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Tax Updates - Archived (April 2019 - September 2018)
April 2019
Accounting
IRS Issues April 2019 Applicable Federal Rates: In Rev. Rul. 2019-8, the IRS the applicable federal rates for April 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.
MOST POPULAR - IRS Broadens Penalty Relief for Underpayment of 2018 Estimated Tax: The IRS modified previous guidance, which had waived the penalty under Code Sec. 6654 for the underpayment of 2018 estimated individual income tax. Notice 2019-25 supersedes Notice 2019-11 and (1) reduces the percentage threshold for penalty relief to individuals whose total withholding and estimated tax payments equal or exceed 80 percent of their total tax liability for 2018, (2) provides updated procedures for requesting the penalty waiver, and (3) provides procedures for taxpayers who paid the penalty for tax year 2018, but who qualify for relief, to request a refund. Notice 2019-25. Read More...
Bankruptcy
Section 5000A Shared Responsibility Payment Is Nondischargeable in Bankruptcy: In In re Cousins, 2019 PTC 137 (Bankr. E.D. La.), a bankruptcy court held that the primary function and purpose of Code Sec. 5000A's shared responsibility payment (SRP) is to support the government and, thus, the provision functions like a tax. Accordingly, the court concluded that the SRP is a nondischargeable "tax" entitled to priority status within the meaning of Bankruptcy Code Section 507(a)(8).
Debtor Can Exempt IRA Funds Temporarily Withdrawn to Buy Lottery Tickets: In In re Jones, 2019 PTC 143 (Bankr. S.D. Ill), a district court overruled a bankruptcy trustee's objection and held that a debtor could exempt funds that were withdrawn from his individual retirement account (IRA), deposited into a checking account, and re-deposited back into the IRA. The debtor had withdrawn the funds to purchase lottery tickets as part of a strategy to win money, pay debts, and avoid bankruptcy but, when that didn't work, $20,000 of the withdrawn funds were redeposited back into the IRA within 60 days of being withdrawn and before the taxpayer filed his bankruptcy petition.
Company Did Not Have Its Liability for Premiums under Coal Act Discharged: In In re Hillsborough Holdings Corp., 2019 PTC 114 (Bankr. M.D. Fla. 2019), a bankruptcy court held that a taxpayer, which previously shared common ownership with a coal mine operator and was sued for unpaid Coal Act premiums as a "related person," did not have discharged, as part of an earlier chapter 11 bankruptcy case, its liability under the Coal Act for premiums that came due after its confirmed bankruptcy plan. According to the court, because Coal Act premiums are in the nature of a tax, any premiums that came due after the effective date of the taxpayer's confirmed plan were not discharged in the earlier bankruptcy case.
Corporations
IRS Withdraws Proposed Continuity of Interest Regs: In REG-124627-11, the IRS withdrew proposed regulations that would have provided guidance on determining whether certain transactions satisfy the continuity of interest (COI) requirement under Reg. Sec. 1.368-1(e) after concluding that current law generally provides sufficient guidance to taxpayers with respect to the COI requirement. The IRS did note that it had issued Rev. Proc. 2018-12 earlier in the year and that procedure provides the circumstances under which the IRS will not challenge a taxpayer's use of certain stock valuation methods to value certain issuing corporation stock for purposes of determining whether the COI requirement is satisfied.
C Corporations
Cash Grants Were Nontaxable Contributions to Capital: In Brokertec Holdings, Inc., T.C. Memo. 2019-32, the Tax Court held that cash grants to members of a taxpayer's consolidated group as part of their participation in the State of New Jersey's Business Employment Incentive Program did not constitute taxable income to the affiliates as the IRS had argued but, instead, were contributions to the capital of the affiliates pursuant to Code Sec. 118(a). According to the court, the circumstances surrounding the payments were substantially similar to those in Brown Shoe Co., 175 F.2d 305 (8th Cir. 1949) and McKay Products Corp., 178 F.2d 639 (3d Cir. 1949), and manifested the definite purpose of enlarging the working capital of the taxpayer's affiliates.
Credits
Phase Out for Credit for GM Qualified Plug-In Electric Drive Motor Vehicles Announced: In Notice 2019-22, the IRS announced the credit phase-out schedule for new qualified plug-in electric drive motor vehicles sold by General Motors, LLC as a result of sales of the vehicles reaching the 200,000-vehicle limit listed in Code Sec. 30D(e) during the calendar quarter ending December 31, 2018. Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM will begin to phase out on April 1, 2019.
Deductions
Tax Court Reject's Theft Deduction Loss: In McNely v. Comm'r, T.C. Memo. 2019-39, the Tax Court held that a couple could not deduct theft losses of more than $400,000 that they alleged were incurred by their wholly owned S corporation in 2011 as a result of real estate fraud. The Tax Court found that the S corporation did not have a subjective belief that there was no reasonable prospect of recovery as late as 2015 and, after reviewing both objective and subjective factors, the Tax Court concluded that the S corporation's prospect of recovery was simply unknowable and nothing more than speculation and conjecture at the end of 2011.
Taxpayer's Customized Solution to Avoid Taxes Did Not Meet the Economic Substance Test: In Tucker v. Comm'r, 2019 PTC 116 (5th Cir. 2019), the Fifth Circuit affirmed the Tax Court and rejected a $39 million loss deduction that a couple claimed, which resulted from the husband's execution of a "customized solution" to mitigate the couple's income tax. The court found that, while the "customized solution" involved highly complex, interrelated foreign currency option investment transactions, which complied with a literal reading of the Tax Code and generated millions in paper gains and losses, it did not meet the economic substance test.
Employee Benefits
Self-Correction Program in EPCRS Expanded: In Rev. Proc. 2019-19, the IRS updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Code Secs. 401(a), 403(a), 403(b), 408(k), or 408(p), but that have not met these requirements for a period of time. In the procedure, the IRS expands the use of the Self-Correction Program (SCP) in the Employee Plans Compliance Resolution System (EPCRS) to permit correction of certain plan document failures and certain plan loan failures, including the ability to correct defaulted plan loans, the failure to obtain spousal consent on a plan loan, and the failure of permitting plan loans that exceed the number of plan loans permitted under the terms of the plan and also provides an additional method of correcting operational failures by plan amendment under the SCP. Rev. Proc. 2019-19 (4/19/19).
Foreign
Government Didn't Need to Devote Additional Resources to Reassess Liability: In Dewees v. U.S., 2019 PTC 140 (D.C. Cir. 2019), the D.C. Circuit held that a district court properly dismissed a taxpayer's complaint involving the assessment of penalties under the 2009 Offshore Voluntary Disclosure Program (Disclosure Program) after finding that it was rational for the government to impose different penalties under the Disclosure Program and the Streamlined Program where there was any reasonably conceivable state of facts that could provide a rational basis for different penalties. The court noted that the purpose of the Streamlined Program was to encourage taxpayers to come forward and, since the taxpayer had already come forward, it was reasonable for the government to decline to devote further resources to reassess his liability under the Streamlined Program's revised penalty structure.
Time Period Waived for Taxpayers to Make Foreign Earned Income Exclusion Election: In Rev. Proc. 2019-15, the IRS provides a waiver of the time requirements for individuals who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country, to elect to exclude their foreign earned income from gross income. The IRS added the Democratic Republic of the Congo, Cuba, Iraq, and Nicaragua to the list of countries for tax year 2018 for which the minimum time requirements are waived.
Foreign Housing Adjustments Released for 2019: In Notice 2019-24, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States and, if the limitation on housing expenses is higher for tax year 2019 than the adjusted limitations on housing expenses provided in Notice 2018-44, qualified taxpayers may apply the adjusted limitations for tax year 2019 to their 2018 tax year.
IRS Can Serve Summons for French Authorities Seeking Financial Info on LLC: In Vistadis, LLC, v. U.S., 2019 PTC 119 (E.D. Pa. 2019), a district court rejected a petition by a limited liability company (LLC) to quash an IRS summons delivered to Wells Fargo seeking information requested by French tax authorities with respect to the LLC and pursuant to a treaty between the United States and France. The court rejected the LLC's argument - that it has no nexus to France and is not subject to French tax and, therefore, the United States may not provide the French government any documents - after the court concluded that the relevant question is whether the IRS issued the summons in good faith, not whether the LLC is subject to French taxes.
IRS Releases Annual Report on Advance Pricing Agreements: In Announcement 2019-3, which was issued pursuant to Section 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999, the IRS released an annual report by Secretary of the Treasury concerning advance pricing agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program), formerly known as the Advance Pricing Agreement Program (APA Program). This twentieth report describes the experience, structure, and activities of the APMA Program during calendar year 2018.
Penalties
Preparer of Fraudulent Returns Is Liable for $2 Million in Restitution: In U.S. v. Tolentino, 2019 PTC 117 (5th Cir. 2019), the Fifth Circuit affirmed a district court's decision that the total loss amount that arose from a tax preparer's preparation of returns with fraudulent education credits, and for which she was liable for restitution, was $2 million. While the preparer argued that the $2 million of restitution was more than she bargained for when she pled guilty, the court noted that the returns on which the IRS's loss was calculated were those that were submitted using the preparer's identification number.
Procedure
Whistleblower Case Remanded to Whistleblower Office: In Whistleblower 769-16W v. Comm'r, 152 T.C. No. 10 (2019), the Tax Court granted an IRS motion to remand a whistleblower case to the Whistleblower Office for further consideration. The court rejected the whistleblower's objection to the motion after finding that, in appropriate circumstances, the Tax Court may remand a whistleblower case to the Whistleblower Office.
Untimely Third Motion to Vacate Tax Court Decision Does Not Restart Appeal Deadline: In Annamalai v. Comm'r, 2019 PTC 136 (5th Cir. 2019), the Fifth Circuit dismissed a couple's motion to vacate a judgment by the Tax Court and held that the couple's untimely third motion to vacate the judgment could not restart the time for appeals. The court noted that the deadline to file a notice of appeal was 90 days after the Tax Court denied the couple's first motion to vacate the judgment.
Companies That Had Their California Rights Suspended Can't Litigate in Tax Court: In Timbron International Corporation v. Comm'r, T.C. Memo. 2019-31, the Tax Court granted an IRS motion to dismiss a petition filed by two related corporations that had their powers, rights, and privileges suspended by California because of their failure to pay state taxes. The court concluded that the corporations did not have the legal capacity to litigate in the Tax Court.
Only Individuals with TINs May Request EINs: In IR-2019-58, the IRS announced that, starting May 13, only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the "responsible party" on the application. The change will prohibit entities from using their own EINs to obtain additional EINs and the requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and online EIN application.
Tax-Exempt Bonds
IRS Issues Guidance on General Public Use Requirement for Certain Rental Projects: In Rev. Proc. 2019-17, the IRS provides guidance regarding the general public use requirements for qualified residential rental projects financed with tax-exempt bonds under Code Sec. 142(d). Specifically, it coordinates these requirements with the provisions in Code Sec. 42(g)(9), which provides that a project does not violate the general public use requirement under Code Sec. 42 as a result of specified occupancy restrictions or preferences (for example, certain housing preferences for military veterans).
Final Regs Address Arbitrage Investment Restrictions: In T.D. 9854, the IRS issued final regulations regarding the arbitrage investment restrictions under Code Sec. 148 applicable to tax-exempt bonds and other tax-advantaged bonds issued by state and local governments. The final regulations clarify existing regulations regarding the definition of "investment-type property" by expressly providing an exception for investment in capital projects that are used in furtherance of the public purposes of the bonds.
