CBIZ & MHM Executive Education Series™

Eye on Washington: Quarterly Business Tax Update

August 6, 12, and 13

Presented by: Stephen C. Henley, CPA National Tax Practice Leader, CBIZ MHM, LLC William M. Smith, Esq. Managing Director, CBIZ MHM, LLC National Tax Office

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Before We Get Started…

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Today’s Presenters

Stephen C. Henley , CPA Senior Managing Director, CBIZ MHM 770.858.4443 | shenley@cbiz.com Steve has 30 years experience in serving the tax needs of clients in a variety of industries including retail, distribution and manufacturing, services, technology and communications. In serving as lead tax engagement executive, Steve’s focus is identifying and executing value creating strategies to meet the needs of his clients in a variety of technical areas, such as revenue recognition, acceleration of deductions, research and experimentation credits, state and local tax minimization, M&A tax structures, international tax planning and tax implications of compensation programs.

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | billsmith@cbiz.com Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals, including mergers and acquisitions, domestic and international investments or divestitures, and the review, negotiation and drafting of tax aspects of business agreements.

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Legislative House Votes to Cut IRS Budget House Votes to Makes §179 Expensing and Bonus Depreciation

Permanent Extenders Update Inversions Update

Administrative PALs and Real Estate Professionals Employer Reimbursement Plans for Employees’ Heath Insurance Costs TIGTA Report on Unpaid Employment Taxes IRS Notice 2014-33: FATCA Transition Relief for Good Faith Compliance Regs: Alternative Simplified Research Credit on Amended Returns Regs: Longevity Annuities and Retirement

Today’s Agenda

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Cases ACA contraceptive decision (Burwell v. Hobby Lobby Stores: USSC) Inherited IRA not exempt from bankruptcy estate (Clark v. Rameker: USSC) Follow up from last EOW –

Bobrow regulations withdrawn Howard Hughes Co LLC v. Comm’r – completed contract method on residential home

construction contracts after Shea Homes Circuits split over ACA premium tax credits and subsidies Bross Trucking – Personal goodwill DC District Court enjoins IRS from enforcing contingent fee ban under Cir. 230 (Ridgely

v. Lew ) Blown attempt to have IRA invest in real property (Dabney v Comm’r) Minority shareholder claim held to be non-deductible reorganization expense (Ash

Grove Cement v. U.S.) Horse breeding and racing expenses – hobby or business? (Roberts v. Comm’r ) Application of consistency in R&E credits (Trinity Industries v. U.S.) Large penalty for failure to e-deposit even though taxes deposited (Commonwealth

Bank & Trust Co. v. U.S.) Charitable easements (1770 Sherman St. LLC v. Comm’r)

Today’s Agenda

LEGISLATIVE UPDATES

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In July, the House approved the Financial Services and General Government Appropriations Bill, 2015 (HR 5016).

Under bill, the IRS would get $9.8 billion in funding for FY 2015. The funding level constitutes a reduction of more than $1 billion

from FY 2014. Amendments to HR 5016 include nominal additional funding:

$1 million to the Office of the Treasury Inspector General (Tax Admin) $10 million to IRS taxpayer services (offset by cuts to IRS enforcement) $2.8 million was redirected within IRS Taxpayer Services to the Tax

Counseling for the Elderly program A prohibition on funding award bonuses to senior IRS executive services A prohibition on the payment of federal employee salaries when the

employee has been found in contempt of Congress

House Cuts IRS Budget

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In July, the House approved legislation which permanently extends The §179 expensing deduction (HR 4457), and The 50 percent bonus depreciation rule (HR 4718)

President Obama has promised to veto the bills because there are no revenue offsets

These bills are not expected to by passed by the Senate; it is more likely that a temporary extension of the §179 expensing and bonus depreciation allowance will be included in the tax extenders package later this year.

