Small Business Taxes & Management

News and Tip of the Day

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

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August 30, 2016


Revenue Procedure 2016-48 (IRB 2016-37) provides guidance to taxpayers for making certain elections and filing amended returns to avail themselves of extenders from the PATH Act. The PATH Act of 2015 generally extends the application of the additional first year depreciation deduction (bonus depreciation), the election out of bonus depreciation for round 5 extension property, and the expensing provision for qualified real property, for property placed in service in 2015.

If you have a net operating loss, you can use it to offset income in a prior (up to 2 years back) or subsequent years (up to 20 years forward). But you've got to be able to show you actually incurred an net operating loss and that you didn't utilize all of it in prior years. That means saving your documentation for the year of the loss and intervening years, even though the statute of limitations would have run out. In Gregory A Power et ux. (T.C. Memo. 2016-157) the taxpayer was unable to show that he incurred a loss or that any of it still remained unutilized. The Court noted that the tax returns, by themselves, were not sufficient to prove a loss. In addition, the Court found the taxpayer did not have sufficient basis in his S corporation.

In Abraham J. George (T.C. Memo. 2016-156) the taxpayer was employed as a car salesman at a New York automobile dealership. He alleged that he was repeatedly harassed by his coworkers because of his national origin. Allegedly because of this harassment, he left the dealer's employ. He subsequently secured employment with another automobile dealership and sued the first dealership, alleging he had suffered psychological and physical harms and been constructively discharged. The taxpayer entered into a settlement and released the dealership against all claims. The settlement agreement did not mention any physical or emotional injury nor did it state any portion of the settlement was for physical or emotional harm. The Court found the award was not excludable from the taxpayer's income. It did find, however, that his legal fees were deductible as an above-the-line deduction.

Tip of the Day

Just because it's difficult . . . That's no reason to put off making a sales forecast for a startup or new product. With little or no outside guidance to go on, making that type of sales forecast is difficult and getting close may be near impossible. But you'll acquire new knowledge about the market by just trying to arrive at a forecast. You may discover problems that need to be solved (e.g., distribution, manufacturing), new ways to market the product or service, etc. Hopefully you'll get an idea of the revenue potential to determine if you can cover your costs, pay off any debt and get a return on your investment.


August 29, 2016


Revenue Procedure 2016-45 (IRB 2016-37) modifies Rev. Proc. 2016-3, which sets forth areas of the Internal Revenue Code on which the IRS will not issue letter rulings or determination letters (no-rule areas), by removing two no-rule areas relating to distributions of stock of controlled corporations under Sec. 355 of the Code.

Qualified farm property in an estate can receive special treatment under the estate tax (Sec. 2032A) under a special use valuation rule. Rev. Rul. 2016-19 contains a list of the average annual effective interest rates on new loans under the Farm Credit System used in the valuation process. This revenue ruling also contains a list of the states within each Farm Credit System Bank Territory.

Several states have created savings opportunities for residents by allowing automatic enrollment in an Individual Retirement Account if they don't have access to a workplace savings arrangement. But uncertainty about federal law has discouraged other states and municipalities from moving forward with payroll deduction IRA programs. The U.S. Department of Labor’s Employee Benefits Security Administration is making public a final rule that assists states that create IRA programs for workers who do not have access to workplace savings arrangements. At the same time, in response to public comments, the department is making public a proposed rule that could facilitate a limited number of cities and other local governments doing the same. For more information go to

Tip of the Day

Orphan plans . . . The IRS is advising employers that sponsor one-participant plans to take the necessary steps to prevent a qualified retirement plan from becoming an orphan plan--a plan that no longer has a plan sponsor. One of the most common reasons why a retirement plan becomes an orphan plan is because the plan sponsor no longer exists. For example, the participant retires, passes away or abandons the plan before properly terminating it. When the sole proprietor with a one-participant plan retires, the assets must be distributed and the plan must be terminated. A distribution involves either rolling over the assets into an IRA or taking a taxable distribution.


August 26, 2016


TThe IRS will conduct its annual Labor Day power outage beginning Saturday, September 3, 2016, starting at 8:00 p.m. and ending Tuesday, September 6, 2016, at 6:00 a.m. The Modernized E-File Systems (both Production and ATS) will not be operational during this timeframe.

The House Majority Leader has announced that after returning from summer recess it will vote on legislation exempting Olympic and Paralympic medals and awards from taxable income.

Many small businesses can use the cash method of accounting. That's what the taxpayer in Mark L. Nebeker (T.C. Memo. 2016-155) used, at least in part. The taxpayer was a consultant for aerospace and defense companies and did business as a sole proprietorship. He reported his income on the cash method, but deferred the deduction of amounts paid to his subcontractors and reimbursed expenses until he was paid by his clients. The IRS and the Court found that the approach failed to clearly reflect income. The Court held that he had to use the cash method for deducting expenses and that the adjustment was a material item and required a change in accounting method under Sec. 481.

Tip of the Day

Know your customers' price points . . . Some customers will pay full price, rarely looking for a bargain. Another group may spring when they hear 15% off. And then there are the diehards who watch for the sales and won't order until they see 25% off and free shipping. If you're careful about tracking your customers, you should be able to identify a good portion of them. By not letting your full price customers see all the sales you'll get your best margins from that group. You can also try to get the hard core discount shoppers to make some of their purchases at the 15% off sales.


