Source: http://riles52.blogspot.com/2010/
Timestamp: 2017-06-28 12:23:09
Document Index: 338101061

Matched Legal Cases: ['art 5', '§ 7436', '§ 3406', '§ 7436', '§ 3406', '§ 6503', '§ 6213', '§ 3406']

Passive Activities and Other Oxymorons: 2010
The imagined future of Star Trek is one in which humans have advanced not only technologically, but also morally. They are less greedy and not racist or sexist and trying to be very benign to other cultures they encounter what with the Prime Directive, which Kirk only rationalized violating every other episode. That could have made for really boring stories. The solution was to project the less endearing, though more entertaining character traits of humanity onto alien humanoids. The Ferengi, although distinguished for their sexism (Rule 139 - Wives serve, brothers inherit.) are best known for their greed which is religious in nature and embodied in the rules of acquisition. There is actually some sound advice (Rule 8- Small print leads to large risk.) mixed in with a commentary on the voracious nature of unrestrained capitalism (Rule 97 - Enough is never enough.) The rules provide significant grist for reflection, the most troubling being perhaps Rule 284 (Deep down everyone's a Ferengi.) CCA 201049034 highlights the Ferengi influence in the office of chief counsel of the IRS.
From: ———————— Sent: Wednesday, October 27, 2010 4:52:12 PM To: ——————————— Cc: —————————————————- Subject: #4741721 - Request for Review of Opinion ————— We have completed our review of the Counsel opinion issued in the above-referenced matter, with which you have expressed disagreement. To summarize the salient facts, the Automated Collection System (“ACS”) issued a continuous wage levy that was served on the taxpayer's employer. The employer remitted levied wages that satisfied each of the several tax year liabilities listed on the levy. However, ACS failed to issue a release of the levy. The employer continued to make remittances and the Service applied such latter remittances to other tax years that were not listed on the levy and for which the taxpayer has not filed any returns. The latest of such latter remittances occurred more than three years ago. The taxpayer has not filed any claims for refund. Although we might have analyzed the matter differently, our conclusion is the same, to wit, that the Service is now prohibited from returning the latter remittances to the taxpayer. Assuming that the latter remittances resulted in overpayments, the limitation on the allowance of a refund contained in section 6511(b)(2) would prohibit the Service from making a refund, because no amounts were remitted within the last three years. Accordingly, were the taxpayer to timely file a claim for refund today (e.g., a Form 1040 for a year in which no return had yet been filed), the three-year lookback period would not extend back far enough to encompass any (involuntary) payments. As we discussed, our answer might be different if the taxpayer had made an informal claim for refund. In that event, the question would be whether the informal claim was made within two years of any of the latter remittances. However, you indicated that you were not aware of any writing that could be viewed as a request for refund. We understand that the situation you describe might involve Service actions that would not conform to its policies or procedures. For example, the continuous wage levy likely should have been released after the listed liabilities were satisfied. You also indicated that, according to transcripts, some involuntary payments might have been misapplied. Finally, you questioned whether the Service may apply levied proceeds to tax liabilities for which no notices have been issued (including a CP 504 or a Collection Due Process levy notice described in section 6330). None of these procedural irregularities, if taken at face value, would trump the section 6511(b)(2) statutory limitation. Additionally, note that IRM Part 5.11.2.5 (08-24-2010) accurately describes surplus levy proceeds as subject to offset. Accordingly, section 6330 would not be implicated. This taxpayer should have been aware of the amounts of his tax liabilities that properly were subject to the wage levy. He also presumably was aware that his wages were being levied. Although the Service should have released the levy once the listed liabilities were satisfied, the taxpayer had ample time in which to raise an objection and ask that the Service both stop levying and refund the surplus proceeds. While we do not know what prompted the taxpayer to approach the Taxpayer Advocate Service at such later time, the statute does limit the time in which a taxpayer may request a refund, and more importantly, it places limits on the amounts that the Service is authorized to refund.
