Tax and Accounting Research: Tax Updates June 2023 - November 2020

June 2023

Accounting

IRS Releases June 2023 Applicable Federal Rates: In Rev. Rul. 2023-10, the IRS issued the applicable federal rates for June 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Credits

Tax Court Denies IRS's Summary Judgment Motion in Research Credit Dispute: In Harper v. Comm'r, T.C. Memo. 2023-57, the Tax Court denied the IRS's motion for partial summary judgment arguing that the construction designs underlying a Code Sec. 41 research credit claimed by the taxpayer, a design builder and general contractor, did not satisfy the business component test of Code Sec. 41(d)(1) and (2). The IRS contended that the taxpayer's designs were never "new or improved," but the court rejected that argument after finding that the taxpayer engaged in a lengthy, multistep process of conceptual design and design development for each project, resulting in novel ideas and iterative improvements to them; thus, the designs could be construed as processes, techniques, or inventions that would constitute a business component of the taxpayer's operations.

Deductions

2024 Inflation Adjustments Issued for HSAs and Excepted-Benefit HRAs: In Rev. Proc. 2023-23, the IRS issued the 2024 inflation adjusted amounts for health savings accounts (HSAs) as determined under Code Sec. 223 and the maximum amount that may be made newly available for excepted benefit health reimbursement arrangements (HRAs) under Reg. Sec. 54.9831-1(c)(3)(viii). For calendar year 2024, (1) the annual limitation on deductions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $4,150; (2) the annual limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $8,300; (3) a "high deductible health plan" is defined under Code Sec. 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $8,050 for self-only coverage or $16,100 for family coverage; and (4) the maximum amount that may be made newly available for the plan year for an excepted benefit HRAs is $2,100.

No Travel Expense Deduction for Taxpayer Indefinitely Employed at Distant Jobsite: In Ledbetter v. Comm'r, T.C. Summary 2023-19, the Tax Court held that a union sheet metal worker who commuted 184 miles roundtrip from his home to a jobsite was not entitled to deduct mileage expenses under the exception to the general rule barring deductions for commuting expenses that applies to transportation expenses incurred in going between the taxpayer's residence and a temporary work location outside the metropolitan area where the taxpayer normally lives and works. The court found that, although the employer described the job as a temporary assignment, the taxpayer's work location was not temporary considering that he was continuously employed at that location for 7 years with no period of layoff exceeding four months.

Fraudulent Allegation of Property Confiscation by Iranian Government Fails in Tax Court: In Soleimani v. Comm'r, T.C. Memo. 2023-60, the Tax Court upheld the denial of a loss deduction claimed by a taxpayer for three parcels of real property in Iran the taxpayer claimed had been confiscated by the Iranian government. The court found that the documents purporting to substantiate the taxpayer's ownership of the properties were forgeries and the purported expert witness whose report the taxpayers relied on to substantiate the loss was a fictitious person; however, the court did not apply a fraud penalty because the IRS waited until the end of the proceedings to ask that a fraud penalty be applied which, in the court's view, would have caused undue prejudice to the taxpayers.

Employee Benefits

IRS Issues Interim Guidance on Expansion of EPCRS Under SECURE 2.0 Act: In Notice 2023-43, the IRS provided interim guidance with respect to Section 305 of the SECURE 2.0 Act of 2022, which provides for the expansion of the Employee Plans Compliance Resolution System (EPCRS) currently set forth in Rev. Proc. 2021-30 and directs the IRS to revise Rev. Proc. 2021-30 by December 29, 2024. Among other issues addressed, the notice: (1) provides that a plan sponsor may self-correct an eligible inadvertent failure before Rev. Proc. 2021-30 is updated; (2) provides that a custodian of an individual retirement account may not correct an eligible inadvertent failure under EPCRS before Rev. Proc. 2021-30 is updated; and (3) provides interim interpretive guidance that applies with respect to corrections of eligible inadvertent failures.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2023-40, 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 notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Employment Taxes

Doctor's Office Misclassified Medical Assistants as Nonemployees: In Cardiovascular Center, LLC v. Comm'r, T.C. Memo. 2023-64, the Tax Court held that a doctor who operated a solo medical practice failed to classify medical assistants as employees and therefore was liable for employment taxes and penalties. The court found that various factors, including the degree of control exercised by the doctor, the lack of investments made by the workers in the workplace, and the lack of opportunities for the workers to seek profit or loss from the doctor's practice, were indicative of an employment relationship; the court also found that the doctor was not eligible for Section 530 relief because he did not consistently file all required returns and did not have a reasonable basis for not treating the workers as employees.

Procedure

Interest Rates Unchanged for Third Quarter of 2023: In Rev. Rul. 2023-11, the IRS issued the rates for interest on tax underpayments and overpayments for the quarter beginning July 1, 2023, which are unchanged from the rates for the second quarter of 2023. Thus the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning July 1, 2023, will be 7 percent for overpayments (6 percent in the case of a corporation), 7 percent for underpayments, and 9 percent for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 4.5 percent.

IRS Abused Its Discretion by Rejecting Taxpayers' Compromise Offer: In Whitaker v. Comm'r, T.C. Memo. 2023-59, the Tax Court remanded a taxpayers' case back to the IRS Independent Office of Appeals (Appeals) after finding that Appeals abused its discretion when it rejected the taxpayers' offer to settle their $33,000 tax bill for $1,629. The court found that the settlement officer clearly erred in concluding that the taxpayers could access the equity in their home in order to pay their taxes and failed to take into account the taxpayers' loss of wage income due to the pandemic.

Claims Court Holds That Return Signature Requirement Is Non-Jurisdictional: In Cooper v. U.S., 2023 PTC 121 (Fed Cl. 2023), the Court of Federal Claims denied the government's motion to dismiss a taxpayer's refund action for lack of jurisdiction based on the taxpayer's failure to sign his Form 843, Claim for Refund and Request for Abatement. The government argued that the decision of the Federal Circuit in Brown v. U.S., 2022 PTC 2 (Fed. Cir. 2022) holding that the "duly filed" requirement Code Sec. 7422(a) is a non-jurisdictional claims processing rule, was not binding because that decision contradicts earlier Federal Circuit panel decisions and a panel of the Federal Circuit cannot overrule another panel; the Court of Federal Claims found that argument was more appropriately addressed by the Federal Circuit and unless it is told otherwise, it will follow Brown as controlling.

IRS Reports to Congress on Feasibility of Free Electronic Tax Return Filing System: The IRS submitted a report to Congress, as required by the Inflation Reduction Act of 2022, evaluating a "direct file" (i.e., a free, voluntary, IRS-run electronic filing) option for taxpayers and is taking steps to begin a pilot project for the 2024 filing season following a directive from the Treasury Department. The report finds that many taxpayers are interested in using a free IRS-provided tool to prepare and file taxes, and that the agency is technically capable of delivering a direct file program; it also concludes that effective execution of a direct file program would require sustained budget investment and careful management of the potential program's operational complexity.

Tax Court Orders IRS to Supplement Discovery Responses in Whistleblower Case: In Barenblatt v. Comm'r, 160 T.C. No. 14 (2023), the Tax Court held, in a case of first impression involving a whistleblower's appeal of a denial of an award, in which the whistleblower argued that the administrative record excluded certain relevant documents and filed motions to compel the IRS to provide additional discovery responses, the IRS's designation of the administrative record enjoys a presumption of correctness and discovery aimed at completing the record is allowed only on a significant showing that there is material in the IRS's possession indicative of bad faith or of an incomplete record. The court further held that the whistleblower did not make a significant showing of bad faith or an incomplete record in connection with his requests for document production but did make a limited showing of an incomplete record with respect to one of his interrogatory requests and therefore compelled the IRS to supplement its responses in that regard.

Tax-Exempt Bonds

Forthcoming Regs Will Address Arbitrage Treatment of Certain Guarantee Funds: In Notice 2023-39, the IRS states that it intends to issue proposed regulations regarding an exception to the arbitrage investment restrictions under Code Sec. 148 applicable to tax-exempt bonds. Specifically, the forthcoming proposed regulations will amend Reg. Sec. 1.148-11(d)(1)(i)(F) regarding whether certain perpetual trust funds created and controlled by states that are pledged as credit enhancement to guarantee tax-exempt bonds will be treated as replacement proceeds of the guaranteed bonds for purposes of the arbitrage investment restrictions on tax-exempt bonds under Code Sec. 148.

Tax-Exempt Organizations

Accountable Care Organization Did Not Qualify for Nonprofit Status: In Memorial Hermann Accountable Care Organization v. Comm'r, T.C. Memo. 2023-62, the Tax Court upheld the IRS's denial of tax-exempt status under Code Sec. 501(c)(4) to an accountable care organization that participated in a number of shared savings programs involving the coordination of healthcare for both Medicare and non-Medicare patients.. The court found that while the organization's stated goal of providing affordable healthcare to patients was an admirable one, the organization's non-Medicare Shared Savings Program activities primarily benefited its commercial payor and healthcare provider participants, rather than the public, and therefore constituted a substantial nonexempt purpose.

May 2023

Accounting

IRS Releases May 2023 Applicable Federal Rates: In Rev. Rul. 2023-9, the IRS issued the applicable federal rates for May 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Deductions

Court Rejects IRS's Motion for Ruling That Notes Were Short-Term Debt: In Colony Brands, Inc. v. U.S., 2023 PTC 115 (W.D. Wis. 2023), a case involving a taxpayer seeking a refund for the IRS's wrongful denial of an interest expense deduction on certain promissory notes, a district court rejected the government's motion for summary judgment seeking to establish that the notes were "short-term debt" because they were payable on demand. According to the court, the fact that the notes were payable on the demand was relevant to whether the taxpayer paid a reasonable interest rate on the notes, but the government failed to show that "short-term debt" is a meaningful designation under state or federal law or that a pre-trial ruling on the issues would clarify issues for trial.

Employment Taxes

Court Lacks Jurisdiction Over United Airlines Pilots' FICA Tax Refund Claims: In DiCicco v. U.S., 2023 PTC 100 (Fed. Cl. 2023), the Court of Federal Claims held that it did not have jurisdiction over the claims of nine United Airlines pilots for refunds of the FICA taxes they paid based on the estimated value of their nonqualified deferred compensation benefits. The pilots sought refunds after United Airlines, which filed for bankruptcy, failed to pay all of the pilots' benefits, and notified the pilots that it would not seek a refund of the FICA taxes it paid on their behalf, but the court found that it lacked jurisdiction because the pilots failed to file timely refund claims with the IRS.

Income

Inheritor of Savings Bond Had to Include Accumulated Interest in Income: In Hitchman v. Comm'r, T.C. Summary 2023-18, the Tax Court held that a taxpayer who inherited a savings bond from his father, then had the bond reissued in his name and redeemed it, had to include the accumulated interest on the bond in his gross income. The court rejected the taxpayer's argument that his interest income was limited to the interest that accrued from the time he had it reissued in his name; the court found that because the taxpayer's father did not report any interest income on the bond while he owned it, the interest therefore accumulated, and when the taxpayer redeemed the bond the accumulated interest was includible in his income as income in respect of a decedent under Code Sec. 691(a).

Insurance Companies

IRS Issues Proposed Regulations on Life Insurance Contract Transactions: IN REG-108054-21, the IRS issued proposed regulations providing guidance on the application of the transfer for valuable consideration rules and associated information reporting requirements for reportable policy sales of interests in life insurance contracts to exchanges of life insurance contracts qualifying for nonrecognition of gain or loss under Code Sec. 1035, as well as to certain acquisitions of interests in life insurance contracts in transactions that qualify as corporate reorganizations. The proposed regulations affect parties involved in these life insurance contract transactions, including with respect to payments of reportable death benefits.

International

IRS Issues Proposed Regulations on Repatriations of Intangible Property: In REG-124064-19, the IRS issued proposed regulations that, in certain cases, would terminate the continued application of certain tax provisions arising under Code Sec. 367(d) from a previous transfer of intangible property to a foreign corporation when the intangible property is repatriated to certain United States persons. The proposed regulations would affect certain United States persons that previously transferred intangible property to a foreign corporation.

Penalties

Concealment of Foreign Bank Account Results in Imposition of Willful FBAR Penalty: In U.S. v. Kelly, 2023 PTC 113 (E.D. Mich. 2023), a district court held that taxpayer was liable for a penalty under 31 U.S.C. Section 5321(a)(5) for willfully failing to file Reports of Foreign Bank and Financial Accounts (FBARs) based on the taxpayer's pattern of concealment of his foreign bank account coupled with his actual knowledge of the FBAR reporting requirement. The court found that the taxpayer's participation in the IRS's offshore voluntary disclosure program (OVDP) did not negate his willfulness because the taxpayer was not accepted into OVDP until 10 months after the FBAR deadline passed and was removed from the OVDP program for failure to comply with the program's requirements.

District Court Declines to Stay Its Order Setting Aside Tax Shelter Notice: In Mann Construction, Inc. v. U.S., 2023 PTC 111 (E.D. Mich. 2023), a district court denied the government's motion to stay the effect of the court's January 2023 order setting aside Notice 2007-83, which the court issued after the Sixth Circuit decided in Mann Construction, Inc. v. U.S., 2022 PTC 63 (6th Cir. 2022), that the IRS violated the notice-and-comment requirements of the Administrative Procedure Act in issuing Notice 2007-83 and remanded the case. The district court rejected the government's request for a stay after finding that the government's appeal was unlikely to be successful and that the government would not be irreparably harmed absent a stay.

Procedure

Tax Court Needs More Facts to Decide if Virgin Islands Cover-Over Requests Are Returns: In Estate of Tanner v. Comm'r, T.C. Memo. 2023-54, the Tax Court denied a taxpayer's motion for summary judgment arguing that the statute of limitations on assessments under Code Sec. 6501(a) was triggered when the Virgin Islands Bureau of Internal Revenue (VIBIR) sent "cover-over" requests to the IRS, requesting that the U.S. taxes paid by the taxpayer (who claimed to be a U.S. Virgin Islands (USVI) resident) be paid over to the USVI Treasury. The taxpayer contended that the cover-over requests, which included portions of his USVI tax returns, constituted returns under the four-part test set forth in Beard v. Comm'r, 82 T.C. 766 (1984), but the Tax Court found that more facts were needed to determine whether the taxpayer intended the VIBIR's transmission of the cover-over requests be the filing of his returns that triggered the statute of limitations.

IRS Resumes In-Person Hearings on Proposed Regulations: In Announcement 2023-16, the IRS announced that it will no longer conduct public hearings on notices of proposed rulemaking solely by telephone for proposed regulations published in the Federal Register after May 11, 2023, following the end of the national emergency concerning the COVID-19 pandemic. A telephonic option will remain available for those who prefer to attend or testify at a public hearing by telephone.

IRS Invites Comments on 2023-2024 Priority Guidance Plan: In Notice 2023-36, the IRS is encouraging the public to submit recommendations for items to be included on their 2023-2024 Priority Guidance Plan, which is used each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2023-2024 Priority Guidance Plan will identify guidance projects that the Treasury Department and the IRS intend to actively work on as priorities during the period of July 1, 2023, through June 30, 2024.

April 2023

Accounting

IRS Releases April 2023 Applicable Federal Rates: In Rev. Rul. 2023-6, the IRS issued the applicable federal rates for April 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

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Bankruptcy

Bankruptcy Court Has No Jurisdiction to Review IRS Denial of Innocent Spouse Relief: In In re Geary, 2023 PTC 95 (Bankr. W.D. Pa. 2023), a bankruptcy court held that it lacked jurisdiction to review the IRS's denial of a debtor's request for innocent spouse relief. The court found that its authority under 11 U.S.C. Section 505(a) to determine the amount or legality of any tax is not a type of "other remedy by law" envisioned by Congress in enacting Code Sec. 6015(e)(1)(A), which most courts agree gives the Tax Court exclusive jurisdiction to hear appeals of adverse innocent spouse decisions, except where a refund suit is commenced in a federal district court.

IRS Did Not Violate Discharge Injunction Due to Equitable Tolling of Lookback Period: In In re Rader, 2023 PTC 96 (Bankr. M.D. Tenn. 2023), a bankruptcy court held that the IRS did not violate the discharge injunction under 11 U.S.C. Section 524(a)(2) by attempting to collect taxes that the debtor claimed were discharged in his Chapter 13 case. The court found that the two-year lookback period in 11 U.S.C. Section 523(a)(1)(B)(ii) was equitably tolled while the debtor was in an earlier unsuccessful bankruptcy proceeding and therefore, the taxes related to the debtor's tax returns for years 2002-2010 were non-dischargeable because the returns were filed late and within the tolled two-year lookback period.

Credits

Dept. of Energy Provides Updated List of Vehicles That Qualify for EV Credit: The Department of Energy provided an updated list at fueleconomy.gov/feg/tax2023.shtml of new vehicles placed in service on or after April 18, 2023, that qualified manufacturers have indicated to the IRS meet the requirements to claim the new clean vehicle credit under Code Sec. 30D. The updated list was provided as a result of the critical minerals and battery components requirements went into effect for vehicles placed in service after April 17, 2023, under the proposed regulations issued in REG-120080-22.

IRS Issues Nationwide Average Purchase Price for Residences: In Rev. Proc. 2023-22, the IRS provides issuers of qualified mortgage bonds, as defined in Code Sec. 143(a), and issuers of mortgage credit certificates, as defined in Code Sec. 25(c), 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. Generally, issuers must use the nationwide average purchase price limitation contained in the procedure 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 30, 2023, and ends on the date when the nationwide average purchase price limitation is rendered obsolete by a new revenue procedure.

Taxpayers Improperly Claimed Credit Automatically Generated by Tax Return Software: In Evan v. Comm'r, T.C. Summary 2023-15, the Tax Court held that taxpayers were liable for a deficiency and penalty as a result of improperly claiming a credit for prior year minimum tax under Code Sec. 53. The taxpayers relied on tax preparation software which automatically generated a Form 8801, Credit for Prior Year Minimum Tax- Individuals, Estates, and Trusts; however, the court determined that the taxpayers paid no alternative minimum tax for the year at issue and therefore, there was not prior year minimum tax credit carryforward from which they could claim a credit for the year at issue.

IRS Issues Guidance on Energy Community Bonus Credit: In Notice 2023-29, the IRS stated that it intends to issue proposed regulations addressing the application of the rules for the energy community bonus credit under Code Secs. 45, 45Y, 48, and Code Sec. 48E. The notice describes certain rules that the IRS intends to include in the regulations for determining what constitutes an energy community as defined in Code Sec. 45(b)(11)(B) and for determining whether a qualified facility, an energy project, or an energy storage technology is located in an energy community; the IRS also noted that until the issuance of the proposed regulations, taxpayers may rely on the rules provided in the notice.

Deductions

Settlement Payment Was Not Deductible in 2012 Where Check Was Delivered in 2013: In Gage v. Comm'r, T.C. Memo. 2023-47, the Tax Court held that a payment made by cash method taxpayers to settle a lawsuit with the Department of Housing and Urban Development (HUD) was not deductible as a business loss in 2012 because the taxpayers' lawyer did not deliver the check to HUD until 2013. The taxpayers argued that under state law the payment was made when they gave the check to their attorney but the court rejected that argument and held that, because the litigation was between the taxpayer and an agency of the federal government, federal law controlled and under federal tax law, a payment by check is made when the check is delivered.

