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Tax Updates - Archived (May 2018 - August 2017)

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...

March 2018

Accounting

March 2018 AFRs Issued: In Rev. Rul. 2018-6, the IRS issued the applicable federal rates for March 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

Liability for ACA Shared Responsibility Payment Isn't a Priority Claim in Bankruptcy: A bankruptcy court held that the IRS's claim against a debtor for failure to purchase health insurance was not entitled to priority status under the Bankruptcy Code because it was a penalty and not a tax. The court found the primary purpose of the individual mandate under the Affordable Care Act is to discourage Americans from going without health insurance, not to fiscally support or fund the government. In re John Chesteen, 2018 PTC 31 (Bankr. E.D. La. 2018). Read More...

Capital Gains

IRS Extends Three-Year Carried Interest Holding Period to S Corporations: The IRS announced that it intends to issue regulations providing guidance on the application of Code 1061, which was enacted as part of the Tax Cuts and Jobs Act of 2017 and which is aimed at curtailing the "carried interest" tax break available to investment fund managers. According to the IRS, the regulations will provide that the exception for corporations to the longer three-year holding period that must be met in order to obtain capital gains tax rates will not apply to S corporations. Notice 2018-18. Read More...

Deductions

Tenth Circuit Affirms Denial of Deduction for Oklahoma Gross Production Tax: In Jacobs v. Comm'r, 2018 PTC 65 (10th Cir. 2018), the Tenth Circuit held that a couple could not deduct the payment of their Oklahoma gross production tax on their federal income tax return because the tax was paid on royalty income that was exempt from federal income tax. The court noted that, under Code Sec. 265(a)(1), no deduction is permitted for any amount otherwise allowable as a deduction which is allocable to one or more classes of income wholly exempt from federal tax.

Lawyer Can't Take Theft or Casualty Loss for Client Files Disposed of After Eviction: In In re Nora, 2018 PTC 47 (Bankr. D. Minn. 2018), a bankruptcy court held that an attorney was not entitled to a $62,500 casualty or theft loss deduction for client files that were disposed of after she was evicted from property that she used as a law office. The court noted that when property is taken under a lawful authorization, the taxpayer is not entitled to a theft loss deduction and the Tax Court has specifically found that the value of personal property that is lost or damaged during a lawful eviction after a foreclosure cannot be the basis of a casualty or theft loss deduction.

Architect Qualified as Real Estate Professional; Rental Real Estate Losses Deductible: In Franco v. Comm'r, T.C. Summary 2018-9, the Tax Court held that a self-employed architect was entitled to deduct a loss of $42,882 that he incurred in his rental real estate activities. The court concluded that the taxpayer qualified as a real estate professional and that his rental real estate activities were regular, continuous, and substantial within the meaning of Code Sec. 469(h)(1) and, thus, were not disallowed under the passive activity loss rules of Code Sec. 469 as the IRS had argued.

Failure to Keep Contemporaneous Records Precludes Deduction for Rental Real Estate Losses: In Pourmirzaie v. Comm'r, T.C. Memo. 2018-26, the Tax Court held that a taxpayer's rental real estate activities were passive activities within the meaning of Code Sec. 469, and, therefore, her loss deductions from those activities were limited by Code Sec. 469(i). The court noted that the taxpayer did not keep contemporaneous records of time spent in the real property activities and rejected the taxpayer's assertion that she was a real estate professional after concluding that she spent only 416 hours during each year under audit in real property trade or business activities.

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.

Money Lost on Scuba Diving Venture Can't Be Deducted as a Bad Debt: In Burke v. Comm'r, T.C. Memo. 2018-18, the Tax Court held that a taxpayer, who lost money after entering into a scuba diving business with a friend, had an equity investment in the scuba diving business and thus could not deduct the money lost on the venture as a bad debt. The court did not, however, sustain the Code Sec. 6662(a) accuracy-related penalties imposed by the IRS because the IRS failed to present any evidence that the penalties were personally approved (in writing) by the immediate supervisor of the individual making such determination.

No Deductions Allowed Where Taxpayer Comingled Expenses in One Bank Account: In Bass v. Comm'r, T.C. Memo. 2018-19, the Tax Court held that, because a taxpayer had not established for 2013 that the car, truck, and other expenses he deducted on his tax return were paid or incurred or that they were ordinary and necessary, the taxpayer was not entitled to Schedule C deductions for those expenses. Further, because the taxpayer comingled in one bank account his personal expenses, his business expenses, and expenses relating to a nonprofit he started, the court could not estimate potential deductible expenses.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2018-16, 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

Court Denies Injunction; IRS Has to Stand in Line with Other Creditors: In U.S. v. Askins & Miller Orthopaedics, P.A., 2018 PTC 34 (M.D. Fla. 2018), a district court denied a renewed motion by the government, which relied on Code Sec. 7422, for a preliminary injunction requiring the taxpayers to comply with their employment tax obligations. The court concluded that the government would not suffer irreparable harm in the absence of an injunction requiring the taxpayers to comply with the internal revenue laws and, while the taxpayers did not contest their employment tax obligations and the record demonstrated that they have failed to comply with those obligations and are likely to continue ignoring them, the court said that the government, like any other creditor, must resort to the remedies provided by law.

CPA/CFO of Newspaper Publishing Companies Is Liable for Payroll Tax Penalty: In Myers v. U.S., 2018-33 (N.D. Ga. 2018), a district court held that a CPA, who was the chief financial officer of several newspaper publishing companies, was a responsible person liable for a trust fund penalty for unpaid payroll taxes. While the court said it understood the taxpayer's position that there were no easy answers for the situation he found himself in and that he was caught between a rock and a hard place, he was still a responsible person under the law.

Disaster Relief

IRS Extends Hurricane Relief to Individuals in Puerto Rico and the U.S. Virgin Islands: In Notice 2018-19, the IRS extends relief previously to certain individuals in Notice 2017-56. In Notice 2017-56, the IRS issued guidance which provides additional relief to individuals who might otherwise lose their status as a "bona fide resident" of the Commonwealth of Puerto Rico or the U.S. Virgin Islands because of the continued dislocation caused by Hurricane Irma and Hurricane Maria. The notice extends the relief previously provided in Notice 2017-56.

Foreign

IRS Supplemental Guidance Explains Changes to Reg. Sec. 1.1441-1T: In Notice 2018-20, the IRS issued supplemental guidance to Notice 2017-46, a notice which (1) provides guidance modifying the requirements of Reg. Sec. 1.1441-1T(e)(2)(ii)(B) for withholding agents to obtain and report foreign taxpayer identification numbers (TINs) of their account holders; (2) extends the date on which the requirement to obtain foreign TINs takes effect to January 1, 2018; (3) provides transitional rules for withholding agents obtaining a foreign TIN for an account holder documented with an otherwise valid Form W-8 that was signed before January 1, 2018; and (4) provides exceptions to obtaining foreign TINs for certain categories of account holders. The supplemental guidance explains that the IRS will amend Reg. Sec. 1.1441-1T(e)(2)(ii)(B) to expand the list of jurisdictions that do not issue TINs to their residents to include jurisdictions that make a request to the U.S. competent authority to be included on such list.

