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Tax Updates - Archived (June 2018 - August 2018)
August 2018
Accounting
In-Depth: Proposed Regs Prevent Taxpayers from Working Around SALT Limitation: The IRS issued proposed regulations which limit certain charitable contribution deductions when an individual, a trust, or a decedent's estate receives or expects to receive a corresponding state or local tax credit. The proposed rules, which apply to contributions made after August 27, 2018, are designed to prevent taxpayers from circumventing the $10,000 limitation on the personal deduction for state and local tax (SALT) by substituting an increased charitable contribution deduction. REG-112176-18. Read More...
In-Depth: Long Awaited Section 199A Proposed Regulations Are Generally Favorable to Taxpayers:
On August 8, the IRS released proposed regulations on Code Sec. 199A, one of the major tax breaks enacted as part of the Tax Cuts and Jobs Act of 2017. The proposed rules, which run to 184 pages, address many issues that had been of concern to practitioners, such as the definition of a "specified trade or business," the calculation of qualified business income flowing through to multiple entities, the treatment of wages paid to employees through third parties, and the definition of "reputation or skill." The rules allow for grouping of related trades or businesses for purposes of applying Code Sec. 199A and provide for narrow applicability of Code Section 199A's "reputation or skill" clause. The IRS separately issued a proposed revenue procedure addressing the calculation of W-2 wages for purposes of the W-2 wage limitation on the deduction. REG-107892-18; Notice 2018-64. Read More...
In-Depth: Bonus Depreciation Proposed Regs Issued; Taxpayers May Rely on Them Immediately: The IRS issued proposed regulations on the additional first year depreciation deduction (i.e., bonus depreciation) available under Code Sec. 168(k) as a result of changes made by the Tax Cuts and Jobs Act of 2017 (TCJA). The proposed regulations address numerous issues such as the bonus depreciation deductions for qualified improvement property, used property, partnership property, as well as what constitutes a binding contract and other special rules. While the proposed regulations are not effective until finalized, the IRS has given permission for taxpayers to apply these rules until final regulations are issued. REG-104397-18 (8/8/18). Read More...
Rev. Proc. Addresses Automatic Accounting Method Changes for Small Business Taxpayers: The IRS issued guidance which provides the procedures by which a small business taxpayer may obtain automatic consent to change its methods of accounting to reflect changes made by the Tax Cuts and Jobs Act of 2017 that expanded the number of small business taxpayers eligible to use the cash method of accounting and exempts small business taxpayers from the requirements to capitalize costs to account for certain long-term contracts under Sec. 460, and to account for inventories under Sec. 471. The revenue procedure is generally effective for tax years beginning after December 31, 2017, and obsoletes Rev. Proc. 2002-28 and Rev. Proc. 2001-10 for tax years beginning after December 31, 2017. Rev. Proc. 2018-40. Read More...
IRS Issues August 2018 AFRs: In Rev. Rul. 2018-21, the IRS issued a ruling which prescribes the applicable federal rates for August 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
Spouse with No Control over Couple's Tax Filings Did Not Willfully Evade Payment of Taxes: A bankruptcy court held that a Chapter 7 debtor was discharged from her debt to the IRS for unpaid income taxes because she did not willfully evade her taxes under Section 523 of the Bankruptcy Code. The court found that although the debtor knew she and her husband were having problems with the IRS and the couple purchased luxury cars and other discretionary items during and after the years in which they failed to pay taxes, the debtor had no control over the couple's expenditures and depended on her husband to fulfill all of their tax obligations, and the IRS failed to show that she intended not to meet her tax obligations. Conard v. IRS, 2018 PTC 209 (Bankr. E.D. Va. 2018). Read More...
Compensation and Benefits
Ninth Circuit Reverses Tax Court on Sec. 482 Cost-Sharing Issue, Then Withdraws Decision: In a decision released on July 24, 2018, the Ninth Circuit, in Altera Corp. v. Comm'r, 2018 PTC 213 (2018), reversed the Tax Court and held that Reg. Sec. 1.482-7A(d)(2), which requires related entities to share the costs of employee stock-based compensation (SBC) in order to avoid an IRS adjustment, is a valid exercise of the IRS's rulemaking authority and a permissible interpretation of Code Sec. 482. However, on August 7, in 2018 PTC 253 (9th Cir. 2018), the Ninth Circuit panel, which was reconstituted after the March 2018 death of Judge Stephen Reinhardt and after the October 2017 arguments in the case were heard, withdrew the July 24 decision to allow time for the reconstituted panel to confer on the IRS's appeal of the Tax Court's decision.
Final Regs Address Definitions of QMACs and QNECs for Certain Retirement Plans: In T.D. 9835, the IRS issued final regulations that amend the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) in regulations regarding certain qualified retirement plans that contain cash or deferred arrangements under Code Sec. 401(k) or that provide for matching contributions or employee contributions under Code Sec. 401(m). Under these regulations, an employer contribution to a plan may be a QMAC or QNEC if it satisfies applicable nonforfeitability requirements and distribution limitations at the time it is allocated to a participant's account, but need not meet these requirements or limitations when it is contributed to the plan.
Credits
Couple Has to Repay Advanced Premium Tax Credit: In Grant v. Comm'r, T.C. Memo. 2018-119, the Tax Court held that a couple was not entitled to a premium tax credit (PTC) and, as a result, had to repay the advanced payment of the PTC (APTC) paid on the wife's behalf. The court noted that the couple failed to include in income the social security benefits they received and, thus, their adjusted gross income exceeded the limitation under which they could qualify for relief from repaying the APTC.
Parents Who Lost Custody of Children Could Not Claim Them as Dependents or Take Child Tax Credit or EITC: The Tax Court held that the biological parents of two children who were adopted by, resided with and received primary financial support from their maternal aunt during the entire year at issue were not entitled to claim the children as dependents and, as a result, could not take the child tax credit or the earned income credit. The Tax Court reasoned that, although the children visited with their parents when not in school, the children did not share a principal place of abode with their parents, making the parents ineligible to claim the children as dependents or take the credits. Jusino v. Comm'r, T.C. Memo. 2018-112. Read More...
Deductions
Real Estate Developer Can't Deduct Yacht Expenses, but Avoids Penalties: In Becnel v. Comm'r, T.C. Memo. 2018-120, the Tax Court held that deductions taken by a Florida real estate developer, who bought a yacht to ostensibly market his properties to wealthy anglers, could not deduct the related expenses, which he claimed under misleading categories such as dues and subscriptions, because the expenses did not qualify as ordinary and necessary business expenses and because the taxpayer could not properly substantiate the amounts deducted. However, because the IRS did not meet its burden of production under Code Sec. 7491, the court found that the taxpayer was not liable for the accuracy-related penalties assessed against him.
IRS Issues Guidance on Section 162(m) as Amended by TCJA: In Notice 2018-68, the IRS provides initial guidance for purposes of applying Code Sec. 162(m), as amended by the Tax Cuts and Jobs Act of 2017.The notice provides guidance on the amended rules for identifying covered employees and the operation of a grandfather rule included in Code Sec. 162(m).
IRS Modifies Safe Harbor Method for Participants in HFA Hardest Hit Fund: In Notice 2018-63, the IRS extends the application of the HFA Hardest Hit Fund safe harbor in Notice 2017-40 to homeowners who may be affected by the new $10,000 limitation on deductible property taxes. Under the modified safe harbor, participating homeowners may allocate mortgage payments actually made first to deductible mortgage interest, and thereafter use any reasonable method to allocate the remaining balance of payments made to real property taxes, mortgage insurance premiums, home insurance premiums and principal.
