Tax Week in Review for the Week Ending October 7, 2016

Tax Legislation

H.R. 954 – CO-OP Consumer Protection Act of 2016

  • Purpose: To amend the Internal Revenue Code of 1986 to exempt individuals, whose health plans under the Consumer Operated and Oriented Plan program have been terminated, from the individual mandate penalty.
  • Companion legislation to Nebraska Congressman Benjamin Sasse’s CO-OP Consumer Protection Act (S. 3311), that would repeal Obamacare’s mandate for families who lost their insurance coverage.
  • The Affordable Care Act provided for the creation of Consumer Operated and Oriented Plans. CO-OP plans were member-controlled, nonprofit health insurance plans that would offer qualified policies in the individual and small business markets. Numerous CO-OP plans have terminated due to low premiums, generous benefits or higher than anticipated claims.
  • Bill will exempt anybody who lost their health insurance because of a CO-OP’s failure from paying the required fine for those who don’t have health insurance.

Legislation Update: Passed by House on September 27, 2016


Treasury Decisions in the News

T.D. 9786 – Final regulations governing the credit for increasing research activities with respect to computer software for internal use.

    • Final regulations provide that internal use software is software developed by the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business. This definition extends to software that the taxpayer develops primarily for a related party’s internal use.
    • The definition also eliminates the distinction between software developed to deliver computer and non-computer services; but limits general and administrative functions to financial management functions, human resource management functions, and support services functions.
    • To qualify for the credit, the software must be innovative, involve significant economic risk and must not be commercially available to the taxpayer.

The full text can be seen here: T.D. 9786


Opinions, Decisions & Rulings Released this Week

CCA 201640017 – Section 847 – Special Estimated Tax Payments

  • Issue: Can Taxpayer amend its tax return to reduce its taxable income by amounts incorrectly taken into income over its tax years and how should the Service correct the errors that occurred in accounting for the §847 election in closed years?
    • Insurer deducted losses under IRC §847 and made the special estimated tax payments as required. (IRC §846 provides for the calculation of a discounted loss reserve account and IRC §847 allows for a tax deduction of the full, undiscounted reserve if special estimated taxes are paid.)
    • Insurer’s calculations were in error and resulted in an overstatement of income in, what are now, closed tax years. Insurer argued that the provisions of §847 should be revenue neutral and an amended return allowed, but the Chief Counsel’s office rejected this argument. While §847 was intended by Congress to be revenue neutral, it does not extend the period for filing an amended return.
  • Chief Counsel advised that:
    • Taxpayer is barred by §6511 from amending its tax return to reduce its taxable income by the aggregate amount of the special loss discount account, which includes amounts from closed years, that was incorrectly taken into income over its tax years.
    • The Service can make adjustments in an open year to address errors that occurred in accounting for §847 in closed years.

The full text can be seen here: CCA 201640017


PLR 201641032 – Section 408 – Individual Retirement Accounts

  • Issue – Can a taxpayer’s claim that a miscommunication with his/her financial advisor be grounds for extending the 60 day rollover requirement?
      • Taxpayer was informed of a Certificate of Deposit (CD) that was about to mature. Upon maturity, the bank issued a certified check to the taxpayer and closed the account which held the CD.
      • Though the taxpayer notified his/her financial advisor of the withdrawal, it was not known that the withdrawal was from the taxpayer’s IRA until the time of filing the taxpayer’s return the following year.
      • Taxpayer made a deposit for the amount withdrawn on April 15th as a rollover of the IRA funds received.
      • The IRS allowed for a waiver of the 60 day requirement, as the information provided by the taxpayer was consistent with the assertion that the failure to deposit the funds was due to a miscommunication with their financial advisor.

The full text can be seen here: PLR 201641032


PLR 201640013 – Section 2632 – Special Rules for Allocation of GST Exemption

  • Issue – Can taxpayers amend tax returns for incorrect elections reported on their initial year gift tax returns?
      • Husband (H) and wife ( W ) formed and funded 3 trusts (T1, T2 & T3) in Year 1, for the benefit of their grandchildren.
      • H & W indicated to their tax preparer that transfers to T1 and T2 were to be allocated GST exemptions and no allocation to T3.
      • Tax preparer completed Schedule A, Part 2 correctly as direct skips for transfers to T1 and T2, with proper allocations of the GST exemptions. However, preparer incorrectly checked the box for indicating an election under § 2632(b)(3) to elect out of the deemed allocation of GST exemption with respect to H’s transfer to Trust 1 and W’s transfer to Trust 2.
      • For the reporting of T3 transfers, preparer incorrectly reported the transfers as an indirect skip on Schedule A, Part 3 and made an improper election under §2632(c). T3 transfers should have been reported on Schedule A, Part 2 as a direct skip, with an election out of the automatic allocations under §2632(b)(3).
      • In Year 2, taxpayers discovered the errors and each filed late amended returns to correct the errors.
      • In response to the taxpayers’ request for a ruling, the IRS determined that the original returns did properly allocate the GST exemptions as intended. The ruling also commented that “literal compliance with the procedural instructions to make an election is not always required. Elections may be treated as effective where the taxpayer complied with the essential requirements of a regulation….”

