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Tax Updates - Archived (December 2019 - May 2019)
December 2019
Accounting
IRS Issues December 2019 Applicable Federal Rates: In Rev. Rul. 2019-26, the IRS issued a ruling which prescribes the applicable federal rates for December 2019. 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
Bankruptcy Court Rejects IRS Attempt to Reopen Bankruptcy Case: In In re Cruz, 2019 PTC 459 (Bankr. P.R. 2019), a bankruptcy court rejected an IRS motion to reopen a Chapter 11 bankruptcy case after noting that the First Circuit Appellate Panel has stated that a bankruptcy court properly exercises its discretionary authority to reopen a closed bankruptcy case when it does so to determine a substantive dispute on its merits, but does not exercise proper discretionary authority when only technical defects with the closed case are at issue. The court found that IRS had not met the necessary burden of proof because it had not provided any information as to the specifics of its request and its motion was insufficient for the court to determine whether reopening the case was necessary.
Credits
Taxpayer Must Repay Advance Payments of Premium Assistance Tax Credits: In Blas v. Comm'r, T.C. Memo. 2019-152, the Tax Court held that a taxpayer received advanced payments of premium assistance tax credits to which he was not entitled because his household income was not below the applicable poverty level. As a result, those amounts had to be repaid and the taxpayer was thus liable for a tax deficiency of more than $8,000.
Employee Benefits
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-61, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
Healthcare
Due Dates and Penalty Relief Extended for Healthcare Coverage Reporting: In Notice 2019-63, the IRS extended the due dates for certain 2019 information reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Code Sec. 6055 and for applicable large employers under Code Sec. 6056. Specifically, the due date for furnishing to individuals the 2019 Form 1095-B, Health Coverage, and the 2019 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, are extended from January 31, 2020, to March 2, 2020, and transitional good-faith relief from Code Sec. 6721 and Code Sec. 6722 penalties are extended to the 2019 information reporting requirements under Code Sec. 6055 and Code Sec. 6056.
International
IRS Finalizes Base Erosion and Anti-Abuse Tax Regs: In T.D. 9885, the IRS issued final regulations implementing the base erosion and anti-abuse tax designed to prevent the reduction of tax liability by some large corporate taxpayers through certain payments made to foreign related parties and certain tax credits. The regulations also provide reporting requirements and affect corporations with substantial gross receipts that make payments to foreign related parties, as well as any reporting corporations required to furnish information relating to certain related party transactions.
Additional Proposed Regs on Base Erosion and Anti-Abuse Tax: In REG-112607-19, the IRS issued proposed regulations that provide guidance regarding the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The proposed regulations would affect corporations with substantial gross receipts that make payments to foreign related parties.
Procedure
Fifth Circuit Denies IRS Motion for Sanctions on Taxpayer Who Filed Frivolous Claim: In Nitschke v. Comm'r, 2019 PTC 458 (5th Cir. 2019), the Fifth Circuit denied an IRS motion for sanctions on a taxpayer after finding there was no evidence to support the IRS's claim that the taxpayer had been warned that his claim of fraud on the court was frivolous. Additionally, the court said, the taxpayer's argument that the Tax Court had jurisdiction to consider a timely filed petition based on his claim of fraud on the court had not been shown to be foreclosed by binding precedent and, in fact, in unpublished opinions, the Fifth Circuit has recognized a possible exception to the finality rule when there has been fraud on the court.
IRS Mailed Deficiency Notice to Taxpayer's Last Known Address: In Williams v. Comm'r, 2019 PTC 464 (5th Cir. 2019), the Fifth Circuit affirmed a Tax Court holding that an IRS deficiency notice had been mailed to the last known address of a self-employed taxpayer who had failed to file tax returns for 10 years. The court also rejected the taxpayer's argument that he was denied constitutionally effective due process of law after the court found that the IRS provided the statutorily required collection due process hearing and the taxpayer declined to avail himself of the opportunity to challenge the deficiency.
November 2019
Accounting
2019 Year-End Tax Planning for INDIVIDUALS. Client Letter Included: The first installment of Parker's annual two-part series on year-end tax planning recaps 2019's major changes affecting individual taxpayers and the implications of those changes for year-end tax moves. The online version of the article includes a link to a sample year-end client letter for individuals. Read more...
2019 Year-End Tax Planning for BUSINESSES. Client Letter Included: The second installment of Parker's annual two-part series on year-end tax planning summarizes strategies clients can use to minimize a business's 2019 tax bill. Read more...
IRS Issues November 2019 Applicable Federal Rates: In Rev. Rul. 2019-25, the IRS issued a ruling which prescribes the applicable federal rates for November 2019. 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
Bankruptcy Court Uses Withholding Rule to Allocate Refund from Joint Tax Return: In re McInerney, 2019 PTC 450 (Bankr. N.D. Ill. 2019), a bankruptcy court held that the proper method for allocating income tax refunds on a jointly filed tax return between a taxpayer in bankruptcy and his non-debtor spouse was the "withholding rule" that a majority of courts follow. Under this method, the refund is allocated between spouses in proportion to their respective tax withholdings during the relevant tax year.
C Corporations
Section 385 Documentation Regulations Removed: In T.D. 9880, the IRS removed final regulations setting forth minimum documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes. The final regulations removed or amended by T.D. 9880 generally affect corporations that issue purported indebtedness to related corporations or partnerships.
IRS Intends to Issue Proposed Regulations under Section 385: In REG-123112-19, the IRS announced that it intends to issue proposed regulations regarding the treatment of certain interests in corporations as stock or indebtedness and is requesting comments from the public regarding the contemplated rules. The IRS also announced that, following the expiration of temporary regulations issued in 2016, a taxpayer may rely on the 2016 proposed regulations until further notice is given, provided that the taxpayer consistently applies the rules in the 2016 proposed regulations in their entirety.
Capital Gains and Losses
IRS Nonacquiesces to Tax Court Holding Relating to Sale or Exchange of a Franchise: In AOD 2019-3, the IRS said that, based on the plain language of Code Sec. 1253 and on the case law, the sale or exchange of a franchise that is not otherwise a capital asset under Code Sec. 1221 is not treated as the sale or exchange of a capital asset under Code Sec. 1253(a) merely because the transferor does not retain any significant power, right, or continuing interest in the franchise. Accordingly, the IRS said that it will not follow the Tax Court's opinion in GreenTeam Materials Recovery Facility PN v. Comm'r, T.C. Memo. 2017-122, and will continue to litigate this issue.
Deductions
Travel Costs Incurred in Monitoring Timberland Properties Are Deductible: In Gervais v. Comm'r, T.C. Summary 2019-34, the Tax Court held that travel costs incurred by a taxpayer to visit timber properties he owned were deductible because they constituted ordinary and necessary travel and away-from-home expenses incurred in monitoring his business properties. According to the court, the taxpayer correctly substantiated his travel costs by using the federal per diem rates and, because the IRS had not questioned the mileage rates used by the taxpayer, the court found that the taxpayer was entitled to the deductions taken for travel costs to and from his timber properties.
Charitable Deduction Disallowed for Expenses Not Paid In Year at Issue: In Presley v. Comm'r, 2019 PTC 415 (10th Cir. 2019), the Tenth Circuit held that the Tax Court properly disallowed the taxpayers' charitable deduction for expenses they paid to improve land owned by their nonprofit family ministry because the expenses were not paid in the year for which the taxpayers claimed the deduction. The Tenth Circuit also upheld the disallowance of deductions for the taxpayers' donation of a tractor-mower to the nonprofit because the mower was not listed on a Form 8283, Noncash Charitable Contributions, and for the donation of their residence because the taxpayers failed to obtain a qualified appraisal and attach it to their return.
IRS Finalizes Reg. on Election to Accelerate Loss in Federally Declared Disaster: In T.D. 9878, the IRS issued a final regulation relating to the election to accelerate the timing of a loss sustained by a taxpayer attributable to a federally declared disaster. Additionally, the IRS removed Reg. Sec. 1.165-11T.
Estates, Gifts, and Trusts
IRS's Valuation of Stock Was Arbitrary and Excessive: In Cavallaro v. Comm'r, T.C. Memo. 2019-144, the Tax Court held that an error by an IRS valuation expert, in a case involving a disguised gift of stock by a couple to their sons, caused the expert to overvalue the disguised gifts by $6.9 million and rendered the IRS's valuation of the stock to be arbitrary and excessive. The court subsequently determined that the gifts were valued at a total of $22.8 million.
Employee Benefits
Nondiscrimination Relief Provided for Certain Closed Defined Benefit Plans: In Notice 2019-60, the IRS is providing additional temporary nondiscrimination relief with respect to closed defined benefit plans that generally meet the eligibility conditions for the relief provided in Notice 2014-5, as extended. Specifically, this relief provides that, if a plan satisfies specified conditions, the plan is deemed to have satisfied certain of the nondiscrimination testing requirements relating to benefits, rights, and features.
Federal Grants
Federal Circuit Affirms Claims Court's Decision in Section 1603 Case: In Westrock Virginia Corporation v. U.S., 2019 PTC 443 (Fed. Cir. 2019), the Federal Circuit upheld a decision by the Federal Claims Court affirming the Department of the Treasury's award of a cash grant to a taxpayer that runs a paper mill in an amount that the taxpayer contended was less than the grant amount required under Section 1603 of the American Recovery and Reinvestment Act of 2009 (Section 1603). The Federal Circuit concluded that the Claims Court correctly determined that the amount of Treasury's grant award was consistent with Section 1603.
Foreign
Since IRS's Cancellation of APAs Was an Abuse of Discretion, APAs Remained in Effect: In Eaton Corporation and Subs v. Comm'r, 153 T.C. No. 6 (2019), the Tax Court held that, because it had previously concluded that the IRS's cancellation of advance pricing agreements (APAs) with the taxpayer was an abuse of discretion, the APAs continued in effect. The court found that there was no net Code Sec. 482 transfer price adjustment and the taxpayer was not liable for any Code Sec. 6662(h) penalties relating to the years at issue.
Healthcare
Prop. Regs Solicit Comments on Disclosing Health Care Cost-Sharing Information: In REG-118378-19, as a result of the issuance of Executive Order 13877, the IRS, Department of Labor, and Department of Health and Human Services issued proposed requirements for group health plans and health insurance issuers in the individual and group markets to disclose cost-sharing information upon request, to a participant, beneficiary, or enrollee (or his or her authorized representative), including an estimate of such individual's cost-sharing liability for covered items or services furnished by a particular provider. Under the proposed rules, plans and issuers would be required to make such information available on an internet website and, if requested, through non-internet means, thereby allowing a participant, beneficiary, or enrollee (or his or her authorized representative) to obtain an estimate and understanding of the individual's out-of pocket expenses and effectively shop for items and services.
Income
Funds Placed Into Taxpayer's Account but Later Misappropriated by Son Were Income: In Nice v. U.S., 2019 PTC 427 (E.D. La. 2019), a district court rejected a taxpayer's argument that she never actually received income for which she was taxed because her son fraudulently diverted the funds for his own use and benefit. The court found that the fact that the taxpayer suffered from dementia and was financially defrauded by her son did not in of itself result in a finding that she did not actually receive income for tax purposes.
