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Rulings and Cases Chapter 17 pp. 571-646

This chapter provides summaries and insights into court cases, treasury regulations, revenue procedures, IRS rulings, and notices, offering a comprehensive guide to understanding and applying national income tax laws.

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Rulings and Cases Chapter 17 pp. 571-646

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  1. Rulings and CasesChapter 17 pp. 571-646 2016 National Income Tax Workbook™

  2. Rulings and Cases pp. 571-572 • Court cases • Treasury regulations • Revenue procedures • IRS rulings • IRS notices • Chief counsel advice

  3. p. 573Substantial Authority • 20% accuracy-related penalty for substantial understatement of tax • Exceptions: • “Substantial authority” for position • Adequate disclosure on return, with “reasonable basis” for position

  4. p. 573Reasonable Basis • Less stringent standard • Some authority exists even if weight of contrary authority is greater • Disclosure required to avoid penalty for substantially understating tax if the IRS proposes a deficiency and wins in court

  5. pp. 574-582Substantial Authority • Do not have to believe there is > 50% chance of winning case • Substantial authority can exist for more than one position relating to same item • Code, regulations (including proposed), IRS releases, federal court cases, treaties, congressional reports . . .

  6. pp. 580-581Jurisdiction • Tax Court has jurisdiction over all of the US • Circuit court of appeals decisions bind only a geographic area (Figure 17.5) • Taxpayers living outside circuit still can (and must) consider opinions in determining substantial authority

  7. A Word of Caution • This chapter contains short summaries. Be sure to read the complete text of a case, ruling, notice, or regulation before using as authority for a return position.

  8. p. 583ACA Prop. Regs. §§ 1.36B-2,-3,-5 • Tax years > 12/31/16 but TPs may rely on some provisions for years > 12/31/13 • Recklessly gives false info to Exchange • If final HHI < 100% not treated as applicable TP • Gives bad info to make ineligible for Medicaid, CHIP, etc → treated as eligible

  9. p. 583ACA Prop. Regs. §§ 1.36B-2,-3,-5 • Nonappropriated Fund Health Benefits Program treated as ER program • If declines ER coverage one year & not given chance to enroll the next, treated as ineligible for ER coverage • If offered only excepted benefits, PTC o.k. with Marketplace insurance • Expand/clarify opt-out arrangements

  10. pp. 583-584ACA Prop. Regs. §§ 1.36B-2,-3,-5 • Rules for when Exchange delays in stopping APTC after TP stop request • APTC eligible after appeal, retroactive enrollment, covered for a month if pays by 120 days after appeal decision • PTC/month lesser of: • Premium reduced by any refund • SLCSP over contribution amount

  11. p. 584ACA Prop. Regs. §§ 1.36B-2,-3,-5 • APTC reconciled by one who attests to the intention to claim exemption • Multiple families in single QHP with APTC, 1095-A premiums = allocable prem. share based on SLCSP share • Full month SLCSP if terminate mid-mo. or if enroll mid-month due to birth, adoption, foster, court order date

  12. p. 584ACA Prop. Regs. §§ 1.36B-2,-3,-5 • Regs changed to make specific form references: 1095-B, 1095-C

  13. p. 585Brinks Gilson & Lione v Comm • Excessive comp: comp vs dividend • Allocated all of book income to comp • Closing agreement for deduction • Appeal of accuracy-related penalty • TP cases not applicable • No substantial authority = penalty

  14. pp. 585-586Richard Schiffmann v Comm • CEO & CFO aware of unpaid emp taxes • Wrote checks for other creditors with loans and investment $$ • IRS sought recovery from CEO & CFO • Main factor: extent of decision-making authority • Court: Willfully failed to pay emp. Trust fund taxes → personally liable

  15. pp. 586-587Rev. Proc. 2016-40 • Examples of distributions of controlled corp stock to distributing corp SHs - no challenge for lacking substance • Applicable transactions: p. 586 • If transaction under a safe harbor • No action taken within 24 months • Unanticipated third-party transaction

  16. pp. 587-588Letter Ruling 2016-23-013 • Unincorporated association to maintain private common driveway to 4 homes • Account to make payments • Revenue from fee assessments • Formed for benefit of members, does not meet requirements for a community → cannot be a 501(c)(4)

  17. pp. 588-590CCA Letter 2016-06-027 • Issue 1: PN guarantees qualified nonrecourse debt if PS states in writing unable to pay – no longer qualified non-recourse for § 752? • Ruling: Debt is no longer qualified non-recourse debt

  18. pp. 588-590CCA Letter 2016-06-027 • Issue 2: PS in business of acquiring, renovating, and maintaining hotels w/o part in day-to-day operations – “activity of holding real property” for § 465(b)(6)? • Ruling: Yes, PS is engaged in activity of holding real property

  19. pp. 588-590CCA Letter 2016-06-027 • Issue 3: If PN guarantees PS qualified non-recourse debt can nonguaranteeing PNs treat debt as qualified non-rec.? • Ruling: If the guarantee is bona fide and enforceable by creditors, the debt is no longer qualified non-recourse debt.

