Tax Updates - Archived (July 2020 - January 2020)

July 2020

Accounting

IRS Issues July 2020 Applicable Federal Rates: In Rev. Rul. 2020-14, the IRS issued a ruling which prescribes the applicable federal rates for July 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

Bankruptcy

Debtor's Objection to IRS's Proof of Claim Only Had to Be Filed with the IRS: In In re Nicolaus, 2020 PTC 186 (8th Cir. 2020), the Eighth Circuit reversed a bankruptcy court and a district court and held that, when the debtor objected to a proof of claim filed by the IRS, that objection only had to be filed with the IRS and was not required to be filed with the Attorney General or the local U.S. Attorney. The Eighth Circuit found that all the Federal Rules of Bankruptcy Procedure required at the time the objection was made was that the objection be filed with the IRS.

Bankruptcy Court Finds in Favor of Debtors' Exemptions: In In re Kauer, 2020 PTC 191 (Bankr. Ariz. 2020), an Arizona bankruptcy court held that the debtors who formerly lived in Idaho were entitled to elect the federal exemptions of 11 U.S.C. Sec. 522(d), including an exemption for their tax refund, and were not limited, as the bankruptcy trustee had argued, solely to exemptions permitted under the Idaho law that might otherwise apply since the debtors were not domiciled in Arizona for the 730 days preceding the filing of bankruptcy. The court found that the trustee did not point to a single exemption under Idaho law that the debtors could claim and, thus, to hold as the trustee had urged would result in a de facto denial of all exemptions to the debtors which, the court said, is counter to the well-established principle that exemption statutes are to be liberally construed in favor of the debtors.

COVID-19

IRS Extends Deadline for Sporting Goods Excise Tax Return and Payments: In Notice 2020-48, the IRS provides that any person with a federal sporting goods excise tax payment due, and a requirement to file a return, under the sport fishing and archery equipment numbers on Part II of Form 720, on July 31, 2020, is determined to be affected by the COVID-19 emergency and such deadline is automatically postponed to October 31, 2020. This relief is automatic and, thus, affected taxpayers do not have to call the IRS, file any extension forms, or send letters or other documents to receive this relief.

Credits

IRS Issues 2021 Inflation Adjustments for Premium Tax Credit: In Rev. Proc. 2020-36, the IRS issued calendar year 2021 indexing adjustments for the applicable percentage table in Code Sec. 36B(b)(3)(A)(i) that is used to calculate an individual's premium tax credit under Code Sec. 36B. The IRS also updated the required contribution percentage in Code Sec. 36B(c)(2)(C)(i)(II), which is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Sec. 36B, for plan years beginning after calendar year 2020.

IRS Issues Temporary Relief from Certain Low-Income Housing Credit Rules: In Notice 2020-53, the IRS issued temporary relief pursuant to Code Sec. 7508A(a) and Reg. Sec. 1.43-13(a) from certain requirements under the low-income housing tax credit rules of Code Sec. 42 for qualified low-income housing projects and under Code Sec. 142(d) and Code Sec. 147(d) for qualified residential projects. The notice, which is in response to the COVID-19 pandemic, amplifies Notice 2020-23, Rev. Proc. 2004-39, Rev. Proc. 2014-49, and Rev. Proc. 2014-50.

Deductions

IRS Issues Temporary Regs on Carrybacks of Consolidated Net Operating Losses: In T.D. 9900, the IRS issued temporary regulations under Code Sec. 1502 that permit consolidated groups that acquire new members that were members of another consolidated group to elect in a year subsequent to the year of acquisition to waive all or part of the pre-acquisition portion of an extended carryback period under Code Sec. 172 for certain losses attributable to the acquired members where there is a retroactive statutory extension of the NOL carryback period under Code Sec. 172. The regulations respond to the enactment of Section 2303 of the CARES Act (Pub. L. 116-136), which retroactively extends the carryback period under Code Sec. 172 for tax years beginning after 2017 and before 2021.

Prop. Regs Would Amend NOL Guidance for Consolidated Returns: In REG-125716-18, the IRS issued proposed regulations that would amend the rules under Code Sec. 1502 to provide guidance implementing recent statutory changes to Code Sec. 172 and would withdraw and re-propose certain sections of previously issued proposed regulations relating to the absorption of consolidated net operating loss carryovers and carrybacks. In addition, the proposed regulations update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes and would affect corporations that file consolidated returns.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-57, 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, the 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).

Employment Taxes

Restaurateur Who Lived "High on the Hog" Deserved Enhanced Prison Sentence: In U.S. v. Minner, 2020 PTC 178 (8th Cir. 2020), the Eight Circuit affirmed a 36-month prison sentence of a taxpayer, who owned a chain of restaurants called the Rowdy Beaver, after he was found guilty of failing to collect or pay employment taxes for his restaurants' employees. While the prison sentence was slightly higher than the guidelines of 27 to 33 months, the court said it was appropriate given that the taxpayer's fraud lasted nine years and, during that time, the taxpayer was "living high on the hog" with an expensive house, real estate, boats, and significant amounts of cash.

Christian Media Network Owner Can't Claim Religious Exemption from Taxes: In Lloyd v. Comm'r, T.C. Memo. 2020-92, the Tax Court held that a taxpayer who operated several Bible-focused websites and internet-based radio stations was liable for income and self-employment taxes, and substantial penalties for failing to file income tax returns and pay income and self-employment taxes for years 2005 - 2010. The court rejected the taxpayer's argument that he was a functioning church entitled to a religious exemption after noting that the income tax laws contain no exemption from tax for an individual "functioning as a church."

IRS Updates the Deferral of Employment Tax Deposit FAQs: On the IRS.gov website, the IRS updated its FAQs relating to the deferral of employment tax deposits and payments through December 31, 2020, as a result of the enactment of changes made by Section 3 of the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act). The IRS notes that the PPP Flexibility Act, enacted on June 5, 2020, amended Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act by striking the rule that would have prevented an employer from deferring the deposit and payment of the employer's share of social security tax after the employer receives a decision that its PPP loan was forgiven by the lender and, thus, an employer that receives a PPP loan is entitled to defer the payment and deposit of the employer's share of social security tax, even if the loan is forgiven.

Foreign

Final Regs Address Deduction for FDII and GILTI: In T.D. 9901, the IRS issued final regulations that (1) provide guidance on the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), and (2) coordinate the deduction for FDII and GILTI with other provisions in the Code. These regulations generally affect domestic corporations and individuals who elect to be subject to tax at corporate rates for purposes of inclusions under subpart F and GILTI.

IRS Finalizes Regs on Income Subject to a High Rate of Foreign Tax: In T.D. 9902, the IRS issued final regulations under the global intangible low-taxed income and subpart F income provisions regarding the treatment of income that is subject to a high rate of foreign tax. The final regulations affect U.S. shareholders of foreign corporations and relate to changes made by the Tax Cuts and Jobs Act of 2017.

IRS Addresses the Treatment of Certain Income Subject to a High Rate of Foreign Tax: In REG-127732-19, the IRS issued proposed regulations under the subpart F income and global intangible low-taxed income provisions regarding the treatment of certain income that is subject to a high rate of foreign tax. The proposed regulations also include information reporting provisions for foreign corporations to facilitate the administration of certain rules in the proposed regulations and would affect U.S. shareholders of controlled foreign corporations.

Healthcare

Prop. Regs Would Amend Rules for Grandfathered Group Health Plans: In REG-130081-19, the IRS issued proposed regulations regarding grandfathered group health plans and grandfathered group health insurance coverage that would, if finalized, amend current rules to provide greater flexibility for certain grandfathered health plans to make changes to certain types of cost-sharing requirements without causing a loss of grandfather status. In the IRS's view, the proposed amendments are appropriate because they would enable these plans to continue offering affordable coverage while also enhancing their ability to respond to rising healthcare costs and, in some cases, the proposed amendments would also ensure that the plans are able to comply with minimum cost-sharing requirements for high deductible health plans so enrolled individuals are eligible to contribute to health savings accounts.

Partnerships

Chief Counsel Addresses Section 965 Partnership Adjustments and Limitations Period: In PMTA-2020-8, the Office of Chief Counsel was asked for guidance on the statute of limitations for adjustments relating to Code Sec. 965 for various types of partnerships. In response, the Chief Counsel's Office advised that, provided no other extensions or suspensions of the statute of limitations on making assessments on Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and non-TEFRA/non-Bipartisan Budget Act of 2015 (BBA) partnerships or adjustments to BBA partnerships apply, then (1) for partnerships subject to TEFRA, assessments of tax related to adjustments to the partnership items of the partnership may be made (i) for all partners and all partnership items, within three years from the date the partnership return is filed (or the due date, if later), and (ii) for a specific partner who has a net tax liability described in Code Sec. 965(h)(6), within six years from the date the partner's return was filed (or due date, if later) for assessing the Code Sec. 965 net tax liability; (2) for partnerships subject to BBA, adjustments to the partnership-related items of the partnership may be made (i) for all partnership-related items, within three years of the date the partnership return is filed (or due date, if later) or the date an administrative adjustment request is filed, and (ii) within six years if any item of gross income required to be included under Code Sec. 951(a) (which includes the Code Sec. 965(a) inclusion amount) was omitted by the partnership; and (3) for partnerships not subject to BBA or TEFRA, assessments of tax may be made (i) within three years from the date the partner's return was filed (or the due date if later) for all items on the partnership return, or (ii) within six years for the net tax liability described in Code Sec. 965(h)(6).

