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Tax Updates August 2018 - April 2018

August 2018

Accounting

In-Depth: Long Awaited Section 199A Proposed Regulations Are Generally Favorable to Taxpayers: On August 8, the IRS released proposed regulations on Code Sec. 199A, one of the major tax breaks enacted as part of the Tax Cuts and Jobs Act of 2017. The proposed rules, which run to 184 pages, address many issues that had been of concern to practitioners, such as the definition of a "specified trade or business," the calculation of qualified business income flowing through to multiple entities, the treatment of wages paid to employees through third parties, and the definition of "reputation or skill." The rules allow for grouping of related trades or businesses for purposes of applying Code Sec. 199A and provide for narrow applicability of Code Section 199A's "reputation or skill" clause. The IRS separately issued a proposed revenue procedure addressing the calculation of W-2 wages for purposes of the W-2 wage limitation on the deduction. REG-107892-18; Notice 2018-64. Read More...

In-Depth: Bonus Depreciation Proposed Regs Issued; Taxpayers May Rely on Them Immediately: The IRS issued proposed regulations on the additional first year depreciation deduction (i.e., bonus depreciation) available under Code Sec. 168(k) as a result of changes made by the Tax Cuts and Jobs Act of 2017 (TCJA). The proposed regulations address numerous issues such as the bonus depreciation deductions for qualified improvement property, used property, partnership property, as well as what constitutes a binding contract and other special rules. While the proposed regulations are not effective until finalized, the IRS has given permission for taxpayers to apply these rules until final regulations are issued. REG-104397-18 (8/8/18). Read More...

Rev. Proc. Addresses Automatic Accounting Method Changes for Small Business Taxpayers: The IRS issued guidance which provides the procedures by which a small business taxpayer may obtain automatic consent to change its methods of accounting to reflect changes made by the Tax Cuts and Jobs Act of 2017 that expanded the number of small business taxpayers eligible to use the cash method of accounting and exempts small business taxpayers from the requirements to capitalize costs to account for certain long-term contracts under Sec. 460, and to account for inventories under Sec. 471. The revenue procedure is generally effective for tax years beginning after December 31, 2017, and obsoletes Rev. Proc. 2002-28 and Rev. Proc. 2001-10 for tax years beginning after December 31, 2017. Rev. Proc. 2018-40. Read More...

IRS Issues August 2018 AFRs: In Rev. Rul. 2018-21, the IRS issued a ruling which prescribes the applicable federal rates for August 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Bankruptcy

Spouse with No Control over Couple's Tax Filings Did Not Willfully Evade Payment of Taxes: A bankruptcy court held that a Chapter 7 debtor was discharged from her debt to the IRS for unpaid income taxes because she did not willfully evade her taxes under Section 523 of the Bankruptcy Code. The court found that although the debtor knew she and her husband were having problems with the IRS and the couple purchased luxury cars and other discretionary items during and after the years in which they failed to pay taxes, the debtor had no control over the couple's expenditures and depended on her husband to fulfill all of their tax obligations, and the IRS failed to show that she intended not to meet her tax obligations. Conard v. IRS, 2018 PTC 209 (Bankr. E.D. Va. 2018). Read More...

Compensation and Benefits

Ninth Circuit Reverses Tax Court on Sec. 482 Cost-Sharing Issue, Then Withdraws Decision: In a decision released on July 24, 2018, the Ninth Circuit, in Altera Corp. v. Comm'r, 2018 PTC 213 (2018), reversed the Tax Court and held that Reg. Sec. 1.482-7A(d)(2), which requires related entities to share the costs of employee stock-based compensation (SBC) in order to avoid an IRS adjustment, is a valid exercise of the IRS's rulemaking authority and a permissible interpretation of Code Sec. 482. However, on August 7, in 2018 PTC 253 (9th Cir. 2018), the Ninth Circuit panel, which was reconstituted after the March 2018 death of Judge Stephen Reinhardt and after the October 2017 arguments in the case were heard, withdrew the July 24 decision to allow time for the reconstituted panel to confer on the IRS's appeal of the Tax Court's decision.

Final Regs Address Definitions of QMACs and QNECs for Certain Retirement Plans: In T.D. 9835, the IRS issued final regulations that amend the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) in regulations regarding certain qualified retirement plans that contain cash or deferred arrangements under Code Sec. 401(k) or that provide for matching contributions or employee contributions under Code Sec. 401(m). Under these regulations, an employer contribution to a plan may be a QMAC or QNEC if it satisfies applicable nonforfeitability requirements and distribution limitations at the time it is allocated to a participant's account, but need not meet these requirements or limitations when it is contributed to the plan.

Credits

Parents Who Lost Custody of Children Could Not Claim Them as Dependents or Take Child Tax Credit or EITC: The Tax Court held that the biological parents of two children who were adopted by, resided with and received primary financial support from their maternal aunt during the entire year at issue were not entitled to claim the children as dependents and, as a result, could not take the child tax credit or the earned income credit. The Tax Court reasoned that, although the children visited with their parents when not in school, the children did not share a principal place of abode with their parents, making the parents ineligible to claim the children as dependents or take the credits. Jusino v. Comm'r, T.C. Memo. 2018-112. Read More...

Deductions

IRS Modifies Safe Harbor Method for Participants in HFA Hardest Hit Fund: In Notice 2018-63, the IRS extends the application of the HFA Hardest Hit Fund safe harbor in Notice 2017-40 to homeowners who may be affected by the new $10,000 limitation on deductible property taxes. Under the modified safe harbor, participating homeowners may allocate mortgage payments actually made first to deductible mortgage interest, and thereafter use any reasonable method to allocate the remaining balance of payments made to real property taxes, mortgage insurance premiums, home insurance premiums and principal.

Employment Taxes

Co-owner Liable as Responsible Person after Partner Failed to Pay Employment Taxes: In U.S. v. Hartman, 2018 PTC 234 (6th Cir. 2018), the Sixth Circuit affirmed a district court holding that, even though one 50-percent owner of a company was responsible for preparing and paying the employment taxes, the other 50-percent owner exercised enough influence and control over the company's financial affairs to be held liable as a responsible person for trust fund penalties arising from the nonpayment of the company's employment taxes. The Sixth Circuit (1) rejected the taxpayer's argument that because he carefully monitored the financial reports within the company's software, he did not willfully fail to pay the taxes due, and (2) concluded instead that the taxpayer should've reconciled the electronic ledger with proof that the other owner had paid the company's taxes - not with proof that the software program had identified the amount of taxes due.

Foreign

IRS Issues Proposed Regulations Implementing Section 965: In REG-104226-18, the IRS issued proposed regulations under Code Sec. 965, a new Code provision which was enacted in December 2017 and which levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. The proposed regulations contain detailed information on the calculation and reporting of a U.S. shareholder's Code Sec. 965(a) inclusion amount, as well as information for making the elections available to taxpayers under Code Sec. 965.

D.C. Circuit Reverses Tax Court; IRS Regs Unreasonably Interpreted the Code: In Good Fortune Shipping SA v. Comm'r, 2018 PTC 228 (D.C. Cir. 2018), the D.C. Circuit reversed a Tax Court ruling that upheld the IRS's refusal to grant a foreign shipping corporation an exemption of some of its U.S.-based income from taxation because all the shipping company's shares were made up of bearer shares and IRS regulations prohibited any consideration of bearer shares when assessing whether a sufficient amount of a foreign shipping corporation's stock was owned by qualifying shareholders. The D.C. Circuit held that the IRS's regulation prohibiting consideration of bearer shares unreasonably interpreted the Code.

FBAR Penalty Limited to Amount Specified in Regs: In Wadhan v. U.S., 2018 PTC 245 (D. Colo. 2018), a district court held that the IRS could not assess penalties in excess of $100,000 per year, the limit specified in 31 C.F.R. Sec. 1010.820, where a taxpayer failed to file or filed inaccurate Forms TD F 90.22-1, Report of Foreign Accounts (FBAR), even though the related statute (31 U.S.C. Sec. 5321(a)(5)(C)) increased the penalty in 2004 to the greater of $100,000 or 50 percent of the balance in the relevant account. The court noted that its reasoning was congruous with the decision in U.S. v. Colliot, 2018 PTC 251 (W.D. Tex. 2018) and stated that, for a statute to supersede a regulation, it has to be clearly inconsistent with the regulation and the court found that the statute and regulation were not inconsistent on their face; instead, the penalty cap in the regulation was, in essence, a subset of the penalties that could be imposed under the statute and the statute did not mandate imposition of the maximum penalty.

FBAR Penalty Not Limited to Amount Specified in Regs: In Norman v. U.S., 2018 PTC 250 (Fed. Cl. 2018), the Court of Federal Claims held that the IRS properly assessed against a taxpayer a penalty in the amount of 50 percent of the balance of her 2007 unreported foreign account after a finding that she willfully failed to file a Report of Foreign Bank and Financial Account (FBAR) in connection with her 2007 Swiss bank account. In response to the taxpayer's request that the court follow the holding in U.S. v. Colliot, 2018 PTC 251 (W. D. Tex. 2018) and award her the difference between the $803,000 penalty she paid and the $100,000 limit stated in 31 C.F.R. 1010.820, the court said that the regulation cited in Colliot was no longer valid as the result of amendments to the statute in 2004.

Gross Income

Additional Debt Relief Provided to Students Attending Schools That Suddenly Closed: In Rev. Proc. 2018-39, the IRS provides relief to taxpayers who took out private student loans to finance attendance at a school owned by Corinthian College, Inc. (CCI) or American Career Institutes, Inc. (ACI). In addition to relief previously provided to such students, Rev. Proc. 2018-39 provides that a creditor is not required to file returns and furnish payee statements for the discharged debt and the taxpayers (1) can exclude from gross income the discharged amount of a private student loan taken out to finance attendance at ACI or CCI; and (2) do not have to increase taxes owed in the year of discharge for prior claimed credits or deductions attributable to payments made on these private student loans.

Taxpayer Liable for Tax on Imputed Income from Employer's Purchase of Life Insurance: In Ramsay v. Comm'r, 2018 PTC 233 (5th Cir. 2018), the Fifth Circuit affirmed the Tax Court and held that (1) the taxpayer's taxable income included imputed income of $891 from a former employer's purchase of a life insurance policy on the taxpayer, and (2) the Tax Court had jurisdiction to decide the taxpayer's liability for interest on the deficiency. The court agreed that the taxpayer's reporting of the $891 constituted an admission that must be overcome by cogent evidence and that the taxpayer had not overcome the presumption and that there was no applicable exception to the general rule that the Tax Court lacks jurisdiction to determine interest in a deficiency case.