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-65, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
IRS Extends Deadline to Submit Opinion Letter Applications: In Rev. Proc. 2018-42, the IRS modified Rev. Proc. 2017-41 to extend the deadline for submitting on-cycle applications for opinion letters for pre-approved defined contribution plans for the third six-year remedial amendment cycle to December 31, 2018. Under Rev. Proc. 2017-41, the submission period was scheduled to expire on October 1, 2018.
IRS Issues Monthly National Average Premium for Qualified Health Plans: In Rev. Proc. 2018-43, the IRS issued the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges for taxpayers to use in determining their maximum individual shared responsibility payment under Code Sec. 5000A(c)(1)(B). The monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges is $283 per individual and $1,415 for a shared responsibility family with five or more members.
IRS Extends Temporary Nondiscrimination Relief for Certain Benefit Plans: In Notice 2018-69, the IRS extends the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5, by making that relief available for plan years beginning before 2020 if the conditions of Notice 2014-5 are satisfied. This extension is provided in anticipation of the issuance of final amendments to the Code Sec. 401(a)(4) regulations and it is expected that the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2020.
Employment Taxes
Co-owner Liable as Responsible Person after Partner Failed to Pay Employment Taxes: In U.S. v. Hartman, 2018 PTC 234 (6th Cir. 2018), the Sixth Circuit affirmed a district court holding that, even though one 50-percent owner of a company was responsible for preparing and paying the employment taxes, the other 50-percent owner exercised enough influence and control over the company's financial affairs to be held liable as a responsible person for trust fund penalties arising from the nonpayment of the company's employment taxes. The Sixth Circuit (1) rejected the taxpayer's argument that because he carefully monitored the financial reports within the company's software, he did not willfully fail to pay the taxes due, and (2) concluded instead that the taxpayer should've reconciled the electronic ledger with proof that the other owner had paid the company's taxes - not with proof that the software program had identified the amount of taxes due.
Exchanges of Property
IRS Addresses Tax Treatment on Certain Freddie Mac and Fannie Mae Changes: In Rev. Rul. 2018-24, the IRS addresses the tax treatment of the exchange of mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) pursuant to a Single Security Initiative. The Federal Housing Finance Agency (FHFA), which has proposed the standardization of the terms for mortgage pass-through certificates issued by Freddie Mac and the Federal National Mortgage Association (Fannie Mae) and, as part of the FHFA's Single Security Initiative, the FHFA will require Freddie Mac to cease issuing participation certificates and Fannie Mae to cease issuing mortgage-backed securities, and will require both entities to issue Uniform Mortgage-Backed Securities instead.
Excise Taxes
Taxpayer Must Reduce Excise Tax Amount Included in COGS by Fuel Credit: In Exxon Mobil Corporation v. U.S., 2018 PTC 266 (N.D. Tex. 2018), a district court held that, because a fuel mixture credit, which was applied against fuel excise taxes and was available to gasoline producers from 2005 to 2011, operates as a reduction of the taxpayer's excise tax liability, only that reduced excise tax liability is included in the taxpayer's cost of goods sold (COGS). The court cited the decision in Sunoco v. U.S., 129 Fed. Cl. 322 (2016) in rejecting the taxpayer's $337 million tax refund claim and holding that the taxpayer could not include the unreduced amount of the excise tax in its COGS.
Court Reject's Taxpayer's Claim That It Is Exempt From Tobacco Excise Taxes: In U.S. v. King Mountain Tobacco Company, Inc., 2018 PTC 263 (9th Cir. 2018), the Ninth Circuit affirmed a district court's judgment in favor of the IRS in an action to collect delinquent federal excise taxes and penalties for the manufacture of tobacco products under Code Sec. 5701. In this case of first impression, the court considered whether a tribal manufacturer of tobacco products located on land held in trust by the United States was subject to the federal excise tax on manufactured tobacco products and agreed with the district court's decision to award the government almost $58 million for unpaid federal excise taxes, associated penalties, and interest after concluding that neither the General Allotment Act of 1887, nor the Treaty with the Yakamas of 1855, entitled the taxpayer to an exemption from the federal excise tax.
Foreign
IRS Issues Proposed Regulations Implementing Section 965: In REG-104226-18, the IRS issued proposed regulations under Code Sec. 965, a new Code provision which was enacted in December 2017 and which levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. The proposed regulations contain detailed information on the calculation and reporting of a U.S. shareholder's Code Sec. 965(a) inclusion amount, as well as information for making the elections available to taxpayers under Code Sec. 965.
D.C. Circuit Reverses Tax Court; IRS Regs Unreasonably Interpreted the Code: In Good Fortune Shipping SA v. Comm'r, 2018 PTC 228 (D.C. Cir. 2018), the D.C. Circuit reversed a Tax Court ruling that upheld the IRS's refusal to grant a foreign shipping corporation an exemption of some of its U.S.-based income from taxation because all the shipping company's shares were made up of bearer shares and IRS regulations prohibited any consideration of bearer shares when assessing whether a sufficient amount of a foreign shipping corporation's stock was owned by qualifying shareholders. The D.C. Circuit held that the IRS's regulation prohibiting consideration of bearer shares unreasonably interpreted the Code.
FBAR Penalty Limited to Amount Specified in Regs: In Wadhan v. U.S., 2018 PTC 245 (D. Colo. 2018), a district court held that the IRS could not assess penalties in excess of $100,000 per year, the limit specified in 31 C.F.R. Sec. 1010.820, where a taxpayer failed to file or filed inaccurate Forms TD F 90.22-1, Report of Foreign Accounts (FBAR), even though the related statute (31 U.S.C. Sec. 5321(a)(5)(C)) increased the penalty in 2004 to the greater of $100,000 or 50 percent of the balance in the relevant account. The court noted that its reasoning was congruous with the decision in U.S. v. Colliot, 2018 PTC 251 (W.D. Tex. 2018) and stated that, for a statute to supersede a regulation, it has to be clearly inconsistent with the regulation and the court found that the statute and regulation were not inconsistent on their face; instead, the penalty cap in the regulation was, in essence, a subset of the penalties that could be imposed under the statute and the statute did not mandate imposition of the maximum penalty.
FBAR Penalty Not Limited to Amount Specified in Regs: In Norman v. U.S., 2018 PTC 250 (Fed. Cl. 2018), the Court of Federal Claims held that the IRS properly assessed against a taxpayer a penalty in the amount of 50 percent of the balance of her 2007 unreported foreign account after a finding that she willfully failed to file a Report of Foreign Bank and Financial Account (FBAR) in connection with her 2007 Swiss bank account. In response to the taxpayer's request that the court follow the holding in U.S. v. Colliot, 2018 PTC 251 (W. D. Tex. 2018) and award her the difference between the $803,000 penalty she paid and the $100,000 limit stated in 31 C.F.R. 1010.820, the court said that the regulation cited in Colliot was no longer valid as the result of amendments to the statute in 2004.
Gross Income
Additional Debt Relief Provided to Students Attending Schools That Suddenly Closed: In Rev. Proc. 2018-39, the IRS provides relief to taxpayers who took out private student loans to finance attendance at a school owned by Corinthian College, Inc. (CCI) or American Career Institutes, Inc. (ACI). In addition to relief previously provided to such students, Rev. Proc. 2018-39 provides that a creditor is not required to file returns and furnish payee statements for the discharged debt and the taxpayers (1) can exclude from gross income the discharged amount of a private student loan taken out to finance attendance at ACI or CCI; and (2) do not have to increase taxes owed in the year of discharge for prior claimed credits or deductions attributable to payments made on these private student loans.