Tax-Exempt Organizations
Rehearing Denied on California's Form 990, Schedule B, Requirement: In Americans for Prosperity Foundation v. Becerra, 2019 PTC 108 (9th Cir. 2019), the Ninth Circuit denied petitions for a rehearing en banc in a case in which the California Attorney General's Service Form 990, Schedule B requirement, which obligates charities to submit the information they file each year with the IRS pertaining to their largest contributors, survived exacting scrutiny as applied to the tax-exempt plaintiffs because it was substantially related to an important state interest in policing charitable fraud. Several judges dissented, with one noting that, given the inability of governments to keep data secure, the standard of disclosing the contributors to the state puts anyone with controversial views at risk.
March 2019
Accounting
IRS Provides Safe Harbor Accounting Method for Automobile Depreciation Deductions: The IRS has provided a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the 100 percent additional first year depreciation deduction under Code Sec. 168(k) (as amended by the Tax Cuts and Jobs Act of 2017 (TCJA)) and that are subject to the luxury automobile depreciation limitations under Code Sec. 280F(a) (as amended by the TCJA). According to the IRS, the safe harbor mitigates the anomalous result that occurs in tax years after the placed-in-service year and before the first year succeeding the end of the recovery period for a passenger automobile. Rev. Proc. 2019-13. Read More...
Bankruptcy
Bankruptcy Court Won't Abstain from Exercising Jurisdiction in Debtors' Case: In In re Jung, 2019 PTC 61 (Bankr. W.D. Wisc.), a bankruptcy court rejected an IRS motion to dismiss for lack of subject matter jurisdiction a petition by the debtors to have the bankruptcy court determine the dischargeability of taxes and penalties assessed by the IRS. The court held that it had subject-matter jurisdiction and that it would not abstain from exercising such jurisdiction.
Corporations
IRS Suspends Two Rulings Over Active Trade or Business Concerns: In Rev. Rul. 2019-9, the IRS suspended Rev. Rul. 57-464 and Rev. Rul. 57-492 pending the completion of a study regarding the active trade or business (ATB) requirement under Code Sec. 355(a)(1)(C) and Code Sec. 355(b). The IRS noted that the ATB analysis underlying the holdings in the rulings focuses, in significant part, on the lack of income generated by the activities under consideration and, consequently, the rulings could be interpreted as requiring income generation for a business to qualify as an ATB.
Charitable Org. Is Classified as a Corporation for Purposes of Interest on Overpayments: In Wichita Center for Graduate Medical Education, Inc. v. U.S., 2019 PTC 77 (10th Cir. 2019), the Tenth Circuit affirmed a district court and held that a charitable organization incorporated under the laws of Kansas was required to repay the IRS part of the interest that had been incorrectly calculated on the organization's tax refund. The court noted that, under Code Sec. 6621(a)(1), corporate taxpayers receive a lower refund interest rate than other taxpayers and that, even though the taxpayer does not issue stock or generate a profit, it must be treated as an ordinary corporation for purposes of Code Sec. 6621(a)(1)).
Credits
IRS Amends Utility Allowance Regulations Relating to Low-Income Housing Credit: In T.D. 9850, the IRS issued final regulations that amend the utility allowance regulations concerning the low-income housing credit under Code Sec. 42. The final regulations extend the principles of the current submetering rules and address situations in which a building owner purchases a utility from a utility company and then separately charges the tenants for the utility.
Deductions
JCT Overview of Deduction for Qualified Business Income: On its website, the Joint Committee on Taxation (JCT) released a slide show on the Code Sec. 199A deduction. In it, the JCT projects the following: (1) 39.2 million returns will include business income from Schedules C, E, or F and, on 26.8 million of these returns, taxpayers will take the Code Sec. 199A deduction; (2) the share of taxpayers that take the Code Sec. 199A deduction who are below the income threshold specified in Code Sec. 199A(e)(2) will be 95.1 percent; (3) the share of taxpayers with Schedule C, E, or F income for which a Code Sec. 199A deduction is allowed will be 68.4 percent; and (4) the share of Schedule C, E, or F income for which a Code Sec. 199A deduction is allowed will be 91.5 percent.
Taxpayer's Business of Restoring Fairey Firefly Did Not Have Profit Motive: In Kurdziel v. Comm'r, T.C. Memo. 2019-20, the Tax Court held that a former fighter pilot, who is the only individual in the United States that owns, and is licensed to fly, a Fairey Firefly, could not deduct losses he incurred in restoring the WWII fighter and anti-submarine aircraft because the restoration business lacked a profit motive. However, because the IRS did not meet its burden of complying with Code Sec. 6751(b)(1), the court concluded that the taxpayer was not liable for the accuracy-related penalties that had been assessed against him for the years at issue.
Marijuana Dispensary Loses Bid to Quash Summonses: In High Desert Relief, Inc. v. U.S., 2019 PTC 76 (10th Cir. 2019), the Tenth Circuit affirmed two district court decisions which rejected a New Mexico marijuana dispensary's petitions to quash third-party summonses issued by the IRS in an attempt to obtain audit information on the taxpayer. The court rejected the taxpayer's arguments that (1) the summonses were issued for an improper purpose - specifically, that the IRS, in seeking to determine the applicability of Code Sec. 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act (CSA), and (2) enforcement of Code Sec. 280E was improper because an official federal policy of non-enforcement of the CSA against medical marijuana dispensaries had rendered that statute's proscription on marijuana trafficking a "dead letter" incapable of engendering adverse tax consequences for the taxpayer.
Taxpayer Can't Reduce Settlement Award for Alleged Pain and Suffering: In Doyle v. Comm'r, T.C. Memo. 2019-8, the Tax Court held that a taxpayer, who had been fired from his job and subsequently awarded "alleged unpaid wages" and "alleged emotional distress" in the settlement of a lawsuit against the employer, could not reduce the award to zero by deducting amounts for pain and suffering. The court noted that the taxpayer had followed his CPA's advice and that the CPA testified at the trial that he did some research and went to a seminar and determined that the payments were nontaxable under Code Sec. 104(a)(2).
Disaster Relief
Victims of Alabama Tornado Given Additional Time to File Returns and Payments: In IR-2019-20 (3/7/19), the IRS gave victims of the recent tornadoes and severe storms in Alabama until July 31, 2019, to file certain individual and business tax returns and make certain tax payments. The July 31, 2019, deadline also applies to (1) quarterly estimated income tax payments due on April 15 and June 17, 2019, (2) quarterly payroll and excise tax returns normally due on April 30, 2019, (3) tax-exempt organizations, operating on a calendar-year basis, that have a Form 990 information return due on May 15, 2019, and (4) businesses, including corporations, S corporations and partnerships, that have a 2018 return due during this period.
Employee Benefits
Mortality Improvement Rates and Static Mortality Tables Updated: In Notice 2019-26, the IRS issued updated mortality improvement rates and static mortality tables that are used for purposes of determining (1) the minimum funding requirements under Code Sec. 430(h)(3) for 2020, and (2) the minimum present value under Code Sec. 417(e)(3) for distributions with annuity starting dates that occur during stability periods beginning in the 2020 calendar year. The notice also includes a modified unisex version of the mortality tables for use in determining minimum present value under Code Sec. 417(e)(3) and Section 205(g)(3) of ERISA for distributions with annuity starting dates that occur during stability periods beginning in the 2020 calendar year.
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-21, 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).
Covered Compensation Tables Released for 2019 Plan Year: In Rev. Rul. 2019-6, the IRS issued tables of covered compensation under Code Sec. 401(l)(5)(E) and related regulations for the 2019 plan year. Covered compensation is the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which an employee attains social security retirement age.
IRS No Longer Intends to Amend RMD Rules: In Notice 2019-18, the IRS informed taxpayers that it no longer intends to amend the required minimum distribution (RMD) regulations under Code Sec. 401(a)(9) to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments. The IRS had previously said, in Notice 2015-49, that it intended to propose amendments to the RMD regulations under Code Sec. 401(a)(9) to address the use of lump-sum payments to replace ongoing annuity payments under a qualified defined benefit plan.
Employment Taxes
Owner of Company Liable as Responsible Person for Failing to Pay Employment Taxes: In U.S. v. Nutter, 2019 PTC 67 (S.D. Ohio 2019), a district court held that the owner and president of a business properly withheld employment taxes from the company's employees' paychecks but used those withholdings to pay the operating expenses of the business rather than paying them to the IRS. The court also found that the taxpayer acted willfully and was a responsible person liable in full for the trust fund recovery penalties assessed under Code Sec. 6672.
Estates, Gifts, and Trusts
Decedent's Heirs Liable for Estate Taxes, Interest, and Penalties: In U.S. v. Ringling, 2019 PTC 63 (S.D. 2019), a district court granted summary judgment to the IRS on claims that three siblings and the son of one of the siblings were liable for unpaid federal estate tax, penalties, and interest. The court noted that the estate tax for the decedent was not paid when due, that the siblings and the grandson had received property included in the decedent's gross estate, that the decedent's heirs failed to establish that they had reasonable cause for failing to make the required payments, and that the IRS was not barred from its assessments by the statute of limitations.
Foreign
Currency of Country in Which Foreign Corporation Is Located Is Used Calculating Gain or Loss: In TAM 201902030, the Office of Chief Counsel advised that, in calculating any Code Sec. 988 foreign currency gain or loss with respect to payments of principal and interest on loans relating to the sale of a foreign corporation to a U.S. partnership, the functional currency of the country in which the foreign corporation is located, and not the functional currency of the country in which the partnership is located, should be used. According to the Chief Counsel's Office, the versions of Reg. Sec. 1.989(a)-1 and Reg. Sec. 1.988-4(b) that were in effect before their modification in T.D. 9794 are applicable to the years at issue.
International
IRS Finalizes Verification Requirements for Certain Foreign Entities: In T.D. 9852, the IRS finalized regulations which provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs), trustees of certain trustee-documented trusts, registered deemed-compliant FFIs, and financial institutions that implement consolidated compliance programs. These final regulations affect certain financial institutions and NFFEs. The final regulations retain the requirement that a sponsoring entity have a written sponsorship agreement in place with each sponsored FFI but, in response to comments, the IRS decided that it is not necessary for the sponsorship agreement to be a standalone agreement.
FBAR Penalty Not Limited to $100,000: In U.S. v. Garrity, 2019 PTC 75 (D. Conn. 2019), a district court held that a taxpayer who was found guilty of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) was liable for a penalty equal to 50 percent of the balance in the taxpayer's account in the year he failed to file the FBAR. The court rejected the taxpayer's arguments that the maximum civil penalty for failing to file an FBAR is $100,000 and that, under the Eighth Amendment, the civil penalty had to be reduced to an amount that was proportional to the harm caused by the failure to file the FBAR.
Prop. Regs Address Deduction for Foreign-Derived Intangible Income and GILTI: In REG-104464-18, the IRS issued proposed regulations that provide guidance to determine the amount of the deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). The proposed regulations also contain rules coordinating the deductions for FDII and GILTI with other Code provisions.