Healthcare

Final Regs Lengthen Maximum Time for Short-Term, Limited-Duration Insurance: In T.D. 9837, the IRS issued final regulations which amend the definition of short-term, limited-duration insurance for purposes of its exclusion from the definition of individual health insurance coverage. The regulations lengthen the maximum duration of short-term, limited-duration insurance, which is a type of health insurance coverage that (1) is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another plan or coverage, and (2) is generally exempt from the federal market requirements applicable to health insurance sold in the individual market because it is not considered individual health insurance coverage.

Information Reporting

Doctor Successfully Sues Business Partner for Issuing Fraudulent Form 1099: In Angelopoulos v. Keystone Orthopedic Specialists, 2018 PTC 242 (N.D. Ill. 2018), a district court awarded $179,000 in compensatory damages to a doctor who filed a lawsuit against his former business partner and other related entities for fraudulently filing an information return in violation of Code Sec. 7434. A jury found that a Form 1099 issued to the doctor overstated the doctor's income for the year at issue by more than $120,000.

Taxpayer's Conviction for Failing to Report Cash Purchases of Luxury Vehicles Upheld: In U.S. v. Guevara, 2018 PTC 248 (11th Cir. 2018), the Eleventh Circuit affirmed a district court's conviction of a taxpayer for structuring transactions relating to his purchase of a Porsche, a Ferrari, a Lamborghini, and a Rolls Royce, for which he paid cash and used a straw buyer for the purpose of keeping his name off of Forms 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. The court remanded with instructions to resentence the taxpayer, however, based on its conclusion that the district court failed to make and explain factual findings that adequately supported the application of a two-level sentencing enhancement for obstruction of justice.

Partnerships

IRS Issues Final Regs Governing Partnership Representatives: In T.D. 9839, the IRS issued final regulations on the designation and authority of a partnership representative under the centralized partnership audit regime, which generally became effective for partnership tax years beginning after December 31, 2017. Simultaneously, the IRS also issued final regulations and removed temporary regulations regarding the election to apply the centralized partnership audit regime to partnership tax years beginning after November 2, 2015, and before January 1, 2018. T.D. 9839.

Penalties

Founder of Investment Management Firm Can't Escape $10 Million Fine for Tax Evasion: In U.S. v. Zukerman, 2018 PTC 237 (2d Cir. 2018), the Second Circuit affirmed a district court's holding that the founder of an investment management firm, who falsified documents relating to a sale of his firm's assets and evaded over $30 million in taxes, was liable for a fine of $10 million. According to the Second Circuit, the assessment of the $10 million fine was within the district court's discretion and the imposition of the fine was not procedurally and substantively unreasonable.

Procedure

Interest on Nonprofit S Corporation's Tax Refund Was Correctly Calculated at Lower Rate: In Charleston Area Medical Center, Inc. v. U.S., 2018 PTC 249 (Fed. Cl. 2018), the Court of Federal Claims held that the word "corporation" as employed in Code Sec. 6621(a), relating to the rate of interest applicable to tax refunds, encompasses both nonprofit and for-profit entities and refused to consider a nonprofit S corporation's argument that the position being taken by the IRS was inconsistent with Notice 2018-18, which provides that the term "corporation" for the purpose of the carried interest rules in Code Sec. 1061(c)(4)(A) does not include S corporations. The court concluded that the IRS was correct in computing the interest due on the taxpayer's tax refund at the rate specified for corporations in Code Sec. 6621(a)(1), rather than the higher rate specified for other taxpayers in Code Sec. 6621(a)(1)(B).

Tax Return Preparers

Tax Return Preparer Doesn't Qualify for Exception to Preparer Penalties: In Taylor v. Comm'r, 2018 PTC 236 (9th Cir. 2018), the Ninth Circuit affirmed a district court's dismissal for lack of jurisdiction of an action by a tax return preparer seeking an abatement of preparer penalties after rejecting the taxpayer's argument that an exception in Code Sec. 6694(c) relieved him of his obligation to pay the penalties in full before bringing a refund suit in the district court. The court noted that, while Code Sec. 6694(c) confers district court jurisdiction when a tax return preparer has paid at least 15 percent of a penalty if the refund action is begun within 30 days after the earlier of the IRS's denial of the refund claim or the expiration of six months after the day on which the refund claim is filed, the taxpayer did not file within those time limits and thus was not eligible to bring suit in the district court.

July 2018

Accounting

Most Popular: IRS Urges Veterans to File Refund Claims Relating to Disability Severance Payments: The IRS is advising certain veterans who received a disability severance payment after January 17, 1991, and had taxes improperly withheld, to file claims for either a credit or refund of the tax overpayment attributable to the payment. Veterans' eligibility for these refunds are the result of the Combat-Injured Veterans Tax Fairness Act passed in 2016; however, the time for claiming the tax refunds is limited. IR-2018-148. Read More...

Proposed Regulations Address TCJA's Expansion of Return Preparer Due Diligence Penalty to Head of Household Determination: The IRS issued proposed regulations on the tax return preparer due diligence requirements of Code Sec. 6695(g). The proposed regulations reflect a change to the due diligence penalty enacted by the Tax Cuts and Jobs Act of 2017, which amended Code Sec. 6695(g) to provide that, in addition to child tax credit, additional child tax credit, and the American opportunity tax credit, the due diligence penalty also applies to a return preparer's determination of a taxpayer's eligibility to file a return or claim a refund as head of household. REG-103474-18. Read More...

IRS Issues July 2018 AFRs: In Rev. Rul. 2018-19, the IRS issued a ruling which prescribes the applicable federal rates for July 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Deductions

Couple Can't Deduct Entire Grocery Bill for Household That Includes Foster Individuals: In Kho v. Comm'r, T.C. Summary 2018-32, the Tax Court denied a couple a deduction for total grocery expenses where they provided foster care for two men with developmental disabilities, one of which required a gluten-free diet. The court noted that any excess cost to the couple in providing gluten-free meals to their client had already been accounted for in the amount that the IRS allowed as a deductible expense for groceries and that the couple could not deduct their entire grocery bill as a business expense because such costs were personal expenses.

No Home Office Deduction Available for Business Owner's Storage of Records in Garage: In Najafpir v. Comm'r, T.C. Memo. 2018-103, the Tax Court held that a business owner's use of his garage for the storage of business records did not qualify as a deductible home office expense under Code Sec. 280A(c)(2) because the taxpayer was not in the trade or business of selling products at retail or wholesale and his business records and invoices did not constitute inventory. In addition, because the taxpayer could not provide evidence showing that certain bank deposits were not income, the court agreed with the IRS that those deposits constituted income to the taxpayer.

Couple Hit with Penalties; Actions Showed a Lack of Reasonable Business Care: In Raifman v. Comm'r, T.C. Memo. 2018-101, the Tax Court held that most of the losses a couple suffered with respect to large investments they made were not deductible theft losses because either the losses could not be substantiated or because the court found that many of the investments were entered into in an effort to avoid federal income taxes. The court also concluded that the couple was liable for accuracy-related penalties after finding that their assertion of reliance on professional advice was unreasonable because their actions revealed a lack of reasonable business care and prudence on their part.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-60 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Estates and Trusts

Newly Enacted Section 67(g) Won't Prevent Certain Estate and Trust Deductions: The IRS issued a notice stating its intention to issue regulations which will provide that the suspension under Code Sec. 67(g) of the deductibility of miscellaneous itemized deductions under Code Sec. 67(a) does not affect the deductibility under Code Sec. 67(e)(1) of certain estate and trust administration fees as well as the deductibility of expenses under Code Sec. 642(b), Code Sec. 651, and Code Sec. 661. Estates and non-grantor trusts may rely on this notice for tax years beginning after December 31, 2017. Notice 2018-61. Read More...

Forms and Instructions

In IR-2018-146, the IRS announced that it plans to streamline Form 1040 into a shorter, simpler form for the 2019 tax season. Along with its announcement, the IRS released a draft of the proposed Form 1040, which is about half the size of the current version. The new form would replace the current Form 1040 as well as Form 1040A and Form 1040EZ. The new Form 1040 uses a "building block" approach in which the tax return is reduced to a simple form that can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. The IRS said that it will be working with the tax community to refine the new form to ensure a smooth transition.

Income

Discrimination and Hostile Work Environment Settlement Is Taxable: In Zinger v. Comm'r, T.C. Summary 2018-33, the Tax Court held that the $20,000 proceeds from a settlement received by the taxpayer was not excludable from income under Code Sec. 104(a)(2). The court concluded that the settlement payment was for the resolution and withdrawal of the taxpayer's discrimination and hostile work environment claims and not on account of personal physical injuries or physical sickness.

International

IRS Finalizes Regs on Inversions and Related Transactions: In T.D. 9834, the IRS issued final regulations that address transactions that are structured to avoid the purposes of Code Sec. 7874 and Code Sec. 367 and certain post-inversion tax avoidance transactions. These regulations affect certain domestic corporations and domestic partnerships whose assets are directly or indirectly acquired by a foreign corporation and certain persons related to such domestic corporations and domestic partnerships.

Partnerships

Partnerships Hit With Additional $300 Million in Income but Escape Penalties: In Endeavor Partners Fund, LLC v. Comm'r, T.C. Memo. 2018-96, the Tax Court upheld increases of more than $300 million to the income of several partnerships after concluding that transactions engaged in by the partnerships involved paired foreign-currency options that lacked any economic substance. However, while finding that accuracy-related penalties assessed on the partnerships were clearly appropriate, the court nevertheless held that the partnerships were not liable for the penalties assessed under Code Sec. 6662(a) because the IRS did not secure, prior to the issuance of the final partnership administrative adjustments, written supervisory approval of the penalties as required by Code Sec. 6751(b)(1).

