Failure to File Penalties - Reasonable Cause

In John Probandt, v. Commissioner (2016) TC Memo 2016-135, I found this case interesting for the failure to file penalty discussion.


Mr. Probandt failed to file a tax return and was assessed failure to file penalties for his business venture. His argument for not filing was that he believed his income was lower than his expenses, and thus would not have a filing requirement. On audit, it was determined there was enough income to trigger a filing requirement for his business venture.


The court discusses how a regular person making the determination that his expenses are higher than his income is not enough reasonable cause. However, had he received professional advice or undertook any other investigation to determine if he had a filing requirement, then it would satisfy the reasonable cause standard.


Overall the case is a good read too for the substantiation requirements for M&E and also a discussion on the Cohan rule.


Relevant Cites: Probandt v. Commissioner TC Memo 2016-135

FBARs - Online Gambling Accounts

Interesting case with US v. Hom (CA 7/26/2016), 118 AFTR 2d, 2016-5057. For FBAR purposes, offshore online gambling accounts, such as ones for online poker, are not considered financial companies for FBAR reporting purposes.

Abuse of Discretion - Arbitrary, Capricious, or Without Sound Basis in Fact or Law

TC Memo 2016-134, Mark West v. Commissioner of Internal Revenue was released on July 19, 2016. The case is pretty standard where a pro se taxpayer raised some rather frivolous arguments after a CDP hearing.


The one interesting tidbit comes on page 8 where the court brings up the abuse of discretion argument. For the relevant citations: "We review the settlement officer's administrative determinations regarding nonliability issues for abuse of discretion. Hoyle v. Commissioner, 131 T.C. 197, 200 (2008). Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. See Murphy v. Commissioner, 125 TC 301, 320 (2005), aff'd 469 F.3d 27 (1st Circ. 2006)."


In this case the court considered the following:

1. Properly verified that the requirements of any applicable law or administrative procedure have been met;
2. Considered any relevant issues petitioner raised; and
3. Determined whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.

This is a good list to keep in mind for practitioners. If looking to advance this type of argument, these are the points that need to be verified and documented.


The second major take away is, "It is not an abuse of discretion for a settlement officer to decline to consider a collection alternative where the taxpayer does not place a specific proposal on the table." So, when looking to advance this type of argument, and really any time a practitioner works with a settlement officer, the practitioner should always have an alternative to the IRS action.


Relevant Cite: TC Memo 2016-134

IRC 83(b) Elections

The IRS has adopted the new final regulations for Reg. 1.83-2. Under IRC 83, when a person performs services in exchange for property (typically stock), the excess fair market value of the property over any amount paid for the property is included in the person who performs the service's gross income. (The provider must have transferable rights and not be substantial risk of forfeiture of the property). IRC 83(b) allows an election to include this amount in gross income as compensation for services.


Under the new regulations, taxpayers do not need to file a copy of the 83(b) election with their tax return any more.

Tax Matter Partners

Great read from the IRS Field Attorneys on Tax Matter Partner (TMP). This is a subject I see done incorrectly a lot on tax returns.


First, do not have a TMP on a non-TEFRA return. It is incorrect and could be an issue for your client in the future. Second, if you have a TEFRA partnership, for the most part, the TMP must be a general partner. They cannot be a limited partner (except in very limited circumstances).


The interesting thing that IRS Field Attorney Advice highlight in 20161801F is that often practitioners need to look to local law and partnership agreements before selecting an TMP.


Relevant Cites: IRS Field Attorney Advice 20161801F

TEFRA - Sham Partnership

Not really new or exciting news, but the IRS released Field Attorney Advice 20162901F. In it, the IRS details whether or not an item is an partnership item or not. This is a good read to get some context before starting a TEFRA audit.


One interesting thing from the advice is that the determination a partnership is sham is a partnership item.


Relevant Cites: Field Attorney Advice 2016201F

IRS Determination on Crowd Funding

On June 24, 2016, the IRS released Information Letter 2016-0036 that looks at whether funds from crowd funding are considered gross income or not.


The basic analysis is under IRC 61(a), all income from whatever source derived is income, unless there is an exception to treating it as income. The IRS takes a facts and circumstances approach to crowd funding money.


There are three circumstances the IRS believes money raised in crowd funding is not considered income: 1) if the money is a loan that must be repaid (this is not really applicable to most crowd funding), 2) the money is capital contributed to an entity in exchange for an equity interest in capital (again, not really common in crowd funding) and 3) gifts made out of detached generosity and without any "quid pro quo." For the third rule, the IRS makes note that a voluntary transfer without "a quid pro quo" is not necessarily a gift for federal income tax purposes.


Clients that are raising money with crowd funding should be aware of this stance, especially if they are providing some sort of gift in exchange for the crowd funding funds.


Relevant Cites: Information Letter 20016-0036

Gain Exclusion on Sale of Home PLR - Unforeseen Circumstances

Interesting PLR released, PLR 201628002, by the IRS. Typically, a taxpayer can exclude $250,000 or $500,000 of gain on the sale of a primary residence if they used the property as a primary residence for two of the previous five years.


Taxpayers can use a pro-rated amount of the exclusion if they have an unforeseen circumstance which caused them to fail to meet the two year primary residence test.


Here, taxpayers were married and had a daughter. They purchased their first residence. The residence was a condo with two bedrooms and two baths. Eventually, the couple had a son and sold the condo prior to living there for two years to move into a bigger house.


The PLR ruled that the birth of the child was an unforeseen consequence and the taxpayers were eligible to use a pro-rata exclusion amount.


It should be noted, the PLR comments that the condo was pretty small. It even elaborated that the child's small bedroom was also used for the dad's office and as a guest room. The outcome of this PLR probably would not have been the same had the taxpayers condo been a 4 bedroom condo.


Relevant Cites: PLR 201628002