Procedure

Sentence of Taxpayer Who Filed False Returns Based on "Legacy Trusts" Affirmed: In U.S. v. Blake, 2020 PTC 199 (7th Cir. 2020), the Seventh Circuit upheld a 36-month prison sentence of a taxpayer who had engaged in a fraudulent tax scheme that he claimed he only participated in after unnamed users in internet chat rooms persuaded him that the federal government was holding hidden bank accounts for its citizens - "legacy trusts" - that could be accessed through various legal maneuvers. The court found the prison sentence to be appropriate after noting that the taxpayer, who has a master's degree in business administration, filed false tax returns and received almost $150,000 from the IRS as a refund claimed on one of those returns.

Court Upholds Prison Sentence of Former IRS Employee Who Stole Taxpayer Checks: In U.S. v. Gambrell, 2020 PTC 187 (4th Cir. 2020), the Fourth Circuit affirmed the prison sentence of a former IRS employee who was found guilty of intercepting taxpayer checks and money orders and depositing them into her own bank account. While the government had recommended a lighter prison sentence than the sentence that was imposed, in part because of the IRS's culpability in hiring someone with a previous criminal record, the Fourth Circuit found that the increased prison time was appropriate in light of the severity of the charges and also concluded that the government had complied with its plea obligations to the former IRS employee.

Taxpayer's Case Is Moot Since No Live Controversy Remained: In Ruesch v. Comm'r, 154 T.C. No. 13, the Tax Court dismissed a challenge by the taxpayer to an IRS certification of her delinquent tax liability was a "seriously delinquent tax debt" under Code Sec. 7345 because the IRS subsequently reversed the certification as being erroneous. The court also concluded that, because it did not have jurisdiction under Code Sec. 7345 or any other provision to consider the taxpayer's challenge to her underlying liability for penalties, there remained no live controversy between the taxpayer and the IRS and the case was thus moot.

Chief Counsel Addresses Effect of Superseding Returns on the Statute of Limitations: In CCM 202026002, the Office of Chief Counsel advised that, for purposes of Code Sec. 6501 and the determination of when the statute of limitations begins in a situation where one tax return is filed and then a second tax return (a superseding return) is subsequently filed before the return due date, there is no effect on the statute of limitations because a return filed before the last day prescribed for filing is deemed filed on the last day. However, the Chief Counsel's Office noted, where the first return is filed before the last date prescribed for filing, and a second return is subsequently filed during the extension period, the statute of limitations begins running on different dates and, under Zellerbach Paper Co. v. U.S., 293 U.S. 172 (1934), the original return, not the superseding return, starts the limitations periods under both Code Sec. 6501 and, with respect to refunds, Code Sec. 6511.

Retirement Plans

Since Divorce Decree Was Not a QDRO, Ex-Spouse Not Entitled to Retirement Benefits: In Crowder v. Delta Airlines, Inc., 2020 PTC 184 (11th Cir. 2020), the Eleventh Circuit held that a taxpayer was not entitled to her ex-husband's retirement plan benefits after his death. The court noted that the taxpayer could have been entitled to such benefits if her divorce decree was a QDRO that gave her, as an alternate payee, rights to receive all or a portion of her ex-husband's plan benefits or directed that she, as the "former spouse . . . be treated as a surviving spouse of" her ex-husband.

Court Excuses Taxpayer from Penalty Assessed During Tumultuous Period in Her Life: In Seril v. Comm'r, T.C. Memo. 2020-101, the Tax Court held that, while a taxpayer who received distributions from her retirement account was taxable on the distributions, a portion of the distributions used for qualified higher education expenses was not subject to the penalty tax under Code Sec. 72(t). In addition, the court concluded that the taxpayer was not liable for the penalties assessed by the IRS because she exercised good faith in her tax reporting and the period during which the return was prepared was a very tumultuous period in her life.

IRS Clarifies Mid-Year Safe-Harbor Amendment Requirements: In Notice 2020-52, the IRS clarifies the requirements that apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan that reduces only contributions made on behalf of highly compensated employees. The notice also provides temporary relief in connection with the ongoing COVID-19 pandemic from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan adopted between March 13, 2020, and August 31, 2020, that reduces or suspends safe harbor contributions.

Tax-Exempt Organizations

Code Section 265 Can't Be Used to Disallow Contributions Used In Computing UBTI: In CCA 202027003, the Office of Chief Counsel advised that Code Sec. 265(a)(1) cannot be applied to disallow a Code Sec. 170 charitable contribution when calculating a tax-exempt organization's unelated business taxable income (UBTI) under Code Sec. 512(a)(1). The Chief Counsel's Office concluded that a charitable contribution is not allocable to tax-exempt income, but instead arises from a donor's charitable intent to voluntarily transfer money or property without receiving any benefit in return.

Tax Return Preparers

IRS Finalizes Regs Reducing Tax Return Preparer PTIN Fees: In T.D. 9903, the IRS issued final regulations relating to the user fees on tax return preparers which are substantially the same as the proposed regulations. The final regulations reduce the amount of the user fee to apply for or renew a preparer tax identification number (PTIN) from $33, plus $17 payable to a third-party contractor, to $21, plus $14.95 payable to a third-party contractor and affect individuals who apply for or renew a PTIN.

Appeals Court Affirms 96-Month Prison Sentence of Tax-Return Preparer: In U.S. v. Jeffries, 2020 PTC 200 (6th Cir. 2020), the Sixth Circuit affirmed the 96-month prison sentence and fine of $100,000 imposed on a tax-return preparer convicted of conspiring to defraud the United States and aiding the preparation and presentation of false income tax returns. The court noted that the taxpayer had secured large refunds for clients by filing false or misleading returns on their behalf, resulting in the underpayment of more than $1 million in taxes.

June 2020

Accounting

An In-Depth Look: The Paycheck Protection Program Flexibility Act. On Wednesday, June 3, the Senate passed the Paycheck Protection Program Flexibility Act of 2020. The bill, which had previously passed the House and which President Trump signed on Friday, makes significant improvements to the Paycheck Protection Program (PPP) by easing the rules for loan forgiveness. Changes include extending the covered period during which a PPP loan recipient may use loan proceeds and still be eligible for loan forgiveness, raising the percentage of nonpayroll expenses for which such loans may be used, and extending the timeframe that an employer has to rehire employees and creating a new exemption for situations in which such rehires are not possible. The bill also repeals a rule that would have prevented borrowers whose loans are forgiven from taking advantage of a provision in the CARES Act that allows the deferment of an employer's share of payroll taxes. H.R. 7010. Read more....

IRS Issues June 2020 Applicable Federal Rates: In Rev. Rul. 2020-12, the IRS issued a ruling which prescribes the applicable federal rates for June 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

Bankruptcy

FDIC Is Owner of Bankrupt Corporation's Federal Tax Refund: In In re United Western Bancorp, Inc., 2020 PTC 157 (10th Cir. 2020), on remand from the Supreme Court, the Tenth Circuit held that, applying Colorado state law, the Federal Deposit Insurance Corporation, as receiver for United Western Bank (the Bank), is the owner of a $4 million federal tax refund rather than the Bank's parent company, which is in bankruptcy. Earlier this year, in Rodriguez v. FDIC, 2020 PTC 72 (S. Ct. 2020), the Supreme Court held that state law, rather than a common law rule known as the "Bob Richards" rule, is well-equipped to handle disputes involving corporate property rights, including ones that involve federal bankruptcy and a tax dispute.

Charitable Deduction

Court Takes Midpoint of IRS's and Taxpayer's Valuations in Determining Easement's Value: In Johnson v. Comm'r, T.C. Memo. 2020-79, the Tax Court determined the value of a conservation easement that covered part of the taxpayer's ranch by taking the midpoints of the valuations determined by each side's experts. The court concluded that the diminution in the value of the taxpayer's ranch was $648,776 and the conservation easement's value was $372,919.

Credits

Premium Tax Credit Unaffected by Suspension of Personal Exemption Deduction: In REG-124810-19, the IRS issued proposed regulations which clarify that the premium tax credit in Code Sec. 36B is unaffected by the suspension of the personal exemption deduction, which is reduced to zero for tax years beginning after December 31, 2017, and before January 1, 2026. While the regulations are proposed to apply to tax years ending after the date the final regulations are adopted, the IRS said that taxpayers may rely on the regulations immediately.

Rehabilitation Credit Is Allocated Over a Five-Year Period: In REG-124327-19, the IRS issued proposed regulations on the Code Sec. 47 rehabilitation credit, including rules to coordinate the new five-year period over which the credit may be claimed with other special rules for investment credit property. The regulations are proposed to apply to tax years beginning on or after the date the regulations are published as final; however, taxpayers may rely on the proposed regulations for qualified rehabilitation expenditures paid or incurred after December 31, 2017, in tax years beginning before the date the regulations are finalized, provided the taxpayers follow the proposed regulations in their entirety and in a consistent manner.

IRS Changes Beginning-of-Construction Requirement for Certain Tax Credits: In Notice 2020-41, the IRS modifies prior guidance on the beginning-of-construction requirement for both the production tax credit for renewable energy facilities under Code Sec. 45 and the investment tax credit for energy property under Code Sec. 48. In response to the Coronavirus Disease 2019 (COVID-19) pandemic, the IRS (1) provides that the continuity safe harbor provided and extended by prior IRS notices is further extended for projects that began construction in either calendar year 2016 or 2017, and (2) provides a 3 1/2 month safe harbor for services or property paid for by the taxpayer on or after September 16, 2019 and received by October 15, 2020.