Taxpayer Realized Constructive Dividends When His Company Paid Personal Expenses: In Santos v. Comm'r, T.C. Memo. 2019-148, the Tax Court held that a taxpayer, who operated an engineering and paving company through his wholly owned C corporation, was liable for tax deficiencies as a result of not filing his 2010 tax return and using his company's bank account to pay personal expenses. The court agreed with the IRS that the taxpayer had constructive dividend income of $156,469 in 2010 as a result of cash withdrawals, electronic transfers to his personal account, and payments of personal and meal expenses, from his corporation's bank account.
International
IRS Issues Final Regs on Ownership Attribution With Respect to CFCs: In T.D. 9883, the IRS issued final regulations regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Code Sec. 954(d)(3). In addition, the final regulations provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income.
Ninth Circuit Denies Petition for Rehearing on Legality of Cost-Sharing Regulation: In Altera Corporation & Subs. v. Comm'r, 2019 PTC 446 (9th Cir. 2019), a panel of the Ninth Circuit denied the taxpayer's petition for rehearing en banc on behalf of the court in a case in which the panel reversed the decision of the Tax Court. However, several judges dissented and said they agreed with the Tax Court's unanimous conclusion that the Department of Treasury's implementation of Reg. Sec. 1.482-7(d)(2) constituted arbitrary and capricious rulemaking in violation of the Administrative Procedure Act.
Partnerships
Partnership Return Signed by CFO of Sole Corporate General Partner Is a Valid Return: In CCA 201945027, the Office of Chief Counsel cited the Tax Court's decision in Beard v. Comm'r, 82 T.C. 766 (1984), in concluding that, all else being proper, a partnership return signed by the chief financial officer (CFO) of a corporation that is the sole general partner of a partnership is a valid return even though the signer signed his e-file Signature Authorization (Form 8879-PE) using a different title, rather than in his capacity as the CFO of the partner corporation. The Chief Counsel's Office also cited Consolidated Apparel Co., 17 T.C. 1570 (1952), in noting that courts have held that if a signee was actually the correct individual to sign a return, the fact that a return was not signed in the correct capacity will not render the return invalid.
Extension Agreements Allowed IRS to Propose Partnership Adjustments After Expiration of Limitations Period: In WHO515 Investment Partners v. Comm'r, 2019 PTC 422 (D.C. Cir. 2019), the D.C. Circuit held that final partnership administrative adjustments (FPAAs) issued after the expiration of the three-year limitations period were not time-barred because the partnerships executed extensions on Forms 872-I, Extension of Assessment Statute of Limitations By Consent, and the IRS issued the FPAAs within the period specified in the agreements. The court rejected the partnerships' arguments that they had fractional tax years which ended before the period specified in the agreements and that the Forms 872-I extended the limitations period for the partners' individual returns but did not apply to the partnership returns.
Procedure
Court Rejects President's Lawsuit over N.Y. Tax Returns: In Trump v. Committee on Ways and Means, U.S. House of Representatives, 2019 PTC 447 (D. D.C. 2019), a D.C. district court held that it does not presently have jurisdiction with respect to a N.Y. law which authorizes the chairperson of one of three congressional committees, including the House Committee on Ways and Means, to request the N.Y. state tax returns of the President of the United States and other elected officials. According to the court, President Trump bears the burden of establishing personal jurisdiction, but his allegations did not establish that the District of Columbia's long-arm statute is satisfied in this case.
Second Circuit Affirms Lower Court; President's Financial Records Must Be Released: In Trump v. Vance, 2019 PTC 429 (2d Cir. 2019), the Second Circuit affirmed a district court's order denying President Trump's request for a preliminary injunction with respect to the release of his financial records. The court held that (1) any presidential immunity from state criminal process does not extend to investigative steps such as the grand jury subpoena served on President Trump's accountants, Mazars USA LLP, and (2) the President had not shown a likelihood of success on the merits of his claims sufficient to warrant injunctive relief.
Question of Fact Exists on Whether IRS Report Was Responsive to FOIA Request: In Institute for Justice v. IRS, 2019 PTC 428 (D.C. Cir. 2019), the D.C. Circuit reversed a district court and held that a question of fact existed as to whether a report created by the IRS in response to a Freedom of Information Act (FOIA) request for all records contained in the IRS's Asset Forfeiture Tracking and Retrieval System (AFTRAK) covered all records contained in the AFTRAK. The D.C. Circuit said that it was not convinced beyond a material doubt that the report contained all AFTRAK records or that its delivery could serve as a substitute for a search for all non-exempt data points as required under FOIA.
Tax Accounting
IRS Updates Automatic Accounting Method Change Procedure: In Rev. Proc. 2019-43, the IRS updated the list of automatic accounting method changes to which the automatic change procedures in Rev. Proc. 2015-13, as clarified and modified by various revenue procedures, apply. The procedure is effective for a Form 3115 filed on or after November 8, 2019, for a year of change ending on or after March 31, 2019, that is filed under the automatic change procedures of Rev. Proc. 2015-13.
October 2019
AFRs
IRS Issues October 2019 Applicable Federal Rates: In Rev. Rul. 2019-23, the IRS issued a ruling which prescribes the applicable federal rates for October 2019. 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
After Bankruptcy Case Is Done, Couple's Tax Penalty Dispute Moves to Tax Court: In Bush v. U.S., 2019 PTC 364 (7th Cir. 2019), the Seventh Circuit held that, although a bankruptcy judge was right to hold that he had authority to resolve a couple's tax dispute while the couple's bankruptcy was ongoing, the exercise of that authority was no longer appropriate since the case had ended. In vacating a district court judge's decision regarding the bankruptcy court's proceedings on the matter, the Seventh Circuit said there is no reason why a residual dispute about tax penalties should stick with the bankruptcy court judge, who otherwise is done with the case, rather than the specialist judges in the Tax Court.
Corporations
As Temporary Section 385 Regs Expire, Taxpayers May Rely on Proposed Regs: In Notice 2019-58, the IRS announced that, following the expiration of the temporary regulations under Code Sec. 385, taxpayers may rely on the Code Sec. 385 proposed regulations that cross-reference the temporary regulations. The temporary regulations expired on October 13, 2019, while the proposed regulations are proposed to apply to tax years ending on or after January 19, 2017, and do not expire.
Employee Benefits
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-56, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
Prop. Regs Address Application of Employer Shared Responsibility Rules to HRAs: In REG-136401-18, the IRS issued proposed regulations which clarify the application of the employer shared responsibility provisions and certain nondiscrimination rules to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare (individual coverage HRAs), and to provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. The proposed regulations are intended to facilitate the adoption of individual coverage HRAs by employers, and taxpayers generally are permitted to rely on the proposed regulations and would affect employers, employees and their family members, and plan sponsors.
Employment Taxes
IRS Nonacquiesces Railroad Retirement Tax Act Case: In AOD 2019-2, the IRS said that, in light of the Supreme Court's reasoning in BNSF Railway Company v. Loos, 2019 PTC 71 (S. Ct. 2019), the Eighth Circuit's holding in Union Pacific Railroad Company v. U.S., 2017 PTC 350 (8th Cir. 2017), that ratification payments are not subject to the Railroad Retirement Tax Act (RRTA) has been superseded. Accordingly, the IRS said that it will not follow the Eighth Circuit's holding in Union Pacific regarding the RRTA taxation of ratification payments in other cases.
Estates, Gifts, and Trusts
Government's Assessment of Gift Taxes Was Timely: In U.S. v. Est. of Elson, 2019 PTC 396 (D. N.J. 2019), a district court held that beneficiaries of an estate were personally liable for gift taxes to the extent of the value of the property received by gift from the decedent or his estate. The court rejected the beneficiaries' argument that the statute of limitations in Code Sec. 6901 prevented the government from collecting the gift taxes due and concluded that Code Sec. 6901 did not eliminate or limit the government's ability to bring an action under Code Sec. 6324 and, under Code Sec. 6324, the government's assessment was timely.
Doctrine of Claim Preclusion Prevents Taxpayer From Rehashing Tax Deficiencies: In U.S. v. Widtfeldt, 2019 PTC 363 (D. Neb. 2019), a district court held that the doctrine of claim preclusion prevented a taxpayer, who was the beneficiary and executor of his mother's estate, from rehashing the validity of the estate's tax deficiencies because (1) the Tax Court had issued a final judgment on the merits, based on proper jurisdiction, and (2) the Tax Court case and the instant suit involved parties in privity - the taxpayer in his capacity as the estate's executor and the taxpayer in his personal capacity. Finally, the district court said, because the Tax Court considered the same questions of tax delinquency as those raised in the instant case, the Tax Court's decision thus precluded the taxpayer from relitigating the estate's tax deficiencies in the district court.
Valuation of Stock Should Take Into Account a Pending Merger: In CCA 201939002, the Office of Chief Counsel advised that, under the fair market value standard, a hypothetical willing buyer and seller of shares in a publicly traded company would consider a pending merger when valuing stock for gift tax purposes. The value of property for federal transfer tax purposes, the Chief Counsel's Office said, is a factual inquiry wherein the trier of fact must weigh all relevant evidence and draw appropriate inferences to arrive at the property's fair market value.
Foreign
IRS Provides Relief for Persons Affected by Repeal of Section 958(b)(4): In Rev. Proc. 2019-40, the IRS generally provides guidance related to the repeal of Code Sec. 958(b)(4) to certain U.S. persons within the meaning of Code Sec. 7701(a)(30) that own stock in certain foreign corporations. The guidance also provides (1) a safe harbor for determining whether a foreign corporation is a controlled foreign corporation (CFC) within the meaning of Code Sec. 957; (2) a safe harbor for determining certain items, including taxable income and earnings and profits, of a CFC based on alternative information; and (3) a safe harbor for determining certain items of a specified foreign corporation within the meaning of Code Sec. 965(e) and Reg. Sec. 1.965-1(f)(45) based on alternative information.
IRS Issues Proposed Regs under Section 958(b): In REG-104223-18, the IRS issued proposed regulations relating to the modification of Code Sec. 958(b) by the Tax Cuts and Jobs Act. The proposed regulations affect U.S. persons that have ownership interests in or that make or receive payments to or from certain foreign corporations.
Gross Income
IRS Addresses Taxation of a Hard Fork of a Cryptocurrency: In Rev. Rul. 2019-24, the IRS ruled that a taxpayer does not have gross income under Code Sec. 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency. The IRS further ruled that, under Code Sec. 61, a taxpayer has gross income, ordinary in character, as a result of an airdrop of a new cryptocurrency following a hard fork, which occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger, if the taxpayer receives units of new cryptocurrency.
Income
Court Rejects Taxpayer's Use of "Basis in Labor" in Computing Income from Services: In Worsham v. Comm'r, T.C. Memo. 2019-132, the Tax Court held that a taxpayer could not consider his "basis in labor" in computing the federal income liability for his income from the performance of services. The court also concluded that the authority to issue a deficiency notice to the taxpayer was appropriately delegated to an IRS Appeals team manager.