The House Approves a Permanent Extension of § 179 Expensing and Bonus Depreciation

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“Tax Extenders” - Expired Business Provisions

Business tax provisions that expired 12/31/13 include: Research and experimentation credit; Work opportunity tax credit; Increase in expensing to $500,000/$2,000,000 and expanded

definition of §179 property; Bonus depreciation; Exceptions under Subpart F for active financing income; Look-through treatment of payments between controlled foreign

corporations (“CFC ”); Special rules for qualified small business stock; Reduction in S corporation recognition period for built-in gains tax; 15-year straight line cost recovery for qualified leasehold,

restaurant, and retail improvements

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On May 29, the House Ways and Means Committee approved 3 specific extenders: HR 4619 – making permanent the incentive for tax-free distributions from

IRAs to charitable organizations HR 4719 – Permanently extending the charitable deduction for

contributions of food inventory HR 4718 – Permanently extending 50 percent bonus depreciation

Democrats did not support these extenders, focusing on the cost to extend the bonus depreciation credit which they estimate will cost $28 billion over 10 years.

“Tax Extenders” – What’s To Come?

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Additional Extenders being considered: HR 4457 – Making §179 permanent for small businesses –

Enables the business to expense up to $500,000 of investment in new equipment and property per year.

The deduction would be phased out for investments exceeding $2 million.

HR 4453 – Permanent S Corp Built-In Gains Recognition Period The extender would make provisions reducing an S corporation’s

built-in gains tax holding period from 10 to 5 years permanent. HR 4454 – S Corp Charitable Contributions Act (2014)

The extender would make permanent a provision allowing a basis adjustment for charitable giving by an S corporation.

“Tax Extenders” – What’s To Come?

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Additional Extenders being considered: The Senate has tabled a vote to extend the EXPIRE Act (Sen. 2260),

which has been debated since May (and would renew approx. $85 billion in tax extenders), until after mid-term elections in November. Senate Republicans are outraged that Sen. Majority Leader Harry

Reid (D-Nev.) will not allow amendments to the bill. The bill would extend 55 expiring tax provisions covering

homeownership, charitable giving, education, business research, depreciation, energy and corporate taxation and international taxation of businesses.

Wyden proposed on June 25 to add these extenders to the Highway Bill, but tax provisions were stripped and bill has gone for President’s signature

“Tax Extenders” – What’s To Come?

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Sen. Carl Levin (D-Mich.) proposed legislation on May 20 , Sen. 2360 – Stop Corporate Inversions Act

The proposed legislation was formed in response to a large U.S. based retail chain’s proposed plan to reincorporate overseas in a lower-taxed jurisdiction.

It is estimated that at least 14 major U.S. corporations have undertaken an inversion in 2014.

Treasury Secretary Jack Lew also urged Congress to act to stop the inversion practice; as “such transactions allow firms to reduce their level of worldwide taxation, but in the aggregate, they function to hollow out the U.S. corporate income tax base.”

Lew continued in a July 27 Washington Post Op-Ed, “closing the inversion loophole is no substitute for comprehensive business tax reform.”

Inversions Update

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As recently as July 28th, 4 Democratic lawmakers have hinted they will introduce legislation that will block federal contracts from being awarded to companies that reincorporate in foreign countries.

The upcoming legislation: No Federal Contracts for Corporate Deserters Act

No federal contracts to companies that reincorporate in foreign countries if they are at least 50 percent owned by American shareholders and don’t have substantial business opportunities in the country in which they aim to incorporate.

The 50 percent shareholder threshold would be lowered from already existing legislation, which bars foreign companies with more than 80 percent U.S. ownership from winning federal contracts.

One potential sticking point in this legislation is whether the Act will be applied retroactively (to May, 2014.

Inversions Update – Cont’d

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Ranking member of the House Ways and Means Committee Rep. Sander Levin (D-Mich.) announced on July 30 that he will propose legislation (“Stop Corporate Earnings Stripping Act “) to fight corporate inversions by curbing earnings stripping, according to a draft bill circulating among tax lobbyists.

Also on July 30, President Obama told a crowd that he has urged both parties to agree on legislation to avoid further corporate inversions, telling the crowd: "They’re not paying their share and stashing their money offshore, you don’t have that option," said Obama. "It ain’t right. Not only is it not right, it ain’t right."