Employee Benefits

IRS Provides Guidance on Employees Using Benefits for COVID-19-Related Charities: In Notice 2020-46, the IRS provides that cash payments employers make to charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave which their employees forgo will not be treated as compensation. Similarly, the employees will not be treated as receiving the value of the leave as income and cannot claim a deduction for the leave that they donated to their employer; however, employers may deduct the cash payments as a business expense or as a charitable contribution deduction if the employer otherwise meets the applicable requirements.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-45, 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, the 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, Gifts, & Trusts

Gift Transfer Document Determines Gift Valuation, Not Donor's Intention: In Nelson v. Comm'r, T.C. Memo. 2020-81, the Tax Court held that two gifts of limited partnership interests that were transferred by a taxpayer were not valued at fixed dollar amounts as the taxpayer had argued but were instead valued at percentage interests. The court noted that, while the intention may have been to transfer dollar values of the limited partner interests, the gift transfer document provided otherwise.

Advances to Son Were Partially Loans and Partially Gifts: In Estate of Bolles v. Comm'r, T.C. Memo. 2020-71, the Tax Court held that advances made by a taxpayer to her son, prior to her death, were loans through 1989 but, after that, were gifts. The court noted that the decedent expected her son to repay the loans because she expected him to be a successful architect but realized by the end of 1989 that he was unlikely to be successful and repay her advances.

Federal Grants

Federal Circuit Affirms Federal Claims Court Decision in Section 1603 Grant Case: In California Ridge Wind Energy LLC v. U.S., 2020 PTC 155 (Fed. Cir. 2020), the Federal Circuit affirmed the Court of Federal Claims and held that two windfarm owners had not proved that proposed development fees were properly included in their cost bases when applying for a cash grant from the federal government under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009. The court noted that it was the windfarm owners' burden to justify the amount of the development fees it claimed in support of the grant amount and the owners had not done so.

Foreign

IRS Provides a Waiver for Meeting Time Requirements Relating to Foreign Earned Income: In Rev. Proc. 2020-14, the IRS provides a waiver under Code Sec. 911(d)(4) for the time requirements that must be met for individuals electing to exclude their foreign earned income who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. The procedure adds the Democratic Republic of the Congo, Haiti, Sudan, and Venezuela to the list of waiver countries for tax year 2019 for which the minimum time requirements are waived.

List of Countries That U.S. Has Information Exchange Agreements in Force Is Updated: In Rev. Proc. 2020-15, the IRS supersedes Rev. Proc. 2019-23 by providing an updated list of countries with which the United States has in force an information exchange agreement, such that bank deposit interest paid to residents of such countries must be reported by payors to the extent required under Reg. Sec. 1.6049-8(a) and Reg. Sec. 1.6049-4(b)(5). The revenue procedure adds one country, Singapore, to this list.

Gross Income

Upfront Payments to Class-Action Attorney Are Income in Year Received: In Novoselsky v. Comm'r, T.C. Memo. 2020-68, the Tax Court held that a class action litigation attorney, who received upfront payments from clients to support the cost of litigation, had to include those payments in income in the year received and could not, instead, treat them as loans. The court also found the taxpayer liable for accuracy-related penalties after noting that the taxpayer had considerable experience with contingent fee litigation and fee-sharing agreements and the proper tax treatment of such payments was not a novel issue for him.

Healthcare

IRS Issues PCORTF Fee for Policy Years Ending After October 1, 2019: In Notice 2020-44, the IRS provides that the adjusted applicable dollar amount that applies for determining the Patient-Centered Outcomes Research Trust Fund (PCORTF) fee for policy years and plan years ending on or after October 1, 2019 and before October 1, 2020 is equal to $2.54. This adjusted applicable dollar amount was determined using the percentage increase in the projected per capita amount of the National Health Expenditures published by HHS in February 2019.

Procedure

IRS Invites Public to Comment on 2020-2021 Priority Guidance Plan: In Notice 2020-47, the IRS invited the public to submit recommendations for items to be included on the 2020-2021 Priority Guidance Plan, which the IRS uses each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. While there is no particular format in which to submit the recommendations, the IRS encouraged the public to briefly describe the recommended guidance and explain the need for the guidance.

Interest Rates for the Third Quarter of 2020 Announced: In Rev. Rul. 2020-13, the IRS announced the interest rates for the 3rd quarter of 2020. The rates for interest determined under Code Sec. 6621 for the calendar quarter beginning July 1, 2020, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent.

Government's Suit Against Taxpayer Was Filed Within Failsafe Period: In U.S. v. Weiss, 2020 PTC 156 (E.D. Pa. 2020), a district court held that, because a government suit against a taxpayer who owed the IRS $773,000 was filed 64 days after the Supreme Court denied certiorari in the taxpayer's case, the suit was begun within the 90-day "failsafe" period in Code Sec. 6330(e)(1). Thus, the court found that the government's suit was not barred by the statute of limitations as had been argued by the taxpayer.

Retirement Plans

Temporary Relief from Certain Physical Presence Requirements Provided: In Notice 2020-42, in response to the public health emergency caused by the Coronavirus Disease 2019 (COVID-19) pandemic, and the related social distancing that has been implemented, the IRS issued temporary relief from the physical presence requirement in Reg. Sec. 1.401(a)-21(d)(6) for participant elections required to be witnessed by a plan representative or a notary public, including a spousal consent required under Code Sec. 417. While this temporary relief, which covers the period from January 1, 2020, through December 31, 2020, is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, it applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

RICs and REITs

IRS Modifies Safe Harbor in Rev. Proc. 2017-45 for RICs and REITs: In Rev. Proc. 2020-19, the IRS provides temporary guidance regarding the treatment of certain stock distributions by publicly offered real estate investment trusts (REITs) and publicly offered regulated investment companies (RICs). Specifically, in recognition of the need for enhanced liquidity during the current period of economic disruption, the guidance modifies the safe harbor provided in Rev. Proc. 2017-45, by temporarily reducing the minimum required aggregate amount of cash that distributee shareholders may receive to not less than 10 percent of the total distribution in order for Code Sec. 301, by reason of Code Sec. 305(b), to apply to such distribution.

Tax-Exempt Organizations

Prop. Regs Address Excise Tax on Certain Tax-Exempt Org Remuneration: In REG-122345-18, the IRS issued proposed regulations under Code Sec. 4960, which imposes an excise tax on remuneration in excess of $1,000,000 and any excess parachute payment paid by an applicable tax-exempt organization to any covered employee. The regulations affect certain tax- exempt organizations and certain entities that are treated as related to those organizations.

Withholding Taxes

Prop. Reg Addresses Income Tax Withholding on Certain Periodic Payments: In REG-100320-20, the IRS issued a proposed regulation that provides rules for federal income tax withholding on certain periodic retirement and annuity payments to implement an amendment made by the Tax Cuts and Jobs Act of 2017 to Code Sec. 3405(a)(4). The proposed regulation would affect payors of such periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments.

May 2020

Capital Gains

Partnership's Receipt of Settlement Award Is Capital Gain Income: In NCA Argyle LP v. Comm'r, T.C. Memo. 2020-56, the Tax Court held that a damage award obtained by a partnership as a result of litigation with a former business partner is capital gain income because it was received in exchange for the partnership's joint venture interest. The court rejected the IRS's argument that the settlement was ordinary income after noting that the award was the result of an arm's length negotiation between adversarial parties.

COVID-19

House Passes $3 Trillion HEROES Act Bill: The House of Representatives, by a vote of 208-199, passed a $3 trillion piece of legislation, the HEROES Act (H.R. 6800), aimed at helping financially burdened state and local governments, extending special unemployment benefits and direct payments to individuals, and strengthening businesses, health care programs, and essential workers during the coronavirus pandemic. The bill, which includes extensive tax provisions, is not expected to receive serious consideration in the Senate, but may serve as the House's opening offer in negotiations over the next round of COVID-19 legislation.

Former Pharmacist Granted Early Release Due to COVID-19 Virus: In U.S. v. Harper, Jr., 2020 PTC 139 (W.D. Va. 2020), a district court granted compassionate early release due to the threat of the COVID-19 virus to a 62-year old former pharmacist, currently incarcerated in a North Carolina correctional facility, who has numerous underlying medical conditions (including left ventricular hypertrophy, chronic obstructive pulmonary disease, asthma, hypertension, emphysema, and sleep apnea). The former pharmacist had been sentenced to 41 months and ordered to pay over $5 million in restitution after failing to pay over to the IRS payroll tax he withheld from his employees' checks.

Credits

Corporation Can't Claim Foreign Tax Credit Relating to STARS Transaction: In Wells Fargo & Co. v. U.S., 2020 PTC 132 (8th Cir. 2020), the Eighth Circuit affirmed a district court and held that a U.S. corporation was not entitled to a foreign tax credit on its 2003 tax return where the credit arose from a structured trust advantaged repackaged securities (STARS) transaction it entered into with a British bank. The court also affirmed that the corporation was liable for a negligence penalty after claiming that credit.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-37, 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, the 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).

FSA Carryover Amount Increased from $500 to $550: In Notice 2020-33, the IRS modified Notice 2013-71 to increase the carryover limit of unused amounts remaining as of the end of a plan year in a health flexible spending arrangement (health FSA) under a Code Sec. 125 cafeteria plan that may be carried over to pay or reimburse a participant for medical care expenses incurred during the following plan year. The notice increases the limit for unused health FSA carryover amounts from $500, to a maximum of $550, as adjusted annually for inflation.

Foreign

Certain Activities Are Not Taken Into Account for Purposes of Form 8858: In Rev. Proc. 2020-30, the IRS provides that certain activities are not taken into account for purposes of Code Sec. 1503(d) or Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), as a result of travel restrictions and disruptions resulting from the global outbreak of the virus that causes COVID-19. The guidance provides relief to individuals that temporarily conducted activities in a foreign country that would not otherwise have been conducted there.