Life Insurance
Prop. Regs Address Reporting for Certain Life Insurance Contract Transactions: In REG-103083-18, the IRS issued proposed regulations providing guidance on new information reporting obligations under Code Sec. 6050Y related to reportable policy sales of life insurance contracts and payments of reportable death benefits. The proposed regulations also provide guidance on the amount of death benefits excluded from gross income under Code Sec. 101 following a reportable policy sale and affect parties involved in certain life insurance contract transactions, including reportable policy sales, transfers of life insurance contracts to foreign persons, and payments of reportable death benefits.
Partnerships
Prop. Rules Would Prevent Corporate Partner from Avoiding Gain on Certain Transactions: In REG-135671-17, the IRS issued proposed regulations which would prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities. The rules contain substantive modifications to the final regulations relating to the definition of "stock of the corporate partner."
Penalties
IRS Finalizes Penalty Regs Dealing with Reportable Transactions: In T.D. 9853, the IRS issued final regulations that provide guidance regarding the amount of the penalty under Code Sec. 6707A for failing to include on any return or statement any information required to be disclosed under Code Sec. 6011 with respect to a reportable transaction. Although no changes to the previously issued proposed regulations were made specifically in response to public comments, the IRS noted that Reg. Sec. 301.6707A-1(d)(1)(ii) was revised to clarify how the penalty is calculated in situations where a transaction becomes reportable after the filing of the return or returns reflecting participation in the transaction.
Court Affirms Convictions of Tax Shelter Promoters: In U.S. v. Donaldson, 2019 PTC 95 (11th Cir. 2019), the Eleventh Circuit affirmed the conviction of two taxpayers for conspiring to defraud the United States and willfully aiding the submission of false and fraudulent income tax returns after concluding that the taxpayers were guilty of promoting certain business-risk insurance policies that were really tax shelters and telling buyers that the policy expenses were deductible as Code Sec. 162 expenses.
Procedure
IRS Removes and Amends Hundreds of Regulations: In T.D. 9849, the IRS removed 296 regulations that it said are no longer necessary because they do not have any current or future applicability under the Internal Revenue Code. Simultaneously, the IRS amended 79 regulations to reflect the removal of the 296 regulations.
Government Must Have IRS Actuary Value Non-Delinquent Spouse's Homestead Interest: In U.S. v. Nelson, 2019 PTC 90 (D. S.D. 2019), a district court rejected an IRS determination that South Dakota's homestead exemption of $60,000 was the best way to value the homestead interest of a non-delinquent spouse upon the forced sale of property under Code Sec. 7403. The court noted that the government has the ability to have an IRS actuary prepare a valuation of a homestead interest as akin to a life estate, as was done in U.S. v. Caraway (W.D. Tex. 2008), and directed the government to do so with respect to the non-delinquent spouse's interest in the property as issue.
IRS Can Continue Receiving 100 Percent of Debtor's Social Security Income: In Holland v. U.S., 2019 PTC 80 (E.D. Mich. 2019), a district court denied a taxpayer's request for an order precluding the IRS, who is currently receiving 100 percent of the taxpayer's social security benefits as a result of a levy aimed at recouping nearly $20 million in federal income taxes owed by the taxpayer, from taking more than 15 percent of his monthly social security benefits. The court also found that the taxpayer plainly had a two-year window of opportunity to seek a judicial review once the Social Security Administration began to withhold his social security benefits in 2012, but noted that courts have uniformly declined to enlarge the time period for bringing a Code Sec. 7433(a) claim based on the continuing effects of a one-time levy.
IRS Did Not Provide Sufficient Notice That It Would Seek Documents from Third Party: In J.B. v. U.S., 2019 PTC 68 (9th Cir. 2019), the Ninth Circuit affirmed a district court's order quashing an IRS subpoena to the California Supreme Court, seeking documents in connection with a tax audit of a California couple. The Ninth Circuit agreed with the district court's conclusion that the IRS had not provided sufficient notice to the taxpayers that it would contact the California Supreme Court, in violation of Code Sec. 7602(c)(1)'s requirement that the IRS provide "reasonable notice in advance" to taxpayers.
Court Affirms That Marijuana Business Was Trafficking in a Controlled Substance: In Feinberg v. Comm'r, 2019 PTC 69 (10th Cir. 2019), the Tenth Circuit affirmed the Tax Court and held that a couple did not meet their burden of proving that the IRS's determination that the couple's wholly owned corporation, which engaged in selling medical marijuana, was unlawfully trafficking in a controlled substance was erroneous. With respect to the taxpayers' contention that placing the burden on them to prove the IRS's determination was erroneous violated their Fifth Amendment privilege, the court concluded that the allocation of the burden of proof does not constitute "compulsion" under the Fifth Amendment, and because the couple made no attempt to meet their evidentiary burden, it was appropriate to affirm the Tax Court's holding on the ground that Code Sec. 280E prohibited the deductions.
IRS Appeals Can Determine Whether It Will Accept Cases with No Tax Issues: In CCA 201902031, the Office of Chief Counsel advised that, while it is ultimately up to IRS Appeals to interpret its own provisions on the criteria for case consideration, Appeals may determine that its procedures allow it to decline to accept cases with no tax issues.
No Change in Quarterly Interest Rates: In Rev. Rul. 2019-5, the IRS provides that the interest rates for underpayments and overpayments for the calendar quarter beginning April 1, 2019, will be the same as the rates for the first quarter of 2019. The rates will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments, 8 percent for large corporate underpayments, and 3.5 percent for the portion of a corporate overpayment exceeding $10,000.
Court Affirms Dismissal of Lawsuit for Unauthorized Disclosure of W-2 Information: In Smith, et al. v. Tipton County Board of Education, 2019 PTC 59 (6th Cir. 2019), the Sixth Circuit affirmed a district court decision dismissing a lawsuit aimed at holding a Tennessee county board of education liable under Code Sec. 6103 for monetary damages as the result of the unauthorized disclosure of employee W-2 information to a third party. The court also rejected a claim for damages under Code Sec. 7431 for each disclosure of the W-2 information.
Couple's CP59 Response to IRS Did Not Qualify as an Informal Claim for Refund: In Linton v. Comm'r, 2019 PTC 64 (10th Cir. 2019), the Tenth Circuit affirmed a Tax Court decision granting partial summary judgment in favor of the IRS in a Collections Due Process (CDP) proceeding involving a couple's unpaid 2010 tax liability and sustaining the IRS's notice of deficiency with respect to the couple's 2009 and 2010 taxes. The Tenth Circuit agreed with the Tax Court's conclusions that (1) the couples' CP59 response, sent in reply to a CP59 notice they received from the IRS, did not qualify as an informal claim for credit or refund, because that response - which the Tax Court described as "premature and unspecific" - did not put the IRS on sufficient notice that a credit or refund was being sought; (2) even if the couple's CP59 response constituted a claim for credit or refund, their election on their later-filed 2008 tax return to have the overpayment refunded to them superseded their CP59 response; and (3) regardless of what the IRS representative may have said to the couple in a January 2013 telephone conference, the IRS has no authority to waive the statutory look-back limitations on credits and refunds.
RICs and REITs
Final RIC Regs Address Income Test to Determine If a Corporation Qualifies as a RIC: In T.D. 9851, the IRS issued final regulations relating to the income test used to determine whether a corporation may qualify as a regulated investment company (RIC) for federal income tax purposes. These final regulations provide guidance to corporations that intend to qualify as RICs.
IRS Revises Prop. Regs Relating to C Corporation and REIT Transactions: In REG-113943-17, the IRS withdrew proposed regulations issued in 2016 which, if adopted, would have provided guidance for transactions in which property of a C corporation becomes the property of a real estate investment trust (REIT) following certain corporate distributions of controlled corporation stock. The IRS issued new proposed regulations which provide revised guidance on the same subject and which would affect REITs, C corporations the property of which becomes property of a REIT, and their respective shareholders.
S Corporations
Court Rejects Personal Deductions for Costs Relating to Taxpayer's S Corporation: In Morowitz v. U.S., 2019 PTC 79 (D. R.I. 2019), a district court held that a lawyer improperly filed a Schedule C claiming deductions on his personal return relating to clients retained through his S corporation. Further, the court said the taxpayer could not deduct case costs he advanced from his personal funds because such payments constituted a loan or a contribution to the capital of the S corporation and are deductible, if at all, not by the shareholder, but by the corporation.
Tax-Exempt Bonds
IRS Provides Average Purchase Price Data: In Rev. Proc. 2019-14, the IRS provides issuers of qualified mortgage bonds and issuers of mortgage credit certificates with (1) the nationwide average purchase price for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. The average area purchase price safe harbors for each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam were last published in Rev. Proc. 2018-28 and guidance with respect to the United States and area median gross income figures that are to be used in computing the housing cost/income ratio was last published in Rev. Proc. 2018-33.
February 2019
Accounting
What to Do About Missing Forms W-2 and Forms 1099: While the receipt of Forms W-2 and Forms 1099 by the end of January are key for taxpayers wishing to get a jump on preparing their tax returns, knowing what to do if those documents aren't received is also important. Read More...
IRS Abused Its Discretion in Rejecting Taxpayer's Offer in Compromise: The Tax Court held that an IRS Appeals officer abused her discretion in a collections due process hearing by rejecting a taxpayer's offer in compromise. The court found that the Appeals officer improperly included assets held by an irrevocable grantor trust in the taxpayer's reasonable collection potential and failed to consider relevant facts in determining that the taxpayer wasted his wealth in investments in an effort to deprive the government of funds. Campbell v. Comm'r, T.C. Memo. 2019-4. Read More...
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-13, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
Employment Taxes
No New Trial for Partner Found to Be a Responsible Person: In Ireland v. U.S., 2019 PTC 40 (C.D. Calif. 2019), a district court refused to overturn an earlier jury verdict and held that the partial owner of a partnership that failed to make full payments of federal employment taxes for certain periods in 2008 and 2009 was not entitled to a refund of more than $333,000 of trust fund recovery penalties he had paid to the government and was not entitled to a new trial. The court found that there was ample evidence to support the jury's verdict that the taxpayer was a responsible person and that the jury was presented with sufficient evidence to support a finding that the taxpayer at least acted recklessly when he failed to inquire about whether the partnership had paid employment taxes for certain payroll quarters.
Gross Income
"Stress" Payments Received by Fired Employee Aren't Excludible from Income: In Doyle v. Comm'r, T.C. Memo. 2019-8, the Tax Court held that emotional-distress payments received by a taxpayer after he was fired from his job were not excludable from income as personal physical injuries or physical sickness under Code Sec. 104(a) and rejected the taxpayer's argument that the stress he suffered from the firing was physical and not the same as emotional distress. The court also held that the taxpayer and his wife were entitled to deduct as a miscellaneous itemized deduction certain legal fees incurred in 2010 in collecting amounts from the taxpayer's former employer but disallowed legal expense deductions taken in 2011 on Schedule C because there was no evidence that any claim necessitating the payment of legal fees arose in connection with the taxpayer's subsequent consulting business.
Procedure
Court Sustains Collection Actions Against a Taxpayer Who Never Filed Tax Returns: In Belanger v. Comm'r, T.C. Memo. 2019-1, the Tax Court held that a taxpayer, who worked as a truck driver averaging approximately $60,000 in gross wages for the nine years at issue and who had never filed a tax return, could not challenge his underlying income tax liabilities reported on substitute returns filed by the IRS. The court also held that the taxpayer had not satisfied his burden of showing that the IRS abused its discretion in sustaining a Notice of Federal Tax Lien filing and the court sustained the IRS's determination to proceed with collection actions against the taxpayer.
