Small Business Taxes & Management

News and Tip of the Day

Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.

For the full text of new Revenue Rulings, Revenue Procedures, Regulations, etc. go to:
  Internal Revenue Bulletins
For a Tax Court Case:
  Tax Court Cases
For IRS News Releases:
  News Releases and Fact Sheets
For Letter Rulings and Technical Advice Memoranda:
  IRS Written Determinations
For IRS Forms and Publications:
  Forms and Publications
For Health Care Tax Tips:
  Health Care Tax Tips


October 21, 2016


Victims of Hurricane Matthew that took place beginning on October 4, 2016 in parts of Georgia may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Georgia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in the counties of Bryan, Bulloch, Camden, Chatham, Effingham, Glynn, Liberty, McIntosh, Screven and Wayne will receive tax relief. For complete details go to Tax Relief for Victims of Hurricane Matthew in Georgia.

In order to deduct unreimbursed employee business expenses, you have to show that either the employer had a policy of not reimbursing such expenses, or that the reimbursement was denied. In Marty Dale Martin (T.C. Memo. 2016-189) the taxpayer claimed deductions for expenses beyond that reimbursed, but he provided no documentation such as receipts for any business lunches or dinners, or any document stating that the employer denied him reimbursement of any expenses. The Court denied a deduction for those expenses.

Tip of the Day

What's worse than dying without a will? . . . Dying without naming a guardian for your child. Without a will your assets will go to relatives based on state law. Often, that may not be far from what you intended (there are BIG exceptions, however). That's not true if you don't name a guardian for your child. The court will appoint one and it may not be the relative you would have chosen, or even a relative for that matter. In addition, taking care of your child financially will be a big headache. The court may have to approve all expenditures over a certain dollar amount, and that amount could be relatively small. In addition, administrative fees could consume a significant percentage of your child's assets. Naming a guardian, and an alternate if your first choice isn't available is probably one of the most important things you can do for your child. And be sure to update your choice if things change.


October 20, 2016


Victims of Hurricane Matthew that took place beginning on October 3, 2016 in parts of Florida may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Florida. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in the counties of Brevard, Duval, Flagler, Indian River, Nassau, Putnam, St. Johns, St. Lucie and Volusia will receive tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after October 3, 2016, and on or before March 15, 2017 have been postponed to March 15, 2017. This includes the January 17, 2017 deadline for making quarterly estimated tax payments and the 2015 individual returns on extension to October 17. Also included are the Oct 31 and Jan 31 deadlines for quarterly payroll and excise tax returns. For more information, go to Tax Relief for Victims of Hurricane Matthew in Florida.

Victims of Hurricane Matthew that took place beginning on October 4, 2016 in parts of South Carolina may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of South Carolina. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in the counties of Allendale, Bamberg, Barnwell, Beaufort, Berkeley, Charleston, Colleton, Darlington, Dillon, Dorchester, Florence, Georgetown, Hampton, Horry, Jasper, Lee, Marion, Orangeburg, Sumter, and Williamsburg will receive tax relief. For complete information on the relief, go to Tax Relief for Victims of Hurricane Matthew in South Carolina .

The Social Security Administration has announced the Cost-of-Living Adjustments (COLA) for 2017. Social Security and SSI beneficiaries will receive a 0.3 percent increase in 2017. The maximum taxable earnings for Social Security (OASDI) will increase from $118,500 to $127,200 (there is no limit on Medicare). Earnings for a quarter of coverage will be $1,300; beneficiaries who have not reached full retirement age can earn $16,920 ($1,410/month) before benefits will be withheld.

Tip of the Day

Moving to another state? . . . If you do, you may have a certain amount of time to change items such as your auto registration, but you're considered a resident from the first day you take up residency in the state. In some cases the date is clear--you move your family and begin work at a new job in Maine and put your Massachusetts home on the market. Sometimes it's not so clear cut. You're retired and have a vacation home in Maine. You spend time there but haven't abandoned your Massachusetts home. Most states consider you a resident if you spend more than six months of the year in the state. Many states consider that time a rebuttable presumption. That is, you may be able to show you're not a resident by showing you still vote, have a membership in the country club, see the doctor and dentist, etc. in the other state. Check the rules in both states. Many states are aggressive in claiming you're a resident.