  20. pp. 588-590CCA Letter 2016-06-027 • Issue 4: PS agreement: if guar PN pays • Make other PN’s contribute capital or • Ratable portions = loans to other PNs Nonguarantee’g PNs personally liable? • Ruling: Not sufficient to make nonguaranteeing PNs personally liable

  21. pp. 590-591Methvin v Commissioner • Owned 3% in various O&G ventures • Ventures excluded from Sub K – line 21 • Subject to SE tax? • TP: Not engaged in T or B, not PN • Court: Liable for SE tax – T or B carried out on his behalf thru agents/EEs + election out of Sub K did not affect nature of business entity

  22. p. 591Williams v Comm. • Husband and wife • S corp in real estate – no mat. part. • C corp operating medical clinic • H full time in clinic – mat. part. • Reported S corp rental as passive • Argued § 469 applied to S corp itself • Court: self-rental, income not passive

  23. pp. 591-592Aleamoni v Commissioner • H 25%, W 25%, Kids 50% - corporation • Corp operated H’s consulting business • TP loaned $ to corp, deducted on Sch C • TP: 1) loans = exp of H – alter ego & 2) IRS estopped due to prior audits • Court: 1) loan or cap contrib., not exp. 2) IRS not estopped from raising issue

  24. p. 592Nelly Home Care v US • SMLLC – nonmedical in-home care • 35 workers at one care facility • Did not train or instruct • Did obtains workers’ comp • Industry practice: not EEs • Prior audit addressed EE/IC issue • Court: Reasonable basis for IC + 530

  25. p. 593Udeobong v Commissioner • Medical supply company – cash basis • 2005 insurance reimb. returned < 2010 • 2010: settlement pay from ins. Comp. to pay returned amounts • TP: not 2010 income, already taxed • Court: § 1341 – deduction for repaym’t, in 2010, payment = income

  26. pp. 593-594H.W. Johnson v Commissioner • Family owned – construction business • Mother 51%, 2 sons 24.5% each • Sons paid 2003: $4M+, 2004, $7.3M+ • Part disallowed as > industry standard • Successful in managing expansion • Court: Hypothetical investor test – 10% return of equity met – comp o.k.

  27. p. 594Letter Ruling 2016-17-002 • Business property condemned – eminent domain for highway expansion • Relocation payments used for relocate and replace equipment not moveable • Taxable? • Ruling: 1) No taxable income, 2) no deduction to extent of payments used, 3) no basis to extent of payments used

  28. pp. 594-595In re Medley • Involuntary chapter 7: Nov & Dec 2013 • Orders of relief filed in Jan & Feb 2014 – effective date of filing • No election to close debtors’ tax years • S corp 2014 K-1’s – Who is taxed? • Court: Filing before end of S tax year, income flows to estate not debtors

  29. pp. 595-596Letter Ruling 2016-11-007 • Parent corp of 2 subsidiaries • EEs of subs transferred to new corp • Substantially all assets to new corp • Is new corp successor ER for emp tax? • Ruling: Yes 1) All property acquired, 2) Successor employs one from former & 3) Wages in year of acquisition

  30. p. 596Ryther v Commissioner • Solely owned corp – steel fabricating • Corp liquidated in chapter 7 • Bank. estate abandoned steel scrap • TP sold scrap over 7 yrs, 2/month • Reported as misc – no SE tax • Court: No SE income, not a T or B

  31. pp. 596-597Peterson v Commissioner • IC sold cosmetics – commissions from sales of TP and downline sales • Retirement pay based on average commissions year before retirement • Retirement pay = SE income? • Court: Yes, subject to SE tax • Deferred comp based on income prior to retirement

  32. p. 597Hess v Commissioner • H&W – Amway distributorship • H: Full-time software manager • No business plan (other than Amway’s) • Receipts for expenses, no sales records • Court; Not operated w/profit intent - not in businesslike manner, no expertise, no advise outside Amway, never a profit

  33. pp. 597-598Delia v Commissioner • Employed full-time + hair braiding bus. • Mall – evenings & weekends • Never produced a profit • Maintained separate records • Made attempts to increase customers • Court: Had intent to make a profit (only negative factor was lack of profit)

  34. p. 598Roberts v Commissioner • Horse breeding/racing 2005-2008 • IRS disallowed losses in all four years • Court: Losses allowable 1) businesslike manner, 2) advice of experts, 3) significant time spent, 4) appreciation expectation, 5) other successes, 6) losses beyond his control, 7) not much pleasure/recreat.