Taxpayer Liable for Tax on Imputed Income from Employer's Purchase of Life Insurance: In Ramsay v. Comm'r, 2018 PTC 233 (5th Cir. 2018), the Fifth Circuit affirmed the Tax Court and held that (1) the taxpayer's taxable income included imputed income of $891 from a former employer's purchase of a life insurance policy on the taxpayer, and (2) the Tax Court had jurisdiction to decide the taxpayer's liability for interest on the deficiency. The court agreed that the taxpayer's reporting of the $891 constituted an admission that must be overcome by cogent evidence and that the taxpayer had not overcome the presumption and that there was no applicable exception to the general rule that the Tax Court lacks jurisdiction to determine interest in a deficiency case.
Healthcare
Final Regs Lengthen Maximum Time for Short-Term, Limited-Duration Insurance: In T.D. 9837, the IRS issued final regulations which amend the definition of short-term, limited-duration insurance for purposes of its exclusion from the definition of individual health insurance coverage. The regulations lengthen the maximum duration of short-term, limited-duration insurance, which is a type of health insurance coverage that (1) is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another plan or coverage, and (2) is generally exempt from the federal market requirements applicable to health insurance sold in the individual market because it is not considered individual health insurance coverage.
Information Reporting
Doctor Successfully Sues Business Partner for Issuing Fraudulent Form 1099: In Angelopoulos v. Keystone Orthopedic Specialists, 2018 PTC 242 (N.D. Ill. 2018), a district court awarded $179,000 in compensatory damages to a doctor who filed a lawsuit against his former business partner and other related entities for fraudulently filing an information return in violation of Code Sec. 7434. A jury found that a Form 1099 issued to the doctor overstated the doctor's income for the year at issue by more than $120,000.
Taxpayer's Conviction for Failing to Report Cash Purchases of Luxury Vehicles Upheld: In U.S. v. Guevara, 2018 PTC 248 (11th Cir. 2018), the Eleventh Circuit affirmed a district court's conviction of a taxpayer for structuring transactions relating to his purchase of a Porsche, a Ferrari, a Lamborghini, and a Rolls Royce, for which he paid cash and used a straw buyer for the purpose of keeping his name off of Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. The court remanded with instructions to resentence the taxpayer, however, based on its conclusion that the district court failed to make and explain factual findings that adequately supported the application of a two-level sentencing enhancement for obstruction of justice.
International
Tax Court Failed to Properly Evaluate Risk and Liability Expense Attributable to Sub: In Medtronic, Inc. & Subs v. Comm'r, 2018 PTC 273 (8th Cir. 2018), the Eighth Circuit vacated a Tax Court decision which the IRS argued did not apply the correct transfer pricing method when calculating the arm's length royalty rates for a taxpayer's intercompany licenses to its Puerto Rican subsidiary. The Eighth Circuit found that the Tax Court reached its decision in the case without making a specific finding as to what amount of risk and product liability expense was properly attributable to the taxpayer's Puerto Rican subsidiary and, in the absence of such a finding, the Eighth Circuit concluded that it lacked sufficient information to determine whether the Tax Court's profit allocation was appropriate.
Legislation
Senate Finance Committee Letter Details Future Corrections to TCJA Legislation: The Senate Finance Committee wrote a letter to Treasury Secretary Mnuchin and Acting IRS Commissioner Kautter clarifying the congressional intent of several provisions in the Tax Cuts and Jobs Act of 2017 (TCJA), including (1) the elimination of the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property and the provision of a new single definition of qualified improvement property which inadvertently was left out of the definition of 15-year property, thus making such property ineligible for bonus depreciation; (2) statutory language stating that the modifications made to net operating loss (NOL) carryforwards and carrybacks apply to NOLs arising in tax years ending after December 31, 2017, when the congressional intent was to provide that the NOL carryforward and carryback modifications are effective for NOLs arising in tax years beginning after 2017; and (3) a provision that arguably denies a deduction of attorney fees to a victim of sexual harassment or sexual abuse who receives a settlement or payment that is subject to a nondisclosure agreement, where congressional intent was not to deny such a deduction. The Committee said it is continuing to review TCJA to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress and that it intends to introduce technical corrections legislation.
Partnerships
IRS Issues Final Regs Governing Partnership Representatives: In T.D. 9839, the IRS issued final regulations on the designation and authority of a partnership representative under the centralized partnership audit regime, which generally became effective for partnership tax years beginning after December 31, 2017. Simultaneously, the IRS also issued final regulations and removed temporary regulations regarding the election to apply the centralized partnership audit regime to partnership tax years beginning after November 2, 2015, and before January 1, 2018. T.D. 9839.
Penalties
Founder of Investment Management Firm Can't Escape $10 Million Fine for Tax Evasion: In U.S. v. Zukerman, 2018 PTC 237 (2d Cir. 2018), the Second Circuit affirmed a district court's holding that the founder of an investment management firm, who falsified documents relating to a sale of his firm's assets and evaded over $30 million in taxes, was liable for a fine of $10 million. According to the Second Circuit, the assessment of the $10 million fine was within the district court's discretion and the imposition of the fine was not procedurally and substantively unreasonable.
Procedure
Interest on Nonprofit S Corporation's Tax Refund Was Correctly Calculated at Lower Rate: In Charleston Area Medical Center, Inc. v. U.S., 2018 PTC 249 (Fed. Cl. 2018), the Court of Federal Claims held that the word "corporation" as employed in Code Sec. 6621(a), relating to the rate of interest applicable to tax refunds, encompasses both nonprofit and for-profit entities and refused to consider a nonprofit S corporation's argument that the position being taken by the IRS was inconsistent with Notice 2018-18, which provides that the term "corporation" for the purpose of the carried interest rules in Code Sec. 1061(c)(4)(A) does not include S corporations. The court concluded that the IRS was correct in computing the interest due on the taxpayer's tax refund at the rate specified for corporations in Code Sec. 6621(a)(1), rather than the higher rate specified for other taxpayers in Code Sec. 6621(a)(1)(B).
Tax-Exempt Organizations
IRS Issues Interim and Transition Rules under Section 512(a)(6): In Notice 2018-67, the IRS sets forth interim and transition rules under Code Sec. 512(a)(6), which was enacted in the Tax Cuts and Jobs Act of 2017. Code Sec. 512(a)(6) requires an organization that is subject to the unrelated business income tax and that has more than one unrelated trade or business to calculate unrelated business taxable income separately with respect to each trade or business.
Tax Return Preparers
Tax Return Preparer Doesn't Qualify for Exception to Preparer Penalties: In Taylor v. Comm'r, 2018 PTC 236 (9th Cir. 2018), the Ninth Circuit affirmed a district court's dismissal for lack of jurisdiction of an action by a tax return preparer seeking an abatement of preparer penalties after rejecting the taxpayer's argument that an exception in Code Sec. 6694(c) relieved him of his obligation to pay the penalties in full before bringing a refund suit in the district court. The court noted that, while Code Sec. 6694(c) confers district court jurisdiction when a tax return preparer has paid at least 15 percent of a penalty if the refund action is begun within 30 days after the earlier of the IRS's denial of the refund claim or the expiration of six months after the day on which the refund claim is filed, the taxpayer did not file within those time limits and thus was not eligible to bring suit in the district court.
July 2018
Accounting
Most Popular: IRS Urges Veterans to File Refund Claims Relating to Disability Severance Payments: The IRS is advising certain veterans who received a disability severance payment after January 17, 1991, and had taxes improperly withheld, to file claims for either a credit or refund of the tax overpayment attributable to the payment. Veterans' eligibility for these refunds are the result of the Combat-Injured Veterans Tax Fairness Act passed in 2016; however, the time for claiming the tax refunds is limited. IR-2018-148. Read More...