FBAR Penalties Apply to Taxpayer Parking Money in Offshore Accounts: In U.S. v. Guggenheim, 2020 PTC 126 (D. N.J. 2020), a district court concluded that a taxpayer owed $100,000 for willfully violating the Foreign Bank Account Report (FBAR) statute by not reporting money received from his father that was subsequently invested in an offshore company in the British Virgin Islands that held numerous foreign bank accounts. The court noted that the taxpayer also received about $450,000 in distributions from the foreign bank accounts that he did not report on his federal income tax returns.

FBAR Penalties Survive Taxpayer's Death: In U.S. v. Green, 2020 PTC 137 (S.D. Fla. 2020), a district court held that the IRS could recover unpaid financial penalties imposed on a taxpayer, who subsequently died, for willfully failing to timely file accurate Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for years 2010 and 2011. The court rejected arguments by the taxpayer's children that the FBAR penalties abated upon the taxpayer's death and stated that granting a windfall to estates of violators of the FBAR requirements because the violator suffered the paradoxical fortune and misfortune of passing away after the violation occurred and before the government filed suit against him or her for FBAR violations contradicts the remedial purpose of the FBAR filing requirements.

Prop. Regs Address Hybrid Arrangements and Allocation of Deductions: In REG-106013-19, the IRS issued proposed regulations that (1) adjust hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation that are included in income by a U.S. shareholder, (2) address, for purposes of the conduit financing rules, arrangements involving equity interests that give rise to deductions (or similar benefits) under foreign law; and (3) address the treatment of certain payments under the global intangible low-taxed income (GILTI) provisions. The proposed regulations affect U.S. shareholders of foreign corporations and persons that make payments in connection with certain hybrid arrangements.

IRS Finalized Rules Relating to Certain Hybrid Arrangements: In T.D. 9896, the IRS issued final regulations that (1) provide guidance regarding hybrid dividends and certain amounts paid or accrued pursuant to hybrid arrangements, which generally involve arrangements whereby U.S. and foreign tax law classify a transaction or entity differently for tax purposes, (2) address dual consolidated losses and entity classifications to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign jurisdiction, (3) provide for information reporting to facilitate the administration of certain rules in the final regulations, and (4) affect taxpayers that would otherwise claim a deduction relating to such amounts and certain shareholders of foreign corporations that pay or receive hybrid dividends.

Partnerships

IRS May Adjust Partner's Outside Basis at the Partner Level: In CCA 202020001, the Office of Chief Counsel advised that a partner's outside basis in his/her partnership interest is an affected item that may be adjusted at the partner level without opening a partnership-level examination, if the partnership return is accepted as filed. According to the Chief Counsel's Office, when adjusting outside basis at the partner level in this manner, none of the partnership-item components of outside basis can be changed without opening a TEFRA proceeding.

Procedure

IRS Abused Its Discretion by Rejecting Couple's Proposed Installment Agreement: In Kirkley v. Comm'r, T.C. Memo. 2020-57, the Tax Court held that by sustaining a proposed levy notice and rejecting a couple's proposed installment agreement because the couple had not first sold almost all of their property, including their residence, the IRS abused its discretion. According to the court, the abuse of discretion arose from the IRS's erroneous assumption that the Internal Revenue Manual provides no discretion to IRS agents to accept an installment agreement unless the taxpayer first sells all of his or her property.

Husband's Testimony Doesn't Qualify as Credible Evidence to Shift Burden to IRS: In Larkin v. Comm'r, 2020 PTC 125 (D.C. Cir. 2020), the D.C. Circuit generally affirmed a Tax Court decision with respect to taxes and penalties owed by a married couple who are dual residents of the United States and United Kingdom and who paid no federal income tax for the four years they lived in the United Kingdom. With respect to the couple's claim that the burden of proof should have shifted to the IRS for their charitable-contribution deductions because they submitted adequate, credible evidence at trial, the D.C. Circuit found that, absent any documentation, the trial testimony of the husband, who is also a lawyer, did not qualify as "credible evidence" under Code Sec. 7491(a) that would shift the burden to the IRS.

Court Upholds Summons Against Law Firm That Helped Clients With Foreign Accounts: In Taylor Lohmeyer Law Firm P.L.L.C. v. U.S., 2020 PTC 133 (5th Cir. 2020), the Fifth Circuit held that a district court did not err by granting a government petition to enforce a summons issued to a law firm, which provides estate and tax planning advice to its clients, notwithstanding the firm's blanket claim that all documents responsive to the summons are protected by attorney-client privilege. The summons was the result of a government investigation that arose because of an audit of one of the firm's clients, where the firm assisted the client in establishing foreign accounts and entities, and executing subsequent transactions relating to those foreign accounts and entities.

IRS Allows Taxpayers to Electronically Submit Ruling and Other Requests: In Rev. Proc. 2020-29, the IRS modified the procedures in Rev. Proc. 2020-1 to temporarily allow for the electronic submission of requests for private letter rulings, closing agreements, determination letters, and information letters under the jurisdiction of the IRS Office of Chief Counsel, and for determination letters issued by the IRS Large Business and International Division (LB&I). Until modified or superseded, both paper and electronic requests for advice described in the new procedure will be accepted.

Recovery Rebates

Lack of Dependent Info Means Some Will Receive $500 Payment after Filing 2020 Return: In IR-2020-86, the IRS clarified that, because it lacked dependent information for recipients of social security, railroad retirement, social security income and veteran affairs benefits, the 2020 recovery rebate payments under the CARES Act did not include the additional $500 per eligible child amount unless the IRS had received dependent information from non-filers before May 6, 2020. The IRS said that eligible recipients of the $500 per eligible child amount, who did not receive that benefit, can expect such amounts after filing a 2020 tax return.

RICs and REITs

IRS Issues Safe Harbor for Certain RIC and REIT Distributions: In Rev. Proc. 2020-19, the IRS modified Rev. Proc. 2017-45 solely with respect to distributions declared by a publicly offered real estate investment trust (REIT) or publically offered regulated investment company (RIC) on or after April 1, 2020, and on or before December 31, 2020. To enable publicly offered REITs and publicly offered RICs to conserve capital, the revenue procedure modifies the safe harbor provided in Rev. Proc. 2017-45, to temporarily reduce the minimum amount of cash that shareholders may receive to not less than 10 percent of the total declared distribution in order for the distribution to be taxable under Code Sec. 301.

Tax Return Preparers

IRS Proposes Reduction in PTIN Fee: In REG-117138-17, the IRS issued proposed regulations which would reduce the amount of the user fee that tax practitioners have to pay when they apply for, or renew, a preparer tax identification number (PTIN). The proposal would reduce the user fee from $33 per application or renewal to $21.

Tax-Exempt Bonds

IRS Expands Temp Rule Allowing Issuers to Purchase Some of Their Own Tax-Exempt Bonds: In Notice 2020-25, the IRS announced that it is temporarily expanding the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150. The notice is effective May 4, 2020, and issuers may apply the notice retroactively to purchases on or after January 1, 2020.

IRS Addresses Public Approval Requirement for Certain Bonds in Light of Pandemic: In Rev. Proc. 2020-21, the IRS provides temporary guidance regarding the public approval requirement under Code Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the Coronavirus Disease 2019 (COVID-19) pandemic, the revenue procedure provides that hearings will be held by teleconference as described in the revenue procedure.

April 2020

Most Popular

An In-Depth Look at the Payroll Protection Program (PPP): In the face of unprecedented economic disruptions due to the Coronavirus (COVID-19) outbreak, a Payroll Protection Program was authorized as part of the CARES Act that was signed into law on March 27, 2020. This new loan program authorizes the Small Business Administration to guarantee $349 billion in new loans to eligible businesses and nonprofits and, if certain criteria are met, the loan may qualify for tax-free loan forgiveness. Because the loans are available until the later of June 30 or until the money runs out, time is of the essence in applying for such loans and business owners will need their tax advisor's help in navigating the requirements that must be met to obtain such loans. The following is in-depth look at the program, its benefits, the criteria that must be met to obtain a loan, and the rules for loan forgiveness. Read more....

In-Depth: A Tax Practitioner's Guide to the CARES Act (Client Letter Included) On Wednesday March 25, the Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion economic relief package featuring extensive tax provisions. On Friday, March 27, the House also overwhelmingly approved the legislation, which President Trump signed the same day. This article includes an in-depth discussion of the tax provisions in the CARES Act, a brief summary of its non-tax provisions, and links to sample client letters. Pub. L. 116-136. (published 3/31/2020). Read more....

Accounting

IRS Issues May 2020 Applicable Federal Rates: In Rev. Rul. 2020-11, the IRS issued a ruling which prescribes the applicable federal rates for May 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

IRS Issues April 2020 Applicable Federal Rates: In Rev. Rul. 2020-9, the IRS issued a ruling which prescribes the applicable federal rates for April 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

COVID-19 Pandemic

Safe Harbors Provided for Modifications under CARES Act Forbearance Program: In Rev. Proc. 2020-26, the IRS provides safe harbors under which modifications to certain mortgage loans in connection with a forbearance program authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary for purposes of determining the federal income tax status of certain securitization vehicles that hold the loans. The revenue procedure also describes a safe harbor under which certain securitization vehicles are not treated as having improper knowledge of an anticipated default on the grounds that they acquired a mortgage loan with respect to which the borrower had participated in a forbearance program.

