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In an attempt to decrease the administrative burden imposed by the repair and capitalization regulations, the IRS has increased the deminimis safe harbor for taxpayers without an applicable financial statement (AFS) from $500 to $2,500.  The safe harbor establishes a floor for automatic deductibility for costs associated with tangible personal property acquired or produced during the tax year that are ordinary and necessary business expenses associated with the taxpayer's trade or business. The safe harbor provides for automatic deductibility for amounts up to $2,500 for the acquisition or production of new property or for the improvement of existing property which would otherwise have to be capitalized.  The IRS Notice points out that deductibility is available for repair and maintenance costs irrespective of amount.  The higher threshold on the safe harbor is effective for costs incurred during tax years beginning on or after January 1, 2016, however, the IRS will not raise on exam the issue of whether a taxpayer without an AFS can use the $2,500 safe harbor if the taxpayer otherwise satisfies the requirements of Treas. Reg. Sec. 1.263(a)-1(f)(1)(ii).  In addition, if a taxpayer is under exam concerning the $500 safe harbor and the amount or amounts in issue do not exceed $2,500 per invoice, the IRS will not further pursue the matter.  IRS Notice 2015-82   

The petitioner had an unpaid tax liability exceeding $600,000 and submitted an offer-in-compromise (OIC) at a collection due process (CDP) hearing.  The OIC was for $2,938.  The IRS rejected the OIC on the basis that the petitioner had withdrawn over $400,000 from his retirement accounts and that the reasonable collection potential exceeded over $500,000.  The court held that the IRS did not abuse its discretion in rejecting the OIC.  Chandler v. Comr., T.C. Memo. 2015-215

The petitioner claimed deductions for meals and entertainment, parking fees, tolls and transportation-related expenses, cost-of-goods sold for solar panels and a home office.  As for the solar panels, the only documentation provided was a quote for 1,000 units.  Concerning the home office, the only substantiation was the petitioner's testimony and the floor plan and area used for the office.  No business interest deduction was allowed because there was no evidence that the use of the loan proceeds was for something other than personal purposes.    The court agreed with the IRS position on the deductibility of the expenses (some were allowed, but most denied).  Smith v. Comr., T.C. Memo. 2015-214. 

The petitioner was a surgeon that had a private practice in one location and also was an “on-call” surgeon at a hospital about 25 miles away from his private practice location.  At the hospital he had to work a 24-hour period three days monthly and had to be available during emergencies.  He had various medical conditions and bought a motor home that he could park near the hospital that he could use for rest and sleep during the 24-hour shifts.  He reviewed patient charts in the motor home and referred to his medical books and other information while in the motor home.  He did maintain mileage logs that separated out the business and personal use of the motor home.  On audit, the IRS allocated the allowable depreciation (including expense method) between his business and personal use.  The petitioner claimed that he used the motor home for business purposes 85% of the time during his 24-hour work days.  The court upheld the IRS position, noting that the motor home was used only 27 days for business in 2008 and 36 days in 2009.  The petitioner’s own logs showed that his business use was approximately 20 percent for the two tax years in issue.  Cartwright v. Comr., T.C. Memo. 2016-212. 

In the facts of this ruling,  the question arose as to whether notices of a non-judicial sale could be delivered to the IRS by private delivery services such as United Parcel Service (UPS) or FedEx.  The IRS noted that under I.R.C. §7425(c), the notice of sale must be given in writing, by registered or certified mail or by personal service, not less than 25 days prior to sale.  The fact that the IRS actually received the documents does not matter.  Delivery by private delivery service such as FedEx or UPS didn’t count.  C.C.A. 201545025 (Jun. 12, 2015). 

