Tax Legislation

• H.R. 5946 – United States Appreciation for Olympians and Paralympians Act of 2016
  • To amend the Internal Revenue Code of 1986 to exclude from gross income any prizes or awards won in competition in the Olympic Games or the Paralympic Games.
  • Update: Passed by House and Senate

Opinions, Decisions & Rulings Released this Week

MILLS v. COMMISSIONER – T.C. Memo. 2016-180

• Issue: Deductibility and allowable amount of legal expenses related to a single member limited liability company (LLC).
  • Taxpayer formed an LLC to conduct mineral mining business. Taxpayer reported income and expenses on Schedule C, using the cash method of accounting.
  • Taxpayer filed 2011 tax return claiming legal expenses of $12,007. Subsequently, he filed an amended return claiming $77,923 of legal expenses, using the accrual accounting method and deducting total charges incurred for 2011.
  • Taxpayer did not file a change of accounting method and no other income or expenses were adjusted.
  • Decision: Court held for the IRS. Taxpayer did not file for permission to change accounting methods nor filed for automatic change of accounting method. Legal expenses were limited to the amount paid, $12,007.

The full text can be seen here: T.C. Memo. 2016-180

ESTATE OF JAMES HELLER v. COMMISSIONER – 147 T.C. No. 11

• Issue: Theft loss deduction for estate when investment account was declared worthless due to fund manager’s involvement in a Ponzi scheme.
  • Estate (E) held a 99% interest in an LLC, which held an investment account, Madoff Securities, that was its only asset. E withdrew funds from the account to pay for estate taxes and administrative costs. Before remaining funds could be distributed, the fund’s director plead guilty to charges involving a Ponzi scheme.
  • Due to the Ponzi scheme, the account became worthless. E claimed a theft loss of $5.1 million for its interest in the LLC on its federal estate tax return.
  • IRS denied the deduction, claiming the loss did not occur during the time of settlement of the estate. Further, the LLC incurred the loss, not the estate directly.
  • Decision: Tax court held that E was entitled to the deduction pursuant to I.R.C. sec. 2054.
  • In its decision, the court stated that estate tax deductions are designed to ensure “that the tax is imposed on the net estate, which is really what of value passes from the dead to the living. The theft extinguished the value of the estate’s JHF interest, thereby diminishing the value of property available to James Heller’s heirs. Thus, the estate’s entitlement to a section 2054 deduction is consistent with the overall statutory scheme of the estate tax. “

The full text can be seen here: 147 T.C. No. 11

ESTATE OF EDWARD BEYER v. COMMISSIONER – T.C. Memo. 2016-183

• Issue: Were assets transferred to a limited partnership includable in the value of the decedent’s estate under Section 2036(a)?
  • Prior to death, decedent (D) transferred shares of corporate stock to a grantor trust (GT). D did not sell the shares.
  • D established a limited partnership (LP) as part of an overall estate plan. The trust then transferred the shares to LP in exchange for a 99% interest in LP. The remaining 1% interest was held by another trust, as general partner.
  • Subsequently, a new irrevocable trust (IRRT) was established and the 99% LP interest was transferred to IRRT in exchange for a promissory note. The only asset of GT was the note receivable.
  • Upon examination of D’s estate return, the IRS included the value of the stock in D’s estate and assessed additional taxes.
  • Decision: Held for IRS.
  •  Reasoning:
    • D’s estate did not qualify for an exception to the bona fide sale requirement, because it could not show that D had a legitimate and significant nontax purpose for forming LP and transferring the stock from the trust to LP.
    • Second, the transfer was not a bona fide sale and he retained control after the transfer. Accordingly, the transfer did not meet the bona fide sale exception of Section 2036(a)(1).
  • The full text can be seen here: T.C. Memo 2016-183

In the News this Week

IR-2016-125 – IRS Announces Use of Private Debt Collectors to Begin Next Spring

• The IRS will begin using private debt collection agencies in 2017, as mandated by Congress in the PATH Act 2015.
• Taxpayers referred to an agency will first be notified by the IRS regarding the transfer of collection activities. Then the assigned agency will also send notification of its assignment and rights to engage in collection activities on behalf of the IRS.
• Agencies will be required to respect the taxpayer’s rights, including adherence to the Fair Debt Collection Practices Act.
• Payments will still continue to be made directly to the U.S. Treasury and not to the agency.

IR-2016-127 – (Notice 2016-60) Farmers given extended time to replace livestock sold due to drought.

• For farmers who were forced to sell livestock due to the drought affecting much of the nation, the IRS has announced that farmers will be given additional time to replace livestock and defer gains generated by the forced sale of livestock.
• For purposes of Section 1033 (e)(1), if a sale or exchange of livestock is treated as an involuntary conversion and is solely on account of drought, flood, or other weather-related conditions that result in the area being designated as eligible for assistance by the federal government, then by Section 1033(e)(2)(A), the replacement period ends four years after the close of the first taxable year in which any part of the gain from the conversion is realized.
• Livestock held for draft, dairy or breeding qualify. Livestock sold for slaughter or sporting purposes do not qualify.
• Notice 2016-60 provides a list of affected counties. Relief is provided for counties listed as suffering extreme weather conditions by the National Drought Mitigation Center for the weekly periods between September 1, 2015 and August, 31, 2016.

Additional details can be found in Notice 2016-60.

NJ Lotto Winner file for state tax refunds – and wins.

• Melvin Mulligan, a NJ resident, won $46M in the NJ Big Game Lottery in June, 2000. After consulting with his accountant, Mr. Mulligan decided to receive an annual annuity rather than a lump sum payment.
• As an enticement to increase ticket sales, NJ publications and lottery advertisements claimed that winnings were not subject to state taxation.
• In 2009, NJ amended its income tax law to include state lottery winnings in excess of $10,000, effective January 1, 2009.
• Mulligan filed his 2009 tax return, reporting the 2009 installment of lottery winnings, and paid the tax liability due. In August, 2009, he filed an amended return, removing the lottery installment and requested a refund of the resulting overpayment.
• NJ court determined that the lottery winning was a contractual agreement entered into as of 2000. Annuity payments were for a fixed amount, not subject to tax.