Taxpayers Survive Summary Judgment in Conservation Easement Case: In North Donald LA Property, LLC v. Comm'r, T.C. Memo. 2023-50, the Tax Court denied the IRS's motion for summary judgment on the issue of whether a conservation easement deed violated the protected in perpetuity requirement under Code Sec. 170(h)(5)(B) because the donor retained the right to extract clay from the property. The court found that the easement deed explicitly barred the extraction of minerals and found that a genuine issue of material fact existed as to whether the former owners of the land over which the easement was granted reserved to themselves the right to mine subsurface clay.

Spouses Can't Combine Time Spent on Rentals to Qualify as Real Estate Professionals: In Teague v. Comm'r, T.C. Summary 2023-16, the Tax Court held that a married couple who owned rental cabins in Maine could not deduct the losses from the rentals in excess of the amount allowable under Code Sec. 469(i) for 2017 because they failed to show that either spouse qualified as a real estate professional under Code Sec. 469(c)(7). The court rejected the taxpayers' argument that they qualified as real estate professionals based on the total time they both spent working on the cabins because Code Sec. 469(c)(7)(B) provides that, in the case of a joint return, the requirements for qualification as a real estate professional are satisfied only if either spouse separately meets the requirements.

Casualty Loss Deduction for Damage to Taxpayer's Boat Sinks Like a Rock in Tax Court: In Richey v. Comm'r, T.C. Memo. 2023-43, the Tax Court held that the IRS properly denied a $740,000 casualty loss deduction for damage to a vacation home and boat which the taxpayers claimed was caused by a 2017 winter storm. The court found that the taxpayers failed to prove that the damage was caused by the storm, did not adequately substantiate their losses or of their basis in the boat, and did not file insurance claims for property that was protected by insurance.

No Rental Loss Deductions for Taxpayers Who Were Not Real Estate Professionals: In Drocella v. Comm'r, T.C. Memo. 2023-12, the Tax Court held that a married couple could not deduct losses with respect to their rental real estate because the losses were disallowed under the passive activity loss rules in Code Sec. 469. The court noted that under Code Sec. 469(c)(2), rental activity is passive unless the taxpayer qualifies as a real estate professional under Code Sec. 469(c)(7)(B), and the court concluded that neither taxpayer met the requirements for being a real estate professional.

Tax Court Disallows Business Bad Debt Deduction for Debts That Were Not Bona Fide: In Keeton v. Comm'r, T.C. Memo. 2023-35, the Tax Court held that cash advances made by a partnership to a C corporation were not bona fide debt and therefore, the taxpayers who jointly controlled both entities were not entitled to take passthrough loss deductions corresponding to their allocable share of the partnership's claimed business bad debt. The court determined that the advances constituted capital contributions and that even if some of the advances were debt, that debt was later extinguished when all loans from shareholders of the corporation were converted to paid-in capital.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2023-33, 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 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 2023-25, 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 notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Estates, Gifts, and Trusts

Value of Gross Estate Was Not Reduced by Claims Against Decedent: In Estate of MacElhenny v. Comm'r, T.C. Memo. 2023-33, the Tax Court held that an estate could not deduct the value of two consent judgments against the decedent which arose in a commercial lending arrangement because the debts were satisfied before the decedent died and therefore were not the decedent's personal obligations at the time of his death as required by Code Sec. 2053. The court also held that the decedent's children received taxable gifts by purchasing property from the estate at a discount.

Excise Taxes

Specially-Designed Peanut Drying Trailers Were Not Subject to 12 Percent Excise Tax: In Rockwater, Inc. v. U.S., 2023 PTC 88 (M.D. Ga. 2023), a district court held that the designer and seller of peanut drying semitrailers was not liable for the 12 percent federal excise tax on heavy trucks and trailers sold at retail under Code Sec. 4051(a) because the trailers were specially designed for the primary function of transporting peanuts for drying purposes in a manner other than over a public highway. The court further found that the taxpayer had a good faith basis for contesting the tax and delaying payment and was therefore not liable for penalties and interest.

Exclusions from Income

Exclusion for Disability Payments Did Not Apply Because Company Paid Premiums: In Hailstone v. Comm'r, T.C. Summary 2023-17, the Tax Court held that a taxpayer's disability payments were not excludable from income under Code Sec. 105(c) because the company, rather than the taxpayer, was required to pay all of the premiums. The court found no merit in the taxpayer's arguments that the disability insurance policy allowed the company to choose an option to permit an employee to pay part of the premiums, because it was clear that the company did not choose that option and did not allow employees to pay any amount of the premiums.

Early Filers Who Reported State Tax Refunds as Taxable Can File Amended Returns: In IR-2023-77, the IRS said that taxpayers who filed their federal income taxes early this year and reported certain state 2022 tax refunds as taxable income should consider filing an amended return. The IRS reminded taxpayers of the guidance it issued in IR-2023-23 on February 10, 2023, in which it clarified that certain state payments made by 21 states in 2022 related to general welfare and disaster relief do not need to be reported as income; thus, taxpayers who filed returns and included these payments in their taxable income should consider filing amended returns, which may be filed electronically.

IRS Advises That Relief Payments for Hawaii Oil Spill Are Excludable from Income: In Announcement 2023-7, the IRS provided guidance on relief payments made to certain civilians affected by the release of petroleum from the Red Hill Bulk Fuel Storage Facility on Oahu, Hawaii by the Department of Defense in 2022. According to the IRS, the payments, which were made to affected federal civilian employees and other civilians who are not employed by the federal government for reimbursement of lodging, meals and personal property damage expenses, are excludable from gross income for federal income tax purposes.

Innocent Spouse Relief

Taxpayer Kept in the Dark About Family Finances is Entitled to Innocent Spouse Relief: In DiGiorgio v. Comm'r, T.C. Memo. 2023-44, the Tax Court held that a taxpayer who failed to report substantial income from his business making mortgage loans and selling mortgage-backed securities while living a lavish lifestyle was liable for deficiencies and penalties, including the civil fraud penalty under Code Sec. 6663. However, the court held that the taxpayer's wife was entitled to innocent spouse relief under Code Sec. 6015(f) after finding that she could not be expected to know that the tax liability her husband stated on their return was erroneous and it would be inequitable to deny her relief.

Insurance Companies

IRS Issues Asset/Liability Percentages and Domestic Investment Yields: In Rev. Proc. 2023-21, the IRS issued the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after Dec. 31, 2021. Rev. Proc. 2022-36 contains the information for the domestic asset/liability percentages and domestic investment yields for tax years beginning after Dec. 31, 2020.

International

Court Orders Taxpayer to Repatriate Foreign Assets to Pay FBAR Penalties: In U.S. v. Schwarzbaum, 2023 PTC 78 (S.D. Fla. 2023), a district court ordered a taxpayer to repatriate funds held overseas into a U.S. bank account in order to satisfy the amounts due under the court's judgment holding the taxpayer liable for penalties for willfully failing to file Reports of Foreign Bank and Financial Accounts (FBARs). The court rejected the taxpayer's argument that the court lacked jurisdiction to issue the order and that foreign assets cannot be repatriated into the United States unless the assets repatriated are intended to satisfy an outstanding tax liability or for disgorgement of ill-gotten gains from fraudulent or deceptive conduct, and the assets were originally in the United States.

District Court Invalidates Foreign Tax Credit Regulation: In FedEx Corp. v. U.S., 2023 PTC 76 (W.D. Tenn. 2023), a district court held that a U.S. corporation was wrongly denied foreign tax credits and was entitled to a refund of more than $89 million for foreign taxes it paid on earnings from profitable foreign subsidiaries that were offset by losses from other foreign subsidiaries (i.e., offset earnings) under Code Secs. 959, 960, and Code Sec. 965. The court found that Reg. Sec. 1.965-5(c), which disallows a foreign tax credit on offset earnings, is invalid because it contradicts the plain language of the Code provisions.

IRS Extends Transition Period for the Single-Country Exception under Section 903: In Notice 2023-31, the IRS announced that it intends to provide a longer transition period for the documentation requirement in Prop. Reg. Sec. 1.903-1(c)(2)(iv)(D) (the documentation requirement) when the exception to the source-based attribution requirement in Prop. Reg. Sec. 1.903-1(c)(2)(iii)(B) (the single-country exception) is finalized. The IRS stated that the documentation requirement will be extended to provide that the required agreement must be executed no later than 180 days after the date final regulations adopting the single-country exception are filed with the Federal Register.

U.S. Citizen Properly Deferred Income from Canadian Retirement Plans: In Dengin v. Comm'r, T.C. Memo. 2023-31, the Tax Court held that a U.S. citizen who lived in Canada and was the owner and beneficiary of three Canadian retirement plans, properly elected to defer income with respect to two of the three plans. The court found that under Rev. Proc. 2014-55, the taxpayer automatically made the election by filing U.S. federal income tax returns for the years in which he was a beneficiary of the plans, even though he did not file the returns until he was under audit by the IRS.

IRS Provides 2023 Adjustments to the Limitation on Housing Expenses under Section 911: In Notice 2023-26, the IRS provides adjustments to the limitation on housing expenses for purposes of Code Sec. 911 for specific locations for 2023. These adjustments are based on geographic differences in housing costs relative to housing costs in the United States.

Penalties

Third Circuit Sends Taxpayer's Appeal of TFRP Assessment Back to Tax Court: In Ahmed v. Comm'r, 2023 PTC 79 (3d Cir. 2023), the Third Circuit vacated the Tax Court's ruling that it lacked jurisdiction over a taxpayer's appeal of a collection due process hearing in a case in which the taxpayer sent $625,000 to the IRS as a deposit in order to stop the running of interest on his disputed trust fund recovery penalties (TFRPs), but which the IRS applied as a direct payment to his tax bill. The Third Circuit remanded the case after finding that it was unclear whether the IRS sent a Letter 1153, Notice of Trust Fund Recovery Penalty, to the taxpayer at his last known address as required under Code Sec. 6672(b) and therefore, the IRS may not have met the requirements to assess the TFRPs administratively.

District Court Allows Taxpayer's Challenge to Notice 2007-83 To Go Forward: In Govig and Associates, Inc. v. U.S., 2023 PTC 64 (D. Ariz. 2023), a district court held that it has jurisdiction over a taxpayer's lawsuit challenging the validity under the Administrative Procedure Act (APA) of Notice 2007-83, in which the IRS identified certain trust arrangements using cash value life insurance policies as listed transactions. However, the court rejected the taxpayer's argument that the Sixth Circuit's decision in Mann Construction, Inc. v. U.S., 2022 PTC 63 (6th Cir. 2022), that Notice 2007-83 was invalid under the APA applied on a nationwide basis and thus declined to treat the notice as a legal nullity.

Procedure

State Agency Cannot Refuse to Comply with IRS Summons Seeking Info on Microcaptives: In U.S.A. v. State of Delaware Dept. of Insurance, 2023 PTC 99 (3d Cir. 2023), the Third Circuit held that the Delaware Department of Insurance was not authorized under Delaware law to refuse to comply with an IRS summons issued in connection with an investigation into whether two companies were liable for penalties under Code Sec. 6700 for promoting abusive tax shelters. The court found that while the Delaware statute does protect state insurance laws from intrusive federal action when certain requirements are met, the conduct at issue - in this case, the refusal to produced summonsed documents - must constitute the "business of insurance," and the court concluded that this requirement was not met.

Eleventh Circuit Holds That Tax Court Lacked Jurisdiction to Redetermine Interest: In Hill, III v. Comm'r, 2023 PTC 80 (11th Cir. 2023), the Eleventh Circuit affirmed a decision of the Tax Court that it lacked jurisdiction to reopen a case to determine if a taxpayer was owed additional interest resulting from an overpayment the taxpayer said that he made to the IRS, even though the taxpayer labeled the amount at issue as a "deposit." The Eleventh Circuit concluded that there was no Tax Court finding that the taxpayer made an overpayment of tax and thus, the Tax Court did not have jurisdiction over his post-judgment motion to redetermine interest.

Tax Court Holds That Virgin Islands Tax Return Did Not Trigger Statute of Limitations: In Tice v. Comm'r, 160 T.C. No. 8 (2023), the Tax Court held a U.S. citizen who was not a bona fide resident of the U.S. Virgin Islands did not trigger the three-year statute of limitations on assessments under Code Sec. 6501(a) by filing tax returns only with the Virgin Islands Bureau of Internal Revenue (VIBIR). According to the court, as a U.S. citizen "other than a bona fide resident of the Virgin Islands" under Code Sec. 932(a), the taxpayer was required to file returns with both the United States and the Virgin Islands, and as a result of his failure to do so, the IRS could issue a notice of deficiency at any time under Code Sec. 6501(c)(3).

IRS Clarifies Relevant Date for Taxable Substances Under Section 4672: In Rev. Proc. 2023-20, the IRS modified Rev. Proc. 2022-26 to clarify that the date on which a taxable substance is added to the list of taxable substances for purposes of refund claims under Code Sec. 4662(e) is the first day of the calendar quarter in which the petition is filed (for an interested person) or the day on which the petition is deemed filed (for an importer or exporter). Code Sec. 4672(a)(2) allows an importer or exporter of any chemical substance to request a determination whether such substance should be listed as a taxable substance on the list or be removed from the list, and Rev. Proc. 2022-26 provides the procedures for importers, exporters, and interested persons to request a determination that a substance be added to or removed from the list.

Relief Extended for Certain Failure to Deposit Penalties for Superfund Chemical Taxes: In Notice 2023-28, the IRS extended the relief provided in Section 3(a) of Notice 2022-15 through the end of 2023, and the relief provided by Section 3(b) of Notice 2022-15 through June 30, 2024. In Notice 2022-15, the IRS provided temporary rules for the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, regarding the failure to deposit penalty imposed by Code Sec. 6656 as that penalty relates to the excise taxes imposed by Code Sec. 4661 and Code Sec. 4671 (i.e., Superfund chemical taxes).

Proposed Regulations Issued on Superfund Chemical Taxes: In REG-105954-22, the IRS issued proposed regulations under Code Secs. 4661, 4662, 4671, and Code Sec. 4672 relating to the excise taxes imposed on certain chemicals and certain imported substances (i.e., Superfund chemical taxes). The proposed regulations affect manufacturers, producers, and importers that sell or use taxable chemicals and importers that sell or use taxable substances.

Tax Accounting

Safe Harbor Provided for Determining if Natural Gas Expenses Must Be Capitalized: In Rev. Proc. 2023-15, the IRS provided a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized. Under the procedure, a taxpayer must first classify its natural gas transmission and distribution property as either linear property or non-linear property; the procedure then provides methods of accounting for each type of property, specifically, a safe harbor method used for the taxpayer's linear transmission and distribution property and an optional safe harbor method that the taxpayer may choose to use for its non-linear transmission and distribution property.

IRS Revises Form 3115, Application for Change in Accounting Method: In Announcement 2023-12, the IRS stated that it has revised Form 3115, Application for Change in Accounting Method, and its instructions, and the Form 3115 (Rev. December 2022) is the current Form 3115 and replaces the December 2018 version of the Form 3115. The IRS stated that it encourages all taxpayers to use the December 2022 Form 3115, but also stated that it will accept either the December 2022 form or the December 2018 form if filed by a taxpayer on or before April 18, 2023, unless the December 2022 Form 3115 is specifically required by published guidance.

Tax-Exempt Bonds

IRS Releases Population Figures for Use by Issuers of Tax-Exempt Private Activity Bonds: In Notice 2023-22, 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 2023 calendar year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii); (2) the 2023 calendar year volume cap under Code Sec. 146; and (3) the 2023 volume limit under Code Sec. 142(k)(5).

Tax-Exempt Organizations

New Procedure Makes Electronic Filing the Exclusive Means of Submitting Form 8940: In Rev. Proc. 2023-12, the IRS modified Rev. Proc. 2023-5 to provide that the electronic submission process is the exclusive means for tax exempt organizations to submit a Form 8940, Request for Miscellaneous Determination, except for submissions eligible for the 90-day transition relief provided in the procedure. Additionally, the procedure modifies existing procedures so that Form 8940 will be used by government entities to request voluntary termination of tax exempt status under Code Sec. 501(c)(3).

IRS Properly Denied Tax Exempt Status to Organization Promoting Use of Hallucinogens: In Iowaska Church of Healing v. U.S., 2023 PTC 75 (D. D.C. 2023), a district court held that the IRS properly denied the application for Code Sec. 501(c)(3) tax-exempt status of an organization whose members' sincerely-held religious belief partly involves the consumption of ayahuasca, a tea brewed from South American plants that contains a drug illegal under federal law. The court agreed with the IRS that the organization's purpose was the illegal distribution and promotion of the use of a controlled substance, which is a non-exempt purpose.

Virtual Currency

Bitcoin Is Not Currency, Despite Legal Tender Status in Some Countries: In Notice 2023-34, the IRS modified Notice 2014-21, which provides that convertible virtual currency is treated as property for federal tax purposes, in order to remove a statement in the Background section that virtual currency does not have legal tender status in any jurisdiction, because certain foreign jurisdictions have enacted laws that treat Bitcoin as legal tender. However, the IRS noted that the revisions do not affect the answers to the frequently asked questions set forth in Notice 2014-21, including Q&A-2, which concludes that convertible virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal income tax purposes.

March 2023

Accounting

IRS Releases March 2023 Applicable Federal Rates: In Rev. Rul. 2023-5, the IRS issued the applicable federal rates for March 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Bankruptcy

Bankruptcy Court Modifies Automatic Stay to Allow IRS to Levy Debtors' Social Security: In In re Rios, 2023 PTC 46 (Bankr. E.D. Wis. 2023), a bankruptcy court modified an automatic stay under 11 U.S.C. Section 362(a) to allow the IRS to enforce its federal tax liens securing tax liabilities on the debtors' right to their social security benefits after finding that the debtors failed to propose adequate protection of the IRS's interest in that property. However, the court denied the IRS's request for relief from the automatic stay to implement its right of setoff; the court noted that counsel for the IRS stated that this would be the first time a court would address head on whether social security benefits can be properly set off against pre-petition tax debt, and the court declined the IRS's invitation to be the first court in the country to make such a ruling.

Solo 401(k) Plan May Qualify for Exemption in Chapter 7 Bankruptcy: In In re Jacobs, 2023 PTC 33 (Bankr. N.D. Okla. 2023), a bankruptcy court denied in part and granted in part a chapter 7 trustee's motion for summary judgment on the trustee's objection to the debtor's claim of exemption with regard to retirement funds held in his solo 401(k) plan. The court found that the funds in the solo 401(k) plan which the debtor transferred from a traditional IRA could be exempt under state law, depending on whether the solo 401(k) was operated in compliance with Code Sec. 401(a); however, the court granted summary judgment for the trustee with respect to funds which the debtor transferred from a Roth IRA, after finding that the transfer was a taxable distribution to the debtor and therefore came into the estate under 11 U.S.C. Section 541(a)(1).