Couple Not Entitled to Refund on Taxes Relating to S Corp Shares They Said They Didn't Own: In Conzelman v. U.S., 2019 PTC 41 (C.D. Calif. 2019), a district court rejected a couple's request for a tax refund that they said they were owed under Code Sec. 7433 after the IRS "tricked" them into believing that they owned certain S corporation shares, which the couple claimed a bankruptcy trustee really owned, and held that they were liable for taxes on income allocated to those shares. The court also held that because the couple's complaint did not allege any collection activity and was based solely on a deficiency letter they received, the couple could not maintain an action against the government pursuant to Code Sec. 7433.
Tanning Bed Owner Subject to Collections Actions for Not Paying Excise Taxes: In Humiston v. Comm'r, T.C. Memo. 2019-9, the Tax Court held that an IRS settlement officer did not abuse his discretion in sustaining a notice of federal tax lien and a proposed collection action for trust fund recovery penalties relating to tanning excise taxes that were not paid by the owner of a tanning bed salon. The court found that the IRS's Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, established supervisory approval of the penalties under Code Sec. 6751(b).
Bank's Lien Has Priority over IRS Tax Liens: In First Sentinel Bank v. U.S., 2019 PTC 48 (W.D. Va. 2019), a district court held that a bank's mortgage lien survived a nonjudicial foreclosure sale of a taxpayer's real property and that tax liens against the property remained inferior to the bank's lien. The court rejected the government's argument that the bank's lien merged with its title when the bank purchased the property at the foreclosure sale, and therefore the bank's lien was extinguished and the tax liens were elevated in priority.
Tax Accounting
Taxpayer Can Use Revenue Proc. 2018-60 to Obtain IRS Consent for Method Change: In CCM 201852019, the Office of Chief Counsel advised that an accrual method taxpayer, whose current accounting method for an item of gross income is impermissible under Code Sec. 451(b)(1)(C), can use Rev. Proc. 2018-60 to obtain automatic IRS consent to change its accounting method to comply with Code Sec. 451(b)(1)(A), if the taxpayer otherwise satisfies the terms and conditions set forth in the revenue procedure. Rev. Proc. 2018-60 provides automatic consent for method changes to comply with Sec. 451(b)(1)(A), as amended by the Tax Cuts and Jobs Act of 2018, and the Chief Counsel's Office noted that, to satisfy Code Sec. 451(b)(1)(A), a taxpayer must also comply with the all events test as defined in Code Sec. 451(b)(1)(C).
January 2019
Accounting
IRS Issues January 2019 AFRs: In Rev. Rul. 2019-3 the IRS issued a ruling which prescribes the applicable federal rates for January 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
Debtor's Failure to Timely File Returns Precludes Discharge of Tax Debts: In re Fremont, 2019 PTC 19 (9th Cir. 2019), the Ninth Circuit affirmed a district court's decision, which upheld a bankruptcy court holding, that a debtor was not entitled to have his tax debts discharged. The court held that, because the debtor failed to provide the information required by a tax return until three to five years after the IRS assessed deficiencies for the debtor's 2001 - 2003 tax returns and, because he did not file a "return" within the meaning of 11 U.S.C. Sec. 523(a)(1)(B), his tax debts were excepted from discharge. .
Tax Debts Not Discharged in Bankruptcy Where Couple Filed Related Returns Late: In In re Nedelka, 2018 PTC 445 (Bankr. Del. 2018), a bankruptcy court held that a couple's 2004 tax liabilities were not discharged because the tax returns for the debts were not filed on time, or at least two years before the commencement of the couple's Chapter 13 case. The court noted that Bankruptcy Code Section 1328(a), read together with Bankruptcy Code Section 523(a)(1)(B), clearly excludes tax liabilities from discharge when the relevant tax return was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the bankruptcy petition.
Deductions
IRS Provides Deduction Safe Harbors Relating to Payments to Charitable Organizations: In Rev. Proc. 2019-12, the IRS provides safe harbors under Code Sec. 162 for certain payments made by a C corporation or a specified pass-through entity to or for the use of a charitable organization described in Code Sec. 170(c) if the C corporation or specified pass-through entity receives or expects to receive a state or local tax credit in return for such payment. The revenue procedure applies to amounts paid on or after January 1, 2018.
Amounts Paid for Work Clothes and Small Tools Are Deductible by Construction Worker: In Triggs v. Comm'r, T.C. Summary 2018-58, the Tax Court held that, because a construction worker credibly testified as to his job-related need for steel-toed boots, construction worker overalls and gloves, and small tools, he was entitled to deduct the costs of those items on his tax returns. While the court denied the taxpayer's deductions for hotel stays, it rejected the IRS's assessments of penalties after concluding that the taxpayer had reasonable cause to rely on the CPA that had prepared the tax returns at issue.
Employee Benefits
IRS Issues Guidance on Vehicle Cents-Per-Mile Valuation Rule: In Notice 2019-8, the IRS issued the 2018 maximum values for use with the vehicle cents-per-mile valuation rule under Reg. Sec. 1.61-21(e) and the fleet-average valuation rule, which is an optional component of the automobile lease valuation rule under Reg. Sec. 1.61-21(d). The IRS also issued interim guidance on new procedures for calculating the inflation adjustments to the maximum values for use with the special valuation rules under Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e) using Code Sec. 280F(d)(7), as modified by the Tax Cuts and Jobs Act of 2017.
Estates, Gifts, and Trusts
IRS Can Enforce Lien Against Estate Property for $2.6 Million in Estate Taxes Owed: In U.S. v. Mengedoht, 2019 PTC 17 (D. Neb. 2019), a district court held that the executor of an estate did not show that he had a personal interest in certain real property of an estate that was superior to federal tax liens that attached to the subject property. The court concluded that the lien against the property, as a result of $2.6 million of unpaid estate taxes, should be enforced.
Excise Taxes
Additional Extension of Temporary Excise Fuel Tax Relief Provided: In Notice 2019-4, the IRS provided an additional extension of the temporary dyed fuel relief initially provided in Notice 2017-30, then extended through December 31, 2018, by Notice 2018-39. Under this additional relief, which will be available beginning on January 1, 2019, and ending on December 31, 2019, a claimant may submit a refund claim for the Code Sec. 4081(a)(1) excise tax imposed on undyed diesel fuel and kerosene for fuel that is (1) removed from a Milwaukee or Madison terminal; (2) entered into a Green Bay terminal within 24 hours of removal from the Milwaukee or Madison terminal; and (3) subsequently dyed and removed from that Green Bay terminal.
Healthcare
Notice Lists Additional Individual Shared Responsibility Payment Hardship Exemptions: In Notice 2019-5, the IRS supplemented guidance previously issued in Notice 2014-76 and Notice 2017-14 by identifying additional hardship exemptions from the individual shared responsibility payment under Code Sec. 5000A that a taxpayer may claim on a federal income tax return for the 2018 tax year without obtaining a hardship exemption certification from the Health Insurance Marketplace (Marketplace). The option to claim an exemption on a federal income tax return for the 2018 tax year applies in addition to the existing procedures for applying for hardship exemptions using the Marketplace exemption determination process.
Insurance Companies
IRS Provides Insurance-Related Factors for 2018 Accident Year: In Rev. Proc. 2019-6, the IRS issued unpaid loss discount factors for the 2018 accident year for use in computing discounted unpaid losses under Code Sec. 846. The unpaid loss discount factors also serve as salvage discount factors for the 2018 accident year for use in computing discounted estimated salvage recoverable under Code Sec. 832.
International
IRS Issues Prop. Regs on Hybrid Dividends and Hybrid Transactions: In REG-104352-18, the IRS issued proposed regulations implementing Code Sec. 245A(e) and Code Sec. 267A, provisions enacted as part of the Tax Cuts and Jobs Act of 2017, regarding hybrid dividends and certain amounts paid or accrued in hybrid transactions or with hybrid entities. The document also contains proposed regulations under Code Sec. 1503(d) and Code Sec. 7701 to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign country, as well as proposed regulations under Code Secs. 6038, 6038A, and 6038C to facilitate administration of certain rules in the proposed regulations.
Prop. Regs Address Base Erosion and Anti-Abuse Tax: In REG-104259-18, the IRS issued proposed regulations that provide guidance regarding the tax on base erosion payments of taxpayers with substantial gross receipts and reporting requirements thereunder. The proposed regulations would affect corporations with substantial gross receipts that make payments to foreign related parties and would affect any reporting corporations within the meaning of Code Sec. 6038A or Code Sec. 6038C.
Legislation
New Law Allows District Court Judges to Transfer Misfiled Cases to the Tax Court: On December 19, President Trump signed into law The Protecting Access to the Courts for Taxpayers Act (Pub. L. 115-332). The law amends 28 U.S.C. Sec. 1631 to authorize a U.S. district court, a U.S. court of appeals, the U.S. Court of Federal Claims, or the Court of International Trade to transfer to the U.S. Tax Court a misfiled case within the Tax Court's jurisdiction.
Partnerships
Two Easements Contributions Did Not Give Rise to Charitable Deductions: In Pine Mountain Preserve v. Comm'r, 151 T.C. No. 14 (2018), the Tax Court held that a partnership's donation of 2005 and 2006 easements did not restrict a specific, identifiable piece of real property because the easements allowed supposedly conserved land to be taken back and used for residential development and, thus, neither easement constituted a qualified real property interest that could give rise to a charitable contribution deduction under Code Sec. 170(h)(1)(A). However, the court concluded that the donation of a 2007 easement did give rise to a charitable deduction because it covered a specific, identifiable piece of real property, was granted in perpetuity under Code Sec. 170(h)(2)(C), was made exclusively for conservation purposes under Code Sec. 170(h)(1)(C), and constituted a qualified real property interest.
Court Splits Estimates of Easement's Value between Amounts Recommended by Experts: In Pine Mountain Preserve, LLLP v. Comm'r, T.C. Memo. 2018-214, the Tax Court held that the value of a partnership's 2007 conservation easement, for which the partnership took a charitable contribution deduction, was $4,779,500. The court concluded that neither side's valuation experts met the criteria in Reg. Sec. 1.170A-14(h)(3)(i) and, thus, the court gave equal weight to the values assigned by both sides.
Penalties
Marijuana Business Avoids Penalties on Disallowed Deductions: In Patients Mutual Assistance Collective Corporation v. Comm'r, T.C. Memo. 2018-208, the Tax Court held that a medical-marijuana dispensary, whose ordinary and necessary business expense deductions were disallowed under Code Sec. 280E, was not liable for accuracy-related penalties under Sec. 6662(a). According to the court, not only had the corporation's main argument for the inapplicability of Code Sec. 280E to its business not yet been the subject of a final unappealable decision, but the meaning of "consists of" as used in Code Sec. 280E is subject to more than one reasonable interpretation.
Procedure
Couple Must Follow Section 7433 Procedures Before Court Will Consider Refund Claim: In Waltner v. U.S., 2019 PTC 16 (D. Ariz. 2019), a district court held that Reg. Sec. 301.7433-1 applied to a couple filing for tax refunds and therefore they were required to exhaust their administrative remedies under Code Sec. 6532(a)(1) and Code Sec. 7422(a) and sue within two years of the action's accrual and must also follow the administrative procedures for filing a damages claim outlined in Reg. Sec. 301.7433-1. The court rejected the couple's argument that Reg. Sec. 301.7433-1 applied to them and that the regulation was unreasonable, nonbinding, and inconsistent with Code Sec. 7433.
