The Year in Review 

2017 Year-End Tax Update

December, 2017

We’re Still Waiting

A Look Back – and Thanksgiving in New England, 2017

Loyal readers of this missive may recall that in our last two annual tax updates, “Make America Great Again!” and “Okay, Now What?” we considered the possibility that real tax reform might at some point be enacted.

When Mr. Trump was elected president, with a Republican majority in both houses of Congress, the possibility of major tax reform became, perhaps, a likelihood, inasmuch as key goals of both the president and the Republicans were a “huge” tax cut and the reform of the broken system of business taxation, in particular, the taxation of international operations of U.S. businesses.

As if to whet our appetites, last year was – as noted in these materials with both nostalgia and a lingering dollop of PTSD – the 30th Anniversary of the Tax Reform Act of 1986, the last truly great effort at simplifying the Code and enhancing the fairness of our tax system.

Some Random Thoughts on Taxes

“A fine is a tax for doing wrong. A tax is a fine for doing well.”

~ Mark Twain

 “For every tax problem there is a solution which is straightforward, uncomplicated and wrong.”

~ Anonymous 

“Politicians and diapers have one thing in common; they should both be changed regularly, and for the same reason.”
~ José Maria de Eça de Queiroz 

“The only difference between death and taxes is that Congress doesn’t meet every year to make death worse.”
~ Will Rogers 

And now here we are, a year after the election and 10 months after the president took office, and nothing has yet been accomplished! Instead, Congress and the administration have frittered away the year since our last update by debating such trivialities as immigration restrictions, health care in America and how to pay for it, Russian meddling in U. S. elections, border walls, and the like, while such critical items as whether private jets should still qualify for like-kind exchanges; local income taxes should no longer be deductible; whether the character of income from a carried interest should turn on how long the interest is held; or whether or not partners in law firms are “job creators” who should be entitled to a reduced tax rate on their hard-earned pay remain unresolved.

So, for our legislators and the administration, we practitioners are still waiting, but are now hoping that our holidays and/or year-end vacation plans will not be totally screwed up by your unaccountable delay in getting the job done.

In fairness, however, I must note that some progress has been made. As we sit down to draft these scribblings on Thanksgiving weekend, the House of Representatives has passed the Tax Cuts and Jobs Act, and the Senate Finance Committee has reported out its version of tax reform which, it is hoped, will be voted on by the Senate shortly.Unsurprisingly, no House Democrats voted in favor of the Tax Cuts and Jobs Act. More surprising, perhaps, is that 13 GOP representatives voted against the Act, 12 of whom are from high-tax states whose residents would be affected by the proposed cutback in SALT deductions. The 13th dissenter was North Carolina Representative Walter Jones who, according to Bloomberg said, “My no vote is for the next generation so they won’t be bankrupt.” Speaker of the House Ryan pointed out that “getting 227 members to agree on something as complicated as the tax code is extraordinary.” Amen, Mr. Speaker. But not all non-Democrats are happy. The National Association of Realtors, for example, warned that the home values of middle-class homeowners will fall as a result of the Act, while big corporations get huge benefits. Guess it turns on whose ox is being gored since I suspect not many realtors voted for Bernie Sanders last year. In other words, whose swamp is it that’s being drained?

It is not our purpose to summarize here the provisions of the Tax Cuts and Jobs Act; we have already given a seminar on tax reform proposals and, if and when legislation is finally enacted, we plan to be back to discuss its salient elements (i.e., our “Who’s Zooming Who” report). Instead, since it’s somewhat in our nature to bitch and to complain despite the numerous benefits in life that have been bestowed on your author, we simply remind our readers that as we predicted last year, your legislative solons will not get around to finishing their work on tax reform until the worst possible moment.

There is something traditional and reaffirming for a tax lawyer (and, I’d guess, just about every other American) about spending Thanksgiving with family in New England, although one could do without the apparent requirement here that all residents put on a Tom Brady jersey when leaving their homes, no matter how short in duration or trivial their trip. You see, New Englanders know a thing or two about taxes. New Hampshire’s state motto is “live free or die,” which I think has something to do with its having no personal income tax, which makes southern New Hampshire like Miami Beach, only colder and, in any event, a likely destination for expatriated citizens of Massachusetts. And Boston residents, back in the day, demonstrated that they were not always humorless Yankees, by donning Native American costumes and tossing cartons of British tea into the harbor to protest taxation without representation. Bostonians, like their fellow Americans in, say, New York, New Jersey, California, and Connecticut, for example, would learn in years to come that the taxation with representation was no big deal either, but that’s a story for another day.

