Cases and Rulings Chapter 16 pp. 607 - 684 2015 National Income TAX Workbook™

Cases and RulingsChapter 16 pp. 607 - 684

2015 National IncomeTAX Workbook™

Introduction pp. 608 - 609

20% accuracy-related penalty for substantial understatement

Exceptions to IRC §6662:

1.“Substantial authority” for position or

2.“Reasonable basis” for position with adequate disclosure on return

Standards of Authority

If Chance of

Winning Is: Your position is:▪ 0 - 5% = Frivolous▪ 20% = Reasonable Basis with Disclosure▪ 33% = Realistic Possibility (AICPA)▪ 40% = Substantial Authority (IRS)▪ 50+% = More likely than not

IRC §6694 Preparer Penalties

Substantial Authorityp. 609

Must believe that there is at least a 40% chance of winning the case on its merits.

Substantial authority can exist for more

than one position relating to same item.

Code, regulations, IRS releases,

court cases, treaties,

congressional reports . . .

Reasonable Basispp. 609 - 610

Less stringent standard than substantial.

Some authority exists (20%) even if weight of contrary authority is greater.

Disclosure required to avoid penalty if have only a reasonable basis.

Disclosure on Form 8275 or 8275R.

Practitioner Note p. 609IRS Disclosure Standards

IRS Revenue Procedure each year: 2015 – Rev Proc. 2015-16, 2015-7 IRB 596▪ Which provides that some items are considered

adequately disclosed on the return itself. 2014 – Rev. Proc. 2014-15 2013 - Rev. Proc. 2012-15 2012 - Rev. Proc. 2011-15 In addition, courts have ruled that alternate forms

of disclosure in the tax return itself may be adequate to avoid IRC §§ 6662 & 6694 penalties.

Jurisdiction of Courtspp. 610 - 611

Tax Court has nationwide jurisdiction.▪ Located in DC & travel to states.▪ Regular (or TC) case v TC Memo case.

District Court – Pay 1st ; File claim / suit for refund.

Circuit court jurisdiction is geographic, except for Federal Circuit; See map on page 610.

Tax Court must follow appellate decisions only for TPs within that court’s jurisdiction (Goldsen Rule)

Other circuit’s opinion has authority.

Organization of the Internal Revenue CodeFig 16.2; 16.3; 16.4 & 16.5 pp. 611 - 615

Pages 611 - 615 provide a list of the IRC Chapters and

Regulation Sections.

Rulings and Cases Discussed Elsewhere in Text p. 607 - 608

Pages 607 - 608 provide a list and index of the

Rulings and Cases and where they can be found in

the Workbook (Text)

Reg-109187-11 p. 616

Proposed Reg under §453B, IRC provides that: Gain or loss is not recognized on disposition of an

installment obligation if not recognized under another Code Section.▪ But, gain or loss is recognized on satisfaction of an

installment agreement, such as when holder transfers it to the issuer for an equity interest in the issuer.

Gain or loss is recognized when an installment agreement is satisfied at other than face value or when obligation is distributed, transmitted, sold or disposed of.

Field Attorney Advice pp. 616 -617

A nonexempt agricultural cooperative did not make per unit retains paid in money (PURPIM) with respect to grain purchases by a related LLC from the taxpayer’s patrons for purposes of the domestic production activity deduction.

In re Wilson 52 BR 635 (Bankr. ND Calif, 2015)

p. 618 TP filed 2008 tax return late in 2011 but did not pay the

liability & did have an extension to 10-15-2009. 7-24-2012 TP filed for bankruptcy. Trustee paid the taxes but not the penalties. IRS assessed penalties under 6651(a)(1), IRC. TP argued penalties were “with respect to tax imposed”

on 4-15-2009 filing date without extensions & so dischargeable since more than 3-years prior to bankruptcy petition.

IRS argued penalties not dischargeable because the 10-15-2009 extension date was within 3-years of

bankruptcy petition………What say yee?

In re Wilson 52 BR 635 (Bankr. ND Calif, 2015)

p. 618

Federal taxes and penalties can be discharged if they are “imposed with respect to a transaction or event “ that occurred more than 3 years before the bankruptcy petition.