Correspondence with IRS Didn't Extend Limitations Period for Refund Claim: In LSW Engineers Arizona Inc. v. U.S., 2019 PTC 21 (D. Ariz. 2019), a district court cited Code Sec. 6532 in rejecting a taxpayer's argument that correspondence between the taxpayer and the IRS with respect to a tax refund claim filed by the taxpayer caused the two-year statute of limitations period to start in 2017 instead of 2015. In addition, the court cited a Supreme Court decision which concluded there is no implied equitable exception to a limitations period in tax refund cases in holding that equitable considerations did not preclude the government from asserting that the statute of limitation applied to deny the taxpayer's refund claim.
Taxpayer to be Tried in Connection With Helping Son File a False Return: In U.S. v. Stinson, 2019 PTC 27 (6th Cir. 2019), the Sixth Circuit affirmed a district court's denial of a taxpayer's request to sever indictments relating to the taxpayer's failure to pay over to the IRS payroll taxes due from his and his wife's staffing company from indictments relating to the taxpayer's involvement in a false federal income tax return filed by his son. The court noted that the taxpayer's son testified that his father told him to list his half-brother as a dependent so he could increase his refund to get money for a spring break trip he wanted to take with his friends.
IRS Updates Procedure on Return Disclosures Necessary to Avoid Penalties: In Rev. Proc. 2019-9, the IRS updated Rev. Proc. 2018-11 and identified circumstances under which disclosures on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under Code Sec. 6662(d) (relating to the substantial understatement aspect of the accuracy-relate penalty), and for the purpose of avoiding the tax return preparer penalty under Code Sec. 694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. Editorial changes have been made throughout this revenue procedure. According to the IRS, minor changes were made in order to update the tax years and tax forms to which this Rev. Proc. 2019-9 applies but no additional substantive changes were made.
December 2018
Accounting
An In-Depth Look: Practitioner's Year-End Tax Planning Guide for Businesses Post TCJA: The second installment of Parker's annual two-part series on year-end tax planning recaps major changes affecting business taxpayers, and strategies clients can use to minimize their 2018 tax bill. The online version of the article includes links to sample year-end client letters for businesses and individuals. Read More...
An In-Depth Look: Practitioner's Year-End Tax Planning Guide for Individuals Post TCJA: The first installment of Parker's annual two-part series on year-end tax planning recaps major changes affecting individual taxpayers, and strategies clients can use to minimize their 2018 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. Read More...
CPA Sample Client Letters: Year-End Tax Planning For 2018: See Parker's client letter for Individuals and for Businesses.
IRS Issues December 2018 AFRs: In Rev. Rul. 2018-30, the IRS issued a ruling which prescribes the applicable federal rates for December 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-86 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
Required Amendments List for 2018 Has No New Entries: In Notice 2018-91, the IRS issued the Required Amendments List for 2018, which has no entries listing changes in qualification requirements since the last list was issued. Rev. Proc. 2016-37 provides that, in the case of an individually designed plan, the remedial amendment period for a disqualifying provision arising as a result of a change in qualification requirements generally is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appears.
IRS Addresses Treatment of Leave-Based Donation Relating to Hurricane Michael: In Notice 2018-89, the IRS issued guidance on income and employment tax issues relating to actions by employers who may have adopted or may be considering adopting leave-based donation programs in which employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Code Sec. 170(c). The IRS said that (1) it will not assert that cash payments an employer makes to Code Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are made to the Code Sec. 170(c) organizations for the relief of victims of Hurricane Michael and are paid to the Code Sec. 170(c) organizations before January 1, 2020; (2) it will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees; (3) it will not assert that an employer is permitted to deduct these cash payments exclusively under the rules of Code Sec. 170 rather than the rules of Code Sec. 162; and (4) cash payments to which this guidance applies need not be included in Box 1, 3 (if applicable), or 5 of the Form W-2.
IRS Identifies Issues with Health Coverage & Accident & Health Plans in Recent Regs: In Notice 2018-88, the IRS summarized concerns resulting from recently issued proposed regulations under the Patient Protection and Affordable Care Act and Code Sec. 36B which (1) would expand the usability of health reimbursement arrangements (HRAs) by eliminating the current prohibition on integrating HRAs with individual health insurance coverage, thereby permitting employers to offer HRAs to employees enrolled in individual health insurance coverage, and (2) address the application of Code Sec. 4980H (the employer shared responsibility provisions) and Code Sec. 105(h) (addressing discriminatory self-insured group health plans). According to the IRS, the notice is intended to initiate and inform the process of developing guidance that addresses questions in these areas, and the IRS is requesting comments on potential approaches.
Employment Taxes
IRS Provides Guidance on 2019 Withholding Rules: In Notice 2018-92, the IRS addresses changes made to Code Sec. 3402 and Code Sec. 3405 by the Tax Cuts and Jobs Act of 2017 (TCJA), and the IRS's decision to delay an overhaul of the Form W-4 from 2019 to 2020 and provides interim guidance for 2019 on income tax withholding, requests comments on certain withholding procedures, and indicates that regulations are planned to update the withholding regulations to reflect changes made by the TCJA. Specifically, the notice (1) announces that the 2019 Form W-4 will be similar to the 2018 Form W-4; (2) addresses new TCJA "withholding allowance" terminology; (3) continues until April 30, 2019, Notice 2018-14's temporary suspension of the requirement to furnish new Forms W-4 within 10 days for changes resulting solely from the TCJA; (4) provides that, for 2019, the default rule when an employee fails to furnish a Form W-4 will continue to be single with zero withholding allowances; (5) allows taxpayers to take into account the qualified business income deduction under Code Sec. 199A to reduce withholding under Code Sec. 3402(m); (6) announces that the IRS intends to update the regulations under Code Sec. 3402 to explicitly allow taxpayers to use the online withholding calculator or Publication 505, Tax Withholding and Estimated Tax, in lieu of the worksheets to Form W-4; (7) requests comments on alternative withholding methods under Code Sec. 3402(h) and announces that the IRS intends to eliminate the combined income tax withholding and employee FICA tax withholding tables under Reg. Sec. 31.3402(h)(4)-1(b); (8) modifies notification requirements for the withholding compliance program; and (9) provides that, for 2019, withholding on annuities or similar periodic payments where no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances under Code Sec. 3405(a)(4).
Healthcare
Interim Rules Expand Exemptions to Contraceptive Coverage Mandate: In T.D. 9840, the IRS issued interim final regulations which expand exemptions to protect religious beliefs for certain entities and individuals whose health plans are subject to a mandate of contraceptive coverage through guidance issued pursuant to the Patient Protection and Affordable Care Act. According to the IRS, (1) these rules do not alter the discretion of the Health Resources and Services Administration to maintain the guidelines requiring contraceptive coverage where no regulatorily recognized objection exists, (2) leaves in place an "accommodation" process as an optional process for certain exempt entities that wish to use it voluntarily, and (3) does not alter multiple other federal programs that provide free or subsidized contraceptives for women at risk of unintended pregnancy.
Final Regs Expand Exemptions to Protect Moral Beliefs Relating to Contraceptive Coverage: In T.D. 9841, the IRS issued final regulations concerning moral exemptions and accommodations regarding coverage of certain preventive services. According to the IRS, these rules (1) expand exemptions to protect moral beliefs for certain entities and individuals whose health plans are subject to a mandate of contraceptive coverage through guidance issued pursuant to the Patient Protection and Affordable Care Act; (2) do not alter the discretion of the Health Resources and Services Administration to maintain the guidelines requiring contraceptive coverage where no regulatorily recognized objection exists; (3) leave in place an optional "accommodation" process for certain exempt entities that wish to use it voluntarily; and (4) do not alter multiple other federal programs that provide free or subsidized contraceptives for women at risk of unintended pregnancy.
Information Reporting
Due Dates Extended for Providing Information Statements on Minimum Essential Coverage: In Notice 2018-94, the IRS extended the due dates for certain 2018 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 notice extends the due date for furnishing to individuals the 2018 Form 1095-B, Health Coverage, and the 2017 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2019, to March 4, 2019, and also extends transitional good-faith relief from Code Sec. 6721 and Code Sec. 6722 penalties to the 2018 information reporting requirements under Code Sec. 6055 and Code Sec. 6056.
IRS Procedure
IRS Updates List of Time-Sensitive Acts Which May Be Postponed: In Rev. Proc. 2018-58, the IRS provides an updated list of time-sensitive acts, the performance of which may be postponed under Code Sec. 7508 and Code Sec. 7508A. Code Sec. 7508 postpones specified acts for individuals serving in the Armed Forces of the United States or serving in support of such Armed Forces in a combat zone or serving with respect to a contingency operation while Code Sec. 7508A permits a postponement of the time to perform specified acts for taxpayers affected by a federally declared disaster or a terroristic or military action.
Code Section 7491(c) Transfers the Burden of Production to IRS in Estate Tax Case: In Est. of Ramirez v. Comm'r, T.C. Memo. 2018-196, the Tax Court held that where a taxpayer died after filing a Tax Court petition but before trial, it is the IRS, and not the taxpayer's estate, who has the burden of producing evidence that penalties assessed against the taxpayer were approved in writing by an IRS supervisor. In the instant case, after the IRS reclassified the taxpayer's business income as active, the taxpayer's estate had sought to reclassify the taxpayer's real estate losses as active losses due to her being a real estate professional and the court concluded that, in such cases, Code Sec. 7491(c) transfers the burden of production to the IRS where an estate's liability for tax is at issue.
Retirement Plans
Transition Relief for Reporting & Withholding on IRA Payments to State Unclaimed Property Funds Extended: In Notice 2018-90, the IRS provides that transition relief previously provided in Rev. Rul. 2018-17, relating to withholding and reporting with respect to payments from individual retirement accounts to state unclaimed property funds, is extended so that a person will not be treated as failing to comply with the withholding and reporting requirements described in Rev. Rul. 2018-17 with respect to payments made before the earlier of January 1, 2020, or the date it becomes reasonably practicable for the person to comply with those requirements. Previously, the transition relief in Rev. Rul. 2018-17 had been extended with respect to payments made before the earlier of January 1, 2019, or the date it became reasonably practicable for the person to comply with the payment requirements.
S Corporations
Due Diligence Penalty May Be Assessed Against S Corporation: In CCA 201846005, the Office of Chief Counsel advised that an S corporation may be a tax return preparer within the definition of Code Sec. 7701(a)(36) if it employs a person who prepares a tax return for compensation. Thus, an S corporation may be the proper person on which to assess a due diligence penalty under Code Sec. 6695(g) pursuant to Reg. Sec. 1.6695-2(c) if one of the requirements set forth in that section are met.
Tax Accounting
New Procedures Address Sec. 451(b) Accounting Method Changes: In Rev. Proc. 2018-60, the IRS modifies Rev. Proc. 2018-31 to provide procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) to obtain automatic IRS consent to change methods of accounting to comply with Code Sec. 451(b), as amended by the Tax Cuts and Jobs Act of 2017. In addition, for the first tax year that begins after December 31, 2017, certain taxpayers are permitted to make a method change to comply with Code Sec. 451(b) without filing a Form 3115, Application for Change in Accounting Method.