Credits

IRS Provides Guidance on Credit for the Production of Electricity from Advanced Nuclear Power Facilities: In Notice 2023-24, the IRS provided guidance under Code Sec. 45J relating to the credit for the production of electricity from advanced nuclear power facilities. The notice includes (1) guidance for computing the Code Sec. 45J credit, (2) the amount of the unutilized national megawatt capacity limitation (NMCL), (3) procedures for taxpayers to apply for allocations of, and that the IRS will use to allocate, the unutilized NMCL solely with respect to facilities that the Department of Energy previously certified as advanced nuclear facilities, and (4) procedures for a qualified public entity to elect to transfer the Code Sec. 45J credit to an eligible project partner.

Corporations

IRS Issues Additional Guidance on New Corporate Alternative Minimum Tax: In Notice 2023-20, the IRS provided the additional interim guidance described in Notice 2023-7 that is intended to help avoid substantial unintended adverse consequences to the insurance industry from the application of the new corporate alternative minimum tax (CAMT), as added by the Inflation Reduction Act of 2022. Sections 3 through 5 of the notice provide additional interim guidance regarding issues intended to be addressed by the forthcoming proposed regulations and taxpayers may rely on the guidance provided in those sections until the issuance of the forthcoming proposed regulations.

Credits

S Corp Can't Take Research Credit for Compensation Paid to Company President: In Moore v. Comm'r, T.C. Memo. 2023-20, the Tax Court held that an S corporation that manufactured scoreboards and LED video displays was not entitled to a research credit under Code Sec. 41 for compensation paid to the company's president and chief operating officer (COO). The court found that (1) the company president and COO did not engage in direct supervision or direct support (as provided by Code Sec. 41(b)(2)(B)(ii)) of persons who performed qualified services and (2), even though he was extensively involved in new product development, the record did not show the portion of his work on new product development which met the requirements of "qualified research" under Code Sec. 41(b)(2)(B)(i).

Criminal

First Circuit Affirms Conviction Relating to International Fraudulent Return Conspiracy: In U.S. v. Akoto, 2023 PTC 41 (1st Cir. 2023), the First Circuit affirmed the conviction of an individual for conspiracy to commit wire fraud, substantive wire fraud, and aggravated identity theft based on evidence of his participation in an international scheme, involving individuals in the United Sates, Nigeria, and Ghana, that used stolen identities to file at least 310 fraudulent federal income tax returns seeking $1,326,633 in refunds, $551,601 of which the IRS paid out. The court rejected the individual's arguments on appeal, including that his attorney's failure to raise a statute of limitations defense amounted to ineffective assistance of counsel.

Employee Benefits

IRS Provides Indexing Adjustments for Employer Shared Responsibility Payments: In Rev. Proc. 2023-17, the IRS provided indexing adjustments for the applicable dollar amounts under Code Sec. 4980H(c)(1) and (b)(1), effective for tax years and plan years beginning after December 31, 2023. These indexed amounts are used to calculate the employer shared responsibility payments under Code Sec. 4980H(a) and (b)(1), respectively.

Employment Tax

IRS Issues Procedure on Maintaining Certification as a CPEO: In Rev. Proc. 2023-18, the IRS addresses the procedures for applying to be certified as a Certified Professional Employer Organization (CPEO), the requirements for a CPEO to remain certified, and the procedures relating to suspension and revocation of CPEO certification. The procedure modifies and supersedes both Rev. Proc. 2016-33 and Rev. Proc. 2017-14.

Estates, Gifts, and Trusts

Vanderbilt Heirs Prevail in Tax Court on Valuation of Shares in Family Business: In Estate of Cecil v. Comm'r., T.C. Memo. 2023-24, the Tax Court held, in a dispute between the IRS and the heirs of the Vanderbilt estate who gifted stock in the family business that owns and operates the Biltmore Estate to their children and grandchildren, that the heirs' valuation of the stock was a more accurate reflection of the fair market value than that of the IRS. The court assigned zero weight to the opinion of the valuation expert presented by the IRS, whose opinion used an asset valuation method, after finding that the company is an operating company whose existence is not in jeopardy, is not a holding company, and that the company's earnings were therefore the best measure of the stock's fair market value.

Estate Failed to Persuade Tax Court That Large Cash Payments Weren't Gifts: In Estate of Spizzirri v. Comm'r, T.C. Memo. 2023-25, the Tax Court held that payments made by a wealthy lawyer and investor during the last few years of his life to his daughters, stepdaughters, and multiple women with whom he was either socially or romantically connected, were taxable gifts after finding that the estate failed to establish that the payments were for care and companionship services. The court also held that the estate was not entitled to a deduction under Code Sec. 2053(c)(1)(A) for claims against the estate as a result of payments the estate made pursuant to an antenuptial agreement; the court concluded that the payments were essentially donative in character and were not made for adequate and full consideration.

Trust Language Prevents Trust's Deduction for Charitable Remainder Interest: In Estate of Block v. Comm'r, T.C. Memo. 2023-30, the Tax Court held that an estate could not deduct the present value of a charitable remainder interest in a trust that was intended to be treated as a charitable remainder annuity trust (CRAT) and that directed an annuity amount to be paid annually to the beneficiary during her life in an amount equal to the greater of (1) all net income or (2) $50,000. The court found that the trust violated the requirement in Code Sec. 664(d)(1) that a "sum certain" be paid to the income beneficiaries, even though the trust had been amended to remove the "all net income" language; the court found that the trust did not qualify as a CRAT at the time of the decedent's death and the charitable remainder was not a reformable interest under the default rules and the exception for judicial reformations did not apply.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2023-19, 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 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).

Foreign

Requirements Waived for Certain Individuals Making Foreign Earned Income Exclusion: In Rev. Proc. 2023-19, the IRS provides a waiver under Code Sec. 911(d)(4) for the time requirements for individuals electing to exclude their foreign earned income who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. The procedure adds Ethiopia, Iraq, Ukraine, Belarus, China, and Mali to the list of waiver countries for tax year 2022 for which the minimum time requirements are waived.

Insurance Companies

Seller of Annuities Contracts Failed to Qualify as Tax-Exempt Insurance Company: In Commonwealth Underwriting & Annuity Services, Inc. v. Comm'r, T.C. Memo. 2023-27, the Tax Court upheld the IRS's final adverse determination that a company that sold annuities contracts to individuals in consideration for purchase payments, was not an organization described in Code Sec. 501(c)(15) and therefore was not exempt from tax under Code Sec. 501(a). The court rejected the taxpayer's argument that the purchase payments were not gross income because they were segregated in a trust account and held that the payments constituted gross receipts which exceeded the $600,000 limit in Code Sec. 501(c)(15)(A).

International

Final Regulations Treat Consolidated Group as a Single U.S. Shareholder: In T.D. 9973, the IRS issued final regulations that treat members of a consolidated group as a single U.S. shareholder in certain cases for purposes of Code Sec. 951(a)(2)(B). The final regulations affect consolidated groups that own stock of foreign corporations.

Procedure

No Refund for Taxpayer Who Paid Taxes Assessed Against His Ex-Wife: In Roman v. U.S., 2023 PTC 49 (Fed. Cir. 2023), the Federal Circuit reversed a ruling by the Court of Federal Claims in favor of an individual who claimed a refund of taxes he paid but that were assessed against his ex-wife. The Federal Circuit found that the individual was not "the taxpayer" as required by Code Sec. 6511(a) and that the Court of Federal Claims lacked jurisdiction to hear his third-party refund claim.

Doctor Who Committed Healthcare Fraud Is Not Eligible for Tax Refund: In Gross v. U.S., 2023 PTC 50 (5th Cir. 2022), the Fifth Circuit affirmed a district court's rejection of a refund claim filed by a psychiatrist for taxes he paid on income he received from fraudulent Medicare reimbursements and which he agreed to repay as restitution pursuant to a plea agreement. The Fifth Circuit found that the taxpayer was not entitled to a refund under Code Sec. 1341 because he could not have believed that he had an unrestricted right to the funds; the court also found that he could not claim a refund under Code Sec. 162(a) because restitution does not qualify for deduction of ordinary and necessary expenses when paid pursuant to a criminal guilty plea.

Merger Survivor Can't Net Underpayments Against Merged Company's Overpayments: In Bank of America Corp. v. U.S., 2023 PTC 35 (W.D. N.C. 2023), a district court granted summary judgment for the government after finding that, when a corporation with preexisting overpayments of tax merged into a corporation with a preexisting underpayment, the surviving corporation could not net the overpayments against its underpayment. The court reasoned that under Code Sec. 6621(d), interest netting is available only when underpayments and overpayments are made "by the same taxpayer" and the two corporations were separate corporation before they merged.

Court of Federal Claims Dismisses Refund Action Due to Unsigned Forms 843: In Vensure HR, Inc. v. U.S., 2023 PTC 36 (Fed. Cl. 2023), the Court of Federal Claims dismissed a taxpayer's complaint seeking a refund of employment tax-related penalties after finding that the taxpayer failed to "duly file" its refund claims with the IRS as required by Code Sec. 7422(a) because its Forms 843, Claim for Refund and Request for Abatement, were signed not signed by the taxpayer and were signed the taxpayer's attorney but did not include power of attorney forms. However, the court dismissed the complaint for failure to state a claim rather than for lack of jurisdiction after finding that the Federal Circuit's decision in Brown v. U.S., 2022 PTC 2 (Fed. Cir. 2022), that the "duly filed" requirement in Code Sec. 7422(a) is not jurisdictional was controlling.

Retirement Plans

IRS Provides Relief from Reporting Required Minimum Distributions in 2023: In Notice 2023-23, the IRS provided guidance to financial institutions on reporting required minimum distributions (RMDs) for 2023 after the amendment to Code Sec. 401(a)(9) made by the Secure 2.0 Act (Pub. L. 117-328), which generally provides that IRA owners who will attain age 72 in 2023 will have a required beginning date of April 1, 2025, rather than April 1, 2024, and therefore, such IRA owners will have no RMD due from their IRAs for 2023. The IRS advised that, in recognition of the short amount of time that financial institutions have had to change their systems for furnishing RMD statements since the enactment of the Secure 2.0 Act, the IRS will not consider an RMD statement provided to an IRA owner who will attain age 72 in 2023 to have been provided incorrectly if the IRA owner is notified by the financial institution no later than April 28, 2023, that no RMD is actually required for 2023.

Proposed Regulations Provide Rules Relating to Use of Forfeitures in Qualified Plans: In REG-122286-18, the IRS issued proposed regulations that would provide rules relating to the use of forfeitures in qualified retirement plans, including a deadline for the use of forfeitures in defined contribution plans. The proposed regulations would clarify that forfeitures arising in any defined contribution plan (including in a money purchase pension plan) may be used for one or more of the following purposes, as specified in the plan: (1) to pay plan administrative expenses, (2) to reduce employer contributions under the plan, or (3) to increase benefits in other participants' accounts in accordance with plan terms; the proposed regulations would also generally require that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures are incurred.

Tax Return Preparers

Court Dismisses FOIA Lawsuit Regarding Third Party Access to Taxpayer Records: In Fogg v. IRS, 2023 PTC 37 (D. Minn. 2023), a district court dismissed a lawsuit after finding that the IRS appropriately withheld from a request under the Freedom of Information Act (FOIA) portions of the Internal Revenue Manual (IRM) relating to the authentication of third-party representatives who contact the IRS on behalf of a taxpayer requesting sensitive taxpayer information. The court found, after an in camera review of the withheld IRM sections, that the material fell under a FOIA exemption for material compiled for law enforcement purposes.

February 2023

Accounting

IRS Releases February 2023 Applicable Federal Rates: In Rev. Rul. 2023-3, the IRS issued the applicable federal rates for February 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), Code Sec. 382(f), Code Sec. 642(c)(5). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Bankruptcy

Filing Bankruptcy Didn't Toll Statute of Limitations for Payroll Tax Penalties: In U.S. v. Colasuonno, 2023 PTC 28 (S.D.N.Y. 2023), a district court held that government's action to recover penalties assessed against an individual for failing to collect and pay over payroll taxes was not time barred because under Code Sec. 6503, the taxpayer's filing of a chapter 7 bankruptcy petition tolled the statute of limitations during the pendency of the bankruptcy. The court also held that the taxpayer's argument that the government violated the automatic stay by filing a notice of federal tax lien during the bankruptcy could only be challenged in the bankruptcy court in an action for damages.

Credits

IRS Establishes Program to Allocate Environmental Justice Capacity Limitations: In Notice 2023-17, the IRS established the program under Code Sec. 48(e) to allocate amounts of environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the energy investment credit determined under Code Sec. 48. In addition, the notice provides initial guidance regarding the overall program design, the application process, and additional criteria that will be considered in determining which applicants will receive an allocation of Capacity Limitation in calendar year 2023 under the Low-Income Communities Bonus Credit Program.

IRS Establishes Qualifying Advanced Energy Project Credit Allocation Program: In Notice 2023-18, the IRS established a program under Code Sec. 48C(e)(1) to allocate $10 billion of credits ($4 billion of which may be allocated only to projects located in certain energy communities) for qualified investments in eligible qualifying advanced energy projects (Code Sec. 48C(e) program). The notice also provides the general rules for determining the Code Sec. 48C credit, definitions of qualifying advanced energy projects, and the procedures for allocating the credits.

Criminal

Fifth Circuit Affirms Sentence and Restitution Award in Tax Fraud Case: In U.S. v. Cooksey, 2023 PTC 31 (5th Cir. 2023), the Fifth Circuit affirmed the sentence and restitution award entered by a district court after the owner and operator of a tax preparation company pled guilty to filing false tax returns. The Fifth Circuit rejected the taxpayer's argument that the district court should have determined the tax loss and restitution amount by taking into account amended returns she filed after being indicted; the court found that it was within the IRS's discretion to reject her amended return on the basis that it was filed in an attempt to reduce her base level offense.

Deductions

No Deduction Allowed for Payments to Ex-Spouse's Attorney: In Aragoni v. Comm'r, T.C. Summary 2023-3, the Tax Court held that, since a taxpayer's liability to pay $15,000 to his ex-spouse's attorney would survive her death, the payment of the fees was not an alimony payment within the meaning of Code Sec. 71(b)(1) and was not deductible. The court found that, even if it were to conclude that California state law was unclear in regard to post-death liability, a reasonable reading of the divorce instrument supported a finding that the liability would continue after the death of the taxpayer's ex-spouse as the order clearly stated that payments were to continue until paid in full.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2023-12, 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 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).

Health Care

Proposed Regs Address Coverage of Certain Preventive Services Under the ACA: In REG-124930-21, the IRS issued proposed regulations regarding coverage of certain preventive services under the Affordable Care Act. The proposed rules rescind the moral exemption rule for contraceptive services under the current regulations and establish a new individual contraceptive arrangement that individuals enrolled in plans or coverage sponsored, arranged, or provided by objecting entities may use to obtain contraceptive services at no cost directly from a provider or facility that furnishes contraceptive services.

Income

Disability Benefits Includable in Income; Lifetime Learning Credit Reduced: In Trice v. Comm'r, T.C. Memo. 2023-15, the Tax Court held that the disability benefits a taxpayer received had to be included in her income; however, the court found that the taxpayer raised a genuine dispute of material fact by showing that she did not receive them. The court further held that the taxpayer's lifetime learning credit had to be reduced to the extent her disability benefits caused her modified adjusted gross income to trigger reductions under Code Sec. 25A(d).

Innocent Spouse Relief

Tax Court Holds That Blog Posts Were Properly Admitted in Innocent Spouse Case: In a case of first impression, the Tax Court denied a taxpayer's motion to strike personal blog posts introduced into evidence by the IRS which were relevant to the ultimate disposition of the taxpayer's claim for relief from joint and several liability under Code Sec. 6015(f). The court found that the blog posts were "newly discovered" and "previously unavailable evidence" under Code Sec. 6015(e)(7)(B). Thomas v. Comm'r, 160 T.C. No. 4 (2023).

Interest Rates

IRS Announces Interest Rates Unchanged for Second Quarter of 2023: In Rev. Rul. 2023-4, the IRS announced that the rates for interest on tax underpayments and overpayments for the second quarter of 2023, will remain the same as the rates for the first quarter of 2023. Thus, the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning April 1, 2023, will be 7 percent for overpayments (6 percent in the case of a corporation), 7 percent for underpayments, and 9 percent for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 4.5 percent.

International

Difficulty with English Language Does Not Insulate Couple from FBAR Reporting: U.S. v. Malekzadeh, 2023 PTC 27 (D. Ore. 2023), a district court granted partial summary judgment to the government after holding that a couple, who immigrated from Iran and became U.S. citizens, willfully failed to disclose their Iranian and Canadian bank accounts to the IRS. Moreover, the court said that even if it were to accept that the couple, like many other immigrants, had difficulty understanding English, that fact would not insulate them from their obligations to file Foreign Bank Account Reports (FBARs) and the court refused to consider the couple's alleged English language limitations in determining whether there was a genuine dispute of material fact regarding the willfulness of the couple's failure to report their foreign bank accounts.

Chief Counsel Addresses Tax Treatment of Pharmaceutical Company Vouchers: In CCM 202304009, the Office of Chief Counsel advised that if a pharmaceutical company (PC) intends to use priority review vouchers (PRVs) to expedite a new drug application (NDA), the PRV costs are properly treated as amounts incurred to facilitate the creation of a franchise right from the Federal Drug Administration (FDA), and therefore, must be capitalized under Code Sec. 263(a) and the regulations thereunder. The Chief Counsel's Office also concluded that (1) if the PC can demonstrate that it acquired the PRV with the intent to hold the PRV for sale, then the acquisition costs are properly treated as amounts paid for the acquisition of a separate intangible asset in a purchase or similar transaction, and therefore, must be capitalized; (2) if the PC uses the PRV to expedite the processing of an NDA filed with the FDA, the PC may amortize the amounts paid for the PRV under Code Sec. 197 and the regulations thereunder over the 15-year period beginning in the month that the NDA is approved by the FDA; (3) if the PC utilizes the PRV for the NDA process, but is not awarded an NDA, the PC may recognize a loss under Code Sec. 165 in the tax year such loss is sustained; and (4) if the PC resells the PRV to a third-party PC, it may not amortize the PRV costs under either Code Sec. 167 or Code Sec. 197 but may recover its basis through the recognition of gain or loss, whichever is appropriate, at the time such PRV is sold.

Penalties

Taxpayer Can't Avoid Penalty Where He Relied on Preparer Without a PTIN: In Mulu v. Comm'r, T.C. Summary 2023-2, the Tax Court held that a taxpayer, who worked as a pharmacist, was liable for penalties for failing to substantiate deductions taken with respect to rental real estate. In addition, the court concluded that the taxpayer did not have reasonable cause and good faith for the resulting underpayment of tax because he relied on a tax return preparer who did not have a preparer tax identification number (PTIN) and who electronically submitted the taxpayer's return as though it had been self-prepared by the taxpayer.

Diabetes Doesn't Qualify for Disability Exception to Early Distribution Penalty Tax: In Lucas v. Comm'r, T.C. Memo. 2023-9, the Tax Court held that a taxpayer was liable for the 10 percent penalty tax under Code Sec. 72(t)(1) for a distribution he took from his retirement plan before he turned 59 1/2 years old. The court rejected the taxpayer's argument that his diabetes qualified him for the disability exception in Code Sec. 72(t)(2)(A) because the court found that his diabetes did not render him unable to engage in any substantial gainful activity within the meaning of Code Sec. 72(m)(7).