October 19, 2016


Individuals or businesses who oppose the Federal tax laws may use a frivolous tax argument to enrich themselves or evade paying tax. Generally, a frivolous tax argument is based on a frivolous or incorrect interpretation of the Federal tax laws. Individuals and businesses use these incorrect interpretations to support their claims that they are not subject to Federal tax. To date the IRS has identified 50 frivolous tax arguments used by taxpayers. During Fiscal Years 2012 through 2014, the IRS identified 36,648 frivolous tax returns in which the taxpayer used one or more of the 50 identified frivolous arguments. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to assess the IRS’s efforts to identify and prevent the avoidance of individual income tax based on frivolous tax argument. TIGTA found that potentially erroneous refunds were paid as a result of undetected or insufficiently addressed frivolous tax return claims. Specifically, IRS processes and procedures do not ensure that all tax returns claiming a potentially frivolous tax argument are identified. As a result, the IRS paid more than $27.2 million in potentially erroneous refunds or tax credits to 1,938 taxpayers who claimed one or more frivolous tax arguments in Tax Year 2014. The IRS can assess a $5,000 frivolous penalty for each of the 1,938 returns for which a valid return is not provided by the taxpayer. IRS management informed us that the Frivolous Return Program (FRP) filters have been modified to ensure that returns with the same characteristics as those 1,938 confirmed as frivolous will be identified and referred to the FRP for additional frivolous filer review. In addition, TIGTA identified that employees are not adequately trained to identify tax returns claiming frivolous tax return arguments. TIGTA recommended that the IRS ensure that the annual evaluation of the FRP filter criteria includes the identification and assessment of all original and amended tax returns, regardless of dollar tolerance, that meet the filter criteria and ensure that appropriate action is taken to address the 1,938 tax returns the IRS confirmed as being frivolous. In addition, the IRS should correct computer programming errors and ensure that all employees receive annual training on the processes for identifying potentially frivolous tax returns. To read the full report, go to

Tip of the Day

Trust denied charitable deduction . . . Attorneys, accountants, and financial advisers often come up with elegant plans but fail because of poor execution. In a recent tax case a testamentary trust was denied a deduction for charitable contributions because the payments were not made in accordance with the governing instrument of the trust. In this case the governing instrument was the will that created the trust. While the terms may not have made sense, they were unambiguous.


October 18, 2016


The IRS has announced that it is delaying the October 24 date for requiring e-services users to re-register and validate their identities through Secure Access authentication. In the next few weeks, the IRS plans to have discussions with key stakeholders affected by the e-services changes to discuss security protocols and next steps in this process. A new implementation date has not been set. When a new date is set, the IRS will share the information widely with e-Services users. The IRS is strengthening the e-Services registration process as part of a wider effort to ensure the protection of taxpayer data and IRS systems.

The IRS has published final and temporary regulations (T.D. 9790) that establish threshold documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes, and treat as stock certain related-party interests that otherwise would be treated as debt for federal tax purposes. The final and temporary regulations generally affect corporations, including those that are partners of certain partnerships, when those corporations or partnerships issue purported indebtedness to related corporations or partnerships.

Tip of the Day

Person on phone more important than ever? . . . Many companies have decided to skimp on the quality of their phone support, thinking their web site should handle the bulk of questions. That may be a mistake. While the volume of telephone calls may have diminished, the calls coming through may be from individuals who couldn't find the answers on the web site. They may come to phone support already frustrated. Providing low-grade phone support may result in lost customers. On the other hand, for some businesses that may be fine. They may not want customers that need the extra support. Evaluate your situation before committing. Recovering lost customers is expensive.


October 17, 2016


On October 14 the IRS expanded the full relief for victims of Hurricane Matthew in North Carolina to those residing or having businesses in the counties of Dare, Duplin, Gates, Hyde, Jones and Pender.

The IRS has issued final and temporary regulations (T.D. 9789) relating to the election to accelerate the timing of a loss sustained by a taxpayer attributable to a federally declared disaster. The text of the temporary regulations also serves as the text of the proposed regulations (REG-150992-13). The temporary regulations generally provide that the due date for making the Sec. 165(i) election is six months after the due date for filing the taxpayer's federal income tax return for the disaster year (determined without regard to any extension of time to file). The IRS will issue additional guidance regarding the time and manner for making the election. The temporary regulations will extend the time for revoking the election to 90 days after the due date for making the election.

Tip of the Day

Fraudulent charges . . . You've almost assuredly read or heard about the fictitious accounts created by a well-known bank. While some of the transactions, such as the creation of phony credit card accounts, were likely unique to that bank, others such as adding and charging for unrequested services are probably not. It's not unheard of charges for credit insurance or other charges, being added to an account. Unless you check the account and question such charges, you could continue to pay them for years. The same can be true for many other vendors or service providers. On recurring monthly bills, scan them regularly for changes--at least every three months, preferably every month. Even a $5 charge will add up to $60 at the end of the year. You should also be alert for continuing charges for services you've canceled. Don't assume a computer generated bill is accurate. There can still be any number of reasons for errors.