Tax Return Preparers
Prop. Regs Address Enrolled Agent User Fees: In REG-122898-17, the IRS issued proposed regulations relating to the imposition of user fees for enrolled agents and enrolled retirement plan agents. The proposed regulations (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; (2) increases the amount of the renewal user fee for enrolled retirement plan agents from $30 to $67; and (3) increases the amount of both the enrollment and renewal user fee for enrolled agents from $30 to $67.
Court Denies Tax Partner's Motion for Acquittal and New Trial: In U.S. v. Berger, 2018 PTC 401 (N.D. Calif. 2018), a district court rejected motions for acquittal and a new trial made by a tax partner at an accounting firm who was convicted under Code Sec. 7206(2) of aiding and abetting a client in filing false tax returns that reported less than $0 of income. The court found that the government's assertion that the partner was trying to "wipe out" his client's income was supported by evidence that the partner's treatment of deferred revenue payments as loans would render the payments nontaxable.
NOVEMBER 2018
Accounting
November 2018 AFRs: In Rev. Rul. 2018-28, the IRS issued a ruling which prescribes the applicable federal rates for November 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
Tax Liens Remain Attached to Property After Transfer to Alter Ego: In In re Bullseye Holdings, LLC, 2018 PTC 355 (Bankr. Ariz. 2018), a bankruptcy court held that a transfer of property from one company to another related company was not an intentional act to defeat an IRS tax claim but that, given the unity of control, the company to which the property was transferred was an alter ego of the transferor company. The court therefore concluded that the federal tax liens filed by the IRS against the property at issue remained attached to the property after its transfer.
IRS Did Not Violate Bankruptcy Discharge Injunction: In In re Reuland, 2018 PTC 372 (Bankr. N.D. Ill. 2018), a bankruptcy court granted an IRS motion to dismiss a debtor couple's complaint for failure to state a claim upon which relief could be granted because the tax debt at issue was not dischargeable pursuant to Bankruptcy Code Sections 1328(a)(2) and 523(a)(1)(B)(ii). The court also concluded that the IRS did not violate a Bankruptcy Code Section 524(a)(2) discharge injunction because that injunction prohibited the collection of only those debts that were discharged ad the debtors were not entitled to a permanent injunction because the IRS is permitted to collect debts that were not discharged.
Corporations
Former Shareholders Can't Use Statute of Limitations to Avoid Transferee Liability: In Trust U/W/O BH v. Comm'r, T.C. Memo. 2018-182, the Tax Court held that notices of transferee liability, which were mailed to former shareholders of a corporation that was the subject of a "Midco" transaction, were mailed within the statute of limitations period specified in Code Sec. 6901(c). The court rejected the former shareholders' assertion that the deficiency notices were void ab initio after finding that the argument derived no support from the opinions of the Supreme Court, the Courts of Appeals, or other binding judicial precedent.
Credits
Fuel Mixture Credit Must Reduce Excise Tax Liability Before Company Receives Payment: In Sunoco, Inc. v. U.S., 2018 PTC 374 (Fed. Cir. 2018), the Federal Circuit affirmed the Court of Federal Claims and held that a taxpayer that is entitled to an alcohol fuel mixture credit under Code Sec. 6426 must first use the mixture credit to reduce any Code Sec. 4081 excise-tax liability before receiving payment under Code Sec. 6427 for any amount of mixture credit exceeding the excise-tax liability. The court found that the taxpayer failed to show that the legislative history extraordinarily contradicted the plain reading of the law that enacted the alcohol fuel mixture credit.
Deductions
Court Rejects Couple's Overseas Investment Loss Deduction: In Giunta v. Comm'r, T.C. Memo. 2018-180, the Tax Court held that a couple could not take a $3 million loss deduction allegedly attributable to an alleged overseas investment that the couple claimed became worthless during 2013 after concluding that the circumstances surrounding the couple's investment were as mysterious as they had appeared on the 2013 tax return. The court also affirmed that the couple was liable for a substantial understatement penalty under Code Sec. 6662(a) and (b)(2).
Estates, Gifts, and Trusts
Court Allows 18 Percent Discount in Valuing Decedent's Limited Partnership Interest: In Streightoff Est. v. Comm'r, T.C. Memo. 2018-178, the Tax Court held that, in determining the value of a decedent's 88.99 percent limited partnership interest in an asset holding entity, an 18 percent discount applied as a result of lack of marketability of the interest. However, the court also concluded that no discount for lack of control was appropriate.
Healthcare
Health and Welfare Benefit Plan Can't Recoup ACA Payments: In The Electrical Welfare Trust Fund v. U.S., 2018 PTC 359 (4th Cir. 2018), the Fourth Circuit affirmed a district court's decision that a self-administered, self-insured employee health and welfare benefit plan created under a collective bargaining agreement was not entitled to recover more than $1 million paid to the Department of Health and Human Services as part of the Transitional Reinsurance Program of the Patient Protection and Affordable Care Act (ACA) of 2010. The Fourth Circuit agreed with the lower court's holding that because the payment was not a tax, exclusive jurisdiction for a suit for repayment lies with the Court of Federal Claims.
Innocent Spouse
No Innocent Spouse Relief Where Taxpayer Was Involved in Preparing Joint Returns: In Schorse v. Comm'r, T.C. Memo. 2018-176, the Tax Court rejected a taxpayer's request for innocent spouse relief under Code Sec. 6015(b), Code Sec. 6015(c), or Code Sec. 6015(f) for 2003 and 2004. According to the court, although many of the factors for equitable relief were either neutral or favored the taxpayer, the taxpayer's actual knowledge of the losses deducted on the joint returns, his involvement in preparing those returns, and the significant benefit he received from the understatements weighed too heavily against him to allow relief.
No Innocent Spouse Relief Available Where Joint Return Was Not Filed: In Abdelhadi v. Comm'r, T.C. Memo. 2018-183, the Tax Court held that, because filing a joint return is a prerequisite for granting relief under Code Sec. 6015, it was not entitled to grant innocent spouse relief to a taxpayer who did not file a joint return. While it did not have jurisdiction to order the IRS to refund amounts taken from the taxpayer, the court said the taxpayer may be entitled to file a claim for refund on the basis that she was not liable for the tax paid toward her husband's liability with her tax refunds.
Penalties
Taxpayer Escapes Penalty after IRS Fails to Introduce Evidence of Supervisory Approval: In Curtis v. Comm'r, T.C. Summary 2018-50, the Tax Court held that a couple was not liable for a $950 substantial understatement penalty under Code Sec. 6662(a) that the IRS assessed after the couple failed to include a $37,000 retirement plan distribution in income. The court said that, because the IRS did not introduce any evidence of managerial approval of the penalty, it did not meet its threshold burden under Code Sec. 6751(b) for the court to sustain the penalty.
Procedure
IRS's Rejection of Offer of 4 Percent of Tax Liability Was Not an Abuse of Discretion: In Snipes v. Comm'r, T.C. Memo. 2018-184, the Tax Court held that, in view of actor Wesley Snipes failure to provide bona fide documentation to prove his assets and financial condition, as well as the disparity in an offer in compromise (OIC) he made to the IRS versus his reasonable collection potential as determined by IRS, an IRS settlement officer did not abuse her discretion by rejecting the actor's OIC, refusing to conduct an expedited transferee investigation, or sustaining the filing of a notice of federal tax lien. The actor had made a cash OIC of $842,000, which was less than 4 percent of his total underlying liability.
OCTOBER 2018
Accounting
IRS Issues November 2018 AFRs: In Rev. Rul. 2018-28, the IRS issued a ruling which prescribes the applicable federal rates for November 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Most Popular: IRS Clarifies Deductibility of Business Meal Expenses in Light of TCJA Changes:
The IRS issued guidance addressing practitioner questions about the deductibility of business meal expenses in light of the elimination of entertainment expense deduction in the Tax Cuts and Jobs Act of 2017. The guidance, which may be relied on before the issuance of regulations, provides that taxpayers may deduct 50 percent of an otherwise allowable business meal expense if five conditions are met. Notice 2018-76. Read More...
IRS Issues October 2018 AFRs: In Rev. Rul. 2018-25, the IRS issued a ruling which prescribes the applicable federal rates for October 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
S Shareholder's Amended Filings Satisfied Requirement to Identify Inconsistencies with Return:
The Ninth Circuit held that the sole shareholder of an S corporation in involuntary bankruptcy, who filed for a refund based on a claimed overstatement of income on the S corporation return filed by the bankruptcy trustee, satisfied the requirement in Code Sec. 6037 to provide a statement identifying the inconsistency between the corporate and the shareholder returns by including a statement that described how his income flowed from the corporation and stating his disagreement with the return filed by the trustee. Rubin v. U.S., 2018 PTC 313 (9th Cir. 2018). Read More...
IRS Not Entitled to Priority Status for Couple's Shared Responsibility Payment: In In re Huenerberg, 2018 PTC 332 (Bankr. E.D. Wisc. 2018), a bankruptcy court held that the IRS was not entitled to priority status for its claim for taxes relating to a couples' shared responsibility payment under Code Sec. 5000A. The court agreed with the debtors that the shared responsibility payment is a penalty, not a tax, and thus the IRS's claim relating to that penalty was not eligible for priority status.
Charitable Contributions
Couple Can't Use Religious Nonprofit to Deduct Personal Expenses: In Presley v. Comm'r, T.C. Memo. 2018-171, the Tax Court held that a husband and wife, who established a religion-based nonprofit, could not deduct as charitable contributions more than $340,000 they paid for certain land improvements relating to their personal residence, a tractor/mower, as well as other expenses relating to their personal residence. The court also held that the couple was liable for the accuracy-related penalty under Code Sec. 6662(a) after finding that they failed to carry their burden of establishing that there was reasonable cause for, and that they acted in good faith with respect to, the tax underpayments attributable to the charitable contribution deductions.
Deductions
IRS Issues 2018-2019 Special Per Diem Rates: In Notice 2018-77, the IRS announced the special per diem rates effective October 1, 2018, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The notice also provides the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.
Time Is Running Out to Elect Out of 100-Percent Depreciation Deduction for 2017: In IR-2018-196, the IRS reminds individuals and calendar-year corporations, who placed qualifying property in service during 2017 but choose not to claim the new 100-percent depreciation deduction, that they must file an election with the IRS by October 15, 2018, to opt out of the deduction. Because the deduction is retroactive and applies to qualifying property acquired and placed in service after September 27, 2017, the IRS notes that it may affect many 2017 tax returns.
Employee Benefits
IRS Issues Monthly Corporate Bond Guidance: In Notice 2018-82, the IRS issued 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 IRS provided 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).
Rev. Proc. Addresses Diversification Requirement for Mortgage-backed Securities: In Rev. Proc. 2018-54, the IRS issued guidance that applies to taxpayers that hold investments in one or more segregated asset accounts on which variable contracts, as defined in Code Sec. 817, are based. The guidance allows taxpayers to elect to treat certain mortgage-backed securities as having deemed issuers for purposes of the diversification requirements of Code Sec. 817(h).