Inversions Update – Cont’d

ADMINISTRATIVE UPDATES

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CCA 201427016

Rental activities (including real estate rentals) are per se passive and subject to the passive activity loss (“PAL”) rules

An exception allows real estate professionals to avoid the PAL treatment if they satisfy two tests:

Performance Test: spend more than half of his time and more than 750 hours in real property trades or businesses (“RPTBs”) in which he materially participates

Participation test: spend more than 500 hours in each individual activity IRS wanted to limit the performance test to only those RPTBs where taxpayer spent

more than 500 hours.

Chief Counsel’s determination: Time spent on any RPTB activity is counted toward the 750 hour performance test because the taxpayer spent more than 500 hours in the combined RPTB. However, the taxpayer only avoids passive activity loss (“PAL”) treatment on the RPTBs in which he “materially participates”, i.e., satisfies the 500 hour participation test.

Note: No grouping election made

PALs and Real Estate Professional Grouping

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CCA 2014300132

Under Code §446(d), a taxpayer truly engaged in two or more separate and distinct businesses may apply different accounting methods to each trade or business.

The accounting method chosen for each business must clearly reflect the income of each trade or business

Must maintain separate books and records Two separate accounting methods will not be allowed however if there is a creation

or shifting of profits or losses between the trades or businesses of the taxpayer (so the income of the taxpayer is not clearly reflected)

The IRS has concluded that a corporation and its wholly owned LLC (a disregarded entity for tax purposes) were separate and distinct trades or businesses under §446(d).

The corporation and the disregarded entity were engaged in different activities, maintained separate books and records, were in different geographical locations and shared only high-level executive employees.

The fact that the LLC was disregarded was irrelevant to the accounting method issue

Individual and His Disregarded Entity – Separate Accounting Methods

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The IRS issued Q&As on the consequences of “dumping” -- when an employer reimburses its employees for the premiums the employee pays for health insurance (i.e., health insurance through a qualified health plan in the health insurance exchange/marketplace or outside the exchange) instead of establishing a health insurance plan for its employees.

An arrangement where the employer allows employee to accept either cash or an after tax amount to be applied to health coverage (whether or not paid directly to insurance provider)

Is not a qualified “employer payment plan” that would allow the premiums paid to be excluded from income

Does not satisfy the 2013 “market reform provisions” No annual dollar limit on benefits Certain preventative services without employee costs

Result: Employer liable for the $100/day per employee ($36,500/year) excise tax

Employer Reimbursement Plans – Employee Health Insurance Costs

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As of June 30, 2012, employers owed the IRS approx. $14.1 billion in delinquent employment taxes per an estimate by the Treasury Inspector General for Tax Administration (“TIGTA”).

As a result, TIGTA is recommending that the IRS improve its procedures for assessing and collecting the trust fund recovery penalty (“TFRP”) from employers who failed to withhold federal income, social security and Medicare taxes.

TIGTA’s report found:

The IRS did not always undertake TFRP actions in a timely manner – in some cases causing the funds to become uncollectible.

Of the 265 TFRP cases reviewed, 37 percent of the IRS’s TFRP actions were untimely and/or inadequate.

Of the 37 percent, nearly 60 percent of those cases (or approx. 59 cases), the IRS required more than 500 days to review and process the TFRP assessment.

In 20 cases, the TFRP assessment period expired, barring the IRS from collection. In 10 of 21 cases where the IRS determined the TFRP was collectible, shoddy

investigative work and/or missing documentation prevented the IRS from collecting the penalty.

TIGTA Report On Unpaid Employment Taxes

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Notice 2014-33

Effective July 1, 2014, FATCA imposes a 30% withholding tax on “withholdable payments” made to non-compliant entities

Unless the withholding agent (“WA”) can reliably associate the payment with documentation for exemption

IRS Notice 2014-33:

2014 and 2015 will be regarded as a “transition period” to extent rules were modified by temporary coordination regs

For purposes of IRS enforcement and administration of the due diligence, reporting, and withholding provisions

IRS will consider whether FFIs, NFFEs or WAs have made good faith efforts to comply

FATCA Transition Relief For Good Faith Compliance

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WAs and FFIs are allowed (pursuant to the Notice) to treat obligations held by an entity that is opened, issued or executed after June 30, 2014 and before January 1, 2015 as a preexisting obligation for the due diligence and withholding requirements in the FATCA regulations.