OT, we mourn the passing of George Michael, late of the 1980s pop duo Wham! Long-time readers will recall our rather inexplicable habit of reciting some verse or other from the Wham! discography in each year’s materials. Goodbye, George, we’ll miss you.

As usual, we outline a number of those cases and rulings that we found significant, or just plain stupid. These materials are not intended to be exhaustive — after all, what fun would that be and, in any event, your author otherwise remains both gainfully employed and engaged in spending quality time enjoying the resurgence of Philadelphia’s sports teams. We nevertheless hope in here to have highlighted some tax items from the past year which should be useful in your practice, or at least entertaining.

Although I alone prepared this outline, so that none of my colleagues is responsible for either the final selection of cases or the discussion of their contents. I again thank my good friend and colleague, Tom Gallagher, whose well-developed sense of Schadenfreude inspired him to call to my attention a number of cases of “lovable losers”2 who made the included list in our decision of “what to leave in, and what to leave out.”3

So come along with me, fellow traveler, as we take a tour of selected 2017 tax developments. As always, I am honored by your time and attention.

Selected 2017 Developments

Meet the Numbers

For estate tax purposes, the applicable exclusion amount for 2018 decedents is scheduled to increase to $5.6 million unless as expected, under proposed tax reform, it is doubled from 2017’s $5.49 million, or increased to some different amount. Clients should be advised to defer their effective date of death until after this year. The annual exclusion from gift tax is scheduled to increase to $15,000 from $14,000.

Cost-of-living adjustment to various Code limitations and thresholds have been announced. Thus, for example, the Social Security wage base increased only modestly to $128,400; the limitation on elective salary reduction deferrals to qualified plans increases to $18,500; but the “catch-up” contribution amount remains $6,000.

In October, the European Commission ordered Luxembourg to recoup from Amazon 250 million euros in corporate income tax. Both Amazon and Luxembourg contest the determination that a Luxembourg tax ruling afforded Amazon anti-competitive state aid.

According to its 2016 databook, IRS processed more than 244 million returns and supplemental documents in its 2016 fiscal year. 131 million of the 149 million individual income tax returns were filed electronically, and more than 120 million of the individual return filers received a refund. (Your author did neither.) Only about 0.7 percent of all 2015 individual income tax returns were examined by IRS. Of the C corp returns filed, 1.1 percent were audited, but audit rates for larger corporations were significantly higher. Continuing a recent trend, 76 percent of the individual income tax return examinations were correspondence audits, and only about 24 percent of the examinations were in person. More than one-third of the audited individual income tax returns were examined based on an earned income tax credit claim.

The IRS Criminal Investigation Division announced in February that it had opened 12 percent fewer investigations in 2016 than in 2015.

An obvious takeaway from these statistics is that, as a general matter, the likelihood of being audited is very small. Clients are, nevertheless, urged, in Spike Lee’s famous dictum, to always remember to do the right thing.

In the heat of the debate over the tax reform and, more particularly, who benefits and who doesn’t, IRS statistics reveal that the highest grossing 5 percent of individual taxpayers paid nearly 60 percent of the total federal income tax for 2014, and the lowest grossing 50 percent of individual return filers paid 2.75 percent of the total. The disparity would not be quite so great, however, were employment taxes taken into account. The average gross income reported on individual income tax returns for 2014 was approximately $69,500, a 6.5 percent increase from 2013’s figure.

The National Conference of Bar Examiners reported in April that the passage rate for the Multistate Bar Exam fell to a historic low in 2016, with only 58 percent of those taking the exam achieving a passing grade. For the uninitiated, the Multistate Bar Exam consists of 200 multiple-choice questions. Most state bar examiners combine the multistate with a second examination (often an essay test) that is more focused on the law for that state. As you might expect, passage rates varied widely from state-to-state. Pass rates in Missouri and Minnesota were 78 percent and 71 percent, respectively, but only 50 percent passed in South Dakota. The pass rate in New Jersey was an average, but pitiful, 58 percent. As recently as a decade ago, the overall pass rate for the Multistate Bar Exam was nearly 70 percent. Readers may be interested to learn that more than 100,000 people applied to law school in 2004, but only 54,500 applied in 2015. One inference to be drawn from these statistics is that the pool of aspiring new lawyers has gotten significantly dumber as the 21st century rolls on, partly accounting perhaps, for the proliferation of online do-it-yourself legal sites. Let’s see how well the robots do on the bar exam in years to come.