Penlties

Couple That Relied Entirely on Tax Prep Software Can't Avoid Underpayment Penalties: In Ayissi-Etoh v. Comm'r, T.C. Memo. 2018-107, the Tax Court held that a couple was liable for additional taxes for (1) underreporting certain income and not substantiating certain deductions, and (2) underreporting self-employment income from the International Monetary Fund that was subject to self-employment tax. In addition, the court held that the couple was liable for penalties for substantially understating their tax liabilities because the couple did not seek advice from a qualified tax professional but relied entirely on tax preparation software and their tax deficiency amounts exceeded both $5,000 and 10 percent of the amounts required to be shown on their returns.

Procedure

Court Rejects IRS Motion to Dismiss Taxpayer's FOIA Complaint: In Middle East Forum v. U.S. Dept. of Treasury, 2018 PTC 204 (D. D.C. 2018), a district court held that, with respect to a FOIA request by the taxpayer for any communications between the IRS Office of Criminal Investigation and other government agencies relating to a third party, Islamic Relief USA, the IRS could not claim that such records were exempt from FOIA disclosure when it had not looked for the records or ascertained whether they even existed. The court noted that, if the IRS searches for such records and finds any, it may well be that those records are exempt from FOIA disclosure; but since the IRS hadn't looked for the records, the court rejected the IRS's motion to dismiss and granted the taxpayer's claim for a declaratory judgment.

Couple Living Beyond Means Hit With IRS Levy on Principal Residence: In U.S. v. Gower, 2018 PTC 211 (M.D. Fla. 2018), a district court gave judicial approval for a levy on the principal residence of a couple that had failed to satisfy their unpaid federal income tax liabilities for 2008 - 2013 after finding that the IRS had exhausted all reasonable alternative means of collecting the couple's tax debts. The court noted that the IRS established that the couple was continuing to live above their means by eating out a lot, making large alcohol purchases, and making purchases at a luxury nail spa and, the court found that this undermined the couple's description of their alleged dire financial situation as well as their description of having to borrow from others because they could not afford necessities.

Extended Statute of Limitations Period Applies With Respect to Omitted S Corp Receipts: In Manashi v. Comm'r, T.C. Memo. 2018-106, the Tax Court held that a taxpayer who owned 100 percent of an S corporation did not adequately disclose the omission of the S corporation's gross receipts for the three years at issue after rejecting the taxpayer's argument that adequate disclosure occurred by virtue of the fact that the S corporation reported some amount of gross receipts on its returns for each year and that the IRS "through internal data" would have had knowledge of the amounts deposited into the taxpayer's bank accounts and could have discovered that gross receipts were erroneously reported for each year. As a result, because the gross income omitted from the taxpayer's return exceeded 25 percent of the amount of gross income reported on the return , the court concluded that the statute of limitations with respect to the deficiency notice mailed to the taxpayer was six years and not the standard three years.

IRS Supervisor Approval Not Required for Tax Court to Assess Frivolous Arguments' Penalty: The Tax Court held that its authority to impose a penalty under Code Sec. 6673 for making a frivolous argument before the Tax Court is not subject to the IRS supervisor approval requirement in Code Sec. 6751(b)(1). The Tax Court found that (1) Congress's intent in enacting the supervisor approval requirement was to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle, while Code Sec. 6673 is designed to deter bad behavior in the Tax Court and conserve judicial resources, and (2) Code Sec. 6751(b)(1) was clearly not intended as a mechanism to restrain the Tax Court. Williams v. Comm'r, 151 T.C. No. 1 (2018). Read More...

Taxpayer's Mistaken Request for a CDP Hearing Suspended Statute of Limitations: In Gilliam v. U.S., 2018 PTC 18 (4th Cir. 2018), the Fourth Circuit affirmed a district court and held that the ten-year statute of limitations period was suspended between December 2007, when the taxpayer mistakenly requested a CDP hearing for review of a nonexistent levy, and September 2010, when the Tax Court determined his initial request was intended to request review of the lien and was therefore timely. Because the limitations period was suspended, the court said, the IRS's subsequent collection action was timely.

Taxpayer's Obstruction Conviction Vacated in Light of Supreme Court Decision: In Westbrooks v. U.S., 2018 PTC 185 (5th Cir. 2018), the Fifth Circuit vacated a taxpayer's conviction for obstruction of tax laws in light of the Supreme Court's decision in Marinello v. U.S., 2018 PTC 77 (S. Ct. 2018). In Marinello, the Supreme Court held that (1) in order to secure a conviction under Code Sec. 7212(a) for interference with the administration of the Internal Revenue Code, the government must show a nexus between the taxpayer's obstructive conduct and a particular administrative proceeding, and (2) applying the statute to the routine administration of the Code conflicts with the language, history, and context of the statute and fails to give taxpayers fair warning of what conduct is subject to criminal prosecution.

Decedent Qualified as a USVI Resident for Two of the Three Years at Issue: In Est. of Sanders v. Comm'r, T.C. Memo. 2018-104, the Tax Court considered the various factors in Vento v. Dir. Of V.I. BIR, 2013 PTC 71 (3d Cir. 2013) for determining whether a taxpayer is a bona fide resident of the U.S. Virgin Islands (USVI), and concluded that, in the instant case, the decedent was not a bona fide USVI resident in 2002, but was a bona fide resident in 2003 and 2004. In Comm'r v. Est. of Sanders (Sanders II), 834 F.3d 1269 (11th Cir. 2016), vacating and remanding Est. of Sanders v. Comm'r (Sanders I), 144 T.C. 63 (2015), the Eleventh Circuit held that the statute of limitations under Code Sec. 6501(a) was triggered only if the decedent, Travis L. Sanders, was a bona fide resident of the USVI and remanded the case back to the Tax Court to make factual findings regarding the amount of time the decedent spent in the USVI.

Court Tells Couple to Sell Their $1 Million Home and Pay Their Back Taxes: In Hudak v. IRS, 2018 PTC 194 (D. Md. 2018), a district court rejected a taxpayer's contention that, even with a monthly income of $17,000, he and his wife could not make any payments on the $2 million in taxes they owed. Noting that the couple had two children that would soon be graduating from high school, the court gave the couple a year to sell their 7,500 square foot home, located on 10 acres and valued at more than $1 million, and limited the monthly payments to the IRS to $1,200 for the next 12 months, and $4,000 a month thereafter.

Qualified Plans

IRS Abused Its Discretion in Revoking ESOP Ruling: In Val Lanes Recreation Center Corporation v. Comm'r, T.C. Memo. 2018-92, the Tax Court held that the IRS abused its discretion in retroactively revoking a prior favorable determination letter (FDL) which found that a company's employee stock ownership plan (ESOP) was a qualified plan under Code Sec. 401(a) and that the ESOP's related trust was exempt from tax under Code Sec. 501(a) for the plan year ending March 31, 2001, and all subsequent plan years. The court rejected the IRS's argument that a restated plan document was never adopted after finding that the restated plan documents and amendments were adopted shortly after the taxpayer received the FDL.

S Corporations

Tenth Circuit Affirms That Marijuana Dispensary Can't Deduct Business Expenses: The Tenth Circuit affirmed a district court's dismissal of a tax refund suit by a medical marijuana business whose business deductions had been denied by the IRS. In so doing, the Tenth Circuit rejected the taxpayer's arguments that (1) the IRS does not have the authority to disallow deductions under Code Sec. 280E without a criminal conviction; (2) Code Sec. 280E violates the Sixteenth Amendment's definition of gross income; and (3) Code Sec. 280E is an excessive fine that violates the Eighth Amendment. Alpenglow Botanicals, LLC v. U.S., 2018 PTC 206 (10th Cir. 2018). Read More...

Chief Counsel Recommends Caution in Assessing Section 6694 Penalty on S Corp Owners: In CCA 201825028, the Office of Chief Counsel advised that assessing a Code Sec. 6694 penalty against an S corporation co-owner could present a legal hazard unless the co-owner acted similarly to the owner in U.S. v. Elsass, 978 F. Supp. 2d 901 (S.D. Ohio 2013), aff'd, 2014 PTC 476 (6th Cir. 2014), where the court found that the owner of an S corporation was a tax return preparer for the purposes of the penalties provided for under Code Sec. 6694 and Code Sec. 6695. Alternatively, the Chief Counsel's Office said, an S corporation may be a tax return preparer within the definition of Code Sec. 7701(a)(36), and the proper person on which to assess the penalty under Code Sec. 6694(b), but only if the requirements set forth in Reg. Sec. 1.6694-3(a)(2) are met.

S Corp. Didn't Terminate When Brother Withdrew Large Sums Without Other Brother's Knowledge: In Mowry v. Comm'r, T.C. Memo. 2018-105, the Tax Court held that an S corporation equally owned by two brothers did not terminate as a result of a violation of the one-class-of-stock rule and the rule against disproportionate distributions when one brother withdrew large sums of money from the corporation without the other brother's knowledge. The court noted that, in determining whether a corporation has more than one class of stock, the rights granted to shareholders in the corporation's organizational documents and other "binding agreements" between shareholders must be considered and that evidence of distributions paid to one shareholder and not to others over the course of multiple years is insufficient on its own to establish that a separate class of stock was created.

Tax Exempt Organizations

Some Exempt Organizations No Longer Required to Report Donors' Names and Addresses to the IRS: The IRS issued a revenue procedure which modifies the information to be reported to the IRS by organizations that are exempt from tax under Code Sec. 501(a), other than Code Sec. 501(c)(3) organizations, and that are required to file Form 990, Return of Organization Exempt From Income Tax. Such organizations are no longer required to report the names and addresses of their contributors on Form 990 or 990-EZ, but must continue to collect and keep this information in their records and to make it available to the IRS upon request. Rev. Proc. 2018-38. Read More...

Tax Return Preparers

Unethical Tax Return Preparer Must Divulge the Names and Addresses of Clients to IRS: In U.S. v. Burden, 2018 PTC 206 (M.D. Fla. 2018), a district court granted a permanent injunction against a tax return preparer who ran a tax preparation business and who, between 2013 and 2016, prepared more than a thousand tax returns, many of which understated income or claimed a credit not available to the taxpayer. In addition, the court ordered the preparer to give the IRS the last known address of every person for whom he prepared a tax return, or assisted in preparing a tax return, as well as all the names and social security numbers of all customers of his tax preparation business.

June 2018

Most Popular

Supreme Court Rejects Precedents in State Sales Tax Case; Quill and Bellas Hess Overruled: The Supreme Court vacated a North Dakota Supreme Court decision in which that court held that a state law requiring out-of-state sellers to collect and remit sales tax as if the sellers had a physical presence in the state was unconstitutional. In so doing, the Supreme Court overruled its prior decisions in Quill Corp. v. North Dakota, 504 U. S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967). South Dakota v. Wayfair, Inc., 2018 PTC 183 (S. Ct. 2018). Read More...