August 25, 2016


Think twice before ignoring IRS requests. In Alfred B. Barrion (T.C. Memo. 2016-153) the taxpayer did not file an income tax return for 2012. Based on third party reports, the IRS prepared a substitute for return and subsequently sent the taxpayer a timely notice of deficiency determining a tax deficiency and additions to tax. The IRS had determined the taxpayer had unreported income. The taxpayer petitioned the Tax Court and in the petition he did not assign error with respect to either item of unreported income. The IRS served the taxpayer with a request of admissions, a request for production of documents, and interrogatories. The taxpayer ignored all of these discovery requests. Because he failed to respond to the request for admissions, the matters therein were deemed admitted. In addition, because the taxpayer provided no documentation as to exemptions and itemized deductions, the Court found he was entitled to only one exemption and the standard deduction.

Tip of the Day

Do you need to pay estimated tax? . . . More than a few taxpayers are used to paying estimated tax. Business owners may me required to do so for a number of reasons, but even retired individuals can be caught in a trap. In some cases you may be able to adjust your withholdings upward, but not infrequently that's not possible. For example, you were making $250,000 a year, but now you're getting a $25,000 salary from your S corporation. Your share of the S corporation's income will be $100,000. There's no way a sufficient amount can be withheld from your salary. A similar situation can occur when you retire and have dividend and capital gain income and can't have enough withheld from your pension or social security. Same thing if you're earning money as a sole proprietor or partnership. Get IRS Publication 505, Tax Withholding and Estimated Tax and/or talk to your tax advisor.


August 24, 2016


Earlier this year the IRS issued proposed debt-equity regulations. Members of both house of Congress on both sides of the aisle have voiced concern over the regulations and noted that many business could be hurt by the regulations.

You may be able to avoid a failure to file penalty if you can show reasonable cause. But the IRS and the courts have found few good reasons. One is if you're ill. But in Refco Public Commodity Pool, L.P., Debtor (U.S. Bankruptcy Court, D. Delaware) the partnership was found not liable for the penalty. Most of the partnership's income came from another partnership that failed to provide a K-1. While the second partnership did provide some information, it was not in a form that could be useful and it contained such errors that made it virtually useless. The Court noted the partnership exercised reasonable care and evaluated the consequences of not filing against filing a inaccurate return that would have generated other penalties. The Court found the failure to file was beyond the partnership's control. (Bear in mind that the decision was one by the Bankruptcy Court and depended heavily on the facts and circumstances.)

In another failure to file case, Carolyn Rogers (T.C. Memo. 2016-152), the taxpayer's apartment had a fire. A second fire not long after the first added to her problems. The taxpayer had bouts of depression and fell on a subway platform. She believed the loss could be claimed in the following year (when the claim was resolved with her insurer) and the loss offset her income. As a result she assumed she didn't have to file. But the loss should have been claimed in the year of the fire because there was no reasonable prospect of recovery. The Court noted the taxpayer's failure to file was not chronic as in many other cases of not or late filing, and considering the upheaval in the taxpayer's life her failure to file was reasonable.

Tip of the Day

Sales tax exemption . . . We've mentioned in the past that many states offer a sales tax exemption for machinery used in the production process. Generally that means equipment used for making tangible personal property. For example, saws used to cut logs into boards or a welder used in the assembly of hand trucks. But that same equipment used elsewhere probably won't be exempt. For example, Madison buys two identical arc welders. One is used on the production line to make hand trucks; the other is used in the repair shop to fix hand trucks shipped back for repair. The first would probably be exempt; the second probably not since it's not used to manufacture a product. What if a piece of equipment is used for both exempt and taxable purposes? While the rules vary, often the equipment must be used more than 50% of the time in manufacturing. Many states also exempt electricity and other energy forms used in the process. Be sure to keep good records. If you're audited for sales tax, the auditor will take a long look at your claimed exemptions. Talk to your tax adviser.


August 23, 2016


Revenue Procedure 2016-44 provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Sec. 141(b) or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under Sec. 145(a)(2)(B) to be met.

Revenue Procedure 2016-43 provides the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges for taxpayers to use in determining their maximum individual shared responsibility payment under Sec. 5000A(c)(1)(B) of the Code and Sec. 1.5000A-4 of the Income Tax Regulations.

The IRS has issued proposed amendments to the regulations (REG-108792-16) that provide user fees for installment agreements. The proposed amendments affect taxpayers who wish to pay their liabilities through installment agreements. The proposed effective date for these proposed amendments to the regulations is January 1, 2017. This document also provides a notice of public hearing on these proposed amendments to the regulations.

Tip of the Day

Property transfers subject to sales tax . . . Most states that impose a sales tax have rules regarding the transfer of property outside of a purchase from a retailer. For example, you give your used truck to an old friend. The truck is valued at $4,000. In most states the transfer is subject to sales tax. On the other hand, many states have a exemption for the transfer to a relative. Had you given the truck to your daughter, tax may not have been due. Most states have an exemption for assets transferred to a corporation or partnership in exchange for an interest in the entity. You contribute a truck you own personally along with tools in exchange for all the stock of Madison Inc. Generally, that transaction is exempt from sales tax. Not infrequently, the exception is narrowly worded, so you've got to check the rules carefully. On the other hand, fewer states exempt a transaction going the other way, when the business transfers assets to the shareholders or partners. Again, check the rules. A mistake here could be costly.