Court held the taxes and penalties are “imposed with respect to a transaction or event” that occurred on the due date for the return without extensions………4-15-2009.

Penalties were discharged by the Bankruptcy Court.

In re Fahey779 F 3d 1 (1st Cir 2015) pp. 618

- 619

Failure to timely file State income tax returns prevented the discharge of State taxes in bankruptcy.

Yuska v CmmissionerTC Memo 2015-77 p. 619

A post bankruptcy petition filing of a Notice of Determination Concerning Collection Actions violated the bankruptcy automatic stay.

Rev Proc 2015-37 pp. 619 - 620

The IRS added a new area to the list for which it will not issue private letter rulings.

Reg-107595-11 pp. 620 - 622

The proposed Regulation adds references to §1022 to various basis rules.

Bell V CommissionerTC Memo 2015-111 pp. 622 - 623 Husband & wife formed a corporation & sold their sole

proprietorship to the corporation. Sales price was $250,000, payable at $10,000 monthly or

more at 10% interest. Purchase agreement signed but no note, collateral or

appraisal of asset values. Corporate stock was issued for $500 weeks later. Individuals reported sale of assets as long term capital

gain & corp amortized the purchase price over 5 years. IRS treated transfer as capital contribution to corporation,

installment payments as dividends & no amortization. Sale or ontribution of capital? What say yee?

Bell V CommissionerTC Memo 2015-111 pp. 622 - 623 The Court applied an 11-factor test to the facts. Some factors supported both arguments but weight was

on IRS side. A couple of key factors:▪ Corp had no capital prior to sale.▪ Thinly capitalized corp could not get loan elsewhere.

The court concluded that:▪ The transfer was a contribution of capital &d not a sale.▪ The installment payments were distributions to the SHs.▪ Earnings & profits exceeded distributions so the

distributions were dividends.

Letter Ruling 2015-22-001 p. 623

Corporation failed to file & pay State taxes. State administratively dissolved the

corporation. Corporation was later reincorporated. IRS Ruling – ▪ Corporation was not terminated for

Federal tax purposes.▪ Corporation liable for taxes based on

Federal status.

Coastal Heart Medical Group, Inc V Commissioner TC Memo 2015-84 p. 614

An LLC member could not increase basis in an LLC interest for a personal guarantee of an equipment lease where the rented equipment was not LLC property.

Reg-151416 p. 625

Proposed regulations prescribe the measurement of a partner’s interest in IRC §751 property (unrealized receivables and substantially appreciated inventory items) and described the effect of distributions.

Letter Ruling pp. 625 - 626

The IRC §83(b) election is effective if the taxpayer filed the election with the iRS wihin 30 days of the date of the transfer of property but failed to attached the election to the annual return.

Prop Tres Reg §1.183 p. 626

The IRS has issued proposed regulations allowing the IRC §83(b) election to be made by filing a written statement with the IRS.

Methvin V CommissionerTC Memo 2015-81 pp. 626 - 627

The taxpayer received self-employment (SE) income from investments in oil and gas ventures.

Eaglehawk Carbon, Inc. v US122 Fed Cl 209 (20-15) p. 627

S Corporations are entitled to interest on overpayments of taxes at the reduced interest rate for corporate tax overpayments exceeding $10,000

McMillan V CommissionerTC Memo 2015-109 p. 628

A business deduction was allowed for 50% of legal fees from a suit involving the taxpayer’s residence where 50% of the residence was used for the taxpayer’s business.

Olive V Commissioner792 F.3d 1146 (9th Cir 2015) p. 628

Taxpayer operated a legal medical marijuana dispensary in California.

Taxpayer deducted the expenses. §280E provides an exception to §162 and

prohibits deduction of expenses of a business trafficking in a controlled substance.

Marijuana is a controlled substance. Deduction disallowed.

Chief Counsel Advice 2015-31-016

p. 629 State of Washington imposed a 25% excise tax on

marijuana which is legal in Washington. §280E prohibits deduction of expenses in dealing

with controlled substances like marijuana. However §164 provides taxes are deductible &

that any tax on disposition of property is a reduction in the amount realized.

