Tax Week in Review for the Week Ending October 14, 2016

Treasury Decisions in the News

T.D. 9789 – IRS Final, Temporary Rules on Election to Take Disaster Loss Deduction for Preceding Year

  • IRS has issued temporary rules interpreting Section 165(i) to allow taxpayers affected by Hurricane Matthew to make an election to deduct losses in the year prior to the year of loss.
  • The temporary regulations also extend the period of time for revoking a §165(i) election to 90 days after the due date for making the election, and authorize the Treasury Department and the IRS to issue additional guidance regarding the time and manner of revoking the election.
  • The IRS has issued Rev. Proc. 2016-53 to describe the method and procedures to properly amend returns.

The full text of T.D. 9789 can be seen here: T.D. 9789

The full text of Rev. Proc. 2016-53 can be seen here: Rev. Proc. 2016-53



Opinions, Decisions & Rulings Released this Week

PLR 201642001 – Section 4941 – Definition of Self-Dealing

Issue: Can private foundation provide funding to a related organization for purposes of constructing a performance venue if the organization is also purchasing land from a related entity?

  • Taxpayer (PF) is recognized as a tax-exempt organization described in section 501(c)(3) and classified as a private foundation under section 509(a). Taxpayer provides grants to dozens of public charities.
  • Supporting Organization (SO), another non-profit organization, operates a public event venue, with stage and open seating for concerts and other events. SO wishes to purchase land from Company B and build a new stage and performance venue. Company B is a subsidiary of Company A, a real estate developer.
  • Individual A is the president of both PF and SO. Individual A is also the President and CEO of Company A and a direct beneficial shareholder of Company A. Under the circumstances presented, with regard to PF, Company B is a disqualified entity for the purposes of Section 4946(a)(1).
  • PF is proposing to give funds to SO for the specific purpose of constructing the new venue.   Funds for the purchase of land will be raised from the general public or grants. Transaction is considered to be between SO and Company B and PF’s funds are to be segregated and not used for the land purchase.
  • Ruling: Based on the facts considered, the transaction will not be considered to be self-dealing if the funds received from PF are not used for the purchase of land. Though Company B is a disqualified entity regarding PF, the transaction between Company B and SO, an intermediary organization, will be allowed, as long as the segregation of funds and their use are respected.

The full text can be seen here: PLR 201642001



CCA 201642033 – Section 199 – Loss on Sale of Equipment

Issue: Whether a loss on the sale of equipment purchased to produce qualifying production property reduces the taxpayer’s qualified production activities income.

  • Taxpayer purchased Equipment A for the purpose of making qualified production property (QPP) over a three year period. Taxpayer properly allocated depreciation expense of Equipment A to the COGS of the QPP.
  • In year 3, taxpayer sold Equipment A for an amount below the remaining adjusted basis of the equipment, generating a loss on the sale.
  • Per Treasury Regulation 1.199-3(a)(1)(i), domestic production gross receipts include revenues from the sale of items that are manufactured, produced, grown or extracted by the taxpayer. Since Equipment A was not produced or manufactured by the taxpayer, the loss from the sale of the asset would not be included with (or reduce) qualified production activity income.

The full text can be seen here: CCA 201642033



HUBBELL TRUST v. COMMISSIONER – T.C. Summary Opinion 2016-67

Issue – Were charitable contributions deducted by a trust made “pursuant to the terms of the governing instrument”, as required by section 642(c)(1)?

  • A testamentary trust was created under the last will and testament of Harvey C. Hubbell executed on October 14, 1955 and came into existence in 1960. Trust document provided for annual distributions to be made to various family members from income and principal.
  • The will provides that the trust will terminate upon the death of the last person receiving benefits under the trust. The executors were also given rights to create a separate foundation to carry out the decedent’s desire to make charitable contributions from the residue of the trust.
  • The will allowed for maintaining the trust beyond the life of all remaining beneficiaries. Although trustees were given permission to make charitable contributions from the trust, the trustees believed there was adequate “latent ambiguity” in the will to allow for regular charitable contributions during the life of the trust and not just after all beneficiaries had passed.
  • To support their position, trustees argued:
    • They consistently exercised their duties with the understanding that the Will authorized them to make charitable gifts.
    • Trust assets were far in excess of the amounts needed to make the required monthly distributions to the beneficiaries.
    • The probate court found that “the language of the Will authorizes, and has from the inception of the Trust, authorized the Trustees to make distributions of income and principal for charitable purposes specified in Internal Revenue Code section 170(c) * * * both currently and upon termination of the trust.”
  • Decision: The court found that the will could have included language that would have allowed for contributions to be made during the life of the trust. However, the language authorizing contributions applied only after the death of the last annuitant. Accordingly, the deduction was disallowed, as it was not in accordance with the trust document.

The full text can be read here: T.C. Summary Opinion 2016-67

In the News this Week

IR-2016-132 – Victims of Hurricane Matthew Qualify for Late-Filing Penalty Relief

The Internal Revenue Service advised taxpayers affected by Hurricane Matthew, but not yet covered by a federal disaster declaration with individual assistance, that they may qualify for relief from penalties if they are unable to meet Monday’s extended deadline for filing 2015 tax returns.

This means that the IRS will automatically provide retroactive extensions and other relief to any locality added to the federal disaster area at a later date. In areas with disaster declarations for individual assistance, taxpayers will have until March 15, 2017 to file returns otherwise due on Monday, October 17.

A complete up-to-date rundown of relief being provided to victims of Hurricane Matthew can be found on the disaster relief page on IRS.gov.   As of Thursday, 17 counties in North Carolina are eligible for relief.

The full text can be read here: IR-2016-132

Categories: Uncategorized

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