Procedure

Motion for Reconsideration Denied in Case Involving Deposits Rejected by IRS: In Dillon Trust Company LLC v. U.S., 2023 PTC 32 (Fed. Cl. 2023), the Court of Federal Claims denied a taxpayers' motion for reconsideration after the court granted summary judgment for the IRS after finding that the IRS properly collected interest after refusing to apply a deposit made by successor trusts to pay taxes owed by the original trusts. The court found no compelling reason to revise its holding that the IRS's collection of interest did not violate the law, nor did the court find that the IRS abused its discretion by refusing to use the successor trusts' deposits for payment of the original trusts' liabilities.

Chief Counsel's Office Says Taxpayer's Form 4868 Wasn't an Informal Refund Claim: In CCA 202306008, the Chief Counsel's Office advised that a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, did not qualify as an informal claim for a refund of an overpayment because it did not inform the IRS of the basis of the claim for a refund, which the Chief Counsel's Office noted is a critical component of a refund claim. The Chief Counsel's Office further advised that the situation before it was not analogous to the facts of Kaffenberger v. U.S., 314 F.3d 944 (8th Cir. 2003), because in that case, despite the lack of detail as to the basis of the refund claim the IRS had sufficient background information to understand the nature of the taxpayers' claim, while in the present case there was nothing to suggest the IRS knew the basis of any overpayment claimed by the taxpayer.

January 2023

Accounting

In-Depth: CAA 2023 Signed into Law On December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023 (CAA 2023). CAA 2023 contains consolidated appropriations for the fiscal year ending September 30, 2023, and includes a major overhaul of retirement-related tax provisions. These retirement-related changes, dubbed SECURE Act 2.0, build on provisions enacted in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). Pub. L. 117-328. Highlights of the tax provisions included in Division T of CAA 2023 include: Read more.

MOST POPULAR: Parker's Top Tax Developments of 2022: In August, President Biden signed the Inflation Reduction Act of 2022 (2022 IRA), a scaled-back version of the Build Back Better Act which had stalled out in the Senate in 2021. After failing to reach a bipartisan deal on a fully refundable child tax credit and other tax measures this fall, Congress is poised to pass a year-end omnibus spending bill that includes the SECURE 2.0 Act of 2022 (aimed at expanding enrollment in retirement plans and increasing retirement savings), as well as changes to the rules for charitable conservation easement contribution deductions. On the administrative front, the IRS finalized regulations fixing the "family glitch" in the premium tax credit, began issuing guidance under the 2022 IRA, and issued proposed regulations in other areas. In addition, several important court decisions were handed down in 2022, in cases dealing with the Tax Court's jurisdiction, micro-captive insurance arrangements, and the IRS's process for identifying listed transactions. See the list.

IRS Releases January 2023 Applicable Federal Rates: In Rev. Rul. 2023-1, the IRS issued the applicable federal rates for January 2023 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), Code Sec. 382(f), Code Sec. 642(c)(5). The ruling also contains the average of the applicable federal mid-term rates (based on annual compounding) for the 60-month period ending December 31, 2022, for purposes of Code Sec. 7702(f)(11).

Corporations

Proposed Regs Forthcoming on New Corporate Alternative Minimum Tax: In Notice 2023-7, the IRS announced its intention to issue proposed regulations addressing the application of the new corporate alternative minimum tax, as enacted by the Inflation Reduction Act of 2022. Sections 3 through 7 of the notice provide interim guidance regarding certain time-sensitive issues intended to be addressed by the forthcoming proposed regulations and taxpayers may rely on the guidance provided in those sections until the issuance of the forthcoming proposed regulations.

IRS Issues Rules and Procedures Relating to New Tax on Repurchases of Corporate Stock: In Notice 2023-2, the IRS announced its intention to issue proposed regulations addressing the application of the new excise tax on repurchases of corporate stock under Code Sec. 4501, as enacted by the Inflation Reduction Act of 2022. To provide taxpayers with interim guidance until publication of forthcoming proposed regulations, the notice describes certain rules and procedures that the IRS intends to include in those regulations and provides that taxpayers may rely on the rules described in Section 3 of the notice.

Credits

High Modified AGI Prevents Taxpayer from Qualifying for Premium Tax Credit: In Henry v. Comm'r, T.C. Memo. 2023-2, the Tax Court held that a taxpayer was required to repay the advanced premium tax credit (PTC) payments made on her behalf for health insurance coverage because her modified adjusted gross income exceeded the applicable amount and thus she no longer qualified for the PTC under Code Sec. 36B. While the taxpayer said she had terminated her health coverage during the year at issue, the court found that there was no record of her attempting to request termination or cancellation of her health coverage during that year.

IRS Announces Applicable Reference Standards for Sec. 179D Credit: In Announcement 2023-1, the IRS notifies taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building property deduction allowed under Code Sec. 179D, as amended the Inflation Reduction Act of 2022. The announcement identifies the existing reference standard, affirms a new reference standard, and clarifies when each of the two reference standards will apply to taxpayers.

Foreign

Regs Address Taxation of U.S. Real Property Interests Held by Foreign Pension Funds: In T.D. 9971, the IRS issued final regulations on the tax treatment of gains or losses of a qualified foreign pension fund attributable to certain interests in U.S. real property. The final regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in United States real property.

IRS Issues Guidance on Sec. 1446 Withholding Regulations: In Notice 2023-8, the IRS issued additional guidance for brokers to comply with the provisions of the final regulations under Code Sec. 1446(f) (and certain provisions of the final regulations that apply to Code Sec. 1446(a)) that relate to withholding on the transfer of an interest in a publicly traded partnership (PTP interest). Additionally, the IRS said it intends to issue proposed regulations that would amend the final regulations to implement this additional guidance.

IRS Provides Relief Relating to FFI Temporary U.S. TIN Requirement: In Notice 2023-11, the IRS provides temporary relief procedures for certain foreign financial institutions (FFIs) required to report U.S. taxpayer identification numbers (U.S. TINs) for certain preexisting accounts as defined in an applicable Model 1 intergovernmental agreement (IGA). If an FFI in an eligible Model 1 IGA jurisdiction (as further defined in the notice) complies with the procedures described in the notice, then the U.S. Competent Authority will not determine there is significant non-compliance of the relevant IGA solely as a result of its failure to report U.S. TINs associated with its preexisting accounts.

Insurance Companies

Loss Payment Patterns and Discount Factors for 2022 Released: In Rev. Proc. 2023-10, the IRS prescribed the loss payment patterns and discount factors for the 2022 accident year. These factors will be used to compute discounted unpaid losses under Code Sec. 846.

Procedure

IRS Reprimanded for Paucity of Evidence on Taxpayer's Lack of Reasonable Cause: In Decrescenzo v. Comm'r, T.C. Memo. 2023-7, the Tax Court held that an accountant who failed to timely file numerous years of federal income tax returns and who offset net earnings from self-employment with a net operating loss (NOL) carryforward, was liable for penalties for late filings as well as for offsetting self-employment income with NOLs, which he had previously been warned was inappropriate. However, the court also reprimanded the IRS for failing to provide evidence sufficient to find that any of the taxpayer's other tax underpayments resulted from a lack of reasonable cause or good faith.

IRS Provides Temporary Guidance Relating to Changes to Secs. 6045 and 6045A: In Announcement 2023-2, the IRS provides transitional guidance under Code Sec. 6045 and Code Sec. 6045A with respect to the reporting of information on digital assets. The IRS noted that those provisions were modified by the 2021 Infrastructure Investment and Jobs Act and that until the IRS issues regulations under Code Sec. 6045 and Code Sec. 6045A (1) a broker may report gross proceeds and basis as required under existing law and regulations as of December 23, 2022, and (2) brokers will not be required to report or furnish additional information with respect to dispositions of digital assets under Code Sec. 6045, or issue additional statements under Code Sec. 6045A, or file any returns with the IRS on transfers of digital assets under Code Sec. 6045A(d) until those new final regulations under Code Sec. 6045 and Code Sec. 6045A are issued.

Portion of Taxpayer's Tax Liabilities Were Offset by Valid Credit Elects: In Schwartz v. Comm'r, T.C. Memo. 2022-125, the Tax Court held that a taxpayer's tax liabilities for 2006 and 2007 were offset by valid credit elects and, thus, the court did not sustain proposed levies by the IRS for those years. The court did sustain, however, levies for years 2010 - 2012 after observing that the IRS Appeals Officer in the case gave the taxpayer an opportunity to propose collection alternatives for those years but the taxpayer did not avail himself of that opportunity or raise any issues relevant to those liabilities.

Tax-Exempt Organizations

Revocation of Nonprofit's Tax-Exempt Status Precludes Court Challenge: In XC Foundation v. Comm'r, T.C. Memo. 2023-3, the Tax Court held that a California corporation, whose corporate powers, rights, and privileges had been suspended by the state of California, lacked the capacity to challenge the IRS's revocation of its tax exempt status in the Tax Court. As a result, the Tax Court dismissed for lack of jurisdiction the corporation's request for a declaratory judgment that the revocation of its tax-exempt status was erroneous.

December 2022

Accounting

IRS Releases December 2022 Applicable Federal Rates: In Rev. Rul. 2022-22, the IRS issued the applicable federal rates for December 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Corporations

Prop. Regs Treat Consolidated Group as a Single U.S. Shareholder: In REG-113839-22, the IRS issued proposed regulations that treat members of a consolidated group as a single U.S. shareholder in certain cases for purposes of Code Sec. 951(a)(2)(B). The proposed regulations affect consolidated groups that own stock of foreign corporations.

Credits

Guidance on New Sustainable Aviation Fuel Credits Issued: In Notice 2023-6, the IRS provides guidance on the new sustainable aviation fuel (SAF) credits under Code Sec. 40B and Code Sec. 6426(k) and related credit and payment rules under Code Secs. 34(a)(3), 38, 87, and Code Sec. 6427(e)(1). The notice also requests comments from the public related to the SAF credit to assist the Department of the Treasury and the IRS in developing additional guidance on the SAF credit in the future.

IRS Procedure Provides Manufacturers Clean Vehicle Tax Credit Criteria: In Rev. Proc. 2022-42, the IRS sets forth the procedures under Code Sec. 30D(d)(3) for qualified manufacturers to enter into a written agreement with the Secretary of the Treasury or her delegate under which such manufacturer agrees to make periodic written reports to the Secretary providing vehicle identification numbers and such other information related to each vehicle manufactured by such manufacturer that is eligible for a clean vehicle credit as the Secretary may require. Vehicles eligible for the clean vehicle credit under Code Sec. 30D, the credit for qualified commercial clean vehicles under Code Sec. 45W, and vehicles eligible for the credit for previously-owned clean vehicles under Code Sec. 25E, respectively, generally must be manufactured by a qualified manufacturer as described in Code Sec. 30D(d)(1)(C) and Code Sec. 30D(d)(3).

Deductions

Strict Substantiation Rules Do Not Apply to Farmer's Substantially Modified Trucks: In Hoakison v. Comm'r, T.C. Memo. 2022-117, the Tax Court held that because a farmer had a bale stabber attached to his 1995 Ford F250 and it was used exclusively to transport hay, and because the farmer equipped his 1999 Ford F350 with tools and equipment, including a torch, oil, and two 60-gallon fuel tanks, both of those vehicles were substantially modified with the result that they were not likely to be used more than a de minimis amount for personal purposes and thus the strict substantiation requirements of Code Sec. 274(d) did not apply with respect to those two trucks.

Couple Cannot Deduct Losses from Malaysian LLC: In Rahim v. Comm'r, T.C. Memo. 2022-113, the Tax Court held that a married couple did not have an ownership interest in a Malaysian limited liability company (LLC) and even if they did have an ownership interest, they could not use the LLC's losses to offset their individual incomes because the LLC is a foreign corporation, the losses of which do not flow through to its owners. The court also found that the couple was not entitled to various business expense deductions because they failed to provide sufficient evidence substantiating such deductions.

Employee Benefits

IRS Issues 2023 Covered Compensation Tables: In Rev. Rul. 2022-24, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2023 plan year. Under Code Sec. 401(l)(5)(E)(i), "covered compensation" with respect to an employee is defined as the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-60, 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 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).

Foreign

IRS Issues Procedure on Final Qualified Intermediary Withholding Agreements: In Rev. Proc. 2022-43, the IRS sets forth the final qualified intermediary (QI) withholding agreement (QI agreement) entered into under Reg. Sec. 1.1441-1(e)(5) that applies beginning January 1, 2023 (the 2023 QI Agreement). In general, the QI agreement (1) allows certain persons to enter into an agreement with the IRS to simplify their obligations as withholding agents for amounts paid to their account holders and allows certain persons to act as qualified derivatives dealers and assume primary withholding and reporting responsibilities on all dividend equivalent payments they make, and (2) allows foreign persons to enter into the agreement for purposes of the withholding and reporting required under Code Sec. 1446(a) and (f) with respect to their account holders holding interests in publicly traded partnerships.

IRS Issues Proposed Foreign Tax Credit Regulations: In REG-112096-22, the IRS issued proposed regulations relating to the foreign tax credit, including guidance with respect to the reattribution asset rule for purposes of allocating and apportioning foreign taxes, the cost recovery requirement, and the attribution rule for withholding tax on royalty payments. Until the effective date of the final regulations, a taxpayer may rely on all or part of the proposed regulations, subject to certain conditions.

Tenth Circuit Upholds Deficiencies and Penalties of Taxpayer Who Hid Foreign Assets: In Harrington v. Comm'r, 2022 PTC 371 (10th Cir. 2022), the Tenth Circuit affirmed the Tax Court's holding that a taxpayer substantially understated his income for the tax years in question; that he provided changing and implausible explanations regarding his ownership of foreign bank accounts, including the false claim that he never received account statements; that he held millions of dollars in offshore accounts in the names of shell companies and fictitious entities situated in tax havens; that his shifting and misleading statements to IRS agents evidenced a failure to cooperate; that he did not testify credibly; and that the original tax returns he filed were false. The court also rejected the taxpayer's assertion that IRS officials improperly backdated the supervisory approval form used to assess fraud penalties on the taxpayer; although the court did note that there is an emerging split of authority over when, precisely, Code Sec. 6751(b) requires supervisory approval for the imposition of fraud penalties.

Gross Income

Payments Made Under Suffolk County's Septic Improvement Program Are Not Taxable: In Announcement 2022-26, the IRS advised that payments made by the County of Suffolk in the State of New York (Suffolk County) to residential property owners in Suffolk County under Suffolk County's Septic Improvement Program (SIP Program) are not included in the gross income of those property owners for federal income tax purposes. In addition, because the SIP Program payments to Suffolk County residents are not includible in the gross income of the recipients, Suffolk County does not have an information reporting obligation for the payments made to residential property owners in Suffolk County under the SIP Program.

Pending Criminal Case and Legal Expenses Did Not Create Economic Hardship: In Lipka v. Comm'r, T.C. Memo. 2022-116, the Tax Court held that a husband's pending criminal case and the associated unquantified legal expenses did not create an economic hardship within the meaning of Reg. Sec. 301.6343-1(b)(4). The court also concluded that the IRS did not abuse its discretion in denying the couple's requested collection alternatives and determining to sustain a proposed levy.

Couple Had Same Household During Husband's Time in Prison: In Reynolds v. Comm'r, T.C. Memo. 2022-115, the Tax Court held that a taxpayer was not entitled to innocent spouse relief after rejecting the taxpayer's claim that she and her husband, who went to prison for embezzlement, were not members of the same household during his time in prison. The court noted that under Reg. Sec. 1.6015-3(b)(3)(i), the husband's period in federal prison is considered a temporary absence and the couple therefore remained members of the same household during his time in prison.

Procedure

IRS Can't Take Taxpayer's Property to Pay Husband's Taxes: In U.S. v. Wilson, 2022 PTC 376 (N.D. Ga. 2022), which involved a quiet title action against the wife of a taxpayer who owed the IRS money and who had transferred title of the property in which they lived to his wife, the court held that the wife met her initial burden of proving the government's tax lien on the property as a result of her husband's tax debt caused her a present injury and the burden thus shifted to the IRS to prove that the wife held title to the property for the benefit of her husband. After reviewing the various nominee factors under Georgia law, the court concluded that the wife was the true owner of the property free and clear as she remained in continuous possession of the property, she alone incurred the purchase money mortgage use to purchase the property, and she paid the property expenses from her own bank account.

Procedure on Adequate Disclosures Updated: In Rev. Proc. 2022-41, the IRS updated Rev. Proc. 2021-52 to identify circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under Code Sec. 6662(d) (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under Code Sec. 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. If the revenue procedure, which applies to 2022 tax forms, does not include an item or position, disclosure is adequate with respect to that item or position only if made on a properly completed Form 8275 or 8275-R, as appropriate, attached to the return for the year or to a qualified amended return.

A $1 Simplified Return Qualifies as a Return for Statute of Limitation Purposes: In CCA 202248010, the Office of Chief Counsel advised that based on the language in Rev. Proc. 2020-28, a $1 simplified return filed through the non-filer portal is a return, including for purposes of the statute of limitation in Code Sec. 6501. Further, the Chief Counsel's Office said, the analogous revenue procedure for the 2020 tax year, Rev. Proc. 2021-24, also states that a simplified return is a federal income tax return for all purposes.

IRS Announces Interest Rate Increases for First Quarter of 2023: In Rev. Rul. 2022-23, the IRS issued the rates for interest on tax underpayments and overpayments for the quarter beginning January 1, 2023. The rates for interest determined under Code Sec. 6621 for the calendar quarter beginning January 1, 2023, will be 7 percent (up from 6 percent for the quarter that began on October 1) for overpayments (6 percent in the case of a corporation, up from 5 percent), 7 percent (up from 6 percent) for underpayments, and 9 percent (up from 8 percent) for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 4.5 percent (up from 3.5 percent).

IRS Issues Proposed Regs Aimed at Defending Listed Transaction Notices: In Announcement 2022-28, the IRS stated that it disagrees with the Tax Court's decision in Green Valley Investors, LLC v. Comm'r, 159 T.C. No. 5 (2022), and the Sixth Circuit's decision in Mann Construction, Inc., 2022 PTC 63 (6th Cir. 2022), both of which held that Notice 2017-10, which identifies syndicated conservation easements as listed transactions, is invalid because it was issued without following the notice-and-comment rulemaking procedure in the Administrative Procedure Act (APA). As a result, the IRS said it will continue defending the validity of existing listing notices in circuits other than the Sixth Circuit but, in order to eliminate any confusion and to ensure that these decisions do not disrupt its ongoing efforts to combat abusive tax shelters throughout the nation, the IRS issued proposed regulations identifying certain syndicated conservation easement transactions as listed transactions.

November 2022

Accounting

Parker's 2022 Tax Planning Guides: Client Letters Included. For an In-Depth Look at Tax Planning for INDIVIDUALS, Click Here. For an In-Depth Look at Tax Planning for BUSINESSES, Click Here.