Payment of tax is allowed to reduce amount realized on the sale of property.

Tax not considered a deduction but a reduction in amount realized and so allowed.

Chief Counsel Advice 2014-39-001 pp. 629 -630

Restaurants that are subject to the uniform capitalization rules should not be forced to use the simplified production method for allocating kitchen labor costs if they implement a reasonable facts and circumstances method instead.

Chief Counsel Advice 2014-47-027 pp. 630 - 631

A 52-53 week tax year is deemed to end on December 31, 2017, for purposes of the domestic production activities deduction.


Taxpayer convicted under federal law for activities related to sale of an illegal product.

Taxpayer sentenced to jail, fined and required to pay restitution to the Government.

Taxpayer paid and deducted restitution payment. §162 prohibits deduction of any fine or similar

penalty paid to a Government for the violation of any law.

Repayment was a deductible ordinary and necessary business expense.

T.D. 9696 p. 631

Final regulations provide safe harbor for treating local lodging expenses incurred for attendance at a business function as ordinary and necessary business expenses.

Central Motorplex, Inc V Commissioner TC Memo 2014-207 p. 632 - 633

Corporations’ president managed business, hired and fired, etc.

Corporation’s secretary-treasurer was in charge of repair & maintenance of cars in inventory.

Another worker was in charging of picking up, delivering cars and securing plates & titles.

Corporation treated all 3 as independent contractors.

IRS held they were employees. What say yee?

Central Motorplex, Inc V Commissioner p. 632 - 633

Officers of corporations who perform just minor services for compensation are “statutory employees”.

President and Secretary-Treasurer were employees by statute.

Using common law factors court held third worker was an employee since president had control over worker, worker did not provide his own tools, worker was paid monthly, etc.

Notice 2015-6 p. 633

The IRS published a notice of procedures for reporting by employers of sick pay paid by third payers.

Letter Ruling 2014-41-004 pp. 633 - 634

Disability payments under a county ordinance qualify as worker’s compensation payments that are excludable from gross income.

McMillan v CommissionerTC Memo 2015-109 pp. 634 - 635 Taxpayer was engaged in training, showing &

breeding horses. In 6 years had receipts in 1 year and over

$154,000 in expenses. No horses had been bred and did not own any

horses in 2008 or 2009. IRS argued in 6th year (2009) taxpayer did not have

a going concern since he did not own, breed or train horses & did not compete in any shows.

Taxpayer said he trained horses in 2009 but lost all his training records.

McMillan v CommissionerTC Memo 2015-109 pp. 634 - 635 Court considered the 9 factors to determine if a taxpayer is

engaged in the activity for a profit…..§183, IRC. Taxpayer’s intent is determinative.

1. Manner in which activity is carried on.

2. Expertise of TPs and advisors.

3. Time & effort expended by TPs on activity.

4. Will assets of activity increase in value.

5. Success of TP in this & other endeavors.

6. History of income and losses.

7. Amount of occasional profits.

8. Financial status of taxpayer.

9. Elements of personal pleasure.

McMillan v CommissionerTC Memo 2015-109 pp. 634 - 635

Court concluded the taxpayer was not engaged in the activity for a profit & disallowed the expenses.▪ Taxpayer spent little time in the activity.▪ There were few or no assets to increase in

value.▪ There were substantial losses & no profit years.▪ Taxpayer enjoyed riding.▪ No success in similar or other activities.

Wyatt V CommissionerTC Summary Opinion 2015-31 p. 635 TP doctor agreed to work in rural area for additional pay

from hospital. Additional compensation was treated as loans which

would be forgiven if the TP worked for an agreed period. Agreement required TP to repay the compensation if he

did not work for the agreed upon period. TP worked the agreed period and loans forgiven. Taxpayer argued the debt was nonrecourse, without any

collateral and so he was not personally liable for it and so there was no cancellation of debt income.