IRS Clarifies 2018 Standard Mileage Rates Notice in Light of New Tax Law: The IRS modified Notice 2018-3, issued in December 2017, to provide additional information in light of changes made by the Tax Cuts and Jobs Act of 2017. The IRS clarified that (1) while Notice 2018-3 provides that the standard mileage rate for 2018 is 54.5 cents per mile for all miles of business use including unreimbursed employee travel expenses deductible as a miscellaneous itemized deduction, deductions for such unreimbursed business expenses are not allowed for years 2018-2025; (2) the 2018 standard mileage moving rate can only be used by members of the U.S. Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station; and (3) because of increased depreciation limitations for passenger automobiles placed in service after December 31, 2017, the maximum standard automobile cost for purposes of applying the fixed and variable rate (FAVR) allowance may not exceed $50,000 for passenger automobiles (including trucks and vans) placed in service after December 31, 2017.. Notice 2018-42. Read More...

IRS Updates and Consolidates Guidance on Charitable Contributions: The IRS issued a revenue procedure which sets forth the extent to which grantors and contributors may rely on the listing in IRS databases of organizations eligible to receive tax-deductible contributions under Code Sec. 170, for purposes of determining whether the grants or contributions to such organizations are deductible under Code Sec. 170, and for certain other purposes. The revenue procedure also provides safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and for determining that a grant or contribution is considered an unusual grant. Rev. Proc. 2018-32. Read More...

Accounting

IRS Issues July 2018 AFRs: In Rev. Rul. 2018-19, the IRS issued a ruling which prescribes the applicable federal rates for July 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

IRS Issues June 2018 AFRs: In Rev. Rul. 2018-16, the IRS issued a ruling which prescribes the applicable federal rates for June 2018. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Bankruptcy

IRS Liable for Damages for Willfully Violating Bankruptcy Discharge Order: In a case of first impression, the First Circuit affirmed a district court and held that an employee of the IRS "willfully violates" a bankruptcy discharge order when the employee knows of the discharge order and takes an intentional action that violates that order. Under Code Sec. 7433(e), the court said, the IRS's good faith belief that it has a right to collect purportedly discharged debts is not relevant to determining whether it willfully violated a discharge order and, in the instant case, the IRS met the applicable standard and violated a discharge order and was thus liable for damages. IRS v. Murphy, 2018 PTC 165 (1st Cir. 2018). Read More...

Credits

S Shareholder Can't Unilaterally Elect FICA Tax Credit on S Corporation's Behalf: The Tax Court held that a shareholder of an S corporation that operated restaurants and whose employees' earnings came partly from customer tips could not elect on the S corporation's behalf to take the Code Sec. 45B credit for social security and Medicare taxes that the S corporation paid on its employees' tip wages by filing amended individual returns to claim flowthrough deductions from the credits. The Tax Court reasoned that the S corporation was considered the taxpayer for purposes of the Code Sec. 45B election and that permitting individual shareholders to unilaterally change an S corporation's tax election would affect the tax liabilities of shareholders who did not consent to the change. Caselli v. Comm'r, T.C. Memo. 2018-81. Read More...

IRS Issues Inflation Factors and Reference Prices for Calculating Sec. 45 Credits: In Notice 2018 - 50, the IRS issued the 2018 the ination adjustment factor and reference prices used to determine the availability of the Code Sec. 45 credit for electricity produced from qualied energy resources and rened coal, including the credit amounts for renewable electricity production and rened coal production. The notice provides that (1) the inflation adjustment factor for calendar year 2018 for qualified energy resources and refined coal is 1.6072; (2) the reference price for calendar year 2018 for facilities producing electricity from wind is 4.85 cents per kilowatt hour; (3) the reference prices for fuel used as feedstock within the meaning of Code Sec. 45(c)(7)(A), relating to refined coal production are $31.90 per ton for calendar year 2002 and $49.69 per ton for calendar year 2018; and (4) the reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic energy have not been determined for calendar year 2018.

IRS Issues Reference Price for Section 45I Credit: In Notice 2018-52, the IRS announced the applicable reference price for qualied natural gas production from qualied marginal wells during taxable years beginning in 2017. The applicable reference price for tax years beginning in calendar year 2017 is $2.17 per 1,000 cubic feet (mcf).

Deductions

Payments to Russian Subsidiary Aren't Deducible as Bad Debts or Ordinary Business Expenses: In Baker Hughes Inc. v. U.S., 2018 PTC 178 (S.D. Tex. 2018), a district court held that a payment made by a U.S. corporation, through a Cypriot entity, to a Russian subsidiary was not deductible either as a bad debt or as an ordinary and necessary business expense. The court reached its decision after concluding that (1) the advances made by the taxpayer to its Russian subsidiary were more in the nature of equity rather than debt because there was no certificate or note evidencing a loan, no provision for or expectation of repayment of principal or interest, and no way to enforce repayment, and (2) the taxpayer was under no obligation to make the payment to its Russian subsidiary but chose to do so to avoid potential future losses.

Taxpayer Can't Deduct Expenses Relating to Sale of Non-Marijuana Merchandise: In Alterman v. Comm'r, T.C. Memo. 2018-83, the Tax Court held that the sale of non-marijuana merchandise by a taxpayer that ran a Colorado medical marijuana business was not separate from the taxpayer's business of also selling marijuana merchandise and thus, under Code Sec. 280E, the business expenses relating to the sale of the marijuana and non-marijuana merchandise were not deductible. The court concluded that the taxpayer, which operated as a limited liability company, had only one unitary business and that business was selling marijuana.

Couple Can't Deduct Cost of Improvements to Home Allegedly Rented to Relatives: In Perry v. Comm'r, T.C. Memo. 2018-90, the Tax Court held that a couple did not establish that they rented their second home to relatives and that, even if the court were to find that the couple did in fact rent the house to their relatives, the couple failed to carry their burden of establishing that they rented such home at fair rental value. Thus, the court denied the couple's deduction for improvements made to that home.

Supreme Court Refuses Cert in Double Deduction Case: The Supreme Court rejected a request for certiorari in Duquesne Light Holdings, Inc. v. Comm'r (S. Ct. 17-1151 (6/18/18)), a case in which the Third Circuit (2017 PTC 304) held that the Tax Court properly applied the Ilfeld doctrine when it disallowed a taxpayer's deduction of $199 million in losses after concluding that the taxpayer was claiming a double deduction. The Ilfeld doctrine, taken from the Supreme Court's decision in Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934) teaches that "the Code should not be interpreted to allow [the taxpayer] 'the practical equivalent of a double deduction' ... absent a clear declaration of intent by Congress."

IRS Issues Applicable Percentage for Depletion of Marginal Properties in 2018: In Notice 2018-51, the IRS announced the applicable percentage under Code Sec. 613A to be used in determining percentage depletion for marginal properties for the 2018 calendar year. The applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2018 is 15 percent and the 2017 reference price used in determining the applicable percentage is $48.05.

Professional Gambler Can't Deduct Track's Takeout in Calculating Gambling Losses: The Ninth Circuit affirmed a Tax Court decision which held that an accountant, who was also a professional gambler, could not deduct from his ordinary income that portion of his losing wagers representing the track's "takeout" - the percentage of all monies wagered on a horse race that the track retains to offset its business costs. The court rejected the taxpayer's argument that the takeout was an expense to him separate and apart from the wager itself and was therefore deductible as an ordinary and necessary expense from non-gambling income under Code Sec. 162(a). Lakhani v. Comm'r, 2018 PTC 135 (9th Cir. 2018). Read More...

Former University Employee Can't Exclude Tuition Waiver from Income: The Tax Court held that a taxpayer who received a tuition waiver as part of a severance package when his employment at a university was terminated, and who later applied the waiver to his dependent child's tuition, was not entitled to exclude the value of the waiver from income because he was not either a current or retired employee of the university. The Tax Court rejected the taxpayer's argument that he was an employee for the year at issue because he received a Form W-2 reporting the value of the waiver, and found that the university's elimination of his position in a workforce reorganization did not constitute separation from the university by retirement. Voigt v. Comm'r, T.C. Summary 2018-25. Read More...

Taxpayer Who Failed 39-Week Test Can't Deduct Moving Expenses: In Rabadi v. Comm'r, T.C. Memo. 2018-70, the Tax Court held that a couple could not deduct moving expenses for the year at issue because (1) they failed to substantiate the expenses involved, and (2) they did not establish that the husband stayed and worked in a new location for the requisite 39 weeks to be eligible to deduct moving expenses. In addition, the court found the couple liable for the accuracy-related penalties under Code Sec. 6662(a).

Mileage Costs Incurred to Visit Customer Facilities Were Personal Commuting Expenses: In Fehr v. Comm'r, T.C. Summary 2018-26, the Tax Court held that a taxpayer, who worked as a sales manager and visited various local customer facilities in the course of performing his job-related duties, was not entitled to deductions for unreimbursed employee business expenses because the court concluded that the pattern of the taxpayer's activity strongly suggested that the expenditures at issue were predominantly personal and only indirectly related to the conduct of company business. The court noted that the taxpayer's logs showed that on many days he drove from his home to a customer's facility, had lunch, and then returned home and that he likewise reported mileage expenses for round trips from his home to the company headquarters; thus, the miles that the taxpayer drove constituted nondeductible personal commuting expenses.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-56 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Estates, Trusts, and Gifts

Trust Owners Are Taxable on Income from Partnerships Owned by the Trust: In Full-Circle Staffing, LLC v. Comm'r, T.C. Memo. 2018-66, the Tax Court held that a trust which owned four partnerships was a sham and thus, the income from the four partnerships was taxable to the couple that owned the trust. However, the court did not uphold the penalty assessments against the couple because the couple had relied on tax professionals to prepare their tax return and thus met the reasonable cause exception for avoiding the penalties.