August 22, 2016


In an effort to collect the taxpayer's unpaid tax liabilities, the IRS prepared a Final Notice of Intent to Levy and Your Right to a Hearing. The IRS attempted to hand-deliver the levy notice during a field call on February 11 but was deterred. Two days later the IRS initiated the mailing of the levy notice by certified mail to the taxpayer's last known address. The IRS did not generate a new levy notice dated February 13; it enclosed in the envelope the original levy notice dated February 11. The taxpayer received the levy notice on February 17 and completed Form 12153 requesting a collection due process (CDP) hearing for the tax years at issue and mailed it on either March 13 or 14. The IRS received it on March 16, which was a Monday. During the CDP hearing the taxpayer argued that the period of limitations on collection of his tax liabilities had expired. He based this contention on the assertion that he intentionally had filed his request for a CDP hearing one day late, such that he was entitled only to an “equivalent hearing,” which would not have suspended the period of limitations on collection. The IRS contended that his request for a CDP hearing was in fact timely because it was filed within 30 days of the date on which the IRS mailed him the levy notice. Before the IRS may levy against a taxpayer's property, it must provide written notice of the proposed levy and inform the taxpayer of his right to an administrative hearing. A levy notice must be sent or delivered to the taxpayer “not less than 30 days before the day of the first levy.” This notice must inform the taxpayer in simple and nontechnical terms of his right “to request a hearing during the 30-day period”. The Tax Court held when the date appearing on a levy notice is earlier than the date of mailing, the 30-day period prescribed by Section 6330(a)(2) and (3)(B) is calculated by reference to the date of mailing. The Court also held the directive that levy and lien notices should be drafted “in simple and nontechnical terms” does not require invalidation of a levy notice when there is a mismatch between the letter date and the mailing date. The Court further held that the taxpayer timely filed his request for a CDP hearing because he mailed his Form 12153 to the IRS, and it was received by the Service, within 30 days of the IRS's mailing of the levy notice. Finally the Court held the period of limitations on collection was suspended when the taxpayer timely requested a CDP hearing, and it remains suspended. Charles J. Weiss (147 T.C. No. 6)

Tip of the Day

Bond call . . . Many bonds have a call provision, that is, the issuer can redeem the bond at a stated price on or after a certain date. For example, Madison Inc. issued $10 million of 6% bonds in 2007 with a call price of $1,010 and a date of January 1, 2017. Madison can redeem the bonds anytime after January 1, 2017 by paying $1,010 for each bond. The provision is included in many bonds because the issuer (Madison in our example) may want to refinance at a lower rate, because the underlying asset is being sold, or it just has the cash and wants to pay down debt with a high interest rate. There are variations on these provisions such as several potential call dates with matching redemption prices. What's that mean to you, an investor? First make sure you know if there is a call provision and when it can take effect and at what price. You don't want to pay $1,100 for a bond that's callable in two years at $1,050 if there's a chance the issuer will redeem the bond. You might also want to know the yield to call date in addition to the yield to maturity. Buying individual bonds (rather than a mutual fund) can be tricky. Get good investment advice.


August 19, 2016


The IRS has issued final regulations (T.D. 9782) under Section 5000C relating to the 2 percent tax on payments made by the U.S. government to foreign persons pursuant to certain contracts. The regulations affect U.S. government acquiring agencies and foreign persons providing certain goods or services to the U.S. government pursuant to a contract. This document also contains final regulations under Section 6114, with respect to foreign persons claiming an exemption from the 2 percent tax under an income tax treaty.

If you meet the time abroad requirement, you may be able to exclude foreign earned income up to the annual limitation. In Eric Stephen Gerencser (T.C. Memo. 2016-151) the taxpayer was a U.S. citizen who lived and worked in Germany as a NATO contractor during the years at issue. He excluded his NATO wages, and claimed a foreign tax credit. The IRS and the Court allowed the foreign earned income exclusion, but denied the foreign tax credit, holding to do so would allow a double benefit--avoiding tax on the income and getting a tax credit. The taxpayer cited the tax treaty with Germany, but the Court noted that as a U.S. citizen he was not entitled to treaty relief.

You've got to be able to show that a business expenditure is an ordinary and necessary expense in order to secure a deduction. In Lawrence A. Tanzi et ux. (T.C. Memo. 2016-148) the taxpayer was a college professor who taught math and communication and his wife a campus librarian. The couple deducted their phone, internet, and television expenses and the cost of books, DVDs and CDs for a professional library. The taxpayer argued that as a professor he incurred expenses to improve his "general knowledge". The outlays were not a condition of their employment and that they were not ordinary and necessary.

Tip of the Day

Cash tight? . . . There's no way you can pay all five credit cards this month with the cash you've got. But four of the cards have low balances and a fifth has a very high balance. The best approach may be to make the monthly payment on the card with the highest balance and defer payment of the other cards. Why? Some issuers have the option to not only charge you a penalty, but also raise the interest rate on the card. But do your homework first. There are a number of factors to consider including the penalty for not paying, the difference in interest between what you're paying now and the penalty rate, whether this is a short- or long-term problem, etc. Read the rules on the cards and discuss the options with your financial advisor.


August 18, 2016


The IRS has again added to the list of parishes qualifying for relief as a result of the severe storms and flooding that took place beginning on August 11. The additional parishes are Avoyelles, Evangeline, Iberville, Jefferson Davis, St. Martin, St. Tammany, Washington and West Feliciana.

It's not unusual to do business through multiple entities such as one or more operating companies and a holding or management company. There can be a number of nontax reasons for doing so, but you've got to be careful. In Little Mountain Corporation (T.C. Memo. 2016-147) was a corporation that claimed to have no employees and no written contracts with any independent contractors, issued no information reports to any independent contractors, and enjoyed enormous amounts of income during the tax year in issue without paying any dividends to its shareholders. Substantial payments were made to a "consultant" during the year. The consultant was related to the shareholders of the entity. He invoiced the corporation, but asked that checks be made to "cash" and were negotiated by various individuals other than the consultant. The taxpayer provided no consulting fee schedule, hourly rate, or specific breakdown of the consultant's tasks. No written contract existed. The invoices did not detail what services were performed. The total payments for the year at issue was $896,493. The Court found the taxpayer did not provide sufficient evidence to persuade it that the expense was both ordinary and necessary, and reasonable and disallowed the deduction.