October 14, 2016


The IRS is advising taxpayers (IR-2016-132) affected by Hurricane Matthew but not yet covered by a federal disaster declaration with individual assistance that they may qualify for relief from penalties if they are unable to meet Monday’s extended deadline for filing 2015 tax returns. The IRS noted that additional individual assistance areas could be added to the federal disaster area in coming days based on continuing damage assessments by the Federal Emergency Management Agency (FEMA). These additional disaster declarations will pave the way for additional extensions and other relief from the IRS. This means that the IRS will automatically provide retroactive extensions and other relief to any locality added to the federal disaster area at a later date. In areas with disaster declarations for individual assistance, taxpayers will have until March 15, 2017 to file returns otherwise due on Monday, October 17.

The IRS has already added to the list of counties in North Carolina qualifying for relief as a result of Hurricane Matthew. The additional counties are Bertie, Greene, Harnett, Johnston, Sampson, Wayne, and Wilson.

The IRS has issued proposed amendments (REG-108934-16) to the regulations that provide user fees for offers in compromise. The proposed amendments affect taxpayers who wish to pay their liabilities through offers in compromise. Under the amendments, the fee would be increased from $186 to $300. The proposed effective date for these proposed amendments to the regulations is for offers in compromise submitted on or after February 27, 2017.

Tip of the Day

Filing deadline October 17 . . . The filing deadline for individual taxpayers with an extension is Monday, October 17 (the actual due date, October 15 is a Saturday). For those taxpayers affected by Hurricane Matthew, but where the IRS has not extended the filing deadline, there's no penalty for failure to file if you're getting a refund (most states have a similar rule). But filing late may not be without consequences for some taxpayers who need to make certain elections on their return. You may be precluded from doing so. Many elections must be made on a timely filed return.


October 13, 2016


You may be able to report the sale of property on the installment method, allowing you to report the gain over time as you receive payments. However, installment sale treatment is generally not available in the case of an installment sale of depreciable property between related parties. (Sale of the assets to another party at a gain would allow the buyer to have a "stepped up" basis for computing depreciation. That could result in depreciation deductions that offset ordinary income to the buyer that exceed the gain reported by the related seller who could be reporting the gain as a capital one.) In that case installment sale treatment is allowed only if it is established to the satisfaction of the IRS that the disposition did not have as one of its principal purposes the avoidance of Federal income tax. In Herb Vest (T.C. Memo. 2016-187) there were three related entities. The Court noted that a taxpayer can carry the burden of proof only by submitting evidence that clearly negates an income-tax avoidance plan. The Court described that burden as a heavy one. The Court found that the substance of the transaction clearly revealed a principal purpose of tax avoidance. The taxpayer retained control of the assets while getting a higher basis. The Court dismissed the taxpayer's argument there was a valid business purpose. First, it did not find a business purpose, and second, that didn't negate the fact that one of the purposes was the avoidance of income tax.

Tip of the Day

Recharacterizing a Roth conversion . . . Made a mistake and converted a traditional IRA to a Roth in 2015 and saw the value of the transferred assets decline? You can undo the transaction by recharacterizing the conversion, but you've only got till October 17 to do so. That's the extended filing deadline for returns. You've got to do the recharacterization as a trustee-to-trustee transfer. There are additional rules. Check with your tax or financial advisor before taking action.


October 12, 2016


President Obama has signed the U.S. Appreciation for Olympians and Paralympics Act of 2016 which exempts from tax the prize money received by athletes from the U.S. Olympic Committee, but only for those whose adjusted gross income does not exceed $1 million for the year of receipt.

Before the IRS will agree to an offer-in-compromise, it will first determine a taxpayer's reasonable collection potential, in other words, how much it believes you can afford to pay. In Eric Edward Chandler (U.S. Court of Appeals, Tenth Circuit) the taxpayer claimed that after the IRS Office of Appeals rejected his offer-in-compromise his medical expenses increased, resulting in changed circumstances. He argued that the Tax Court should have remanded his appeal to the IRS Office of Appeals to reconsider his offer, even though his reasonable collection potential is still substantially more than his offer in compromise. The Tax Court rejected this argument and concluded that even if the taxpayer were able to show a change in circumstances, that change wouldn't be material or alter the Office of Appeals' determination. The Court of Appeals affirmed the Tax Court decision.

Tip of the Day

State tax agencies worse than federal? . . . They can be, particularly when it comes to sales tax. Some states are far more aggressive than others, often asking the court for jail time to create an example. In one recent case the state claimed the taxpayer, the owner of a restaurant, filed false sales tax returns for some 5 years and underpaid the state my at least $221,000. The state charged the owner with 26 felonies. Jail time could be up to 15 years (15 years is unlikely, though some jail time isn't), and penalties that can equal the amount of the tax owed (very likely) as well as interest. In a relatively high percentage of such cases the business fails to survive. Keep in mind that in most states the owner(s) and other "responsible" persons can be held personally liable for the tax. If you've got partners, make sure they're not pocketing or underreporting the tax.