Proposed Regulations Address TCJA's Expansion of Return Preparer Due Diligence Penalty to Head of Household Determination: The IRS issued proposed regulations on the tax return preparer due diligence requirements of Code Sec. 6695(g). The proposed regulations reflect a change to the due diligence penalty enacted by the Tax Cuts and Jobs Act of 2017, which amended Code Sec. 6695(g) to provide that, in addition to child tax credit, additional child tax credit, and the American opportunity tax credit, the due diligence penalty also applies to a return preparer's determination of a taxpayer's eligibility to file a return or claim a refund as head of household. REG-103474-18. Read More...
IRS Issues July 2018 AFRs: In Rev. Rul. 2018-19, the IRS issued a ruling which prescribes the applicable federal rates for July 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Deductions
Couple Can't Deduct Entire Grocery Bill for Household That Includes Foster Individuals: In Kho v. Comm'r, T.C. Summary 2018-32, the Tax Court denied a couple a deduction for total grocery expenses where they provided foster care for two men with developmental disabilities, one of which required a gluten-free diet. The court noted that any excess cost to the couple in providing gluten-free meals to their client had already been accounted for in the amount that the IRS allowed as a deductible expense for groceries and that the couple could not deduct their entire grocery bill as a business expense because such costs were personal expenses.
No Home Office Deduction Available for Business Owner's Storage of Records in Garage: In Najafpir v. Comm'r, T.C. Memo. 2018-103, the Tax Court held that a business owner's use of his garage for the storage of business records did not qualify as a deductible home office expense under Code Sec. 280A(c)(2) because the taxpayer was not in the trade or business of selling products at retail or wholesale and his business records and invoices did not constitute inventory. In addition, because the taxpayer could not provide evidence showing that certain bank deposits were not income, the court agreed with the IRS that those deposits constituted income to the taxpayer.
Couple Hit with Penalties; Actions Showed a Lack of Reasonable Business Care: In Raifman v. Comm'r, T.C. Memo. 2018-101, the Tax Court held that most of the losses a couple suffered with respect to large investments they made were not deductible theft losses because either the losses could not be substantiated or because the court found that many of the investments were entered into in an effort to avoid federal income taxes. The court also concluded that the couple was liable for accuracy-related penalties after finding that their assertion of reliance on professional advice was unreasonable because their actions revealed a lack of reasonable business care and prudence on their part.
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-60 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
Estates and Trusts
Newly Enacted Section 67(g) Won't Prevent Certain Estate and Trust Deductions: The IRS issued a notice stating its intention to issue regulations which will provide that the suspension under Code Sec. 67(g) of the deductibility of miscellaneous itemized deductions under Code Sec. 67(a) does not affect the deductibility under Code Sec. 67(e)(1) of certain estate and trust administration fees as well as the deductibility of expenses under Code Sec. 642(b), Code Sec. 651, and Code Sec. 661. Estates and non-grantor trusts may rely on this notice for tax years beginning after December 31, 2017. Notice 2018-61. Read More...
Forms and Instructions
In IR-2018-146, the IRS announced that it plans to streamline Form 1040 into a shorter, simpler form for the 2019 tax season. Along with its announcement, the IRS released a draft of the proposed Form 1040, which is about half the size of the current version. The new form would replace the current Form 1040 as well as Form 1040A and Form 1040EZ. The new Form 1040 uses a "building block" approach in which the tax return is reduced to a simple form that can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. The IRS said that it will be working with the tax community to refine the new form to ensure a smooth transition.
Income
Discrimination and Hostile Work Environment Settlement Is Taxable: In Zinger v. Comm'r, T.C. Summary 2018-33, the Tax Court held that the $20,000 proceeds from a settlement received by the taxpayer was not excludable from income under Code Sec. 104(a)(2). The court concluded that the settlement payment was for the resolution and withdrawal of the taxpayer's discrimination and hostile work environment claims and not on account of personal physical injuries or physical sickness.
International
IRS Finalizes Regs on Inversions and Related Transactions: In T.D. 9834, the IRS issued final regulations that address transactions that are structured to avoid the purposes of Code Sec. 7874 and Code Sec. 367 and certain post-inversion tax avoidance transactions. These regulations affect certain domestic corporations and domestic partnerships whose assets are directly or indirectly acquired by a foreign corporation and certain persons related to such domestic corporations and domestic partnerships.
Partnerships
Partnerships Hit With Additional $300 Million in Income but Escape Penalties: In Endeavor Partners Fund, LLC v. Comm'r, T.C. Memo. 2018-96, the Tax Court upheld increases of more than $300 million to the income of several partnerships after concluding that transactions engaged in by the partnerships involved paired foreign-currency options that lacked any economic substance. However, while finding that accuracy-related penalties assessed on the partnerships were clearly appropriate, the court nevertheless held that the partnerships were not liable for the penalties assessed under Code Sec. 6662(a) because the IRS did not secure, prior to the issuance of the final partnership administrative adjustments, written supervisory approval of the penalties as required by Code Sec. 6751(b)(1).
Penlties
Couple That Relied Entirely on Tax Prep Software Can't Avoid Underpayment Penalties: In Ayissi-Etoh v. Comm'r, T.C. Memo. 2018-107, the Tax Court held that a couple was liable for additional taxes for (1) underreporting certain income and not substantiating certain deductions, and (2) underreporting self-employment income from the International Monetary Fund that was subject to self-employment tax. In addition, the court held that the couple was liable for penalties for substantially understating their tax liabilities because the couple did not seek advice from a qualified tax professional but relied entirely on tax preparation software and their tax deficiency amounts exceeded both $5,000 and 10 percent of the amounts required to be shown on their returns.
Procedure
Court Rejects IRS Motion to Dismiss Taxpayer's FOIA Complaint: In Middle East Forum v. U.S. Dept. of Treasury, 2018 PTC 204 (D. D.C. 2018), a district court held that, with respect to a FOIA request by the taxpayer for any communications between the IRS Office of Criminal Investigation and other government agencies relating to a third party, Islamic Relief USA, the IRS could not claim that such records were exempt from FOIA disclosure when it had not looked for the records or ascertained whether they even existed. The court noted that, if the IRS searches for such records and finds any, it may well be that those records are exempt from FOIA disclosure; but since the IRS hadn't looked for the records, the court rejected the IRS's motion to dismiss and granted the taxpayer's claim for a declaratory judgment.
Couple Living Beyond Means Hit With IRS Levy on Principal Residence: In U.S. v. Gower, 2018 PTC 211 (M.D. Fla. 2018), a district court gave judicial approval for a levy on the principal residence of a couple that had failed to satisfy their unpaid federal income tax liabilities for 2008 - 2013 after finding that the IRS had exhausted all reasonable alternative means of collecting the couple's tax debts. The court noted that the IRS established that the couple was continuing to live above their means by eating out a lot, making large alcohol purchases, and making purchases at a luxury nail spa and, the court found that this undermined the couple's description of their alleged dire financial situation as well as their description of having to borrow from others because they could not afford necessities.
Extended Statute of Limitations Period Applies With Respect to Omitted S Corp Receipts: In Manashi v. Comm'r, T.C. Memo. 2018-106, the Tax Court held that a taxpayer who owned 100 percent of an S corporation did not adequately disclose the omission of the S corporation's gross receipts for the three years at issue after rejecting the taxpayer's argument that adequate disclosure occurred by virtue of the fact that the S corporation reported some amount of gross receipts on its returns for each year and that the IRS "through internal data" would have had knowledge of the amounts deposited into the taxpayer's bank accounts and could have discovered that gross receipts were erroneously reported for each year. As a result, because the gross income omitted from the taxpayer's return exceeded 25 percent of the amount of gross income reported on the return , the court concluded that the statute of limitations with respect to the deficiency notice mailed to the taxpayer was six years and not the standard three years.