WAs are also to be provided more time for documenting entities that are payee or account holders. The additional time should enable the withholding agent to determine if the entity is subject to FATCA withholding.

It is the intent of the IRS to amend existing Intergovernment Agreements (“IGAs”) to reflect the changes in the FATCA implementation.

The “good faith” relief is only available to entities and is not available to individuals (because individual accounts should be easier to document and are far less complex).

FATCA Transition Relief For Good Faith Compliance – Cont’d

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Temp. Reg. §1.41-9T; Final Reg. §1.41-9 New regulations allow taxpayers to use the Alternative Simplified

Credit (“ASC”) on amended returns In cases where the taxpayer had not claimed the R&D credit for

those years Eliminates need to substantiate expenditures and costs for the

base period Revenue might have been too high to meet traditional threshold

requirements in the past ASC Calculation:

14% of qualified research expenses (QRE) that exceed 50% of the average QRE for the 3 preceding years

If no QRE for last 3 years, then credit is 6% of the current year QRE

Alternative Simplified Credit on Amended Returns

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TD 9673

Final regulations expand retirement income options by making longevity annuities more accessible.

The final regulations amend the required minimum distribution (“RMD”) amounts from a qualified plan. The regulations allow for a delay of a participant’s receipt of a longevity annuity payment prematurely – a participant may defer their commencement of a qualifying longevity annuity contract (“QLAC”) until age 85.

The RMD rules under Code §401(a)(9), require the distribution of an employee’s entire interest in a qualified plan (such as a 401(k) plan) beginning when an employee turns age 70 ½ (or the year of retirement, if later). The employee’s entire interest must be distributed over the life of the employee (or the lives of the employee and a beneficiary).

The previous RMD rules are designed to prevent a qualified plan participant from postponing benefit payouts indefinitely, so that the participant cannot defer benefits until death without taxation.

Regulations: Longevity Annuities and Retirement

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The newly issued final regulations permit a plan participant to exclude the value of a QLAC from the participant’s account balance used to determine the amount of the RMD that must begin at age 70 ½. The regulations apply to contracts purchased on or after July 2, 2014.

The final regulations apply to the use of longevity annuities in qualified defined contribution (“DC”) plans and IRAs.

Unlike DC plans, defined benefit (“DB”) plans generally are required to offer annuities that provide longevity protection. Because these plans already provide longevity protection, the new regulations do not apply to DB plans.

Significant changes in the final regulations (from the proposed regulations) include:

The final regulations increase the maximum premium payment for a QLAC from $100,000 to $125,000 (or 25 percent of an employee’s account balance), with a cost-of-living adjustment available in $10,000 increments.

The final regulations offer a return of premium feature if the longevity annuity purchaser dies before receiving the benefit equal to the premium paid.

The final regulations allow individuals who exceed the limit on premium payments to correct their mistake without disqualifying the annuity.

Regulations: Longevity Annuities and Retirement

CASES

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2014-2 U.S.T.C. ¶50,341 (S. Ct. 6/30/ 2014)

The ACA added a provision to the Public Health Services Act (“PHSA”) requiring group health plans to provide preventative health services without cost-sharing requirements and specifically requires the provision of contraceptive care on a no-cost basis (the “contraceptive mandate”).

Religious employers (e.g., churches) and religious nonprofits are exempt

HHS regulations require non-exempt employers to provide coverage for 20 contraceptive methods, including 4 that operate post-fertilization

Owners of a for-profit closely held business sued, saying the regulations regarding the 4 post-fertilization contraceptive methods violated their Christian beliefs that life begins at conception and were barred by the Religious Freedom Restoration Act of 1993 (RFRA).