IRS Modifies Procedure for Foreign Corporations to Change Accounting Periods: In Rev. Proc. 2018-17, the IRS modified the circumstances under which the IRS grants approval of certain requests by certain foreign corporations for changes in annual accounting periods filed under Rev. Proc. 2002-39 and Rev. Proc. 2006-45. The IRS issued the revenue procedure pursuant to Code Sec. 965(o) to prevent the avoidance of the purposes of Code Sec. 965 through changes in the taxable years of certain specified foreign corporations (within the meaning of Code Sec. 965(e)).

Gains and Losses

IRS Was Wrong to Recharacterize Partnership's Property Sales as Ordinary Income: In Sugar Land Ranch Development, LLC v. Comm'r, T.C. Memo. 2018-21, the Tax Court held that the IRS was incorrect in recharacterizing net gains from a partnership's sale of two parcels of real property from capital gains to ordinary income. The court found that the partnership was not engaged in a development business after 2008 and held the parcels of real property as investments and thus had properly characterized the gains and losses from the sale of the properties as income from capital assets.

Gross Income

Taxpayer's Transfer of Funds from His IRA to Wife's IRA in Divorce Was a Taxable Distribution: In Kirkpatrick v. Comm'r, T.C. Memo. 2018-20, the Tax Court held that a taxpayer's $100,000 transfer from his IRA to his wife's IRA pursuant to divorce proceedings was a taxable distribution to him. The Tax Court held that a taxpayer's transfer of $100,000 from his IRA to his wife's IRA in a divorce proceeding in which the court ordered him to transfer $100,000 to his wife, was not a nontaxable transfer of an account incident to divorce under Sec. 408(d)(6). Instead, citing the decision in Bunney v. Comm'r, 114 T.C. 259 (2000), the court found the distribution from the taxpayer's IRA to be taxable income to the taxpayer under Sec. 408(d)(1).

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.

Healthcare

IRS Clarifies Health Plan Rules Relating to Male Sterilization and Male Contraceptives: In Notice 2018-12 the IRS clarifies that a health plan providing benefits for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(A) is not an HDHP under current guidance interpreting the requirements of Code Sec. 223(c)(2)(C). The notice further provides transition relief for periods before 2020 during which coverage was provided for male sterilization or male contraceptives without a deductible, or with a deductible below the minimum deductible for an HDHP.

Refund Claim for ACA Shared Responsibility Payment Was Properly Filed on Form 843: The Third Circuit vacated a district court's decision that it lacked jurisdiction over a taxpayer's refund claim for a shared responsibility payment (SRP) under the Affordable Care Act because it was filed on Form 843, Claim for Refund and Request for Abatement, instead of on a Form 1040X. The court found that although a claim for a refund of income taxes must be made by filing an amended return, the SRP is a penalty, not a tax, so the taxpayer correctly filed a Form 843. Cash v. U.S., 2018 PTC 32 (3d Cir. 2018). Read More...

Prop. Regs. Would Redefine Short-Term, Limited-Duration Insurance: In REG-133491-17 (2/21/18), 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.

Insurance Companies

Certain Life Insurance Contracts May Continue in Force after Insured Reaches 100: In Rev. Proc. 2018-20, the IRS issued a procedure which provides that the safe harbor set forth in Rev. Proc. 2010-28, concerning the application of Code Sec. 7702 and Code Sec. 7702A to life insurance contracts that have mortality guarantees based on the 2001 CSO tables (i.e., the Commissioners' Standard Ordinary Mortality Tables), may continue in force after the day on which an insured individual attains age 100. The safe harbor is extended to life insurance contracts that have mortality guarantees based on the 2017 CSO tables and any other prevailing Commissioners' standard tables that extend beyond age 100.

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.

Proposed Regs Address Adjustment of Tax Attributes Under Centralized Partnership Audit Rules: The IRS issued proposed regulations which give further guidance on the centralized partnership audit regime rules that are effective for partnership with tax years beginning after 2017. These proposed regulations provide rules that were reserved in earlier proposed regulations and specifically address how and when partnerships and their partners adjust tax attributes to take into account partnership adjustments under both Code Sec. 6225 and Code Sec. 6226. REG-118067-17. Read More...

Penalties

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.

Procedure

IRS Must Credit Tax Overpayments to Other Assessed Tax Liabilities First: In CCA 201808015, the Office of Chief Counsel advised that the IRS credits a taxpayer's tax overpayments to other assessed federal tax liabilities pursuant to Code Sec. 6402 before it allows or makes refunds. The Chief Counsel's Office noted that this procedure follows a statutory provision and not a policy directive and, because nothing in Code Sec. 7508A overrides this provision, a taxpayer with both an overpayment (in one module) and an assessed balance-due liability (in another module) will have the overpayment first offset against the assessed balance-due liability.

IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2018-7, the IRS issued the rates for interest on tax overpayments and underpayments for the second calendar quarter of 2018, beginning April 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.

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.

Deficiencies Resulting from Improper Inventory Reporting and Unreasonable Compensation Upheld: The First Circuit affirmed a Tax Court decision to uphold deficiencies resulting from a company's improper inventory reporting and unreasonable compensation payments made to employee-shareholders. According to the First Circuit, the Tax Court properly found that the taxpayer's use of the gross profit method massively understated its inventory and that the salaries in question were unreasonable given the employees' lack of special experience or education. Transupport, Inc. v. Comm'r, 2018 PTC 43 (1st Cir. 2018). Read More...

Court Rejects IRS Motion to Stop Couple from Obtaining Info on Who Turned Them In: In Montgomery v. IRS, 2018 PTC 45 (D. D.C. 2018), a district court denied an IRS motion aimed at preventing a couple from obtaining certain FOIA records in an ongoing attempt by the couple to deduce who had tipped off the IRS with respect to sham partnerships in which they had been involved with in the early aughts. The court rejected the IRS's arguments that the couple's FOIA suit was barred by (1) an earlier settlement agreement, (2) collateral estoppel, or (3) res judicata, concluding that none of the IRS's threshold claims held water.