Court held TP was personally liable & so had cancellation of debt income.


pp. 635 - 636 LLC taxed as PS had 2 members. LLC obtained one loan from a bank and another

from a corporation. The 2nd loan was secured by 2nd deed of trust

subordinated to first bank loan, etc. Foreclosure of property paid off bank loan. 2nd loan cancelled, LLC recognized cancellation of

debt income & passed through to members. IRS said cancellation of debt income was income

from a sale…..Why would IRS argue this? And, what is the answer?


pp. 635 - 636 If the income was from a sale by the LLC the

members cannot use §108 exceptions to exclude cancellation of debt from their individual income.

Chief Counsel concluded that taxpayer had no personal liability for the 2nd loan from the corporation.

Therefore the debt was nonrecourse and could not be collected from the LLC.

The cancellation was therefore not cancellation of debt income but income from a sale or disposition.

Domestic Production Activities DeductionLarge Business & International Directive

1-04-0315-001 pp. 636 - 637

IRS provides information as to what is and what is not Manufacturing, Producing, Growing or Extracting (MPGE) for purposes of the Domestic Production Activity Deduction.

NOT MPGE are, for example:▪ Cutting blank keys.▪ Mixing base paint & color.▪ Applying garnishments to a cake not baked

where sold.▪ Etc.

T.D. 9725 pp. 637 - 638

Final regulations provide guidance under IRC §2010 and §2505 on the estate and gift tax applicable exclusion amount, the requirements for electing portability of a deceased spousal unused exclusion (DSUE) amount and the rules for the surviving spouse’s use of the DSUE amount.

Letter Ruling 2015-23-003 pp. 638 - 639

An election to split gifts by a husband and wife was irrevocable where the time for determining whether split gift treatment was effective had expired.

Frequently Asked Questions on Estate Taxes pp. 639 - 640 The IRS will issue estate tax closing letters only

on request filed on or after 6-1-2015. It will take about 4-months to issue a requested

closing letter. For estate tax returns filed before 6-1-2015 no

request is needed & it will be 4 to 6 months for the letter to be issued.

See Fig 16.6, page 640 for estate returns filed between 1-1-2015 and 6-1-2015 where a closing letters will not be issued.

Questions – Call IRS at 866-699-4083.

Fargo V Commissioner TC Memo 2015-96 pp. 642 - 643

The gain from the sale of commercial property from one of the taxpayer’s entities to their other entity produced ordinary income because the taxpayer held the property for sale in the ordinary course of business.

Estate of Menges V Commissioner114 AFTR 2d (RIA) 2014-6514 p. 643

The beneficiary of an estate could not claim the first-time home buyer credit after disclaiming her interest and then acquiring the inherited home from the other beneficiaries.

Saenz V CommissionerTC Summary Opinion 2015-6 pp. 643 - 644

On 2011 return taxpayer claimed:▪ An adult child as a dependent,▪ The adult child’s daughter as a dependent,▪ Earned income credit for both of above,▪ Additional child credit for the above granddaughter.

Both of above lived with and were supported by the taxpayer from Jan 2011 to Aug 2011.

After Aug 2011 both above lived with third party who claimed to be adult child’s common law spouse.

Third party agreed to be married to adult child 4-2012 when they signed their 2011 return.

What do you want to know? Does TP get dependents?

Saenz V CommissionerTC Summary Opinion 2015-6 pp. 643 - 644

Was Adult Child married in 2011?▪ TP cannot claim the adult child if she was married in

2011 since she filed a joint return for that same tax year.▪ Adult child was not married in 2011.▪ Taxpayer can claim adult child.

Could the Adult Child claim her daughter as a dependent?▪ An individual who can be claimed as a dependent

cannot claim a dependent.▪ Since the adult child was a dependent of the TP she

cannot properly claim her daughter as a dependent.▪ Taxpayer can claim the adult child’s child as a

dependent.

Kunkel V CommissionerTC Memo 2015-71 pp. 644 - 645

TPs claimed contribution deduction of $42,455▪ Cash portion ( 5,140)▪ Non-cash portion $37,315

TPs presented no receipts from charitable organizations itemizing donations, valuing items or saying the TPs did not receive any benefit.

TPs did present list of items with their FMV determination but no basis of each item.