Diesel Technology Specialist Was an Employee, Not an Independent Contractor: In McGuigan v. Comm'r, T.C. Summary 2019-27, the Tax Court held that a taxpayer who worked in the oil business as a diesel technology specialist and claimed he was an independent contractor was really a common law employee who could only deduct his unreimbursed employee expenses on Schedule A, subject to the 2 percent of adjusted gross income limitation. The taxpayer was allowed, however, to deduct on Schedule A costs incurred in seeking legal advice on how to avoid trade secret infringement after an oil company representative suggested he do so.
Innocent Spouse
Taxpayer Can't Claim Abuse Occurred After Divorce and After Remarrying: In Jones v. Comm'r, T.C. Memo. 2019-139, the Tax Court disallowed a taxpayer's claim for innocent spouse relief under Code Sec. 6015(f) with respect to underpayments of tax for years 2009 and 2010. The court rejected the taxpayer's assertion that she was emotionally mistreated by her ex-spouse with whom she had filed the joint tax returns at issue after noting that the alleged abuse supposedly occurred after the dissolution of the couple's marriage and the filing of the returns at issue, as well as after the taxpayer had married another man.
No Innocent Spouse Relief for Taxpayer Reluctant to Confront Financial Problems: In Sleeth v. Comm'r, T.C. Memo. 2019-138, the Tax Court rejected a taxpayer's request for innocent spouse relief after concluding that the taxpayer's unwillingness to confront the financial problems she and her former spouse faced weighed strongly against relief. While the taxpayer's ex-husband supported granting the taxpayer relief, the court concluded that the taxpayer had cooperated in her ex-spouse's practice of simply not paying taxes and that her assumption that her former spouse would pay the taxes due was unreasonable and not credible.
Partnerships
Challenge to Timeliness of an FPAA Must Be Raised in the Partnership-Level Proceeding: In Bedrosian v. Comm'r, 2019 PTC 390 (9th Cir. 2019), the Ninth Circuit affirmed the Tax Court's dismissal, for lack of jurisdiction, of a taxpayer's petition challenging adjustments to a Final Partnership Administrative Adjustment (FPAA) involving the taxpayers' partnership. The Ninth Circuit joined every other circuit court to consider this issue in holding that a challenge to the timeliness of an FPAA must be raised in the partnership-level proceeding itself, and that failure to do so results in a forfeiture of the argument.
Penalties
Court Rejects Former Tax Preparer's Request to Reduce Restitution Amount: In U.S. v. Mercer, 2019 PTC 378 (E.D. Mich. 2019), a district court rejected the argument of a former tax preparer, who had pled guilty to 30 criminal counts relating to the filing of false tax returns and was sentenced to prison and a restitution obligation of $331,000, that his restitution obligation should be reduced by amounts that former customers had since paid to the IRS. While noting that the government did not dispute the validity of the taxpayer's argument that his restitution obligations should be offset by any amount that his former customers paid, the court found that there was no evidentiary basis to conclude that any of the taxpayer's former customers have paid any of their tax obligations.
Court Disallows Refund of Penalties on Underpayment of Black Lung Excise Tax: In Blue Mountain Energy, Inc. v. U.S., 2019 PTC 381 (D. Utah 2019), a district court held that a coal producer was not entitled to a refund of the accuracy related penalty it paid after the IRS's assessment of black lung excise taxes. The court found that the taxpayer was negligent and did not have a reasonable basis for its tax return position because it exercised no diligence and disregarded the plain meaning of the statutes to justify its position.
Procedure
Court Rejects Argument that President Enjoys Absolute Immunity from Criminal Process: In Trump v. Vance and Mazars USA, LLP, 2019 PTC 391 (S.D. N.Y. 2019), a district court denied President Trump's emergency motion for a restraining order and a preliminary injunction to enjoin enforcement of a grand jury subpoena issued by the District Attorney of the County of New York to the accounting firm which prepared the President's tax returns, Mazars USA, LLP. The court rejected the President's argument that, while he is in office, he enjoys absolute immunity from criminal process of any kind, and said it could not endorse such a categorical and limitless assertion of presidential immunity from judicial process.
President's Accounting Firm Must Turn Over Records Relating to Work Performed: In Trump v. Mazars USA and Committee on Oversight and Reform of the U.S. House of Representatives, 2019 PTC 398 (D.C. Cir. 2019), the D.C. Circuit affirmed a district court decision granting summary judgment in favor of the House Committee on Oversight and Reform (the Committee) with respect to a subpoena the Committee issued to the accounting firm Mazars USA, LLP for records related to work performed for President Trump and several of his business entities both before and after he took office. Contrary to the President's arguments, the Federal Circuit said, the Committee possesses authority under both the House Rules and the Constitution to issue the subpoena, and Mazars must comply.
IRS Officer Abused His Discretion by Not Verifying Termination of Taxpayer's OIC: In Moore v. Comm'r, T.C. Memo. 2019-129, the Tax Court held that an IRS settlement officer (SO) abused his discretion by attempting to collect by levy unpaid trust fund recovery penalties from the taxpayer. According to the court, the SO did not properly verify that an IRS office, which terminated an offer in compromise (OIC) that the taxpayer had in effect, had followed the administrative procedures for terminating the OIC and failure to properly verify such information was an abuse of discretion.
Retirement Plans
IRS Addresses Remedial Amendment Periods for Correcting Form Defects in 403(b) Plans: In Rev. Proc. 2019-39, the IRS sets forth a system of recurring remedial amendment periods for correcting form defects in a Code Sec. 403(b) plan (both for Code Sec. 403(b) individually designed plans and Code Sec. 403(b) pre-approved plans) first occurring after March 31, 2020 (the ending date for the initial remedial amendment period under Rev. Proc. 2013-22 ends). It also provides a limited extension of the initial remedial amendment period for certain form defects.
Trade or Business
Renovation Activities Were Not a Trade or Business; Losses Disallowed: In Sarkin v. Comm'r, T.C. Memo. 2019-131, the Tax Court held that renovation activities conducted by a U.S. taxpayer in South Africa did not rise to the level of a trade or business and, thus, the taxpayer and his wife could not deduct on Schedules C the losses attributable to such activities. The court also concluded that the husband was not an employee during the years at issue and thus could not deduct unreimbursed employee business expenses, but rejected the IRS's assessment of accuracy-related penalties on the couple because the IRS did not meet its burden of proving it had obtained supervisory approval for assessing those penalties.
September 2019
AFRs
IRS Issues September 2019 Applicable Federal Rates: In Rev. Rul. 2019-20, the IRS issued a ruling which prescribes the applicable federal rates for September 2019. 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.
Deductions
Partnership Operated Golf Course for Profit: In WP Realty, LP v. Comm'r, T.C. Memo. 2019-120, the Tax Court held that a Texas limited partnership was engaged in the activity of operating a golf course with the objective of making a profit and the loss deductions were therefore not barred by the hobby loss rules in Code Sec. 183. The court noted that the majority partner initially had the goal of creating a charitable organization but that objective subsequently changed and the partnership's predominant, primary, or principal objective was to realize an economic profit independent of tax savings.
Disaster Relief
IRS Expands California Wildfire Relief: In Notice 2019-52, in response to the devastation caused by the California wildfires, the IRS expanded the emergency housing and compliance monitoring relief that was provided in Rev. Proc. 2014-49 and Rev. Proc. 2014-50. The notice specifically provides that it does not modify the carryover allocation relief provisions of Rev. Proc. 2014-49, because the only low-income housing project damaged or destroyed by the wildfire had been placed in service before the disaster.
Employee Benefits
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-51, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
Excise Taxes
IRS Provides Hurricane Dorian Relief with Respect to Dyed Diesel Fuel: In IR-2019-148, the IRS announced that, to minimize or prevent disruptions to the supply of fuel for diesel-powered highway vehicles because of Hurricane Dorian, the IRS will not impose a penalty when dyed diesel fuel is sold for use or used on the highway in the State of Florida. This relief is effective immediately and, consistent with the Environmental Protection Agency waiver for Florida allowing the sale, distribution, and use of red dyed Non-Road Diesel Locomotive and Marine fuel in Florida for use in highway diesel vehicles, this relief will remain in effect through September 15, 2019.
Gross Income
Value of Car Awarded to High School Student for Good Grades Is Taxable Income: In Conyers v. Comm'r, T.C.O. 13969-18, the Tax Court held that a high school student, who was awarded a car by a local car dealership for maintaining good grades and perfect attendance at school, had to include the value of the car as additional income on her 2016 tax return. The court rejected the student's argument that the car was a gift under Code Sec. 102 and thus should be excluded from taxable income.
Health Care
Annual Fee on Covered Entities is Zero for 2019: In Notice 2019-50, the IRS advised that the annual fee on covered entities engaged in the business of providing health insurance for United States health risks, as enacted by the Patient Protection Affordable Care Act (PPACA), is zero for 2019. However, the IRS said, absent legislative action, the fee will resume in 2020.
Innocent Spouse
Court Denies Innocent Spouse Relief Relating to "Phantom" Income from Partnerships: In Welwood v. Comm'r, T.C. Memo. 2019-113, the Tax Court held that a taxpayer who filed joint returns with her husband was not entitled to innocent spouse relief under Code Sec. 6015(f) with respect to tax underpayments resulting from "phantom income" caused by investment partnerships that her invalid husband had owned for decades. While expressing sympathy over the taxpayer's situation, the court concluded that the taxpayer's circumstances were not compelling and did not justify relief from the joint liabilities.
Insurance Companies
IRS Provides Domestic Asset/Liability Percentages for Foreign Insurance Companies: In Rev. Proc. 2019-36, the IRS issued the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after December 31, 2017. Instructions are also provided for computing foreign insurance companies' liabilities for the estimated tax and installment payments of estimated tax for tax years beginning after December 31, 2017.
International
IRS Updates List Relating to Nonresident Alien Deposit Interest Regulations: In Rev. Proc. 2019-23, the IRS provides a list of the jurisdictions with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under Reg. Sec. 1.6049-4(b)(5) and Reg. Sec. 1.6049-8(a). The list has been updated and restated from the versions of those set forth in Rev. Proc. 2018-36 and (1) Georgia has been added to the list of jurisdictions with which the United States has in effect a relevant information exchange agreement and (2) Curacao and Cyprus have been added to the list of jurisdictions with which the relevant automatic exchange of information has been determined appropriate.
Procedure
Taxpayer's Case for Overpayment Interest Transferred to Claims Court: In Pfizer Inc. & Subs. v. U.S., 2019 PTC 354 (2d Cir. 2019), the Second Circuit vacated the judgment of a district court which had dismissed a taxpayer's claim against the United States for overpayment interest on a delayed tax refund. The court concluded that jurisdiction over the taxpayer's claim lies exclusively with the Court of Federal Claims and thus transferred the case to the Court of Federal Claims.
IRS Tax Lien Is Superior to a Lender's Unrecorded Security Interest: In Bennet v. Bascom, 2019 PTC 357 (6th Cir. 2019), the Sixth Circuit affirmed a district court decision that an IRS tax lien was superior to a lender's unrecorded security interest and awarded priority status to the IRS. The court rejected the lender's argument that its lien was entitled to "superpriority" status under Code Sec. 6323(b).