IRS Modifies Procedures for Submitting VCPs: In Rev. Proc. 2018-52, the IRS modifies and supersedes Rev. Proc. 2016-51, which sets forth the Employee Plans Compliance Resolution System (EPCRS), a comprehensive system of correction programs administered by the Employee Plans Division (TE/GE) for sponsors of retirement plans that have failed to satisfy certain requirements under Code Secs. 401(a), 403(a), 403(b), 408(k), or Code Sec. 408(p). The revenue procedure (1) sets forth new procedures for using the {{www.pay.gov }}{ website to file Voluntary Correction Program (VCP) submissions and pay user fees; (2) provides that, beginning on April 1, 2019, the IRS will no longer accept paper VCP submissions or process user fees paid with a paper check; and (3) that, during the transition period from January 1, 2019, through March 31, 2019, plan sponsors may file VCP submissions with the IRS either by using {{www.pay.gov }}{ in accordance with applicable provisions of the revenue procedure or by filing paper VCP submissions in accordance with the applicable procedures in Rev. Proc. 2016-51.
Employee Credit
IRS Issues Retroactive Guidance on Employer Credit for Paid Family and Medical Leave: The IRS issued a notice in a question and answer format on the employer credit for paid family and medical leave under Code Sec. 45S, a provision enacted in the Tax Cuts and Jobs Act of 2017. According to the IRS, it plans to publish proposed regulations under the provision but, until then, the guidance supplied in the notice applies to wages paid in tax years beginning after December 31, 2017, and before January 1, 2020. Notice 2018-71. Read More...
Employment Taxes
IRS Aims to Have New Form W-4 Ready in 2020: On its website, the IRS announced that it is postponing the issuance of a new version of Form W-4, Employee's Withholding Allowance Certificate, until 2020 and that the 2019 version of the Form W-4 will be similar to the current 2018 version. According to the IRS, it will continue working closely with the payroll and the tax community as it makes additional changes to the Form W-4 for use in 2020 and that the new form will help employees improve withholding accuracy and fully reflect changes included in the Tax Cuts and Jobs Act.
Excise Taxes
Court Upholds Excise Tax Deficiency on Founder of Association of Honest Attorneys: In Farr v. Comm'r, 2018 PTC 325 (10th Cir. 2018), the Tenth Circuit affirmed the Tax Court and held that an attorney was liable for an excise tax deficiency for engaging in excess benefit transactions with her Code Sec. 501(c)(3) organization, Association for Honest Attorneys (AHA). The excess benefit transactions occurred when the taxpayer used AHA's checking account to make personal purchases from various grocery, retail, automotive, and home-improvement stores, as well as to make tuition payments for her son and to cover the costs of exhuming her father's remains for DNA analysis.
Farmers and Ranchers
IRS Extends Replacement Period under Sec. 1033 for Certain Livestock Sales: The IRS issued a notice extending the time that farmers and ranchers in 41 states and the District of Columbia have under Code Sec. 1033(e) to replace livestock sold on account of weather-related conditions. The Appendix to the notice lists the U.S. counties that qualify for the extension. Notice 2018-79. Read More...
Foreign
IRS to Adjust Timing of Code Section 965 Binding Basis Election: In Notice 2018-78, the IRS announced that it has determined that a requirement under recently issued Code Sec. 965 proposed regulations requiring taxpayers to make a binding basis election before the proposed regulations are finalized would be too onerous for taxpayers and thus the final regulations will provide a transition rule for returns due (determined with regard to any extension) before the date that is 90 days after the date that the final regulations are published and, in such cases, the basis election must be made no later than 90 days after the publication of the final regulations. In addition, the final regulations will provide that if a basis election was made on or before the date the final regulations are published, the basis election may be revoked no later than 90 days after the publication of the final regulations.
FBAR Penalties Did Not Abate Upon Death; Decedent's Son Now Liable: In U.S. v. Est. of Schoenfeld, 2018 PTC 331 (M.D. Fla. 2018), a district court held that the government's claim for foreign bank account report (FBAR) penalties did not abate upon the decedent's death. The court concluded that the government could pursue its claim for FBAR penalties against the decedent's son because the son was a distributee of the decedent's estate.
Gross Income
Couple Liable for Taxes and Penalties for Failing to Report Income Embezzled from Charity: In Castaneda v. Comm'r, T.C. Memo. 2017-173, the Tax Court held that a couple was liable for taxes on more than $200,000 that the wife had embezzled from a nonprofit where she worked and that her husband was liable for self-employment tax on income he received from the same nonprofit. The court also denied the couple's deduction for gambling losses and concluded that the couple was liable for the Code Sec. 6663 fraud penalty and the late-filing penalty under Code Sec. 6651(a).
Healthcare
Government Violated ACA by Failing to Pay Health Insurer: In Sanford Health Plan v. U.S., 2018 PTC 346 (Fed. Cl. 2018), the Federal Claims Court granted summary judgment to a health insurer after holding that the government violated a statutory obligation created by Congress in the Affordable Care Act when it failed to provide the health insurer its full cost-sharing reduction payments for 2017. According to the court, Congress's failure to appropriate funds to make those payments did not vitiate that obligation.
Hobby Loss
Country Club Can't Deduct Nonmember Event Losses from Investment Income: The Sixth Circuit affirmed a Tax Court decision disallowing a tax-exempt country club from using losses from unprofitable nonmember events to avoid paying tax on its investment income. Although the Sixth Circuit disagreed with the Tax Court's reasoning that, under Portland Golf Club v. Comm'r, 497 U.S. 154 (1990), the country club was required to show evidence of profitability to prove its intent to profit and could not consider the hobby loss factors in Code Sec. 183, the Sixth Circuit concluded that, even applying the hobby loss factors, the country club's long history of consistent and unexplained losses overwhelmed all other evidence of its intent to profit from the events. Losantiville Country Club v. Comm'r, 2018 PTC 353 (6th Cir. 2018). Read More...
Income
Refunds from Bank Aren't Includible in Taxpayer's Income: In Park v. Comm'r, T.C. Summary 2018-46, the Tax Court held that $12,789 received by a taxpayer from Bank of America (BOA) during 2014 was a reimbursement for erroneously collected payments on the taxpayer's accounts in prior years and thus was not taxable income to the taxpayer. Another $719 received by the taxpayer was interest that accrued on the erroneously collected payments and, thus, was includible in the taxpayer's 2014 income.
Innocent Spouse
Husband Who Was Unaware of Wife's Income Qualified for Innocent Spouse Relief: In Merlo v. Comm'r, T.C. Summary 2018-47, the Tax Court held that there was insufficient evidence submitted at trial to establish that a taxpayer had actual knowledge of income received by his wife and not reported on their 2011 joint return, as would be required to disqualify him from innocent spouse relief under Code Sec. 6015(c). The now ex-wife's contentions and testimony that the taxpayer had actual knowledge of that income, the court said, were implausible and without support from, and to some extent contradicted by, the record and, thus, the taxpayer was entitled to innocent spouse relief and was not liable for the tax deficiency on that income.
IRS
IRS Can Withhold Info About Commissions Paid to IRS Debt Collectors: In Hodes v. Department of Treasury, 2018 PTC 327 (D. D.C. 2018), a district court held that the Freedom of Information Act (FOIA) did not entitle a taxpayer to certain information about four contracts the IRS awarded to private companies in the outsourcing of debt collection for certain IRS tax liabilities. The court said the IRS was correct in applying a FOIA exemption to the taxpayer's request for the contracts' commission percentage rates.
Like-Kind Exchanges
Energy Company Did Not Satisfy Like-Kind Exchange Requirements; Penalties Upheld: In Exelon v. Comm'r, 2018 PTC 338 (7th Cir. 2018), the Seventh Circuit affirmed a Tax Court holding that purported like-kind exchanges involving sale-leaseback strategies by an energy company were not like-kind exchanges but rather were transactions properly characterized as loans since the transactions did not transfer the benefits and burdens of ownership. The Seventh Circuit also affirmed the imposition of $87 million in accuracy-related penalties on the energy company.
Procedure
Tax Evasion Conviction of Sherriff and Wife Upheld: In U.S. v. Bolton, 2018 PTC 354 (5th Cir. 2018), the Fifth Circuit affirmed the convictions of a Mississippi chief deputy sheriff and his wife for attempted tax evasion and filing false tax returns after they were found guilty of stealing food from a local detention center and using the food in the their businesses, as well as classifying business income as loans. The court did, however, modify the lower court's judgment to reflect that the couple did not owe restitution until the terms of their supervised release begins.
IRS Issues Procedure for Applying for PLRs for Divisive Reorganizations: In Rev. Proc. 2018-53, the IRS provides procedures for taxpayers requesting private letter rulings regarding certain issues pertaining to reorganizations under Code Sec. 368(a)(1)(D) and Code Sec. 355 (i.e., Divisive Reorganizations), including representations, information, and analysis that taxpayers requesting these rulings should submit. Under the procedure, a taxpayer engaging in a Divisive Reorganization may request rulings that no gain or loss will be recognized to Distributing (1) upon Controlled's assumption of liability for an obligation of Distributing under Code Sec. 357(a), and (2) upon Distributing's receipt of Code Sec. 361 consideration and its distribution of the Code Sec. 361 consideration to a creditor in satisfaction of Distributing's debt obligation.
Tax Accounting
Accrued Market Discount Is Not Includible in Income under Code Section 451(b): In Notice 2018-80, the IRS announced that it intends to issue proposed regulations providing that accrued market discount is not includible in income under Code Sec. 451(b), which was added to the Code as part of the Tax Cuts and Jobs Act of 2017. Under Code Sec. 451(b), the all events test is considered met with respect to an item of gross income no later than when the taxpayer takes that item of gross income into account as revenue for financial accounting purposes in an applicable financial statement.
Tax Returns
IRS Releases Draft of 2018 Schedule A: On October 9, the IRS issued a draft of a proposed 2018 Schedule A. The draft includes a line for the limitation of state and local income and property tax deductions, a new box in the section on interest deductions that a taxpayer must check if the taxpayer didn't use all of his or her home mortgage loan to buy, build, or improve the taxpayer's home, and eliminates the sections relating to job expenses and miscellaneous itemized deductions.
SEPTEMBER 2018
Accounting
September 2018 AFRs Issued: In Rev. Rul. 2018-23, the IRS issued a ruling which prescribes the applicable federal rates for September 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.
Bankruptcy
IRS Inappropriately Applied Debtor's Tax Overpayment to Prepetition Liabilities: In U.S. v. Copley, 2018 PTC 306 (E.D. Va. 2018), a district court affirmed a bankruptcy court and held that a debtor's $3,208 overpayment to the IRS became part of the debtors' bankruptcy estate upon the debtors' petition for bankruptcy and that the debtors properly exempted it from the estate pursuant to Bankruptcy Code Section 522 and Virginia law. While noting the tension between Bankruptcy Code Section 553 and Bankruptcy Code Section 522 and contrary court decisions as to which applies first, the district court found that Bankruptcy Code Section 522 applies before Section 553 and, as a result, concluded that the IRS inappropriately applied the debtors' overpayment to prepetition tax liabilities in violation of the debtors' claimed exemption and ordered the IRS to release the $3,208 to the debtors.
Debtor's Pension Isn't Exempt from Bankruptcy Estate: In In re Jie Xiao, 2018 PTC 286 (Bankr. Ct. 2018), a bankruptcy court held that more than $410,000 held in a pension plan, plus any interest or dividend accruals thereon, was not exempt from a debtor's bankruptcy estate. The court found that the pension plan substantially violated the core qualification requirements for a retirement plan and operated as a subterfuge for the distribution of profits to the owner of the company - in this case, the debtor.