Contribution Rules:Donations less than $250 require some sort of documentation.Single donations in excess of $250 require contemporaneous written acknowledgment from donee stating the donor did not receive a benefit for the gift.Non-cash contribution in excess of $500 require a Form 8283 be filed with the return which asks for FMV, cost or basis, method for FMVs, etc for items of property.Non-cash contributions over $5,000 require Form 8283 and an appraisal.Similar item of property must be aggregated to determine if the gift(s) meet the $500 or $5,000 requirements.


Tax Court aggregated many similar items so many values exceeded the $500 and $5,000 limits for requiring cost or basis, valuation method for the FMVs, etc.

The deduction was not allowed for the non-cash items for which proof was not presented.

Costello v Commissioner, TC Memo 2015-87 pp. 645 – 646Mitchell V Commissioner, 775 F.3rd 1243 (10th Cir., 2015)

Bosque Canyon Ranch V Commissioner, TC Memo 2015– 130Kaufman V Commissioner, 784 F.3rd 56 (1st Cir., 2015)

Pages 645 – 648 list 3 cases where a charitable contribution deduction was not allowed for an easement because either:▪ There was no qualified appraisal or▪ A deed of trust was not subordinate to the easement or▪ The grantors retained a right to change boundaries of

the easement.

And a 4th case Kaufman: Where the 40% accuracy related penalty was imposed because the deduction was overstated by more than 400% and the “historic easement” of the front of the TPs home was worth zero.

The point: Dot the “I”s and cross the “t”s before claiming contribution of an easement.

Copeland V Commissioner, TC Memo 2014-226 pp. 648 - 649

Cash basis taxpayer bought home in 1991 with mortgage loan.

2010 loan was modified and unpaid interest was added to principle of the loan.

Taxpayers claimed deduction for payment of interest. IRS disallowed and Tax Court agreed. Tax Court pointed out that interest will be deductible when

the loan is paid off. Court also noted that TPs would have had an interest

deduction if existing loan had been paid off from a loan from a new lender.

Chief Counsel Advice 2014-51-027 p. 649

Co-owners of residence and joint bank account may deduct equal shares of mortgage interest payment made from the joint account.

Co-owners of a house can both deduct their share of interest even if one is not liable on the mortgage.

Voss V Commissioner796 F3d 1051 (9th Cir. 2015) pp. 649 -651

Unmarried co-owners can each deduct interest on up to $1,000,000 of home acquisition debt and $100,000 of home equity debt.

Phan V CommissionerTC Summary Opinion 2015-1 p.651

A taxpayer without legal title to the residence could claim a residential mortgage interest deduction.

Under California law an oral agreement of ownership provided for ownership.

Redisch V CommissionerTC Memo 2015-95 pp.651 - 652

TPs bought vacation home condo in 2004. 2008 decided to rent condo & listed with real

estate firm. 2009 decide to sell after no rentals for a year. 2010 sold condo. 2009 taxpayers deducted rental loss. 2010 taxpayer claim an ordinary loss on sale. IRS held property not held for production of

income so disallowed rental loss and treated loss from sale as a capital loss.

Redisch V CommissionerTC Memo 2015-95 pp.651 - 652

Court considered: Time occupied by taxpayer as residence. Whether taxpayer abandoned personal use. Character of property. Taxpayer’s offers to rent. Taxpayer’s offers to sell. Court not convinced taxpayers had converted into

income producing property. Rental loss disallowed and loss on sale not

ordinary loss.

Van Malssen V CommissionerTC Memo 2014-236 p. 652 Taxpayers claimed losses from vacation condo. 2008 2009 2010▪ Days of occupied by TP 81 59 45 ▪ Days claimed as personal use 14 14 15▪ Rented by relative 7▪ Rented by rental company 10 8 7

Expenses of personal residence are not deductible.

Dwelling is personal residence if personal use is the greater of 14 days or 10% of the days rented at FRV.