Property Transactions

Amount Realized in Short Sale Is Neither Gain Nor Loss to Couple: In Simonsen v. Comm'r, 150 T.C. No. 8 (2018), the Tax Court held that a transaction involving the short sale of a home, which a couple bought with nonrecourse debt and occupied as their personal residence before turning it into rental property, followed by the bank forgiving the debt used to purchase the home, was part of one sale or exchange transaction and the amount realized by the couple included the discharged debt. The court further held that the amount realized was greater than the couple's loss basis in the property under Reg. Sec. 1.165-9(b)(2), but less than the couple's gain basis in the property and, because the property was sold for an amount between those bases, there was neither a gain nor a loss on the sale.

IRS Gives More Time for Deducting Home Repair Damage Due to Presence of Pyrrhotite: The IRS is extending the time that individuals have to pay to repair damage to their personal residences resulting from deteriorating concrete foundations caused by the presence of the mineral pyrrhotite. The additional time is available to any taxpayer whose personal residence was either in Connecticut or outside of Connecticut, provided the taxpayer obtains a written evaluation from a licensed engineer indicating that the foundation was made with defective concrete containing the mineral pyrrhotite. Rev. Proc. 2018-14. Read More...

Retirement

Payments from Foreign Sales Corporation Reclassified as Excess Roth IRA Contributions: The Tax Court held that a plan to save taxes by routing income from a family business through a Bermuda based foreign sales corporation (FSC) and then into Roth IRAs was properly characterized as contributions from the taxpayers to their Roth IRAs in excess of the contribution limits and thus subject to excise taxes. The Tax Court distinguished Summa Holdings, Inc. v. Comm'r, 2017 PTC 58 (6th Cir. 2017), where the Sixth Circuit reversed in part a Tax Court decision to recharacterize payments in a similar plan involving domestic international sales corporations. Mazzei v. Comm'r, 150 T.C. No. 7 (2018). Read More...

Tax Practice

IRS Updates Withholding Calculator, Releases New Version of Form W-4: In IR-2018-36 (2/28/18), the IRS announced that it released an updated Withholding Calculator on IRS.gov and a new version of Form W-4. Following the changes in the tax law made by the Tax Cuts and Jobs Act of 2017, the IRS is urging taxpayers to use these tools to make sure the right amount of tax is being taken out of their paychecks.

Tax Returns

IRS Ready to Process Returns Including Those with Recently Extended Tax Benefits: In IR-2018-33, the IRS said that it has reprogramed its processing systems and is ready to process tax year 2017 returns claiming three popular tax benefits recently renewed retroactively into law. The Bipartisan Budget Act renewed the following provisions: (1) the exclusion from gross income of discharge of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness), claimed on Form 982; (2) mortgage insurance premiums treated as qualified residence interest, generally claimed by low- and middle-income filers on Schedule A; and (3) the deduction for qualified tuition and related expenses claimed on Form 8917.

February 2018

Charitable Contributions

Lower Court Reversed; Deduction for Trust's Property Donation Is Limited to Basis: The Tenth Circuit Court reversed a district court and held that a trust's deduction for its charitable donation of real property was the trust's basis in the property and not the fair market value. The Tenth Circuit rejected the district court's interpretation of Code Sec. 642(c)(1) and concluded that the deduction thereunder was limited the trust's adjusted basis in donated properties and that the unrealized appreciation in the donated property was not part of the trust's gross income as required under Code Sec. 642(c)(1), which permits a trust to deduct a charitable contribution only if it comes from the trust's gross income. Green v. U.S., 2018 PTC 6 (10th Cir. 2018). Read More...

Property

Tax Court Limits Real Estate Developer's Losses; Rejects Penalty Assessment: The Tax Court held that a individual who owned undeveloped land, sold custom built homes, and owned rental properties (1) had a capital, not ordinary, loss on the sale of property held for investment, (2) was entitled to deduct expenses as investment expenses under Code Sec. 212, and (3) was barred by the passive activity rules from deducting rental expenses because he did not materially participate in the business. However, the Tax Court determined that accuracy-related penalties did not apply because the taxpayer reasonably relied on his accountant to prepare his returns. Conner v. Comm'r, T.C. Memo. 2018-6. Read More...

January 2018

Accounting

NEW - In-Depth Analysis of Section 199A Deduction for Qualified Business Income: Become a Section 199A Expert with Parker's in-depth explanation and analysis of the new tax break, featuring dozens of original examples, planning tips, and insightful observations. Read More...

Three New TCJA Quick Reference PDFs Available: Parker's Quick Reference database now includes three detail-packed, downloadable guides for the Tax Cuts and Jobs Act of 2017 (TCJA). Arranged in an easily accessible table format, the guides provide the key rules, rates, amounts, and thresholds for more than 100 TCJA provisions.
1. TCJA Provisions Affecting Individuals
2. TCJA Provisions Affecting Businesses
3. TCJA - Deduction for Qualified Business Income
View Downloads

Bankruptcy

Bankruptcy Court Holds S Corporation Status Is Not Property for Bankruptcy Purposes: A bankruptcy court, in a case of first impression in the Fourth Circuit, held that a Chapter 11 debtor's S corporation status was not property for bankruptcy purposes and that the shareholders' prepetition revocation of the S election could therefore not be avoided as a fraudulent transfer. The court found that the debtor's S corporation status lacked all of the attributes of a property right except for the right to use it to pass through tax liabilities to shareholders and that feature alone was not sufficient for the S election to be treated as a property interest. Health Diagnostic Laboratory, Inc. vs. U.S., 2017 PTC 543 (Bankr. E.D. Va. 2017). Read More...

Bankruptcy Court Upholds IRS Position on Tax Lien: In In re Hutchinson, 2018 PTC 1 (Bankr. E.D. Calif. 2018), a bankruptcy court granted the government's motion to dismiss after holding that Bankruptcy Code Section 551 controls when a bankruptcy trustee avoids a lien and, if the trustee avoids an IRS lien, Code Section 551 authorizes the trustee to preserve the lien for the benefit of the estate's creditors. The court noted that the Bankruptcy Code precludes debtors from avoiding an IRS tax lien for penalties and, because the debtors in the instant case cannot avoid this lien, they cannot preserve it for their own benefit.

Deductions

District Court Holds That Settlement Proceeds Were Nontaxable, but Disallows Deduction of Legal Fees: A district court held that a taxpayer who settled a lawsuit against an accounting firm for failing to properly form an S corporation and an employee stock ownership plan, did not have to include $800,000 in settlement proceeds in income because the proceeds constituted a nontaxable return of capital. However, the taxpayer could not deduct the legal fees he incurred as business expenses because they were personal to him. The court also disallowed a deduction for the difference between the taxes paid as a result of the accounting firm's error and the settlement proceeds. McKenny v. U.S., 2018 PTC 2, (M.D. Fla. 2018). Read More...

