Chapter 8 Accounting Methods and 199 1 New Form 3115 and Filing Location New form and instructions (12/15). After 4/19/16, may only use the 12/15 version (not the 2009 version). Ann. 2016-14 Instructions reflect new change guidance Rev. Procs. 2015-13 and 2015-14. Starting January 2016, duplicate 3115 for automatic changes is filed with IRS in Covington, KY 2
New Automatic Method Change Guidance 2 Rev. Proc. 2016-29 Updates RP 2015-14 EFFECT ON OTHER DOCUMENTS.01 This revenue procedure amplifies and modifies Rev. Proc. 2015-14, as modified by Rev. Proc. 2015-20. Rev. Proc. 2015-14, as amplified and modified is superseded in part. The third sentence in the subsection 330.01 under the EFFECT ON OTHER DOCUMENTS section of Rev. Proc. 2015-14 remains in effect. All other sections of Rev. Proc. 2015-14 are superseded. 3 Improper Method Change Mills, TC Memo 2016-180 (9/27/16) LLC filing on Schedule C since 2005, cash method 2011 return filed early with about $11K legal expense Amend soon afterwards to increase legal fee and more to accrual method M says instructed to do so by IRS IRS rejects, court agrees M did not file 3115 or otherwise get permission to change 446(e) must have consent to change IRS can put M back on cash Nebeker, TC Memo 2016-155 (8/16/16) - similar 4
Confusion Over Fixed ( 461) 3 Giant Eagle, Inc., No. 14-3961 (3 rd Cir., 5/6/16) Reversed Tax Court (TC Memo 2014-146) with a divided opinion Customers earn fuelperks! when buy groceries Redeem for 10 off per gallon; might make purchase free Redeem within 3 months or they expire GE took deduction for estimated cost of unredeemed points at year end IRS and TC doesn t meet all events test Also 1.451-4 n/a because coupon/points only usable if make an additional purchase (the gas). 5 Giant Eagle 3 rd Cir Coupons represent fixed liability prior to purchase of gas. GE tracked monthly redemption rates to help prove absolute liability and a near-certainty that liability would soon be discharged by payment. Penn common law of (unilateral) contracts supports that GE had liability because customers knew of the offer and had power to accept. Suggest that makes GE liable. Dissenting judge GE s liability was not absolute. 6
Giant Eagle 3 rd Cir 4 Dissenting judge noted that expiration date indicated that coupons might not be redeemed such that a contingency existed preventing the liability from being fixed prior to use of the coupons. Cases cited by majority involved liabilities that had to remain on their books until discharged by payment. For example: Hughes Properties progressive slot machine liability GE liabilities are temporary due to expiration date; so no absolute liability. Not liable until customer redeemed the fuelperk! 7 Relevance of Giant Eagle Reminder that fixed part of all events test is subjective. Economic performance is objective But no EP issue because met in year prior to redemption under recurring item exception IF the liability was fixed at year end. How does likelihood of using the coupon, when have past data to support usage, relate to likelihood that customer brings in product still under warranty? How definite must this be? Relevance of state law? 8
NA in Giant Eagle (3 rd Cir.) 5 AOD 2016-03 (10/3/16) non-acq Will only follow in 3 rd Circuit unless facts are meaningfully distinguished IRS concern Court confused these situations: Liability unconditionally fixed at point prior to payment. Contractual obligation to pay if something happens. Example progressive slot machine Hughes Properties (USSC 1986) Example Giant Eagle s Fuelperks 9 Duty of Consistency and Reporting of Income Squeri, et al, TC Memo 2016-116 (6/15/16) Cash method S corp Reported based on bank deposits Result income rec d in Dec but deposited in following January was reported in wrong year 2008 year closed by SL Full correction would have removed $1.6M from 2009 that belonged in 2008. If done, the $1.6M would never be reported 10
Squeri and Duty of Consistency 6 duty of consistency, or quasi-estoppel, is an equitable doctrine which prevents a taxpayer from benefiting in a later year from an error or omission in an earlier year which cannot be corrected because the limitations period for the earlier year has expired. 11 Duty of Consistency & 3 Requirements 1. Representation by taxpayer S corp consistent in reporting income per bank deposits and IRS is holding them to that approach. Does not matter that this treatment was incorrect. 2. Reliance by IRS IRS accepted 2008 returns and allowed statute to expire. 3. Attempt by taxpayer after statute has run to change previous representation such as to harm IRS Adj desired by S corp would cause $1.6M to never be reported. 12
Installment Method and Related Parties 7 Vest, TC Memo 2016-187 (10/6/16) TB LLC, accrual method, owned 85% by V and wife TB owned 100% of two p/s VAS and M TB sold tangible and intangible assets to VAS and M under ten-year installment note all P and I due in 10 years Allowed TB to defer $3.2 million gain AND VAS and M to get stepped up basis in assets for depr purposes. V had NOLs, but still owed AMT Arrangement lowered AMT bill 13 Vest - continued 453(g) Sale of depreciable property to controlled entity Generally, IS not allowed unless tax avoidance is not a principal purpose IRS and Court Is a tax avoidance purpose here Defer $3.2 million gain for 10 years Get stepped up basis for assets to generate larger depr While V has NOLs, owes AMT and this deal lowers his AMT 14
IRS Audit Guide on TPR! Supplement 8 Issued 9/14/16 by LB&I Division, 202 pages Query Will one be issued by SB/SE? https://www.irs.gov/pub/irs-utl/tangiblepropertyatg9142016.pdf 15 The 18 Chapters 1. Examination of tangible property 2. Compliance considerations 3. Unit of property 4. Amounts paid to acquire or produce property 5. De minimis safe harbor 6. Improvement rules betterments 7. Improvement rules restorations 8. Improvement rules new or different use 9. Safe harbors special rules other provisions 10. Materials and supplies 11. Leased property 12.Disposition concepts and MACRS accounting rules 13.Dispositions in general 14.MACRS disposition rules 15. General asset account rules 16.Accounting method changes 17.Accounting method changes capitalization 18.Accounting method changes depreciation and dispositions https://www.irs.gov/pub/irs-utl/tangiblepropertyatg9142016.pdf 16
199 Ruling 9 CCA 201626024 (6/24/16) T manufactures clothes outside of US Print media for promotion produced by 3 rd parties in US Is not sold. T claims 199 deduction for the print media Argues is part of the clothing and accessories sold. Price include the print media. Print media drives sales. 17 IRS No Way! fact that advertising products increases sales is of no consequence when applying 1.199-3(i)(5)(ii)(A). For this rule to be relevant, Taxpayer s customers have to pay to advertise in Taxpayer s print media. That is not happening when they buy a product. Taxpayer s argument is a misapplication of the rules in 1.199-3(i)(5). Taxpayer s products are MPGE outside of the United States, and the gross receipts from their sale are non-dpgr. 18