Excise Taxes

IRS Provides Guidance Relating to Excise Tax on Educational Institutions: In Notice 2018-55, the IRS announced that it intends to issue proposed regulations providing clarification on the calculation of net investment income for purposes of the imposition of the 1.4 percent excise tax imposed on an educational institution's net investment income. According to the IRS, similar to the rules found in Code Sec. 4940(c), the proposed regulations will provide that, in the case of property held by an applicable educational institution on December 31, 2017, and continuously thereafter to the date of its disposition, the basis of such property for determining gain will be deemed to be not less than the fair market value of such property on December 31, 2017, plus or minus all adjustments after December 31, 2017, and before the date of disposition, consistent with the regulations under Code Sec. 4940(c).

Foreign

IRS Intends to Amend Foreign Currency Guidance under Sec. 987: In Notice 2018-57, the IRS announced that it intends to amend regulations under Code Sec. 987 to delay the applicability date of the final Code Sec. 987 regulations and certain temporary Code Sec. 987 regulations by one additional year. The IRS intends to amend Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.987-1T through Reg. Sec. 1.987-4T, Reg. Secs. 1.987-6T, 1.987-7T, 1.988-1, 1.988-1T, 1.988-4, and Reg. Sec. 1.989(a)-1 to provide that the final regulations and the related temporary regulations will apply to tax years beginning on or after the date that is three years after the first day of the first tax year following December 7, 2016.

IRS Offers Penalty and Filing Relief for Taxpayers Subject to New Foreign Earnings Transition Tax: In IR-2018-131, the IRS announced that it will waive certain late-payment penalties relating to the Code Sec. 965 transition tax, and provided additional information for individuals subject to the Code Sec. 965 transition tax regarding the due date for relevant elections. In general, the IRS advised that (1) in some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018; (2) for individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019; (3) individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS generally by October 15, 2018.

Healthcare

IRS Updates Premium Tax Credit for 2019 Adjustments: In Rev. Proc. 2018-34, the IRS issued the 2019 indexing adjustments for certain provisions under Code Sec. 36B. In particular, the IRS updated the Applicable Percentage Table in Code Sec. 36B(b)(3)(A)(i), which is used to calculate an individual's premium tax credit.

Individuals

Letters from Child's School and Doctor Indicated Child Lived with Taxpayer: In Engesser v. Comm'r, T.C. Summary 2018-29, the Tax Court held that, because a minor child that the taxpayer claimed as a dependent had the same principal place of abode as the taxpayer for more than one-half of 2014, the taxpayer was entitled to a child tax credit, an earned income tax credit, and head of household filing status with respect to the child for 2014. In reaching its conclusion, the court cited the fact that correspondence from child's doctor and school both indicated that the child lived with the taxpayer.

Information Reporting

IRS Plans to Amend Rules on Electronic Filing of Information Returns: In REG-102951-16, the IRS issued proposed regulations amending the rules for determining whether information returns must be filed using magnetic media (electronically). The proposed regulations would (1) require that all information returns, regardless of type, be taken into account to determine whether a person meets the 250-return threshold and, therefore, must file the information returns electronically; and (2) require that any person required to file information returns electronically file corrected information returns electronically, regardless of the number of corrected information returns being filed.

IRS

Two Million ITINs Set to Expire at the End of 2018: In IR-2018-137, the IRS noted that more than 2 million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2018. Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire December 31, 2018, and ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year; thus, affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible.

IRS Releases List of Qualified Opportunity Zones: In Notice 2018-48, the IRS lists the census tracts that have been designated as qualified opportunity zones and thus may be eligible for certain tax benefits. A qualified opportunity zone is a population census tract that is a low-income community.

Partnerships

Partnership's Transfer Property Transfer Was a Quid Pro Quo Exchange; Charitable Deduction Denied: In Triumph Mixed Use Investments III, LLC, v. Comm'r, T.C. Memo. 2018-65, the Tax Court held that a partnership could not deduct more than $11 million in charitable contributions as the result of its transfer of real property and development credits to a city in which it was developing a planned community. The court concluded that benefits received by the partnership in exchange for the contribution had substantial value and the tax matters partner did not report or value those benefits on the partnership tax return.

Partners Can't Rely of Tax Shelter Promoter's Advice to Avoid Penalties: In RB-1 Investment Partners v. Comm'r, T.C. Memo. 2018-64, the Tax Court held that two brothers, who were partners in a partnership which sold a family business and engaged in a Son-of-BOSS deal to manufacture tax losses to offset the resulting gains, were liable for accuracy-related penalties on the resulting tax deficiencies. According to the court, the partners could not meet the reasonable-cause-and-good-faith defense to the penalties by relying on the advice of a tax shelter promoter.

Procedure

IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2018-18, the IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2018, beginning July 1, 2018. The interest rates will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, 2 and one-half percent for the portion of a corporate overpayment exceeding $10,000, and 7 percent for large corporate underpayments.

Court Rejects Suit by Investor against Son of Boss Promoters: In McMahan v. Deutsche Bank AG, 2018 PTC 168 (7th Cir. 2018), the Seventh Circuit affirmed a lower court and dismissed a taxpayer's claim against his accountant, American Express Tax and Business Services (AMEX) (the firm that prepared his tax return), and Deutsche Bank AG and Deutsche Bank Securities Inc. (the entities that facilitated certain tax shelter transactions) for harming him by convincing him to participate in a Son of BOSS tax shelter. The Seventh Circuit agreed that the case should be dismissed against the accountant and AMEX for lack of prosecution and granted summary judgment to Deutsche Bank on statute of limitations grounds.

Taxpayer Who Owed IRS More Than $2 Million Fraudulently Transferred Property to Grandson: In U.S. v. Wight, 2018 PTC 171 (W.D. Wash. 2018), a district court granted summary judgment to the IRS after finding that the conveyance by the taxpayer to her grandson of property held by her sister's estate, where the taxpayer was the executor of her sister's estate and the taxpayer owed the IRS more than $2 million, was a fraudulent transfer. The court ordered the property to be sold and the proceeds paid to the IRS once the taxpayer's life estate terminates.

Court Did Not Violate Taxpayer's Right to Counsel By Allowing Him to Proceed Pro Se: In U.S. v. Stanley, 2018 PTC 164 (8th Cir. 2018), the Eighth Circuit affirmed a district court and upheld a taxpayer's conviction of tax evasion and corruptly endeavoring to impede enforcement of Internal Revenue laws in violation of Code Sec. 7201 and Code Sec. 7212. The court rejected the taxpayer's arguments that the district court violated his right to counsel by allowing him to proceed pro se, and erred in instructing the jury.

Interest Rates Remain the same in the Third Quarter of 2018: In Rev. Rul. 2018-18, the IRS announced that interest rates will remain the same for the calendar quarter beginning July 1, 2018, as they were in the quarter that began on April 1. The rates will be: 5 percent for overpayments (4 percent in the case of a corporation); 2.5 percent for the portion of a corporate overpayment exceeding $10,000; 5 percent for underpayments; and 7 percent for large corporate underpayments.

IRS Updates and Consolidates Guidance on Charitable Contributions: The IRS issued a revenue procedure which sets forth the extent to which grantors and contributors may rely on the listing in IRS databases of organizations eligible to receive tax-deductible contributions under Code Sec. 170, for purposes of determining whether the grants or contributions to such organizations are deductible under Code Sec. 170, and for certain other purposes. The revenue procedure also provides safe harbors for determining that a grantor's or contributor's grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization's loss of public charity classification and for determining that a grant or contribution is considered an unusual grant. Rev. Proc. 2018-32. Read More...

Facebook Doesn't Have Enforceable Right to Take Its Case to IRS Appeals: In Facebook, Inc. & Subs v. IRS, 2018 PTC 139 (N.D. Calif. 2018), a district court held that Facebook did not have an enforceable right to take its tax case, in which the IRS asserted that Facebook undervalued certain intangible property that it transferred to its Ireland-based subsidiary by approximately $7 billion, to IRS Appeals, or to compel the IRS to do so. The court concluded that (1) Facebook lacked standing because the deprivation of a nonexistent right to access IRS Appeals does not constitute injury in fact, and (2) the IRS's decision not to refer Facebook's tax case to IRS Appeals was not reviewable under the Administrative Procedure Act.

Statute Doesn't Prevent IRS from Seizing and Selling Marijuana Equipment: In CCA 201820018, the Office of Chief Counsel advised that, pursuant to Code Sec. 6331 and Code Sec. 6335, the IRS may administratively seize and sell gas chromatographer mass spectrometers (GCMS) and liquid chromatographer mass spectrometers (LCMS) used by taxpayers involved in the marijuana industry to measure cannabinoids in marijuana. According to the Chief Counsel's Office, GCMSs and LCMSs are not drug paraphernalia under the Drug Paraphernalia Statute (28 U.S.C. Sec. 863) and, thus, there is generally no restriction on the seizure and sale of such items.

Taxpayer Not Entitled to Attorney's Fees After Suing IRS for FOIA Records: In Hohman v. IRS, 2018 PTC 144 (E.D. Mich. 2018), a district court held that a taxpayer, who brought suit against the IRS for failing to timely provide information she had requested under FOIA, was not entitled to attorney's fees and costs because she had not substantially prevailed in the litigation. The court rejected the taxpayer's argument that she substantially prevailed because she obtained relief through a judicial order and instead sided with the IRS and found that the filing of the taxpayer's complaint did not cause the release of records because the filing of the complaint was not reasonably necessary to obtain the requested records and the lawsuit did not have "a causative effect" on the release of the requested records.

Lawyer's Failure to Provide Required Info Precludes Offer-in-Compromise: In Solny v. Comm'r, T.C. Memo. 2018-71, the Tax Court sustained a proposed collection action by the IRS against a lawyer who had outstanding tax liabilities of almost $200,000. The court noted that at his collection due process hearing, the lawyer sought a collection alternative but did not supply any of the required forms or necessary financial information and thus it was not an abuse of discretion for the IRS to reject collection alternatives and sustain the collection action.

Retirement Plans

IRA Trustee Must Withhold Federal Taxes on Amounts Paid to Unclaimed Property Fund: The IRS ruled that a payment by individual retirement account (IRA) trustee of an individual's interest in an IRA to a state's unclaimed property fund, as required by state law, is subject to federal income tax withholding under Code Sec. 3405. In addition, the payment by the trustee is subject to reporting under Code Sec. 408(i). Rev. Rul. 2018-17. Read More...