Deductions

Additional Guidance on Interest Expense Deduction Limitations Issued: In Rev. Proc. 2020-22, the IRS addresses the Code Sec. 163(j)(7)(B) election to be an electing real property trade or business and the Code Sec. 163(j)(7)(C) election to be an electing farming business for purposes of the business interest expense deduction limitation under Code Sec. 163(j). The guidance (1) provides that certain taxpayers can make a late election, or withdraw an election, under Code Sec. 163(j)(7)(B) or Code Sec. 163(j)(7)(C), as applicable, on an amended federal income tax return, an amended Form 1065, or an administrative adjustment request under Code Sec. 6227; and (2) describes the time and manner in which certain taxpayers can elect (i) out of the 50 percent adjusted taxable income (ATI) limitation for tax years beginning in 2019 and 2020, (ii) to use the taxpayer's ATI for the last tax year beginning in 2019 to calculate the taxpayer's Code Sec. 163(j) limitation for tax year 2020, and (iii) out of deducting 50 percent of excess business interest expense (EBIE) for tax years beginning in 2020 without limitation.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-27, 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, the 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, Gifts, and Trusts

Deadlines Extended for Gift and Generation-skipping transfer Tax Returns: In Notice 2020-20, the IRS is providing federal income tax filing and payment relief on account of the Coronavirus Disease 2019 (COVID-19) emergency. In addition to the relief provided in Notice 2020-18, the IRS is providing additional relief to all taxpayers who have federal gift (and generation-skipping transfer) tax returns and payments due on April 15, 2020, by postponing such deadlines to July 15, 2020, and suspending associated interest, additions to tax, and penalties for late filing or late payment also until July 15, 2020.

Gross Income

Amount Received in Stock Disposition Was Taxable Interest and Not Capital Gains: In Goldring v. U.S., 2020 PTC 118 (E.D. La. 2020), a district court granted summary judgment to the IRS after finding that proceeds awarded to a taxpayer in connection with the disposition of her stock in a corporation via a cash-out merger were properly classified as taxable interest income. According to the court, although the taxpayer agreed to surrender her stock pursuant to an agreement that included statutory interest, the disputed character of the remaining amount of the payment did not reflect a gain from the sale or exchange from such stock, but instead represented statutory interest in order to compensate the taxpayer for the loss of use of her stock for a specific period of time.

Procedure

IRS Public Hearings to Be Held Telephonically: In Announcement 2020-4, the IRS advised that it would be conducting public hearings on notices of proposed rulemaking by telephone until further notice, and is encouraging taxpayers to submit public comments electronically. Individuals who want to testify (by telephone) at a public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing and the subject line of the email must contain the regulation number (REG-XXXXXX-XX) for the hearing and the word TESTIFY.

Form 4549 Signed by Taxpayer Was Not a Binding Contract: In Goldberg v. Comm'r, T.C. Memo. 2020-38, the Tax Court held that (1) a Form 4549, Income Tax Examination Changes, prepared by the IRS in April 2011 and signed by the taxpayer and his wife in May 2011, was not a binding contract under which the couple owed no interest for their 2004 tax year, and (2) with the exception of one time period out of 22 time periods between years 2007 and 2014, the taxpayer was not entitled to an abatement of interest under Sec. 6404(e)(1). The court sustained the IRS's notice of determination, with the exception of an abatement of interest for the one time period mentioned and concluded that the IRS Office of Appeals did not abuse its discretion in denying interest abatements for the other time periods.

Chief Counsel's Office Changes Procedures Relating to Chief Counsel Documents: In CC-2050-5, the Office of Chief Counsel announced changes to procedures relating to electronic clearance and digital signatures for Office of Chief Counsel documents and regulations. Effective immediately, where a physical document or file previously would have been used to clear a document, the same document may be submitted to the approving official electronically via email and the subject line of the email must reflect that the document is being submitted for clearance.

Chief Counsel's Office Explores Exception to Third-party Contact Rule: In CCM 202013015, the Office of Chief Counsel advised that IRS contacts with non-IRS federal, state, local, or foreign government agencies or their employees are generally not considered third-party contacts under Reg. Sec. 301.7602-2(f)(5); however, an exception to this general rule exists if the IRS contact with another government agency concerns that other government agency's business (such as a taxpayer contract with or employment by the other agency) with the taxpayer. Additionally, the Chief Counsel's Office concluded that the general exception that IRS contacts with a non-IRS government employee are not considered third-party contacts applies equally to IRS verbal discussions with the non-IRS government employee as to a formal request for documentary information and the very limited, in context, exception to this general rule for when the subject matter of the government's cause of action concerns the taxpayer's employment by, or business contract with, the Department of Justice would also be applied the same way.

March 2020

Accounting

IRS Issues March 2020 Applicable Federal Rates: In Rev. Rul. 2020-6, the IRS issued a ruling which prescribes the applicable federal rates for March 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

Bankruptcy

Debtor Must Turn Over Half of Tax Refund Pledged in Loan Agreement: In In re Somerset Regional Water Resources, LLC, 2020 PTC 63 (3d Cir. 2020), the Third Circuit affirmed a bankruptcy court's decision that rejected a debtor's novel reading of an agreement entered into by the debtor and a trust in which the debtor pledged as collateral his tax-refund check in exchange for a loan from the trust. The court stated that the bankruptcy court properly ordered the taxpayer and his wife to turn over the taxpayer's half of the refund to the trust.

Shared Responsibility Payment Is Not an Excise Tax Entitled to Priority in Bankruptcy: In In re Chesteen, 2020 PTC 69 (5th Cir. 2020), the Fifth Circuit reversed a holding by a district court in which that court concluded that the Patient Protection and Affordable Care Act's shared-responsibility payment (SRP) is entitled to priority treatment in bankruptcy as an excise tax pursuant to 11 U.S.C. Sec. 507(a)(8)(E)(i). According to the Fifth Circuit, an excise tax is imposed on some type of activity, such as manufacturing, production, etc. and the SRP is, therefore, not an "excise tax" as used in 11 U.S.C. Sec. 507(a)(8)(E)(i) since it is applied in situations where a taxpayer failed to meet the individual-mandate requirement for at least one month.

Compensation

IRS Fails to Show That Insurance Agent's Deferred Comp Plan Was Taxable: In Keels v. Comm'r, T.C. Memo. 2020-25, the Tax Court held that an insurance agent was not taxable on the year-end balances in his insurance company's deferred compensation plan. The court found that the IRS failed to meet its burden of showing that the plan at issue did not meet at least one of the requirements of Code Sec. 409A.

COVID-19 Pandemic

Tax Court Building Remains Closed; Trial Sessions Cancelled Through the End of June: The Tax Court issued a press release on March 23, 2020 stating that it has determined that it is appropriate to keep the Tax Court building closed, to continue having personnel working remotely, and to cancel trial sessions scheduled in various locations thru the end of June. The court noted that, while mail will not be delivered to the court until the building opens, the eAccess and eFiling systems remain operational and the court will continue to process items received electronically, serve orders and opinions, enter and serve decisions, work with litigants, and receive telephone calls.

Credits

IRS Provides Methods for Taxpayers to Establish Construction of Qualified Facility: In Notice 2020-12, the IRS provides two methods for a taxpayer to establish that construction of a qualified facility or carbon capture equipment has begun for purposes of the carbon oxide sequestration credit under Code Sec. 45Q. As a result of the modifications made by the Bipartisan Budget Act of 2015, the credit under Code Sec. 45Q now applies to the sequestration of qualified carbon oxide, a broader term than the "qualified carbon dioxide" that was previously the subject of the credit and Code Sec. 45Q now provides that construction of a qualified facility that includes carbon capture equipment must begin before January 1, 2024.

Partnership Safe Harbor Applies for Sec. 45Q Credit: In Rev. Proc. 2020-12, the IRS provides a safe harbor for partnerships to make valid allocations of the carbon oxide sequestration credit under Code Sec. 45Q. The safe harbor is similar to those developed for partnerships receiving the wind energy production tax credit and the rehabilitation credit and simplifies the application of Code Sec. 45Q credit rules to partnerships able to claim the credit.

Deductions

Taxpayer Can Deduct Rental Expenses for Home He Used Entirely for Business: In Benton v. Comm'r, T.C. Summary 2020-12, the Tax Court held that a taxpayer, who operated a picture framing business in a house in a residential community, was entitled to deduct as a business expense the rent he paid for the house. The court found that the taxpayer did not use the house as a residence and thus rejected the IRS's reliance on Code Sec. 280A in disallowing the rental expense.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-16, 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, the 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 Issues 2020 Cumulative List of Plan Changes: In Notice 2020-14, the IRS issued the 2020 Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Benefit Plans. The IRS Cumulative Lists identify changes in the qualification requirements of the Internal Revenue Code that are required to be taken into account in a pre-approved plan document submitted under the pre-approved plan program administered by the IRS and that will be considered by the IRS for purposes of issuing opinion letters.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-11, 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, the 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, Gifts, and Trusts

Court Rejects Expert's Reliance on Additional Actions in Valuing LLC Interest: In Grieve v. Comm'r, T.C. Memo. 2020-28, the Tax Court held that, in determining the fair market value for gift tax purposes of a taxpayer's interest in a limited liability company (LLC) that was transferred to a grantor retained annuity trust, and the taxpayer's interest in an LLC transferred to a family irrevocable trust, an IRS expert's reliance on an additional action being taken with respect to some of the units in one of the LLCs was not appropriate. According to the court, elements affecting the value of an LLC interest that depend upon events within the realm of possibility should not be considered if the events are not shown to be reasonably probable.

Exclusions from Gross Income

Exonerated Military Service Members' Back Pay Isn't Taxable: In PMTA 2020-5, the Office of Chief Counsel advised that payments in the form of back pay made to U.S. military service members following the reversal of a court martial conviction are considered a civil damage, restitution, or other monetary award related to the service member's wrongful incarceration under Code Sec. 139F and may be excluded from gross income if all other requirements of Code Sec. 139F are satisfied. According to the Chief Counsel's Office, a service member's wrongful incarceration is the proximate cause of that individual's lost wages when the court martial sentence includes incarceration and forfeiture of pay so that the payment of back wages resulting from exoneration is related to, and on account of, the incarceration under Code Sec. 139F.