On those days, gentle reader, when you really want to tell the boss to take this job and shove it (come on, don’t lie to me, I know you have all had days like that!), have you ever mused about whether there was a salary so high that if they paid you that much, it would forever keep you from quitting, no matter how unpleasant your workday had been? Well then, consider the case of Eric Bledsoe, shooting guard, late of the NBA’s Phoenix Suns. Seems that on Sunday night, October 22, Bledsoe, whose salary for the year was $14.5 million, tweeted “I don’t wanna be here.” (The Suns were then 0-3.) The next day, the Suns’ general manager was quoted as saying about the tweet, “[Bledsoe] said he was at a hair salon. I don’t believe that to be true. He won’t be with us going forward.” Bledsoe was subsequently traded. So, at least for some of us (?!), $14.5 million is not enough to keep from quitting. Reminds me of an old friend and former partner who, back in our salad days, famously declared that “excess is not enough.”

Employment Tax Matters

In "Legal Advice Issued by Field Attorneys," LAFA 20171201F, IRS determined that a taxpayer was responsible for employment taxes when the Professional Employee Organization (PEO) with which it had contracted failed to deposit and pay the employment taxes. The taxpayer had entered into a series of employee leasing arrangements for its workforce whereby the PEO retained the persons who worked at the taxpayer’s locations. The PEO was required to administer the taxpayer’s payroll and to process and pay the wages from its own account based on hours reported to it by the taxpayer. The contracts also obligated the taxpayer to let the PEO know the wages to be paid to each employee and to remit to the PEO the amount of wages and the employee’s share of FICA taxes before the end of the payroll period. When the PEO failed to pay the employment taxes, IRS sought to recover those amounts from the employer. The LAFA concludes that the taxpayer was the “employer” for purposes of § 3401(d)(1), because it remained the common law employer and, in substance, remained in control of the payment of wages. The LAFA also concludes that no relief is available under Section 530 of the Revenue Act of 1978, finding that Section 530 only deals with controversies involving the employment status (i.e., employee or independent contractor) of the service provider. The LAFA did agree, however, that the interest-free adjustment provisions of § 6205(a) should apply, given taxpayer’s reliance on the PEO. The analysis of LAFA 20171201F is further developed in CCA 201724025 in which IRS emphasized its conclusion that because the PEO did not assume legal responsibility for the payment of wages to the employees, it would not be considered to be in control of the payment of the wages under § 3401(d), and should, therefore, be viewed as a conduit for the payment of wages and employment taxes. Thus, the taxpayer remains the “employer” for employment tax purposes.

As a result of problems like those described in the preceding paragraph, the Tax Increase Prevention Act of 2014 enacted a rule that a “certified PEO” (and no one else) would be treated as the employer for purposes of liability for employment taxes with respect to wages paid by the PEO. A certification program was to have been developed by IRS by July 1, 2015, but the date on which IRS was to begin accepting applications for PEO certification was delayed until July 1, 2016. (The PEO’s in the LAFA and CCA were not certified PEO’s under TIPA.) In January 2017, IRS published its requirements for a PEO to remain certified and procedures for revocation of certification.

In Vincent J. Castighola and Marie Castighola, et al. v. Commissioner, the Tax Court rejected an effort by the members of a Mississippi law firm LLC to avoid self-employment taxes on a portion of their income from the firm. The LLC made guaranteed payments to the three members in amounts commensurate with local salaries, as determined by a survey of legal salaries in the area, and the members treated those amounts as net earnings from self-employment. They excluded from self-employment income the rest of their share of the firm’s profits on the theory that as to such amounts, they stood in relation to their firm in the same manner as limited partners. § 1402(a)(13) excludes from SEI the distributive share of the income of a limited partner. Because of their work in the practice, the entire share of each member’s income from the firm was self-employment income.