Compensation

IRS Revises Covered Compensation Tables for 2018: In Rev. Rul. 2018-4, the IRS issued revised covered compensation tables that are effective January 1, 2018. These tables supersede the tables previously released in Rev. Rul. 2017-22. Rev. Rul. 2018-4.

Employee Benefits

IRS Issues Annual Procedure on Employee Plans and Tax-exempt and Government Entities: In Rev. Proc. 2018-4, the IRS issued an annual revenue procedure that provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements Office (Employee Plans Rulings and Agreements). It also details the types of advice that is available to taxpayers, and the manner in which such advice is requested and provided.

Exempt Organizations

Nonprofit Teaching Hospitals Subject to Income Tax on Fees from Third-Party Vendors: The Tax Court held that fees received by a nonprofit membership organization, whose members consist primarily of teaching hospitals operating in New Jersey, under contracts with third parties were not excluded from unrelated business taxable income as either (1) royalties under Code Sec. 512(b)(2), or (2) amounts received in a trade or business carried on primarily for the convenience of the organization's members under Code Sec. 513(a)(2). New Jersey Council of Teaching Hospitals v. Comm'r, 149 T.C. No. 22. Read More...

Founder of Association for Honest Attorneys Engaged in Excess Benefit Transactions: In Farr v. Comm'r, T.C. Memo. 2018-2, the Tax Court held that an attorney who formed a Code Sec. 501(c)(3) tax-exempt organization called Association for Honest Attorneys (AHA), and who made payments from AHA's bank account for her son's tuition to military school, vet bills, and to pay for the exhumation and DNA testing of her father's remains, was a disqualified person who engaged in excess benefit transactions with AHA. As a result, the court concluded that the taxpayer was liable for excise taxes under Code Sec. 4958 of approximately $79,000.

Foreign

Extended Limitations Period Did Not Apply to Omissions in Years Before Foreign Asset Reporting Applied: The Tax Court held that the IRS was barred by the three-year statute of limitations period from assessing deficiencies and accuracy-related penalties on a taxpayer's omission of income earned on foreign assets in years before the enactment of the foreign account reporting requirement in Code Sec. 6038D. The Tax Court found that the six year statute of limitations under Code Sec. 6051 for such omissions applies only to years for which there was a Code Sec. 6038D foreign asset reporting requirement. Rafizadeh v. Comm'r, 150 T.C. No. 1 (2018). Read More...

IRS Announces Intention to Issue Subpart F Regulations: In Notice 2018-7, the IRS announced that it intends to issue regulations for determining amounts included in gross income by a U.S. shareholder under the Subpart F rules of Code Sec. 951(a)(1). The notice describes the regulations the IRS intends to issue as well as the proposed effective dates of those regulations.

IRS Suspends Application of New Code Section 1446(f) for Certain Dispositions: In Notice 20128-8, the IRS announced the suspension of the application of new Code Sec. 1446(f) in the case of a disposition of certain publicly traded partnership interests. The notice provides background on new Code Sec. 864(c)(8) and Code Sec. 1446(f) and describes the revised timeline for the application of new Code Sec. 1446(f) to a disposition of certain interests in publicly traded partnerships.

Innocent Spouse

Taxpayer Qualifies for Innocent Spouse Relief: In Bishop v. Comm'r, T.C. Summary 2018-1, the Tax Court held that a taxpayer was entitled to innocent spouse relief with respect to the tax liability arising from the failure to report on a joint return a distribution from his former spouse's separately owned retirement account. The court concluded that, while the history of the withdrawals from the retirement account used by the taxpayer and his ex-spouse supported a conclusion that the taxpayer should have known about the distribution, there was no evidence that the taxpayer saw the bank records before the joint return was filed and his denials were not incredible, implausible or contradicted by direct evidence.

Court Denies Innocent Spouse Relief Where No Evidence Existed of Abuse or Financial Control: In Lessard v. Comm'r, T.C. Summary 2017-95, the Tax Court held that a taxpayer was not entitled to innocent spouse relief from her 2013 joint tax return liability after the court reviewed the relevant factors in Rev. Proc. 2013-34 and concluded that such factors did not favor relief for the taxpayer. The court noted that there was no evidence of abuse or exercise of financial control by the taxpayer's ex-husband and concluded that the taxpayer should have known of the understatement reflected on the joint return.

Partnerships

IRS Finalizes Rules on Opting Out of Centralized Partnership Audit Rules: The IRS issued a final regulation on who can elect out of the centralized partnership audit regime and the manner in which such election must be made. In the final rule, the IRS declined to expand the types of taxpayers eligible to make the opt-out election even though Congress authorized it to do so, saying that such an expansion would increase the IRS's burden with respect to auditing such taxpayers. T.D. 9829. Read More...

Penalties

Court Upholds 40 Percent Penalty after Charitable Deduction Is Denied: In Roth v. Comm'r, the Tax Court held that, with respect to a 40 percent penalty assessed on a couple with respect to a conservation easement charitable deduction that was subsequently denied, the IRS complied with the requirements of Sec. 6751(b) in assessing the penalty and the court found the couple liable for the penalty. The court also denied a deduction for the repayment of proceeds relating to a state tax credit that had been sold and had to subsequently be repaid as a result of the denial of the charitable deduction.

Tax Preparers

Tax Return Preparer Hit with 75 Percent Fraud Penalty: In Ankerberg v. Comm'r, T.C. Memo. 2018-1, the Tax Court held that a CPA, who prepared tax returns and underreported gross receipts and claimed excessive deductions on Schedules C, Profit or Loss from Business, was liable for the 75 percent fraud penalty under Code Sec. 6663. The court rejected the taxpayer's claim that various serious medical problems during the years at issue constituted reasonable cause for the deficiencies, instead finding that the taxpayer had not overcome the clear and convincing evidence of fraud.

Property Tax

Prepaid 2018 Real Property Taxes Are Deductible in 2017 If Assessed and Paid in 2017: The IRS is advising taxpayers that 2018 state and local real property taxes prepaid in 2017 may be deductible if the 2018 taxes are assessed in 2017. However, a prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. IR-2017-210. Read More...

December 2017

Accounting

IRS Issues January 2018 AFRs: In Rev. Rul. 2018-1, the IRS issued the applicable federal rates for January 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

Couple's Actions Precluded Tax Debt from Being Discharged in Bankruptcy: In Faulk v. Comm'r, T.C. Summary 2017-92, the Tax Court upheld an IRS determination to proceed with a collection action against a couple who had argued that their 2006 tax debt had been discharged in bankruptcy. In reaching its conclusion, the court found that the couple had filed their tax return for 2006 more than four years after it was due and more than two months after the date the couple filed their bankruptcy petition and thus, consistent with Section 523(a)(1)(B) of the Bankruptcy Code, it followed that their 2006 tax liability was not discharged in bankruptcy.