Rollover Fee Debited to Taxpayer's IRA Was Not a Taxable Distribution: In Azam v. Comm'r, T.C. Memo. 2018-72, the Tax Court held that, due to lack of substantiation, a couple could not deduct expenses claimed on Schedule C as well as charitable contributions they had deducted and were also liable for penalties under Code Sec. 6662. However, the court also concluded that a $28 rollover fee that was debited directly from the husband's individual retirement account constituted a nontaxable administrative fee and, therefore, was not a taxable distribution under Code Sec. 408(d) and was not subject to the 10-percent penalty tax under Code Sec. 72(t).

SALT Deductions

IRS Responds to State Legislative Attempts to Circumvent Limitation on SALT Deduction: The IRS issued a notice informing taxpayers that it intends to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes. The notice was issued as several states are considering legislation intended to circumvent TCJA's limitation on the deduction for state and local taxes. Notice 2018-54. Read More...

Tax Accounting

IRS Issues Procedure for Automatic Method Change for Citrus Replanting Costs: In Rev. Proc. 2018-35, the IRS provides a new automatic method change for certain taxpayers to change their method of accounting from applying Code Sec. 263A to citrus plant replanting costs to not applying Code Sec. 263A to those costs, pursuant to Code Sec. 263A(d)(2)(C), which was enacted as part of the Tax Cuts and Jobs Act of 2017. Code Sec. 263A(d)(2)(C) provides that the uniform capitalization rules of Code Sec. 263A does not apply to certain costs that are paid or incurred by certain taxpayers for replanting citrus plants after the loss or damage of citrus plants.

Tax Return Preparers

Court Issues Permanent Injunction Against Tax Return Preparer: In U.S. v. Wells, 2018 PTC 159 (S.D. Miss. 2018), a district court issued a permanent injunction against a tax return preparer forbidding her to, individually or as a business, engage in the tax preparation business. The injunction was the result of an IRS investigation into the taxpayer which showed that she and her business prepared thousands of federal income tax returns that falsified business losses and profits to boost the earned income tax credits customers could claim and which the IRS said deprived the U.S. Treasury of millions of dollars in tax revenue.

Tax-Exempt Organizations

Treasurer of Tax-Exempt Organization Was Responsible Person: In Jarrett v. Comm'r, T.C. Memo. 2018-73, the Tax Court held that a taxpayer, who was on the board of directors of a tax-exempt organization and was treasurer for a two-year period in which employment taxes were not paid to the IRS, was a responsible person with respect to those taxes and was liable for trust fund recovery penalties under Code Sec. 6672. The court rejected the taxpayer's argument that the penalties were not valid due to lack of IRS supervisory approval after concluding that the IRS complied with the requirements of Code Sec. 6751(b)(1).

May 2018

Accounting

IRS Updates Accounting Method Change Procedure: The IRS updated Rev. Proc. 2015-13, the revenue procedure for requesting IRS consent (both automatic and non-automatic) for an accounting method change, and Rev. Proc. 2017-30, which lists the accounting method changes eligible for IRS automatic consent. The new procedure is necessary because of changes made by the Tax Cuts and Jobs Act of 2017 and because certain sections of Rev. Proc. 2017-30 have been obsoleted. Rev. Proc. 2018-31. Read More...

May 2018 AFRs Issued: In Rev. Rul. 2018-12, the IRS issued the applicable federal rates for May 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.

Bankruptcy

Taxpayers Must Exhaust Administrative Remedies before Recovering Costs for Bankruptcy Violations: A bankruptcy court held that two former debtors who sought damages and attorney fees from the IRS for violating their bankruptcy discharge injunctions by attempting to collect discharged taxes were first required to exhaust administrative remedies before seeking recourse from the bankruptcy court. The bankruptcy court found that, although the debtors may have been entitled to seek attorney fees and costs, they had not exhausted the administrative remedies provided in the applicable IRS regulations. In re Thal, 2018 PTC 128 (Bankr. S.D. Fla. 2018). Read More...

Business Expenses

Engineer's Losses from Music Activities Partially Allowed as Business Expenses: The Tax Court held that a professional engineer, who recorded two full length albums of music and released them for sale, properly deducted most of the expenses related to the music activities as ordinary and necessary business expenses even though he had no income from his music activities for the years at issue. The court found that the taxpayer, who filed three Schedules C, Profit or Loss From Business, in one year and six the following year, had adequately substantiated most of the expenses he reported on his Schedules C even though some of his records were not maintained in an orderly fashion, were illegible, and required the court to cross reference multiple schedules and bank records. Nicholson v. Comm'r, T.C. Summary 2018-24. Read More...

C Corporations

IRS Modifies Approaches in Notice 2003-65 for Identifying RBIG and RBIL: In Notice 2018-30, the IRS modifies the Code Sec. 338 and Code Sec. 1374 approaches in Notice 2003-65 for determining recognized built-in gains or losses under Code Sec. 382(h). Under the proposed notice, the hypothetical cost recovery deductions that would have been allowable had an election under Code Sec. 338 been made or had the asset been purchased at fair market value are determined without regard to the additional first year depreciation deduction in Code Sec. 168(k).

Corporations

IRS Provides Guidance to Corporations on Tax Changes in TCJA: In Notice 2018-38, the IRS provides guidance on the changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) to federal income tax rates for corporations under Code Sec. 11(b) and to the alternative minimum tax for corporations under Code Sec. 55 and on the application of Code Sec. 15 in determining the federal income tax (including the alternative minimum tax) of a corporation for a tax year that begins before January 1, 2018, and ends after December 31, 2017.

Full-Payment Rule Was Properly Applied to Taxpayer's $160 Million Penalty Payment: In Larson v. U.S., 2018 PTC 111 (2d Cir. 2018), the Second Circuit affirmed a district court decision and held that the full-payment rule, which requires the full payment of assessed penalties before any judicial review of the penalty assessment, applied to the $160 million in Code Sec. 6707 penalties paid by a taxpayer who was involved with, and later convicted of, crimes relating to the organization of several fraudulent tax shelters. The Second Circuit concluded that the district court properly dismissed the taxpayer's tax refund, due process, Administrative Procedure Act, and Eighth Amendment claims.

Deductions

IRS Issues 2019 Inflation-Adjusted Health Savings Account Amounts: In Rev. Proc. 2018-30, the IRS issued the 2019 inflation adjusted amounts for health savings accounts (HSAs). For calendar year 2019, (1) the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,500; (2) the annual limitation on deductions under for an individual with family coverage under a high deductible health plan is $7,000; (3) a high deductible health plan is defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 for self-only coverage or $13,500 for family coverage.

Noncash Contributions Disallowed Where Donation Receipt Did Not Describe Items Donated: In Moore v. Comm'r, T.C. Memo. 2018-58, the Tax Court held that a couple could not deduct noncash charitable contributions to Goodwill and Dress for Success because, while it was clear that the couple made such contributions, the donation receipts did not contain descriptions of the items donated. The court also noted that a deduction may still have been available if the couple had kept reliable written records of the contributions but because they did not, they had not substantiated the noncash contributions and were not entitled to any charitable contribution deductions for 2013, 2014, or 2015.

IRS Addresses Deemed Termination Dates Designated in Empowerment Zone Nominations: In Notice 2018-47, the IRS issued guidance explaining how state and local governments are deemed to extend the termination date designated in their empowerment zone nominations. According to the IRS, the termination dates are deemed extended until December 31, 2017, and the extension in the guidance follows along similar past extensions such as Notice 2013-38, Notice 2015-26, and Notice 2016-28.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-53 provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-34, 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).

Employment Taxes

PEOs Entitled to Refund of Overpayment of FICA Taxes Paid on Clients' Employees Wages: In Paychex v. U.S., 2018 PTC 127 (M.D. Fla. 2018), a district court granted several professional employer organizations (PEOs) a refund of more than $4 million as a result of overpayments of the employer portion of the FICA taxes the PEOs paid on wages earned by their clients' worksite employees. The court rejected the IRS's argument that the PEO voluntarily paid over $4 million towards the employer's portion of the social security taxes at issue and that the PEO lacked standing to sue for a refund instead finding that the PEO had control over the payment of wages to the worksite employees, and thus were the statutory employers.

Law Firm Can Equitably Recoup Employment Taxes Erroneously Paid by Related Entity: The Tax Court held that a law firm was permitted to offset an employment tax liability by the amount of employment taxes paid on the same wages for the same time period by a related firm due to an error by the firm's payroll services provider. The court held that the firm established the elements of equitable recoupment because an action for the overpayment was time barred, both the overpayment and the IRS's levy arose from the payment of wages to the same employees during the same time period, the payment of wages would otherwise be subject to tax twice on inconsistent theories, and there was sufficient identity of interest between the taxpayer and the related entity. Emery Celli Cuti Brinckerhoff & Abady, P.C. vs. Comm'r, T.C. Memo. 2018-55. Read More...

Excise Taxes

IRS Extends Dyed Fuel Relief: In Notice 2018-39, the IRS extends the dyed fuel relief provided in Notice 2017-30 and expands the relief to permit claims for refund for fuel that is initially taxed upon removal from a terminal in Madison and later removed from a Green Bay terminal as dyed fuel. The relief takes effect beginning May 4, 2018 and ending December 31, 2018.

Foreign

Ten Year Limitations Period Did Not Apply to Refund Claim Where Taxpayer Had Net Decrease in Foreign Tax Credit: The Fifth Circuit held that the ten year limitations period applicable to refund claims for overpayments attributable to the allowance of a foreign tax credit did not apply to a taxpayer's refund claim because the taxpayer had a net decrease in the foreign tax credit for the year at issue. The Fifth Circuit also held that the taxpayer did not file the refund claim within two years of any payment of the tax because the adjustments to, and carryforward of, the taxpayer's credits on amended returns did not constitute payments for purposes of the statute of limitations. Schaeffler v. U.S., 2018 PTC 125 (5th Cir. 2018). Read More...

IRS Issues Revised Inflation Adjusted Foreign Housing Amounts: In Notice 2018-44, the IRS advised that Notice 2018-33 used an incorrect amount for the maximum foreign earned income exclusion to calculate the housing cost amount for 2018. As a result, the IRS revoked Notice 2018-33, issued revised maximum housing expenses and base housing amounts for 2018, and updated the table of adjusted limitations on housing expenses.

Healthcare

Proposed Regs Would Modify Definition of Short-Term, Limited-Duration Insurance: The IRS issued proposed regulations amending the definition of short-term, limited-duration insurance for purposes of its exclusion from the definition of individual health insurance coverage. The purpose of the proposed regulations is to lengthen the maximum period of short-term, limited-duration insurance to provide more affordable consumer choices for health care coverage. REG-133491-17. Read More...