Tip of the Day

Records of gambling losses . . . You can take a deduction for gambling losses (on Schedule A) up to the amount of any winnings. But you've got to substantiate those losses. One way is statements from a casino, another is an accurate diary. In one case the Tax Court noted inconsistencies in the diary and in the statements from the casinos. The Court held that the record provided no satisfactory basis for estimating the taxpayers' gambling losses in excess of the amount allowed by the IRS. There were too many omissions and discrepancies among the documents the taxpayers presented as substantiation. Consequently, the Court did not apply the Cohan rule to estimate the amount of the taxpayer's gambling losses. The taxpayers could have avoided this result by keeping complete records of their gambling activities or perhaps by simply using their casino cards to track their slot machine play on each of their gambling trips.


August 17, 2016


The IRS has already added to the list of parishes qualifying for relief as a result of the severe storms and flooding that took place In Louisiana beginning on August 11. The additional parishes are Acadia, Ascension, East Feliciana, Iberia, Lafayette, Pointe Coupee, St. Landry and Vermilion.

The IRS has announced the Fourth Quarter Update to its 2015-2016 Priority Guidance Plan and the Initial Version of the 2016-2017 Priority Guidance Plan. You can find both at Priority Guidance Plan.

Normally, a taxpayer's net loss on rental real estate is limited to $25,000 and even that exemption phases out as his or her income increases. There's a special exception to the limitation for real estate professionals. But you've got to show that during the year you spent more than half your work time on real estate and more than 750 hours on qualifying real estate activities. Only activities in which the taxpayer materially participates counts toward the 750 hour test. The taxpayer's only employment during the years at issue was as a real estate professional so she easily met the first test. The second test was tougher, particularly since the taxpayer failed to elect to group her rental properties so participation on the properties would be aggregated. While the taxpayer kept no contemporaneous record of her time spent on each property, the Court found she testified credibly as to the time and substantial amount of money devoted to each property. The Court used the "facts and circumstances" test to show she materially participated in each property, but cautioned the taxpayer to construct contemporaneous time logs in the future. Beth Hailstock (T.C. Memo. 2016-146)

Tip of the Day

Buying a property rent? . . . While economic considerations come first, you should be aware that until the property is rented you may not be able to deduct expenses associated with the property. If the property needs work before it's ready for rent, you should try and get it available in rentable condition as soon as possible. Fortunately, that also makes sense from a business standpoint.


August 16, 2016

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The IRS has added the Texas counties of Hall, Hardin, Navarro, and Throckmorton to the list eligible for assistance as a result of severe storms and flooding published in a June 11, 2016 notice. Taxpayers sustaining losses may deduct them on their 2015 or 2016 return.

If you're going to court seeking a refund you generally must have paid your taxes in full. In Philip A Duggan (U.S. District Court, E.D. Washington) the taxpayer argued he was not requesting a refund but an abatement of the penalties assessed. Thus, the "full payment" rule should not apply. The Court failed to agree, noting only the IRS can abate a penalty under Sec. 6404. The Court also noted the taxpayer had failed to fully pay his tax liability. The penalties assessed were also considered taxes for the full payment rule.

Tip of the Day

Basis for amortization/depreciation deductions . . . Before taking an amortization or depreciation deduction, you've got to be able to show you've got a basis in the asset. For example, you may be able to amortize start-up expenses, developed intangibles, etc. or physical assets such as purchased or constructed equipment or buildings. If you purchased the asset you've got a receipt or bill of sale. But what if you self-constructed it? The IRS will not just accept that you expended $20,000 in constructing a special machine to use in your business. You've got to have receipts and canceled checks and show that you didn't deduct those expenditures elsewhere. If you had your own employees working on the project you want to be able to reconcile total payroll with currently deducted and capitalized expenditures. The amounts involved can be substantial and may not be challenged immediately. For example, you used in-house labor to construct a building. Seven years later the IRS challenges your depreciation deduction. Do you still have the documentation to prove your basis?


August 15, 2016


In Estate of George H. Bartell, Jr., et al. (147 T.C. No. 5) a drugstore chain, BD, entered into an agreement to purchase property L from a third party. In anticipation of structuring an exchange transaction under Sec. 1031 to facilitate acquisition of L, BD later assigned its rights in the purchase agreement to third-party exchange facilitator EPC and entered a further agreement with EPC. That second agreement provided for EPC to purchase L and for BD to have a right to acquire L from EPC for a stated period and price. EPC so purchased L on August 1, 2000, with bank financing guaranteed by BD, acquiring title to L at that time. BD then managed the construction of a drugstore on L using proceeds from the aforementioned financing and, upon substantial completion of the construction in June 2001, leased the store from EPC from that time until title to L was transferred from EPC to BD on December 31, 2001. In late 2001, BD contracted to sell its existing property E to a fourth party. BD next entered an exchange agreement with intermediary SS and assigned to SS its rights under the sale agreement and under the earlier agreement with EPC. SS sold E, applied the proceeds of that sale to the acquisition of L, and had the title to L transferred to BD on December 31, 2001. The Court held that BD's disposition of E and acquisition of L in 2001 qualifies for nonrecognition treatment pursuant to Sec. 1031 as a like-kind exchange, as EPC is treated as the owner of L during the period it held title to the property.