JAMES A. HILL, JR. v. COM TC Memo 2010-268 There were a number of issues in this case, not all of them interesting. For example, you have to report your share of S corporation income even though you don't receive any distributions. One issue was of some interest though. M. Hill and his wife had formed an LLC to purchase property that they intended to develop. The LLC was treated as an S corporation. (This gets me a little suspicious of the quality of the advice they were getting. One of my themes is that the partnership form is generally superior, particularly in real estate, but I don't have enough facts to second guess them here.) Mr. Hill also filed a schedule C for his real estate brokerage business.
Mr. Hill found a likely property for Parkwood and contracted to buy it. At the closing things got a little complicated::
Petitioner attended the real estate closing on February 7, 2003, in his dual capacity as broker and as the purchaser's representative. At the closing, Robert Garrison (Mr. Garrison), the closing attorney, credited to Real Estate North's account $10,000 in earnest money that Real Estate North had been holding in escrow from Parkwood. Mr. Garrison also tendered a check to petitioner, payable to Real Estate North, for $90,000. Petitioner informed Mr. Garrison that he did not want to accept a commission on the sale, and he asked Mr. Garrison to redraft the closing agreement to eliminate Real Estate North's commission. Mr. Garrison refused to redraft the closing documents. Instead, he asked petitioner to endorse the $90,000 check to Mr. Garrison's escrow account. Mr. Garrison then applied the $90,000 to the purchase price of the Huntington Park property. A February 7, 2003, closing statement signed by petitioner indicates that Real Estate North received a $100,000 commission in the transaction. Petitioner, however, did not report the $100,000 commission on his 2003 Form 1040, U.S. Individual Income Tax Return. The IRS determined that Mr. Hill should recognize the $100,000 commission as income on his schedule C. Mr. Hill argued that he should be able to treat it as having been used to reduce his cost of the property purchased.
The Court sided with the IRS :
First, the record is clear that petitioner did, in fact, realize the commission. Petitioner testified that he asked Mr. Garrison to redraft the closing documents to eliminate the commission, but Mr. Garrison refused. Whatever discussions occurred at the closing, the fact remains that petitioner was tendered a $90,000 commission check and signed the closing statement affirming that Real Estate North received a $100,000 commission in the transaction. The commission was not subject to any limitations or restrictions. Thus, the commission was income when tendered. .....The fact that petitioner did not deposit the check into his or Real Estate North's bank account is immaterial. Petitioner cannot alter the tax consequences of the transaction by claiming, after the fact, that he did not want to accept the commission. ....
Second, both this Court and the U.S. Court of Appeals for the Eleventh Circuit have rejected the argument that a commission paid to a broker or agent who is purchasing for his own account is a purchase price reduction and is not income to the recipient. ..... Thus, even if petitioner had not received the $100,000 commission but instead transferred his rights to the money to Parkwood, the transfer would constitute an anticipatory assignment of income. ......
Finally, we note that “the Commissioner may bind a taxpayer to the form in which the taxpayer has cast a transaction.” ........Petitioner deliberately structured the purchase of the Huntington Park property so that Real Estate North would receive a $100,000 commission. Petitioner cannot avoid paying tax on the income by attempting, after the fact, to recharacterize the commission. The moral of the story is to not wait till closing to do the tax structuring of a transaction.
Issue 1: The Tax Court does not have jurisdiction under § 7436 to determine the application of backup withholding liability for any workers determined to be independent contractors. Issue 2: If a Taxpayer filed Forms 945 and thus started the running of the period of limitations on assessment with regard to backup withholding, the issuance of the NDWC may nonetheless suspend the period of limitations with respect to the backup withholding. I get the sense that they feel they may not be on firm ground with this interpretation :
We recognize the potential incongruity in noting that the Tax Court does not have jurisdiction over § 3406 taxes in a § 7436 proceeding while also asserting that the proper issuance of the NDWC suspends the period of limitations with respect to § 3406 taxes. However, due to the unique nature of employment taxes, there is no perfect analogy in the deficiency arena to apply to the operation of § 6503(a), a provision involving income tax deficiencies, in the employment tax arena. The principles we distill above from §§ 6213 and 6503 are especially apt in light of the uniqueness of the situation where assessing one type of employment tax (e.g., backup withholding on non-employees) is inconsistent with assessing another type of employment tax (e.g., social security and Medicare tax on employees). Furthermore, these principles only apply to situations where the period of limitations for assessment of § 3406 taxes is open at the time the NDWC is issued. Also they were not anxious to release it.
CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views. Please call Ligeia Donis at (202) 622-0047 if you have any further questions.
Michael Walter Bragg v. Commissioner, TC Summary Opinion 2010-172 In some recent posts, I've taken to rooting for one side or the other. As I was reading the facts in this one, I was definitely with the taxpayer. He was in tax court representing himself over a $937 deficiency. At issue was an alimony deduction of $6,340 (which locates Mr. Bragg right in the 15% bracket I guess).
Here is the story. Michael Bragg was divorced from Rosalie Bragg in 2002. Although the decree called for him to pay $9,600 per year she had informally agreed to accept a lesser amount. After the informal agreement they probably didn't communicate all that much. At some point in 2006, she remarried. She did not mention that to her ex-husband. Finally, in December 2007, her grandson ratted her out (The court didn't put it that way, but I think it adds to the drama). Mr. Bragg ceased making payments.
Under the law in the state of Washington, the obligation to make spousal support payments automatically ceases when the spouse being supported remarries (I think that that may be true in all states).
The IRS disallowed Mr. Bragg's alimony deduction for the year 2007, because he was not under any legal obligation to make the payments. There isn't any mention of whether they issued the former Mrs. Bragg a refund (Of course maybe she wouldn't be entitled to one. Much as we accountants like everything to balance, the tax law does admit of asymmetrical results.) So how would you rule ? I want you to share the suspense for a moment. This one had me on the edge of my seat.
The IRS argument was :
Despite the fact that petitioner falls within the provisions of the applicable Federal statute, respondent argues that because Ms. Bragg remarried in 2006, petitioner's legal obligation to pay spousal maintenance terminated as a matter of Washington State law; thus, respondent contends that the payments were not received under a divorce instrument as required by section 71(b)(1)(A). The Tax Court found for Mr. Bragg :
Respondent's (IRS) legal argument has as its foundation old law and does not reflect amendments to the statute. Although there certainly have been cases holding that voluntary payments made outside a written instrument incident to divorce are not alimony, those cases have generally dealt with situations where there was no proper divorce decree or separation agreement, where a payment was made before the operative document went into effect, or where the older version of section 71 applied to the particular case.
The more recent regulation requires only that alimony payments meet the following requirements: (a) That payments be made in cash; (b) that payments not be designated as excludable from the gross income of the payee and nondeductible by the payor; (c) that payments be made between spouses who are not members of the same household; The court's finale is beautiful:
More than 25 years after the enactment of the amended statute, there is no reason to assume that Congress meant anything other than what it said in enacting the present version Equip. Corp. v. Commissioner, 98 T.C. 141, 149 (1992). of section 71. It is not the Court's place to support respondent's attempt to include language Congress itself did not. We have no way of knowing whether the former Mrs. Bragg is still speaking to her grandson. For the life of me, I can't figure out why the IRS bothered with this case. Posted by
The IRS will not transfer or redesignate a payment that has been applied to a taxpayer's account to satisfy a different liability of the taxpayer if the payment was applied according to the taxpayer's instructions. If the IRS applies a payment contrary to a taxpayer's instructions, the IRS will, upon request by the taxpayer, transfer the payment to the intended tax liability. A corporation that believes it will have overpaid its estimated tax for the tax year may apply for a quick refund on Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, before the 16th day of the 3rd month after the end of the tax year at issue, but before it files its income tax return, if the overpayment is at least 10% of the expected tax liability and at least $500. A corporation should not file Form 4466 before the end of its tax year.