IRS Releases November 2022 Applicable Federal Rates: In Rev. Rul. 2022-20, the IRS issued the applicable federal rates for November 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Credits

Tax Court Agrees That Couple Is Liable for Premium Tax Credit Deficiency: In Manzolillo v. Comm'r, T.C. Memo. 2022-107, the Tax Court agreed with the IRS that a married couple's income tax liability should be increased by the amount of an excess advance premium tax credit (PTC) benefit that was applied against their monthly health insurance premium. The court concluded that the IRS was not precluded from issuing the couple a deficiency notice after issuing them a refund for the year at issue because the subsequent calculation of the alternative marriage-year computation for the PTC showed that the couple was liable for the tax increase imposed by the IRS.

IRS Requests Comments on New Code Section 45W and Amendments to Code Sec. 30C: In Notice 2022-56, the IRS announced its intention to issue guidance under Code Sec. 45W and Sec. 30C, as enacted and amended by the 2022 Inflation Reduction Act (Pub. L. 117-169). The IRS is requesting general comments on the new qualified commercial clean vehicles credit under Code Sec. 45W and the amendments to the alternative fuel vehicle refueling property credit under Code Sec. 30C, as well as specific comments as described in Section 3 of the notice.

IRS Requests Comments on Recent Amendments to Code Section 45Q: In Notice 2022-57, the IRS announced its intention to issue guidance on the Code Sec. 45Q credit for the sequestration of carbon dioxide, as amended by the 2022 Inflation Reduction Act (Pub. L. 117-169). The IRS is requesting general comments on the amendments to the credit, as well as specific questions as described in Section 3 of the notice.

IRS Requests Comments on New Code Sections 45V and 45Z: In Notice 2022-58, the IRS announced its intention to issue guidance on new Code Sec. 45V and new Code Sec. 45Z, as enacted by the 2022 Inflation Reduction Act (Pub. L. 117-169). The IRS is requesting general comments on the clean hydrogen production credit under Code Sec. 45V and the clean fuel production credit under Code Sec. 45Z, as well as specific comments as described in Section 3 of the notice.

IRS Publishes Unused Housing Credit Carryovers Allocated to Qualified States: In Rev. Proc. 2022-37, the IRS published the amounts of unused housing credit carryovers allocated to qualified states under Code Sec. 42(h)(3)(D) for calendar year 2022. The procedure is effective for allocations of housing credit dollar amounts attributable to the National Pool component of a qualified state's housing credit ceiling for calendar year 2022.

Deductions

Taxpayer Lacked Profit Motive for Solar Purchase Where Solar System Never Took Off: In Olsen v. Comm'r, 2022 PTC 335 (10th Cir. 2022), the Tenth Circuit affirmed the Tax Court and held that a taxpayer who purchased solar lenses, which were advertised to be part of a new system to generate electricity, was not entitled to tax benefits relating to that purchase because he lacked a profit motive for the purchases. The court noted that the taxpayer made a down payment of 30 percent of the cost of the lenses, with the rest due in installments after the system started producing revenue, but the system never generated any revenue.

Oakbrook Land Holdings Asks Supreme Court to Resolve Circuit Split: In Oakbrook Land Holdings Petition for Writ of Certiorari, a partnership that deducted a conservation easement it donated to a charity and had its deduction denied by the Sixth Circuit, filed a petition asking the U.S. Supreme Court to take up its case and resolve a circuit split that its case presented. The question the partnership is asking the court to resolve is whether the Treasury Department's failure to respond to comments raising concerns about Reg. Sec. 1.170A-14(g)(6)(ii) (known as "the proceeds regulation") violated the Administrative Procedure Act.

Tax Court Values Conservation Easement at $7.8 Million: In Champions Retreat Golf Founders, LLC v. Comm'r, T.C. Memo. 2022-106, on remand from the Eleventh Circuit, the Tax Court determined the amount of a deduction for the charitable contribution relating to a conservation easement on a golf course development. The Tax Court concluded that the fair market value of the easement in 2010 was $7,834,091.

Employee Benefits

Health Coverage Rules under Cafeteria Plans Expanded: In Notice 2022-41 the IRS expanded the application of the permitted change-in-status rules for health coverage under a Code Sec. 125 cafeteria plan (cafeteria plan). In particular, the guidance addresses a situation in which, during a period of coverage (typically a plan year), a cafeteria plan participant may wish to revoke an election under the cafeteria plan for other than-self-only (family) coverage under a group health plan (other than a flexible spending arrangement) in order to allow one or more family members to enroll in a Qualified Health Plan through a Health Insurance Exchange in the individual market.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-54, 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 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).

International

IRS Withdraws Sec. 959 and Sec. 961 Prop. Regs: In REG-121509-00, the IRS withdrew 2006 regulations that it proposed under Code Sec. 959 and Code Sec. 961 but never finalized and that never went into effect. According to the IRS, withdrawing the proposed regulations at this point will help prevent possible abuse or other misuse of them - such as inappropriate basis adjustments in certain stock acquisitions to which Code Sec. 304(a)(1) applies - while the IRS continues to develop new proposed regulations.

Supreme Court Hears Arguments in Bittner v. U.S.: On November 2, the Supreme Court heard arguments in the case of Bittner v. U.S., No. 21-1195 (S. Ct. 2022), in which the Fifth Circuit (U.S. v. Bittner, 2021 PTC 372 (5th Cir. 2021)) held that there is a separate violation (with its own $10,000 penalty) for each foreign account not timely reported on an annual foreign bank account report (FBAR) and thus authorized a penalty on a per-account, not a per-form, basis. In so holding, the Fifth Circuit expressly rejected a contrary decision of the Ninth Circuit (U.S. v. Boyd, 2021 PTC 72 (9th Cir. 2021)), which held that the failure to file an annual FBAR constitutes a single violation, no matter the number of accounts.

Penalties

Taxpayer Hit with $8,000 Frivolous Appeal Penalty: In Lowe v. Comm'r, 2022 PTC 329 (5th Cir. 2022), the Fifth Circuit affirmed a decision of the Tax Court and held that a taxpayer was liable for income taxes on almost $200,000 of employment earnings which he maintained were not subject to U.S. income taxes and also granted an IRS request to impose an $8,000 frivolous appeal penalty on a taxpayer. The court noted that such penalties are appropriate where, as in the instant case, the appeal was instituted or maintained primarily for delay or where the taxpayer's position is frivolous or groundless.

Procedure

Court Rejects Taxpayer's Argument About Two Types of U.S. Citizenship: In Fonda v. Rettig, 2022 PTC 322 (5th Cir. 2022), the Fifth Circuit affirmed a district court and rejected a taxpayer's claim that he was not subject to the U.S. tax laws because the rights and privileges contained in the Constitution provide for two types of citizenship - one for those who want or need oversight and control, and another for those who wish to self-govern - and he had chosen the latter. The court also rejected the taxpayer's lawsuit against several government officials and his request for a new passport recognizing his status as "a Pre-March 9, 1993 Private American National Citizen of the United States."

Disclosing Noneconomic Substance Transactions on Form 8886 Meets Disclosure Rules: In CCM 202244010, the Office of Chief Counsel advised that adequate disclosure requirements are met when taxpayers disclose a noneconomic substance transaction for purposes of Code Sec. 6662(i)(2) on Form 8886, Reportable Transaction Disclosure Statement. The Chief Counsel's Office noted that, while Notice 2010-62 requires the disclosure of such information on Form 8275, a Treasury Department Policy Statement on the Tax Regulatory Process prevents the IRS from arguing that Notice 2010-62 has the force and effect of law.

Retirement Plans

IRS Modifies Plan Sponsor Rules for Submitting a Determination Letter Application: In Rev. Proc. 2022-40, the IRS modifies Rev. Proc. 2016-37 to permit the submission of determination letter applications for Code Sec. 403(b) individually designed plans. Under this revenue procedure, a Plan Sponsor that maintains a Code Sec. 403(b) individually designed plan will be permitted to submit a determination letter application for an initial plan determination, for a determination upon plan termination, and in certain other circumstances identified by the IRS in guidance published in the Internal Revenue Bulletin.

S Corporations

Receivership Was Not Liable for S Corporation Taxes: In Yaguda, T.C. Summary 2022-21, the Tax Court held that a couple filing joint returns failed to include in income amounts attributable to their S corporation and also failed to include in income their daughter's taxable interest and distributive share of the S corporation's income pursuant to Code Sec. 1(g). According to the court, the husband's guilty plea in criminal proceedings, which resulted in the couple's ownership interest in the S corporation being transferred to a receivership created by the California Superior Court, did not cause the receivership to be liable for the S corporation's tax liabilities.

October 2022

Accounting

IRS Releases October 2022 Applicable Federal Rates: In Rev. Rul. 2022-18, the IRS issued the applicable federal rates for October 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Bankruptcy

Issuance of Form 1099-C by Bank was Appropriate: In In re Jackson, 2022 PTC 303 (Bankr. W.D. Ky 2022), a bankruptcy court held that because certain property purchased by a taxpayer and his wife was rental property, and therefore held for investment purposes, the issuance of a Form 1099-C by the bank to the couple was appropriate under Reg. Sec. 1.6050P-1(d)(1)(i). The court found no merit to the husband's argument that because he and his wife file joint tax returns, the issuance of the Form 1099-C to his wife violated 11 U.S.C. Sec. 108(a)(1)(A) because her indebtedness was not discharged in his Chapter 7 case.

Stimulus Payment Is Excluded from Bankruptcy Estate, but Not the Child Tax Credit: In In re Lewis, 2022 PTC 283 (W.D. Ok. 2022), a bankruptcy court denied a couple's argument that all of their tax refund held by a bankruptcy trustee was outside of the bankruptcy estate and should be returned to the couple. The court noted that while Oklahoma law excluded the couple's stimulus payments received under the American Rescue Plan (ARP) from being included in their bankruptcy estate, the expanded child credit also received under ARP was not excludible from the couple's bankruptcy estate.

Credits

IRS Soliciting Comments on Credits for Clean Vehicles: In Notice 2022-46, the IRS announced plans to issue guidance under Code Sec. 30D and Code Sec. 25E, as amended by the 2022 Inflation Reduction Act (Pub. L. 117-169). The IRS is soliciting general comments from practitioners on questions relating to these provisions, as well as specific comments involving questions described in Section 3 of the Notice.

IRS Soliciting Comments on Energy Security Tax Credits for Manufacturing: In Notice 2022-47, the IRS announced plans to issue guidance regarding the advanced manufacturing production credit under Code Sec. 45X and the qualifying advanced energy project credit under Code Sec. 48C, as added and amended by the 2022 Inflation Reduction Act. The Notice requests general and specific comments on questions pertaining to the implementation and administration of Code Sec. 45X and Code Sec. 48C, which will help to inform the development of guidance implementing Code Sec. 45X and Code Sec. 48C.

IRS Soliciting Comments on Incentive Provisions for Improving Energy Efficiency: In Notice 2022-48, the IRS announced plans to issue guidance on the provisions of Code Secs. 25C, 25D, 45L, and 179D, as amended by the 2022 Inflation Reduction Act. The Notice requests general comments on questions arising because of these amendments, as well as specific comments involving questions listed in the Notice.

IRS Soliciting Comments on Certain Energy Generation Incentives: In Notice 2022-49, the IRS announced its plan to issue guidance on Code Secs. 45, 45U, 45Y, 48, and 48E, as amended or added by the 2022 Inflation Reduction Act. The Notice requests general as well as specific comments on issues arising under Code Secs. 45, 45U, 45Y, 48, and 48E that will be used to help inform development of guidance to implement those provisions.

IRS Soliciting Comments on Elective Payment and Transfers of Certain Credits: In Notice 2022-50, the IRS announced its intention to issue guidance to implement the elective payment provisions under Code Sec. 6417 and the elective credit transfer provisions under Code Sec. 6418, as added by the 2022 Inflation Reduction Act. The IRS is seeking general comments on questions arising under these provisions, as well as specific comments on questions listed in Section 3 of the Notice.

IRS Soliciting Comments on Prevailing Wage, Apprenticeship, and other Requirements: In Notice 2022-51, the IRS announced its plan to issue guidance regarding the provisions of Code Secs. 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D, as amended or added by the 2022 Inflation Reduction Act. The Notice requests comments on general as well as specific questions pertaining to the prevailing wage, apprenticeship, domestic content, and energy community requirements for increased or bonus credit (or deduction) amounts relating to these Code provisions.

IRS Provides Additional Relief from Section 42 Requirement Due to Supply Chain Issues: In Notice 2022-52, the IRS modified Notice 2022-05 by providing additional temporary relief from certain requirements under Code Sec. 42 for qualified low-income housing projects. The IRS said it has received numerous inquiries relating to unavoidable labor and supply-chain disruptions delaying the construction, rehabilitation, and restoration of properties throughout the United States and, in view of the unique circumstances resulting from these disruptions and their effect on the existing relief provided in Notice 2022-05, it was appropriate to provide additional temporary relief.

IRS Issues Inflation Adjustment Factor for Section 45Q for 2022: In Notice 2022-38, the IRS provides the inflation adjustment factor for the carbon oxide sequestration credit under Code Sec. 45Q for calendar year 2022. The notice also advises taxpayers that, pursuant to Code Sec. 45Q(g), as amended by the Inflation Reduction Act of 2022, 2022 is the final calendar year for which a taxpayer may claim a Sec. 45Q credit under Sec. 45Q(a)(1) and (2) for qualified carbon oxide that is captured by carbon capture equipment originally placed in service at a qualified facility before November 2, 2015.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-40, 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 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).

Foreign

IRS to Issue Regs under Section 901 to Address Recent Puerto Rican Decree: In Notice 2022-42, the IRS announced its intention to issue regulations under Code Sec. 901 to provide that taxpayers amending an existing tax decree with Puerto Rico pursuant to Puerto Rico's Act 52-2022, on or before December 31, 2022, does not cause any amount of foreign income tax paid or accrued to Puerto Rico pursuant to the amended tax decree to be treated as a noncompulsory amount under Reg. Sec. 1.901-2(e)(5). According to the IRS, under the forthcoming proposed regulations, amending an existing tax decree pursuant to Act 52-2022 (as enacted on June 30, 2022) will not, solely by reason of any difference in the amount of income tax liability to Puerto Rico under the existing tax decree as compared with the amended tax decree, be considered to increase the taxpayer's liability for Puerto Rico income tax over time for purposes of Reg. Sec. 1.901-2(e)(5) if (1) the existing tax decree is amended pursuant to Act 52-2022 on or before December 31, 2022, and (2) the taxpayer's Puerto Rico income tax liability under the amended tax decree in each tax year is less than the amount of income tax the taxpayer would have owed.

IRS Updates Procedure Addressing Countries with Information Exchange Agreements: In Rev. Proc. 2022-35, the IRS updated the current published list of countries with which the United States has in force an information exchange agreement, such that interest paid to residents of such countries must be reported by payers to the extent required under Reg. Sec. 1.6049-4(b)(5) and Reg. Sec. 1.6049-8(a). Turkey has been added to the current published list of countries with which the IRS has determined it is appropriate to have an automatic exchange relationship with respect to the information collected under Reg. Sec. 1.6049-4(b)(5) and Reg. Sec. 1.6049-8(a).

Insurance Companies

IRS Issues Asset/Liability Percentages and Domestic Investment Yields: In Rev. Proc. 2022-36, the IRS issued the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after Dec. 31, 2020. Rev. Proc. 2021-41 contains the information for the domestic asset/liability percentages and domestic investment yields for tax years beginning after Dec. 31, 2019.

Nontaxable Exchanges

IRS Extends Replacement Period for Livestock Sold on Account of Drought: In Notice 2022-43, the IRS explains the circumstances under which the four-year replacement period under Code Sec. 1033(e)(2) is extended for livestock sold on account of drought. The Appendix to the Notice contains a list of counties that experienced exceptional, extreme, or severe drought conditions during the 12-month period ending Aug. 31, 2022, and taxpayers may use this list to determine if an extension is available.

Procedure

No Refund Allowed to Taxpayer Whose Former Wife Was the Source of Overpayment: In Collins v. Comm'r, T.C. Summary 2022-20, the Tax Court denied a taxpayer's request for a refund of taxes overpaid on a joint tax return filed with his former wife after finding that the taxes at issue were paid by his former wife and the taxpayer had been ordered by a state court to reimburse his former wife for a portion of the tax liability in the form of increased spousal support payments. Additionally, the court stated, the taxpayer did not make any payments directly to the IRS, and most of his increased spousal support payments were not paid until after the liability was satisfied so he could not be said to have made or been the source of an overpayment.

IRS Issues Procedures for Filing One-time Claim for Alternative Fuels Credit: In Notice 2022-39, the IRS issued the rules that claimants must follow to make a one-time claim for the credit and payment allowable under Code Sec. 6426(d) and Code Sec. 6427(e) for alternative fuels sold or used during the first, second, and third calendar quarters of 2022. The IRS also provides instructions for how a taxpayer's liability for the excise tax imposed by Code Sec. 4081 may be reduced by claiming the alternative fuel mixture credit allowable under Code Sec. 6426(e) for the first and second calendar quarters of 2022.

Retirement Plans

IRS Extends Time to Amend IRA and Certain Other Retirement Plans: In Notice 2022-45, the IRS extended the deadline for amending an eligible retirement plan (including an individual retirement arrangement (IRA) or annuity contract) to reflect the provisions of Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136), and Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Pub. L. 116-260). Under the notice, the extended amendment deadline applicable to (1) a qualified retirement plan or Code Sec. 403(b) plan that is not a governmental plan, or (2) an IRA is December 31, 2025, while later deadlines apply with respect to governmental retirement plans.

S Corporations

S Corporation's Expenses Can't Be Deducted Directly on Shareholders' Personal Return: In Vorreyer v. Comm'r, T.C. Memo. 2022-97, the Tax Court held that a couple who was part of a group running a family farm, which was incorporated as an S corporation, was not entitled to deduct their share of property taxes and utility expenses directly on their personal tax return. The court also disallowed a deduction for truck expenses under Code Sec. 179 because no election had been made under Code Sec. 179.

Tax Return Preparers

IRS Finalizes Increase in Enrolled Agent Fees: In T.D. 9966, the IRS finalized regulations which increase the user fees for enrolled agents and enrolled retirement plan agents from $67 to $140. The final regulations affect individuals who are or apply to become enrolled agents and individuals who are enrolled retirement plan agents and apply beginning October 31, 2022.

September 2022

Accounting

IRS Releases September 2022 Applicable Federal Rates: In Rev. Rul. 2022-17, the IRS issued the applicable federal rates for September 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Bankruptcy

Bankruptcy Trustee Cannot Seize Debtor's Retirement Accounts to Pay Creditors: In In re Gilbert, 2022 PTC 259 (Bankr. N.J. 2022), a bankruptcy court held that a Chapter 7 trustee could not use the funds in a debtor's Code Sec. 401(a) and Code Sec. 401(k) retirement accounts, totaling approximately $1.7 million, to pay creditors. The court acknowledged the bankruptcy trustee's significant efforts to manufacture something for creditors out of essentially a no-asset case, but said it was not the purview of the court to create bad faith exceptions to the protections that Congress has granted retirement funds both inside and outside of bankruptcy.