In Information Letter 2016-0081, post-retirement payments received by a taxpayer were held to be subject to self-employment income tax because of a nexus between the amount received and a trade or business carried on by the individual. IRS determined that the payments were a result of taxpayer’s 34 years of service with his company, citing Peterson v. Commissioner and Newberry v. Commissioner.

Retirement payments to retired law firm partners are excluded from self-employment income under § 1402 if the partner “rendered no services with respect to any trade or business” carried on by the law firm. The Tax Section of the New York State Bar Association asked Treasury and IRS to clarify whether retired partners would jeopardize this exclusion if they performed pro-bono services, questioning whether pro-bono work could be considered a “trade or business” of a law firm since it is not a profit-making activity.

Where an employer incorrectly classifies a worker as an independent contractor, rather than an employee, the employer can be liable for the worker’s income and employment taxes, as well as for the employer’s share of FICA. But the liability for the employee’s taxes will not be applied if the employer can prove that the worker paid the taxes that he or she owed, even though no taxes were withheld. In Mescalero Apache Indian Tribe v. Commissioner, IRS reclassified many independent contractors to the tribe as employees. Although the tribe was able to show that a number of the reclassified workers had in fact paid some or all of their taxes, it could not locate 70 former workers who were reclassified as employees by IRS. IRS refused to provide the tribe with information about the tax payments that the 70 workers had made, citing the § 6103 prohibition on disclosing tax return information. In a reviewed decision of the tribe’s motion to compel discovery, the court helpfully found that an exception in § 6103 allowing disclosure in administrative or judicial tax proceedings authorized the disclosure of information to the tribe to the extent it showed whether the workers had paid taxes on amounts paid to them by the tribe.

Reversing its holding in prior cases and adopting the reasoning of the Eighth Circuit, the Tax Court in Martin v. Commissioner held that where a corporation paid its sole shareholders both wages for work and rent for farmland, the rent was not subject to self-employment income tax. The critical element, said the court, was that the rent received by the taxpayers was equal to or less than fair rental value of the land. In such event, the rent is presumed to be unrelated to the parties’ employment arrangements and, therefore, not SEI, absent a showing by IRS of a nexus between the rent and the taxpayers’ obligation to materially participate in the agricultural production business.

Practice and Procedure

Proposed regulations eliminate the requirement that § 754 elections be signed. Taxpayers are permitted to rely on this proposed regulation for periods prior to its proposed effective date of partnership years ending on or after the proposed regulation is published in final form.

In Steele v. U. S., the district court in Washington, D.C., upheld the authority of IRS to require tax return preparers to obtain a PTIN, but permanently enjoined IRS from charging a fee to obtain or renew a PTIN. It further ordered IRS to refund PTIN fees that practitioners had previously paid. IRS has appealed this decision, but PTIN’s are currently being issued and renewed without charge.

Practitioners should by now be aware that IRS no longer automatically sends out closing letters with respect to estate tax returns. For returns filed after May 31, 2015, IRS will issue a closing letter at the request of the estate, but no earlier than four months after the return is filed. However, Notice 2017-12 alerts taxpayers, state tax departments, probate courts, etc. that they can instead request an account transcript on Form 4506-T, and an account transcript that includes Code “421” and the explanation “Closed Examination of Tax Returns” confirms that the IRS examination is complete.

In a May 2017 memo regarding frequently asked questions and other items posted to, the SB/SE Division alerted its auditors that items on its website that have not (yet) been published in the Internal Revenue Bulletin are not legal authority and so should not be cited to sustain a position unless an FAQ specifically states otherwise or IRS indicates otherwise by press release, notice, or announcement published in the Internal Revenue Bulletin. Got it? In other words, “if we only post, your reliance is toast.”

IRS announced at the ABA Tax Section meeting that it will again begin to grant certain taxpayer requests for in-person conferences with IRS Appeals, beginning with field cases. In-person conferences will not be granted for smaller cases worked out of IRS campuses, at least for the moment; such cases will continue to be handled by phone or correspondence. According to the national taxpayer advocate, 75-80 percent of individual taxpayer appeals are currently conducted by correspondence.

IRS announced in June that user fee payments for letter rulings and requests for closing agreements and certain other rulings made after August 15, 2017, will have to be made electronically on IR 2017-102.