Van Malssen V CommissionerTC Memo 2014-236 p. 652

2008 2009 2010▪ Days of occupied by TP 81 59 45 ▪ Days claimed as personal use 14 14 15▪ Rented by relative 7▪ Rented by rental company 10 8 7

Court disallowed claimed rental losses. Taxpayers failed 14 day or 10% of use test:▪ Taxpayers could not show that relative paid

FRV so relative’s time attributed to taxpayers.▪ Court moved some occupied days to personal

use days since it appeared taxpayer had more personal use than working on condo.

Iglicki V CommissionerTC Memo 2015-80 p 653

Payment of a judgement enforcing spousal support arrears payments were not eligible for an alimony deduction

Cutler V CommissionerTC Memo 2015-73 pp. 653 - 654

Nonresident state income taxes were deductible by a partner in an LLC on Sch A (Form 1040)

Obergefell v Hodges p. 654

The right to same-sex couples to marry is protected by the 14th Amendment to the US Constitution and States may not prohibit such marriages.

Ibrahim V Commissioner788 F3d 834 (8th Cir 2015) p. 655

A married taxpayer who mistakenly filed under head of household status may file and amended return using married filing joint status.

Elbaz V Comm, TC Memo 2015-49Maines V Comm, 144 TC #8 (2015)

pp. 655 - 656

State tax refunds are taxable income where the taxpayers’ pass-through entity claimed a deduction for State taxes.

Sewards V Commissioner785 F 3d 131 (9th Cir 2015) pp. 657 - 658

Retirement benefits were taxable to the extent the amount was determined by the taxpayer’s length of service.

Campbell V US13-55607 Fed Appx 697442 (9th Cir 2015)

p. 658

Retirement benefits were taxable to the extent the amount was determined by the taxpayer’s length of service.

Speer V Commissioner144 TC No 14 (2015) pp. 658 - 659

Payments for unused vacation and sick leave received by a retired police officer upon retirement were not excludible from income as worker’s compensation benefits.

Notice 2015-21 p. 659

A proposed revenue procedure provides a safe haven method for reporting wagering gains and losses.

Letter Ruling 2015-21-009 pp. 659 -660

Accidental disability benefits paid to former spouses of state employees pursuant to domestic relations order were taxable income to former spouses.

Prop. Tres Reg 1.529-1 et seq pp. 660 - 661

Proposed regulations were issued to implement new Achieving a Better Life Experience (ABLE) accounts.

Reg-136018-13 p. 661

Proposed regulations provide methods for adjusting applicable federal interest rates for tax exempt obligations.

Morehouse V Commissioner769 F 3d 616 (8th Cir 2014) pp. 662 - 663

The Eighth Circuit Court of Appeals ruled that conservation reserve program payments are not self-employment income.

IRS has non-acquiesced.

Revenue Ruling 2015-13 p. 663

IRS has provided dates got filing 2015 tax returns, with special dates for Massachusetts and Maine taxpayers.

Notice 2015-57 pp. 663 -664

Due dates for IRC §6035 statements of value that are required to be filed with the IRS or furnished to beneficiaries are delayed until February 29, 2016.

Reg-136676-13 p. 664

Proposed Regulation remove the 36-month testing period for information reporting of discharge of indebtedness income.

Field Attorney Advice 2015-10-02F p. 665

A motor freight carrier company that paid independent operations to haul freight on the company’s trailers was not required to file information returns under IRC §6041 and was not a broker as defined in IRC §6045.


Scenario #1:Preparer prepared amended returns for 3 years showing understatement of liabilities due to willful or reckless conduct.Preparer filed 1 of the returns and waited to see if refund would be issued.No refund was issued. Preparer did not file the other returns.Taxpayer filed all 3 amended returns.Each return contained the preparer’s signature.§6694(b) preparer penalty can be asserted for all 3 years.▪ Preparer prepared and signed all 3 returns.


Scenario #2:Preparer prepared amended return containing an understatement of liability due to willful or reckless conduct.IRS disallowed claimed refunds.IRS has only copy of amended return from the preparer that was not signed by him.§6694(b) preparer penalty can be asserted.▪ Preparer prepared a return containing an

understatement of liability due to willful or reckless conduct and the return was filed.