IRS Supervisor Approval Not Required for Tax Court to Assess Frivolous Arguments' Penalty:
The Tax Court held that its authority to impose a penalty under Code Sec. 6673 for making a frivolous argument before the Tax Court is not subject to the IRS supervisor approval requirement in Code Sec. 6751(b)(1). The Tax Court found that (1) Congress's intent in enacting the supervisor approval requirement was to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle, while Code Sec. 6673 is designed to deter bad behavior in the Tax Court and conserve judicial resources, and (2) Code Sec. 6751(b)(1) was clearly not intended as a mechanism to restrain the Tax Court. Williams v. Comm'r, 151 T.C. No. 1 (2018). Read More...
Taxpayer's Mistaken Request for a CDP Hearing Suspended Statute of Limitations: In Gilliam v. U.S., 2018 PTC 18 (4th Cir. 2018), the Fourth Circuit affirmed a district court and held that the ten-year statute of limitations period was suspended between December 2007, when the taxpayer mistakenly requested a CDP hearing for review of a nonexistent levy, and September 2010, when the Tax Court determined his initial request was intended to request review of the lien and was therefore timely. Because the limitations period was suspended, the court said, the IRS's subsequent collection action was timely.
Taxpayer's Obstruction Conviction Vacated in Light of Supreme Court Decision: In Westbrooks v. U.S., 2018 PTC 185 (5th Cir. 2018), the Fifth Circuit vacated a taxpayer's conviction for obstruction of tax laws in light of the Supreme Court's decision in Marinello v. U.S., 2018 PTC 77 (S. Ct. 2018). In Marinello, the Supreme Court held that (1) in order to secure a conviction under Code Sec. 7212(a) for interference with the administration of the Internal Revenue Code, the government must show a nexus between the taxpayer's obstructive conduct and a particular administrative proceeding, and (2) applying the statute to the routine administration of the Code conflicts with the language, history, and context of the statute and fails to give taxpayers fair warning of what conduct is subject to criminal prosecution.
Decedent Qualified as a USVI Resident for Two of the Three Years at Issue: In Est. of Sanders v. Comm'r, T.C. Memo. 2018-104, the Tax Court considered the various factors in Vento v. Dir. Of V.I. BIR, 2013 PTC 71 (3d Cir. 2013) for determining whether a taxpayer is a bona fide resident of the U.S. Virgin Islands (USVI), and concluded that, in the instant case, the decedent was not a bona fide USVI resident in 2002, but was a bona fide resident in 2003 and 2004. In Comm'r v. Est. of Sanders (Sanders II), 834 F.3d 1269 (11th Cir. 2016), vacating and remanding Est. of Sanders v. Comm'r (Sanders I), 144 T.C. 63 (2015), the Eleventh Circuit held that the statute of limitations under Code Sec. 6501(a) was triggered only if the decedent, Travis L. Sanders, was a bona fide resident of the USVI and remanded the case back to the Tax Court to make factual findings regarding the amount of time the decedent spent in the USVI.
Court Tells Couple to Sell Their $1 Million Home and Pay Their Back Taxes: In Hudak v. IRS, 2018 PTC 194 (D. Md. 2018), a district court rejected a taxpayer's contention that, even with a monthly income of $17,000, he and his wife could not make any payments on the $2 million in taxes they owed. Noting that the couple had two children that would soon be graduating from high school, the court gave the couple a year to sell their 7,500 square foot home, located on 10 acres and valued at more than $1 million, and limited the monthly payments to the IRS to $1,200 for the next 12 months, and $4,000 a month thereafter.
Qualified Plans
IRS Abused Its Discretion in Revoking ESOP Ruling: In Val Lanes Recreation Center Corporation v. Comm'r, T.C. Memo. 2018-92, the Tax Court held that the IRS abused its discretion in retroactively revoking a prior favorable determination letter (FDL) which found that a company's employee stock ownership plan (ESOP) was a qualified plan under Code Sec. 401(a) and that the ESOP's related trust was exempt from tax under Code Sec. 501(a) for the plan year ending March 31, 2001, and all subsequent plan years. The court rejected the IRS's argument that a restated plan document was never adopted after finding that the restated plan documents and amendments were adopted shortly after the taxpayer received the FDL.
S Corporations
Tenth Circuit Affirms That Marijuana Dispensary Can't Deduct Business Expenses: The Tenth Circuit affirmed a district court's dismissal of a tax refund suit by a medical marijuana business whose business deductions had been denied by the IRS. In so doing, the Tenth Circuit rejected the taxpayer's arguments that (1) the IRS does not have the authority to disallow deductions under Code Sec. 280E without a criminal conviction; (2) Code Sec. 280E violates the Sixteenth Amendment's definition of gross income; and (3) Code Sec. 280E is an excessive fine that violates the Eighth Amendment. Alpenglow Botanicals, LLC v. U.S., 2018 PTC 206 (10th Cir. 2018). Read More...
Chief Counsel Recommends Caution in Assessing Section 6694 Penalty on S Corp Owners: In CCA 201825028, the Office of Chief Counsel advised that assessing a Code Sec. 6694 penalty against an S corporation co-owner could present a legal hazard unless the co-owner acted similarly to the owner in U.S. v. Elsass, 978 F. Supp. 2d 901 (S.D. Ohio 2013), aff'd, 2014 PTC 476 (6th Cir. 2014), where the court found that the owner of an S corporation was a tax return preparer for the purposes of the penalties provided for under Code Sec. 6694 and Code Sec. 6695. Alternatively, the Chief Counsel's Office said, an S corporation may be a tax return preparer within the definition of Code Sec. 7701(a)(36), and the proper person on which to assess the penalty under Code Sec. 6694(b), but only if the requirements set forth in Reg. Sec. 1.6694-3(a)(2) are met.
S Corp. Didn't Terminate When Brother Withdrew Large Sums Without Other Brother's Knowledge: In Mowry v. Comm'r, T.C. Memo. 2018-105, the Tax Court held that an S corporation equally owned by two brothers did not terminate as a result of a violation of the one-class-of-stock rule and the rule against disproportionate distributions when one brother withdrew large sums of money from the corporation without the other brother's knowledge. The court noted that, in determining whether a corporation has more than one class of stock, the rights granted to shareholders in the corporation's organizational documents and other "binding agreements" between shareholders must be considered and that evidence of distributions paid to one shareholder and not to others over the course of multiple years is insufficient on its own to establish that a separate class of stock was created.
Tax Exempt Organizations
Some Exempt Organizations No Longer Required to Report Donors' Names and Addresses to the IRS: The IRS issued a revenue procedure which modifies the information to be reported to the IRS by organizations that are exempt from tax under Code Sec. 501(a), other than Code Sec. 501(c)(3) organizations, and that are required to file Form 990, Return of Organization Exempt From Income Tax. Such organizations are no longer required to report the names and addresses of their contributors on Form 990 or 990-EZ, but must continue to collect and keep this information in their records and to make it available to the IRS upon request. Rev. Proc. 2018-38. Read More...
Tax Return Preparers
Unethical Tax Return Preparer Must Divulge the Names and Addresses of Clients to IRS: In U.S. v. Burden, 2018 PTC 206 (M.D. Fla. 2018), a district court granted a permanent injunction against a tax return preparer who ran a tax preparation business and who, between 2013 and 2016, prepared more than a thousand tax returns, many of which understated income or claimed a credit not available to the taxpayer. In addition, the court ordered the preparer to give the IRS the last known address of every person for whom he prepared a tax return, or assisted in preparing a tax return, as well as all the names and social security numbers of all customers of his tax preparation business.
June 2018
Most Popular
Supreme Court Rejects Precedents in State Sales Tax Case; Quill and Bellas Hess Overruled: The Supreme Court vacated a North Dakota Supreme Court decision in which that court held that a state law requiring out-of-state sellers to collect and remit sales tax as if the sellers had a physical presence in the state was unconstitutional. In so doing, the Supreme Court overruled its prior decisions in Quill Corp. v. North Dakota, 504 U. S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967). South Dakota v. Wayfair, Inc., 2018 PTC 183 (S. Ct. 2018). Read More...