The full text can be seen here: PLR 201640013


PLR 201641005 – Section 2010 – Unified Credit Against Estate Tax

  • Issue – Request to extend the time allowed for portability election to take into account decedent’s “deceased spousal unused exclusion” (DSUE) amount available to his surviving spouse.
    • Decedent died with an estate that was less than the basic exclusion amount. Under Section 6018, the estate was not required to file Form 706; but by not doing so, the estate did not make a timely filed portability election as required by statute.
    • In response to the taxpayers’ request for a ruling, the IRS responded:
      • “It is represented that, based on the value of the gross estate and taking into account any taxable gifts, Decedent’s estate is not required to file an estate tax return under §6018(a). Under these facts, the Commissioner has discretionary authority under §301.9100-3 to grant to Decedent’s estate an extension of time to elect portability.”
    • Relief was granted for 120 days from the date of the letter to file the decedent’s Form 706 with the proper election.

The full text can be seen here: PLR 201641005


VEST v. COMMISSIONER – T.C. Memo. 2016-187

Issue – Was the Petitioner engaged in an activity for profit?

  • Petitioner, a successful CPA, sold his financial services firm and used his profit to pursue other interests, specifically an investigation into the death of his father and the formation of businesses that hosted a dating website and developed advertising delivery technology.
  • During the years of investigating his father’s death, petitioner used partnerships controlled by him to pay for private investigators, forensic services and writers who could help him determine the facts of his father’s death and produce a book or movie based on his story.
  • Petitioner incurred $6.7MM in costs related to his investigations. Losses passed to the petitioner from the partnerships owned by him.
  • The regulations set forth a nonexclusive list of nine factors relevant in ascertaining whether a taxpayer conducts an activity with the intent to earn a profit as listed in Sec. 1.183-2(b).
  • The court’s opinion noted:
    • Petitioner had never earned an annual profit from his investigative activities and losses were continuous and substantial.
    • Petitioner did not conduct his activity in a businesslike manner. He had no professional training or experience in writing, publishing, or media. He had no budget or business plan.
    • Petitioner did not adjust the scale or direction of his activities as a profit-maximizing person would do.
  • Court disallowed deductions related to the investigation costs deducted for the tax years under review.

The full text can be seen here: T.C. Memo 2016-187



TISHKOFF v. COMMISSIONER – T.C. Summary Opinion 2016-65

Issue – Were settlement proceeds received for “alleged emotional distress” excludable under Section 104(a)(2)?

  • Petitioner received a settlement of $28,056 for lost wages and $84,177 for emotional distress from her employer, Wells Fargo, stemming from a suit that included accusations of 1) wrongful termination for whistleblowing, 2) hostile work environment, 3) intentional infliction of emotional distress, and 4) whistleblower retaliation.
  • The opinion noted:
    • Damages (excluding punitive damages) received for personal physical injuries or physical sickness may generally be excluded from gross income. Sec. 104(a)(2).
    • Emotional distress is not by itself considered a physical injury or physical sickness.
    • Damages for emotional distress attributable to a physical injury or physical sickness qualify as damages excludable from income under section 104(a)(2)
    • Stress-induced sickness does not qualify; the personal physical injury or personal physical sickness must instead be the cause of the stress.
  • On consideration of the facts presented the court determined that the settlement proceeds of $84,177 did not qualify for the exclusion under Section 104(a)(2).
    • “On the basis of this entire record it appears more likely that, to the extent petitioner suffered personal physical injury or personal physical sickness, that injury or sickness was the result of her emotional distress, than that the emotional distress was caused by her physical injuries and physical sickness.”

The full text can be seen here: T.C. Summary Opinion 2016-65


In the News this Week

IR-2016-130 – IRS Reminds Us to look for Tax Benefits

  • Taxpayers in several disaster area localities who already had valid extensions now have more time to file. Currently, taxpayers in parts of Florida, Louisiana and West Virginia qualify for this relief. For details, see the disaster relief page on IRS.gov.
  • For low-and moderate-income workers and families, especially the Earned Income Tax Credit. The EITC Assistant can help taxpayers see if they’re eligible.
  • Savers credit, claimed on Form 8880, for low-and moderate-income workers who contributed to a retirement plan, such as an IRA or 401(k).
  • American Opportunity Tax Credit, claimed on Form 8863, and other education tax benefits for parents and college students.
  • Taxpayers who enrolled in health coverage through the Health Insurance Marketplace may be eligible for the premium tax credit. Taxpayers who benefited from advance payments of the premium tax credit must file a federal income tax return to reconcile their advance credit payments.


IR-2016-130 – Reminders for Filing in 2017

  • Before filing the 2015 return, be sure to make a copy and keep it and all supporting documents for a minimum of three years. Doing so will make it easier to fill out a 2016 return next year. In addition, a taxpayer will often need the adjusted gross income (AGI) amount from their 2015 return to properly e-file their 2016 returns.
  • Check withholding. This is especially important for any taxpayer who is getting a big refund or has a big balance due. Adjusting your W-4 now can help to ensure you have sufficient amounts paid before the end of 2016 or give you more in your current paycheck if you are over-withholding.
  • Starting next year, some people will get their refunds a little later. A recent tax law requires the IRS to hold the refund for any tax return claiming either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) until Feb. 15. By law, the IRS must hold the entire refund, not just the portion related to the EITC or ACTC.

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