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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Majority Opinion (5-4): RFRA prohibits the government from “substantially burdening a

person’s exercise of religion” unless government demonstrates that – Government has compelling interest, and The method chosen is the least restrictive means of furthering that

compelling interest The RFRA applies to “a person’s” exercise of religion” and the

definition of a person includes corporations Regulations substantially burdened the business owners because of

the financial consequences There are other ways to further cost free access to the contraceptives

(in place for religious employers and non-profits), so the regulations were not the least restrictive method

Decision limited to the contraceptive mandate, and does not mean any conflict between religion and insurance coverage must fail (e.g., blood transfusions)

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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Dissenting Opinion:

Majority opinion requires that RFRA must accommodate for-profit corporation’s religious beliefs no matter the impact that such accommodation may have on third parties who do not share the corporation owner’s faith.

Drew a distinction between religious non-profit organizations and for-profit corporations, noting that while religious organizations exist to serve a community of believers, “for-profit corporations do not fit that bill.”

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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2014-1 U.S.T.C ¶50,317 (S. Ct. 6/12/14)

Under the Bankruptcy Code, all of a debtor’s interests in property become part of the bankruptcy estate, unless there is an exemption.

“Retirement funds” are exempt. The debtor had inherited an IRA, and claimed it was exempt as a “retirement fund.”

Court disagreed. Three characteristics of an inherited IRA indicate the inherited IRA should not qualify as a “retirement fund”:

Additional money may not be invested by the holder into the IRA Withdrawals from inherited IRAs are required, even if the holder hasn’t

reached retirement age The holder of the inherited IRA may withdraw the entire balance of the

account at any time, without penalty.

Clark v. Rameker -- Inherited IRAs are Part of the Bankruptcy Estate

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Discussed in last EOW

The Tax Court held that a taxpayer could only make one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained.

Code §408(d)(3)(B) provides a one-year limitation which the Court found was not specific to any single IRA maintained by an individual.

The one-year limitation applies to all IRAs maintained by a taxpayer.

Bobrow v. Comm’r, T.C. Memo. 2014-21

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SUBSEQUENT ORDER:

Court denied taxpayer’s request for reconsideration because IRS Publication 590 and Proposed Regulations were supportive of taxpayer’s treatment

The IRS released Announcement 2014-15 which indicated the IRS would follow the Bobrow Court’s decision, but would not enforce it until January 1, 2015. Extended the approach to the taxpayers, reducing the taxpayer’s liability and penalty

Update: As a result of the Court’s decision, the IRS partially withdrew its proposed regulations (Prop. Reg. §1.408-4(b)(4)(ii)) which applied the one-year limitation on nontaxable rollovers on an IRA-by-IRA basis.

Bobrow v. Comm’r, T.C. Memo. 2014-21

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Discussed in last EOW

Developer of planned residential communities purchased land, constructed infrastructure and amenities as common improvements, and constructed homes.

The completed contract method (CCM) is available tor home construction contracts.

80 percent of the estimated total contract costs will be attributable to dwelling units and to real property improvements related to and on the site of the dwelling units.

Includes the cost of the dwelling units the allocable share of costs for common improvements (sewers, roads, clubhouses) that benefit the units and that the taxpayer is obligated to construct.

A long-term contract is a contract to build, install or construct property that will not be completed in its initial tax year.

A contract is completed upon the customer’s use of the "subject matter of the contract" and at least 95 percent of the costs of the contract’s subject matter have been incurred.

Tax Court held that taxpayer could wait until all costs were incurred, including common improvements, before recognizing income.

Shea Homes, Inc. v. Comm’r, 142 T.C. 3

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142 T.C. No. 20

The taxpayer was in the land development business -- acquired land, divided it into parcels, divided the parcels into lots, constructed infrastructure (common improvements), and sold the parcels to builders. Many of the improvements made to the land were necessary for the builders to construct homes on the land. The taxpayer did not build homes on the land they sold.

The taxpayer used the CCM in computing its gain on the sale of the properties (before homes were built). The IRS assessed a $144 million deficiency, arguing that at taxpayer should have used the percentage-of-completion method.