October 11, 2016


The IRS can use one of several methods to reconstruct your income if you don't maintain adequate records. In Ramon Reynoso (T.C. Memo. 2016-185) the IRS used the bank deposits method to do so. Basically, all deposits that are not found to be nontaxable are counted as income. The taxpayer argued that the IRS classified some nontaxable deposits as income. The Court rejected that claim because he failed to produce any evidence that nontaxable amounts were deposited. The Court also disallowed unsubstantiated deductions noting that when a taxpayer claims business expenses that he cannot fully substantiate the court may estimate the allowable amount, (Cohan rule), but he must still provide at least some reasonable evidence that enables the court to do so. The IRS argued that because the taxpayer provided no documentation to substantiate any expenses, the court did not have reasonable evidence and should not allow any expenses. The Court said it had no obligation to apply Cohan when a taxpayer doesn't cooperate with the IRS or the Tax Court. In addition, the Court found that many of the "badges of fraud" were present and found the taxpayer liable for the fraudulent failure to file penalty.

Tip of the Day

Counting inventory . . . Time to count inventory in the warehouse? Who better to do so than the person in charge? Wrong. One of the best ways to cover up missing inventory is to pad the inventory count. And who better to do that than the people who work in the warehouse? The problem is that your office staff may not be familiar with the items. There are ways around the problem. First, consider taking inventory periodically during the year of select areas. That will familiarize employees. Second, use the warehouse staff in an advisory position. Just be sure other staffers do the actual counting. Third, talk to your CPA. He or she can provide suggestions on how to run the count.

October 7, 2016


The House Ways and Means Committee sent a letter to the Secretary of the Treasury urging the IRS not to finalize the Section 385 (debt-equity) regulations, recommending that any revised rules be issued as proposed regulations. The letter noted the Treasury has received many comments and that the impact on businesses, both large and small, could be material and any new regulations should be carefully analyzed.

In valuing property an estate you may be able to secure a discounted value on assets in a family limited partnership (FLP). But in Estate of Edward G. Beyer, Deceased (T.C. Memo. 2016-183) the Court allowed no discount because the FLP held assets in a restricted management account where distributions of principal were prohibited. On a second issue, assets transferred to the FLP were included in the estate. The decedent transferred the assets some years earlier but not in a bona fide sale and retained the right to the income from the property.

You may be able to borrow from your qualified plan at work. But in Dora Marie Martinez and Carlos Garcia (T.C. Memo. 2016-182) the Tax Court found that the taxpayers stopped making loan repayments and did not repay the loan during the allowable grace period. The failure to pay constitutes a deemed distribution from the plan equal to the entire outstanding balance, including accrued interest at the time of failure. The Court also allowed the 10% excise tax on an early distribution because the taxpayers did not qualify for one of the exceptions.

Tip of the Day

Picking a charity . . . Often selecting a charity is done on impulse. You were treated well at the hospital so you donate $100 each year. Same for your alma mater. But if you don't have an emotional attachment, what do you do? You want to donate to breast cancer, but there are so many choices. And the productivity of your money can vary widely. One charity uses over 50% for marketing and payroll, one uses 15% for marketing 10% for administrative expenses and the rest for research. Spend some extra time to do your homework. There are a number of web sites that have researched charities and provide information. Two are Guidestar and Charity Navigator. You can also ask the charity for their IRS Form 990 which will provide information on salaries, etc. While the initial work may be tedious, if you're making a significant contribution and/or intend to make additional, regular, contributions, the time will be well spent.


October 6, 2016


The IRS has issued final regulations (T.D. 9787) under Sections 707 and 752 of the Code. The final regulations under Section 707 provide guidance relating to disguised sales of property to or by a partnership and the final regulations under Section 752 provide guidance relating to allocations of excess nonrecourse liabilities of a partnership to partners for disguised sale purposes. Additional final and temporary regulations (T.D. 9788) concern how liabilities are allocated for purposes of Sec. 707 and when certain obligations are recognized for purposes of determining whether a liability is a recourse partnership liability under Sec. 752. These regulations affect partnerships and their partners.

The IRS has also released proposed regulations (REG-122855-15) that incorporate the text of related temporary regulations and withdraws a portion of a notice of proposed rulemaking (REG-119305-11) to the extent not adopted by final regulations. This document also contains new proposed regulations addressing when certain obligations to restore a deficit balance in a partner's capital account are disregarded under Section 704 of the Code and when partnership liabilities are treated as recourse liabilities under Section 752.