The new partnership audit rules and procedures take effect beginning generally with 2018 tax returns. Not all of the anticipated regulations to these rules have yet been proposed, and certain aspects of the proposed regulations, particularly those dealing with the “partnership representative,” have been criticized as overly broad. We have previously dealt with these rules in other materials. Practitioners are reminded, however, that not only should partnership or LLC agreements that are currently being drafted take these provisions into account, but previously executed agreements should be reviewed with clients.

In a reviewed decision, a unanimous Tax Court upheld the disallowance by IRS of a $33 million charitable contribution deduction where the taxpayer neglected to fill out the line in Form 8283 that asks the taxpayer for its basis in the donated property, here, a remainder interest in an LLC that held commercial real estate subject to a long-term lease. Reporting the basis might have alerted IRS to the fact that the taxpayer was claiming that the donated property had appreciated by 10 or 11 times in the approximately year and one-half from acquisition to donation. Be careful out there. RERI Holdings I, LLC v. Commissioner.

They say “go big or go home.” So, in another charitable contribution case, a good-hearted West Virginia couple in 2011 donated (so they say) more than 20,000 distinct items of property to Goodwill Industries, including, inter alia, 1,040 items of boys’ clothing, 36 lamps, and 14 filing cabinets that stored the 3,153 books they gave. The aggregate value of the gifts they claimed for 2011 was $145,250. In disallowing all but $250 of the deduction, the court cited a lack of substantiation and questioned the taxpayers’ credibility. Mark Robert Ohde and Rose M. Ohde v. Commissioner. The Ohde’s also claimed property donations from 2007-2010 in the aggregate of $292,143 and $105,000 for the years 2012-2013. But for demonstrating that it’s better to give than receive, a very Merry Christmas to you, Mr. and Mrs. Ohde, from your friends here in Pennsylvania.

In Jacobs v. Commissioner, the Tax Court, perhaps somewhat surprisingly, allowed the Boston Bruins to deduct 100 percent of the cost of meals provided to the players and staff at away game hotels as a de minimis fringe benefit, rather than only 50 percent. The court concluded that the hotels at which the meals were served were employer-leased eating facilities, because of the vital importance that supervised healthy meals and the conduct of team business on the road played in the team’s success. (In that case, the Flyers should definitely eat out more!)

More than 30 years ago, in U.S. v. Rodgers, the U.S. Supreme Court ruled that § 7403 permits a court to enforce a tax lien against a taxpayer by ordering the sale of an entire property, even though a non-delinquent taxpayer also has an interest in the property. The non-delinquent taxpayer, of course, would be entitled to its share of the proceeds of the forced sale. For a recent case analyzing the factors set forth in Rodgers for when a district court, in its discretion, might conclude to grant or not to grant IRS’s motion to compel a sale in those circumstances, see U.S. v. Davis. The Davis Court allowed the lien foreclosure and sale.

On the other hand, in Cordaci v. U.S., a district court, though concluding that a home owned as tenants by the entireties taxpayer and his wife was subject to a federal tax lien, rejected IRS’s motion to force a sale of their home in order to collect a liability of taxpayer-husband only. Exercising its discretion under the Rodgers case, the court instead ordered the taxpayer to pay IRS the imputed fair rental value of the house of $1,500 per month. On appeal, the Third Circuit concluded that the district court had erred in its analysis of the Rodgers factors and ordered the lower court to make a further analysis of the Rodgers factors. Among other things, the Appeals Court noted that a sale of only the taxpayer’s interest in the house was unlikely to produce the same or a greater amount of proceeds than could be realized from the sale of the entire property with half of the proceeds to be paid to IRS. The Appeals Court apparently was unfazed by the fact that the property in question was the taxpayer’s and his wife’s personal residence.

The Ninth Circuit, in a split decision, ruled in May v. U.S., that the § 6501(c)(10)(A) special one-year statute of limitations on the penalty for failing to disclose a listed transaction did not begin to run where the taxpayer neither filed a reportable transaction disclosure statement on Form 8886 nor sent that form to the Office of Tax Shelter Analysis. The district court had ruled in favor of the taxpayer because IRS by March 2010 had, in the court’s view, sufficient information to determine that the taxpayer had engaged in the listed transaction but did not assess the § 6707A penalty for failure to disclose until February 2012.

