Proof a Loan is a Loan

One interesting issue that often arises in IRS audits is whether what a taxpayer classifies as a loan is actually a loan.
The Tax Court recently released an interesting, taxpayer friendly, decision on this matter in Stanley v. Commission, TC Memo 2016-196.


The general rule being:


Courts consider various factors in determining whether the parties intended
a bona fide loan, such as: (1) the ability of the borrower to repay; (2) the existence
or nonexistence of a debt instrument; (3) security, interest, a fixed repayment date,
and a repayment schedule; (4) how the parties’ records and conduct reflect the
transaction; (5) whether the borrower had made repayments; (6) whether the
lender had demanded repayment; (7) the likelihood that the loan was disguised
compensation for services; and (8) the testimony of the purported borrower and
lender. Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C.
Memo. 1998-121; Frierdich v. Commissioner, 925 F.2d 180, 182 (7th Cir. 1991),
aff’g T.C. Memo. 1989-393; see also Todd v. Commissioner, T.C. Memo. 2011-
123, aff’d, 486 F. App’x 423 (5th Cir. 2012). The factors are “non-exclusive” and
provide a “general basis upon which courts may analyze a transaction”. Welch v.
Commissioner, 204 F.3d at 1230.


In Stanley, the taxpayer did not even have a plan of repayment, but his testimony that he believed the loan offered a good rate of return, and that he did intend to repay the loan helped meet the above tests. The taxpayer was also able to supply general promissory notes.


When working with loans, its always important that taxpayers document any agreements. I've seen these agreements even documented on a napkin over a dinner deal for a loan.


Relevant Citations: TC Memo 2016-196

Ability to Go to Tax Court - Suspended Corporation Status

In Urgent Care Nurses Registry, Inc. v. Commissioner, the Tax Court found that Urgent Care Nurses Registry, Inc. did not have jurisdiction to go to Tax Court because their charter was suspended under California law. This is due to the corporation not having legal capacity to prosecute the case.


This is a pretty common occurrence in the tax world and one that practitioners need to be aware of when representing a business entity. Before taking anything to Tax Court, all state obligations to make sure the company is in good standing with the state should be made.


Relevant Citation: TC Memo 2016-198

Statute of Limitations - Tax Court Docketed Cases

IRS released Chief Counsel Advice 201644020. The most interesting takeaway is that it is the IRS' belief that that statute of limitations on assessment will be suspended when a case is placed on the Tax Court docket for a deficiency hearing, even is there is no deficiency notice that has been issued.


Interesting piece of tax procedure in that the statutory notice of deficiency is not key for suspending the assessment statute.


Relevant Citations: Chief Counsel Advice 201644020

Gift Tax Statute of Limitations

IRC 6501(a) defines the statute of limitations on assessment of a gift tax return as three years from when it is filed.


IRC 6501(c)(9) provides an exception if a gift is not reported on the return to extend the statute of limitations.


In Chief Counsel Advice 201643020, the IRS determined that prior year gifts that were not disclosed on a gift tax return do not count as unreported gifts under IRC 6501(c)(9). If a taxpayer fails to disclose prior year gifts on a gift tax return, then the 3 year statute of limitations will still apply.


Relevant Cites:
Chief Counsel Advice 201643020
IRC 6501

IRS Auditors Need to Consider Collectability More Often

TIGTA just released a new report detailing the IRS' lack of following established procedures for determining collectability during audit.


56 percent of cases sampled did not follow collectability procedures. TIGTA estimated that 1,731 office audits and1,445 field audits were closed where the auditor did not follow established collectability procedures. These cases were later closed out as Currently Not Collectable by the IRS Collection division.


This is really important. Representatives need to bring this issue up more for their clients. Under the IRM, collectability needs to be considered throughout the audit process. If circumstances change, clients can get no change audit reports due to their inability to pay the audit adjustments.


IRM management is going to take corrective actions proposed by TIGTA to try to eliminate this issue in the future.


Relevant Cites: TIGTA Report

Admitting to Income in Non-Tax Cases

An Tax Court order was released in Swartz v. Commissioner. Swartz worked for Tyco and during his time there proceeded to steal $12.5 million through loan write-offs. A criminal case arose from the theft and Mr. Swartz was found guilty of theft.


The IRS used the criminal conviction to assert that Mr. Swartz had $12.5 million of income in the year he stole the money. The Tax Court found that he was collaterally estopped from arguing that he did not receive the $12.5 million. Under IRC 61(a), income from criminal endeavors are considered taxable income.


This case brings up a big issue for tax practitioners. When representing a client, there can often be many different things that can be affected by a single decision. Here, Mr. Swartz may have had a chance to settle his criminal case out of court. If he had, then he would not have been collaterally estopped from arguing he did not receive the income and may have avoided a hefty tax bill.


Relevant Cites: Tax Court order, Mark H. Swartz, Docket No. 3583-10

IRS e-Services Update Delayed

The IRS has decided to delay their e-Services update that would require users to re-register and validate identities. Originally, this was planned to take place on October 24th. The IRS has suspended this indefinitely.