IRS Clarifies 2018 Standard Mileage Rates Notice in Light of New Tax Law:
The IRS modified Notice 2018-3, issued in December 2017, to provide additional information in light of changes made by the Tax Cuts and Jobs Act of 2017. The IRS clarified that (1) while Notice 2018-3 provides that the standard mileage rate for 2018 is 54.5 cents per mile for all miles of business use including unreimbursed employee travel expenses deductible as a miscellaneous itemized deduction, deductions for such unreimbursed business expenses are not allowed for years 2018-2025; (2) the 2018 standard mileage moving rate can only be used by members of the U.S. Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station; and (3) because of increased depreciation limitations for passenger automobiles placed in service after December 31, 2017, the maximum standard automobile cost for purposes of applying the fixed and variable rate (FAVR) allowance may not exceed $50,000 for passenger automobiles (including trucks and vans) placed in service after December 31, 2017.. Notice 2018-42. Read More...
IRS Updates and Consolidates Guidance on Charitable Contributions: The IRS issued a revenue procedure which sets forth the extent to which grantors and contributors may rely on the listing in IRS databases of organizations eligible to receive tax-deductible contributions under Code Sec. 170, for purposes of determining whether the grants or contributions to such organizations are deductible under Code Sec. 170, and for certain other purposes. The revenue procedure also provides safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and for determining that a grant or contribution is considered an unusual grant. Rev. Proc. 2018-32. Read More...
Accounting
IRS Issues July 2018 AFRs: In Rev. Rul. 2018-19, the IRS issued a ruling which prescribes the applicable federal rates for July 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
IRS Issues June 2018 AFRs: In Rev. Rul. 2018-16, the IRS issued a ruling which prescribes the applicable federal rates for June 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
IRS Liable for Damages for Willfully Violating Bankruptcy Discharge Order: In a case of first impression, the First Circuit affirmed a district court and held that an employee of the IRS "willfully violates" a bankruptcy discharge order when the employee knows of the discharge order and takes an intentional action that violates that order. Under Code Sec. 7433(e), the court said, the IRS's good faith belief that it has a right to collect purportedly discharged debts is not relevant to determining whether it willfully violated a discharge order and, in the instant case, the IRS met the applicable standard and violated a discharge order and was thus liable for damages. IRS v. Murphy, 2018 PTC 165 (1st Cir. 2018).
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Credits
S Shareholder Can't Unilaterally Elect FICA Tax Credit on S Corporation's Behalf: The Tax Court held that a shareholder of an S corporation that operated restaurants and whose employees' earnings came partly from customer tips could not elect on the S corporation's behalf to take the Code Sec. 45B credit for social security and Medicare taxes that the S corporation paid on its employees' tip wages by filing amended individual returns to claim flowthrough deductions from the credits. The Tax Court reasoned that the S corporation was considered the taxpayer for purposes of the Code Sec. 45B election and that permitting individual shareholders to unilaterally change an S corporation's tax election would affect the tax liabilities of shareholders who did not consent to the change. Caselli v. Comm'r, T.C. Memo. 2018-81.
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IRS Issues Inflation Factors and Reference Prices for Calculating Sec. 45 Credits: In Notice 2018 - 50, the IRS issued the 2018 the ination adjustment factor and reference prices used to determine the availability of the Code Sec. 45 credit for electricity produced from qualied energy resources and rened coal, including the credit amounts for renewable electricity production and rened coal production. The notice provides that (1) the inflation adjustment factor for calendar year 2018 for qualified energy resources and refined coal is 1.6072; (2) the reference price for calendar year 2018 for facilities producing electricity from wind is 4.85 cents per kilowatt hour; (3) the reference prices for fuel used as feedstock within the meaning of Code Sec. 45(c)(7)(A), relating to refined coal production are $31.90 per ton for calendar year 2002 and $49.69 per ton for calendar year 2018; and (4) the reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy have not been determined for calendar year 2018.
IRS Issues Reference Price for Section 45I Credit: In Notice 2018-52, the IRS announced the applicable reference price for qualied natural gas production from qualied marginal wells during taxable years beginning in 2017. The applicable reference price for tax years beginning in calendar year 2017 is $2.17 per 1,000 cubic feet (mcf).
Deductions
Payments to Russian Subsidiary Aren't Deducible as Bad Debts or Ordinary Business Expenses: In Baker Hughes Inc. v. U.S., 2018 PTC 178 (S.D. Tex. 2018), a district court held that a payment made by a U.S. corporation, through a Cypriot entity, to a Russian subsidiary was not deductible either as a bad debt or as an ordinary and necessary business expense. The court reached its decision after concluding that (1) the advances made by the taxpayer to its Russian subsidiary were more in the nature of equity rather than debt because there was no certificate or note evidencing a loan, no provision for or expectation of repayment of principal or interest, and no way to enforce repayment, and (2) the taxpayer was under no obligation to make the payment to its Russian subsidiary but chose to do so to avoid potential future losses.
Taxpayer Can't Deduct Expenses Relating to Sale of Non-Marijuana Merchandise: In Alterman v. Comm'r, T.C. Memo. 2018-83, the Tax Court held that the sale of non-marijuana merchandise by a taxpayer that ran a Colorado medical marijuana business was not separate from the taxpayer's business of also selling marijuana merchandise and thus, under Code Sec. 280E, the business expenses relating to the sale of the marijuana and non-marijuana merchandise were not deductible. The court concluded that the taxpayer, which operated as a limited liability company, had only one unitary business and that business was selling marijuana.
Couple Can't Deduct Cost of Improvements to Home Allegedly Rented to Relatives: In Perry v. Comm'r, T.C. Memo. 2018-90, the Tax Court held that a couple did not establish that they rented their second home to relatives and that, even if the court were to find that the couple did in fact rent the house to their relatives, the couple failed to carry their burden of establishing that they rented such home at fair rental value. Thus, the court denied the couple's deduction for improvements made to that home.
Supreme Court Refuses Cert in Double Deduction Case: The Supreme Court rejected a request for certiorari in Duquesne Light Holdings, Inc. v. Comm'r (S. Ct. 17-1151 (6/18/18)), a case in which the Third Circuit (2017 PTC 304) held that the Tax Court properly applied the Ilfeld doctrine when it disallowed a taxpayer's deduction of $199 million in losses after concluding that the taxpayer was claiming a double deduction. The Ilfeld doctrine, taken from the Supreme Court's decision in Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934) teaches that "the Code should not be interpreted to allow [the taxpayer] 'the practical equivalent of a double deduction' ... absent a clear declaration of intent by Congress."
IRS Issues Applicable Percentage for Depletion of Marginal Properties in 2018: In Notice 2018-51, the IRS announced the applicable percentage under Code Sec. 613A to be used in determining percentage depletion for marginal properties for the 2018 calendar year. The applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2018 is 15 percent and the 2017 reference price used in determining the applicable percentage is $48.05.
Professional Gambler Can't Deduct Track's Takeout in Calculating Gambling Losses: The Ninth Circuit affirmed a Tax Court decision which held that an accountant, who was also a professional gambler, could not deduct from his ordinary income that portion of his losing wagers representing the track's "takeout" - the percentage of all monies wagered on a horse race that the track retains to offset its business costs. The court rejected the taxpayer's argument that the takeout was an expense to him separate and apart from the wager itself and was therefore deductible as an ordinary and necessary expense from non-gambling income under Code Sec. 162(a). Lakhani v. Comm'r, 2018 PTC 135 (9th Cir. 2018). Read More...