In the tax-world equivalent of “the dog ate my homework” defense, the Tax Court in Bulakitis v. Commissioner, after disallowing a number of deductions that the taxpayer claimed on his 2011 and 2012 returns, upheld the accuracy-related penalty despite taxpayer’s claim that his TurboTax software lured him into claiming improper deductions. One day, Mr. Bulakitis, the robots will get even with us!

They say that in life, timing is everything. For proof of the accuracy of that old adage, look no further than Estate of Kollsman v. Commissioner. In that case, Ms. Kollsman, at the time of her death, owned a 17th-century painting by Pieter Brueghel the Younger titled “Village Kermesse, Dance Around the Maypole.” A Sotheby’s Old Master Paintings expert expressed the view to decedent’s executor that the painting would likely sell at auction for $600,000 – $800,000. The executor, although using a value in that range for the estate tax return, on the advice of an art restoration expert, subsequently decided that the painting should be cleaned. Following that restoration, but while an audit of the estate tax return was still ongoing, the estate hired the Sotheby’s expert, who had opined as to the painting’s value, to auction it off; it sold at auction for $2.4 million! At trial, the court rejected the Sotheby’s expert’s views, finding both that the painting wasn’t all that soiled to begin with and that the art market hadn’t appreciated all that much since he had first expressed his views as to valuation. The court believed the Sotheby’s expert to be conflicted, hoping that the low value he put on the painting in his letter to the executor would induce the estate to hire Sotheby’s to sell it. The important takeaway from the case is don’t sell a valuable piece of property as to which there is a valuation dispute until after the estate tax examination is concluded if there is any chance that the sale proceeds will be materially higher than the appraised value. (Duh!)

Selected Developments of Note

The IRS ratcheted up its war on micro-captive insurance companies on a number of fronts. For the last three years, micro-captives have been named to IRS’s “dirty dozen” list, and micro-captives were classified as transactions of interest in Notice 2016-66. In addition, the Office of Tax Shelter Analysis is analyzing data on micro-captive structures with a view to determining those, if any, to be named listed transactions.

Now, in the first reported decision of three cases regarding micro-captives that have been tried in the Tax Court, Avrahami v. Commissioner, Judge Holmes sustained the assertion by IRS that the captive insurers did not provide insurance because of a lack of adequate risk distribution (or, in the court’s verbiage, an insufficient number of “independent risk exposures”). The court went on to hold that the premiums paid were not for insurance in a tax sense because, among other things, no claims had ever been processed; the premium for terrorism coverage was exorbitant and designed to come as close as possible to the (then) $1.2 million limit of § 831(b); and some of the premiums were “recycled” back to the premium payors — in short, the arrangement did not meet commonly accepted practices of the insurance business.

Although the facts in Avrahami were not good, the court did not agree to the imposition of the accuracy penalty, finding that the taxpayers had relied in good faith on a professional adviser, thereby proving the late Tom Petty’s dictum that “even the losers get lucky sometimes.” (We regret no longer being able to see Tom Petty in concert.)

It is hoped that the decisions in the other two micro-captive cases, Caylor v. Commissioner and Wilson v. Commissioner, will provide further guidance on what works and what doesn’t.

In a somewhat surprising decision, the Tax Court in Grecian Magnesite Mining, Industrial & Shopping Co., SA v. Commissioner held that the capital gain recognized by a non-U.S. person from the redemption of its interest in an LLC that was engaged in a U.S. trade or business (i.e., mining and the sale of minerals) was not U.S. source effectively connected income and, therefore, not subject to federal income tax except to the extent attributable to interests in U.S. real property. In so holding, the court refused to follow Rev. Rul. 91-32 that had reached the opposite conclusion. Note that proposed tax reform legislation would overturn the court’s decisions.

In the Hamm case, an executive exercised nonqualified stock options and immediately sold the option shares to the underwriter in his company’s IPO. The Court of Federal Claims rejected Mr. Hamm’s position that the underwriting fees were deductible in arriving at the wages recognized on the option exercise, holding instead that the fees gave rise to a capital loss.