Compensation

Guidance Under Section 409A Issued for Pre-2009 Section 457A Deferrals: In Notice 2017-75, the IRS provides guidance on the application of Code Sec. 409A and Code Sec. 457A by addressing the transition provisions enacted as part of Code Sec. 457A, that generally provide that amounts deferred and attributable to services before January 1, 2009, that would otherwise have been subject to inclusion in income under Code Sec. 457A, are includible in gross income in the later of the last tax year beginning before 2018 or the date of vesting. The notice provides that service recipients may accelerate distributions to pay federal and state taxes on amounts includible in 2017 and later years without violating Code Sec. 409A.

Credits

Mixture of Butane and Gasoline Is Not an Alternative Fuel Mixture Qualifying for Credit: In Rev. Rul. 2018-2, the IRS ruled that a mixture of butane (or other gasoline blendstock as defined in Reg. Sec. 48.4081-1(c)(3)(i)) and gasoline is a mixture of two taxable fuels. As a result, the IRS concluded that it is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under Code Sec. 6426(e).

Deductions

Package of Films Licensed to Customers May Be an "Item" under Section 199: In Rev. Rul. 2018-3, the IRS ruled that a package of films licensed to customers in the normal course of business may be an item under Reg. Sec. 1.199-3(d)(1)(i) for purposes of determining the domestic production activities deduction under Code Sec. 199. According to the IRS, this holding does not affect the characterization of the property for any other purpose of the Code.

Court Denies Education Expense Deduction But Allows Education Credit: In Pemberton v. Comm'r, T.C. Summary 2017-91, the Tax Court held that a taxpayer could not take a deduction on his 2013 tax return for education expenses incurred in obtaining a jurisprudence degree because he had not met his burden of proving that the degree maintained or improved skills required by his employment as a tutor and test proctor. However, the court concluded that the taxpayer was entitled to a Lifetime Learning Credit equal to 20 percent of the first $10,000 in eligible tuition and related expenses that the taxpayer paid in 2013.

Speech Pathologist Can't Deduct Expenses Incurred for Master's Degree and Other Certificate: In Colliver v. Comm'r, T.C. Summary 2017-93, the Tax Court held that a medical speech pathologist did not qualify for an education expense deduction on her 2013 return because the tasks and activities that she was qualified to perform after earning a master's degree and a certificate of clinical competency (CCC) were significantly different from those she could perform before pursuing this education. The court noted that, before receiving her master's degree and CCC, the taxpayer could not work at a hospital and perform "barium swallow studies," tasks that she was eligible to perform after receiving her master's and CCC.

Taxpayer Can't Deduct as Alimony Employment-Related Bonus Payments to Ex-wife: In Koester v. Comm'r, T.C. Summary 2017-88, the Tax Court held that payments by a taxpayer to his ex-wife of an amount equal to a portion of an employment-related bonus that the taxpayer received in 2012 was not deductible as alimony. According to the court, there was no evidence that the obligation to make the payments, which were required under a divorce agreement, would have stopped if the taxpayer's ex-wife had died.

Taxpayer Can't Take Capital Loss on the Sale of Property to Ex-wife: In Stapleton v. Comm'r, T.C. Summary 2017-87, the Tax Court held that Code Sec. 1041(a) barred a taxpayer from recognizing a capital loss that he realized on a sale of property to his ex-wife. The court rejected the taxpayer's argument that a transfer of property between former spouses relates to the cessation of the marriage only where the transfer is made as consideration for an outstanding marital obligation, after concluding that neither Code Sec. 1041(a), the temporary regulation under that provision, nor the legislative history imposed such a restriction on applying Code Sec. 1041(c).

Father Can't Rely on Divorce Judge's Statement "Awarding" Him Benefits for Child: In Shvetsov v. Comm'r, T.C. Summary 2017-89, the Tax Court held that a divorced father was not entitled to head of household filing status and an earned income credit with respect to one of his children because he did not meet the applicable requirements. The court dismissed the taxpayer's argument that, in his divorce proceedings, a Washington State court judge assured him that he would be entitled to all of the federal tax benefits for one of his children and on that basis he had agreed to pay a certain amount of child support.

No Deduction Available for Disgorgement Payments Made for Violating Securities Law: In CCM 201748008, the Office of Chief Counsel advised that Code Sec. 162(f) prohibits a deduction under Code Sec. 162(a) for disgorgement payments made for violating a federal securities law. In reaching its conclusion, the Chief Counsel's Office cited the Supreme Court's decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), in which the Court held that because disgorgement payments are penalties and are not compensatory, no deduction is allowed.

Employment Taxes

Former Partners of Defunct Law Firm Liable for $700,000 in Trust Fund Taxes: In Spizz v. U.S., 2017 PTC 541 (S.D. N.Y. 2017), a district court concluded that two partners of a now defunct law firm were jointly liable for almost $700,000 of trust fund taxes after finding that the law firm had unencumbered assets available to pay down its outstanding employment tax liability and the failure of the partners to apply those assets toward the trust fund tax liabilities constituted willfulness. The court noted that while the Second Circuit, to which the case would be appealable to, had not settled on a definition of "unencumbered assets," the circuits that have addressed the issue have established a narrow rule that only a legal prohibition on the expenditures of funds renders assets encumbered.

Exclusions from Gross Income

Court Rejects Request for Partial Refund of Taxes of Non-Minister Housing Allowance: In Gaylor v. Mnuchin, 2017 PTC 564 (W.D. Wisc. 2017), a district court issued a supplemental ruling following its earlier holding that Code Sec. 107(2), which excludes a minister's housing allowance from the minister's gross income, violated the First Amendment. In the supplemental ruling, the court rejected the taxpayers' request for a partial refund of taxes they paid but which would have been reduced if they had been permitted to claim a housing allowance as an exclusion of income under Code Sec. 107(2).

Exempt Organizations

IRS Requests Comments on Excise Taxes on Certain Donor Advised Funds: In Notice 2017-73, the IRS issued guidance describing approaches that it is considering to address certain issues regarding donor advised funds (DAFs) of sponsoring organizations and requesting comments on those approaches. The IRS is considering developing proposed regulations under Code Sec. 4967 that would, if finalized, provide that: (1) certain distributions from a DAF that pay for the purchase of tickets that enable a donor, donor advisor, or related person under Code Sec. 4958(f)(7) to attend or participate in a charity-sponsored event result in a more than incidental benefit to such person under Code Sec. 4967; and (2) certain distributions from a DAF that the distributee charity treats as fulfilling a pledge made by a donor, donor advisor, or related person, do not result in a more than incidental benefit under Code Sec. 4967 if certain requirements are met.