Foreign

Final Regulations on Covered Asset Acquisitions Issued: In T.D. 9895, the IRS issued final regulations under Code Sec. 901(m) with respect to covered asset acquisition transactions that generally are treated as asset acquisitions for U.S. income tax purposes and either are treated as stock acquisitions or are disregarded for foreign income tax purposes. The regulations are necessary to provide guidance on applying Code Sec. 901(m) and affect taxpayers claiming foreign tax credits.

Taxpayer Liable for Almost $1 Million in Penalties for Not Filing FBAR: In Ott v. U.S., 2020 PTC 77 (E.D. Mich. 2020), a district court held that a taxpayer who owned several Canadian brokerage accounts was liable for almost $1 million in penalties for failing to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) for calendar years 2007, 2008, and 2009. The court concluded that the taxpayer's failure to review his tax returns, his decision not to ask his tax preparer about foreign account reporting obligations, his decision to send his mail to a Canadian address, and his knowledge of almost a million dollars in account balances for the years in question all indicated that he acted with reckless disregard to his reporting requirements.

U.S Beneficiary of Foreign Trust Can Claim Withholding Credits: In PMTA 2020-6, the Office of Chief Counsel advised that, under Code Sec. 1462, a U.S. beneficiary of a foreign complex trust may claim a credit for taxes withheld under Code Sec. 1441 on payments of U.S. source income to the foreign complex trust and included in the trust's income for the year of payment provided that the foreign trust distributes all or a portion of the income to the U.S. beneficiary during the tax year, properly allocates the withholding associated with the distribution to the U.S. beneficiary, and does not itself claim a credit or refund with respect to the Code Sec. 1441 withholding allocated to the beneficiary. According to the Chief Counsel's Office, the U.S. beneficiary must include on its federal income tax return the amount of income required to be reported under Code Sec. 1462 that is associated with the distribution and the amount of credit properly allocable to the income reportable from the distribution and must substantiate entitlement to the credit for the withholding.

Foreign Housing Adjustments Released for 2020: In Notice 2020-13, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States and, if the limitation on housing expenses is higher for tax year 2020 than the adjusted limitations on housing expenses provided in Notice 2019-24, qualified taxpayers may apply the adjusted limitations for tax year 2020 to their 2019 tax year.

Penalties

FinCEN Announces Inflation Adjustments to Civil Monetary Penalties: In the Federal Register, FinCEN published inflation adjustments to its civil monetary penalties as mandated by the Federal Civil Penalties Inflation Adjustment Act of 1990. Civil penalties for willful violation of the Bank Secrecy Act relating to the filing of a Foreign Bank Account Report have increased from a maximum penalty of the greater of $100,000 or 50 percent of the balance in the account at the time of violation to a maximum penalty of the greater of $134,806 or 50 percent of the balance in the account at the time of violation.

Procedure

Tax Loss for Sentencing Purposes Is the Amount of Refunds Shown on False Returns: In Badger v. U.S., 2020 PTC 93 (N.D. Miss. 2020), a district court held that, in determining the amount of tax loss resulting from a Mississippi prison inmate filing false tax returns under the names of other inmates that requested tax refunds of more than $500,000, the amount of tax loss calculated for purposes of determining the inmate's prison sentence is the intended tax loss, not the government's actual loss. Thus, the taxpayer's motion to vacate his sentence was denied.

IRS Did Not Abuse Its Discretion in Denying Whistleblower's Claim: In Cline v. Comm'r, T.C. Memo. 2020-35, the Tax Court held that the IRS Whistleblower Office (WBO) did not abuse its discretion when it denied a whistleblower's first claim and rejected the whistleblower's second claim. The Tax Court found that the information provided in the first claim did not result in the collection of any proceeds and, with respect to the second claim, the court stated that the WBO's conclusion that the claim was speculative did not appear to lack a sound basis in fact and law.

Interest Rates Remain the Same for the Second Quarter of 2020: In Rev. Rul. 2020-7, the IRS announced that the interest rates on overpayments and underpayments of tax will remain the same for the calendar quarter beginning April 1, 2020. The rates will be: five (5) percent for overpayments [four (4) percent in the case of a corporation]; two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000; five (5) percent for underpayments; and seven (7) percent for large corporate underpayments.

Court Orders Sale of Delinquent Taxpayer's One-Half Interest in His Sister's Home: In U.S. v. Dase, 2020 PTC 76 (N.D. Ala. 2020), a district court granted the government's request for a court ordered sale of property a delinquent taxpayer owned as a tenant in common with his sister and which was solely occupied by his sister as her principal residence. The court noted that the taxpayer owed almost $300,000 in taxes and his only asset was his one-half interest in the property in which his sister lived and the forced sale of the property was appropriate under the circumstances.

Refund Claim Dismissed after Taxpayer Fails to Sign the Claim Under Penalty of Perjury: In Dixon v. U.S., 2020 PTC 70 (Fed. Cl. 2020), the Court of Federal Claims dismissed a taxpayer's claim for a refund of certain foreign taxes because the taxpayer did not sign his refund claim under penalties of perjury or designate signing authority to another through a valid power of attorney. Because a signature under penalties of perjury is a jurisdictional requirement in tax refund suits, the court granted the government's motion and dismissed the taxpayer's complaint.

S Corporations

Dividends from S Corporation Aren't Qualified Dividends: In Liu v. Comm'r, T.C. Memo. 2020-31, the Tax Court held that dividends a couple received from a wholly owned S corporation that operates a Montessori school were not qualified dividends as the couple had reported but instead were properly classified as ordinary income. Since the S corporation reported ordinary income for the years at issue, the court found that the shareholders also had ordinary income.

Tax Accounting

Chief Counsel Addresses Use of Hybrid Method by Construction Contractors: In CCA 202008007, the Office of Chief Counsel concluded that construction contractors may compute taxable income using the cash method of accounting, except for purchases and sales, when the contractors are providing substantial services while also producing, purchasing, or selling merchandise as an income producing factor in their businesses. The Chief Counsel's Office noted that, while Reg. Sec. 1.446-1(c)(2)(i) provides that in any case in which it is necessary to use an inventory, an accrual method of accounting must be used with regard to purchases and sales unless otherwise authorized, Reg. Sec. 1.446-1(c)(1)(iv) authorizes the use the cash method in computing all other items of income and expense.

Tax Court

Tax Court Posts Announcement on COVID-19/Coronavirus: On Monday, March 9, the Tax Court announced the following on its website: Considering recent announcements and media coverage regarding the COVID-19/Coronavirus, the U.S. Tax Court would like to assure the public that the Court is following recommended guidelines provided by the Centers for Disease Control and Prevention. The announcement goes on to state that (1) effective March 9, 2020, and until further notice, out of an abundance of caution, the Court is encouraging social distancing and will therefore limit the number of people in the courtroom at any one time; (2) if an individual is required to appear in Court and is experiencing any flu like symptoms, has a fever, or is coughing or sneezing, the individual should contact the Court before appearing; (3) the Court will make reasonable accommodations and reschedule appearances, hearings, and trials as needed; and (4) if an individual has recently traveled from an area with widespread or ongoing community spread of COVID-19 and is having symptoms of the disease (fever, cough, shortness of breath), the individual should reach out to a healthcare provider for details on how to proceed with proper medical care.

Tax Return Preparers

Court Thwarts H&R Block's Attempt to Move California Case to Federal Court: In People of the State of California v. H&R Block, Inc., 2020 PTC 62 (C.D. Calif. 2020), a district court granted a motion to remand by the state of California in a case where California is asserting that H&R Block is violating California's Unfair Competition Law by engaging, and continuing to engage, in unfair, fraudulent, and deceptive business practices with respect to its Free File Agreement with the IRS. The court rejected H&R Block's argument that the state-law claim implicated significant federal issues and thereby conferred federal jurisdiction.

February 2020

Credits

IRS Explains Computation of Income Limits for Low-Income Housing Credit: In Rev. Rul. 2020-4, the IRS clarified the manner of properly computing the income limits applicable to the low-income housing credit under Code Sec. 42. The Consolidated Appropriations Act of 2018 added a new minimum set-aside test - the average income test in Code Sec. 42(g)(1)(C) - to the existing minimum set-aside tests available to owners of a low-income housing project and the IRS ruling addresses the additional income limits available in the average income test.

Deductions

Court Denies Charitable Deduction for Easement Not Protected in Perpetuity: In Railroad Holdings, LLC v. Comm'r, T.C. Memo. 2020-22, the Tax Court held that a partnership could not take a charitable contribution deduction for a donation of a conservation easement to a charitable organization because the easement deed provided that, if the easement was ever extinguished and the proceeds were to be allocated between the partnership and the charity, then the charity would be entitled to a portion of the proceeds at least equal to the fair market value of the conservation easement as of the date of the conservation easement rather than being entitled to a proportionate share of the proceeds. The court concluded that the conservation purpose of the easement was not protected in perpetuity within the meaning of Code Sec. 170(h)(5)(A) and thus did not qualify as a qualified conservation contribution under Code Sec. 170(h)(1).

Professional and Admin Fees Paid in Connection with Acquisition Must Be Capitalized: In TAM 202004010, the IRS National Office advised that professional and administrative fees paid by a corporation (Target) in connection with a taxpayer's acquisition of Target did not create or enhance a separate and distinct intangible asset under Reg. Sec. 1.263(a)-4(b)(1)(iii) and Reg. Sec. 1.263(a)-4(b)(3)(i). The National Office further concluded that the taxpayer could not claim a loss deduction under Code Sec. 165 on behalf of Target for the professional and administrative fees incurred by Target related to its stock acquisition by the taxpayer in the tax year in which the taxpayer sold all of Target stock.