The Tax Court

Said the contracts were not completed until all of the obligatory improvements had been made, not at the time escrow closed; however,

The contracts were not “home construction contracts” because developer was never obligated to build the homes

Howard Hughes Co., LLC v. Comm’r

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(Halbig v. Burwell, 114 AFTR 2d, 2014-5068 (DC Cir. July 22); King v. Burwell, 114 AFTR 2d, 2014-5071 (4th Cir. July 22)

The Burwell cases have led to a split in the Circuit Courts of Appeal. The findings:

DC Circuit –a federal [health insurance] exchange is not an “Exchange established by the State.” As a result, the premium tax credit individuals are entitled to under Code §36B are unavailable if the individuals purchase their insurance through a federal exchange. The DC Circuit further stated that the §36B regulations (which allow for a

subsidy by the federal government for individuals who purchase health insurance on a federal exchange) were invalid.

Fourth Circuit – Concluded the plain language and context of the relevant statutory sections, along with the ACA’s legislative history made it unclear if Congress intended to limit the premium tax credits to state exchanges. Giving deference to the IRS’s determination in the regulations (and applying the Chevron Doctrine of statutory interpretation) the Court concluded the statute permitted the IRS to decide whether the tax credits would be available on federal exchanges.

King plaintiffs filed petition for Supreme Court review on July 31

Circuits Split on Premium Tax Credits Under ACA

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T.C. Memo. 2014-107

IRS issued notices of deficiency to the taxpayer (Bross Trucking) for $1 million of deficiencies and accuracy related penalties and to Mr. and Mrs. Bross for gift tax deficiencies.

IRS claimed Bross Trucking distributed appreciated intangibles (goodwill) to Mr. Bross, who then gifted them to his sons who subsequently opened a new trucking company.

The distribution of appreciated intangible assets to a shareholder may be taxed under Code §311(b), causing the corporation to recognize gain as if the appreciated property had been sold for its fair market value.

The Court determined the intangible belonged to Mr. Bross (personal goodwill) , not to Bross Trucking, relying on Martin’s Ice Cream:

Bross never conveyed or otherwise transferred his personal goodwill to the company and was neither obligated to do so by contract (e.g., an employment agreement) nor was he limited by a non-compete agreement.

Bross Trucking Co. v. Comm’r - Personal Goodwill

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2014-2 USTC ¶50,359 (D. D.C. July 16)

Mr. Ridgely was a CPA who charged his clients a contingent fee for the preparation of an ordinary refund claim. A contingent fee is barred by Circular 230, §10.27, except in very limited circumstances

Ridgley maintained that §10.27 caused him to suffer “a loss of clients and significant revenue” and that “his ability to represent and assist clients in the preparation and filing of ordinary refund claims and to practice before the IRS has been severely restricted.”

The Court, relying on the Loving decision (striking down the IRS regime for registering tax return preparers), found that the IRS exceeded its statutory authority when it prohibited contingent fees for the preparation of ordinary refund claims.

The Court reasoned that return preparation was not “practice before the IRS” as envisioned by 31 U.S.C. §330 (authorizing the Treasury Secretary to regulate the practice of representatives before the Treasury Department).

Further erodes the IRS authorities to regulate return preparers, and opens up the possibility of renewed tax shelter activity.

Ridgely v. Lew – IRS Enjoined From Imposing Contingent Fee Ban Under Cir. 230

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T.C. Memo. 2014-108

A taxpayer attempted to purchase real property through his self-directed IRA

Custodian (Schwab) informed Dabney that Schwab did not allow IRAs to hold alternative investments, including real property

Schwab wired money to escrow instructing title company to put title in name of IRA, but title company mistakenly titled in Dabney’s name.

Tax Court held that because Schwab did not allow real property, even if correct name had been used it would not have been held in his IRA

Further, although he could have transferred IRA to a custodian who allowed alternative investments and completed the transaction, he did not. Instead, he checked the box stating he was taking an early distribution with no know exception to taxation

Taxpayer liable for income tax and early withdrawal penalty on full amount.

Dabney v. Commissioner – Blown attempt to have IRA Invest in Real Property

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2014-1 U.S.T.C. ¶50,265

The corporation was denied a current year deduction for expenses it incurred while resolving a minority shareholder claim in a reorganization.

The taxpayer argued the expenses were incurred as ordinary and necessary business expenses because they arose while indemnifying a company director as required under the corporation’s bylaws.

The minority shareholder’s complaint stemmed from the terms of the reorganization. Applying the “origins of the claim” doctrine, the court determined that the taxpayer’s litigation expense and settlement were proximately caused by the reorganization itself.