Insurers Can Bring Class Action for Unpaid ACA Cost Sharing Reduction Payments; The Court of Federal Claims allowed a lawsuit against the government by health insurers for unpaid cost sharing reduction (CSR) payments under the Affordable Care Act to go forward as a class action. The court found that the putative class representative satisfied all of the requirements for class certification and rejected the government's argument that a class action would be unmanageable due to the many individualized computations that it claimed would be required as a result of insurers offsetting the unpaid CSR payments by raising premiums in order to receive increased premium tax credit payments. Common Ground Healthcare Cooperative v. U.S., 2018 PTC 110 (Fed. Cl. 2018). Read More...

After Stakeholder Complaints, IRS Adjusts 2018 HSA Annual Limitation on Deductions: The IRS modified the 2018 annual limitation on deductions for contributions to health savings accounts for individuals with family coverage under a high deductible health plan (HDHP) to bring it back to the limitation amount in effect prior to the change in the limitation announced in Rev. Proc. 2018-18. The modification was the result of complaints from stakeholders that implementing the $50 reduction to the limitation on deductions for individuals with family coverage would impose numerous unanticipated administrative and financial burdens. Rev. Proc. 2018-27. Read More...

Innocent Spouse

Court Rejects Innocent Spouse Claim Citing Taxpayer's Vague Testimony of Abuse: In Suwareh v. Comm'r, T.C. Summary 2018-23, the Tax Court held that a taxpayer failed to carry her burden of establishing that it would be inequitable to hold her liable for a tax deficiency for the two years at issue and denied the taxpayer innocent spouse relief for those years. The court rejected the taxpayer's allegations of abuse, noting that the only evidence presented of such abuse was her vague testimony and a letter written to the IRS examiner by the taxpayer's sister who was not called as a witness at trial.

Mortgage Bonds

IRS Issues Qualified Mortgage Bond Guidance: In Rev. Proc. 2018-28, 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. Issuers may rely on the IRS guidance to determine average area purchase price safe harbors for commitments to provide financing or issue mortgage credit certificates that are made, or (if the purchase precedes the commitment) for residences that are purchased, in the period that begins on April 24, 2018, and ends on the date as of which the safe harbors contained in the procedure are rendered obsolete by a new revenue procedure.

Penalties

Mistake in Inputting Info in Turbo Tax Isn't Reasonable Cause to Avoid Penalty: In Spottiswood v. U.S., 2018 PTC 114 (N.D. Calif. 2018), a district court rejected a couple's request for an abatement and refund of penalties for the late filing and failure to pay their 2012 federal taxes that the couple claimed resulted when the husband made a mistake inputting a dependent's social security number into the Turbo Tax program they used to prepare their tax return. The court concluded that the couple had not created a triable issue of fact that the document they submitted in 2013 should have been accepted as a tax return, or that they had reasonable cause for failing to timely file their 2012 federal tax return or pay the taxes owed that year.

Procedure

Eleventh Circuit Refuses to Hear Government's New Argument: In Stein v. U.S., 2018 PTC 130 (11th Cir. 2018), which was on remand to the en banc Eleventh Circuit, the Eleventh Circuit vacated a summary judgment entered by a district court and held that, because the government was making a new argument that a taxpayer's affidavit failed to create a genuine issue of material fact about her tax liability, the court could not consider the government's argument. The court noted that, if it were to regularly address questions that were not presented to the district court, it would not only waste its resources, but also deviate from the essential nature, purpose, and competence of the appellate court.

IRS Seeking Comments on 2018-2019 Priority Guidance Plan: In Notice 2018-43, the IRS asked for recommendations for items that should be included on the 2018-2019 Priority Guidance Plan. The 2018-2019 Priority Guidance Plan will identify guidance projects that the IRS intends to work on as priorities during the period from July 1, 2018, through June 30, 2019.

Tax-Exempt Bonds

IRS Releases Population Figures for Use by Issuers of Tax-Exempt Private Activity Bonds: In Notice 2018-45 the IRS advised state and local housing credit agencies that allocate low-income housing tax credits under Code Sec. 42, and states and other issuers of tax-exempt private activity bonds under Code Sec. 141, of the population figures to use in calculating: (1) the 2018 calendar year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii); (2) the 2018 calendar year volume cap under Code Sec. 146; and (3) the 2018 volume limit under Code Sec. 142(k)(5).

Tax-Exempt Fraud

Alleged Non-profit Was Really a Facade for a Doctor's Consulting Activity: The Tax Court held that a corporation organized to deliver quality management consulting services to medical providers, and to advance government programs through patient safety initiatives, did not qualify for tax exemption under Code Sec. 501(c)(3) because it would be operated for commercial purposes and it benefits would inure to its owner, a military vet and medical doctor who was also the sole employee and service provider. The court was not persuaded that the organization would act on the government's behalf and found that the company was a facade for its owner's consulting activities, which were of the sort that ordinarily are carried on by commercial ventures organized for profit. Abovo Foundation, Inc. v. Comm'r, T.C. Memo. 2018-57. Read More...

April 2018

Accounting

Taxpayers May Continue to Rely on Rev. Proc. 2004-34 for Advance Payments: As a result of the enactment by the Tax Cuts and Jobs Act of 2017 (TCJA) of a new provision dealing with the tax treatment of advance payments, the IRS is providing transitional guidance until more formal guidance can be issued. Noting that the TCJA provision largely tracks the approach in Rev. Proc. 2004-34, the IRS stated that a taxpayer receiving advance payments (regardless of whether the taxpayer has an applicable financial statement) may continue to rely on the 2004 revenue procedure until further guidance is issued. Notice 2018-35. Read More...

Appropriations Act Makes Major Modifications to the Partnership Audit Rules: The Consolidated Appropriations Act of 2018 (CAA), which was signed into law on March 23, 2018, contains numerous modifications, corrections, and clarifications relating to the centralized partnership audit regime rules that were enacted in the Bipartisan Budget Act of 2015 (2015 BBA) and which apply generally to partnership tax years beginning after 2017. Among the many changes, CAA revises ... Read More...

President Signs $1.3 Trillion Spending Bill Featuring Extensive Technical Tax Corrections: On March 23, 2018, President Trump signed into law the Consolidated Appropriations Act of 2018 (CAA). In addition to funding the federal government through September 30, 2018, the $1.3 trillion spending bill also makes technical corrections to numerous tax bills enacted over the past fifteen years. Most notably, CAA fixes the Code Sec. 199A "grain glitch" that created a disparity between farmers marketing products to cooperatives versus farmers marketing products to non-cooperatives, enacts major changes to the centralized partnership audit regime rules, and makes extensive corrections to the PATH Act of 2015. Pub. L. 115-141. Read More...

April 2018 AFRs Issued: In Rev. Rul. 2018-9, the IRS issued the applicable federal rates for April 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.

Bankruptcy

Attorney's Affidavit Insufficient to Rebut IRS's Proof of Claim in Bankruptcy: The Bankruptcy Appellate Panel for the Eighth Circuit Court of Appeals reversed a bankruptcy court's decision that a worker's compensation attorney's affidavit stating his opinion on the value of the debtor's pending claim for worker's compensation on the petition date was substantial evidence to rebut the IRS's proof of claim. The Eighth Circuit found that the affidavit was not substantial evidence of value because it did not contain the financial or factual information necessary to support the attorney's opinion and the IRS never had the opportunity to cross examine the attorney. In re Austin, 2018 PTC 100 (B.A.P. 8th Cir. 2018). Read More...

Deductions

Losses from Hunting Consulting Business Aren't Deductible: In Vallejo, T.C. Memo. 2018-39, the Tax Court held that a taxpayer could not deduct on his Schedule C losses relating to a hunting consulting business because he failed to carry his burden of establishing that he was entitled to the losses. Further, because the taxpayer failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment of tax for the year at issue, he was liable for the accuracy-related penalty under Code Sec. 6662(a).

No Charitable Deduction Allowed Where Taxpayer Expects Substantial Benefit: In Wendell Falls Development, LLC, T.C. Memo. 2018-45, the Tax Court held that, because a taxpayer donated an easement with the expectation of receiving a substantial benefit from his donation, he was not entitled to a charitable-contribution deduction because of that expectation. Alternatively, the court also noted that an easement must have value in order for it to generate a charitable-contribution deduction and, because there was no evidence in the record of sales of easements comparable to the easement contributed by the taxpayer, the value of the easement was equal to the value of the land before the easement minus the value of the land after the easement and that value was zero.

Travel Expenses Relating to House Remodeling Project Are Capital Expenditures: In Costa v. Comm'r, T. C. Summary 2018-17, the Tax Court held that a couple could not deduct mileage and travel expenses relating to the husband's house remodeling activity. The court found that the remodeling project added to the property's value and extended its life and, thus, all expenses relating to the project were capital expenditures that were added to the basis of the property.

Auto Company Manager Can Deduct Vehicle Expenses for Travel To Auto Auctions: In Rademacher v. Comm'r, T.C. Memo. 2018-43, the Tax Court held that a manager at a car dealership, who was required to regularly attend auto auctions, could deduct as an employee business expense his mileage costs. The court also held that the taxpayer was not liable for penalties assessed by the IRS because after allowing the mileage deductions, it was possible that the taxpayer no longer had a substantial understatement of income tax, and because the IRS failed to include in the record evidence of supervisory approval of the assessed penalties in compliance with Code Sec. 6751(b)(1).

Litigation Consultant Can't Deduct Alleged Research Expenses: In Bradley v. Comm'r, T.C. Summary 2018-13, the Tax Court held that a taxpayer was not entitled to a deduction for research expenses related to his litigation consulting business because the activities he engaged in did not meet the requirements of Code Sec. 174 and, even if the activities did meet the threshold requirements for taking the deduction, it did not appear to the court that the value of the taxpayer's time qualified as a deductible expense under Code Sec. 174.

Employee Benefits

Comments Requested on Pension Plan Determination Letter Program: In Notice 2018-24, the IRS announced that it is looking for comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year. In reviewing such comments, the Department of the Treasury and the IRS will consider the factors regarding the scope of the determination letter program set forth in Section 4.03(3) of Rev. Proc. 2016-37 and will issue guidance if they identify any additional types of plans for which plan sponsors may request determination letters during the 2019 calendar year.