It's not easy to escape the accuracy-related penalty. If you owe additional taxes because of a mistake and the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000 the IRS will assess the penalty. The excuse that applies most frequently is that you relied on a professional for advice. But that wasn't the case in Shenita A. Hill (T.C. Memo. 2016-181). The taxpayer failed to report unemployment compensation. She claimed that the online software did not reference the unemployment compensation and/or that she did not receive information from the State until after she had filed her return. The Court held that, in the context of the case, the claim did not constitute reasonable cause to be relieved of the penalty.

You generally can't change accounting methods without IRS permission unless you qualify for a special exception. In Carey Clayton Mills (T.C. Memo. 2016-180) the taxpayer had been using the cash method of accounting to report the income and expenses of a single-member LLC. In the year at issue the taxpayer switched to the accrual method to report both income and expenses. The Tax Court found the change in accounting methods required IRS permission. However, even if the change came under the purview of one qualifying for automatic consent, the taxpayer had not filed Form 3115, Application for Change in Accounting Method. The Court required the taxpayer to use the cash method of accounting for the year.

Tip of the Day

Hurricane preparations . . . For individuals and businesses in Florida and South Carolina, there's not much time left for preparations. There are two things you can do--or have your kids do. Take pictures of the interior of the house and important or valuable items, then the exterior. The second thing is to either take your computer or download your most important files onto a flash drive. Accounting records, business data, etc. as well as any personal information such as bank and brokerage account numbers, etc. In the future you should consider backing up the computer to the cloud or to an outboard hard drive. Make sure you put the flash or hard drive in a waterproof container before leaving the house.


October 5, 2016


The IRS has published final regulations (T.D. 9786) concerning the application of the credit for increasing research activities. These final regulations provide guidance on software that is developed by (or for the benefit of) the taxpayer primarily for internal use by the taxpayer (internal use software). These final regulations also include examples to illustrate the application of the process of experimentation requirement to software. These final regulations will affect taxpayers engaged in research activities involving software.

The IRS has issued a correction to a notice of proposed rulemaking (REG-163113-02) that was published in the Federal Register on Thursday, August 4, 2016. The proposed regulations concern the valuation of interests in corporations and partnerships for estate, gift, and generation-skipping transfer tax purposes. On page 51418 of FR Doc. 2016-18370, in the third column, under the paragraph heading “Effective Dates”, in the second line from the top of the paragraph, the language “proposed to be effective on and after the” is corrected to read “proposed to be effective on the”.

The IRS can show proof of mailing of a deficiency by presenting a substitute for a U.S. Postal Service Form 3877, the burden shifts to the taxpayer to prove the notice wasn't mailed by the IRS. That's what the Tax Court held in Sharon L. Garrett (T.C. Memo. 2016-179) and the taxpayer wasn't able to prove the notice wasn't mailed. The Court noted the use of a substitute Form 3877 was acceptable.

Tip of the Day

Get it right the first time . . . It's usually cheaper. To save a couple of minutes an employee took a short cut with an order and mistakenly entered a quantity of two instead of one. The customer was billed for two and complained. It took another employee 45 minutes on the phone to straighten it out and calm the customer. Had the company got it right the first time it would have saved the time to correct the problem and avoided a dissatisfied customer. The problems can be much more significant for a manufacturer or service provider. For example, you have to recall a defective product or have to rework a job.


October 4, 2016


President Obama has signed an interim spending bill that will fund the federal government through the middle of December.

The IRS has announced the release of 2015 Statistics of Income Program Documentation: Data Items by Forms and Schedules. This document is now available and contains the Federal tax forms, schedules, and information documents selected for SOI's Tax Year 2015 studies. It is organized in the following three parts:

In addition, the IRS has announced the release of Partnership Returns, Tax Year 2014--Twenty-three tables containing Tax Year 2014 statistics for partnerships, including statistics on the types of partnerships and specific industrial sectors, are now available on Tax Stats.

In Estate of James Heller (147 T.C. No. 11) the estate held a 99% interest in an LLC, which held an account with Madoff Investment Securities (MS) as its only asset. The LLC distributed to the estate a portion of the funds from the MS account, and the estate used those funds to pay estate taxes and administrative expenses. Before the estate could distribute its remaining assets to the beneficiaries, MS' chairman was arrested on, and pleaded guilty to, charges relating to a Ponzi scheme. As a result of the Ponzi scheme, the MS account became worthless, and the estate, on its Federal estate tax return, deducted a theft loss relating to its interest in the LLC. In a notice of deficiency issued to the estate, the IRS determined that the estate was not entitled to an Sec. 2054 theft loss deduction. The estate challenged the determination and moved for summary judgment. The IRS objected, contended that the LLC owned the MS account, and moved for partial summary judgment. The Tax Court held that the estate, pursuant to Sec. 2054, is entitled to a deduction relating to its interest in the LLC.

