Recent Developments in Tax Related Matters

by Pessin Katz Law, P.A.

June and July, 2013 have born a number of new developments relating to tax related matters.  This article is designed to provide a synopsis of those that might be of interest to PK Law readers:

  • In Daley v. Mostoller (In re Daley) No. 12-6130, 2013 U.S. App. LEXIS 12138 (6th Cir. June 17, 2013) the 6th Circuit Court of Appeals held that a debtor’s granting of a lien on his IRA securing future debts that might arise with the debtor’s brokerage house, without actually securing an extension of credit from the brokerage house, did not disqualify the IRA from exempt status in the debtor’s later bankruptcy filing, contrary to a Department of Labor position and the position of the debtor’s bankruptcy trustee (Chapter 7) that it did do so.  The District Court ruled with the bankruptcy trustee but was reversed on appeal and the IRA was granted exempt status.
  • Montgomery v. Commissioner, T.C. Memo 2013-151 (June 17, 2013), set forth the Tax Court’s position, citing Underwood v. Commissioner, 63 T.C. 468 (1975), aff’d 535 F.2d 309 (5th Cir. 1976), that: “The mere fact that the debtor defaults and thereby renders the guarantor liable…” was not sufficient to increase the taxpayers’ (husband and wife) basis in S corporation stock so as to permit significantly increased loss deductions following a corporate default on a loan.
  • Chief Counsel (CC) Notices are directives that provide interim guidance, furnish temporary procedures, describe changes in litigating positions, or announce personnel matters or other types of administrative information. Notices providing interim guidance or instructions to staff are designed to be incorporated into the Chief Counsel Directives Manual (CCDM), but are issued as Notices to provide immediate notification of important policy or procedural changes.  In Notice CC-2013-011, the IRS Chief Counsel Office directed its attorneys to no longer argue that the Tax Court should review “innocent spouse” determinations by the Service under section IRC 6015(f) for abuse of discretion or on the administrative record.  The direction was issued in light of the holding in Wilson v. Comm’r, 705 F. 3d 980 (9th Cir. 2013), aff’g T.C. Memo 2010-134, to which the IRS acquiesced (AOD 2012-07, I.R.B. 2013-25 (June 17, 2013), that the standard of review in IRC 6015(f) cases is “de novo” or “from the beginning”. 
  • In Chief Counsel Advice (CCA) 201324016 (an email memo from the Chief Counsel’s Office to an examiner), dealing with a deceased husband’s failure to file income tax returns for a number of years, the examiner was instructed that the decedent’s daughter, who was a joint tenant on a bank account with her husband, should not file returns for her late father.  (The father left no Will and there was no probate opened for his estate.)  Instead, the IRS should prepare returns under the authority of IRC 6020(b)(1) and “issue statutory notices”, presumably to the daughter, but that is unclear.
  • On June 24, 2013, in Graev v. Commissioner (140 T.C. No. 17), the Tax Court held that a contribution of cash and a conservation easement to a charitable organization were not to be allowed as deductions because they were “conditional gifts”.  The IRS successfully argued that a “side letter” in which the charity agreed to return the cash contribution and join in a process to remove the contribution of the “façade [conservation] easement” were charitable deductions to be denied to the taxpayer as not “so remote as to be negligible”, citing 26 C.F.R. 1.170A-1(e), 1.170A-7(a)(3) and 1.170A-14(g)(3), Income Tax Regs., thereby resulting in their characterization as “conditional gifts.”
  • In PLR 201326011 the taxpayer sought a ruling that a trust she created for the benefit of herself, as life income beneficiary, and her children, and which contained a limited power of appointment, was a “Grantor Trust” under IRC 671 so that she would be considered the owner of the income and the corpus of the trust for federal income tax purposes.  The IRS ruled that because the net income of the trust must be paid to the grantor at least annually, the grantor would be treated as the owner of the income of the trust.  Also, because the grantor had a limited power of appointment over the corpus of the trust and any accumulated income therefrom, and, by the terms of the trust capital gains are added to the trust corpus, the grantor would be treated as the owner of the corpus of the trust.
  • IRS Fact Sheet FS-2013-9, July 2013, reiterated the position of the IRS that employers are responsible for payroll and related taxes even if the payroll tax service used by an employer is defrauding the employer or not acting in its best interests.  The Fact Sheet outlines some steps employers ought to consider in hiring a payroll service and to attempt to protect an employer from “unscrupulous” ones. 
  • The mere right to insurance policy dividends, by itself, is not an “incident of ownership” under IRC 2042.  According to Chief Counsel Advice CCA 201328030, this is particularly true in those cases in which the dividends may be applied against a current premium, representing “…nothing more than a reduction in premiums paid rather than a right to the income of the policy.”
  • On July 15, 2013, the Tax Court issued its opinion in Nye v. Commissioner, T.C. Memo 2013-166, which held that a lump sum payment of alimony to a former wife, possibly payable after death to her estate under state law, was not deductible as “alimony” to the former husband.  The husband had begun to make periodic payments under a property settlement agreement which the former wife sought to modify.  They then proceeded to mediation over the matter and entered into a “Mediation Settlement Agreement” at the end of 2007 in which the former husband agreed to pay a lump sum to settle the alimony modification case and his obligation under the property settlement agreement.  In early January, 2008 the husband made payment and claimed a large deduction for alimony for the 2008 tax year.  The divorce court’s “modification judgment” relating to the case was entered on February 4, 2008, and it incorporated the “Mediation Settlement Agreement”.  The Tax Court held that under Florida law, as a matter of contract, that the agreement to pay the former spouse a lump sum under the Mediation Settlement Agreement would survive her death and, therefore, was not deductible as alimony under IRC 71.  The Mediation Agreement was silent on the issue.
  • Deseret Management Corp, (Ct. Fed. Cl., 7/31/2013) 112 AFTR 2d ¶ 2013-5151involved a claim by the owner of a radio station that the sale of the station involved no goodwill and a radio station could not have goodwill due to the nature of audiences’ listening tastes and habits.  The Court of Claims rejected that position and stated that radio stations could have goodwill represented in a sale of the station by the purchase price of the station over and above the value of assets sold, other than goodwill.  In the case at hand, the Court found that the goodwill attributable to the station’s sale was negligible.
  • Chief Counsel Advice 201330033 contains guidance on the manner in which the amount of a gift is to be determined for Self-Cancelling Installment Notes (“SCINs”) for gift tax purposes when there is an exchange of property for the SCIN.  Also, there is a discussion of whether such notes should be included in the holder’s gross estate for estate tax purposes.
  • A Federal District Court has ruled in Cozen O’Connor, P.C. v. Tobits, No. 2:11-cv-00045-CDJ (E.D. Pa. 7/29/13) that in light of the Supreme Court’s invalidation of DOMA, the same-sex spouse of a deceased profit sharing plan participant is entitled to spousal death benefits under the terms of the plan and ERISA.  Prior to the Supreme Court’s DOMA ruling, such same-sex spouses would not be entitled to spousal benefits under ERISA plans.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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