Foreign

IRS Extending Qualified Securities Lender Regime for 2018 and 2019 Payments: In Notice 2018-05, the IRS said it is permitting withholding agents to apply in 2018 and 2019 the transition rules from Notice 2010-46, which addresses potential overwithholding in the context of securities lending and sale repurchase agreements and which provides a two-art solution to the problem of overwithholding on a chain of dividends and dividend equivalents. The IRS said it has decided to extend the qualified securities lender regime described in Notice 2010-46, Part III, but only for payments made in calendar years 2018 and 2019 and, during this period, it intends to consider whether additional guidance is appropriate to address the particular circumstances of foreign lenders of U.S. dividend-paying stocks.

Gross Income

Russian Student Must Include University Payments in Income: In Dovzhenok v. Comm'r, T.C. Summary 2017-86, the Tax Court held that payments made by Indiana University-Purdue University Indianapolis to a Russian citizen who held an F-1 student visa, and which totaled $18,917 during 2009 and $19,708 during 2010, were not exempt from federal income tax under the Russia - U.S. tax treaty. According to the court, the taxpayer failed to prove that he was the recipient of a grant, allowance, or other similar tax exempt-type of payment.

IRS Procedure

D.C. District Court Again Denies IRS the Right to Charge Fees for PTINs: In Steele v. U.S., 2017 PTC 568 (D. D.C. 2017), the U.S. District Court for the District of Columbia denied a motion by the IRS for a stay of the court's prior order enjoining the IRS from charging fees to issue a preparer tax identification number (PTIN). The court said the IRS had not presented any new information that would change the court's previous decision.

Court Rejects Argument That IRS Lacked Probable Cause in Levying Bank Account: In Certified Enters, Inc. v. U.S., 2017 PTC 547 (D. Mo. 2017), a district court rejected a corporation's motion for summary judgment with respect to a lawsuit in which it argued that the IRS lacked probable cause to levy on its bank accounts for a tax debt owed by a delinquent taxpayer that the IRS said was the alter ego of the corporation. The court noted that the Eighth Circuit, the circuit to which the case is appealable, has found that probable cause existed (without holding that it was necessary) where the IRS levied property on the basis of a single piece of evidence supporting a nexus between that property and the delinquent taxpayer.

IRS Extends Due Date for Furnishing Statements Relating to Health Insurance Coverage: In Notice 2018-6, the IRS announced that it is extending the due date for certain 2017 information-reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Code Sec. 6055 and for applicable large employers under Code Sec. 6056. Specifically, the IRS is (1) extending the due date for furnishing to individuals the 2017 Form 1095-B, Health Coverage, and the 2017 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2018, to March 2, 2018, and (2) extending good-faith transition relief from Code Sec. 6721 and Code Sec. 6722 penalties to the 2017 information-reporting requirements under Code Sec. 6055 and Code Sec. 6056.

Taxpayer Can't Collect Damages Relating to Refund and Delinquent Student Loan Debt Mixup: In Ivy v. Comm'r, 2017 PTC 567 (D.C. Cir. 2017), the D.C. Circuit dismissed a taxpayer's lawsuit after concluding that the taxpayer could not use Code Sec. 7433(a) to recover damages he claimed to have suffered as a result of a mix-up relating to a delinquent student loan debt and a tax refund due him on his 2011 income tax return. According to the court, Code Sec. 7433(a) waives the government's sovereign immunity only for damages suffered in connection with the collection of federal taxes, and the taxpayer's injury (if any) related to the collection of a student loan debt.

Court Refuses to Sustain Levy after Finding IRS Appeals Officer Abused His Discretion: In Credex, Inc. v. Comm'r, T.C. Memo. 2017-241, the Tax Court refused to sustain an IRS levy notice after finding that an IRS Appeals officer abused his discretion in a case involving a taxpayer's Federal Insurance Contributions Act (FICA) tax liabilities relating to periods in the mid- to late-1990s. The court found that the officer had not applied all of certain stipulated credits to the taxpayer's accounts and, because the officer's determination lacked a sound basis in law and fact, he had abused his discretion.

IRS Issues Quarterly Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2017-25, the IRS issued the rates for interest on tax overpayments and underpayments for the first calendar quarter of 2018, beginning January 1, 2018. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 1 and one-half percent for the portion of a corporate overpayment exceeding $10,000, and 6 percent for large corporate underpayments.

Retirement Plans

IRS Updates Mortality Tables for Defined Benefit Pension Plans: In Notice 2018-2, the IRS issued updated mortality improvement rates and static mortality tables to be used for defined benefit pension plans under Code Sec. 430(h)(3)(A) and Section 303(h)(3)(A) of the Employee Retirement Income Security Act of 1974, as amended. These updated mortality improvement rates and static tables, which are being issued pursuant to the regulations under Code Sec. 430(h)(3)(A), apply for purposes of calculating the funding target and other items for valuation dates occurring during calendar year 2019.

IRS Lists Plan Qualification Requirements That Took Effect in 2017: In Notice 2017-72, the IRS issued the 2017 Required Amendments List for individually designed qualified retirement plans. The list identifies certain changes in qualification requirements that became effective in 2017 that may require a retirement plan to be amended in order to remain qualified, and establishes the date by which any necessary amendment must be made.

Tax Return Preparers

Court Grants Injunction Forbidding Individuals from Preparing Tax Returns: In U.S. v. CDP Accounting Services, P.C., 2017 PTC 539 (E.D. Mich. 2017), a district court granted a permanent injunction forbidding certain individuals that operated a tax return preparation business from ever engaging in the business of preparing income tax returns after finding that the individuals had filed numerous fraudulent returns that claimed false deductions and understated the amount of tax due. Several individuals for whom returns had been prepared testified that their tax returns contained deductions for made up expenses, such as a deduction for non-cash donations of more than $30,000 in one case.

November 2017

Accounting

IRS Issues December 2017 Applicable Federal Rates: In Rev. Rul. 2017-24, the IRS issued the applicable federal rates for December 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

32 Key Differences Between the House and Senate Tax Reform Bills: As the House votes to approve its tax reform bill (House Bill) and the Senate Finance Committee debates and amends its own bill (Senate Bill), there remain dozens of differences between the two proposals. Read More...

Parker's Explanation of the House Tax Reform Bill (TCJA 2017): On Thursday, November 2, 2017, the House released its long-awaited tax reform package in H.R. 1, Tax Cuts and Jobs Act (TCJA; "the Bill"). Most of the changes in the Bill would go into effect for tax years beginning after 2017. An in-depth explanation of the Bill's key provisions follows. Read More...