Tip of the Day

Looking for yield? . . . While stock prices have risen significantly in the past few years, more than a few quality issues still boast a respectable yield. Even without other considerations, the income is attractive since the yield is more than you'd get in a bank and nearly comparable to many corporate bonds. But you'll also get the benefit of lower tax rates on qualified dividends. There's no question that stocks carry more risk, but if you're investing for the longer term (and you should be) the risk of having to sell at a bad time is diminished. Look for high quality issues where the company has a history of increasing dividends. There are a number of companies that have increased their dividend more than 50% over a 10-year period. Talk to your investment advisor before committing.


October 3, 2016


The IRS has posted a new web page Questions and Answers Related to e-Services Migration to Secure Access that provides answers to a number of questions regarding the new authentication process required to access e-Services.

The Treasury Inspector General for Tax Administration (TIGTA) conducts an annual review of the analysis and trending of Collection and Examination function activities. The overall objective was to provide various statistical information regarding Collection and Examination function activities. In April 2016, the IRS updated its estimate of the annual Net Tax Gap to $406 billion for Tax Years 2008 through 2010. The estimated Net Tax Gap for individual income tax was $291 billion, corporation income tax was $35 billion, employment tax was $79 billion, and estate and excise tax combined was $1 billion. In Fiscal Year (FY) 2015, 44 percent of the IRS’s appropriations were allocated to enforcement of tax laws. In FY 2015, the IRS continued to experience losses in the numbers of employees available to provide services to taxpayers and those needed to enforce tax laws. In addition, after an increase in FY 2014, the IRS budget for FY 2015 decreased $345 million (3 percent), from $11.3 billion to $10.9 billion. However, despite fewer resources, total tax revenues received and collected continued to climb to $3.3 trillion, an increase of 8 percent from FY 2014. On the other hand, enforcement revenue collected decreased from $57.1 billion in FY 2014 to $54.2 billion in FY 2015, a decline of 5 percent. Unpaid assessments increased to $412 billion. Collection function activities showed mixed results in FY 2015. While some areas of compliance declined, collections on delinquent accounts increased in every collection program except Field Collection. The Collection function also continued to receive more delinquent accounts than it closed, although the number of accounts closed as uncollectible has decreased in recent years. Fewer enforcement actions were used during FY 2015, with the numbers of levies, seizures, and Notices of Federal Tax Lien all declining in the last year. Additionally, the use of payment options such as offers in compromise and installment agreements decreased, although the amount of delinquent taxes collected through these tools increased. The Examination function conducted fewer examinations in FY 2015, with field examination conducting 28 percent fewer examinations than in FY 2011. Declines in the number of examinations are directly related to the 24 percent decline in the revenue agents and tax compliance officers available to perform them during that period. However, during FY 2015, the dollar yield per hour for most return types increased. Further, the no-change rates for revenue agent examinations of corporations increased, but it decreased for examinations of individuals. For the full report go to

Tip of the Day

Charitable contribution limitation . . . The law contains a limit on the amount that can be deducted as a charitable contribution in any year. While most individuals won't come close to approaching the limit, there are more than a few special circumstances when that could happen. For example, a retired individual making a large contribution--of either cash or property. Or a business owner with significant pass-through losses. The cash contribution limitation to many charitable organizations such as churches, educational institutions, is 50% of adjusted gross income. For contributions of capital gain property (e.g., stock, artwork, etc.) the limit is 30%. The limits on contributions to nonoperating foundations and organizations such as war veteran organizations is generally 30% for cash and 20% for capital gain property. There are other, special limitations, and any unused charitable contribution can be carried forward up to 5 years. If you're contemplating a large contribution, check with your tax advisor.


September 30, 2016


Revenue Procedure 2016-51 (IRB 2016-42) Rev. Proc. 2013-12, 2013-4, which sets forth the Employee Plans Compliance Resolution System ("EPCRS"), a comprehensive system of correction programs for sponsors of retirement plans that have failed to satisfy certain requirements under section 401(a), 403(a), 403(b), 408(k), or 408(p) of the Code. EPCRS is being modified to take into account the changes in the determination letter application program, as described in Rev. Proc. 2016-37. The revenue procedure also incorporates certain modifications set forth in Rev. Proc. 2015-27 and Rev. Proc. 2015-28, two prior revenue procedures which modified Rev. Proc. 2013-12. In addition, the revenue procedure incorporates modifications to Rev. Proc. 2013-12 from Rev. Proc. 2016-8, the annual user fee revenue procedure. Rev. Proc. 2013-12, Rev. Proc. 2015-27 and Rev. Proc. 2015-28 are modified and superseded by this revenue procedure.