Former University Employee Can't Exclude Tuition Waiver from Income: The Tax Court held that a taxpayer who received a tuition waiver as part of a severance package when his employment at a university was terminated, and who later applied the waiver to his dependent child's tuition, was not entitled to exclude the value of the waiver from income because he was not either a current or retired employee of the university. The Tax Court rejected the taxpayer's argument that he was an employee for the year at issue because he received a Form W-2 reporting the value of the waiver, and found that the university's elimination of his position in a workforce reorganization did not constitute separation from the university by retirement. Voigt v. Comm'r, T.C. Summary 2018-25. Read More...
Taxpayer Who Failed 39-Week Test Can't Deduct Moving Expenses: In Rabadi v. Comm'r, T.C. Memo. 2018-70, the Tax Court held that a couple could not deduct moving expenses for the year at issue because (1) they failed to substantiate the expenses involved, and (2) they did not establish that the husband stayed and worked in a new location for the requisite 39 weeks to be eligible to deduct moving expenses. In addition, the court found the couple liable for the accuracy-related penalties under Code Sec. 6662(a).
Mileage Costs Incurred to Visit Customer Facilities Were Personal Commuting Expenses: In Fehr v. Comm'r, T.C. Summary 2018-26, the Tax Court held that a taxpayer, who worked as a sales manager and visited various local customer facilities in the course of performing his job-related duties, was not entitled to deductions for unreimbursed employee business expenses because the court concluded that the pattern of the taxpayer's activity strongly suggested that the expenditures at issue were predominantly personal and only indirectly related to the conduct of company business. The court noted that the taxpayer's logs showed that on many days he drove from his home to a customer's facility, had lunch, and then returned home and that he likewise reported mileage expenses for round trips from his home to the company headquarters; thus, the miles that the taxpayer drove constituted nondeductible personal commuting expenses.
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-56 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
Estates, Trusts, and Gifts
Trust Owners Are Taxable on Income from Partnerships Owned by the Trust: In Full-Circle Staffing, LLC v. Comm'r, T.C. Memo. 2018-66, the Tax Court held that a trust which owned four partnerships was a sham and thus, the income from the four partnerships was taxable to the couple that owned the trust. However, the court did not uphold the penalty assessments against the couple because the couple had relied on tax professionals to prepare their tax return and thus met the reasonable cause exception for avoiding the penalties.
Excise Taxes
IRS Provides Guidance Relating to Excise Tax on Educational Institutions: In Notice 2018-55, the IRS announced that it intends to issue proposed regulations providing clarification on the calculation of net investment income for purposes of the imposition of the 1.4 percent excise tax imposed on an educational institution's net investment income. According to the IRS, similar to the rules found in Code Sec. 4940(c), the proposed regulations will provide that, in the case of property held by an applicable educational institution on December 31, 2017, and continuously thereafter to the date of its disposition, the basis of such property for determining gain will be deemed to be not less than the fair market value of such property on December 31, 2017, plus or minus all adjustments after December 31, 2017, and before the date of disposition, consistent with the regulations under Code Sec. 4940(c).
Foreign
IRS Intends to Amend Foreign Currency Guidance under Sec. 987: In Notice 2018-57, the IRS announced that it intends to amend regulations under Code Sec. 987 to delay the applicability date of the final Code Sec. 987 regulations and certain temporary Code Sec. 987 regulations by one additional year. The IRS intends to amend Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.987-1T through Reg. Sec. 1.987-4T, Reg. Secs. 1.987-6T, 1.987-7T, 1.988-1, 1.988-1T, 1.988-4, and Reg. Sec. 1.989(a)-1 to provide that the final regulations and the related temporary regulations will apply to tax years beginning on or after the date that is three years after the first day of the first tax year following December 7, 2016.
IRS Offers Penalty and Filing Relief for Taxpayers Subject to New Foreign Earnings Transition Tax: In IR-2018-131, the IRS announced that it will waive certain late-payment penalties relating to the Code Sec. 965 transition tax, and provided additional information for individuals subject to the Code Sec. 965 transition tax regarding the due date for relevant elections. In general, the IRS advised that (1) in some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018; (2) for individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019; (3) individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS generally by October 15, 2018.
Healthcare
IRS Updates Premium Tax Credit for 2019 Adjustments: In Rev. Proc. 2018-34, the IRS issued the 2019 indexing adjustments for certain provisions under Code Sec. 36B. In particular, the IRS updated the Applicable Percentage Table in Code Sec. 36B(b)(3)(A)(i), which is used to calculate an individual's premium tax credit.
Individuals
Letters from Child's School and Doctor Indicated Child Lived with Taxpayer: In Engesser v. Comm'r, T.C. Summary 2018-29, the Tax Court held that, because a minor child that the taxpayer claimed as a dependent had the same principal place of abode as the taxpayer for more than one-half of 2014, the taxpayer was entitled to a child tax credit, an earned income tax credit, and head of household filing status with respect to the child for 2014. In reaching its conclusion, the court cited the fact that correspondence from child's doctor and school both indicated that the child lived with the taxpayer.
Information Reporting
IRS Plans to Amend Rules on Electronic Filing of Information Returns: In REG-102951-16, the IRS issued proposed regulations amending the rules for determining whether information returns must be filed using magnetic media (electronically). The proposed regulations would (1) require that all information returns, regardless of type, be taken into account to determine whether a person meets the 250-return threshold and, therefore, must file the information returns electronically; and (2) require that any person required to file information returns electronically file corrected information returns electronically, regardless of the number of corrected information returns being filed.
IRS
Two Million ITINs Set to Expire at the End of 2018: In IR-2018-137, the IRS noted that more than 2 million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2018. Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire December 31, 2018, and ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year; thus, affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible.
IRS Releases List of Qualified Opportunity Zones: In Notice 2018-48, the IRS lists the census tracts that have been designated as qualified opportunity zones and thus may be eligible for certain tax benefits. A qualified opportunity zone is a population census tract that is a low-income community.
Partnerships
Partnership's Transfer Property Transfer Was a Quid Pro Quo Exchange; Charitable Deduction Denied: In Triumph Mixed Use Investments III, LLC, v. Comm'r, T.C. Memo. 2018-65, the Tax Court held that a partnership could not deduct more than $11 million in charitable contributions as the result of its transfer of real property and development credits to a city in which it was developing a planned community. The court concluded that benefits received by the partnership in exchange for the contribution had substantial value and the tax matters partner did not report or value those benefits on the partnership tax return.
Partners Can't Rely of Tax Shelter Promoter's Advice to Avoid Penalties: In RB-1 Investment Partners v. Comm'r, T.C. Memo. 2018-64, the Tax Court held that two brothers, who were partners in a partnership which sold a family business and engaged in a Son-of-BOSS deal to manufacture tax losses to offset the resulting gains, were liable for accuracy-related penalties on the resulting tax deficiencies. According to the court, the partners could not meet the reasonable-cause-and-good-faith defense to the penalties by relying on the advice of a tax shelter promoter.
Procedure
IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2018-18, the IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2018, beginning July 1, 2018. The interest rates will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, 2 and one-half percent for the portion of a corporate overpayment exceeding $10,000, and 7 percent for large corporate underpayments.
Court Rejects Suit by Investor against Son of Boss Promoters: In McMahan v. Deutsche Bank AG, 2018 PTC 168 (7th Cir. 2018), the Seventh Circuit affirmed a lower court and dismissed a taxpayer's claim against his accountant, American Express Tax and Business Services (AMEX) (the firm that prepared his tax return), and Deutsche Bank AG and Deutsche Bank Securities Inc. (the entities that facilitated certain tax shelter transactions) for harming him by convincing him to participate in a Son of BOSS tax shelter. The Seventh Circuit agreed that the case should be dismissed against the accountant and AMEX for lack of prosecution and granted summary judgment to Deutsche Bank on statute of limitations grounds.