Deductions

Retention of Qualified Mineral Interest by Donor Precludes Easement Deduction: In CCM 202236010, the Office of Chief Counsel advised that a conservation easement does not satisfy the requirements of Code Sec.170(h) where the donor of the easement retains a qualified mineral interest, the ownership of the surface estate and mineral interest has never been separated, and under the terms of the deed the donor can use a surface-mining method to extract the subsurface minerals with the donee's approval. The Chief Counsel's Office noted that the exception under Code Sec. 170(h)(5)(B)(ii), which provides an exception where the ownership of the surface estate and mineral interests has been and remains separated, and the probability of surface mining occurring on the property is so remote as to be negligible, does not apply in this situation.

Eleventh Circuit Denies Relief Sought by Partnership in Conservation Easement Case: In Hancock County Land Acquisitions, LLC v. U.S., 2022 PTC 245 (11th Cir. 2022), the Eleventh Circuit affirmed a district court's dismissal of a partnership's request for injunctive relief relating to IRS actions after the IRS rejected the partnership's conservation easement charitable deduction. The court concluded that it did not have subject matter jurisdiction to decide the dispute between the partnership and the IRS because the relief sought by the partnership was barred by the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act.

Drug Company Can Deduct Patent Litigation Expenses: In Actavis Laboratories, Fl, Inc. v. U.S., 2022 PTC 246 (Fed. Cl. 2022), the Court of Federal Claims held that the taxpayer, a generic drug manufacturer, could deduct patent litigation legal expenses incurred in defending its business practices. In reaching its conclusion, the Court of Federal Claims relied on the decision in Mylan, Inc. and Subsidiaries v. Comm'r, 156 T.C. 137 (2021), in which the Tax Court held that the legal expenses a drug manufacturer incurred to defend patent infringement suits were deductible as ordinary and necessary business expenses.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-35, 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 notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Employment Taxes

IRS Does Not Need Written Supervisory Approval to Impose Sec. 72(t) Exaction: In Grajales v. Comm'r, 2022 PTC 254 (2d Cir. 2022), the Second Circuit affirmed the Tax Court and held that a taxpayer was liable for the 10 percent exaction under Code Sec. 72(t) for early distributions received from her pension plan. The court rejected the taxpayer's argument that the assessment was invalid because no IRS supervisory approval was obtained after the court concluded that no supervisory approval was necessary because the exaction in Code Sec. 72(t) is a tax and not a penalty and thus Code Sec. 6751 does not apply.

Exclusions from Income

Social Security Income Is Not Reduced Because of Reduction in Disability Benefits: In Murphy v. Comm'r, 2022 PTC 271 (10th Cir. 2022), the Tenth Circuit affirmed the Tax Court and held that a taxpayer was liable for a tax deficiency on social security income she excluded from her return. The court rejected her argument that her social security benefits are in part exempt from tax because her employer-provided disability benefits are reduced by the amount of her social security disability benefits.

Foreign

Former Navy Serviceman's Tax Home Was Not Outside the U.S.: In Domdom v. Comm'r, T.C. Summary 2022-17, the Tax Court held that a former Navy serviceman who worked and lived in Iraq following his military service, did not establish that his home for tax purposes was not in the United States for either of the years at issue and thus he could not exclude from income under Code Sec. 911 the wages he earned in Iraq for those years. However, the Tax Court concluded that the taxpayer was not liable for the penalties assessed by the IRS because his tax returns were prepared by a paid income tax return preparer who was provided with all the relevant information and the circumstances surrounding the taxpayer's employment situation in Iraq and the taxpayer thus had reasonable cause for his understatement of tax.

Sixth Circuit Sides with Corporation on All Issues in Advanced Pricing Agreement Case: In Eaton Corporation and Subsidiaries, 2022 PTC 255 (6th Cir. 2022), the Sixth Circuit affirmed the Tax Court in part and reversed in part, siding with the taxpayer on all issues presented in a case dealing with a pair of advance pricing agreements (APAs) that a corporation entered into with the IRS. The Sixth Circuit concluded that the IRS had wrongfully cancelled the APAs and the taxpayer was thus not liable for the tens of millions of dollars that the IRS claimed that the taxpayer owed.

IRS Extends Phase-In Period for Complying with Final Section 871(m) Regs: In Notice 2022-37, the IRS issued additional guidance for complying with the final regulations on dividend equivalents under Reg. Secs. 871(m), 1441, 1461, and Reg. Sec. 1473 in 2023, 2024, and 2025. Specifically, the guidance extends for two years the period during which the enforcement standards provided by Notice 2020-2 will apply.

Healthcare

No Surprises Act Regulations Finalized: In T.D. 9965, the IRS and the Departments of Labor and Health and Human Services finalized regulations under the No Surprises Act, which was enacted as part of the Consolidated Appropriations Act, 2021 (CAA). The regulations finalize (1) certain disclosure requirements relating to information that group health plans and health insurance issuers offering group or individual health insurance coverage must share about the qualifying payment amount under the interim final rules issued in July 2021, titled Requirements Related to Surprise Billing; Part I (July 2021 interim final rules); and (2) select provisions under the October 2021 interim final rules, titled Requirements Related to Surprise Billing; Part II (October 2021 interim final rules), to address certain requirements related to consideration of information when a certified independent dispute resolution (IDR) entity makes a payment determination under the federal IDR process.

Penalties

Single-Minded Pursuit of Tax Objective in Obtaining Appraisal Results in Penalty: In Glade Creek Partner, LLC v. Comm'r, 2022 PTC 244 (11th Cir. 2022), the Eleventh Circuit affirmed the Tax Court and held that an appraisal of property for which a charitable conservation easement deduction was taken and subsequently denied was not done in good faith because the individual obtaining the appraisal single-mindedly pursued an appraisal that accomplished his tax objectives for the easement transaction. As a result, the court affirmed the imposition of the substantial valuation misstatement penalty and concluded that the partnership did not qualify for the Code Sec. 6664 reasonable cause exception to the penalty.

Procedure

Terms of Closing Agreement Did Not Prevent IRS from Assessing Additional Interest: In Chesapeake Energy Corp. v. U.S., 2022 PTC 278 (W.D. Okla. 2022), a district court agreed with the government that a corporation, which entered into a closing agreement with the IRS regarding its 2012 tax year, was liable for an additional $12.6 million of interest assessed by the IRS under Code Sec. 6601(d)(1) (relating to income tax being reduced for carrybacks or adjustments of certain unused deductions) after taking into account the $1.4 million of interest already paid by the corporation. However, the court held that, while the terms of the closing agreement did not prohibit the IRS from assessing interest under Code Sec. 6601(d)(1) and the parties' settlement calculations did not make Code Sec. 6601(d)(1) inapplicable, it was not concluding that the corporation was due no refund at all.

Government Can Foreclose Its Tax Liens Against Stock Owned by Company's Founder: In U.S. v. Shipley, 2022 PTC 264 (N.D. Calif. 2022), a district court held that the founder of DSGI Technologies, Inc. did not effectuate a sale of his restricted DSGI stock to a group of investors because the transfers of the stock did not follow the restrictions imposed on the stock certificates by DSGI and were not reflected in the books of DSGI. As a result, the court held that the government has the ability to foreclose its tax liens against all DSGI stock in the founder's name as reflected on DSGI's stock ledger.

Retirement Plans

Mandatory Victims Restitution Act Allows Garnishment of Taxpayer's 401(k) Account: In U.S. v. Shkreli, 2022 PTC 258 (2d Cir. 2022), the Second Circuit affirmed a district court and held that the Mandatory Victims Restitution Act authorized the garnishment of the taxpayer's Code Sec. 401(k) retirement funds and the Consumer Credit Protection Act's 25-percent cap on garnishments does not apply to limit the government's garnishment. However, the court remanded the case to the district court to determine whether the 10-percent early withdrawal tax in Code Sec. 72(t) will be imposed upon the garnishment.

Tax-Exempt Organizations

IRS Revokes Organizations' Tax-Exempt Status: In Announcement 2022-18, the IRS announced the revocation of the tax-exempt status of Code Sec. 501(c)(3) organizations for failing to meet the applicable Code requirements for tax-exempt status. As a result, contributions made to the organizations by individual donors are no longer deductible under Code Sec. 170(b)(1)(A).

IRS Alerts Donors to Declaratory Judgment Suit Filed by Former Nonprofit: In Announcement 2022-19, the IRS served notice to potential donors that Goodcity, NFP, located in Payson, Arizona, recently filed a timely declaratory judgment suit under Code Sec. 7428, challenging the IRS's revocation of its status as an eligible donee under Code Sec. 170(c)(2). According to the IRS, protection under Code Sec. 7428(c) begins on the date that the notice of revocation is published in the Internal Revenue Bulletin and ends on the date on which a court first determines that an organization is not described in Code Sec. 170(c)(2) and, in the case of individual contributors, the maximum amount of contributions protected during this period is limited to $1,000, with a husband and wife being treated as one contributor.

IRS Issues Guidance to States on Process to Obtain or Inspect Tax-Exempt Returns: In T.D. 9964, the IRS issued final regulations which provide guidance to states regarding the process by which they may obtain or inspect certain returns and return information (including information about final and proposed denials and revocations of tax-exempt status) for the purpose of administering state laws governing certain tax-exempt organizations and their activities. The final regulations will affect the states choosing to obtain information from the IRS under these rules, as well as the organizations and taxable persons whose tax information is disclosed.

August 2022

Accounting

IRS Releases August 2022 Applicable Federal Rates: In Rev. Rul. 2022-14, the IRS issued the applicable federal rates for August 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Credits

IRS Provides Indexing Adjustments for Section 36B Provisions: In Rev. Proc. 2022-34, the IRS provides indexing adjustments required by statute for certain provisions under Code Sec. 36B. Specifically, the procedure updates the applicable percentage table used to calculate an individual's premium tax credit for tax years beginning in calendar year 2023 and updates the required contribution percentage for plan years beginning after calendar year 2022.

Deductions

Eighth Circuit Rejects Taxpayer's $51 Million Alimony Deduction: In Redleaf v. Comm'r, 2022 PTC 230 (8th Cir. 2022), the Eighth Circuit affirmed the Tax Court and held that deferred cash payments made by a taxpayer to his ex-wife pursuant to a marriage termination agreement which said his ex-wife "waives any right to ... permanent spousal maintenance" were not spousal maintenance payments under Minnesota law but instead represented a property settlement. As a result, the court concluded that the taxpayer could not deduct under the now-repealed alimony provisions in the Code the $51 million in cash payments made to his ex-wife.

Eleventh Circuit's Hewitt Decision Preludes IRS from Denying Charitable Deduction: In Thompson v. Comm'r, T.C. Memo. 2022-80, the Tax Court cited the Eleventh Circuit's decision in Hewitt v. U.S., 2021 PTC 410 (11th Cir. 2021) in holding that the IRS improperly denied a taxpayer's charitable contribution deduction for an easement on the basis that the easement was not protected in perpetuity. However, the court held that the IRS did comply with the requirements of Code Sec. 6751(b)(1) in assessing penalties on the taxpayer with respect to other issues.

Pattern Maker Met Requirements for Deducting Car, Truck, and Meal Expenses: In Gonzalez v. Comm'r, T.C. Summary 2022-13, the Tax Court held that a taxpayer who started a business as a pattern maker and incurred travel expenses relating to that business (1) met the strict substantiation requirements for deducting car and truck expenses and thus could deduct such expenses; and (2) was entitled to deduct $1,800 of meal and incidental expenses using the federal standard per diem rate for Los Angeles because she kept records establishing the time, place, and business purpose of her travel. However, the court disallowed deductions for other expenses that were not properly substantiated.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-32, 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 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).

Foreign

IRS Announces Intention to Amend Section 987 Regulations: In Notice 2022-34, the IRS announced that the Department of the Treasury and the IRS intend to amend the regulations under Code Sec. 987 to defer the applicability date of the final regulations under Code Sec. 987, as well as certain related final regulations, by one additional year. The IRS stated that (1) it intends to amend Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and Reg. Sec. 1.989(a)-1 of the 2016 final regulations and Reg. Sec. 1.987-2 and Reg. Sec. 1.987-4 of the 2019 final regulations (the related 2019 final regulations) to provide that the 2016 final regulations and the related 2019 final regulations apply to tax years beginning after December 7, 2023; and (2) taxpayers may rely on certain related proposed regulations that cross-reference temporary regulations which have expired.

Partnerships

Couple Liable for Taxes Where Return was Inconsistent with Source Partnership Return: In Ivanhoe v. U.S., 2022 PTC 224 (D. Conn. 2022), a district court held that the IRS could issue a tax year 2012 TEFRA computational adjustment to a couple with an interest in a partnership even though the IRS issued a No Adjustments Letter to that partnership for the same year. The court noted that Reg. Sec. 301.6222(a)-2(b) requires that an indirect partner treat partnership items consistently with a source partnership's return and while the couple's return was consistent with the return of a partnership in which the couple held a direct interest, that partnership's return was inconsistent with a source partnership's return.

Partner Signature No Longer Required on Section 754 Elections: In T.D. 9963, the IRS finalized without change proposed regulations issued in October of 2017 (REG-116256-17) which streamline the Code Sec. 754 election process by eliminating the requirement that the election be signed by a partner in the partnership. While the final regulation provides that the change applies to tax years ending on or after August 5, 2022, it also provides that taxpayers may apply the change to tax years ending before August 5, 2022.

Penalties

Lawyer's Illness Didn't Justify Late Filing of Returns of Earlier Years: In Elstein v. Comm'r, T.C. Summary 2022-14, the Tax Court held that a partner in a law firm, who was placed on involuntary inactive status after an illness in 2019, was liable for penalties for the late filings of his 2011-2013 tax returns. The court, while expressing sympathy for the lawyer's illness, found that he failed to introduce any evidence showing how his illness in 2019 could be reasonable cause for the late filing of his 2011, 2012, and 2013 tax returns.

Procedure

IRS Announces Interest Rate Increases for Fourth Quarter of 2022: In Rev. Rul. 2022-15, the IRS issued the rates for interest on tax underpayments and overpayments for the quarter beginning October 1, 2022. The rates for interest determined under Code Sec. 6621 for the calendar quarter beginning October 1, 2022, will be 6 percent (up from 5 percent for the quarter that began on July 1) for overpayments (5 percent in the case of a corporation, up from 4 percent), 6 percent (up from 5 percent) for underpayments, and 8 percent (up from 7 percent) for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 3.5 percent (up from 2.5 percent).

IRS Procedure Addresses Requests for IRS to Create Statistical Studies: In Rev. Proc. 2022-29, the IRS sets forth the procedures for other government agencies and members of the public to request the creation of special statistical studies and compilations involving return information pursuant to Code Sec. 6108(b). The procedure also sets forth the criteria for determining reasonable fees for costs associated with the creation of the special statistical studies and compilations and supersedes Rev. Proc. 2006-36.

IRS No Longer Issuing Rulings on Certain Spin-Off Transactions Under Sec. 4980(c)(2): In Rev. Proc. 2022-28, the IRS announced that it will not issue letter rulings on whether a spin-off/termination transaction that involves excess assets results in an employer reversion under Code Sec. 4980(c)(2) of the Code. As a result, Rev. Proc. 2022-3 is amplified.

Federal Courts Cannot Order Treasury to Reimburse Taxpayers on Equitable Grounds: In Affordable Bio Feedstock, Inc. v. U.S., 2022 PTC 218 (11th Cir. 2022), the Eleventh Circuit affirmed a district court and denied a taxpayer's claim for reimbursement of "protest payments" made to the IRS after the IRS claw-backed an alternative fuel tax credit it had previously given to the taxpayer. The court rejected the taxpayer's argument that federal courts may order the government to play plaintiffs money from the Treasury based solely on equitable principles after noting that the Supreme Court foreclosed that argument 32 years ago in Office of Personnel Management v. Richmond, 496 U.S. 414 (S. Ct. 1990).

Tax-Exempt Organizations

IRS Revokes Tax-Exempt Status for Several Organizations: In Announcement 2022-16, the IRS announced the revocation of the tax-exempt status of Code Sec. 501(c)(3) organizations for failing to meet the applicable Code requirements for tax-exempt status. Thus, contributions made to the organizations by individual donors are no longer deductible under Code Sec. 170(b)(1)(A).

July 2022

Accounting

IRS Releases July 2022 Applicable Federal Rates: In Rev. Rul. 2022-12, the IRS issued the applicable federal rates for July 2022 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Deductions

Taxpayer's Disgorgement of Funds in SEC Settlement Is Not Deductible: In Ziroli v. Comm'r, T.C. Memo. 2022-75, the Tax Court held that a couple failed to satisfy their burden of demonstrating that their disgorgement of funds in settlement of the husband's potential civil liability for alleged federal securities violations was a deductible expense under Code Sec. 162. Consequently, the couple failed to prove their entitlement to the deduction and thus could not deduct the disgorgement on their 2016 tax return. The court noted that, even if the Securities and Exchange Commission subsequently distributed the disgorged funds to harmed investors, courts have held that any post hoc exercise of discretion by the government to use the disgorged funds to compensate victims does not transform the payment from a penalty into deductible compensatory damages.

Employee Benefits

IRS Addresses Applicability of Sec. 432(b)(7) and Multiemployer Plan Following Merger: In Rev. Rul. 2022-13, the IRS ruled that, if a multiemployer defined benefit pension plan that has received special financial assistance (SFA) from the Pension Benefit Guaranty Corporation (PBGC) is merged into a multiemployer defined benefit pension plan that has not received SFA, and the plan that has not received SFA is designated as the ongoing plan after the merger, the ongoing plan is not deemed to be in critical status under Code Sec. 432(b)(7) solely as a result of the merger. Under Code Sec. 432(b)(7), the IRS noted, if an eligible multiemployer plan that receives SFA under Section 4262 of ERISA meets the requirements of Code Sec 432(k)(2), then, notwithstanding Code Sec. 432(b)(7), the plan is deemed to be in critical status for plan years beginning with the plan year in which the effective date of the SFA occurs and ending with the last plan year ending in 2051.

Retroactive Election Date Extended for Community Newspaper Pension Plans: In Notice 2022-31, the IRS provides guidance regarding the changes made by the American Rescue Plan Act of 2021 (ARP), to the election of alternative minimum funding standards under Code Sec. 430(m) for a defined benefit pension plan that is a community newspaper plan or any other plan that is sponsored by an eligible newspaper plan sponsor. To facilitate retroactive Code Sec. 430(m) elections and to fully reflect the impact of the reduced minimum funding requirement resulting from a retroactive Code Sec. 430(m) election, the guidance substitutes September 15, 2022, for December 31, 2020, as the extended deadline for the actions specified in that section.

Estates, Gifts and Trusts

Most of Checks Written by Decedent Prior to Death Are Includible in Estate: In Est. of DeMurth, Jr. v. Comm'r, T.C. Memo. 2022-72, the Tax Court held that the value of seven of ten checks written before, but paid after, a decedent's death were properly includible in the decedent's gross estate. However, the remaining checks were not includible in the estate because of an IRS concession regarding those checks.