Government Shutdown Affected Validity of Form 872: In CCA 201937017, the Office of Chief Counsel advised that, where the IRS did not timely sign a Form 872, Consent to Extend the Time to Assess Tax, due to a government shutdown but the taxpayer did timely sign the Form 872, the consent is invalid. The Chief Counsel's Office also noted that a prior consent signed by a Power of Attorney (POA) is valid when the POA (1) lists a date range that includes all the years at issue but does not mention them explicitly, and (2) conveys only the boilerplate POA authorities and does not go beyond that to list authority to sign consents.
Taxpayer with Balance Over $50,000 Doesn't Qualify for Streamlined Installment Plan: In Rayle v. Comm'r, T.C. Memo. 2019-119, the Tax Court held that an IRS settlement officer (SO) did not abuse her discretion in concluding that a taxpayer who originally owed $44,000 in taxes and penalties for tax years 2009 and 2010 was ineligible for a streamlined installment agreement. Because the taxpayer's total unpaid assessed balance exceeded $50,000 when the SO made her determination, the court said the taxpayer did not qualify for a streamlined installment agreement under the applicable Internal Revenue Manual provisions, regardless of the fact that his liability was less than $50,000 five years previously.
Fourth Quarter Interest Rates for Underpayments and Overpayments Remain Unchanged: In Rev. Rul. 2019-21, the IRS announced that the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning July 1, 2019, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent.
IRS Doesn't Have to Prepare Substitute Returns before Assessing Frivolous Return Penalty: In Smith v. Comm'r, T.C. Memo. 2019-111, the Tax Court held that, with respect to a couple who had omitted income from their 2013 and 2014 tax returns, the IRS was not required to make Code Sec. 6020(b)(1) substitute returns for the couple before it could assess Code Sec. 6702 frivolous return penalties. The court also rejected the couple's argument that the income tax is an excise tax that they are not subject to and upheld Code Sec. 6651(a)(1) and Code Sec. 6673(a)(1) penalties against the couple.
Retirement Plans
Taxpayer's Withdrawal of Money Put into Retirement Account by Ex-Spouse Is Taxable: In Rosenberg v. Comm'r, T. C. Memo. 2019-124, the Tax Court held that the withdrawal of funds by a taxpayer from his retirement account was a taxable distribution subject to the penalty tax under Code Sec. 72(t) because he was under 59 1/2 and did not meet any of the other criteria for a nontaxable distribution. While the money was put into his retirement account by his former spouse pursuant to a court order that she pay him a certain amount, that fact did not overcome the fact that the funds were transferred from her retirement account to his and he then withdrew those funds and that withdrawal was a taxable event.
Employer Must Experience Reduction in Assets to be Eligible for Sec. 404(a) Deduction: In CCA 201935011, the Office of Chief Counsel advised that, for a contribution by an employer to the trust of a qualified retirement plan maintained by the employer to be deductible under Code Sec. 404(a) for the employer's tax year in which the contribution is made, the contribution must be a payment of cash (or its equivalent) or property to the trust. Whether a contribution is paid for purposes of Code Sec. 404(a), the Chief Counsel's Office said, is determined under the objective outlay-of-assets test set forth in Don E. Williams Co. v. Comm'r, 429 U.S. 569 (1977), which means that the employer must experience an outlay of, or reduction in, its assets when the contribution is made.
August 2019
AFRs
IRS Issues August AFRs: In Rev. Rul. 2019-17, the IRS issued the applicable federal rates for August 2019. 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
Bankruptcy Court Allows Debtor to Exempt Certain Retirement Accounts from Estate: In In re Hoffman, 2019 PTC 281 (Bankr. N.D. Ga. 2019), as a result of a bank filing objections with respect to a debtor's exclusion of his retirement accounts from the bankruptcy estate, a bankruptcy court was asked to decide whether the debtor's retirement accounts were excludible from the estate, or, in the alternative, whether they were exempt under Georgia law. The court granted the bank's objection as to the debtor's Roth IRAs and an IRA distribution, but denied the bank's objection with respect to the debtor's traditional IRA and 401(k).
Credits
EITC May Be Banned for Taxpayer's Children after Taxpayer Improperly Claimed One Child: In CCA 201931008, the Office of Chief Counsel advised that, where a taxpayer claimed the earned income tax credit (EITC) for three children and the credit was disallowed for one of those children yet the taxpayer continued to claim the credit for that one child in succeeding years, the taxpayer is subject to the two-year ban on claiming the EITC under Code Sec. 32(k)(1), assuming a determination is made that the taxpayer's claim for that one child was due to reckless or intentional disregard for the rules and regulations. According to the Chief Counsel's Office, the two-year ban applies even though the taxpayer otherwise would have been entitled to the EITC for her other two children.
IRS Provides Indexing Adjustments for Premium Tax Credit: In Rev. Proc. 2019-29, the IRS provides indexing adjustments applicable to certain calculations of the Code Sec. 36B premium tax credit. Specifically, the revenue procedure updates the applicable percentage table used to calculate an individual's premium tax credit for tax years beginning in calendar year 2020 and updates the required contribution percentage for plan years beginning after calendar year 2019.
Deductions
Taxpayer Entitled to Deductions Relating to Girlfriend's Grandchildren: In Gutierrez v. Comm'r, T.C. Summary 2019-23, the Tax Court held that a taxpayer was entitled to dependency exemption deductions for his girlfriend's two grandchildren, whom he shared custody with, because, under the tie-breaker rule, his income was higher than his girlfriend's income. Additionally, the court concluded that the taxpayer also (1) qualified for filing as a head of household; (2) was entitled to an earned income credit with respect to the two children; (3) was entitled to a child tax credit for the children; and (4) was not liable for the accuracy-related penalty assessed by the IRS.
Couple Operating Foster Care Business Can Deduct Home-Related Expenses: In Kho v. Comm'r, T.C. Summary 2019-18, the Tax Court held that a couple operating a foster care business was entitled to depreciation deductions attributable to the use of their home for their foster care business and other foster care related deductions for the business use of their home. However, the court denied dependency exemption deductions relating to the couple's foster care clients.
Taxpayer Can't Deduct Educational Expenses for Son as a Business Expense: In Cristo v. Comm'r, 2019 PTC 275 (9th Cir. 2019), the Ninth Circuit affirmed a Tax Court decision that the taxpayer was not entitled to deduct educational expenses for his son as a business expense under Code Sec. 162. Further, contrary to the taxpayer's contention, the court found no authority that dictated that the Tax Court should have shifted the burden of proof to the IRS.
Employee Benefits
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-48, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
IRS Extends Temporary Nondiscrimination Relief for Closed Defined Benefit Plans: In Notice 2019-49, the IRS extended the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5 by making that relief available for plan years beginning before 2021 if the conditions of Notice 2014-5 are satisfied. The extension in Notice 2019-49 is in anticipation of the issuance of final amendments to the Code Sec. 401(a)(4) regulations and modifies Notice 2014-5, Notice 2015-28, Notice 2016-57, Notice 2017-45, and Notice 2018-69.
Employment Taxes
IRS Issues Second Draft of 2020 Form W-4: On its website, IRS.gov, the IRS issued a second early release draft of the 2020 IRS Form W-4 so that taxpayer can begin programming of payroll systems. The IRS advised that (1) while the title of Form W-4 has been changed to Employee's Withholding Certificate (removing the word "Allowance"), the computation of withholding has not changed from the first early release posting; (2) the next early release of Publication 15-T will discuss separate computations for calculating withholding for employees who file a 2020 Form W-4 in 2020 and for a 2019 or earlier Form W-4; and (3) although the final Form W-4 will not be posted for a few months, there will be no further substantive changes.
Court Denies Refund Claim Where Overpaid Amounts Were Part of an Earlier Refund: In Birger Engineering, Inc. v. U.S., 2019 PTC 291 (D. Mass. 2019), a district court held that the IRS did not owe the taxpayer a refund with respect to employment taxes the taxpayer claimed to have overpaid in 2011. The court agreed with the government that, while the taxpayer paid $14,860 more than it reportedly owed for the fourth quarter of 2011, the IRS properly transferred the overpayment amounts, pursuant to Code Sec. 6402(a), as credits toward other tax liabilities, namely to the third and fourth quarters of 2009 and, thus, a refund that was made to the taxpayer for 2009 included the amount that the taxpayer overpaid in 2011.
IRS Launches New Tax Withholding Estimator: In IR-2019-139, the IRS announced the launch of a new redesigned online tool to make it easier to do a paycheck checkup to ensure the right amount of taxes are being paid throughout the year. According to the IRS, the new Tax Withholding Estimator offers a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.
Estates, Gifts, and Trusts
Court Will Look to Bahamian Law to Determine a Taxpayer's Rights in Property: In Nineveh Investments Limited v. U.S., 2019 PTC 312 (E.D. Pa. 2019), a district court held that, with respect to a trust created under Bahamian law, the court would first look to Bahamian law to determine what rights the taxpayer has in the property that the U.S. government seeks to reach. The court further held that, for all issues other than the interpretation of the trust instrument, the court will assume that Bahamian law is the same as Pennsylvania law.
Gross Income
Alimony Is Includible in Taxpayer's Income but She Avoids Penalty on Underpayment: In Faust v. Comm'r, T.C. Memo. 2019-105, the Tax Court held that a taxpayer had to include more than $27,000 of alimony that she received from her ex-husband in 2015 in income. However, the court cited the taxpayer's limited English proficiency and history of abuse by her ex-husband in concluding that the taxpayer was not liable for an accuracy-related penalty assessed by the IRS because she acted with reasonable cause and in good faith in not including the alimony income on her tax return. Faust, T.C. Memo. 2019-105 (8/20/19).
Insurance Companies
Automatic IRS Consent Granted for Insurance Company Accounting Method Changes: In Rev. Proc. 2019-34, the IRS issued simplified procedures for insurance companies to obtain the automatic consent of the IRS to change their methods of accounting for life insurance reserves, amounts under Code Sec. 807(c)(3), and specified policy acquisition expenses under Code Sec. 848, as applicable, to comply with Code Sec. 807 and Code Sec. 848, as amended by the Tax Cuts and Jobs Act, for tax years beginning after December 31, 2017. However, the IRS noted that this procedure is only available for one tax year and, as a result, the timing of the issuance of the procedure may pose challenges to an insurance company that has already prepared its tax return for the first tax year beginning after December 31, 2017; but, the IRS said that the procedure does provide accommodations for such an insurance company.
IRS Revises Insurance Discount Factors: In Rev. Proc. 2019-31, the IRS revised insurance discount factors for the 2018 accident year, as well as discount factors for the 2019 accident year. These discount factors will be used to compute discounted unpaid losses under Code Sec. 846 and discounted estimated salvage recoverable under Code Sec. 832.
IRS Simplifies Accounting Method Change Procedures for Insurance Companies: In Rev. Proc. 2019-30, the IRS issued simplified procedures for an insurance company to obtain automatic IRS consent to change its methods of accounting for discounting unpaid losses and expenses unpaid, estimated salvage recoverable, and unearned premiums attributable to title insurance, to comply with Code Sec. 846, as amended by the Tax Cuts and Jobs Act of 2017. The new procedures apply for tax years beginning after December 31, 2017, and ending on or before December 31, 2019.