Taxpayer Who Owed IRS More Than $2 Million Fraudulently Transferred Property to Grandson: In U.S. v. Wight, 2018 PTC 171 (W.D. Wash. 2018), a district court granted summary judgment to the IRS after finding that the conveyance by the taxpayer to her grandson of property held by her sister's estate, where the taxpayer was the executor of her sister's estate and the taxpayer owed the IRS more than $2 million, was a fraudulent transfer. The court ordered the property to be sold and the proceeds paid to the IRS once the taxpayer's life estate terminates.
Court Did Not Violate Taxpayer's Right to Counsel By Allowing Him to Proceed Pro Se: In U.S. v. Stanley, 2018 PTC 164 (8th Cir. 2018), the Eighth Circuit affirmed a district court and upheld a taxpayer's conviction of tax evasion and corruptly endeavoring to impede enforcement of Internal Revenue laws in violation of Code Sec. 7201 and Code Sec. 7212. The court rejected the taxpayer's arguments that the district court violated his right to counsel by allowing him to proceed pro se, and erred in instructing the jury.
Interest Rates Remain the same in the Third Quarter of 2018: In Rev. Rul. 2018-18, the IRS announced that interest rates will remain the same for the calendar quarter beginning July 1, 2018, as they were in the quarter that began on April 1. The rates will be: 5 percent for overpayments (4 percent in the case of a corporation); 2.5 percent for the portion of a corporate overpayment exceeding $10,000; 5 percent for underpayments; and 7 percent for large corporate underpayments.
IRS Updates and Consolidates Guidance on Charitable Contributions: The IRS issued a revenue procedure which sets forth the extent to which grantors and contributors may rely on the listing in IRS databases of organizations eligible to receive tax-deductible contributions under Code Sec. 170, for purposes of determining whether the grants or contributions to such organizations are deductible under Code Sec. 170, and for certain other purposes. The revenue procedure also provides safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and for determining that a grant or contribution is considered an unusual grant. Rev. Proc. 2018-32. Read More...
Facebook Doesn't Have Enforceable Right to Take Its Case to IRS Appeals: In Facebook, Inc. & Subs v. IRS, 2018 PTC 139 (N.D. Calif. 2018), a district court held that Facebook did not have an enforceable right to take its tax case, in which the IRS asserted that Facebook undervalued certain intangible property that it transferred to its Ireland-based subsidiary by approximately $7 billion, to IRS Appeals, or to compel the IRS to do so. The court concluded that (1) Facebook lacked standing because the deprivation of a nonexistent right to access IRS Appeals does not constitute injury in fact, and (2) the IRS's decision not to refer Facebook's tax case to IRS Appeals was not reviewable under the Administrative Procedure Act.
Statute Doesn't Prevent IRS from Seizing and Selling Marijuana Equipment: In CCA 201820018, the Office of Chief Counsel advised that, pursuant to Code Sec. 6331 and Code Sec. 6335, the IRS may administratively seize and sell gas chromatographer mass spectrometers (GCMS) and liquid chromatographer mass spectrometers (LCMS) used by taxpayers involved in the marijuana industry to measure cannabinoids in marijuana. According to the Chief Counsel's Office, GCMSs and LCMSs are not drug paraphernalia under the Drug Paraphernalia Statute (28 U.S.C. Sec. 863) and, thus, there is generally no restriction on the seizure and sale of such items.
Taxpayer Not Entitled to Attorney's Fees After Suing IRS for FOIA Records: In Hohman v. IRS, 2018 PTC 144 (E.D. Mich. 2018), a district court held that a taxpayer, who brought suit against the IRS for failing to timely provide information she had requested under FOIA, was not entitled to attorney's fees and costs because she had not substantially prevailed in the litigation. The court rejected the taxpayer's argument that she substantially prevailed because she obtained relief through a judicial order and instead sided with the IRS and found that the filing of the taxpayer's complaint did not cause the release of records because the filing of the complaint was not reasonably necessary to obtain the requested records and the lawsuit did not have "a causative effect" on the release of the requested records.
Lawyer's Failure to Provide Required Info Precludes Offer-in-Compromise: In Solny v. Comm'r, T.C. Memo. 2018-71, the Tax Court sustained a proposed collection action by the IRS against a lawyer who had outstanding tax liabilities of almost $200,000. The court noted that at his collection due process hearing, the lawyer sought a collection alternative but did not supply any of the required forms or necessary financial information and thus it was not an abuse of discretion for the IRS to reject collection alternatives and sustain the collection action.
Retirement Plans
IRA Trustee Must Withhold Federal Taxes on Amounts Paid to Unclaimed Property Fund:
The IRS ruled that a payment by individual retirement account (IRA) trustee of an individual's interest in an IRA to a state's unclaimed property fund, as required by state law, is subject to federal income tax withholding under Code Sec. 3405. In addition, the payment by the trustee is subject to reporting under Code Sec. 408(i). Rev. Rul. 2018-17. Read More...
Rollover Fee Debited to Taxpayer's IRA Was Not a Taxable Distribution: In Azam v. Comm'r, T.C. Memo. 2018-72, the Tax Court held that, due to lack of substantiation, a couple could not deduct expenses claimed on Schedule C as well as charitable contributions they had deducted and were also liable for penalties under Code Sec. 6662. However, the court also concluded that a $28 rollover fee that was debited directly from the husband's individual retirement account constituted a nontaxable administrative fee and, therefore, was not a taxable distribution under Code Sec. 408(d) and was not subject to the 10-percent penalty tax under Code Sec. 72(t).
SALT Deductions
IRS Responds to State Legislative Attempts to Circumvent Limitation on SALT Deduction: The IRS issued a notice informing taxpayers that it intends to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes. The notice was issued as several states are considering legislation intended to circumvent TCJA's limitation on the deduction for state and local taxes. Notice 2018-54. Read More...
Tax Accounting
IRS Issues Procedure for Automatic Method Change for Citrus Replanting Costs: In Rev. Proc. 2018-35, the IRS provides a new automatic method change for certain taxpayers to change their method of accounting from applying Code Sec. 263A to citrus plant replanting costs to not applying Code Sec. 263A to those costs, pursuant to Code Sec. 263A(d)(2)(C), which was enacted as part of the Tax Cuts and Jobs Act of 2017. Code Sec. 263A(d)(2)(C) provides that the uniform capitalization rules of Code Sec. 263A does not apply to certain costs that are paid or incurred by certain taxpayers for replanting citrus plants after the loss or damage of citrus plants.
Tax Return Preparers
Court Issues Permanent Injunction Against Tax Return Preparer: In U.S. v. Wells, 2018 PTC 159 (S.D. Miss. 2018), a district court issued a permanent injunction against a tax return preparer forbidding her to, individually or as a business, engage in the tax preparation business. The injunction was the result of an IRS investigation into the taxpayer which showed that she and her business prepared thousands of federal income tax returns that falsified business losses and profits to boost the earned income tax credits customers could claim and which the IRS said deprived the U.S. Treasury of millions of dollars in tax revenue.
Tax-Exempt Organizations
Treasurer of Tax-Exempt Organization Was Responsible Person: In Jarrett v. Comm'r, T.C. Memo. 2018-73, the Tax Court held that a taxpayer, who was on the board of directors of a tax-exempt organization and was treasurer for a two-year period in which employment taxes were not paid to the IRS, was a responsible person with respect to those taxes and was liable for trust fund recovery penalties under Code Sec. 6672. The court rejected the taxpayer's argument that the penalties were not valid due to lack of IRS supervisory approval after concluding that the IRS complied with the requirements of Code Sec. 6751(b)(1).
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