Scenario #3:Preparer prepared amended return showing an understatement of liabilities due to willful or reckless conduct.The amended return was not filed.IRS has only an unsigned copy of the return.§6694(b) preparer penalty should not be asserted.▪ Return was not filed and there is no evidence

preparer signed the return.


Scenario #4:Preparer prepared amended return after the period of limitations had expired.The amended return was filed.§6694(b) preparer penalty should not be asserted.


The IRS may abate penalties and interest where the taxpayer has shown on an amended return that the taxpayer owed less taxes on the original return.

Even if the amended return was filed more than 3-years after the original return was filed and the taxes were paid.

The abatement is not limited to the paid portion of the assessments. WOW!

SBSE-04-9615-0045 p. 667

Taxpayers who cannot obtain a bank account due to reasonable cause will not be assessed the failure to deposit penalty for not making tax payments electronically.

Musa V CommissionerTC Memo 2015-58 pp. 667 - 668

A civil fraud penalty was imposed for failing to maintain accurate sales and wage records, filing false tax forms, and underreporting income on 5 years of income tax returns.

Notice 2014-58 pp. 668 - 669

Transaction similar rule of law are defined for purposes of the economic substance doctrine.

Chief Counsel Advice 2015-22-005 pp. 669 -670

For 2848 for an LLC should be signed by an officer of a parent corporation where the subsidiary of a parent corporation is the manager-partner of the LLC.

Notice 2015-38 p. 670

The IRS updated the list of designated private delivery services for delivery of returns.

Use of these services meets the timely mailed or paid – timely filed or paid requirement.

Gyorgy V Commissioner p. 671

An IRS notice of deficiency was valid where it was mailed to the taxpayer’s last known address that appeared on the taxpayer’s last filed return and the taxpayer did not file a change of address with the IRS.

Heckman V Commissioner788 F3d 845 (8th Cir 2015) pp. 671 - 672

The 6-year statute of limitations applied for a notice of deficiency where the taxpayer omitted taxable income on a return.

Karagozian V Commissioner595 Fed Appx 87 (2d Cir 2015) pp. 672 - 673

An employee may not apply the doctrine of equitable recoupment to use overpaid employment taxes from prior years to offset income tax in a later year.

Butts V CommissionerTC Memo 2015-74 pp. 673 - 674

TPs could not get a refund of taxes where the statute of limitations had expired on the time for filing a refund.

Hey…..Using the Chief Counsel Advice 2015-20-010, text page 666, could they ask the IRS to refund any interest and penalties attributable to the difference between what they owed and what was assessed & paid?

TD 9727 p. 674

The IRS has adopted final regulations amending the regulations governing the filing of refund claims.▪ Form 1040X must be used to amended

individual income tax returns.▪ Separate Form 941-X must be used to

amended each quarterly employment tax return for FICA and withholding.▪ Form 843 is used when there is no

alternative form.

North Central Rental & Leasing, LLC V US779 F3d 738 (8th Cir 2015) pp. 674 - 675

Sale of used equipment and purchase of replacement was not entitled to like-kind exchange treatment.

Marvel Enterprises, Inc V Commissioner145 TC No 2 (2015) pp. 675 - 676

Cancellation of debt income of members of a consolidated group must be first used to reduce consolidated NOL of the group.

Williams V CommissionerTC Memo 2015-76 p. 676

Taxpayers owned S Corporation that owned and operated a real estate company.

Taxpayers also owned a C Corporation that owned and operated a medical practice.

TPH worked for the medical clinic and materially participated in its operations.

Neither TP materially participated in the real estate business and the taxpayers are not engaged in a real property trade or business.

The real estate company leased real property to the C Corporation.

Taxpayers reported rental income as passive on Sch E.

Williams V CommissionerTC Memo 2015-76 p. 676

IRS argued that since the taxpayers’ S corp was leasing real property to the taxpayers’ C Corp the “self-rental” rule is applicable.

The “self-rental” rules leaves rental losses as passive but re-characterizes rental losses to being nonpassive.

Tax Court agreed with the IRS and held that the “self-rental” rule applied so the rental income was nonpassive.

