Second part of the catch up. These materials are largely from February. One more installment coming shortly. We may be renaming SumOp. Although I loved the name (thanks Prof. Grewal), this keeps getting linked as a summary of all Tax Court summary opinions. Feel free to suggest names, although it may just fall under the Grab Bag title from now on. And, if you work at a law firm that is taxed as a C-corporation, check out the Brinks, Gibson discussion below. Might be a little scary.
- Most of you probably heard that the Form 8971 was issued for basis reporting in estates. Form can be found here and instructions here. First set will (probably, although it has been extended a couple times already) be due June 30th. Pretty good summary can be found here. Lots of complaints so far.
- The Fourth Circuit had a recent Chapter 7 priority case in Stubbs & Perdue, PA v. Angell (In re Anderson). In Stubbs (great name), S&P were lawyers who represented Mr. Anderson. Initially, the case was a Chapter 11 case, and S&P racked up $200k in legal fees. Priority, but unsecured. There was also over $1MM in secured tax debt. The bankruptcy converted to a Chapter 7, and S&P were tossed in with the unsecured debtors, which they took exception with. The Court looked to the current version of section 724(b)(2) of the bankruptcy code. That section allows certain unsecured creditors to “step into the shoes” of secured creditors, and recover before other creditors. Due to perceived abuses, that section had been amended in 2010 to limit the expenses that were given super priority, including Chapter 11 administrative expenses when the case was converted to a Chapter 7 case. The amended provision was in place when the conversion occurred, and the Fourth Circuit relied on that version of the law, disallowing the legal fees super priority. The law firm argued the prior version of the statute should apply, as it was the applicable statute when the originally filing occurred, but the Fourth did not agree. Why does this really matter? It is the federal tax liability supported by the federal tax lien that gets subordinated to pay these priority claims. So, the fight in this insolvent estate boiled down to whether the lawyers, who may have waited too long to convert the case to Chapter 7, or the IRS get paid (of course, the decision to convert is a client decision which puts the lawyer’s ability to get their fees at the mercy of the rationality of the client’s decision. A bad place to be) (thanks to Keith for giving me a quick primer on this subject).
- The Tax Court in Brinks, Gilson & Lione, PC v. Commissioner has probably caused quite a bit of concern for quite a few law firms – or should (which reminds me, I have something to discuss with the Gawthrop management committee). McGuire Woods has a good write up, and some insight into planning around the issue, which is found here. The facts are that the firm would provide partners with a salary, and then at year end it would take all the profits and provide year-end bonuses to the partners, who would treat the amounts as W-2 wages. This would wipe out the profits, so the c-corporation law firm would have no tax due (sounds familiar to a lot of you in private practice, doesn’t it?). This firm had close to 300 non-lawyer employees who generated profits, and the IRS said that treating the bonus amount as w-2 income on to the partners on what those other folks generated was improper. The corporation should have paid tax, and then dividends should have been issued to the partners, who would also then pay tax. Yikes! That is interesting enough, but the Court also found that the firm lacked substantial authority for its positions and there was no reasonable cause under Section 6662(d)(2)(B), so substantial penalties were also due on the corporate income tax due (the regulations do not allow for an “everyone else is doing it” defense).
- Sometimes you go into court just knowing you are going to look like an @s$ for one reason or another. I may have felt that way walking in to argue Estate of Stuller for the government before the Seventh Circuit. Not because I would have been wrong, but, based on the opinion, the taxpayer was having a pretty bad year. In Stuller, the Court held that the penalties for failure to timely file returns were proper when a restaurant business owner (who was a widow) missed the filing deadline. In the year in question, the husband died in a tragic fire, which also injured the widow. In addition, a key employee was embezzling from her businesses and she had difficulty tracking down aspects of the probate proceedings. The Court found all required info could have been found in her records, and she did not exercise ordinary business care and prudence to fulfill the requirements of the reasonable cause exception (it probably didn’t help that she was taking questionable deductions related to her “horse” business that lost like $1.5MM in the preceding years).
- We have covered Rand pretty extensively here on the blog, including the reversal of it by section 209 of the PATH Act and the Chief Counsel advice that followed, which can be found here. In February, additional guidance was released stating there are no longer any situations where the Section 6676 penalty is subject to deficiency procedures, which was the same conclusion our (guest) blogger, Carlton Smith, came to in his post discussing the Kahanyshyn case. Carl, however, reflected upon this more, and concluded there may, in fact, be a situation where the deficiency procedures might apply to a Section 6676 penalty. I’m somewhat quoting Carl (via email) here. All intelligent comments are Carl’s, while any errors are assuredly mine:
If you recall from prior posts, in PMTA 2012-016…the IRS changed its position and held that where it had frozen the refund of a refundable credit, there was no “underpayment” for purposes of section 6664(a) because the freezing of the refund should be considered as “an amount so shown [on the tax return] previously assessed (or collection without assessment)” under section 6664(a)(1)(B). So, there can be no assessment of a section 6662 or 6663 penalty in that circumstance.
However, section 6676′s penalty on excessive refund claims can apply even if the refund is never paid. Accordingly, within the PMTA, the IRS states (I think correctly) that where it freezes a refund of a disallowed refundable tax credit, it can assert a section 6676 penalty instead.
The PATH Act did two significant things to section 6676: It removed the previous exception to applying the penalty with respect to EITC claims. It changed the defense to the penalty from the troublesome proof of “reasonable basis” (an objective test) to the easier “reasonable cause” (a subjective one).
So, we may see section 6676 assessments in the future where refundable credits were improperly claimed, but the refund was frozen.…If a taxpayer improperly claimed, say, an EITC, but the refund was frozen, the IRS would later issue a notice of deficiency to permanently disallow the EITC. The IRS could also assess a section 6676 penalty (assuming no reasonable cause), since it is the claiming of an improper refund that triggers the section 6676 penalty, not its payment.
It is still an open question whether or not the section 6676 penalty on disallowed frozen refundable credit claims will be asserted by the deficiency procedures or the straight-to-assessment procedures usually involved in the assessable penalties part of the Code.
- In United States v. Smith, the District Court for the Western District of Washington reviewed a community spouse’s argument that her portion of the community property house could not be used to satisfy her husband’s tax debt from his fraud. I found this write up of the case from a law firm out west, Miles Stockbridge. The Court upheld the foreclosure, finding the wife did not show that she was entitled to the exception of collecting against community property under Section 66(c), nor did she show that the debt was not a community property debt by clear and convincing evidence, as required under Washington law.
- Nothing too novel in US v. Wallis, from the District Court of the Western District of Virginia in February of 2016, but a good review of suspension provisions to collection statute. In Wallis, the Service took collection actions after the ten year period found under Section 6502 for penalties under Section 6722. The Court found collection was not prohibited, as the statute was tolled due to the taxpayer’s bankruptcy and OIC/CDP hearings. Sorry, couldn’t find a free version.
- The folks over at The Simple Dollar have asked that we provide you with links to some of their content. This post is about the best tax software for nonprofessionals to use for doing their own taxes. This site is geared to the general public, but has some basic finance and tax info. These are usually in the form of listicles, which are completely click bait, but are hard to hate.