The email responds to your request for assistance. You asked for advice regarding whether there is any limitations period applicable to reducing tax liability based on a net operating loss (NOL) carryback. Section 6511(a) provides that a “[c]laim for credit or refund of an overpayment . . . shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” Section 6511(d)(2) provides an additional special period of limitation with respect to a claim for a refund or credit relating to an overpayment attributable to a NOL carryback. The relevant portion of section 6511(d)(2) provides, in lieu of the 3 year period of limitation prescribed in section 6511(a), the period shall be the period ending 3 years after the due date of the return (plus extensions) for the taxable year of the NOL. In this case, the Service disallowed the taxpayer's purported claim for credit because it determined that it was untimely. However, you provided that the NOL carryback, if allowed, would not result in an overpayment which would generate a credit or refund but would simply reduce the taxpayer's outstanding tax liability. Even though there are restrictions on the time within which the Service may allow a claim for credit or refund, no such statutory impediments exist to prevent the carryback of an NOL to reduce a taxpayer's outstanding tax liabilities. This might be of interest to someone dealing with collections who has had things go from bad to worth. Possibly a carryback from a subsequent disastrous year can alleviate an outstanding debt. CCA 201049030
Subject: Filing joint return after filing of substitute for return ———— You asked whether a taxpayer can elect joint status after the Service has filed a substitute for return under section 6020(b) and has issued a notice of deficiency to the taxpayer. The Tax Court held in Millsap v. Commissioner, 91 T.C. 926, 936-937 (1998), acq. in result, AOD-1992-03, that a taxpayer is not foreclosed from electing joint status after the Service has prepared a return under section 6020(b) because the return does not constitute a “separate return” filed by the individual for purposes of section 6013(b). Because the taxpayer has not previously filed a separate return in this case, section 6013(b) does not apply, therefore, the taxpayer may file a joint return provided that none of the exceptions in section 6013(a) apply. Section 6013(a)(2) states that “in the case of death of one spouse the joint return may be made by the surviving spouse . . . if no return for the taxable year has been made by the decedent, no executor or administrator has been appointed, and no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse.” The facts that you provided did not state whether an executor or administrator had been appointed. Thus, if an executor or administrator was not appointed, the taxpayer may file a joint return with respect to himself and his deceased spouse. See IRC section 6013(a)(2). If you are married and he Service does your return for you it will be married filing separately. You may be able to reduce the tax if your spouse will consent to a joint return. If your spouse happens to be dead, you might be able to consent for them. Definitely has the makings of a Law and Order episode.
Susan Fay Mostafa v. Commissioner, TC Memo 2010-277 , Code Sec(s) 6330. In my professional life, I represent taxpayers. So my general inclination is to root for them. Sometimes, though, I really wonder if we have too much process. Susan Fay Mostafa did not file her 1996 return (Sometimes I have this time warp thing where I will type 1995 where I really mean 2005. That's not the case here. I really mean 1996). The IRS issued a notice of deficiency which Ms. Mostafa appealed to Tax Court.
Parsonage Exclusion - Shouldn't Enough be Enough ?
Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27 Foxes have holes, and birds of the air nests; but the Son of man hath not where to lay his head.
Here is where we get into the tension between the establishment clause and the free exercise clause. Some denominations and congregations might think, perhaps with some encouragement from the clergy, that it is not such a good idea to have the minister live in a house owned by the church. Since you wouldn't want to treat them differently than other denominations or congregations the parsonage exclusion was expanded to include "rental allowances". There is no dollar limitation on such rental allowances and no limit on the relationship that they can bear to taxable compensation. The money just has to be spent on providing housing. If the housing allowance is used to pay deductible expenses they are still deductible. The question the tax court had to decide in this case was whether a parsonage allowance should be allowed with respect to a second home. In 2002, the Code was amended to limit the exclusion to the fair rental value of a home. Prior to that it would presumably have been legitimate to have a $500,000 parsonage exclusion that was used to be buy a house. Since the parson would have basis in the house it could be subsequently sold for $500,000 with no taxable income. The case which prompted the Code change was not nearly that extreme.
One commentator has suggested that the in-kind exclusion grew out of “the general respect held by Congress and the public for churches,” What they came down to was statutory construction. The language in Section 107 says "provide a home", but when you go to the definition section of the Code you find :
In determining the meaning of any Act of Congress, unless the context indicates otherwise— words importing the singular include and apply to several persons, parties, or things; So providing a home includes providing two or, in this case for part of the time, three places to live. And of course Reverend Driscoll in 2007 had free housing provided by the federal government, although that was just for himself.