Disability income payments from an insurance policy may be nontaxable, but they have to meet the requirements of Code Sec. 105. In Estate of Howard J. Barnhorst, II, Deceased, et al. (T.C. Memo. 2016-177) the terms of the policy provided that if the taxpayer didn't get the full 97% cash value from a lump-sum payment from any type of catastrophic injury, he'd get the rest of it in monthly installments over the course of the benefit period, regardless of the type of “catastrophic disability” he suffered. The premium (a large up-front payment was made) was paid by the taxpayer's employer. In addition, the taxpayer (or his beneficiaries in the event of death) was guaranteed to get the 98% cash value of the policy, no matter what happened. The Court noted the guaranteed payout was a very strong indicator that the policy was a form of deferred (and taxable) compensation. The Court found the policy was not an accident or health plan under Sec. 105(a). Nor were the payments excludable from income under Sec. 105(c) since they were not calculated with respect to the nature of the injury.

The IRS will charge interest for late payment of taxes, or if any tax liability is outstanding. In Ajai Prakash et ux. (T.C. Memo. 2016-176) the taxpayer sought an abatement of interest. The Court noted that Sec. 6404(e)(1) authorizes the IRS to abate interest only when the deficiency or payment of tax is attributable to any unreasonable error or delay by the IRS in performing a ministerial or managerial act. In addition, an error or delay can only be taken into account if no significant aspect of such error or delay can be attributed to the taxpayer and after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. In this case the delay was attributable in part to the taxpayer. The Court denied any abatement of interest.

Tip of the Day

Attorney-client privilege . . . The concept exists to protect communication between an attorney and his client involving a case. But the protection has limits. It does not apply to records created by or held by a third party. For example, your bank records are not protected. Importantly, the protection is lost if the communication is disclosed to another party who is not your attorney or working for him or her.


September 29, 2016


The Senate appears to have passed a continuing resolution that would fund the government at current levels through December 9, thereby averting a shutdown.

Notice 2016-59 (IRB 2016-42) advises readers of revisions to the requirements for the reduced user fee for substantially identical letter rulings set forth in section 15.07(2) of Rev. Proc. 2016-1. This notice also corrects the amount of the user fee for Foreign Insurance Excise Tax Waiver Agreements stated in Appendix A of Rev. Proc. 2016-1.

You can't just claim you didn't receive a deficiency notice from the IRS, you've got to show that you did not receive the notice. The IRS can show proof of mailing using Substitute USPS Forms 3877 by certified mail, and that provides a presumption of delivery which a taxpayer has to rebut. In James William Harris (T.C. Memo. 2016-175) the Court found there was a presumption of delivery of the notice(s) and the taxpayer could not contest his underlying liability at a Collection Due Process hearing and raised no relevant issues.

Tip of the Day

Use that rebate . . . Some merchants use rebate cards instead of sales to entice buyers. If you're on the purchase end, there's nothing wrong with that--if you use the card. For example, one retailer prices a gallon of paint at $55, but offers a rebate card for $40, bringing the price down to $15. At that price it's tough to pass up. The retailer is betting you won't apply for the rebate card, and, if you do, you won't use it before it expires. If they're right, you've paid full price for the paint and probably could have gotten a better deal elsewhere. If you're buying this for yourself, have a way to insure you apply for and use the card or rebate. If this is for your business, make sure you or someone in your office is in charge of securing the rebate.


September 28, 2016


Notice 2016-58 (IRB 2016-41), announces the special per diem rates effective October 1, 2016, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. This notice provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Revenue Procedure 2016-49 (IRB 2016-42) provides procedures to disregard and treat as null and void for transfer tax purposes a qualified terminable interest property (QTIP) election in situations where the QTIP election was not necessary to reduce the estate tax liability to zero. This guidance provides that such procedures are unavailable where QTIP elections are made in estates in which the executor elected portability of the deceased spousal unused exclusion (DSUE) amount under Sec. 2010(c)(5)(A). This guidance modifies and supersedes Rev. Proc. 2001-38.

A welfare-benefit fund is any fund which is part of a plan of an employer through which the employer provides welfare benefits to employees or their beneficiaries. Under Section 419(b), a deduction for a contribution to a welfare-benefit fund cannot exceed the welfare-benefit fund's qualified cost. However, the Section 419(b) qualified-cost limitation does not apply to a deduction for a contribution to a welfare-benefit fund that is part of a 10-or-more-employer plan. In Jay D. Schechter (T.C. Memo. 2016-174) the taxpayer claimed that his S corporation's $450,000 payment (a one-time premium on a life insurance policy) was a contribution to a welfare-benefit fund that is part of a 10-or-more employer plan which did not maintain experience-rating arrangements with respect to individual employers. The IRS contended that the payment was, instead, employee compensation under a plan deferring compensation and no deduction would be allowed. Alternatively, the plan was not part of a 10-employer plan and thus did not qualify, and no deduction would be allowed for the year. The taxpayer could not prove that the plan met the 10-employer requirement. In fact, the taxpayer's dealings with the plan administrator involved only the individual who sold the plan, who had been permanently enjoined from "marketing, preparing, etc. . . . pension plans or welfare benefit plans". In addition, the plan contained an experience-rating arrangement that would have disqualified it. The Court disallowed the deduction and sustained the accuracy-related penalty.