Foreign

Proposed Regs Define Foreign Currency Contract: In REG-130675-17, the IRS issued proposed regulations which provide that only a forward contract on foreign currency is a "foreign currency contract" as defined in Code Sec. 1256(g)(2). While the proposed regulations do not define the term "forward contract," they do provide that whether a derivative contract is properly characterized as a forward contract for U.S. federal income tax purposes is determined under current law.

IRS to Amend Regs Relating to Qualified Derivative Payments: In Notice 2022-30, the IRS announced its intention to amend the regulations under Code Sec. 59A and Code Sec. 6038A to defer the applicability date of certain provisions of the regulations relating to the reporting of qualified derivative payments until tax years beginning on or after January 1, 2025. The IRS said that taxpayers may rely on the provisions of the notice before the issuance of the amendments to the final regulations and also stated that the notice supersedes Notice 2021-36.

Partnerships

Court Can't Enjoin IRS from Issuing FPAA, Nor Order IRS to Rescind FPAA: In Rocky Branch Timberlands LLC v. U.S., 2022 PTC 171 (N.D. Ga. 2022), a district court held that it could neither (1) enjoin the IRS from issuing an FPAA to a partnership where the IRS had already issued such FPAA nearly a year earlier, nor (2) compel the IRS to rescind the FPAA and issue a new one because, the court noted, Code Sec. 6223(f) only permits the IRS to issue a subsequent FPAA if the first FPAA was tainted by taxpayer malfeasance, which did not occur in this case. The court observed that the partnership had available another remedy for challenging the FPAA, specifically petitioning for readjustment of the FPAA in the Tax Court and, the court noted, the partnership's tax matters partner had already started that process.

Penalties

Court Finds Clear Error in IRS Assessment of Penalty on NOL Calculation: In Filler v. Comm'r, 2022 PTC 197 (9th Cir. 2022), the Ninth Circuit upheld the Tax Court's denial of a net operating loss (NOL) to a doctor who had argued that he suffered an involuntary conversion loss as a result of the State of California infringing on his patent for a magnetic resonance imaging technique. However, the court vacated the penalty assessment after concluding that, because the doctor had relied on signed representations of an IRS Agent when the NOL was calculated, it was clear error for the IRS to impose an accuracy-related penalty.

Procedure

IRS Procedures Are Being Updated to Ensure FAQs Are Archived and Searchable: In CC-2022-006, the Office of Chief Counsel advised Chief Counsel attorneys that the Chief Counsel's Directive Manual (CCDM) is being revised to reflect updated procedures for the review and posting of certain frequently asked questions (FAQs) on IRS.gov. According to the Chief Counsel's Office, these procedures apply to FAQs prepared for newly enacted legislation and in other contexts, such as emerging issues, as appropriate, where no pre-existing Internal Revenue Bulletin guidance, including regulations, has been issued and the purpose of these procedures is to ensure that these FAQs can be properly archived and searchable on IRS.gov and to provide clarity on the issue of taxpayer reliance on FAQs.

Eleventh Circuit Overturns Tax Fraud Conviction Due to Insufficient Evidence: In Hesser v. U.S., 2022 PTC 202 (11th Cir. 2022), the Eleventh Circuit vacated the remaining conviction of a taxpayer who was initially found guilty of four counts of tax fraud but subsequently had three of those convictions overturned by a district court due to insufficient evidence. According to the Eleventh Circuit, the government did not carry its burden in proving the taxpayer's guilt beyond a reasonable doubt and, the court said, the taxpayer's own defense probably did more to convict him than the government did.

Tax Court Does Not Have Jurisdiction to Redetermine Interest on Penalties: In Colbert v. Comm'r, T.C. Memo. 2022-74, the Tax Court held that a couple was not entitled to have accrued interest and fees waived because they were unaware that an individual who helped them prepare their tax returns submitted and declared certain incorrect deductions on their tax returns. The court said it does not have jurisdiction to redetermine the couple's interest.

IRS Places Account in Currently Not Collectible Status, but Rejects OIC: In Serna v. Comm'r, T.C. Memo. 2022-66, the Tax Court granted summary judgment to the IRS and upheld a Notice of Federal Tax Lien (NFTL) relating to a taxpayer's 2016 tax year after concluding that an IRS settlement officer (SO) did not abuse her discretion in rejecting the taxpayer's offer in compromise and upholding the NFTL. The court noted that (1) the SO, acting of her own volition, put the taxpayer's account in currently-not-collectible (CNC) status, effectively ending further collection efforts unless his income increased substantially, and (2) the SO was not required to put the taxpayer's account in CNC status in light of his equity in a house he purchased for his ex-wife and disabled sons but took into consideration the hardship a sale of the house would have on his sons.

Exclusive Procedures Issued for Adding or Removing Taxable Substances to Section 4672: In Rev. Proc. 2022-26, the IRS provides the exclusive procedures for requesting a determination under Code Sec. 4672(a)(2) that a substance be added to or removed from the list of taxable substances under Code Sec. 4672(a). The sale or use of any such taxable substances by importers of such substances is subject to the excise tax imposed by Code Sec. 4671(a), subject to certain exceptions.

June 2022

Accounting

IRS Issues June 2022 Applicable Federal Rates: In Rev. Rul. 2022-10, the IRS provides various prescribed rates for federal income tax purposes for June 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

Credits

Fuel Producer Precluded from Seeking Refund of Excise Taxes: In ETC Sunoco Holdings, LLC v. U.S., 2022 PTC 167 (5th Cir. 2022), the Fifth Circuit affirmed a district court's ruling that a fuel producer and distributor was precluded under collateral estoppel from seeking a partial refund of its income tax payments for 2010 and 2011 based on a theory of reduced tax liability that the company had argued unsuccessfully for prior tax years in the Court of Federal Claims. The court rejected the company's argument that issue preclusion should not apply because two of its competitors appealed the same mixture-credit issue to other circuits and a decision for the fuel producer in either case would create a circuit split that might lead the Supreme Court to take up the issue.

IRS Issues Inflation Adjustment Factor and Reference Price for Code Section 45 Credit: In Notice 2022-20, the IRS published the inflation adjustment factor and reference price for calendar year 2022 for the renewable electricity production credit under Code Sec. 45. The guidance also provides the credit amounts for calendar year 2022.

Criminal

Service-Connected Disability Benefits Already Paid Out Are Subject to Garnishment: In U.S. v. Charpia, 2022 PTC 160 (5th Cir. 2022), the Fifth Circuit upheld a district court's ruling that a taxpayer's service-connected disability benefits, which had been deposited into her bank account as a lump sum after she appealed an initial denial of benefits and the denial was reversed, were not exempt from garnishment to satisfy a criminal restitution order under the exemption provided in Code Sec. 6334(a)(10). The court found that the statute exempts only service-connected disability benefits which are "payable" and thus does not apply to funds which have already been disbursed.

Court Generally Allows Lavish Spending Evidence: In U.S. v. Millegan, 2022 PTC 153 (D. Ore. 2022), a district court held that, with respect to a taxpayer's upcoming trial on tax evasion, the government could introduce evidence relating to the taxpayer's (1) personal assistants; (2) cars; (3) homes; (4) equestrian activities; and (5) travel, country club membership, clothing, books, and wine. However, the court drew the line at the government introducing evidence about girlfriends, mistresses, or any extramarital affairs saying that any probative value about the taxpayer's expenditures on such individuals would be substantially outweighed by a danger of unfair prejudice.

Filing False Tax Returns Nets Taxpayer 118 Months in Prison; $1.8 Million in Restitution: In U.S. v. Croft, 2022 PTC 149 (5th Cir. 2022), the Fifth Circuit affirmed a taxpayer's convictions for filing false tax returns, wire fraud, aggravated identity theft, and money laundering. The court also affirmed the district court's assessment of $1.5 million in restitution and 118 months in prison.

Court Affirms Sentence of Taxpayer Who Claimed Large Refund on Doctored Return: In U.S. v. Cook, 2022 PTC 128 (6th Cir. 2022), the Sixth Circuit affirmed a district court's sentence of 51 months for a taxpayer who tried to deposit a fake $1 million bill at a bank and also claimed a $251,925 refund with a doctored tax return. The court said that the taxpayer, who founded and served as the executive director of a nonprofit, Sheep Ministries, Inc. (Sheep), which was supposed to offer financial support to the poor, was really a wolf in sheep's clothing as she used the nonprofit to collect social security numbers and other information from her flock and used that information to file fraudulent tax returns.

Court Upholds Priest's Conviction for Failing to Report Embezzlement Income: In U.S. v. Garbacz, 2022 PTC 118 (8th Cir. 2022), the Eighth Circuit reversed three of a priest's wire fraud convictions but affirmed the remaining convictions relating to wire fraud, money laundering, transporting stolen money, and filing false tax returns in which he failed to account for money embezzled from parishes where he worked. The court also affirmed the 93-month prison sentence originally handed down.

Deductions

Court Dismisses Appraisers' Challenge to Increased Scrutiny of Conservation Easements: In Benson v. IRS, 2022 PTC 165 (N.D. Ga. 2022), a district court dismissed a complaint filed by licensed real estate appraisers who provided appraisal services in connection with donations of conservation easements to charitable organizations, arguing that the IRS's increase in enforcement actions for syndicated conservation easement transactions announced in IR-2019-182 lacked transparency and unlawfully expanded the IRS's regulatory powers regarding appraisals for donations of qualified real property. The court found that the appraisers failed to adequately serve the named defendants, which included individually named IRS employees, with the complaint.

Conservation Easement Deed Which Was Silent on Extinguishment May Be Lawful: In Morgan Run Partners, LLC v. Comm'r, T.C. Memo. 2022-61, the Tax Court denied the IRS's motion for summary judgment after finding that a conservation easement deed which did not address the possibility that that the easement might be extinguished in a future judicial proceeding and provided that any eminent domain proceeds would be reduced by both parties' expenses, did not obviously violate the judicial extinguishment rule in Reg. Sec. 1.170A-14(g)(6)(i) or the requirement under Code Sec. 170(h)(5)(A) that the conservation purpose be protected in perpetuity. Noting that the deed contained language stating that if circumstances arose that required modifying the deed, the parties would agree to appropriate amendments as long as no amendments violated Code Sec. 170(h), the court found that the taxpayer had a reasonable argument that the deed violated neither the regulation nor the protected-in-perpetuity requirement.

Tax Court Allows Miscellaneous Itemized Deduction for Nurse's Work Clothing Expenses: In Romana v. Comm'r, T.C. Summary 2022-9, the Tax Court held that a taxpayer who worked as a nurse in a plastic surgery clinic and who purchased scrubs and a lab coat embroidered with the name of the clinic to wear while at work was entitled to deduct the costs of the clothing and dry cleaning as unreimbursed employee business expenses on her 2017 tax return. The court found that the taxpayer was required to dress professionally and comfortably for her job as a nurse and that the scrubs and lab coat were not adaptable to general use as ordinary clothing and thus the taxpayer could deduct the expenses as miscellaneous itemized deduction under Code Sec. 67 (which was subsequently suspended for years 2018-2025 by the Tax Cuts and Jobs Act).

IRS Issues Depletion Percentage for Marginal Properties: In Notice 2022-24, the IRS stated that the applicable percentage for purposes of determining percentage depletion on marginal properties under Code Sec. 613A(c)(6)(C) for calendar year 2022 is 15 percent. The IRS noted that the "applicable percentage" is the percentage (not greater than 25 percent) equal to the sum of 15 percent, plus one percentage point for each whole dollar by which $20 exceeds the reference price (determined under Code Sec. 45K(d)(2)(C)) for crude oil for the calendar year preceding the calendar year in which the tax year begins and that the reference price determined under Code Sec. 45K(d)(2)(C) for the 2021 calendar year is $65.90.

Payments to Ex-Wife Were Not Deductible as Alimony: In Ibrahim v. Comm'r, T.C. Summary 2022-7, the Tax Court held that a doctor who made payments to his ex-wife, which he deducted as alimony, was not entitled to the deduction because under the divorce agreement neither party was responsible for maintenance of the other. The court also concluded that the taxpayer was not entitled to rely on Missouri state law to satisfy the Code Sec. 71 alimony deduction requirements.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-25, 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 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).

Excise Taxes

Manufacturer Liable for Excise Taxes on Archery Equipment Sold to Related Party: In Perfect Form Manufacturing LLC v. U.S., 2022 PTC 141 (Fed. Cl. 2022), the Court of Federal Claims held that a manufacturer of archery equipment was liable for excise taxes under Code Sec. 4161(b) on archery bows it sold to a related wholesale distributor. The court also found that the manufacturer was liable for the penalty under Code Sec. 6651 because it did not show that there was reasonable cause for its failure to pay the excise taxes due.

Innocent Spouse Relief

Taxpayer Who Lacked Knowledge of Fraudulent Returns Wins Innocent Spouse Relief: In Pocock v. Comm'r, T.C. Memo. 2022-55, the Tax Court held that a taxpayer was entitled to relief from joint and several liability under Code Sec. 6015(f) to the extent of the tax items attributable to her ex-husband. The court found that the taxpayer did not have actual knowledge of her ex-husband's scheme of overstating withholdings on the couple's joint returns in order to generate large refunds and that the ex-husband's abuse and physical intimidation of the taxpayer prevented her from questioning the accuracy of the joint returns.

Foreign

Mandatory Repatriation Tax on CFC Owners Survives Constitutional Challenges: In Moore v. U.S., 2022 PTC 166 (9th Cir. 2022), a panel of the Ninth Circuit affirmed a district court's dismissal of an action seeking to invalidate the mandatory repatriation tax (MRT) under Code Sec. 965, enacted by the Tax Cuts and Jobs Act (TCJA), which provides that the owners of at least 10 percent of a controlled foreign corporation (CFC) are taxed on the CFC's profits regardless of whether the CFC distributed earnings. The panel found that the MRT was a valid exercise of Congress's broad taxing powers and accomplished the legitimate purpose of preventing CFC shareholders from avoiding tax on pre-2018 earnings as a result of other changes to CFC tax rules enacted by the TCJA.

Information Reporting

Bank That Continued Collection Efforts After Mailing Form 1099-C Didn't Violate Law: In Gericke v. Truist, 2022 PTC 168 (3d Cir. 2022), the Third Circuit upheld a district court's dismissal of an individual's suit against a bank that obtained a judgment against the individual, issued the individual a Form 1099-C, Cancellation of Debt, reporting a portion of the judgment amount as the "amount of debt discharged,' but then notified the individual that it intended to continue efforts to collect on the judgment. The court found that under Reg. Sec. 1.6050P-1(a)(1), the Form 1099-C was a reporting requirement that did not depend on whether the debt had been actually discharged or the debtor had been actually released from his obligations on the underlying debt.

Penalties

Tax Court Nixes Frivolous Return Penalty Imposed on Copy of Return: In Walker v. Comm'r, T.C. Memo. 2022-63, the Tax Court held that the IRS improperly imposed a $5,000 frivolous return penalty under Code Sec. 6702(a) on a return copy of a taxpayer's tax return which was attached to a letter the taxpayer sent to the IRS. The court held that the penalty was improperly imposed because the copy did not purport to be a tax return, but it upheld the imposition of a frivolous return penalty on the taxpayer's original tax return.

Procedure

IRS Properly Certified Tax Debt for Passport Revocation: In Ezekwo v. Comm'r, T.C. Memo. 2022-54, the Tax Court granted summary judgment for the IRS after finding that it properly certified a taxpayer to the Secretary of the Treasury as having seriously delinquent tax debt under the passport revocation provision of Code Sec. 7345(e). The court found that to the extent the taxpayer was seeking to challenge the amount of her underlying tax liability, that challenge was impermissible because Code Sec. 7345(e)(1) only allows the Tax Court to determine whether the certification of a taxpayer as having a seriously delinquent tax debt was erroneous.

Taxpayer Fails to Overcome Presumption That IRS Assessments Were Correct: In U.S. v. Perkins, 2022 PTC 158 (S.D. Ill. 2022), a district court held that a taxpayer was liable for unpaid taxes, penalties and interest after finding that the Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters for the years at issue were presumptive evidence of valid assessments and the taxpayer failed to overcome the presumption. The court held that the government's failure to produce the Forms 4340 during discovery was harmless because the IRS produced uncertified tax transcripts; the court also found that the Forms 4340 were presumptive proof that the government properly terminated an installment agreement in effect for one of the years at issue.

IRS Issues Third Quarter Interest Rates: In Rev. Rul. 2022-11, the IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2022, beginning July 1, 2022. The interest rates will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, 2.5 percent for the portion of a corporate overpayment exceeding $10,000, and 7 percent for large corporate underpayments.

Retirement Plans

Treasury Department Issues Final Forms and Instructions Revisions for Form 5550: In 87 Fed. Reg. 31113 (5/23/22), the Treasury Department, Department of Labor, and the Pension Benefit Guaranty Corporation issued final forms and instructions revisions for the Form 5500 Annual Return/Report of Employee Benefit Plan and Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, effective for plan years beginning on or after January 1, 2022. The changes to the forms and instructions in the document primarily implement annual reporting changes for defined benefit plans.

IRS Extends Temp. Relief from Physical Presence Requirement in Retirement Plan Regs: In Notice 2022-27, the IRS provides a six-month extension, through December 31, 2022, of the temporary relief provided in Notice 2021-40, from the requirement in Reg. Sec. 1.401(a)-21(d)(6)(i) that certain participant elections be witnessed in the physical presence of a plan representative or a notary public (the physical presence requirement). The IRS is providing this extension of relief from the physical presence requirement in response to the continuing Coronavirus Disease 2019 pandemic.

May 2022

Accounting

IRS Issues May 2022 Applicable Federal Rates: In Rev. Rul. 2022-9, the IRS provides various prescribed rates for federal income tax purposes for May 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

Credits

IRS Simplifies Child Tax Credit Procedures for Certain Puerto Rican Residents: In Rev. Proc. 2022-22, the IRS provides simplified procedures for certain bona fide residents of Puerto Rico to claim the child tax credit under Code Sec. 24. In Section 4, the IRS provides a simplified procedure for filing Form 1040-PR, Planilla para la Declaracide la ContribuciFederal sobre el Trabajo por Cuenta Propia, or Form 1040-SS, U.S. Self-Employment Tax Return, to claim the child tax credit and, in Section 5, the IRS provides a simplified procedure for filing Form 1040, U.S. Individual Income Tax Return (also available as Formulario 1040(SP), Declaracide Impuestos de los Estados Unidos Sobre los Ingresos Personales), or Form 1040-SR, U.S. Tax Return for Seniors (also available as Formulario 1040-SR(SP), Declaracide Impuestos de los Estados Unidos para Personas de 65 Ade Edad o Mto claim the child tax credit.

Criminal

Former CPA Cannot Move Ahead With Lawsuit Against IRS Employees: In Podlucky v. Comm'r, 2022 PTC 123 (3d Cir. 2022), the Third Circuit held that three of the claims in a lawsuit brought by a former CPA against several IRS employees alleging various constitutional violations relating to previous criminal proceedings in which former CPA pleaded guilty to income tax evasion, mail fraud, and conspiracy to commit money laundering, were barred by the Supreme Court's decision in Heck v. Humphrey, 512 U.S. 477 (1994). The court also held that the remainder of the taxpayer's claims, which raised technical challenges to the IRS's use of its summons authority and searches in which officials discovered inculpatory evidence were untimely.