In-Depth: 2017 Year-End Tax Planning for INDIVIDUALS: The first installment of Parker's annual two-part series on year-end tax planning recaps 2017's major changes affecting individual taxpayers, and strategies clients can use to minimize their 2017 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses. Read More...

CPA Client Letters: Year-End Tax Planning For 2017:
2017 Year-End Tax Planning for INDIVIDUALS.
2017 Year-End Tax Planning for BUSINESSES.

IRS Issues November 2017 AFRs: In Rev. Rul. 2017-21, the IRS issued the applicable federal rates for November 2017. 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

No Discharge of Tax Debts in Bankruptcy for Couple with High Income, Extravagant Lifestyle: A bankruptcy court held that a married couple's tax debts were not dischargeable because the couple had intentionally failed to pay their tax debt while realizing millions in income and sustaining high levels of spending on personal items. The bankruptcy court was not persuaded that the couple's spending was necessary to earn income and found that they had intentionally made offers in compromise to delay collection on the debt. Feshbach v. U.S., 2017 PTC 482 (Bankr. M.D. Fla. 2017). Read More...

Compensation and Benefits,/

IRS Provides 15-Year Sec. 481 Adjustment Period for Elections under Sec. 404A: In Rev. Proc. 2017-59, the IRS modified Rev. Proc. 2015-13 to specify that the Code Sec. 481 adjustment period with respect to an election under Code Sec. 404A, relating to a deduction for certain foreign deferred compensation plans, is 15 tax years for a positive Code Sec. 481(a) adjustment and 15 tax years for a negative Code Sec. 481(a) adjustment. This revenue procedure is effective for Forms 3115 filed under Rev. Proc. 2015-13 on or after November 13, 2017.

Deductions

Alimony Deduction Disallowed for Lack of Unambiguous Termination Provision: In Logue v. Comm'r, T.C. Memo. 2017-234, the Tax Court held that a taxpayer was not entitled to an alimony deduction for payments made to his ex-wife in 2010 because (1) a marital settlement agreement signed by the taxpayer and his ex-wife did not contain an unambiguous provision terminating the taxpayer's obligation to pay his ex-wife in the event of her death, and (2) the obligation would not have terminated in the event of his ex-wife's death by operation of Texas law. The court also held that 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 relating to the alimony deduction and was thus liable for an accuracy-related penalty.

Obtaining Life Insurance to Ensure Alimony Payments Doesn't Indicate Payments Would Terminate at Death: In Wolens v. Comm'r, T.C. Memo. 2017-236, the Tax Court concluded that a taxpayer was not entitled to an alimony deduction after finding nothing in the couple's divorce order indicating that the payments being made by the taxpayer would terminate on the death of his ex-wife. In reaching its conclusion, the court (1) did not view the taxpayer's agreement to cooperate with his ex-wife's obtaining life insurance on his life to secure payments to her as indicating that payments would terminate on her death, and (2) found that the section in the divorce order requiring lump-sum payments was a division of the couple's assets rather than support payments to the ex-wife.

Couple Can't Deduct Short-Term Capital Loss Upon Transfer of Personal Assets to S Corp: In Smith v. Comm'r, T.C. Memo. 2017-218, the Tax Court held that a couple was not entitled to a short-term capital loss relating to the dissolution of an S corporation into which they had transferred their personal assets of cash and marketable securities and which had, in turn, transferred such assets to a family limited partnership. The court found that the couple's receipt of the partnership interest in the dissolution of the S corporation and the couple's use of a substantially discounted value for the assets held by the partnership to be transactions lacking in economic substance and upheld penalties assessed by the IRS.

Employee Benefits

IRS Provides Guidance on Qualified Small Employer Health Reimbursement Arrangements: In Notice 2017-67, the IRS provides the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA) under Code Sec. 9831(d), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees. To be an eligible employer that may provide a QSEHRA, the employer must not be an applicable large employer, as defined in Code Sec. 4980H(c)(2) and the regulations thereunder (and, thus, may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year), and must not offer a group health plan (as defined in Code Sec. 5000(b)) to any of its employees.

Estates, Gifts, and Trusts

Chief Counsel's Office Rejects Appeal by Trust for Refund Relating to a Charitable Deduction: In CCM 201747005, the Office of Chief Counsel responded to a trust's appeal regarding a refund request involving a charitable distribution deduction that had been denied and concluded that Code Sec. 642(c)(1) requires that a charitable distribution must be made pursuant to the terms of a trust's governing instrument, and a court order modifying a will in the absence of a controversy involving the interpretation of the instrument is not "pursuant to the terms of the governing instrument." The Chief Counsel's Office thus rejected the trust's refund request, as well as its argument that the decisions in Crown Income Charitable Fund v. Comm'r, 8 F.3d 571 (7th Cir. 1993), and Brownstone v. U.S., 465 F.3d 525 (2d Cir. 2006), did not support a narrow interpretation of Code Sec. 642(c)(1).

Exclusions from Gross Income

Chinese Professor Not Exempt from U.S. Tax under U.S. - China Treaty: In Ye v. Comm'r, T.C. Memo. 2017-216, the Tax Court held that wages earned by an assistant professor, who was a Chinese citizen and a U.S. resident, were not exempt from U.S. tax under article 19 of the U.S. - China treaty since that provision only applies to persons who are temporarily present in the United States. The court rejected her argument that, at the time she filed the applicable tax returns, she was only "temporarily present" in the United States because a variety of contingencies could have resulted in her returning to China.

Gross Income

Employer's Purchase of Life Insurance Policy on Taxpayer Results in Imputed Income to Taxpayer: In Ramsay v. Comm'r, T.C. Memo. 2017-223, the Tax Court held that a taxpayer's taxable income included imputed income of $891 as a result of a former employer's purchase of a life insurance policy on the taxpayer. The court also held that it had jurisdiction to determine the taxpayer's liability for interest on the deficiency that resulted from not including the $891 in taxable income.

IRS Provides Guidance on Employer-Leave Based Donation Program for Wildfire Victims: In Notice 2017-70, the IRS advised that it will not assert that cash payments an employer makes to Code Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the Code Sec. 170(c) organizations for the relief of victims of the 2017 California Wildfires; and (2) paid to the Code Sec. 170(c) organizations before January 1, 2019. Similarly, the IRS said that it will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees, but noted that electing employees may not claim a charitable contribution deduction under Code Sec. 170 with respect to the value of forgone leave excluded from compensation and wages.