In Ory Eshel and Linda Coryell Eshel (U.S. Court of Appeals, District of Columbia Circuit) the Appeals Court reversed and remanded the Tax Court (142 TC 197) ruling that taxes paid to the French government were not creditable under section 317(b)(4) of the Social Security Act. The Court found the Tax Court erred in not analyzing the totalization agreement.

Tip of the Day

Time limits on contesting statements . . . An error on your bank statement? Or an invoice? Or what a supplier has shipped you? You may have a time limit on how long you've got to contest the error. Best approach? Have a system in place for reviewing transactions within 30 days. Bank accounts should be reconciled quickly at the end of every month. Better yet, review on-line statements every day. Arriving shipments should be checked on receipt. The error may be a one-time event--or it could be a recurring one that, if found early, could save a lot of headaches.


August 12, 2016


Failure to keep adequate records is one of the badges of fraud and it often results in the IRS reconstructing a taxpayer's income. That's what happened in Robert L. Schwartz (T.C. Memo. 2016-144). The IRS reconstructed the taxpayers' income using the bank deposits method and the Court found the taxpayer had a substantial amount of unreported income. The taxpayer argued that the unreported amounts were reimbursements from an estate for which he was the executor, presenting the Court with numerous receipts, but failed to explain how the receipts related to the estate or his business. The Court noted numerous badges of fraud were present and found the taxpayer intentionally evaded payment of tax he knew to be owed. The Court also cited the taxpayer's conviction for criminal fraud in a separate case. The Court found the taxpayer liable for the civil fraud penalty.

When you're in a bankruptcy proceeding, your earnings belong to the bankruptcy estate and it is responsible for paying the tax. In Charles A. Sisson et ux. (T.C. Memo. 2016-143) the taxpayer had self-employment income from his employment with an international quasi-government agency. The Court held that the self-employment tax is not a tax on taxable income but on net earnings from self-employment and the tax is a tax not imposed on the bankruptcy estate; it was the responsibility of the taxpayer.

Tip of the Day

Each tax year stands alone . . . What that means, basically, is that the IRS can challenge a transaction, item, etc. it allowed in a previous year. That can add to the uncertainty of a situation. For example, the IRS can deny a deduction for an item it allowed on a previous audit, even though the facts and circumstances are identical. But often the facts and circumstances are not identical. Subtle variations can change the tax outcome. Add to that the fact that tax law is always changing. The IRS issues new regulations, revenue procedures, etc. that can change the law. And court holdings can also change the law. While it's nearly impossible to scrutinize every transaction, if the dollar consequences are substantial, talk to your tax advisor before committing.


August 11, 2016


The IRS has issued final regulations (T.D. 9781) relating to the imposition of certain user fees on tax return preparers. The final regulations supersede and adopt the text of temporary regulations that reduced the user fee to apply for or renew a preparer tax identification number (PTIN) from $50 to $33. The final regulations affect individuals who apply for or renew a PTIN.

Turn in your employer, ex-spouse, etc. to the IRS and you could get a whistleblower award. In the case of Whistleblower 21276-13W (147 T.C. No. 4) the award was substantial. The petitioners, husband and wife, sought whistleblower awards authorized by Sec. 7623(b). The Whistleblower Office rejected their claims for awards as untimely and administratively closed their cases. In Whistleblower 21276-13W (144 T.C. 290), the Tax Court (1) held that the petitioner's claims for awards were timely, (2) ordered the parties to attempt to resolve their differences and keep the Court informed as to their progress, and (3) retained jurisdiction. The parties subsequently agreed that the petitioners were eligible for an award of 24% of the collected proceeds. The targeted taxpayer pleaded guilty to a violation of 18 U.S.C. sec. 371 and paid $74,131,694 in tax restitution, a criminal fine, and civil forfeitures to the Government. The parties agreed that the tax restitution payment constituted collected proceeds for purposes of an award under Sec. 7623(b). They disagreed as to whether payments of the criminal fine and civil forfeitures constituted collected proceeds. The Tax Court held that the criminal fine and civil forfeitures are collected proceeds for purposes of an award under Sec. 7623(b).

Tip of the Day

IRS advising tax professionals to check their PTIN activity . . . In IRS Security Awareness Tax Tip 2016-11 the IRS is advising tax preparers thy can help protect clients from identity theft by checking their PTIN Accounts to ensure the number of return filed using their identification number matches IRS records. The IRS offers many preparers the ability to monitor “Returns Filed Per PTIN.” This information is available in the online PTIN system for tax return preparers who meet both of the following criteria. You must have:

The Tax Tip has more information on the procedure.


August 10, 2016


Rev. Proc. 2016-42 (IRB 2016-34) contains a sample provision that may be included in the governing instrument of a charitable remainder annuity trust (CRAT) providing for annuity payments payable for one or more measuring lives followed by the distribution of trust assets to one or more charitable remaindermen. The IRS will treat the sample provision as a qualified contingency within the meaning of Sec. 664(f). Thus, inclusion of the sample provision in the trust instrument does not cause the trust to fail to qualify as a charitable remainder trust under Sec. 664. Any CRAT containing the sample provision will not be subject to the “probability of exhaustion” test set forth in Rev. Rul. 70-452, and applied in Rev. Rul. 77-374. The “probability of exhaustion” test is used to determine whether a CRAT complies with the regulatory requirement applicable to all contingent charitable transfers that only a negligible chance exists that the charity will receive nothing. See Reg. Sec. 1.170A-1(e), Sec. 20.2055-2(b) of the Estate Tax Regulations, and Sec. 25.2522(c)-3(b)(1) of the Gift Tax Regulations.