The petitioner was a licensed real estate appraiser and director of real estate valuation at two national CPA firms, but did not own an equity interest in either businesses.  After getting married, the petitioner had three condominiums that he and his wife rented out.  He claimed that he put in more than 750 hours in managing the rental activities and that he spent most of his time on rental activities, but did not provide any log to document his time.  His wife had some notes, but nothing that carefully substantiated the time she spent on rental activities.  However, she did construct an activity log after the IRS selected their return for audit.  For the year at issue, the petitioner and spouse claimed about $40,000 in losses from the rental activity.  The IRS denied the losses due to failure to satisfy the real estate professional exception to rents being passive.  The court agreed, and noted that the petitioner's work for the CPA firms did not count toward the750-hr test because he didn't have an ownership interest in those businesses.  The evidence also did not support the argument that petitioner's wife met the 750-hr requirement.  The court upheld the imposition of an accuracy-related penalty.  Calvanico v. Comr., T.C. Sum. Op. 2015-64.

The settlors created a dynasty trust in 1993 with terms authorizing the trustee to make charitable distributions out of the trust's gross income at the trustee's discretion.  The trust wholly owned a single-member LLC and in 2004, the LLC donated properties that it had purchased to three charities.  Each property had a fair market value that exceeded basis.  The LLC received the funds to buy the properties from a limited partnership's distribution to the trust in which the trust was a 99 percent limited partner.  The limited partnership owned and operated most of the Hobby-Lobby stores in the U.S.  The IRS claimed that the trust could not take a charitable deduction equal to the full fair market value, but should be limited to the trust's basis in each property.  The trust claimed a charitable deduction in excess of $20 million on Form 1041 for 2004, and later filed an amended Form 1041 increasing the claimed charitable deduction to just shy of $30 million, and seeking a tax refund of over $3 million.  The IRS denied the refund, claiming that the charitable deduction was limited to cost basis.  The trust paid the deficiency and sued for a refund.  On the trust's motion for summary judgment, the parties agreed that the donated properties were acquired by the trust with funds coming from gross income from a pre-2004 tax year.  Thus, according to the trust, I.R.C. Sec. 642(c)(1) allowed the charitable deduction to be computed based on the donated property's fair market value.  The court agreed, noting that I.R.C. Sec. 642(c)(1) allowed a deduction without limitation contrary to the basis limitation contained in I.R.C. Sec. 170, and that charitable deduction provisions are to be construed liberally in the taxpayer's favor.  The court noted that the donated properties were all acquired with distributions from the limited partnership to the trust, and each distribution was part of the LLC's gross income for the year of distribution.  Thus, the donated properties were clearly bought with funds traceable to the trust's gross income and were donated under the terms of the trust.  The court noted that the IRS admitted that there was no caselaw or other substantial authority that supported the government's position.    The court granted summary judgment for the trust.  Green v. United States, No. CIV-13-1237-D, 2015 U.S. Dist. LEXIS 151539 (W.D. Okla. Nov. 4, 2015). 

Tax preparers must pay an annual fee to obtain a preparer tax identification number (PTIN).  Effective November 1, 2015, the annual fee for a 2016 PTIN is $50 for new applications and renewals of existing PTINS.  The $50 fee will split between the IRS and a third-party administrator with the third-party receiving $17 for administration of the online system and provision of customer support and the IRS retaining $33.  IR-2015-123.

The petitioner claimed that he was a trader in securities and had, in an earlier year, made a mark-to-market election.  To do so, a Form 3115 must be attached to the return.  However, IRS didn’t have any evidence from the petitioner that a Form 3115 had been filed and the petitioner could not prove his claim that he had filed one in an earlier year.  The court held for the IRS that a valid mark-to-market election had not been made.  Poppe v. Comr., T.C. Memo. 2015-205.

The IRS has issued a news release to inform non-credentialed tax return preparers (preparers other than CPAs, attorneys or enrolled agents) of certain continuing education requirements that must be satisfied after 2015.  Specifically, the IRS noted that non-credentialed preparers must participate in the IRS' "voluntary" education program, the Annual Filing Season Program (AFSP).  Effective for tax returns and claims for refunds prepared and signed after 2015, non-credentialed preparers must complete either 15 or 18 hours of continuing education from IRS-approved continuing education providers which must be completed by December 31, 2015, to be able to receive a 2016 Annual Filing Season Program Record of Completion.  IR 2015-123.