Employment Taxes

Court Won't Reconsider Allowing Payroll Company to Sue for Refund of Overpaid Taxes: In Paychex v. U.S., 2018 PTC 91 (M.D. Fla. 2018), a district court rejected an IRS motion to reconsider its prior opinion where it held that a payroll company had standing to sue for a refund after it overpaid the social security taxes of a client. The court found that the IRS did not meet any of the three major grounds justifying reconsideration.

Estates, Trusts, and Gifts

IRS Provides Guidance on Trust Income Payable to Former Spouses in Light of Tax Reform Changes: In Notice 2018-37, the IRS advised that it will be issuing regulations that will provide that Code Sec. 682, as in effect prior to December 22, 2017 (the date of enactment of the Tax Cuts and Jobs Act of 2017 (TCJA)), will continue to apply with regard to trust income payable to a former spouse who was divorced or legally separated under a divorce or separation instrument executed on or before December 31, 2018, unless such instrument is modified after that date and the modification provides that the changes made by TCJA apply to the modification. The IRS is also requesting comments on whether guidance is needed with respect to the application of Code Secs. 672(e)(1)(A), 674(d), and 677 to trusts for the benefit of a spouse following a divorce or separation.

Foreign

Rev. Proc. Addresses Eligibility Rules for Certain Individuals in Foreign Countries: In Rev. Proc. 2018-23, the IRS provides a waiver for the time requirements for individuals electing to exclude their foreign earned income from their U.S. taxable income. The procedure applies to individuals who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country and adds Turkey to the list of waiver countries for tax year 2016 for which the minimum time requirements are waived but does not add, for 2017, any country to the list of waiver countries.

IRS Issues Guidance on Recently Revised Code Sec. 965: In Notice 2018-26, the IRS issued guidance on the implementation of Code Sec. 965, as amended by the Tax Cuts and Jobs Act of 2017 (TCJA). Among other things, the guidance provides relief from estimated tax penalties in connection with the amendment of Code Sec. 965 and the repeal of Code Sec. 958(b)(4) by TCJA.

IRS Provides Interim Guidance under Code Sec. 1446(f): In Notice 2018-29, the IRS announced that it intends to issue regulations under recently enacted Sec. 1446(f) regarding withholding on a disposition by a foreign person of a partnership interest that is not publicly traded. In the announcement, the IRS provides interim guidance that taxpayers may rely on pending the issuance of regulations.

Gross Income

Corporation Can't Defer to Later Year Client Fees Received for Tax Services: In RJ Channels, Inc. v. Comm'r, T.C. Memo. 2018-27, the Tax Court held that a C corporation that provided tax-related services had to include certain client fees, which involved potential future services, in gross income in the year the payments were received because there was no restriction or limitation on the disposition of the fees. The court also concluded that the corporation could not deduct certain expenses paid on behalf of some of its clients and could not deduct a contingent liability relating to a lawsuit against its sole owner and a related corporation because the company failed to show that it had any liability with respect to the lawsuit.

Grants Received to Restore Building Are Income to Partnership: In Uniquest Delaware LLC v. U.S., 2018 PTC 87 (W.D. N.Y. 2018), a district court held that grants valued at $11 million provided to a partnership by the New York State Empire State Development Corporation for the restoration of a building in Buffalo, New York, constituted income to the partnership for federal income tax purposes. The court also concluded that the TEFRA audit provisions applied to the partnership and that the partnership could not, as the partnership had argued, be categorized as a "small partnership" exempt from TEFRA because it was owned by S corporations which, as pass-through entities, prevented the partnership from being eligible for the small partnership TEFRA exemption.

Inflation Adjusted Amounts

IRS Corrects Previously Announced for 2018 AMT Amounts: In Rev. Proc. 2018-22, the IRS modified Rev. Proc. 2018-18 to correct the previously published alternative minimum tax phaseout threshold amounts for estates and trusts. Rev. Proc. 2018-22 also reflects increases to the state housing credit ceiling limit in Code Sec. 42, which were made by the Consolidated Appropriations Act of 2018.

IRS Modifies Previously Announced COLA as a Result of Tax Reform: In Rev. Proc. 2018-18, the IRS modified certain 2018 cost-of-living adjustments previously set forth in Rev. Proc. 2017-58 and Rev. Proc. 2017-37 to reflect changes made by the Tax Cuts and Jobs Act of 2017 (TCJA). The changes and modifications are effective for taxable years beginning in 2018.

Original Issue Discount

Code Section 1274A Inflation Adjusted Amounts Announced: In Rev. Rul. 2018-11, the IRS issued the dollar amounts, increased by the 2018 inflation adjustment, for Code Sec. 1274A. Inflation-adjusted amounts for Code Sec. 1274A for 2018 are $5,831,500 for qualified debt instruments and $4,165,300 for cash method debt instruments.

Partnerships

LLC liable for partnership late filing penalty: In Argosy Technologies, LLC, T.C. Memo. 2018-35, the Tax Court held that a limited liability company, which was owned by a husband and wife and which represented itself to be a partnership, was liable for the penalty under Code Sec. 6698 for the late filing of its partnership tax return. The court said that the entity could not represent itself as a partnership on its tax returns and then argue it was really a single member LLC that could not be subject to a partnership late filing penalty.

Failure by IRS to Timely Issue FPAA Precludes Adjustments to Partnership Return: In DTDV, LLC v. Comm'r, T.C. Memo. 2018-32, The Tax Court held that, because any omission from a partnership's gross income for the year at issue was less than 25 percent of its reported gross income for that year, the statute of limitations period was not extended. Instead, the statute of limitations period expired three years after the partnership filed its return and, because the IRS did not issue its final partnership administrative adjustment (FPAA) until several years later, the court said it would be unable to assess any tax resulting from an acceptance of the FPAA adjustments or penalty determinations.

Penalties

Supreme Court: Conviction for Felony Tax Obstruction Requires Awareness of Pending Tax Proceeding: The Supreme Court reversed the Second Circuit and held that, in order to secure a conviction under Code Sec. 7212(a) for interference with the administration of the Internal Revenue Code, the government must show a nexus between the taxpayer's obstructive conduct and a particular administrative proceeding, such as an investigation, audit, or other targeted administrative action. The Court found that broadly applying the statute to the routine administration of the Code, including the processing and review of tax returns, would conflict with the language, history, and context of the statute and fail to give taxpayers fair warning of what conduct is subject to criminal prosecution. Marinello v. U.S., 2018 PTC 77 (U.S. 2018). Read More...

IRS Issues Transitional Guidance on Code Section 162(f) and Code Section 6050X: In Notice 2018-23, the IRS announced that it intends to issue proposed regulations on Code Sec. 162(f), as amended by the Tax Cuts and Jobs Act of 2017 (TCJA), and Code Sec. 6050X, a new provision added by TCJA. Until then, the IRS is providing transitional guidance for complying with the new provisions.

Private Activity Bonds

IRS Provides Guidance on Certain Remedial Actions for Issuers of Tax-Exempt Bonds: In Rev. Proc. 2018-26, the IRS issued guidance which provides certain remedial actions that issuers of state and local tax-exempt bonds and other tax-advantaged bonds may take to preserve the tax-advantaged status of the bonds when nonqualified uses of the bond proceeds occur. The guidance applies to a nonqualified use that occurs on or after April 11, 2018, and may be applied to a nonqualified use that occurs before April 11, 2018.

Procedure

Prop. Regs. Would Prevent Certain Attorneys from Participating in Exams as Contractors: In REG-132434-17, the IRS issued proposed regulations which would, with a limited exception, exclude non-government attorneys from (1) receiving summoned books, papers, records, or other data or (2) from participating in the interview of a witness summoned by the IRS to provide testimony under oath. Current regulations permit any person authorized to receive returns and return information under Code Sec. 6103(n) and the regulations thereunder to receive and review summoned books, papers, and other data, and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a witness in a summons interview.

Whistleblower's Claim Rejected Where IRS Did Not Act on Information Presented: In Whistleblower 23711-15W, T.C. Memo. 2018-34, the Tax Court held that the IRS was entitled to summary judgment with respect to a whistleblower's action because the IRS did not initiate any administrative or judicial action on the basis of the whistleblower's information and the IRS did not collect any proceeds as a result of the information. The court noted that, if the taxpayer believes that the IRS may have proceeded with an administrative or judicial action against the target and collected proceeds from the target subsequent to a cut-off date relating to the instant litigation, the whistleblower can file a new Form 211 with the Whistleblower Office.

Taxpayer Didn't Need Specialized Legal Skills to Prevail on Passive Activity Issue: In Tolin, T.C. Memo. 2018-29, the Tax Court held that a taxpayer who substantially prevailed in a case brought by the IRS regarding the deductibility of the taxpayer's expenses with respect to a thoroughbred horse activity, and which the IRS had labeled as a passive activity, could not recover attorney's fees above the $180 per hour statutory rate. The court, in rejecting the taxpayer's argument that he needed a lawyer with specialized skill during the litigation, found that to prevail on the passive activity loss issue, the taxpayer had to prove the extent of his participation in the thoroughbred activity and this only required generalized tax and litigation expertise.

IRS Decreases User Fee for Form 5310 Applications: In Rev. Proc. 2018-19, the IRS issued a revenue procedure which changes one of the user fees set forth in Appendix A of Rev. Proc. 2018-4, Schedule of User Fees, relating to applications on Form 5310, Application for Determination for Terminating Plan. That user fee is reduced from $3,000 to $2,300, effective January 2, 2018, and applicants who paid the $3,000 user fee listed in Rev. Proc. 2018-4 will receive a refund of $700.

Retirement

First Circuit Reverses Tax Court; Roth IRA Arrangement Did Not Lack Economic Substance: The First Circuit held that approximately $1.4 million in dividend distributions from a domestic international sales corporation to two Roth IRAs was not an excess contribution subject to excise tax. The First Circuit reversed the Tax Court's holding that the distributions were in essence dividends to the owners of the Roth IRAs under the substance over form doctrine because it found that the transactions were a permitted tax avoidance arrangement under the Code and were consistent with Congress's intent in permitting DISC distributions to Roth IRAs. Benenson v. Comm'r, 2018 PTC 98 (1st Cir. 2018). Read More...

 

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