The IRS has released draft copies of Form 1095A, Health Insurance Marketplace Statement, Form 1095B, Health Coverage and Form 1095C, Employer Provided Health Insurance Offer and Coverage. The IRS has also started releasing draft versions of many of the forms for 2016 returns for individuals. To see draft forms, go to Draft Tax Forms.

Rental activities are inherently passive and losses cannot be deducted against other income. But there's an exemption for this per se rule for real estate professionals. In Charles Gragg, Delores Gragg (U.S. Court of Appeals, Ninth Circuit) the taxpayers argued that the wife's status as a real professional rendered their rental losses per se nonpassive. The IRS countered that the taxpayers were required to show they materially participated in the rental properties, which they had not done. The Court found that the statutory text, regulations, and relevant case law all point in one direction: although taxpayers who qualify as real estate professionals are not subject to Sec. 469(c)(2)'s per se rule that rental losses are passive, they still must show material participation in rental activities before deducting rental losses according to the general rule under Sec. 469(c)(1).

Tip of the Day

When does a partnership terminate? . . . For tax purposes a partnership terminations when all its operations are discontinued and no part of any business is continued by any of its partners, or at least 50% of the total interest in a partnership capital and profits interest is sold or exchanged within a 12-month period, including a sale or exchange to another partner.


August 9, 2016


The IRS announced that many taxpayers who made their next-day employment tax deposits on Tuesday, May 31, or semi-weekly employment tax deposits on Thursday, June 2, 2016, were incorrectly sent notices that their deposits were late. Due to a programming error, IRS systems did not recognize changes in deposit due dates created by the Memorial Day holiday observed on May 30, 2016. As a result of the holiday observance, the next-day deposits that would have been due on Monday, May 30, were instead due on Tuesday, May 31, and the semi-weekly deposits that would have been due on Wednesday, June 1, 2016, were instead due on Thursday, June 2, 2016. IRS systems have been corrected and impacted taxpayer accounts will be updated. No taxpayer action is required. You may receive one of two notices:

The IRS has issued temporary regulations under Sec. 6221 (T.D. 9780) pursuant to section 1101(g)(4) of the Bipartisan Budget Act of 2015 regarding an election to apply the new partnership audit regime enacted by that act to certain returns of a partnership. The regulations provide the time, form, and manner for making this election. The regulations affect any partnership that wishes to elect to have the new partnership audit regime apply to its returns filed for certain taxable years beginning before January 1, 2018.

Notice 2016-49 (IRB 2016-34) provides interim guidance on certain requirements for persons seeking certification as Certified Professional Employer Organizations (CPEOs), as defined in Reg. Sec. 301.7705-1T(b)(1). The IRS recently issued temporary and proposed regulations under Section 7705 of the Internal Revenue Code (Code) addressing the requirements relating to applications for and maintenance of certification as a CPEO, as well as a revenue procedure setting forth detailed procedures for applying for certification as a CPEO.

Tip of the Day

Bank gifts . . . Free isn't really free if there are strings attached. Some banks are offering $100, $200, or as much as $400 for opening a new account. But there's a catch. In some cases more than one. You'll most likely have to keep a substantial minimum balance. How high will depend on the bank and the reward. Fail to maintain that minimum and you could get hit with a $25 monthly fee. There could be a fee for inactivity. Fail to make a transaction for over 2 months and you'll be hit with another fee. Or you could be required to accept and use a debit card a certain number of times. All those fees get you upset? Close the account. But you may get another fee for doing so. Just when you thought it couldn't get worse, the reward you receive from the bank is taxable; but unless this is a business account, the fees are unlikely to be deductible.


August 8, 2016


The IRS has updated the disaster notice for Texas. Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The additional counties include Bosque, Callahan, Coleman, Comanche, Erath, Falls, Fisher, Leon, Madison, Somervell, Trinity and Walker.

To satisfy tax debts, the IRS may levy Social Security benefits. However, a provision of the Internal Revenue Code requires the IRS to release levies that cause economic hardship. In addition, taxpayers have the right to claim an exemption against the levy, which allows them to receive a minimum amount of the Social Security payment and prevent all or part of the levy. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS appropriately applied manual levies to Social Security benefits. Revenue officers make levy determinations of Social Security benefits on a case-by-case basis and exercise judgment in making the determination to levy. While there are special procedures and thresholds for levying individual retirement accounts and 401(k) retirement accounts, there are no special considerations or procedures for revenue officers when levying Social Security benefits. In these cases, revenue officers follow procedures for levying assets in general. In most cases, revenue officers are compliant with these general IRS procedures when levying Social Security benefits. However, for 15 percent of the audit’s sample, TIGTA found that revenue officers took levy action on Social Security recipients that likely caused or exacerbated economic hardship. These levies may be due in part to a change in collection policies that appears to give equal weight to nonlegal considerations (such as whether taxpayers are “cooperative” within the subjective determination of revenue officers) and the legal requirement to release the levy when the IRS determines that the levy is creating an economic hardship for the taxpayer. In these cases, revenue officers could have discerned from the facts that the taxpayers were experiencing economic hardship. Additionally, while existing procedures allow revenue officers to manually levy up to 100 percent of Social Security benefits, taxpayers have the right to claim an exemption from the levy. However, in 28 percent of the sampled cases, revenue officers used the wrong form to levy Social Security benefits. As a result, the IRS did not consider exemption amounts before establishing the levy. Of these cases, 6 percent involved taxpayers who suffered greater Social Security levies than allowed by law. TIGTA believes the IRS needs to adjust its policies and procedures to allow revenue officers, with appropriate discretion, not to levy if facts and circumstances clearly show that taxpayers are in or on the threshold of an economic hardship. to see the complete report, go to

Tip of the Day

Check out your partners' finances . . . If you're going into a partnership (or taking in stockholders in a corporation) you want to make sure your partners are financially able to handle the load. You may each start out putting in $20,000, but if things don't go as planned can they come up with any additional cash needed? And if you have to go for a loan, will their credit rating help or hurt your chances of approval? (Most knowledgable lenders will be interested in the owners' credit rating.) You don't want to share disproportionately in the risk. And if you do have to put in additional capital, can you adjust the ownership interests without causing problems?