Pursuant to §263, costs incurred in the acquisition or disposition of a capital asset are to be treated as a capital expenditure (and not a current year deduction).

Case law further established that expenses incurred for the purpose of changing a corporate structure for the benefit of future operations are not ordinary and necessary business expenses.

Ash Grove Cement v. U.S. – Nondeductible Reorganization Expenses

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T.C. Memo. 2014-74 Taxpayer was a horse breeder and owner of a number of race horses. He also

provided (for a fee) boarding and training services for other racing horses as needed by their owners.

Prior to getting into the horse racing business, the taxpayer was a successful restaurant and nightclub owner who owned and rented real property (including one piece of land that became his first farm).

Between 1999 and 2008, the taxpayer generated losses in his horse-related activiites and deducted the losses against his other income.

The court analyzed seven factors to determine the taxpayer’s profit objective, including: (1) did he carry on the activity in a business like manner, (2) did he have expertise in the activity, (3) did he have significant time and effort devoted to the activity, (4) did he have a reasonable expectation the assets would appreciate in value, (5) did he have success in other activities, (6) were there occasional profits, and (7) did he receive pleasure or recreation from the activity.

The Court held that taxpayer did not have the requisite profit motive until 2007, when he significantly changed his operation, opened a new facility on real estate specifically purchased for horse-related activities, and reported all horse racing, breeding and farm activities under his wholly owned S corporation.

Roberts v. Comm’r – Horse Breeding Expenses

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2014-2 U.S.T.C ¶50,346 (5th Cir. 2014)

Taxpayer was involved in naval construction work and its expenses in the development of naval projects constituted a qualified research expense (“QRE”).

A taxpayer is entitled to calculate a QRE utilizing a fixed base percentage which is consistent with the determination of QREs for the credit year, regardless of whether the refund claim period has expired.

To meet the consistency requirement, a taxpayer must show consistency between the QREs in the credit year and the QREs in the baseline years, thus ensuring that the credit due is not over or understated.

The taxpayer was entitled to a consistent QRE for its programs when it tests the credit years compared to the baseline years.

Further, the Court stated when measuring an increase in qualified research spending between two periods, a uniform standard should be applied to determine whether the projects pursued during the two periods was sufficiently experimental to qualify as research.

Trinity Industries, Inc. v. U.S. – R&E Credits

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114 AFTR 2d ¶2014-5033 (D. Ky. 2014)

The IRS imposed on the taxpayer (a bank) a penalty in excess of over $250,000 because the taxpayer failed to deposit its taxes electronically.

Pursuant to Treas. Reg. §31.6302-(h)(2)(ii), taxpayers were obligated to use the electronic funds transfer (“EFT”) system when paying more than $200,000 in tax to the IRS.

The taxpayer timely paid its taxes, but failed to make the payment using the EFT system. As a result, the IRS assessed the taxpayer a failure-to-deposit penalty under Code §6656(a).

Code §6656(a) applies to failures to deposit funds as required by the Code or Regulations, including Treas. Reg. §31.6302-(h)(2)(ii).

Because taxpayer manually deposited the taxes due, the IRS dismissed its claim and affirmed the penalty.

Commonwealth Bank & Trust Co. v. U.S. – Penalties For Failure to e-Deposit

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T.C. Memo. 2014-124

Taxpayer purchased a lot which contained the El Jebel Shrine – a historic landmark protected by the Landmark Commission.

Taxpayer agreed to provide Historic Denver, Inc (a designated charity) with interior and exterior easements for the El Jebel Shrine as part an agreement to obtain the zoning permit to build the development.

Taxpayer’s valuation of the interior and exterior easements was $7.15 million.

Taxpayer did not reduce the value of the donated property by the value of the consideration it received in completing the transaction (included zoning changes and a variance).

Court: The taxpayer’s grant of the easement was part of a quid pro quo transaction. Because the taxpayer failed to identify and value all of the consideration it received in the transaction, the taxpayer was not entitled to any charitable contribution deductions with respect to the grant of the easement.

1770 Sherman St. LLC v. Comm’r – Charitable Easements

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