Employment Taxes

Collection Actions Upheld with Respect to Business's Unpaid Employment Taxes: In Northside Carting, Inc. v. Comm'r, T.C. Memo. 2020-18, the Tax Court upheld collection actions against a family-run trash and recycle business as a result of unpaid employment taxes for three calendar quarters during 2015 and 2016. The court also concluded that, because the taxpayer became unresponsive to the IRS, the IRS settlement officer was justified in closing the case when he did.

Income

Couple Had Constructive Dividends, But Reliance on Return Preparer Negates Penalties: In Reliable Computer Services, Inc. v. Comm'r, T.C. Summary 2020-7, the Tax Court held that a couple's income was increased by unreported constructive dividends received from a corporation wholly owned by the husband and that the wholly owned corporation failed to substantiate certain deductions and failed to establish that other deductions were ordinary and necessary trade or business expenses that the corporation was entitled to deduct. However, the court also concluded that the couple, who had hired an income tax return preparer to prepare the federal income tax returns for the years in issue, relied in good faith on the preparer not only for advice in preparing the relevant federal income tax returns but also during the examinations of the returns and the preparations for trial and the couple was thus not liable for the accuracy-related penalties assessed by the IRS.

Penalties

Disbarred Attorney Hit With $1.9 Million Fraud Penalty: In Isaacson v. Comm'r, T.C. Memo. 2020-17, the Tax Court held that the IRS proved by clear and convincing evidence that an attorney, who successfully represented clients in a Catholic Church abuse lawsuit, underpaid his income tax liability with respect to fees received from the lawsuit. The court also concluded that the subsequently-disbarred attorney underpaid that tax liability with fraudulent intent and was thus liable for a $1.9 million fraud penalty under Code Sec. 6663.

Procedure

Final Regs Update Return Due Date and Extended Due Date Changes: In T.D. 9892, the IRS issued final regulations that update the due dates and available extensions of time to file certain tax returns and information returns. The dates in the regulations are updated to reflect the statutory requirements set by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 and the Protecting Americans from Tax Hikes Act of 2015 and the regulations also remove a provision for electing large partnerships that was made obsolete by the Bipartisan Budget Act of 2015.

Taxpayer Can't Prove Breach of Contract Where He Can't Establish a Contract Existed: In Meidinger v. U.S., 2020 PTC 29 (Fed. Cl. 2020), the Court of Federal Claims rejected a taxpayer's breach of contract claim against the IRS for not acting on information he provided to the IRS's Whistleblower Office. The court noted that, in the absence of any negotiations or settlement on a fixed award amount, the taxpayer could not establish the existence of a contract that could possibly confer jurisdiction on the Court of Federal Claims.

January 2020

Accounting

Cash Method Taxpayers Are Unaffected by TCJA Changes to Sec. 451: In CCA 202002013, the Office of Chief Counsel confirmed that the changes made to Code Sec. 451 by the Tax Cuts and Jobs Act of 2017 (TCJA) regarding the time that an accrual method taxpayer must include an advance payment in gross income do not impact the basic rules of constructive receipt and prepaid income with regard to cash-basis method taxpayers. The Office of Chief Counsel noted that the TCJA changes to Code Sec. 451 affect only accrual method taxpayers.

Bankruptcy

Bankruptcy Court Properly Allowed IRS to Collect Debtor's Pension Income: In Pansier v. U.S., 2019 PTC 494 (E.D. Wis. 2019), a district court affirmed a bankruptcy court's decision to lift the automatic stay under 11 U.S.C. Sec. 362(d)(1) to allow the IRS to collect a married couple's pension income and apply those funds to their delinquent tax obligations. The district court noted that the IRS asserted in its motion to lift the automatic stay that the debtors were consuming the income to pay personal expenses rather than make payments toward the couple's significant tax liabilities, and the bankruptcy court recognized that the debtors neither offered to provide adequate protection nor used their discretionary income to make payments to the IRS during the stay.

Corporations

Revised Applicability Dates for Sec. 382(h) Regs on Built-In Gains and Losses: In REG-125710-18, the IRS withdrew a portion of the proposed revisions to Reg. Sec. 1.382-2 and Reg. Sec. 1.382-7 issued in September 2019 relating to the determination of net built-in gains and losses and recognized built-in gains and losses under Code Sec. 382(h) that, in turn, affect the limitation under Code Sec. 382 on net operating losses and disallowed business interest under Code Sec. 163(j). The newly issued proposed regulations provide revised applicability dates and transition relief provisions.

Deductions

Qualified Disaster Losses Subject to Higher $500 Limit with No AGI Limitation: In CCA 202002014, the Office of Chief Counsel confirmed that qualified disaster losses are subject to a $500 limitation instead of the usual $100 limitation in Code Sec. 165(h)(1) and are not subject to the 10 percent of adjusted gross income (AGI) limitation in Code Sec. 165(h)(2). The Office of Chief Counsel explained that a qualified disaster loss is an individual's casualty or theft loss of personal-use property that is attributable to a major disaster declared by the President under the Stafford Act in 2016, as well as from Hurricane Harvey, Tropical Storm Harvey, Hurricanes Irma and Maria, or the California wildfires.

Constructive Denial Clauses in Conservation Easement Deeds are Not Inconsistent with Perpetuity Requirements: In CCA 202002011, the Office of Chief Counsel advised that a clause in a conservation easement deed providing that if the easement holder does not respond within a specified period of time to a request by the property owner regarding a proposed use of the land, then the request is considered denied and is not inconsistent with the perpetuity requirements of Code Sec. 170(h). However, the Office of Chief Counsel clarified that nothing in CCA 202002011 allows for a use that would permit destruction of a significant conservation interest or that would be otherwise inconsistent with the requirements of Code Sec. 170(h).

Agriculture Co-op Isn't Required to Compute Separate DPAD Amounts: In Growmark, Inc. and Subs v. Comm'r, T.C. Memo. 2019-161, the Tax Court held that, in accordance with its holding in Ag Processing, 153 T.C. No. 3 (2019), an agricultural cooperative was not required to compute separate Code Section 199 domestic production activities deduction (DPAD) amounts for its patronage and nonpatronage activities. Also in accordance with the ruling in Ag Processing, the court said that the agricultural cooperative must allocate its aggregately computed DPAD between its patronage and nonpatronage accounts and, because the Schedule G allocation is done pursuant to subchapter T and not Code Section 199, the taxpayer should allocate the aggregate DPAD on its Schedule G using the same method it used for its other Schedule G allocations.

Employee Benefits

Covered Compensation Tables Released for 2020 Plan Year: In Rev. Rul. 2020-2, the IRS issued tables of covered compensation under Code Sec. 401(l)(5)(E) and related regulations for the 2020 plan year. Covered compensation is the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which an employee attains social security retirement age.

IRS Guidance Addresses Withholding from Retirement and Annuity Distributions: In Notice 2020-3, the IRS issued guidance for the 2020 calendar year regarding withholding from periodic payments for pensions, annuities, and certain other deferred income under Code Sec. 3405(a), including the rules for withholding from periodic payments under Code Sec. 3405(a) when no withholding certificate has been furnished. The guidance also informs taxpayers that the Department of the Treasury and the IRS are considering whether the 2020 default rate of withholding under Code Sec. 3405(a) will continue to be appropriate for calendar years after 2020 and request comments related to the potential adoption of a new default rate of withholding.

Prop. Regs Address Employee Remuneration in Excess of $1 Million: In REG-122180-18, the IRS issued proposed regulations under Code Sec. 162(m), which limits the deduction for certain employee remuneration in excess of $1 million for federal income tax purposes. The proposed regulations also implement amendments made to Code Sec. 162(m) by the Tax Cuts and Jobs Act of 2017 and would affect publicly held corporations.

IRS Issues 2019 Required Amendments List: In Notice 2019-64, the IRS sets forth the 2019 Required Amendments List (2019 RA List). Beginning with the 2019 RA List, all Required Amendments Lists will apply to both individually designed plans qualified under Code Sec. 401(a) and individually designed plans that satisfy the requirements of Code Sec. 403(b).

IRS Clarifies Plan Amendments That Are Treated as Integral to Pension Plan Provisions: In Rev. Proc. 2020-9, the IRS clarifies which amendments are treated as integral to a plan provision that fails to satisfy the qualification requirements of the Internal Revenue Code by reason of a change to those requirements made by the recently published regulations under Code Sec. 401(k) and Code Sec. 401(m) relating to hardship distributions of elective deferrals. The revenue procedure also extends the deadline, applicable to pre-approved plans, for adopting an interim amendment relating to those regulations.

IRS Updates Mortality Improvement Rates and Static Mortality Tables: In Notice 2019-67, the IRS sets forth: (1) the mortality improvement rates and static mortality tables that are required to determine minimum funding requirements under Code Sec. 430(h)(3)(A) for valuation dates occurring during 2021, and (2) the mortality table that is used for purposes of determining minimum present value under Code Sec. 417(e)(3) for distributions with annuity starting dates that occur during stability periods beginning in the 2021 calendar year. In addition, the IRS is requesting comments on possible regulations to modify the basis for determining these mortality tables.

Exempt Organizations

Game of Standard Flash Does Not Qualify as Bingo under Sec. 513(f): In TAM 202002010, the National Office advised that the game of standard flash does not qualify as a bingo game within the meaning of Code Sec. 513(f) because it does not meet the requirement that winners be determined in the presence of all persons placing wagers in such games. The National Office further advised that the game of standard flash may not be divided or bifurcated so that a part of the game may be classified as bingo.