August 5, 2016


The IRS has announced (IR-2016-100) important changes to help taxpayers comply with revisions to the Individual Taxpayer Identification Number (ITIN) program made under a new law. The changes require some taxpayers to renew their ITINs beginning in October. The new law will mean ITINs that have not been used on a federal tax return at least once in the last three years will no longer be valid for use on a tax return unless renewed by the taxpayer. In addition, ITINs issued prior to 2013 that have been used on a federal tax return in the last three years will need to be renewed starting this fall, and the IRS is putting in place a rolling renewal schedule, described below, to assist taxpayers. If taxpayers have an expired ITIN and don’t renew before filing a tax return next year, they could face a refund delay and may be ineligible for certain tax credits, such as the Child Tax Credit and the American Opportunity Tax Credit, until the ITIN is renewed. For additional information, see Notice 2016-48.

As a result of severe storms and flooding in Oklahoma during the period from June 11 to 13, 2016, the president has declared certain areas there eligible for disaster assistance. The affected counties include Caddo, Comanche, Cotton, Garvin, Grady, and Stephens.

The IRS has issued corrections to a partial withdrawal of notice of proposed rulemaking; notice of proposed rulemaking (REG-123854-12) that was published in the Federal Register on Wednesday, June 22, 2016 (81 FR 40569). The proposed regulations are to clarify or modify certain specific provisions of the final regulations under Section 409A (T.D. 9321).

Tip of the Day

Leave funds in business . . . Many business owners take as much out of the business as they can through distributions. For S corporations, partnerships, and LLCs, these distributions are generally not taxable, but they do have negative consequences. Having equity capital can be an important determinant of whether or not you get a loan, a supplier extends credit on favorable terms, etc. There are also tax reasons for retaining funds in the business. A high debt-to-equity ratio can indicate that loans you make to the business are really equity (regardless of documentation and how you account for them). No or a loan salary for shareholder/officers can be challenged if the shareholders take distributions from an S corporation. Finally, if you have insufficient basis in the business, you may not be able to take any losses from the business currently. Your tax advisor can help you sort this out.


August 4, 2016


The IRS has issued proposed regulations (REG-163113-02) concerning the valuation of interests in corporations and partnerships for estate, gift, and generation-skipping transfer (GST) tax purposes. Specifically, these proposed regulations concern the treatment of certain lapsing rights and restrictions on liquidation in determining the value of the transferred interests. These proposed regulations affect certain transferors of interests in corporations and partnerships and are necessary to prevent the undervaluation of such transferred interests.

It's not that easy to avoid your debts, particularly a tax debt. In Happpy Home Health Care, Inc. (U.S. District Court, D. Minnesota) the corporation's shareholder incurred significant tax debt. The shareholder incorporated the sole proprietorship and continued to do business, but as a corporation. The IRS conducted audits of the shareholder for three years and assessed approximately $250,000 in taxes, penalty and interest, which he did not pay. To collect the IRS began issuing levies in the name of the corporation as nominee/alter ego/transferee of the shareholder. The levies were issued to parties holding property of the corporation including the bank accounts and the Minnesota Department of Human Services, which had payables due to the corporation. The IRS collected some $258,000 through the levies. The corporation did not show the levies were wrongful. The Court noted evidence of nonpayment of dividends, lack of corporate formalities, siphoning of funds by the shareholder and few corporate records. As a result the Court found that the first step of the alter ego test weighed in favor of finding that the corporation is the alter ego of the shareholder. The Court found the taxpayer also met the second test, that the shareholder formed the corporation for the purpose of avoiding the tax debt, citing a $50,000 loan from the corporation to the shareholder to pay for the shareholder's residence, noting the money could have been used to pay the tax debt.

Tip of the Day

Market discount bonds . . . If you buy a bond in the market for less than the stated redemption value at maturity, the difference is market discount. (Don't confuse that with original issue discount.) If you sell the bond for more than the purchase price, the difference is generally not capital gain but ordinary income. For example, in 1996 you bought a Madison Industries Inc. bond with a face amount of $1,000 for $850. In 2016 you sell the bond for $975. The $125 of gain is not long-term capital gain but ordinary income. The rule applies to all bonds, including tax-exempt bonds, except:

You can elect to take the market discount into income ratably over the life of the bond, avoiding a big gain on sale. For several reasons, most taxpayers don't make that election.


August 3, 2016


In Whistleblower 11099-13W (147 T.C. No. 3) the Whistleblower petitioned for review of the IRS' decision not to make an award to him for information that purportedly led to the collection of unpaid taxes and other amounts. He moved to compel production of documents. the IRS objected principally on grounds of relevance. The Tax Court held that the IRS's claim of lack of relevance presented an unsettled question of law as to when the IRS proceeds on the basis of information provided by a whistleblower. (Sec. 7623(b)(1); Reg. Sec. 301.7623-2(b)) The Court also held it would not in the context of this discovery dispute decide a question of law; if the IRS is interested in a pretrial ruling on matters of law, the Service's proper course of action under Tax Court Rules would be to file a motion for summary judgment. The Court held further that the IRS failed to carry his burden of showing that the documents need not be produced. The Court granted the Whistleblower's motion.