The Tax Court, in Community Education Foundation v. Commissioner, upheld the revocation of the organization’s exempt status as a private foundation under the operational test of § 501(c)(3) as a result of its inactivity from 2001 – 2008. Because it did not carry on any of the activities that it promised to undertake in its exemption application for such a lengthy period, it was not operated exclusively for an exempt purpose, said the court.

In an interesting ruling, IRS determined that a proposed testamentary gift by the founder of a private foundation of a 99 percent nonvoting interest in an LLC whose sole asset was a promissory note payable to founder would not constitute a direct or indirect act of self-dealing. One of the founder’s sons would be the LLC manager. Because the foundation would have no management control or rights to compel distributions, the foundation would not acquire an interest in the note, so the proposed transfer of the LLC interests would not be an act of self-dealing under § 4941. LTR 201723005.

In Morrissey v. United States, the Eleventh Circuit affirmed a district court decision that Mr. Morrissey’s in vitro fertilization costs could not be deducted as medical expenses because the expenses did not affect his own reproductive function. Mr. Morrissey, who is gay, had argued that the lower court’s decision was a discriminatory violation of his rights to due process under the Constitution.

For a useful analysis of the “grouping” rules of § 469, see Hardy v. Commissioner, in which the Tax Court rejected IRS’s attempt to group as one unit Dr. Hardy’s income from his plastic surgery practice and his income from the ownership of a 12.5 percent interest in an LLC that operated a surgery center. Hardy treated the surgery center income as passive (although he had reported it as active in earlier years), and deducted passive activity losses from other activities against that income. The grouping regulations appear in § 1.469-4, which also gives IRS the right to “regroup” the taxpayer’s activities where the grouping does not produce an appropriate economic unit and a principal purpose of the taxpayer’s treatment of his activities is to circumvent § 469.

In a prior update, we reported on the Stine LLC case, in which a Louisiana district court held that two new retail stores of the taxpayers were placed into service for depreciation purposes when they received certificates of occupancy allowing the taxpayer to install equipment and shelving but which did not allow customers (yet) to enter the buildings. Now, in AOD 2017-02, IRS has announced its non-acquiescence with the decision.

We continue to await the Tax Court’s decision on the value of Michael Jackson’s name and likeness rights for estate tax purposes. An expert witness for the estate testified at trial that at the time of his death, the King of Pop’s image was in “nuclear winter” because of child abuse allegations. The IRS has determined a $505 million deficiency and $197 million in penalties, attributable in part to valuing the name and likeness rights at $434 million; the estate had returned them at $2,105!

In the “rich get richer” category, Amazon defeated IRS against transfer-pricing adjustments made by IRS with respect to Amazon’s transfer of intangibles to a foreign subsidiary. The Tax Court concluded that the Service’s determination was arbitrary and capricious.

Dumb and Dumber — The Tax Edition

Readers of last year’s update will recall how Ireland vigorously protested the 2016 ruling by the European Commission ordering Ireland to collect 13 billion euros in back taxes from Apple resulting from sweetheart tax rulings that the commission found constituted impermissible state aid. The rulings reportedly reduced Apple’s Irish subsidiary’s effective tax from 1 percent in 2003 to 0.005 percent in 2014. Although Ireland could presumably use the funds, its new finance minister continues to appeal the commission’s order as, of course, does Apple. The European Commission has since sued Ireland for not collecting this amount.

Think our tax system is bizarre? Well, the Court of Justice of the European Union ruled that Belgium’s so-called “fairness tax”violates the EU’s freedom of establishment principle if it treats nonresident companies less favorably than resident companies. The “unfairness” results from the possible inclusion in the Belgium tax base of profits earned outside Belgium simply because the nonresident company had a permanent establishment in Belgium. So, in other words, Belgium has a “fairness tax” that itself may be unfair. Gee, who knew? In dealing with a very difficult matter many years ago, your author decided to appeal to the U.S. Department of Fairness but was told that we didn’t have one of those here. Serious oversight by our Founding Fathers, if you ask me.

In an incredibly tone-deaf decision, IRS, in September, hired Equifax to verify taxpayer’s identities. This was a mere two months after Equifax revealed that its website had been hacked and information about 145 million persons had been accessed. Worse, IRS never considered any other bidders, believing that Equifax was the sole source vendor, meaning IRS believed no other company could have performed the required services. When Congress predictably went berserk on learning of this arrangement, IRS withdrew from the contract. This reminds me of the old line about the two drunks leaning against one another to keep from falling or, as Dr. Phil would have said to the Service, “What the hell were you thinking!”