Foreign

IRS Issues Prop. Regs on Source of Income from Certain Sales of Personal Property: In REG-100956-19, the IRS issued proposed regulations modifying the rules for determining the source of income from sales of inventory produced within the United States and sold without the United States or vice versa. The proposed regulations also (1) contain new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States, and (2) modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the United States.

IRS to Amend Foreign Currency Guidance under Code Section 987: In Notice 2019-65, the IRS announced that it intends to amend the regulations under Code Sec. 987 to defer the applicability date of the final regulations under Code Sec. 987, as well as certain related final and temporary regulations, by one additional year. The IRS said that it intends to amend Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and Reg. Sec. 1.989(a)-1 of the 2016 final regulations and Reg. Sec. 1.987-2 and Reg. Sec. 1.987-4 of the 2019 final regulations to apply to tax years beginning on or after the first day of the first tax year following December 7, 2020.

Old Age and English as a Second Language Are Not Reasonable Causes for Failing to File FBAR: In U.S. v. Agrawal, 2019 PTC 480 (E.D. Wisc. 2019), a district court held that, because a taxpayer did not establish reasonable cause for failing to file a Foreign Bank Account Report (FBAR), he was liable for penalties of more than $46,000 for failing to file the FBAR. The court noted that the taxpayer has sufficient mental acuity and technical facility with the English language to work as a math teacher and as a geophysicist and to represent himself in litigation and thus rejected the taxpayer's argument that the penalty should be abated because he is elderly, speaks English as a second language, and has an inexpert understanding of tax reporting requirements.

IRS Finalizes Regs on Dividend Equivalents from Sources within the United States: In T.D. 9887, the IRS issued final regulations under Reg. Sec. 1.871-15 relating to certain financial products providing for payments that are contingent upon or determined by reference to U.S. source dividend payments. The final regulations also provide guidance identifying which party to a potential Code Sec. 871(m) transaction is responsible for determining whether a transaction is a Code Sec. 871(m) transaction when multiple brokers or dealers are involved in the transaction and also withdraws temporary regulations regarding these matters.

Proposed Regs Address Various Foreign-Related Tax Calculations: In REG-105495-19, the IRS issued proposed regulations addressing the following issues: (1) the allocation and apportionment of deductions under Code Sec. 861 through Code Sec. 865, including new rules on the allocation and apportionment of research and experimentation expenditures and certain deductions of life insurance companies; (2) the definition of financial services income under Code Sec. 904(d)(2)(D); (3) the allocation and apportionment of creditable foreign taxes; (4) the interaction of the branch loss and dual consolidated loss recapture rules with Code Sec. 904(f) and Code Sec. 904(g); (5) the effect of foreign tax redeterminations of foreign corporations on the application of the high-tax exception described in Code Sec. 954(b)(4) (including for purposes of determining tested income under Code Sec. 951A(c)(2)(A)(i)(III)), and required notifications under Code Sec. 905(c) to the IRS of foreign tax redeterminations and related penalty provisions; (6) the definition of foreign personal holding company income under Code Sec. 954; (7) the application of the foreign tax credit disallowance under Code Sec. 965(g); and (8) the application of the foreign tax credit limitation to consolidated groups.

Healthcare

Fifth Circuit Affirms ACA Individual Mandate Is Unconstitutional: In State of Texas v. U.S., 2019 PTC 481 (5th Cir. 2019), the Fifth Circuit affirmed a district court and held that (1) there remains a live case or controversy between Texas and other states opposed to the Patient Protection and Affordable Care Act (ACA) and the United States; (2) Texas and other states opposed to the ACA have standing to challenge the ACA because the individual mandate injures both the individuals in the states, by requiring them to buy insurance that they do not want, and the states, by increasing their costs of complying with the reporting requirements that accompany the individual mandate; and (3) the individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, on the question of how much, if any, of the rest of the ACA beyond the individual mandate is inseverable from the individual mandate, the Fifth Circuit remanded the case to the district court to provide additional analysis of the provisions of the ACA as they currently exist in light of the penalty for not having insurance being reduced to zero in the Tax Cuts and Jobs Act of 2017.

Partnerships

Tax Matters Partner Designation Is Unaffected by Subsequent Disposition: In CCA 202002015, the Office of Chief Counsel advised that, if a person was a proper tax matters partner (TMP) in the year under audit, subsequently disposing of the person's interest or going from a member-manager to a non-member-manager in a different year has no effect on the TMP designation for the year in which the person was a member-manager. The Office of Chief Counsel said that a TMP designation is only terminated as described in Reg. Sec. 301.6231(a)(7)-1(l).

Procedure

Taxpayers Miss Cutoff for Filing Refund Claim by Two Days: In Harrison v. IRS, 2020 PTC 5 (W.D. Wis. 2020), a district court held that a couple's refund claim was barred by the three-year limitations period under Code Sec. 6511(b)(2)(A) because their late-filed return was treated as filed under Code Sec. 7502(a)(2) on the date it was received by the IRS rather than the date they mailed it. The couple's refund claim therefore was filed outside of the lookback period, albeit only two days outside of that period, but the court found that this harsh result was required under Code Sec. 6511, which the court said sets forth its time limitations "in unusually emphatic form."

Court Lacked Jurisdiction Over IRS Offset of Taxpayer's Refund for Unpaid Child Support: In Blue v. U.S. Dept. of Treasury, 2019 PTC 493 (N.D. Ohio 2019), a district court held that it did not have jurisdiction to review the IRS's offset of a taxpayer's refund against his child support arrearage under Code Sec. 6402(c). The court found that Congress explicitly barred such lawsuits in Code Sec. 6402(g).

Court Rejects Equitable Tolling in Excise Tax Refund Case: In Advanced Refining Concepts, LLC v. U.S., 2019 PTC 490 (D. Nev. 2019), a district court granted the government's motion for summary judgment after finding that the taxpayer did not file its excise tax refund claim until after the Code Sec. 6532 limitations period for filing such claim had expired. With respect to the taxpayer's argument that equitable tolling should apply, the court noted that, although the Supreme Court has not ruled on whether equitable tolling is inapplicable to Code Sec. 6532, it had previously ruled that equitable tolling was inapplicable in a related statute - Code Sec. 6511.

IRS Issues Guidance on Misdirected Direct Deposit Refunds: In REG-116163-19, the IRS issued proposed regulations which provide guidance under Code Sec. 6402(n) concerning the procedures for identification and recovery of a misdirected direct deposit refund. The regulations reflect changes to the law made by the Taxpayer First Act and affect taxpayers who have made a claim for refund, requested the refund be issued as a direct deposit, but did not receive a refund in the account designated on the claim for refund.

Second Circuit Affirms District Court's Judgment That It Had Jurisdiction over Defendant: In U.S. v. McLaughlin, 2019 PTC 491 (2d Cir. 2019), the Second Circuit held that a federal court has personal jurisdiction over a defendant in a criminal proceeding whenever such defendant is charged with a crime over which the federal court has subject matter jurisdiction and such defendant is brought before that court. Accordingly, the court affirmed a district court's judgment that it had personal jurisdiction over a taxpayer who was convicted of making false statements to the IRS.

Interest Rates Remain the Same for the First Quarter of 2020: In Rev. Rul. 2019-28, the IRS announced that interest rates will remain the same for the calendar quarter beginning January 1, 2020. 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.

Employee Can't File Private Action Against Employer for Failing to File Tax Document: In Francisco v. U.S., 2019 PTC 479 (E.D. N.Y. 2019), a district court held that Code Sec. 7434 does not provide a private right of action for employees, such as the taxpayer, who allege that their employer filed a tax document that was fraudulent, in that it did not report payments made to the employee and other employees. According to the court, in reality, the taxpayer was alleging the failure to file a tax document regarding payments actually made to an employee - versus the filing of a tax document falsely reporting payments that were never made to an employee - and such a claim is not covered by Code Sec. 7434.

Taxpayer Can't Recover Administrative Costs After Settling with IRS: In Klopfenstein v. Comm'r, T.C. Memo. 2019-156, the Tax Court held that, because the IRS Appeals Office reached a settlement with the taxpayer with respect to the taxpayer's failure to disclose certain reportable transactions, the government never took a "position" contrary to the taxpayer's within the meaning of Code Sec. 7430(c)(7). Thus, the court concluded, the taxpayer was not a "prevailing party" entitled to recover administrative costs.

Qualified Opportunity Funds

IRS Finalizes Regs on Investments in Qualified Opportunity Funds: In T.D. 9889, the IRS issued final regulations governing the extent to which taxpayers may elect the federal income tax benefits provided by Code Sec. 1400Z-2 with respect to certain equity interests in a qualified opportunity fund (QOF). The final regulations (1) address the comments received in response to previously issued proposed regulations; (2) provide additional guidance for taxpayers eligible to elect to temporarily defer the inclusion in gross income of certain gains if corresponding amounts are invested in certain equity interests in QOFs; (3) provide guidance on the ability of such taxpayers to exclude from gross income additional gain recognized after holding those equity interests for at least 10 years; (4) address various requirements that must be met for an entity to qualify as a QOF, including requirements that must be met for an entity to qualify as a qualified opportunity zone business; and (5) affect entities that self-certify as QOFs and eligible taxpayers that make investments, whether qualifying or non-qualifying, in such entities.

S Corporations

S Shareholders Can't Increase Debt Basis for Debt to Related S Corporation: In Messina v. Comm'r, 2019 PTC 489 (9th Cir. 2019), the Ninth Circuit affirmed a Tax Court decision and held that a group of S corporation shareholders improperly relied on a debt that their S corporation owed to another S corporation also owned by the shareholders to increase their debt basis and the amount of their pass through losses. The court concluded that, because the relevant debt ran to a related entity, but not the shareholders themselves, it did not increase the debt basis that the S shareholders may claim in their S corporation.

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