Debt or equity? Interest payments on debt are deductible. If a true debt does not exist, the transfer is equity and associated distributions are either dividends or a return of capital. The case of American Metallurgical Coal Co. and Subsidiaries; Heimdal Investment Company, Inc. (T.C. Memo. 2016-139) involved a foreign entity but the issue applies to strictly domestic transactions as well. The Court looked at the transaction and the factors normally examined (for the Fifth Circuit). While a note existed, the entire price of the purchase was financed, an indication of equity; when the debtor could not make the interest payments the interest rate was reduced and the note extended rather than the terms being enforced; some of the interest payments were contingent on the debtor's cashflow. The Court found the taxpayer designed and implemented an elaborate system to create the appearance the other party was paying interest, while in substance it was not. The Court held the payments to be nondeductible.

Tip of the Day

Selling a house and contents? . . . It's not unusual to sell both a home and many of the furnishings at the same time. However, the home sale exclusion only applies to the home, not to the contents. They have to be dealt with separately. The best approach is to negotiate the sale of the furnishings separately and draft a bill of sale for them. More than likely you'll have a loss (which won't be deductible unless the house was rental property). If the property was used for rental and you're doing a like-kind exchange, the furnishings must be dealt with separately. You can't exchange a house and furnishings for another item of real property--only real estate for real estate qualifies. Similar rules apply to other property. For example, the sale or exchange of several assets of a business. Talk to your tax advisor before doing the deal.


August 2, 2016


If the IRS loses a tax case it may or may not appeal, depending on a number of circumstances. It's not unusual for the IRS to forgo an appeal if they believe their case is weak and wait for a case where they have a better chance of winning. In such situations the Service generally announces whether it will follow the case (acquiesce) or not (nonacquiesce). In an Action on Decision (AOD) the IRS has announced it will acquiesce in Voss (U.S. Court of Appeals, Ninth Circuit) that relates to the holding that the Section 163(h)(3) interest limitations on a home mortgage apply on a per taxpayer basis, allowing each unmarried taxpayer to deduct interest on mortgage indebtedness of up to $1.1 million. (Married taxpayers have the same limitation.)

The IRS has issued proposed regulations (REG-103058-16) relating to information reporting of minimum essential coverage under Section 6055 of the Code. Health insurance issuers, certain employers, and others that provide minimum essential coverage to individuals must report to the IRS information about the type and period of coverage and furnish related statements to covered individuals. These proposed regulations affect health insurance issuers, employers, governments, and other persons that provide minimum essential coverage to individuals.

The IRS has issued proposed regulations (REG-131418-14) that revise the rules for reporting qualified tuition and related expenses under Section 6050S on a Form 1098-T, “Tuition Statement,” and conforms the regulations to the changes made to Section 6050S by the Protecting Americans from Tax Hikes Act of 2015. This document also seeks to amend the regulations on the education tax credits under Section 25A generally as well as to conform the regulations to changes made to Section 25A by the Trade Preferences Extension Act of 2015 and the Protecting Americans from Tax Hikes Act of 2015. The proposed regulations affect certain higher educational institutions required to file Form 1098-T and taxpayers eligible to claim an education tax credit.

Tip of the Day

Delivery date or sale date? . . . You purchase a machine on August 1, 2016 but it's not delivered until October 15. The sales tax rate for your state changes on September 1, going from 5% to 5.25%. What's the rate to be applied on the machine purchase? It actually could be either, depending on state law. You may encounter similar questions when deciding when a sale occurs for tax or accounting purposes, when you can start depreciation on an asset, etc.


August 1, 2016


You can deduct net operating losses (NOLs) from prior years or carry them back two years. But, if audited, you've got to document the NOL. In Harry E. Obedin and Neale P. Obedin (U.S. Court of Appeals, Ninth Circuit) the Appeals Court affirmed the Tax Court holding that the taxpayers failed to attach the required concise statement computing the loss. The taxpayers did not produce documentary evidence substantiating the deduction and the taxpayer provided only vague and conclusory testimony concerning the net operating loss. In addition, there was a double deduction for wages in 2004 and 2005 which the taxpayer failed to explain or to provide any reason to believe the same errors did not infect previous years' returns.

In Charles W. King (U.S. Court of Appeals, Seventh Circuit) the Court reversed the Tax Court's holding (T.C. Memo. 2015-36) in finding the IRS was correct in denying the abatement of interest on an employment tax deficiency. The taxpayer had requested an abatement of interest for the period from when the IRS indicated it would honor his request for an installment agreement till the time the IRS decided his income and assets were too high to justify an installment agreement. The Appeals Court rejected the Tax Court's finding that the IRS's failure to communicate to the taxpayer the deficiencies of his proposed installment agreement was unfair to him under all the facts and circumstances. (Note. The taxpayer, who was an attorney had represented himself in Tax Court and would probably have done so in the appeal, if he had not passed away suddenly. As a result, only the IRS filed a brief and presented an oral argument.)

Tip of the Day

Fraudulent failure to file . . . You may know someone who claims to be exempt from taxes based on some "tax protestor" argument. Don't even think about the approach. In a recent case the taxpayers had a history of maintaining such arguments. The IRS assessed and the Tax Court upheld the full penalties when the taxpayers failed to file returns and the badges of fraud were present. For one of the years the IRS found the taxpayers owed $35,534.89 in taxes. The IRS added $8,883.72 (25%) for failure to file, $25,762.80 (75%) for fraudulently failing to file and a failure to pay estimated tax penalty of $1,617.29. The penalties of $36,263.81 more than doubled their tax bill from $35,534.89 to $71,798.70 for one year.


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

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