International
Ninth Circuit Sides With Amazon on Definition of "Intangible" in Cost-Sharing Case: In Amazon.Com, Inc. v. Comm'r, 2019 PTC 308 (9th Cir. 2019), a Ninth Circuit panel affirmed a Tax Court decision, which sided primarily with the taxpayer, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement. The panel concluded that the definition of "intangible" does not include residual-business assets, and that the definition is limited to independently transferable assets.
IRS Issues Prop. Regs on Classification of Cloud and Digital Content Transactions: In T.D. 9865, the IRS issued proposed regulations regarding the classification of cloud transactions for purposes of the international tax provisions. The proposed regulations also modify the rules for classifying transactions involving computer programs, including by applying the rules to transfers of digital content.
IRS Issues Final Regs Dealing with Allocation by Partnerships of Foreign Income Taxes: In T.D. 9871, the IRS issued final regulations on the allocation by a partnership of foreign income taxes. According to the IRS, these regulations are necessary to improve the operation of an existing safe harbor rule that determines whether allocations of creditable foreign tax expenditures are deemed to be in accordance with the partners' interests in the partnership and the regulations affect partnerships that pay or accrue foreign income taxes and partners in such partnerships.
Partnerships
Eleventh Circuit Agrees That Tax Court Doesn't Have Jurisdiction in Partnership Case: In Highpoint Tower Technology Inc. v. Comm'r, 2019 PTC 276 (11th Cir. 2019), the Eleventh Circuit affirmed a Tax Court's decision that it did not have jurisdiction over gross valuation misstatement penalties imposed against a partnership previously determined to be a "sham" and "lacking economic substance." The court agreed with the IRS's characterization of the penalty at issue as relating to an adjustment to a partnership item and noted that an adjustment to a partnership item is explicitly excluded from the Tax Court's deficiency jurisdiction.
Deemed Distribution in Assets-Over Merger Is Treated as an Exchange: In TAM 201929019, the National Office advised that a deemed distribution of a partnership interest in an assets-over merger of two partnerships under Reg. Sec. 1.708-1(c)(3)(i) is, pursuant to Code Sec. 761(e), treated as an exchange that requires a mandatory downward inside-basis adjustment under Code Sec. 743(b) when the resulting partnership has a substantial built-in loss. In addition, the National Office stated that cancellation of indebtedness income that is deferred under Code Sec. 108(i) is not included in calculating a transferee partner's share of adjusted basis to the partnership of partnership property for purposes of Reg. Sec. 1.743-1(d)(1).
Procedure
Same EIN Must Be Used for Forms 945 and Related Information Returns: In PMTA 2019-10, the Office of Chief Counsel advised that the IRS has the authority to require taxpayers that file Forms 945, Annual Return of Withheld Federal Income Tax, to use the same employer identification number (EIN) when filing related information returns. The IRS has ample authority under the Internal Revenue Code and regulations, the Chief Counsel's Office said, to impose the requirement that the same EIN be used on both the Form 945 and the information returns furnished to payees that report the federal income tax withholding reported on the Form 945 and that no legislative change is necessary to effectuate this requirement.
Taxpayer Can't Use Tenth Circuit Decision to Avoid Federal Jurisdiction: In U.S. v. Springer, 2019 PTC 319 (N.D. Ok. 2019), a district court denied a Native American taxpayer's motion for relief from judgment after finding that the judgment was not void for lack of jurisdiction as had been argued by the taxpayer. With respect to the taxpayer's reliance on the Tenth Circuit's decision in Murphy v. Royal, 875 F.3d 896 (10th Cir. 2017), cert granted, Royal v. Murphy, 138 S. Ct. 2026 (2018), the court said that, while Murphy held that the Oklahoma state courts did not have jurisdiction over the taxpayer by virtue of his being a Native American in what was Indian country, it did not address any potential limits to federal jurisdiction in Indian country and the instant case deals with federal law.
Third Party Can't Pay Another Party's Tax Liability and Then Sue for a Refund: In CCA 201933011, the Office of Chief Counsel advised that Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4) supersede U.S. v. Williams, 514 U.S. 527 (1995), and thus third parties cannot pay another party's tax liability and then sue for a refund. This advice, the Chief Counsel's Office said, reflects the position taken in Rev. Rul. 2005-50, which is a position it continues to follow.
Feigned Incompetency Results in Increase in Prison Sentence for Tax Evasion: In U.S. v. Nygren, 2019 PTC 296 (1st Cir. 2019), in a case of first impression, the First Circuit held that the feigned incompetency of a taxpayer convicted of tax evasion may comprise the basis for an obstruction-of-justice enhancement and, thus, support an upward offense-level adjustment of the taxpayer's prison term. As a result, the court affirmed the taxpayer's prison sentence.
Judge Reassigns President's Lawsuit Involving NY Tax Returns to Another Judge: In Trump v. Committee on Ways and Means, U.S. House of Representatives, 2019 PTC 282 (D. D.C. 2019), a case involving a lawsuit brought by the President of the United States against the U.S. House of Representatives' Committee on Ways and Means alleging violations of Article I of the United States Constitution and House Rules and violations of the First Amendment, a district court judge disagreed that the instant case was related to another earlier-filed case involving some of the same parties because, the court said, the focus of the earlier-filed case is a federal statute that involves acquiring the President's federal tax returns from a federal agency while the instant case involves New York law and the President's New York state tax returns. As a result, the judge said the instant case was not a related case over which he should also preside and ordered the case to be transferred for random reassignment to another judge.
IRS Sending Letters to Virtual Currency Owners Advising Them to Pay Back Taxes: In IR-2019-132, the IRS said that it has begun sending letters to taxpayers, who have engaged in virtual currency transactions and who have potentially failed to report income and pay the resulting tax from such transactions or who did not report their transactions properly. The IRS said that such taxpayers should review their tax filings and, when appropriate, amend past returns and pay back taxes, interest and penalties with respect to transactions involving virtual currency which may not have been properly reported.
Chief Counsel Opines on Medicare Taxes and Deficiency Procedures: In PMTA 2019-6, the Office of Chief Counsel advised that the additional Medicare tax imposed under Code Sec. 1401(b)(2) is subject to the deficiency procedures under Code Sec. 6211 through Code Sec. 6213 because it is an income tax, but the additional Medicare tax imposed under Code Sec. 3101(b)(2) is not subject to such deficiency procedures because it is considered an employment tax. According to the Chief Counsel's Office, for purposes of the deficiency procedures under Code Sec. 6211 through Code Sec. 6213, the term "deficiency" is limited to income, estate, and gift taxes, as well as certain excise taxes.
Court Rejects IRS Attempt to Dismiss Taxpayer's FOIA Action: In Cause of Action Institute v. IRS, 2019 PTC 270 (D. D.C. 2019), a district court rejected an IRS argument that the court lacked subject-matter jurisdiction over a taxpayer's FOIA request for records involving certain communications and records exchanged between the IRS and the Joint Committee on Taxation from 2009 until present. The court said that the IRS will have ample opportunity to dispute the taxpayer's claim when it addresses the merits of the taxpayer's complaint in a future motion for summary judgment; and in the meantime, and for the purpose of the IRS's motion to dismiss, the court found that the taxpayer's allegations must be accepted as true, and they are manifestly sufficient to state a claim for violation of the FOIA.
Agent Risks Unauthorized Disclosure of Return Info by Having a Friend Drive Him to an Appointment: In PMTA 2019-7, the Office of Chief Counsel advised that there may be a risk of unauthorized disclosure of confidential return information under Code Sec. 6103 where a revenue agent has a friend or relative drive him or her to an appointment at a taxpayer's residence. While there is no prohibition to using alternative methods of transportation, the Chief Counsel's Office stated that agents should be sure that no direct or indirect disclosure is made when using a third party for transportation to a taxpayer's location.
Taxpayer Can't Recoup Costs for Hiring Out-of-District Counsel: In Audio Technical U.S., Inc. v. U.S., 2019 PTC 269 (N.D. Ohio 2019), a district court held that a taxpayer who had taken the government to court to obtain a refund of several years' worth of research tax credits and who received a unanimous verdict from the jury, was not entitled to fees incurred for travel expenses for out-of-district counsel. The court rejected as without merit the taxpayer's argument that it was unfair and inequitable to punish the taxpayer for not hiring "less knowledgeable" local counsel merely for their proximity to the courthouse after noting that (1) the forum in which the case was heard was large and contained many capable and specialized attorneys and large and sophisticated law firms, (2) obtaining in-forum counsel does not require parties to retain an attorney with an office next to the courthouse, nor is it a "requirement" in its own sense, and (3) travel expenses for out-of-district counsel are not enumerated under the law as expenses for which the taxpayer could be reimbursed.
Retirement Plans
Early Distribution from 401(k) Plan Doesn't Qualify for First-Home-Purchase Exception: In Amadi, T.C. Summary 2019-19, the Tax Court held that a taxpayer, who received an early distribution from her 401(k) retirement plan in order to help with the purchase of her first home, did not qualify for the Code Sec. 72(t)(2)(F) first-home-purchase exception to the 10 percent penalty tax on early retirement plan distributions. The court noted that the taxpayer did not qualify for the first-home-purchase exception because it applies only to distributions from individual retirement accounts and the distribution the taxpayer received was from a 401(k) plan.
Tax Accounting
Promissory Note Is Included in Accrual-Method Taxpayer's Income: In King Solarman, Inc. v. Comm'r, T.C. Memo. 2019-103, the Tax Court held that a corporation that manufactures and sells solar equipment was required to include in income sales proceeds received in the form of a promissory note. The court rejected the taxpayer's argument that it was a cash method taxpayer and thus did not have to include those amounts in income after finding that the taxpayer elected the accrual method of accounting and actually used that method.
Tax-Exempt Organizations
Final Regs Address Notification Requirement for 501(c)(4) Organizations: In T.D. 9873, the IRS issued final regulations relating to the requirement that Code Sec. 501(c)(4) organizations must notify the IRS, no later than 60 days after their establishment, of their intent to operate under Code Sec. 501(c)(4). The notification to the IRS must be made on Form 8976, Notice of Intent to Operate Under Section 501(c)(4), no later than 60 days after the date the organization is organized.
July 2019
Bankruptcy
Taxpayer Forfeited Right to Exempt IRA From Bankruptcy: In In re Yerian, 2019 PTC 244 (11th Cir. 2019), the Eleventh Circuit affirmed decisions by a district court and a bankruptcy court and held that a taxpayer forfeited the right to exempt his individual retirement accounts (IRAs) from bankruptcy administration and shield his IRA from creditors when he engaged in self-dealing transactions prohibited by the IRA's governing instruments. The taxpayer, who titled IRA-owned cars in his own name and his wife's name and used IRA funds to purchase a condo which he used for personal purposes, had incurred over $100,000 in tax penalties for abusing his IRA.
Credits
IRS Tolls and Extends Continuity Safe Harbor to Mitigate National Security Concerns: In Notice 2019-43, the IRS updates and clarifies the guidance provided in prior IRS notices regarding the beginning of construction for purposes of Code Sec. 45 and Code Sec. 48, generally referred to as the production tax credit and the investment tax credit, respectively. Specifically, the notice provides that the Continuity Safe Harbor may be tolled and extended in certain limited circumstances involving significant national security concerns.
