounts deferred under a
NQDC plan are taken into account on the later of:
• When services are performed, or, if later,
• When the deferred amount is no longer subject to a substantial risk of
forfeiture (Sec. 3121(v)(2))
Page 46
Small Captive Insurance Companies added to
the IRS “Dirty Dozen” list
IR 2015-19, 02/03/2015
In a news release, the IRS takes aim at small captive insurance companies under
Sec. 831(b). We know that:
• The IRS is currently investigating several captive managers with a focus on how
the captives are being marketed and how risk pools are designed and operated
• A large number of the clients of these managers have been contacted and
placed under examination
• The IRS is placing significant resources behind this initiative and may further
ramp up its investigative efforts
Reference: Accounting Today, May 22, 2015 “Small Captive Insurance Companies Hit the IRS
Dirty Dozen List”, by Steven Miller
Page 47
Activities Performed at Retail that don’t
Qualify for Sec. 199 Deduction
LB&I-04-0315-001, “Large Business & International Directive on the IRC
Sec. 199 Definition of Manufactured, Produced, Grown, or Extracted”
(March 16, 2015)
• The IRS has provided its examiners guidance on activities
that won’t qualify for the Sec. 199 manufacturing
deduction
• Takeaway: the directive is seen as possibly a reaction by
the IRS to an extremely taxpayer-favorable holding in
Dean, 112 AFTR 2d 2013-5592, (DC CA), 05/07/2013
relating to repackaging gift items
Page 48
Nonqualified Deferred Compensation
Audit Guide
www.irs.gov (search for “nonqualified deferred” to
locate the Audit Technique Guide (ATG))
• With the advent of Sec. 409A, deferred
compensation plan compliance has increased
greatly in complexity.
• The ATG provides IRS auditors with a roadmap to
the issues and what to watch for when reviewing
plans.
Page 49
Can a Charitable Donation be a
Business Expense???
CCA 201543013
• A new Chief Counsel Advice examines the deductibility of amounts
given to charity associated with advertising programs where
businesses give a certain percentage of their sales to particular
causes.
• Charitable Contribution deductible under Sec. 170 (with associated
deductibility limitations) or a business expense under Sec. 162 (not
limited)???
• Conclusion: a payment to a qualifying charity which is directly
related to a taxpayer’s business with a “reasonable expectation of
financial return commensurate with” the amount transferred, is
deductible as a business expense and not as a charitable
contribution citing Reg 1.162-15(a), Reg. 1.170A-1(c)(5).
Page 50
Fiduciary Duty Breached by Failing to
Monitor Investments
Tibble v. Edison International, (2015, S Ct) 2015 WL 2340845
• In a unanimous decision, the Supreme Court has ruled in favor of
participants in Edison International’s 401(k) plan who claimed company
fiduciaries violated their duty to monitor three retail-class mutual
funds.
• During 1999 and 2002, 401(k) plan funds were invested in retail-class
mutual funds instead of institutional-class funds, resulting in higher
management or administrative fees.
• The Supreme Court ruled for the plan participants with Justice Breyer
noting that a trustee “has a continuing duty to monitor trust
investments and remove imprudent ones. This continuing duty exists
separate and apart from the trustee’s duty to exercise prudence in
selecting investments at the outset.”
Page 51
Estates, Trusts & Gifts
Final Regulations on Portability Election
TD 9725
• Allows an executor to transfer a decedent’s unused
exclusion amount to the decedent’s surviving spouse.
• Estates making the election must file an estate tax return
(Form 706) even if assets are below the filing threshold.
• Regulations indicate that the IRS is considering making the
safe harbor in Rev. Proc. 2014-18 permanent for estates
not otherwise required to file, i.e., allowing late-filed
elections.
• Regulations effective June 12, 2015.
Page 53
Estate Closing Letters Issued Only on
Request
IRS Website
• IRS announced that it will issue estate tax closing
letters only upon request.
• Applies for Forms 706 filed on or after June 1, 2015.
• Taxpayers are advised to wait at least four months
after filing the return to request a closing letter.
• The IRS’s policy for issuing closing letters has been
changed to reflect the portability election rules.
Page 54
New Law Imposes Estate Basis and
Reporting Requirements
Highway Act (H.R. 3236), 7/31/15
• Executors of taxable estates must notify the IRS and estate
heirs as to the property values reported on Form 706 for
inherited assets.
• Beneficiaries are required to use the reported Form 706
values as their income tax basis in the inherited assets.
• Effective for Forms 706 filed after 7/31/15 (although
Notice 2015-57 delays its reporting requirement until
2/29/16).
Page 55
Failure to Adequately Disclose Gifts Keep
Statute of Limitations Open
Field Attorney Advice 20152201F
• A timely filed Form 709 gift tax return provided incorrect
names for interests in partnerships that were given as well
as an incorrect EIN for one of the partnerships and also
contained other disclosure deficiencies. The statute was
deemed open.
• CAUTION: the 3-year statute of limitations for gift tax
returns remains open under Sec. 6501(c)(9) if the gifts are
not “adequately disclosed”. Therefore, the IRS can assess
gift tax based on these transfers at any time.