I really don't think this type of thing does the cause of religion much good. I doubt that it is good for the clergy to have their own special tax gimmick that while appearing modest can be gamed to exclude from income tax as much as 100% of above average incomes in some cases. If 107 were simply repealed it would not cause the taxation of clergy who are provided a place to live by their congregations. They would be covered by the convenience of the employer exception even if the residence had a theoretically high rental value (conceivably a bishop's residence or the like). There is another option, which as far as I know is original with me, although whenever I think that it turns out that I am wrong. Code Section 134 excludes from income a number of military benefits including a housing allowance. A rationale similar to that for the parsonage exclusion can be made here. Members of the military are frequently and perhaps more so traditionally provided with housing at a place convenient to the employer, think Fort Apache. It is reasonable that a cash allowance in lieu of that benefit would be exempt. From a policy viewpoint the military housing exclusion is less troubling, since there is nothing disturbing about the federal government deciding who is entitled to it (Unless you are a far out militia type). Perhaps more significantly, since it is paid by the federal government, it is limited. The allowance varies by whether the service member has dependents, by region and as you might expect rank. If you look at the table, though, you will see that the variation by region is the most dramatic with junior enlisted ranks in Alaska having housing allowances greater than a general in Alabama. My recommendation is that the parsonage allowance be limited to no more than the highest military allowance anywhere. You could come up with something more complicated than that. The important thing is that there be some dollar limit.
First, the Commonwealth contends that the Minimum Essential Coverage Provision, and affiliated penalty, are beyond the outer limits of the Commerce Clause and associated Necessary and Proper Clause as measured by U.S. Supreme Court precedent. More specifically, the Commonwealth argues that requiring an otherwise unwilling individual to purchase a good or service from a private vendor is beyond the boundaries of congressional Commerce Clause power. The Commonwealth maintains that the failure, or refusal, of its citizens to elect to purchase health insurance is not economic activity historically subject to federal regulation under the Commerce Clause. Alternatively, the Commonwealth contends that the Minimum Essential Coverage Provision cannot be sustained as a legitimate exercise of the congressional power of taxation under the General Welfare Clause. It argues that the Provision is mischaracterized as a tax and is, in actuality, a penalty untethered to an enumerated power. Congress may not, in the Commonwealth's view, exercise such power to impose a penalty for what amounts to passive inactivity. Lastly, the Commonwealth asserts that Section 1501 is in direct conflict with the Virginia Health Care Freedom Act. Its Attorney General argues that the enactment of the Minimum Essential Coverage Provision is an unlawful exercise of police power, encroaches on the sovereignty of the Commonwealth, and offends the Tenth Amendment to the U.S. Constitution
LIBERTY UNIVERSITY, INC v. GEITHNER, Cite as 106 AFTR 2d 2010-7174, 11/30/2010 The conduct regulated by the individual coverage provision is also within the scope of Congress' powers under the Commerce Clause because it is rational to believe the failure to regulate the uninsured would undercut the Act's larger regulatory scheme for the interstate health care market
THOMAS MORE LAW CENTER v. OBAMA, ET AL., Cite as 106 AFTR 2d 2010-6720, 10/07/2010 In this case the court found that the insurance requirement was within the realm of the Commerce Clause. I managed to find something amusing so I posted on that decision a while ago. The Thomas More decision was by the Eastern District of Michigan.
STATE OF FLORIDA v. U.S. DEPT. OF HEALTH & HUMAN SERVICES, Cite as 106 AFTR 2d 2010-6761, 10/14/2010 That suit withstood a motion to dismiss. The latest I see on it is that it will be heard on December 16.
LEVY v. U.S., Cite as 106 AFTR 2d 2010-7205, 12/01/2010 Sometime in the last millennium there was a TV situation comedy called Angie. It was about the early days of a marriage between a fellow from a very wealthy Philadelphia family and a waitress from a family of more modest circumstances. In one of the episodes the two families compete on the game show Family Feud. Family Feud is a wonderfully egalitarian contest. Unlike Jeopardy, which requires you to come up with the one correct answer (Expressed in the form of a question) the questions in Family Feud are matters of opinion. If you get one of the top five or ten answers (something like that) that were determined by a survey you get some points. The more common the answer you come up with the more points it is worth.