Deductions
Gambler Lacked Requisite Profit Objective to Deduct Losses on Schedule C: In Zalesiak v. Comm'r, T.C. Summary 2019-16, the Tax Court held that, while a taxpayer was entitled to $16,841 in deductible gambling losses for 2015, the taxpayer could not deduct such losses on his Schedule C as a professional gambler but could only deduct them on Schedule A as an itemized deduction. While the court did not question that the taxpayer wished to win at poker, the taxpayer did not have the requisite profit objective to qualify his gambling activity as a trade or business for 2015.
Employee Benefits
Proposed Regs Would Affect Multiple Employer Plans: In REG-121508-18, the IRS sets forth proposed regulations relating to the tax qualification of plans maintained by more than one employer. The proposed regulations would provide an exception, if certain requirements are met, to the application of the ''unified plan rule'' for a defined contribution multiple employer plan (MEP) in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement and would affect MEPs, participants in MEPs (and their beneficiaries), employers participating in MEPs, and MEP plan administrators.
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-44, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
Innocent Spouse
Tax Court Rejects Innocent Spouse Claim: In Ogden v. Comm'r, T.C. Memo. 2019-88, the Tax Court held that, because a taxpayer did not establish that she requested innocent spouse relief within two years from the IRS's commencing collection activities, she did not qualify for innocent spouse relief under Code Sec. 6015(b) or Code Sec. 6015(c). Furthermore, the court concluded that she did not qualify for equitable relief under Code Sec. 6015(f) beyond the amount the IRS previously granted because the liability from which she was seeking relief was attributable to her income and she failed to show that, because of prior abuse and fear of her ex-husband's retaliation, she was not able to challenge the exclusion of a particular item of income from one year's tax return and was not able to question the payment of the balance due reported on the following year's return.
International
Court Denies Summary Judgment for Taxpayer in FBAR Case: In U.S. v. Dadurian, 2019 PTC 247 (S.D. Fla. 2019), a district court held that, regardless of whether it used "recklessness," "willful blindness," or even "knowingly" to define the term "willfulness" in determining if a taxpayer willfully failed to file financial bank account reports (FBARs), circumstantial evidence existed that the taxpayer willfully failed to file FBARs for five financial accounts. Accordingly, the court denied the taxpayer's motion for partial summary judgment and found that there were genuine issues for trial as to whether the taxpayer may be penalized for failing to report such financial accounts.
IRS Issues Final and Temp Regs on GILTI, Subpart F, and Foreign Tax Credit: In T.D. 9866, the IRS issued (1) final and temporary regulations that provide guidance to determine the amount of global intangible low-taxed income (GILTI) included in the gross income of certain U.S. shareholders of foreign corporations, including the U.S. shareholders that are members of a consolidated group, (2) final regulations relating to the determination of a U.S. shareholder's pro rata share of a controlled foreign corporation's subpart F income included in the shareholder's gross income, as well as certain reporting requirements relating to inclusions of subpart F income and global intangible low-taxed income, and (3) final regulations relating to certain foreign tax credit provisions applicable to persons that directly or indirectly own stock in foreign corporations. This guidance obsoletes Notice 2009-7 and Notice 2010-41.
Prop. Regs Address Tax Treatment of Domestic Partnerships with Foreign Partners: In REG-101828-19, the IRS issued proposed regulations on the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations. The IRS also issued proposed regulations under the global intangible low-taxed income provisions regardi-g gross income that is subject to a high rate of foreign tax.
IRS Provides Guidance on Passive Foreign Investment Companies: In REG-105474-18, the IRS withdrew previously proposed regulations and replaced them with new proposed regulations under Code Sec. 1291, Code Sec. 1297, and Code Sec. 1298 regarding the determination of ownership in a passive foreign investment company and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation for purposes of Code Sec. 1297. The regulations (1) provide guidance regarding when a foreign corporation is a qualifying insurance corporation (QIC) under Code Sec. 1297(f) and the amounts of income and assets that a QIC excludes from passive income and assets pursuant to Code Sec. 1297(b)(2)(B) (i.e., the PFIC insurance exception) for purposes of Code Sec. 1297(a); (2) clarify the application and scope of certain rules that determine whether a U.S. person that directly or indirectly holds stock in a PFIC is treated as a shareholder of the PFIC, and whether a foreign corporation is a PFIC; and (3) affect U.S. persons with direct or indirect ownership interests in certain foreign corporations.
Penalties
No Reduction in Prison Sentence for Taxpayer Who Scammed Investors: In U.S. v. Rosen, 2019 PTC 245 (8th Cir. 2019), the Eighth Circuit upheld a more than five-year prison sentence handed down by a district court to a taxpayer who pled guilty to one count of engaging in monetary transactions involving property derived from unlawful activity and one count of tax fraud. The taxpayer had sold multiple investors on his business plans regarding the training and sale of highly-trained security dogs and the creation of a luxury dog-boarding facility, but used the investors' money instead to bankroll his daughter's wedding and his lifestyle, which included luxury vacations, designer handbags and watches, and diamond jewelry.
Company Should Have Disclosed Insurance Transaction Similar to a Listed Transaction: In Interior Glass Systems v. U.S., 2019 PTC 241 (9th Cir. 2019), the Ninth Circuit affirmed a district court and held that a company that joined a group life insurance term plan to fund a cash-value life insurance policy, which was owned by the company's sole shareholder and only employee, was liable for penalties for failing to disclose the existence of the transaction, which the court found to be substantially similar to a listed transaction. The court also held that the taxpayer's procedural due process rights were not violated when it was required to pay penalties for non-disclosure in full before seeking judicial review.
Procedure
Trustee Who Is Not a Licensed Attorney Cannot Represent Trust in Court: In U.S. v. Lain, 2019 PTC 260 (10th Cir. 2019), the Tenth Circuit affirmed a district court's denial of a taxpayer's right to intervene pro se in a case involving a trust of which the taxpayer is a trustee. In the appeal, which arose from an action to enforce federal tax liens and sell real property owned by the trust, the Tenth Circuit said that, because the taxpayer is not a licensed attorney, he can only represent himself before the court; he cannot prosecute an appeal for another party.
No Increase in Attorney's Fees Allowed for Legal Hours Unreasonably Expended: In Tolin v. Comm'r, 2019 PTC 254 (8th Cir. 2019), the Eighth Circuit affirmed a Tax Court decision that a taxpayer who was awarded attorney's fees after prevailing in a deficiency proceeding was not entitled to an enhancement of the hourly statutory $180 fee rate. The Eighth Circuit also upheld the Tax Court's reduction in the number of compensable hours after finding that it had no reason to second-guess the Tax Court's assessment that the legal hours were unreasonably expended in relation to the task at hand.
Supreme Court Refuses to Overrule Deference Doctrine: In Kisor v. Wilkie, 2019 PTC 248 (S. Ct. 2019), the Supreme Court refused to overrule the decisions in Auer v. Robbins, 519 U.S. 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945) and thus rejected calls to discard the deference those decisions give to government agencies. However, the Court said the deference doctrine is not always appropriate and remanded the case to the Federal Circuit to decide whether that doctrine applies to a decision by the Board of Veterans' Appeals, which was based on its interpretation of a Department of Veterans Affairs rule governing the retroactivity of a veteran's claim for disability benefits.
Interest Is Allowable on Payment Incorrectly Applied by IRS: In CCA 201926001, the Office of Chief Counsel advised that interest was allowable on the refund of a remittance made by a non-liable spouse that the IRS incorrectly applied to the liable spouse's tax liability. The interest is allowable on the overpayment from the date the remittance was received and applied by the IRS to the date the overpayment is either credited or refunded.
Retirement Plans
IRS Can Levy on 401(k) Funds; Early Withdrawal Penalty Doesn't Apply: In CCA 201927019, the Office of Chief Counsel advised that the IRS can levy on funds accumulated in a 401(k) account in accordance with the procedures and policies set out in the Internal Revenue Manual (IRM) and, as the IRM states, the early withdrawal penalty would not apply. The Chief Counsel's Office noted that the procedures for levying on retirement income are found in IRM Section 5.11.6.2 and, relevant to the issue at hand, procedures for levying on funds in pension retirement plans - including 401(k)s - are found in IRM 5.11.6.3.
Tax Accounting
IRS Removes Advance Payment Deferral Regs in Light of TCJA Changes: In T.D. 9870, the IRS issued final regulations removing Reg. Sec. 1.451-5, which generally allowed accrual method taxpayers to defer the inclusion of income for advance payments for goods and long-term contracts. The Tax Cuts and Jobs Act of 2017 (TCJA) enacted new Code Sec. 451(c), which overrides the deferral method provided in Reg. Sec. 1.451-5 and generally requires an accrual method taxpayer that receives any advance payment described in Code Sec. 451(c)(4) during the tax year to include the advance payment in income in the tax year of receipt or make an election to: (1) include any portion of the advance payment in income in the tax year of receipt to the extent required under new Code Sec. 451(b); and (2) include the remaining portion of the advance payment in income in the following tax year.
Tax Return Preparer Penalties
Court Affirms Taxpayer's Prison Sentence for Aiding the Filing of False Returns: In Kadiri v. U.S., 2019 PTC 242 (4th Cir. 2019), the Fourth Circuit affirmed a district court's 48-month sentence imposed on a taxpayer after a jury convicted her of two counts of aiding or assisting in the filing of false tax returns in violation of Code Sec. 7206(2), and two counts of willfully failing to file tax returns in violation of Code Sec. 7203. The court rejected the taxpayer's challenges to the district court's application of an abuse-of-trust enhancement, as well as the court's reliance on the findings underlying the enhancement to justify an upward variance sentence.
Tax-Exempt Organizations
Prop. Regs Provide Guidance on Net Investment Excise Tax for Colleges and Universities: In REG-106877-18, the IRS issued proposed regulations for determining the Code Sec. 4968 excise tax applicable to the net investment income of certain private colleges and universities, as provided by the Tax Cuts and Jobs Act of 2017. The proposed regulations clarify a number of definitions related to the excise tax and make use of a number of existing statutory and regulatory provisions in defining students, tuition, exempt purpose, fair market value, net investment income and related organizations.
June 2019
Accounting
IRS Releases Draft of Newly Designed Form W-4 for Use in 2020: The IRS issued a draft of the 2020 Form W-4, Employee's Withholding Allowance Certificate, which has been redesigned in light of changes made by the Tax Cuts and Jobs Act of 2017. In the new version of Form W-4, withholding allowances are no longer used since personal exemptions, to which the withholding allowances were previously tied, were eliminated by the TCJA for years 2018 - 2025. Draft Form W-4 and W-4 FAQ (IRS website). Read More...
IRS Issues June 2019 Applicable Federal Rates: In Rev. Rul. 2019-14, the IRS provides the applicable federal rates for June 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
Shared Responsibility Penalty Is Not a Tax, According to N.C. Bankruptcy Court: In In re Bailey, 2019 PTC 205 (Bankr. E.D. N.C. 2019), a bankruptcy court held that the shared responsibility penalty (SRP), imposed by Code Sec. 5000A(b) on a couple who failed to comply with the Affordable Care Act's individual mandate to maintain minimum essential health care coverage, is a penalty and not a tax, as had been argued by the IRS. As a result, the IRS was not entitled to priority status for the SRP owed by the couple and instead had a general unsecured claim.