Page 56
Return Preparer’s Malpractice Not
Reasonable Cause for Estate’s Late Filing
Specht, 115 AFTR 2d 2015-315, (DC OH), 01/06/2015
• Citing the Supreme Court in Boyle, (S Ct 1985), 55 AFTR 2d 851535, an executor has a duty to ascertain the statutory deadline
and meet it
• Reliance on an attorney to prepare and file an estate tax return
doesn’t relieve an executor of his duty to meet the filing
deadline
• Reliance on professional advice on matters of tax law was
contrasted with reliance on an agent to meet the filing deadline
– two different concepts
Page 57
Estate Not Entitled to Charitable Income Tax
Deduction
Estate of Eileen S. Belmont, 144 TC 84, 02/19/2015
• Decedent left amounts in her will to a charitable organization
which the estate claimed an income tax deduction for the
amounts “permanently set aside”
• Reg. 1.642(c) – 2(d) disallows a deduction unless the possibility
that the amount to be used for the charitable purpose will not
be devoted to it is so remote as to be “negligible”
• The estate was embroiled in a legal dispute with the decedent’s
brother and used a portion of the funds set aside for the charity
• Held – for the Government: because the estate was aware that a
prolonged legal battle was more than just a remote possibility at
the time the deduction was claimed, the deduction was
disallowed
Page 58
No Letter Rulings on Asset Basis Adjustments
for Grantor Trusts
Rev. Proc. 2015-37, 06/15/2015
• The IRS added to its “no rule” list any determinations on
whether assets in a grantor trust will receive a Sec. 1014
basis “step-up” upon the death of the deemed owner of
the trust when the assets are not includable in the owner’s
gross estate.
• This issue is particularly important for intentionally
“defective” grantor trusts structured to be complete
transfers for estate tax purposes but incomplete tranfers
for income tax purposes.
Page 59
Individuals
Capital Gain Upheld by Eleventh Curcuit
Overturns the Tax Court Ordinary income
Determination
Long v. Comm., 772 F3d 670, (CA11), 11/20/2014
• Taxpayer was a real estate developer who sold a position in a
lawsuit to enforce a land purchase contract and reported the
gain as capital gain
• The Tax Court sided with IRS that because the taxpayer would
have incurred ordinary income tax from the eventual sale of the
land, the gain on the sale of the lawsuit position should be
considered ordinary income
• Held – for the Taxpayer = The Eleventh Circuit reverses, in part,
the Tax Court decision noting that the lawsuit position was what
the taxpayer sold which would be considered a capital asset
under Sec. 1221
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Compensation or Excluded Damages???
Nichelle G. Perez, 144 TC 51, 01/22/2015
• Taxpayer was compensated $20,000 as an inducement to be an
egg donor and received a Form 1099-MISC which she did not
include on her return
• Taxpayer’s argument was that the payments were nontaxable
because she endured “pain and suffering” during the lengthy
egg-retrieval process”, i.e., excludable damages under Sec.
104(a)(2)
• Held-for the Government: Her consent to the procedures and
her attendant physical pain, although real, was just a by-product
of performing a service contract. She voluntarily foreswore a
legally recognized interest against bodily invasion for payment
that had to be included in gross income
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Previous Passive Investor’s Activities
Determined Material Participation
Jose A. Lamas, TC Memo 2015-59, 03/25/2015
• A previously passive investor stepped in to rescue several related family
businesses. Taxpayer worked at least 691 hours in day-to-day
management and operations of one of the troubled entities that were
grouped with the related businesses as an appropriate economic unit
under Reg. 1.469-4(c)
• Over $5 million of refunds were disallowed by the IRS due to NOL
carrybacks from the business.
• Held – for the taxpayer: the Court found that the businesses were an
appropriate economic unit and should be grouped as a single activity
and that taxpayer’s work which exceeded 500 hours was adequately
proven by credible testimony and phone records.
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No Alimony Deduction for Payments Made in
Arrears – OUCH!!!
David Iglicki, TC Memo 2015-80
• Taxpayer defaulted on his alimony payments required under his divorce
decree. A Colorado state court ordered him to pay all past-due
amounts. Taxpayer then paid all amounts owed and deducted them as
alimony.
• The IRS denied the deduction and imposed an accuracy-related penalty
• Held – for the Government: The Court agreed with the disallowance of
the alimony deduction because, under Colorado law, past due amounts
under an order enforcing spousal support arrearages becomes a final
money judgment, which wouldn’t terminate if the ex-wife were to die
violating the “no liability beyond death” requirement of Sec.
70(b)(1)(D). Accuracy penalties were upheld.
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No Rental Losses for Home Leased to
Relative
Charles and Cecilia Okonkwo, TC Memo 2015-181, 09/24/2015
• Sec. 280A limits applied to a cardiologist’s and wife’s
deduction for expenses relating to a home they built and
originally attempted to sell and then rented to their
daughter.
• Held-for the Government: The Court held that the
daughter’s use of the house was personal and attributed to
the taxpayers as the daughter did not pay fair rental.
Accuracy penalties were upheld.
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Supreme Court Legalizes Same-Sex Marriages
Obergefell v. Hodges, 115 AFTR 2d 2015-2309, (S. Ct.),
06/26/2015
• The Supreme Court legalized same-sex marriage in all 50
states entitling married individuals to file join federal and
state tax returns and be entitled to spousal benefits.
• Some states required same-sex couples to file separate
income tax returns regardless of marital status.
• Amended returns to file jointly could be filed for open
years if beneficial.
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When is Foreign Earned Income Excluded?
Joel B. Evans, et al v. Comm., TC Memo 2015-12
• Taxpayer was a U.S. citizen working on a Russian-owned oil rig. During
this time, the taxpayer owned a house in LA where he returned for a
month at a time, six times per year, to be with his family.
• Upon the advice of a professional tax preparer, taxpayer excluded his
wages earned in Russia under Sec. 911(a) taking the position that his
tax home was in Russia.
• Held-for the Government: the Sec. 911 foreign earned income
exclusion requires that a U.S. citizen be a bona fide resident of a
foreign country for an entire taxable year. Maintaining a U.S.
residence (LA home) was fatal to his eligibility to claim the exclusion.
Accuracy-related Penalties under Sec. 6662 were not applied due to
taxpayer’s reliance on his tax preparer.
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