The defendant was an order buyer of cattle (broker) that the plaintiff bought cattle from.  The parties entered into multiple contracts for the defendant to deliver 644 head of cattle to the plaintiff.  While written contracts were not produced, the bankruptcy trustee identified two separate contracts accounting for 572 of the delivered cattle - one executed on Aug. 26, 2010 and one executed on Sept. 17, 2010.  The defendant was paid by check three days after delivery (in mid-October), which were then voided and replaced by a single wire transfer on October 20, 2010.  The plaintiff filed bankruptcy on Dec. 6, 2010, and the bankruptcy trustee sought to set aside the payment under 11 U.S.C. Sec. 547(b).  The defendant, however, claimed that the payment amounted to a contemporaneous  exchange for value and that the payment was made in the ordinary course of business - both exceptions to 11 U.S.C. Sec. 547(b) contained in 11 U.S.C. 547(c).  On the ordinary course of business exception, the court noted that the defendant had not established a pattern of behavior and that the court could not conclude that the wire transfer was made in the ordinary course of business.  On the issue of substantially contemporaneous exchange for value, the court noted that the plaintiff's checks had not been dishonored, had not been presented to a bank for payment, and that the plaintiff had changed the form of payment by replacing them with the wire transfer.  As such, the parties intended the exchange to be contemporaneous, and it was, in fact, contemporaneous.  The court granted the defendant's motion for summary judgment.  In re Eastern Livestock Co., LLC v. Krantz, No. 10-93904-BHL-11, 2015 Bankr. LEXIS 3656 (Bankr. S.D. Ind. Oct. 28, 2015). 


Owners of adjacent tracts, for decades, had treated an invisible line between their properties as the boundary.  A new owner of one of the adjacent tracts had a survey taken which showed that the line was six-feet onto their tract and that the swimming pool on the adjacent tract was partially on their side of the surveyed line.  An existing split-rail fence was on the line between the properties, but had not been there the statutorily required 10-years to establish a boundary by acquiescence (IA Code §650.14).  The new owner removed the fence and the plaintiffs (owners of the adjacent tract) sued to quiet title to establish the line as the boundary between the properties via acquiescence.  The trial court determined that the elements for boundary by acquiescence had been satisfied.  Testimony at trial revealed that the adjacent owners had always mowed up to the line and maintained their respective tracts up to the line.  That was sufficient evidence of a physical division between the tracts that had been recognized for at least 10 years.  Mapes v. U.S. Bank National Association, N.D., et al., No. 14-1770, 2015 Iowa App. LEXIS 993 (Iowa Ct. App. Oct. 28, 2015).    

The petitioner was in the land development business and sold land to builders for home construction.  The petitioner accounted for the income from the sales under the completed contract method which applies to home construction contracts and other real estate construction contracts if the taxpayer estimates that the contracts will be completed within two years of the contract commencement date and the taxpayer satisfies a $10 million gross receipts test under the Treasury Regulations.  Under the completed contract method, no income is reported until the contract is complete irrespective of when contract payments are actually received.  The IRS asserted that the contracts didn't qualify for the completed contract method of accounting because the contracts could not be considered long-term and were not construction contracts because the taxpayer did no construction activities.   The court determined that the custom lot and bulk sale contracts were long term contracts and were construction contracts.  However, the court determined that none of the contracts were home construction contracts because the taxpayer merely paved the road leading to a home.  Thus, gain under the contracts could not be reported under the completed contract method.  The court also determined that none of the contracts involved a general contractor or subcontractor relationship.  The Howard Hughes Company, LLC v. Comr., No. 14-60915, 2015 U.S. App. LEXIS 18726 (5th Cir. Oct. 27, 2015), aff'g., 142 T.C. No. 20 (2014).

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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