Credits
Notice 2019-32 Deadline for Comments on Section 45Q Issues Corrected: In Announcement 2019-6, the IRS issued a correction of a typographical error in the first sentence of Section 4.01 of Notice 2019-32, a notice in which the IRS requests comments on Code Sec. 45Q issues. The sentence states that comments may be submitted in writing on or before Thursday, June 4, 2019, but the correct date is July 4, 2019.
Deductions
Couple Can't Deduct Losses from Thoroughbred Horse Activity: In Donoghue v. Comm'r, T.C. Memo. 2019-71, the Tax Court held that a couple was not engaged in their thoroughbred horse activity for profit and thus were not entitled to deduct losses from that activity. The court also found the couple liable for accuracy-related penalties after noting that both taxpayers were college-educated business people and neither sought any advice regarding the deductibility of their horse activity losses for any of the years at issue.
Taxpayer Can't Deduct Evangelization Expenses: In Oliveri v. Comm'r, T.C. Memo. 2019-57, the Tax Court held that a taxpayer could not deduct as charitable contributions the majority of unreimbursed expenses incurred in his evangelization activities because the expenses were either incurred in whole or in part for personal purposes or were not properly substantiated. The court also concluded that the denial of these deductions did not violate the Constitution and that the taxpayer was liable for a penalty under Code Sec. 6651(a) for not timely filing the return at issue; however, he was not liable for the accuracy related penalty under Code Sec. 6662 because the IRS did not show that it had obtained the proper written supervisory approval for assessing that penalty.
Employee Benefits
IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-40, 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), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).
Innocent Spouse
Failure to File Return and Knowledge of Understatements Precludes Innocent Spouse Relief: In Briley v. Comm'r, T.C. Memo. 2019-55, the Tax Court held that a taxpayer was not entitled to innocent spouse relief after finding that she failed to file her 2016 tax return, and she had reason to know of the understatements of tax liability on the joint returns at issue. The court concluded that, because the remaining factors it considered in determining whether the taxpayer qualified for innocent spouse relief were neutral, it would not be inequitable to hold the taxpayer liable for the payment of tax at issue.
Insurance
Final Regs Address Insurance Discounting Rules: In T.D. 9863, the IRS issued final regulations on discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for federal income tax purposes. The final regulations update and replace existing regulations to implement recent legislative changes to the Code and make a technical improvement to the derivation of loss payment patterns used for discounting.
International
Prop. Regs. Provide Exception from Tax for Gain or Loss on Certain Foreign Pension Funds: In REG-109826-17, the IRS issued proposed regulations on the exception from taxation with respect to gain or loss of a qualified foreign pension fund attributable to certain interests in U.S. real property. The proposed regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in U. S. real property and affect certain holders of certain interests in U.S. real property and withholding agents that are required to withhold tax on certain dispositions of, and distributions with respect to, such property.
Ninth Circuit Panel Again Reverses Tax Court; Rules Reg. 1.482-7A(d)(2) Valid: In Altera Corporation & Subs v. Comm'r, 2019 PTC 216 (9th Cir. 2019), the Ninth Circuit panel reversed, for the second time, a decision of the Tax Court that Reg. Sec. 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements (QCSAs), was invalid under the Administrative Procedure Act. The panel explained that Code Sec. 482 does not speak directly to whether the IRS may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The panel held that the IRS reasonably interpreted Code Sec. 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute and, thus, should be given deference.
Like-Kind Exchanges
Exchange of Property Between Related Parties Doesn't Qualify as Sec. 1031 Exchange: In The Malulani Group, Limited and Subsidiary v. Comm'r, 2019 PTC 224 (9th Cir. 2019), the Ninth Circuit affirmed a Tax Court holding that a 2007 real estate exchange between related parties did not qualify for deferred recognition of gain under the like-kind exchange rules of Code Sec. 1031 because the transaction was structured with a tax avoidance purpose. The Ninth Circuit agreed with the Tax Court's conclusion that, because the aggregate tax liability arising out of the exchange was significantly less than the hypothetical tax liability that would have arisen from a direct sale between the related parties, the like-kind exchange served tax-avoidance purposes.
Penalties
Sixth Circuit Affirms Convictions of Siblings that Filed Fictitious Tax Returns: In U.S. v. Gandy, 2019 PTC 217 (6th Cir. 2019), the Sixth Circuit affirmed a district court's decision that found the taxpayer, his brother and sister, and his brother-in-law guilty of obtaining over $360,000 in tax refunds after submitting fictitious tax returns that claimed refunds for nonexistent excess withholding. The court affirmed the taxpayers' convictions for mail fraud, conspiracy to commit mail fraud, aggravated identity theft, conspiracy to commit identity theft, and illegal monetary transactions.
Court Rejects Argument That Notice 2016-66 Violates Law: In CIC Services, LLC v. IRS, 2019 PTC 202 (6th Cir. 2019), the Sixth Circuit affirmed a district court's dismissal of a taxpayer's complaint that alleged that Notice 2016-66, which identified certain micro-captive transactions as reportable transactions of interest, was issued in violation of the Administrative Procedure Act and the Congressional Review Act. By deeming these transactions to be reportable transactions, Notice 2016-66 imposed requirements and potential significant penalties under various Code provisions (e.g., Code Secs. 6011, 6707A(b), 6111, and Code Sec. 6707(b)) on taxpayers engaging in them, and on material advisors aiding in them.
Restitution Includes Tax Debt That Taxpayer Tried to Discharge in Bankruptcy: In U.S. v. Yurek, 2019 PTC 197 (10th Cir. 2019), the Tenth Circuit affirmed a taxpayer's conviction for tax evasion and bankruptcy fraud but vacated the sentence because the district court applied the wrong test when deciding whether to grant a mitigating-role adjustment. The court also concluded that the intended loss attributable to her, and for which she was ordered to provide restitution, equaled the monetary harm that she intended to cause her creditors and included the amount of federal tax debt that she tried to discharge in bankruptcy.
Procedure
IRS Did Not Abuse Its Discretion in Refusing to Discharge Company's $4.8 Million Debt: In Indus Group, Inc. v. Comm'r, T.C. Memo. 2019-68, the Tax Court held that an IRS settlement officer did not abuse his discretion in declining a company's proposal to discharge its almost $4.8 million federal tax liability in exchange for installment payments of $5,500 per month. The court also sustained a proposed collection action against the company.
IRS Issues Third Quarter Interest Rates for Tax Underpayments and Overpayments: In Rev. Rul. 2019-15, the IRS announced that the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning July 1, 2019, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent.
The Filing of Forms 4549 and 982 Constituted Two Separate and Timely Refund Claims: In CCA 201921013, the Office of Chief Counsel concluded that, following examinations of the taxpayer's return by the IRS Automated Underreporter Program (AUR) and an IRS Field Examiner (Exam), a Form 4549, Income Tax Examination Changes, signed by a taxpayer's POA and a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), submitted by the Taxpayer Advocate Service on behalf of the taxpayer, were two separate refund claims. According to the Chief Counsel's Office, (1) because the IRS Letter 105C did not disallow the claim contained in the Form 4549, the Code Sec. 6532 period for filing suit had not begun to run, and (2) because the Form 4549 was a timely informal claim that was never disallowed, Code Sec. 6514 did not prevent the IRS from making a credit or refund to the taxpayer.
Underpayment of Tax Interest Is Not Suspended for Deposit Subsequently Returned: In CCA 201922029, the Office of Chief Counsel cited Section 8 of Rev. Proc. 2005-18 for the proposition that, if a remittance that is held as a deposit is returned at the taxpayer's written request, with or without interest, and a deficiency is later assessed for that period and type of tax, the running of interest will not be suspended during the period for which the remittance was held as a deposit. The Chief Counsel's Office also stated that, if the taxpayer identified any or part of the deposit as being for a disputable tax, the taxpayer is entitled to overpayment interest on the returned deposit under Code Sec. 6603(d) and the interest rate is the federal short-term rate determined under Code Sec. 6621(b), compounded daily.
Ex-wife Who Paid Off Lien That Encumbered Mutually Owned Property Not Entitled to Refund: In CCA 201922028, the Office of Chief Counsel advised that a taxpayer's ex-wife, who had paid off her ex-husband's tax lien/liabilities which encumbered mutually owned property and then sought a refund for having paid off a senior lien on the property, did not have a refund claim. According to the Chief Counsel's Office, the only remedy available to a person in her position is to request a discharge under Code Sec. 6325(b)(4) and then file a refund suit under Code Sec. 7426.
Tax Preparers
Law Firm Must Turn Over Client Info; Court Rejects Blanket Assertion of Privilege: In Taylor Lohmeyer Law Firm PLLC v. U.S., 2019 PTC 190 (W.D. Tex. 2019), a district court granted a government motion to enforce an IRS summons seeking certain information related to the clients of a law firm, which had previously assisted one of its clients in setting up foreign accounts, foreign trust, and foreign corporations to avoid paying U.S. taxes for which he was liable. In rejecting the law firm's blanket assertion that such information was covered by attorney-client privilege, the court said that if the law firm wishes to assert any claims of privilege as to any responsive documents, it may do so provided that any such claim of privilege is supported by a privilege log which details the foundation for each claim on a document-by-document basis.
Tax-Exempt Bonds
Guidance Issued on Tax-Exempt State, Local, and Indian Tribal Government Bonds: In Notice 2019-39, the IRS issued guidance regarding the issuance of tax-exempt state and local bonds under Code Sec. 103 and tax-exempt Indian tribal government bonds under Code Sec. 7871 in current refunding issues to refund (directly or indirectly in a series of current refunding issues) original bonds issued in eligible targeted bond programs. The guidance supersedes Notice 2012-3 and Notice 2014-9.
Withholding Taxes
Prop. Regs. Provide Withholding Rules for Certain Periodic and Nonperiodic Payments: In REG-132240-15, the IRS issued proposed regulations relating to withholding on certain periodic and nonperiodic distributions under Code Sec. 3405, other than eligible rollover distributions. The proposed regulations are based on guidance provided in Notice 87-7 with clarifications for (1) situations where the payee has an Army Post Office, Fleet Post Office, or Diplomatic Post Office address, and (2) situations where the payee provides the payor with a residence address located within the United States but provides payment instructions that request delivery of the designated distribution to a financial institution or other person located outside of the United States.
May 2019
Accounting
IRS Issues May 2019 Applicable Federal Rates: In Rev. Rul. 2019-12, the IRS provides the applicable federal rates for May 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Credits
IRS Requests Comments on Section 45Q Issues: In Notice 2019-32, the IRS requests general comments on issues arising under Code Sec. 45Q, as well as specific comments concerning the secure geological storage and measurement of qualified carbon oxide, the recapture of the benefit of the credit for carbon oxide sequestration, and other issues described in Section 3 of the Notice. The IRS anticipates issuing regulations and other guidance to implement the provisions of Code Sec. 45Q, as amended by Section 41119 of the Bipartisan Budget Act of 2018.