Deductions
Failure to Fully Complete Form 8283, Precludes Charitable Donation Deduction: In Belair Woods, LLC v. Comm'r, T.C. Memo. 2018-159, the Tax Court held that, because a partnership failed to attach to its 2009 tax return a fully completed "appraisal summary" on Form 8283, Noncash Charitable Contributions, and did not disclose on that form, as was required, the cost or adjusted basis of a conservation easement that was donated, the partnership was not entitled to a charitable contribution deduction for the donation because the substantiation requirements of Reg. Sec. 1.170A-13(c) were not met. However, with respect to the penalty assessed by the IRS, the court found that disputes of material fact existed as to whether the partnership had reasonable cause for its failure to supply a fully completed appraisal summary.
Failure to Show That Partnership Interest Was Worthless Precludes Loss Deduction: In Forlizzo v. Comm'r, T.C. Memo. 2018-137, the Tax Court held that a taxpayer, who was a partner in several real estate partnerships, was not entitled to deduct losses relating to his interest in any of the partnerships because he failed to show that his interests in any of the partnerships were worthless as of December 31, 2008. To the contrary, the court said there was value remaining in the partnerships and pointed to the fact that the partnerships renegotiated the financing of certain construction loans to add value for the partners by minimizing losses. Forlizzo, T.C. Memo. 2018-137 (8/27/18).
Court Denies Deductions for Horse Breeding Activity: In Householder v. Comm'r, T.C. Memo. 2018-136, the Tax Court held that a couple was not entitled to deduct losses from a horse breeding activity because the activity was not a trade or business they engaged in for profit. Additionally, the court rejected their claim that they were entitled to a theft loss deduction with respect to money invested in the horse breeding activity.
Employee Benefits
Monthly Corporate Yield Curve and Segment Rates Issued: In Notice 2018-73, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
IRS Extends Temporary Nondiscrimination Relief: In Notice 2018-69, the IRS announced that it is extending the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5, by making that relief available for plan years beginning before 2020 if the conditions of Notice 2014-5 are satisfied. According to the IRS, it is providing the extension in anticipation of the issuance of final amendments to the Code Sec. 401(a)(4) regulations and it is expected that the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2020.
Estates, Gifts, and Trusts
Decedent's Son Fails to Prove He Resigned as Executor; Liable for Estate Taxes: In U.S. v. Paulson, 2018 PTC 294 (S.D. Calif. 2018), a district court held that, where a taxpayer who was appointed as executor of his father's estate was unable to prove that he completed the requisite procedural steps to resign as the executor, the taxpayer remained the acting statutory executor, despite his contention to the contrary. The court also agreed with the government that the taxpayer, as a trustee who held property of the his father's estate at the time of his father's death, was personally liable under Code Sec. 6324(a)(2) for unpaid estate taxes.
Exclusions from Income
IRS Clarifies That Certain Moving Expenses Paid in 2018 Are Not Taxable: In Notice 2018-75, the IRS advised that reimbursements an employer pays to an employee in 2018 for qualified moving expenses incurred in a prior year are not subject to federal income or employment taxes and the same is true if the employer pays a moving company in 2018 for qualified moving services provided to an employee before 2018. As the IRS noted, the Tax Cuts and Jobs Act of 2017 suspended the exclusion from income for moving expenses reimbursed or paid by an employer for most employees starting in 2018, making these amounts taxable, except for amounts for active-duty members of the U.S. Armed Forces whose moves relate to a military-ordered permanent change of station.
Exempt Organizations
Nonprofit Did Not Receive Unrelated Business Taxable Income from Journal Ads: In TAM 201837014, the National Office advised that a Code Sec. 501(c)(6) professional society that published a scholarly journal under a contract with a for-profit publisher did not receive unrelated business taxable income from advertising in the journal. The National Office said that the issue was whether the trade or business of publishing commercial advertising was regularly carried on by the professional society and the National Office concluded that it was not.
Foreign
Ten-Year Statute Doesn't Apply to Refund Arising from Foreign Tax Deduction: The Second Circuit held that a company that elected to deduct foreign taxes from its U.S. taxable income for a prior tax year was barred by the three-year statute of limitations from claiming a refund for an overpayment arising from the deduction. The Second Circuit rejected the taxpayer's argument that the special 10-year statute of limitations period under Code Sec. 6511(d)(3)(A) applied after concluding that Code Sec. 6511(d)(3)(A) applies only to refund claims relating to an overpayment attributable to a credit for foreign taxes paid, and does not apply where a taxpayer elects to deduct foreign taxes. Trust Media Brands, Inc. v. U.S., 2018 PTC 260 (2d Cir. 2018). Read More...
Healthcare
Court Rules That States Are Entitled to Equitable Disgorgement of ACA Fees: In State of Texas v. U.S., 2018 PTC 283 (N.D. Tex. 2018), a district court denied the taxpayers' request for a permanent injunction against the United States imposing liability for the payment of the Affordable Care Act's Health Insurance Provider Fee (HIPF). Instead, the court said that Texas and other states joining in the lawsuit are entitled to equitable disgorgement of their HIPF payments, a remedy that the court said gives them complete relief.
Innocent Spouse
Wife Goes to Prison for Fraud; Husband Liable for Taxes on the Fraudulent Income: In Benson v. Comm'r, T.C. Memo. 2018-157, the Tax Court held that a taxpayer was not eligible for equitable relief under Code Sec. 6015(f) with respect to the nonpayment of tax liabilities relating to a joint tax return he filed with his wife because he knew or had reason to know that the tax liability reported on the 2011 joint tax return would not and could not be paid by his wife since she was going to prison. Although the unpaid tax liability related to income from fees obtained when the wife fraudulently overbilled the City of St. Louis, the court noted that the relevant question was not whether the taxpayer had knowledge of the fraud, it was whether he knew or had reason to know that the tax liability reported on the 2011 return would not and could not be paid by his wife.
Taxpayer Entitled to Innocent Spouse Relief: In Neitzer v. Comm'r, T.C. Memo. 2018-156, the Tax Court held that a taxpayer was eligible for innocent spouse relief after finding that it would be inequitable to hold her jointly and severally liable for an underpayment of taxes relating to a joint return filed with her ex-husband because, among other things, the taxpayer's ex-husband had instructed his business accountant not to disclose information to the taxpayer about his finances and he had changed the mailing address on file with the IRS so that correspondence would go to him rather than the taxpayer. As a result, the Tax Court held that the taxpayer was entitled to a refund of money that had been taken from her bank account by the IRS.
Insurance Companies
IRS Provides Domestic Asset/Liability Percentages: In Rev. Proc. 2018-45, the IRS issued a revenue procedure which provides 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, 2016. Instructions are provided for computing foreign insurance companies' liabilities for the estimated tax and installment payments of estimated tax for tax years beginning after December 31, 2016.
International
Revenue Procedure Addresses Foreign Income Inclusions for REITs: In Rev. Proc. 2018-48, the IRS issued guidance for real estate investment trusts (REITs) regarding the treatment of certain foreign income inclusions, including inclusions under Code Sec. 951A, for purposes of the 95 percent gross income qualification test of Code Sec. 856(c)(2). While the procedure is generally effective for tax years beginning after September 13, 2018, certain REITs may choose to apply the rules with respect to any prior tax year(s).
Proposed Regulations Implement Global Intangible Low-Taxed Income Rules: In REG-104390-18, the IRS issued proposed regulations implementing Code Sec. 951A, a provision that was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) and that affects U.S. shareholders of controlled foreign corporations (CFCs). The regulations provide guidance for U.S. shareholders to determine the amount of global intangible low-taxed income to include in gross income and also provide guidance relating to TCJA changes to Code Sec. 951, Code Sec. 1502, and Code Sec. 6038.
IRS Intends to Delay Effective Date of Certain Section 871(m) Regs: In Notice 2018-72, the IRS announced that it intends to amend the Code Sec. 871(m) regulations to delay the effective/applicability date of certain rules in those regulations. In addition, the IRS said it is extending the phase-in period provided in Notice 2017-42 and Notice 2018-5 for certain provisions of the Code Sec. 871(m) regulations.
Offshore Voluntary Compliance Program to End September 28: In IR-2018-176, the IRS reminded taxpayers that they have until September 28, 2018, to apply for the Offshore Voluntary Disclosure Program. The IRS said it will maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose their past actions and come into compliance with the tax system and noted that updated procedures will be announced soon.
IRS Implements Nonresident Alien Deposit Interest Regulations: In Rev. Proc. 2018-36, the IRS added adds two countries - Argentina and Moldova - to the list of countries with which the United States has in force an information exchange agreement such that interest paid to residents of such jurisdictions must be reported by payors to the extent required under Reg. Sec. 1.6049-8(a) and Reg. Sec. 1.6049-4(b)(5). The revenue procedure also adds Greece to the list of jurisdictions with which the IRS has determined that it is appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under those regulatory provisions.
Penalties
Tax Protester Arguments Net Taxpayer a $5,000 Fine: In MacDonald v. Comm'r, T.C. Memo. 2018-138, the Tax Court rejected a taxpayer's arguments that payments reported to him on Form W-2, as well as retirement plan distributions, were not taxable as income. The court also imposed a $5,000 penalty under Code Sec. 6673 and warned the taxpayer that, if he did not abandon his "misguided positions," a greater penalty might be imposed in the future.
Procedure
Taxpayer Can't Continue to Contest Deficiency After CDP Hearing: In Huminski v. Comm'r, 2018 PTC 301 (11th Cir. 2018), the Eleventh Circuit affirmed the Tax Court and granted summary judgment to the IRS after finding that a taxpayer's challenge to his underlying tax liability came too late. The court noted that, while taxpayers may raise any relevant issue relating to an unpaid tax or a proposed levy during a collection due process hearing, they may not challenge the amount or existence of the underlying tax liability unless they did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability, and the taxpayer in this case did not dispute that he had received a notice of deficiency letter.
Husband's Arguments Contradicted His Claims of Ignorance and Confusion: In Henderson v. Comm'r, T.C. Memo. 2018-150, the Tax Court sustain an IRS collection action and held that a couple was not entitled to challenge their underlying tax liabilities. Among the reasons given by the court for its decision was the fact that the husband's story about his failure to follow up regarding the status of an IRS audit after receiving a letter from the IRS was not plausible and the husband's continued use of certain terminology contradicted his claims of ignorance and confusion.
IRS Doesn't Have to Respond to Taxpayer's OIC Before Putting Levy on Home: In U.S. v. Brabant-Scribner, 2018 PTC 275 (8th Cir. 2018), the Eighth Circuit affirmed a district court's holding that the IRS could seize the taxpayer's home as a result of the taxpayer failing to pay a half a million dollars in tax liabilities and the IRS was not required to first respond to the taxpayer's offer in compromise. The court noted that the taxpayer was correct in pointing out that the IRS does settle tax liabilities for less than face value, particularly when the taxpayer cannot afford the full amount, but that does not entitle the taxpayer to a decision from the IRS before a court approves a levy on her home.
Retirement Plans
IRS Modifies Safe Harbor Explanations in Eligible Rollover Information: In Notice 2018-74, the IRS modified the two safe harbor explanations in Notice 2014-74 that may be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The safe harbor explanations, as modified, take into consideration certain legislative changes and recent guidance, including changes related to qualified plan loan offsets (as defined in Section 13613 of the Tax Cuts and Jobs Act of 2017) and guidance issued on self-certification of eligibility for a waiver of the deadline for completing a rollover (described in Rev. Proc. 2016-47), and include other clarifying changes.
Tax Accounting
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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