International

IRS Issues Hurricane Guidance Relating to Certain CFC Obligations Held by U.S. Persons: In Notice 2017-68, the IRS announced that, for purposes of Code Sec. 956, if a controlled foreign corporation (CFC) holds an obligation of a U.S. person, such obligation will be considered to satisfy the requirements of Code Sec. 956(c)(2)(C) and Reg. Sec. 1.956-2(b)(1)(v) to be excluded from U.S. property, if (1) the obligation was received in exchange for property that, if transported to the United States for temporary storage for safekeeping in anticipation of, or as a result of, Hurricane Irma or Hurricane Maria, would not cause a CFC to be treated as holding U.S. property pursuant to Notice 2017-55, and (2) the obligation ceases to be outstanding on or before March 31, 2018. An obligation of a U.S. person that does not meet the conditions in the preceding sentence may nevertheless be excludable from U.S. property under Code Sec. 956(c)(2)(C) and Reg. Sec. 1.956-2(b)(1)(v) depending on all of the facts and circumstances.

No Foreign Tax Credit Allowed Where Investment Is Treated as Debt, Not Equity: In Hewlett-Packard Company and Subs v. Comm'r, 2017 PTC 509 (9th Cir. 2017), the Ninth Circuit affirmed the Tax Court's holding that an investment by the taxpayer could not be treated as equity for which the taxpayer could claim foreign tax credits. While acknowledging a circuit split on the issue of whether the debt versus equity question is one of law, fact, or a mix of the two, the Ninth Circuit explained that the best way to read circuit precedent was that the test is "primarily directed" at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like, taking into account eleven factors set forth in A.R. Lantz Co. v. U.S., 424 F.2d 1330 (9th Cir. 1970).

Penalties

Ninth Circuit Upholds Sanctions on Attorney for Advancing Frivolous Positions: In MacPherson v. Comm'r, 2017 PTC 513 (9th Cir. 2017), the Ninth Circuit held that the Tax Court did not abuse its discretion in ordering an attorney to pay excess costs pursuant to Code Sec. 6673(a)(2) because he had counseled his taxpayer clients to maintain frivolous positions. The court found that, on behalf of his clients, the attorney had advanced a position contrary to established law and unsupported by fact and that he knew his position would be unsuccessful.

Late Filing Penalties Apply Even Where Return Shows a Refund: In Parekh v. Comm'r, T.C. Memo. 2017-227, the Tax Court held that a couple, who was owed a tax refund, was liable for late filing penalties because they did not establish a reasonable cause for filing their tax return 15 months late. The court noted that the couple had a history of filing their income tax returns late and seemed to believe that the filing deadlines were not important when they were expecting a refund.

Procedure

Letter from SSA Demonstrated Legitimate Question as to Whether Tax Liability Had Been Satisfied: In Gage v. U.S., 2017 PTC 523 (9th Cir. 2017), the Ninth Circuit reversed a district court's judgment that the IRS could, under Code Sec. 6334(e)(1), levy on a couple's principal residence for nonpayment of taxes. The court concluded that the receipt by a couple of a notice from the Social Security Administration informing the wife that the IRS would no longer take money out of her monthly social security payment because she no longer owed the IRS any money raised a genuine issue of material fact as to whether the underlying tax liability had been satisfied.

Corporation Can't Get Refund of Excise Tax Paid by Customers: In Worldwide Equipment of TN, Inc. v. U.S., 2017 PTC 521 (6th Cir. 2017), the Sixth Circuit affirmed a district court's dismissal of a corporation's refund claim because the requirement under Code Sec. 6416(a) that the corporation show that it made arrangements to avoid double payments by submitting written customer consent forms had not been met. The corporation had remitted a 12 percent federal excise tax collected from purchasers of its heavy duty trucks, and sought a refund from the IRS because, it claimed, the trucks qualified as exempted, "off-highway" vehicles under Code Sec. 7701(a)(48).

Sign Language Interpreters Aren't Required to Sign Non-disclosure Agreement: In CCA 201746025, the Office of Chief Counsel advised that a contract under which sign language interpreters operate, which holds them to all the criminal and civil penalties that apply to the unauthorized disclosure of tax data, was sufficient assurance to taxpayers that their confidential tax data is being adequately protected. According to the Chief Counsel's Office, there is no basis for an interpreter to be required to sign a non-disclosure agreement furnished by a taxpayer.

Court Affirms Conviction of Brothers Who Owned Strip Club Business That Kept Two Sets of Books: In U.S. v. Kiraz, 2017 PTC 499 (9th Cir. 2017), the Ninth Circuit affirmed the conviction of two brothers who engaged in a scheme to underreport a family-run strip-club business' income by failing to report door fees, which were charged for customer entry, and house fees, which were charged for working as a dancer. The court noted that the jury heard evidence that one of the brothers participated in a scheme to maintain two sets of books and that the other brother knowingly aided in that scheme.

Retirement Plans

No Deduction Allowed for UBTI Losses Sustained by Partnerships Held in Individual's IRAs: In Fish v. Comm'r, 2017 PTC 478 (2017), the Ninth Circuit affirmed the Tax Court and held that a taxpayer could not deduct on his personal return unrelated business taxable income (UBTI) losses sustained by two partnerships held in an individual retirement account (IRA). The court noted that, while IRAs are generally tax-exempt, they are subject to the taxes imposed by Code Sec. 511 on the UBTI of organizations in which they invest and there is no provision for the pass-through of UBTI losses to an IRA beneficiary's personal tax return.

IRS Provides Relief for Victims of Hurricane Maria and California Wildfires: In Announcement 2017-15, the IRS is providing relief to victims of Hurricane Maria and the recent California wildfires, which caused damage to Puerto Rico, the U.S. Virgin Islands, and parts of California. It permits easier access to funds held in workplace retirement plans and in individual retirement accounts, for the period beginning September or October 2017 and ending March 15, 2018.

IRS Provides Covered Compensation Tables for 2018 Plan Year: In Rev. Rul. 2017-22, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2018 plan year. For purposes of determining covered compensation for the 2018 year, the taxable wage base is $128,700.

Tax Accounting

Company Can Reduce Income Where It Did Not Meet All-Events Test for Accruing Income: In VHC, Inc. and Subsidiaries v. Comm'r, T.C. Memo. 2017-220, the Tax Court held that a corporation did not meet the all-events test for accruing income with respect to a particular client and thus could reduce its income by the amount previously accrued. The court found that the all-events test was not satisfied because the client had initiated a lawsuit contesting the amount it owed.

Tax Return Preparers

CPA Liable for Penalties for Understating Clients' Tax Liabilities: In John Q. Rodgers v. U.S., 2017 PTC 507 (C.D. Calif. 2017), a district court held that a CPA, who operated a tax preparation business, was liable for penalties under Code Sec. 6694 for willful or reckless understatements of liability on nine tax returns he prepared. The court agreed with the IRS that because the CPA did not make reasonable inquiries in situations in which the situations required him to do so, his conduct satisfied the requirements for the assessment of penalties.

 

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