  35. pp. 598-599Letter Ruling 2016-19-003 • Facts: • Farmer’s cooperative implemented an online patronage application • Issue: • Does the online application constitute a valid “consent in writing” under I.R.C. §1388(c)(2)(A)?

  36. pp. 598-599Letter Ruling 2016-19-003Continued • Analysis: • No special form is required for consent as long as it adequately discloses terms • Ruling: • Online application is a signed written document

  37. pp. 599-600CCA 2016-26-024 • Specialty retailer - clothing MPGR outside the US • Produced printed material sent to potential customers to advertise • No advertising for other retailers • TP: GR Portion = advertising MPGR same as newspaper exception in regs • Ruling: Not the same, no MPGR

  38. pp. 600-602Tech. Advice Memo. 2016-38-022 • Facts: • Taxpayer constructed and renovated building components which were on columns attached to the foundation • Issue: • Do the activities qualify for the DPAD?

  39. pp. 600-602Tech. Advice Memo. 2016-38-022Continued • Analysis: • Qualify for DPAD if activities are construction of real property • Real property includes inherently permanent structures • Ruling: • Components are heavy and affixed to real property so activities qualify for DPAD

  40. pp. 602-603Dieringer v Commissioner • Facts: • Decedent’s trust gave stock to charity • Prior to contribution, corporation redeemed stock and family purchased additional shares at a discount • Issue: • What is the value of the charitable contribution?

  41. pp. 602-603Dieringer v CommissionerContinued • Analysis: • Charitable contribution deduction usually date of death value but limited by trustee’s powers • Ruling: • Value of stock transferred to charity was reduced because trustee had substantial power prior to distribution

  42. pp. 603-604Estate of Holliday v Commissioner • Facts: • Decedent’s children helped him form family LLP and took a discount for value of decedent’s LLP interest • Issue: • What is the value of the LLP interest/assets to be included in the gross estate?

  43. pp. 603-604Estate of Holliday v CommissionerContinued • Analysis: • I.R.C. §2036 inclusion if retained interest – exception for bona fide sale • Ruling: • Decedent retained an interest in LLP income and contribution of assets to LLP was not a bona fide sale – value of LLP assets included in gross estate

  44. p. 604Singer v Commissioner • Executor made distributions of estate property before full pay of estate tax • IRS sought tax payment from executor • Court: Executor not liable • Estate not insolvent @ distribution • NY law right of contribution form beneficiaries for state/fed taxes

  45. pp. 604-605Newman v Commissioner • 8/08 - Withdrew $ from new account before deposit cleared – ($7,875) • 8/08 - Bank closed the account • 12/11 – Bank issued Form 1099-C • Does TP have income in 2011? • Court: 1099 due to 36 months rule for event – but TP insolvent, no income

  46. pp. 605-606Anderson v Commissioner • Pretrial order – TP paid mortgage on ex-spouse residence Jan-Sep 2010 + $ to ex for monthly expenses • Final decree 9/10 - required same payments to spouse for 2 years • Are payments alimony?

  47. p. 606Anderson v Commissioner • Alimony: • Under a divorce/separation doc, • Not designated as not alimony, • Not members of same household, & • No pay requirement after death • Court: Alabama law: paymts terminate @ death – 1-4 met → alimony

  48. pp. 606-607Vichich v Commissioner • Husband had AMT credit carryforward from year prior to marriage • Husband died & widow applied unused AMT credit in later single years • Court: Looking at NOL cases disallowing carryover of other spouse, disallowed AMT credits as not hers

  49. p. 607Alphonso v Commissioner • SH in coop housing corporation • Retaining wall collapse, SHs assessed • TP claimed casualty loss • TP: 2-years’ heavy rain + faulty drainage system caused collapse • Court: No loss - Caused by gradual deterioration accelerated by rain

  50. pp. 607-608Riley v Commissioner • 2003-2008 invested $ with friend developing software • Suspicious – asks for repay in 2010 • No repay – claimed theft loss in 2010 • Need to prove 1) theft occurred, 2) Loss amount, 3) year discovered • Court: Friend claimed willingness to repay → no loss

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