Tip of the Day

Bankruptcy clawbacks . . . What luck. You dodged a bullet. Madison Inc. paid you the $20,000 it owed you just a month before it filed for bankruptcy. Hold on. Don't spend that money quite yet. Amounts paid within 90 days of a bankruptcy filing can be preference payments and the bankruptcy trustee can recover them from the recipient. The claims can be filed as long as two years after the bankruptcy. Small companies can be particularly vulnerable to a "clawback" because it may not be worth an attorney and related costs to fight it. While this has been in the law for some time, it's just recently that attorneys have been asserting such claims. Are you at risk? First, not all bankrupt companies file such claims. Second, if your customer is reorganizing and will be back in the same business you might avoid a clawback. The customer may not want to risk losing you as a supplier.


September 27, 2016


Rep. Warren Davidson, R-Ohio, has introduced a bill (Protect Family Farms and Business Bill) that would quash the Sec. 2704 regulations proposed by the IRS. Those regulations (REG-163113-02) would reduce the discounts on valuation of certain property for estate, gift, and generation-skipping transfer taxes.

The IRS has issued a correct Notice 2016-54 which provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2) of the Code.

In Exelon Corporation, as Successor by Merger to Unicom Corporation and Subsidiaries (147 T.C. No. 9), the taxpayer corporation engaged in the production, transmission, and distribution of electricity to residential, commercial, and industrial customers in Northern Illinois, sold its fossil fuel power plants in 1999 for $4.813 billion. Seeking to manage the taxable gain of $1.6 billion resulting from the sale, the taxpayer pursued a series of like-kind exchanges employing sale-leaseback strategies between itself and unrelated third parties C and M, each of the latter a tax-exempt public utility. The taxpayer fully funded the transactions using the proceeds from the sale of its own power plants. In the transactions, C or M would lease a power plant to the taxpayer for a term exceeding the plant's useful life, receiving in turn a lump-sum payment of cash, and the taxpayer would sublease the power plant back to C or M. Part of the amount paid to C or M would be returned to the taxpayer as a prepayment of the sublease, another part would be set aside for investment and to secure a cancellation option allowing C and M to purchase back their power plants at the end of the sublease periods, and the remainder would be retained by C and M and used for their own needs. Since exercising the cancellation options was expected to be the only economically viable option, the parties to the transactions anticipated that at the end of the sublease periods C and M would exercise their cancellation options and regain ownership of the power stations leased to the taxpayer. The primary tax benefits that the taxpayer expected to derive were from the deferral of income tax under Sec. 1031 and various deductions related to the replacement properties. The taxpayer identified appropriate replacement properties, conducted due diligence, and closed the transactions within the timeframes provided for in Sec. 1031. The Tax Court held:

  1. The agreements between the taxpayer and C and M are not true leases but rather properly characterized as loans since the transactions did not transfer the benefits and burdens of ownership to the taxpayer. The substance of the transactions is not consistent with their form.
  2. The taxpayer did not satisfy the requirements of Sec. 1031 for the 1999 tax year since it exchanged power plants for an interest in financial instruments.
  3. The taxpayer is not entitled to depreciation deductions claimed for 2001 with respect to its transactions with C and M.
  4. The taxpayer may not deduct interest or include rental income with respect to the transactions with C and M for the 2001 tax year since the transactions are not lease agreements for Federal tax purposes under Sec. 467.
  5. The taxpayer must include in income for the 2001 tax year original issue discount income arising out of it's equity contribution, which is to be repaid with interest through the cancellation options in its agreements with C and M.
  6. The taxpayer is not entitled to deduct transaction costs related to its transactions with C and M for its 2001 tax year and must instead include them as an additional amount lent to C and M.
  7. The taxpayer is liable for accuracy-related penalties under Sec. 6662 for the 1999 and 2001 tax years on the grounds of negligence or disregard of rules or regulations. The taxpayer did not show reasonable cause and good faith under Sec. 6664(c) to meet the exception for those penalties.

Tip of the Day

Sales tax exemptions . . . In the past we've discussed the sales tax exemption on machinery and equipment purchased for use in manufacturing. The rules, of course, vary by state. Many states also provide a sales tax exemption for electricity and other fuels used in the manufacturing process. Check the rules in the states where you have operations.


Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

Return to Home Page