No R & D Credit for Couple That Failed to Adequately Explain Entitlement to Credit: In Harper v. U.S., 2019 PTC 155 (S.D. Calif. 2019), a district court rejected a couple's claim that their wholly owned corporation was entitled to Code Sec. 41 tax credits of more than $400,000 for increasing research and development (R&D) activities. The court agreed with the IRS that the claims for the tax credit failed to adequately set forth the grounds and facts entitling the corporation to any R&D credit, and such failure deprived the court of subject matter jurisdiction over the refund suit.
Alternative Premium Tax Credit Is Zero for Couple Who Married During the Year: In Fisher, T.C. Memo. 2019-44, the Tax Court held that the tax liability of a couple who had married during the year at issue was appropriately increased by the amount of the advance Code Sec. 36B premium assistance tax credit (PTC), which was applied against the wife's monthly health insurance premium, because the couple's income exceeded 400 percent of the amount of the federal poverty line. According to the court, the couple's alternative marriage-year tax credit was equal to the sum of their alternative premium assistance amounts for the pre-marriage months (zero) and their premium assistance amounts for the marriage months and, accordingly, the couple's alternative marriage-year tax credit was zero.
IRS Issues Area Median Gross Income Figures for Mortgage Credit Certificates: In Rev. Proc. 2019-21, the IRS provides guidance with respect to the United States and area median gross income figures that are to be used by issuers of qualified mortgage bonds, as defined in Code Sec. 143(a), and issuers of mortgage credit certificates, as defined in Code Sec. 25(c), in computing the income requirements described in Code Sec. 143(f). Code Sec. 143(f) imposes eligibility requirements concerning the maximum income of mortgagors for whom financing may be provided by qualified mortgage bonds and Code Sec. 25(c)(2)(A)(iii)(IV) provides that recipients of mortgage credit certificates must meet the income requirements of Code Sec. 143(f).
Deductions
Couple Can't Deduct Mortgage Interest Reported to Them But Not Paid: In Milkovich v. U.S., 2019 PTC 195 (W.D. Wash. 2019), a district court held that a couple who filed for bankruptcy, and whose home the bankruptcy trustee abandoned due to lack of equity, could not deduct unpaid interest that had accrued on the home's mortgage and which their mortgagor reported to them on Form 1098-MISC. In reaching its conclusion, the court cited the decision in Estate of Franklin v. Comm'r, 544 F.2d 1045 (9th Cir. 1976), in which the Ninth Circuit disallowed an interest deduction because the transaction in question had no economic substance beyond the creation of tax benefits.
Employee Benefit Plans
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-35, 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).
2019 Maximum Values for Vehicle Cents-Per-Mile and Fleet-Average Valuation Issued: In Notice 2019-34, the IRS issued a notice which provides (1) the inflation-adjusted maximum value of a vehicle (including cars, vans and trucks) for 2019 for use with the fleet-average and vehicle cents-per-mile valuation rules, (2) information about where this maximum value will be published in the future, and (3) flexibility for 2018 and 2019 in the consistency requirements in the existing regulations relating to use of the fleet-average and vehicle cents-per-mile rules. The IRS noted that while Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e) provide special valuation rules for employers to use in determining the amount to include in employee income for personal use of employer-provided vehicles, employers can only use these rules for vehicles with fair market values that do not exceed a maximum value that is adjusted for inflation each year under Code Sec. 280F.
Healthcare
Benefit Plan Isn't Entitled to Refund of Annual Health Insurer Fee: In Iowa Bankers Benefit Plan v. U.S., 2019 PTC 172 (Fed. Cl. 2019), the Court of Federal Claims held that a benefit plan was not excluded from the Affordable Care Act's (ACA) definition of a "covered entity" subject to the annual fee on health insurance providers and thus was not entitled to a $3.7 million refund for annual fees paid in 2014, 2015, and 2016. According to the court, Reg. Sec. 57.2(b)(2)(iv) disqualifies multiple employer welfare arrangements from being excluded from the annual fee and the benefit plan waived the argument that it was an employer that self-insures its employees' health risks and thus not liable for the annual fee because it was late in raising that point.
Information Returns
Service Provider Isn't an Applicable Entity and Isn't Required to File Forms 1099-C: In PLR 201917002, the IRS ruled that a service provider, that also provided financing to its customers for services, was not required by Code Sec. 6050P and Reg. Sec. 1.6050P-1 to file Forms 1099-C to report discharges of indebtedness because the service provider is not an applicable entity under Code Sec. 6050P(c). The IRS noted that the service provider was involved in the founding of other entities that may be applicable financial entities, but that these other entities were not the taxpayer and were not the subject of this ruling.
International
Final Regs Affect Taxpayers Owning Qualified Business Units: In T.D. 9857, the IRS issued final regulations relating to combinations and separations of qualified business units (QBUs) subject to Code Sec. 987 and the recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and certain other transactions involving partnerships. In addition, the IRS withdrew temporary regulations regarding the allocation of assets and liabilities of certain partnerships for purposes of Code Sec. 987.
Prop. Regs. Would Address Ownership Attribution Relating to Controlled Foreign Corps: In REG-125135-15, the IRS issued proposed regulations that provide rules regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Code Sec. 954(d)(3). The proposed regulations, which would affect U.S. persons with direct or indirect ownership interests in certain foreign corporations, also provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income (FPHCI).
IRS
IRS Invites Comments on 2019-2020 Priority Guidance Plan: In Notice 2019-30, the IRS invites public comment on recommendations for items that should be included on the 2019-2020 Priority Guidance Plan. The Treasury Department's Office of Tax Policy and the IRS use the Priority Guidance Plan 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 and the 2019-2020 Priority Guidance Plan will identify guidance projects that the Treasury Department and the IRS intend to actively work on as priorities during the period from July 1, 2019, through June 30, 2020.
Procedure
Renewal User Fee Increased for Enrolled Retirement Plan Agents and Enrolled Agents: In T.D. 9858, the IRS issued final regulations that (1) remove the initial enrollment user fee for enrolled retirement plan agents because the IRS no longer offers initial enrollment as an enrolled retirement plan agent, and (2) increase the amount of the renewal user fee for enrolled retirement plan agents from $30 to $67. In addition, the final regulations increase the amount of both the enrollment and renewal user fee for enrolled agents from $30 to $67.
IRS Performed Adequate Search for Information Sought by Taxpayer: In Powell v. IRS, 2019 PTC 182 (D. D.C. 2019), a district court granted an IRS motion for summary judgment in a case brought by a taxpayer seeking additional information from the IRS concerning his grandfather, his father, a printing business once owned by his family, and himself in an effort to uncover information regarding asset distributions following the death of his father in 1992. The court sided with the IRS which had argued that it did not receive most of the taxpayer's requests, that it performed an adequate search for the request that did arrive, and that the taxpayer had failed to exhaust the required administrative remedies before bringing the issue before the court.
Firm Must Provide Privilege Log If It Wants to Protect Clients from IRS Investigation: In Taylor Lohmeyer Law Firm PLLC v. U.S., 2019 PTC 190 (W.D. Tex. 2019), a district court rejected a law firm's petition to quash a John Doe summons issued by the IRS and aimed at obtaining information relating to the firm's clients between 1995-2017 with respect to its investigation of the tax liability of taxpayers who used the firm to create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries. The court rejected the firm's blanket assertions of privilege but said that, if the firm wished to assert any claims of privilege as to any particular documents, it may later do so provided that such claim of privilege is supported by a privilege log which details the foundation of each claim on a document-by-document basis.
IRS Entitled to Consultant's Earnings Because It Filed Its Notices First: In AES-Apex v. Rotondo, 2019 PTC 192 (6th Cir. 2019), the Sixth Circuit affirmed a district court and held that the IRS was entitled to money earned by a consultant who was behind on his taxes rather than the company for whom he did consulting work and another company to which he owed money. The court noted that the decision as to who is entitled to the money comes down to the timing of the IRS's federal tax lien versus the timing of state security interests and the court concluded that the IRS filed its notices of tax liens first.
Couple Can't Use Common-Law Mailbox Rule to Prove Timely Filing of Petition: In Waltner v. Comm'r, 2019 PTC 169 (9th Cir. 2019), the Ninth Circuit affirmed the Tax Court and held that a couple's appeal of an earlier Tax Court decision was untimely and that the evidence they produced in the earlier trial was not sufficient to prove their Tax Court appeal had been timely mailed. The court noted that the law in the Ninth Circuit has changed with respect to how a taxpayer can prove timely filing of an undelivered tax document, and that the rules in Reg. Sec. 301.7502-1(e)(2)(i) replaced the common-law mailbox rule under which a taxpayer could prove timely filing by testimonial or circumstantial evidence.
Court Rejects Taxpayer's Self-Serving Affidavit That Lacked Admissible Facts: In Stein v. U.S., 2019 PTC 151 (11th Cir. 2019), the Eleventh Circuit rejected a taxpayer's self-serving affidavit, which the taxpayer argued was specific, relevant, and detailed enough to preclude summary judgment, and affirmed a district court's holding that reduced to judgment assessments against the taxpayer for taxes, interest, and penalties on five federal tax returns that she filed late. According to the Eleventh Circuit, the taxpayer's affidavit that the IRS assessments were erroneous had to satisfy certain criteria such as setting out facts that would be admissible in evidence, and the affidavit had to do more than present conclusory allegations that have no probative value.
False Documents Provided to Government Met Obstruction Nexus Requirement: In U.S. v. Sutherland, 2019 PTC 148 (4th Cir. 2019), the Fourth Circuit affirmed the conviction of a taxpayer, who owned several insurance businesses that sold products out of the United States and Bermuda, for filing false tax returns and obstructing a grand jury proceeding. The court rejected the taxpayer's argument that providing fabricated loan documents to a U.S. Attorney's office was too distant from an ongoing grand jury proceeding to meet the nexus requirement between an obstructive act and an official proceeding as set forth in U.S. v. Aguilar, 515 U.S. 593 (1995), and Marinello v. U.S., 2018 PTC 77 (S. Ct. 2018).
Retirement Plans
IRS Expands Determination Letter Program for Certain Retirement Plans: In Rev. Proc. 2019-20, the IRS provides for a limited expansion of the determination letter program with respect to individually designed retirement plans. The revenue procedure also provides for a limited extension of the remedial amendment period under Code Sec. 401(b) and Rev. Proc. 2016-37, under specified circumstances, and for special sanction structures that apply to certain plan document failures discovered by the IRS during the review of a plan submitted for a determination letter pursuant to this revenue procedure.
IRS Addresses Change in Method of Accounting Relating to Certain New Standards: In Rev. Proc. 2018-49, the IRS modified Rev. Proc. 2018-29 and Rev. Proc. 2018-31 to allow a taxpayer that made an early adoption of a method of recognizing revenues described in the new financial accounting standards issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (New Standards) to change its method of accounting for the recognition of income for federal income tax purposes. Publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans are required to adopt the New Standards for annual reporting periods beginning after December 15, 2017, while all other entities are required to adopt the New Standards for annual reporting periods beginning after December 15, 2018; however, early adoption was allowed for reporting periods beginning after December 15, 2016.
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