Lamas V CommissionerTC Memo 2015-59 pp. 676 - 677

Taxpayer owned an interest in two family corporations involved in real estate development.

Taxpayer managed operation of both corps. Taxpayer worked 691 hours @ year for one or both corps

& materially participated for more than 500 hours @ year. Taxpayer thus worked 1,191 hours for the two

corporations. If the businesses are an “appropriate economic unit” the

hours of the two businesses can be aggregated to then determine whether there is “material participation” &, if so, losses may be nonpassive.


Court found the 2 Corps were an “appropriate economic unit” after considering:

1. Similarities & differences in type of business.

2. Extent of common control.

3. Extent of common ownership.

4. Geographical location.

5. Interdependence of businesses.


Since the businesses are an appropriate economic unit the hours spent at each can be combined.

Since the taxpayer spent more than 500 significant participation hours on the activity and more than 100 in each business he meets one of the seven tests for material participation.

Since the TP materially participated in the activity the losses are nonpassive.

Sabolic V CommissionerTC Memo 2015-32 pp. 677 - 678

2009 – 2011 TP was a bartender in a casino. Employer had tip records from charges. TP kept record of all tips received. Both records presented to IRS & Tax Court. IRS computed tips based on formulas. IRS pointed to errors & inconsistencies. TP explained differences. Tax Court accepted TP’s records.

Ellis V Commissioner787 F3d 1213 (8th Cir 2015) pp. 678 - 679

Payment of compensation to the taxpayer by an LLC owned by the taxpayer’s self-directed IRA was a prohibited transaction.

Announcement 2014-32 p. 679

IRA distributions in 2014 rolled over is disregarded for purposes of determining whether 2015 distribution can be rolled over provided 2015 is from or to a different IRA.

A 2014 rollover to 2015 is not a rollover.

Letter Ruling 2015-23-019 pp. 679 - 680

Distributions from a marital trust could be rolled over to the trustee’s IRA without income tax.


TP was receiving equal monthly distributions that meant the 10% tax on early withdrawals did not apply.

IRA custodian made error and made two distributions in one month.

The error is not subject to the 10% tax.

Specht V US, 115 AFTR 2d 2015-357 (S.D. Ohio 2015) pp. 681 - 682

Decedent died & TP hired attorney to help with Estate. Attorney had brain cancer. TP knew Estate tax return was due 9-30-2009. No return filed or payment made until Jan 2011. IRS asserted late filing & pay penalties. TP argued relying on attorney was reasonable cause. Court held reliance on attorney was valid regarding legal

questions but not for filing. Court noted TP had been sent info on required filing and

had missed other things. Penalty sustained…………….See Boyle, Sup Court

Annual Filing Season Program p. 682

The IRS posted information on the Annual Filing Season Program on its website.

Boneparte V CommissionerTC Memo 2015-128 pp. 682 - 683

TP full-time Government employee. Stayed each night at casino hotel where he

gambled. Also gambled on racehorses & other casinos. Filed return not showing gambling activity. When IRS exam started TP filed amended return

listing $25,000 in gambling losses and gambling related expenses on Sch A and $25,000 in gambling income on Sch C.

Taxpayer claimed to be a professional gambler.

Boneparte V CommissionerTC Memo 2015-128 pp. 682 - 683

To be a gambling professional must be engaged in activity for a profit……§183, IRC.

Court found TP did not gamble with intent to make a profit & disallowed gambling related expenses because:▪ No records of activity & none used to win more.▪ TP had no expertise and no experts to help.▪ No history of success in similar business.▪ No evidence of history of profits or losses.▪ Losses offset income from other sources.▪ TP enjoyed gambling.

Program Manager Technical Assistance Letter 2014-18 pp. 683 - 684

Failure to include required forms for reporting foreign

assets on Form 1040, 1041 or 706 means the statute of

limitations is open until 3-years after required information is

provided.

Chapter 16 – Rulings & Cases

Cases and Rulings Chapter 16 pp. 607 - 684 2015 National Income TAX Workbook™

Documents

Transcript of Cases and Rulings Chapter 16 pp. 607 - 684 2015 National Income TAX Workbook™