Until recently they focused on poor execution which I discussed at length in one of my early blog posts. Assets aren't really transferred to the partnerships. Personal bills are paid directly by the partnership. Distributions are not made in proportion to partnership ownership. Tax returns are not filed or not done correctly. In a more recent case, Fisher, discounts were not allowed for a single asset partnership, because it lacked business characteristics. There was no discussion of flawed execution. No discount was allowed to the Estate of Meyer Levy for the sale of its Plano real estate that was in a partnership. The estate appealed the verdict alleging error on the part of the trial court.
(1) evidence of the ongoing negotiations over the sale of the property, specifically the offers and proposals; (2) evidence of the listing price of the property, and the ultimate sale price of the property;
(3) valuation testimony by the Government's expert based on flawed methodology; and (4) opinion testimony by a lay witness and hearsay testimony.
The Estate contends that the jury arbitrarily disregarded unequivocal, uncontradicted, and unimpeached testimony of an expert witness, bearing on technical questions of causation beyond the competence of lay people. The Government counters that the jury had the partnership agreement in evidence from which it could have determined that there was no lack of control or marketability. The record contains ample evidence to support the jury's verdict valuing the property at $25 million. The Estate listed the property, and eventually sold the property, for $25 million. It was immediately resold for $26.5 million. Sophisticated developers with no stake in the current litigation engaged in ongoing negotiations for the property for prices in the $20–25 million range. The Estate's expert testified that the market in Plano remained relatively flat during the period between Levy's death and the sale of the property. Also Jordan testified regarding the value of the property. Any of these provides sufficient support for the jury's verdict on the property. The jury verdict regarding the discount also finds support in the record. The partnership agreement itself would be sufficient evidence. The jury could have rationally found that no discounts for lack of control or marketability were merited because the Estate controlled the general partner interest, which had nearly unfettered control over the Partnership's assets. The trial court did not abuse its discretion when it denied the Estate's motion for new trial. I'm not a lawyer and I don't even play one on TV. I prepare and review tax returns and do tax planning. I also represent people who are being audited by the IRS, but there I'm generally dealing with accountants. If my clients end up in Tax Court and win I'll still think that I lost. I am fairly certain though, that it was the choice of the estate's lawyers to bring this matter to a jury. To have that privilege, they had to pay at least part of the tax in order to be able to sue for refund in district court. They could have instead gone to Tax Court where they would have had people who dealt with "technical questions beyond the competence of lay people" all the time and frequently allow discounts. Somehow though they thought they would do better with a jury.
Apparently though the government lawyers saw to it that the jury found out that the Estate got $25,000,000 and these simple minded people thought that might be indicative of whatever the estate had was worth. I suppose there was some sort of trial strategy that would keep this information undisclosed. In which case the jury would have had to weigh the government's yada, yada, yada against the Estate's yada, yada, yada. There might have been some logic to that. If I was playing Family Feud and the question was "Name a class of people that are very popular" I would venture neither multi-millionaires or IRS agents. If the question was "Name a class of people that are despised" I think I might score higher with "IRS agents". I mean no disrespect to IRS agents, their unpopularity is inherent in their jobs. In a refund suit in district court either the government or the taxpayer can ask for a jury. I haven't been able to figure out which it was. I did find that the executor had been a potential candidate for mayor of Austin Texas and the late Mr. Levy had established a fairly well known charitable foundation. So there may have been a feeling that there was a home town advantage. There was also a sense in which the Estate was playing with the house's money if it was the one that gambled on a jury, as is noted in a footnote:
Although we have declined to set aside the jury's verdict of zero discount, we note that the actual discount applied in taxing the Estate was thirty percent. Given the valuation found by the jury, it would have had to find a discount of larger than thirty percent for the verdict to make a difference to the judgment in this case. I don't know whether this case will have a chilling effect on family limited partnerships or not. My cumulative sense is that you should only do them if you think they are a good idea anyway. Oddly enough, that will make it more likely that you will succeed on the discount issue. I think the key planning point to take away from the case is the Court's comment that it would have been reasonable to find a zero discount because of the Estate's general partnership interest.