New York imposes a 4 percent amusement tax but exempts musical performances from its reach. Now, the owner of Larry Flynt’s Hustler Club in New York has appealed from a ruling that the performances in the club were “sexual fantasy, not dance.” Among other facts, the petition alleges that the agent never visited the club to view any of the shows (which star topless dancers), and that the lower court had overstepped its bounds by deciding, in its "Qualitative Opinion," that the dances weren’t sufficiently “artistic” or “worthy” to qualify for the exemption. (Come on, gang, not everyone wants to see the 13th revival of A Chorus Line and, in any event, the show at the Hustler Club has to be better than enduring a Broadway production of Cats.) The Appeals Court has since upheld the lower court decision. In an unrelated matter, an El Paso, Texas, gentlemen’s club filed suit against the Texas Department of Public Safety because its officers “stormed” the club just before last call to determine if outfitting its dancers with latex-wear successfully avoided a tax imposed on nude entertainment. Texas’s tax code imposes a fee of $5 per customer in “Sexually Oriented Businesses,” or “SOB’s.” Folks, you can’t make this stuff up.

This year’s rogues’ gallery includes such worthies as:

  • Former U.S. Tax Court Judge Kroupa who, along with her husband, was sentenced to a prison term for conspiracy to commit tax fraud.
  • Robert Bertrand of Connecticut, the CFO of Soupman, Inc., which licenses the recipes of the man who inspired the “Soup Nazi” episode of Seinfeld, was charged with 20 counts of tax evasion.
  • Jeffrey Moffatt was disbarred by the U.S. Tax Court for trying to trade legal services for nude pictures and sexual favors from a prospective client. Moffatt had been disbarred by Arizona for the same conduct.
  • Mike “The Situation” Sorrentino, of Jersey Shore fame, was charged with tax evasion and conspiracy to defraud the United States in a superseding indictment that supplemented charges brought against him in 2014. In other words, Mike’s situation just got worse.
  • Former Morgan Stanley banker and energy investor Morris Zukerman was sentenced to nearly six years in prison and a $10 million fine for avoiding taxes, including those from a $130 million sale of a petroleum products company. Zukerman was 72 years old at the time of sentencing.
  • Collingdale, Pa.,’s own, Ahmed Kamara, received a seven-year sentence for filing and assisting in the filing of false returns, among other offenses. Kamara, the manager of Medmans Financial Services, a Philadelphia tax management business, had a fondness for using the names of foster children as dependents on a number of his clients’ returns.

Taxpayer Judith Barrigas called IRS Revenue Agent Jimmy Forsythe to try to resolve some issues regarding her tax liabilities. Just before the taxpayer called him, Jimmy had called into The Howard Stern Show on Sirius XM Radio and was on hold waiting to talk to Howard. While still on hold, Jimmy conversed with Judith about her tax issues when Stern picked up Jimmy’s call, and a portion of the conversation regarding her taxes was heard by 1.2 million Americans who had tuned into Howard’s show. Barrigas has now sued IRS and Howard Stern for negligence, invasion of privacy, and unauthorized disclosure of tax return information.

But my favorite case of life imitating art involves Jack Vitayanor, Esq., an attorney with the IRS Office of Professional Responsibility and adjunct professor who taught ethics at Georgetown Law School, who was arrested for conspiracy to distribute methamphetamine. Breaking bad, huh Jack?


So now, my friends, as we count our blessings, await some important new tax legislation, look forward to celebrating with our loved ones during this season of miracles, and contemplate with both interest and trepidation the brave new tax world of 2018, I remind you that as I have long believed, “the best things in life aren’t things.”

And from our house to yours, we wish each of you, season’s greetings and a healthy and prosperous new year.



1 Subsequently, early in the morning of Saturday, December 2, the Senate, by a thin margin, passed its own version of the Tax Cuts and Jobs Act. The two bills will now have to be reconciled before a final version can be voted on.

2 From “Honky Tonk Heroes,” by Waylon Jennings.

3 “Against the Wind,” by Bob Seger.



Dennis L. Cohen

Of Counsel

(215) 665-4154

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