Deductions

2023 Inflation-Adjusted Amounts Issued for HSAs and Excepted-Benefit HRAs: In Rev. Proc. 2022-24, the IRS issued the 2023 inflation adjusted amounts for health savings accounts (HSAs) as determined under Code Sec. 223 and the maximum amount that may be made newly available for excepted benefit health reimbursement arrangements (HRAs) under Reg. Sec. 54.9831-1(c)(3)(viii). For calendar year 2023, (1) the annual limitation on deductions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,850; (2) the annual limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $7,750; (3) a "high deductible health plan" is defined under Code Sec. 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,500 for self-only coverage or $3,000 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,500 for self-only coverage or $15,000 for family coverage; and (4) the maximum amount that may be made newly available for the plan year for an excepted benefit HRAs is $1,950.

Employee Benefits

Updated Mortality Improvement Rates and Static Mortality Tables Released: In Notice 2022-22, the IRS issued guidance that (1) updates the 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 (ERISA), and (2) provides a modified unisex version of the mortality tables for use in determining minimum present value under Code Sec. 417(e)(3) and Section 205(g)(3) of ERISA for distributions with annuity starting dates that occur during stability periods beginning in the 2023 calendar year. The updated mortality improvement rates and static mortality tables apply for purposes of determining present value and making any other computations under Code Sec. 430 for valuation dates occurring during the 2023 calendar year.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-16, 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 notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Estates, Gifts, and Trusts

IRS Issues Prop. Regs Updating Actuarial Tables: In REG-122770-18, the IRS issued proposed regulations relating to the use of actuarial tables in valuing annuities, interests for life or a term of years, and remainder or reversionary interests. The regulations will affect the valuation of inter vivos and testamentary transfers of interests dependent on one or more measuring lives, and are necessary because applicable law requires the actuarial tables to be updated to reflect the most recent mortality experience available.

Foreign

IRS Proposes Changes to Qualified Intermediary Withholding Agreement: In Notice 2022-23, the IRS sets forth proposed changes to the qualified intermediary (QI) withholding agreement (QI agreement) described in Reg. Sec. 1.1441-1(e)(5) and (6) that will permit a QI to assume withholding and reporting responsibilities for purposes of Code Sec. 1446(a) and (f) (relating to withholding taxes on (i) a foreign partner's share of effectively connected income and (ii) dispositions relating to foreign partnership interests). The QI agreement currently in effect, as provided in Rev. Proc. 2017-15, expires on December 31, 2022. The notice sets forth proposed changes to the QI agreement that apply to a QI effecting a transfer of an interest in a publicly traded partnership (PTP) or receiving a distribution made by a PTP on behalf of an account holder of the QI.

Procedure

No Abuse of Discretion Where Taxpayer Failed to Provide Requested Documents: In Wolfson v. Comm'r, T.C. Memo. 2022-46, the Tax Court held that an IRS settlement officer (SO) did not abuse his discretion in upholding a Notice of Federal Tax Lien filing against a taxpayer who failed to collect and pay over employment taxes reportable on Form 941, Employer's Quarterly Federal Tax Return, for three quarters in 2012. The court found that the taxpayer did not submit any of the documents requested by the SO that were necessary for the SO to consider a lien discharge and that the SO had given the taxpayer and his representative ample time to submit the requested documents.

IRS Invites Comments on 2022-2023 Priority Guidance Plan: In Notice 2022-21, the IRS is encouraging the public to submit recommendations for items to be included on their 2022-2023 Priority Guidance Plan, which is used each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2022-2023 Priority Guidance Plan will identify guidance projects that the Treasury Department and the IRS intend to actively work on as priorities during the period of July 1, 2022, through June 30, 2023.

Procedure Addresses Certain Late 2018 and 2019 Elections: In Rev. Proc. 2022-23, the IRS provides guidance allowing a taxpayer to make a late election under Code Sec. 181(a)(1) to deduct costs instead of capitalizing them for the taxpayer's tax year ending in 2018 or in 2019 for certain film, television, or live theatrical productions begun by the taxpayer after December 31, 2017. The procedure also allows taxpayers to make late elections under Code Sec. 168(j)(8) (relating to Indian reservation property) and Code Sec. 168(l)(3)(D) (relating to second generation biofuel plant property) for the taxpayer's tax year ending in 2018 or in 2019 for property placed in service by the taxpayer after December 31, 2017.

Relief Issued for Certain Failure to Deposit Penalties for Superfund Chemical Taxes: In Notice 2022-15, the IRS provides relief for the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, regarding the failure to deposit penalties imposed by Code Sec. 6656 with respect to the excise taxes imposed on certain chemicals under Code Sec. 4661 and on certain imported substances under Sec. 4671 (i.e., Superfund chemical taxes). The notice also provides that during the first, second, and third calendar quarters of 2023, the IRS will not withdraw a taxpayer's right to use the deposit safe harbor rules of Reg. Sec. 40.6302(c)-1(b)(2) for failure to make required deposits of Superfund chemical taxes if certain requirements are met.

Chief Counsel's Office Addresses Look-Back Rule in Section 6511(c)(2): In CCA 202216015, the Chief Counsel's Office advised that the statute of limitations look-back rule in Code Sec. 6511(c)(2) applies on multiple extensions by reaching back to the first extension. According to the Chief Counsel's Office, if an agreement to extend the statute of limitations is reached under Code Sec. 6501(c)(4), then Code Sec. 6511(c)(1) provides that the taxpayer's time to file a claim for refund is extended to six months after the agreed upon assessment and the Code Sec. 6511(c)(2) look back provision then limits the amount the taxpayer can claim in a refund to (1) payments made between the time the agreement was executed and the filing of the refund claim, plus (2) payments that would have been available under Code Sec. 6511(b)(2) had the claim been filed on the date the agreement was executed.

S Corporation

Couple Is Liable for Deficiencies After Failing to Substantiate Overstated Gross Receipts: In Kohout v. Comm'r, T.C. Memo. 2022-37, the Tax Court held that a husband and wife, who were engaged in medical funding and real estate business ventures through the husband's wholly owned S corporation, were liable for tax deficiencies and an accuracy-related penalty because they failed to substantiate their claim that the S corporation overstated gross receipts for the 2013 tax year by $956,000. The court also rejected the couple's claim that the husband and his S corporation had enough bases in a limited liability company (LLC) to deduct their pro rata shares of the LLC's loss for the 2013 tax year.

April 2022

Accounting

IRS Issues April 2022 Applicable Federal Rates: In Rev. Rul. 2022-8, the IRS provides various prescribed rates for federal income tax purposes for April 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

Credits

IRS Issues Nationwide Average Purchase Price for Residences: In Rev. Proc. 2022-21, the IRS provides issuers of qualified mortgage bonds, as defined in Code Sec. 143(a), and issuers of mortgage credit certificates, as defined in Code Sec. 25(c), 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. Generally, issuers must use the nationwide average purchase price limitation contained in the procedure 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 March 30, 2022, and ends on the date when the nationwide average purchase price limitation is rendered obsolete by a new revenue procedure.

Fifth Circuit Holds That Butane Is Not Eligible for the Alternative Fuel Credit: In Vitol, Inc. v. U.S., 2022 PTC 82 (5th Cir. 2022), in an issue of first impression, the Fifth Circuit affirmed a district court's denial of partial summary judgment and held that butane is not a liquefied petroleum gas. As a result, the court concluded that butane is not an "alternative fuel" that can be mixed with a taxable fuel to qualify for the tax credit in Code Sec. 6426.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-14, 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 notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Employment Taxes

Taxpayer's Claim of Coercion by IRS Does Not Affect His Status as a Responsible Person: In Middleton v. Comm'r, T.C. Memo. 2022-28, the Tax Court held that the IRS did not abuse its discretion where it proceeded with a collection action against a taxpayer who was liable for a trust fund recovery penalty under Code Sec. 6672. Further, the court found that even if the taxpayer's claim that he was coerced by the revenue officer into admitting that he was a responsible person was true, it would not affect his status as a responsible person.

IRS Nonacquiescences to CSX Corporation Holding in Eleventh Circuit: In AOD 2022-2, the IRS stated that it will not acquiesce to the Eleventh Circuit's decision in CSX Corp. v. U.S., 2021 PTC 359 (11th Cir. 2021). Specifically, the IRS said it does not agree with the holding that relocation benefits provided by a railroad to its employees are exempt from Railroad Retirement Tax Act taxation under Code Sec. 3231(e)(1)(iii).

Foreign

Requirements Waived for Certain Individuals Making Foreign Earned Income Exclusion: In Rev. Proc. 2022-18, the IRS provides a waiver under Code Sec. 911(d)(4) for the time requirements for individuals electing to exclude their foreign earned income who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. The procedure adds Iraq, Burma, Chad, Afghanistan, and Ethiopia to the list of waiver countries for tax year 2021 for which the minimum time requirements are waived.

Gross Income

Legal Malpractice Settlement Not Excludible from Income: In Blum v. Comm'r, 2022 PTC 79 (9th Cir. 2022), the Ninth Circuit affirmed the Tax Court and held that a taxpayer's legal malpractice settlement proceeds of $125,000 were not exempt from tax under Code Sec. 104(a)(2). The court noted that such payments can be excluded from income where the damages are received on account of personal physical injuries or physical sickness but the terms of the taxpayer's settlement made clear that there was no direct causal link between the legal malpractice settlement and her physical injuries.

Like-Kind Exchanges

Second Circuit Affirms Disallowance of Like-Kind Exchange Involving a Partnership: In Gluck v. Comm'r, 2022 PTC 74 (2d Cir. 2022), the Second Circuit held that the Tax Court correctly determined that it lacked jurisdiction to redetermine a computational adjustment made in connection with the IRS's disallowance of a couple's claimed like-kind exchange of a condominium for a partnership interest. The court noted that, had the couple filed Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), which is required for taxpayers choosing to make an election that is inconsistent with a partnership tax return, they might have avoided subsequent computational adjustments.

International

Treasury Issues Reports Dealing with Advanced Pricing: In Announcement 2022-7, the Secretary of the Treasury announced that, pursuant to Section 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999 (Pub. L. 106-170), it has issued an annual report to the public concerning Advance Pricing Agreements and the Advance Pricing and Mutual Agreement Program (APMA Program). This report describes the experience, structure, and activities of the APMA Program during calendar year 2021.

Procedure

Failure to File Return Negates Election to Itemize Deductions in Calculating Deficiency: In Salter v. Comm'r, T.C. Memo. 2022-29, the Tax Court upheld a notice of deficiency issued to a taxpayer after he failed to file a federal income tax return for 2013. In addition, in calculating the taxpayer's tax deficiency for that year, itemized deductions he might otherwise have taken were not included in the calculation because of his failure to file a return for that year.

Proprietors of Famous Philly Cheesesteak Business Face Tax Fraud Charges: In U.S. v. Lucidonio, 2022 PTC 77 (E.D. Pa. 2022), a district court refused to dismiss charges under Code Sec. 7601(1) against a father and son, who own and operate a well-known cheesesteak franchise operation in Philadelphia and beyond, after rejecting their argument that, under Code Sec. 7206(1), an individual cannot be charged with aiding and abetting one's own conduct. The court stated that the charge in Code Sec. 7206(1) does not refer to an individual, but instead refers to an activity, i.e., the preparation and presentation of a return.

IRS Settlement Officer Abused Her Discretion: In Hamilton v. Comm'r, T.C. Memo. 2022-21, the Tax Court held that an IRS settlement officer (SO) abused her discretion in conducting a collection due process hearing. The court found that her decision to uphold a notice of federal tax lien filing was arbitrary and lacked a sound basis in fact or law.

Government Employees Are Subject to Disclosure Rules in Section 6103: In Rev. Rul. 2022-7, the IRS ruled that (1) government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(c), like all designees who receive returns or return information pursuant to taxpayer consent, are subject to the disclosure restrictions of Code Sec. 6103(a); but (2) government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or Code Sec. 6103(e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions of Code Sec. 6103(a) with regard to the returns or return information received. As a result of this ruling, Rev. Rul. 2004-53 is superseded.

Retirement Plans

Taxpayer's Retirement Payments to go Toward Paying Restitution: In U.S. v. Phillips, 2022 PTC 99 (S.D. W.V.), a district court held that in determining the terms of a restitution order for a company's former Chief Financial Officer who was convicted of diverting company funds to herself, payments received during her period of incarceration, whether it is a backpay or an ongoing monthly payment for retirement or similar benefits, 50 percent of that payment will be paid toward restitution. Once she is released, the court said, 25 percent of her benefit payments per month from any and all sources will be attributed to her restitution obligation and, in the event that her appeal relating to her future retirement benefits is unsuccessful, the lump sum payment she would receive for the contributions she paid into the retirement system will be applied toward her restitution obligation in its entirety.

IRS Issues Proposed Regulations Relating to Certain Multiple Employer Plans: In REG-121508-18, the IRS issued proposed regulations relating to certain multiple employer plans (MEPs). The proposed regulations provide an exception, if certain requirements are met, to the application of the ''unified plan rule'' for MEPs in the event of a failure by one or more employers participating in the plan to take actions required of them to satisfy the applicable requirements of the Code.

Tax Return Preparers

D.C. Court Rejects Enrolled Agent's Request for Summary Judgment in FOIA Case: In Castro v. IRS, 2022 PTC 78 (D.C. D.C.), a district court granted summary judgment to the IRS and denied an enrolled agent's request for summary judgment after finding that the enrolled agent's Freedom of Information Act (FOIA) request seeking records regarding the cancellation and subsequent reinstatement of his credential to serve as an Enrolled Agent was properly handled by the IRS. The court rejected the enrolled agents request that the court review (1) redactions of pages that could include potential evidence that might be used in a proceeding against the enrolled agent and (2) pages containing "material concerning the relation of an investigation of plaintiff to other matters, references to particular documents with evidentiary significance for a proceeding against the plaintiff, particular actions by plaintiff that have been/are being investigated by the IRS and possible planned future investigatory actions by the IRS."

March 2022

Accounting

IRS Issues March 2022 Applicable Federal Rates: In Rev. Rul. 2022-4, the IRS provides various prescribed rates for federal income tax purposes for March 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

Bankruptcy

Fourth Circuit Affirms Lower Court; Tax Penalty Obligations Are Not Voidable: In In re Yahweh Center, Inc., 2022 PTC 65 (4th Cir. 2022), the Fourth Circuit upheld a district court's dismissal of claims by a bankruptcy trustee attempting to void tax penalty obligations owed by a debtor to the IRS and the trustee's attempts to recover prior payments by the debtor to the IRS. The Fourth Circuit concluded that under the Bankruptcy Code and the applicable state fraudulent transfer statutes, tax penalty obligations are not voidable, and relatedly, tax penalty payments are not recoverable.

Bankruptcy Court Rejects Trustee's Definition of "Net Tax Refunds": In In re Shaikh, 2022 PTC 58 (Bankr. E.D. Okla. 2022), a bankruptcy court denied a bankruptcy trustee's request that a debtor turn over more than he received in his 2020 income tax refund, stating that it did not believe a debtor can turn over funds he did not receive. The court rejected the bankruptcy trustee's interpretation of "net tax refunds," (which the debtor was supposed to turn over) as being the debtor's total refund for a particular year less earned income credits and instead concluded that "net tax refunds" meant that the deduction for earned income tax credits modifies "net income tax refunds" and may be taken in addition to other offsets taken to arrive at the net refund amount that the debtor was supposed to turn over.

Bankruptcy Court's Denial of Debtor's Request for Fees and Expenses Reversed: In Nicolaus v. U.S., 2022 PTC 64 (N.D. Iowa 2022), a district court held that a bankruptcy court erred in denying a debtor's application for an award of fees and expenses after finding that the government failed to meet its burden of showing that a reasonable basis in law existed for its position. The court concluded that the debtor's mailing of an objection to an address provided by the IRS in its own proof of claim, rather than to other recipients allegedly prescribed by a rule of procedure, was not such a fundamental infirmity as to dissolve the bankruptcy court's jurisdiction to rule on the claim.

Corporations

Federal Circuit Denies Request for Additional Payments of Section 1603 Grants: In Ampersand Chowchilla Biomass, LLC v. U.S., 2022 PTC 52 (Fed. Cir. 2022), the Federal Circuit affirmed the Court of Federal Claims and denied a corporation's request for additional payments of Section 1603 grants under the American Recovery and Reinvestment Act of 2009. The court agreed with the lower court that the relevant power facilities owned by the taxpayer did not meet the requirements of the statute because the property at issue was placed in service outside of the statute's designated time period.

Deductions

Musician Can't Deduct Personal and Unsubstantiated Expenses: In Sonntag v. Comm'r, T.C. Summary 2022-3, the Tax Court held that a taxpayer, who was in the music business and incurred expenses relating to traveling and performing on stage, was not entitled to numerous deductions taken on his Schedule C because he either failed to substantiate the amount expended and/or failed to provide or establish any basis that would entitle him to a greater deduction than the IRS had already allowed. Among the disallowed expenses were costs relating to meals and entertainment, nail salon services, a fitness membership, shoes and clothing worn on stage that were suitable for general wear off stage, catering expenses, hair styling products, and subscriptions to Netflix, Apple Music, and Spotify.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-9, 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 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).

Partnerships

Chief Counsel Addresses Issue of Including a Person's Title on Form 8979: In CCA 202208015, the Office of Chief Counsel was asked whether adding a title, such as "Member," on the signature line of Form 8979, Partnership Representative Revocation, Designation, and Resignation, impacts the legitimacy of a person's appointment as a partnership representative (PR). Citing Reg. Sec. 301.6233-1(b), the Chief Counsel's Office concluded that a PR's current or previous connection to a Bipartisan Budget Act partnership is not a determinative factor when considering a person's (or entity's) eligibility to serve as a PR and, thus, appointment as PR on Form 8979 is not invalidated by a person's inclusion of the word "Member" after his or her name.

Procedure

Unpaid Shareholder Income Isn't a Bad Debt That Extends the Statute of Limitations: In Taha v. U.S., 2022 PTC 57 (Fed. Cir. 2022), the Federal Circuit, affirming a decision by the Court of Federal Claims, held that a taxpayer's earned shareholder income, which the taxpayer reported as income but never actually received the full amount reported, did not constitute a bad business debt and, accordingly, the taxpayer was not entitled to the extended seven-year statute of limitations period provided under Code Sec. 6511(d)(1) and Code Sec. 166(a) for filing a refund claim. The court also concluded that, as a non-corporate taxpayer, the taxpayer was not entitled to deduct his unpaid shareholder earnings from his 2003 taxes as a capital loss incurred in 2004 and thus was not entitled to the extended seven-year statute of limitations period provided under Code Sec. 6511(d)(1) and Code Sec. 165(g) for filing a refund claim.

Return Info Disclosures by IRS Appraiser Permissible in Some Cases: In CCA 202208014, the Office of Chief Counsel advised that certain proposed return information disclosures in order to help an IRS appraiser complete an investigation into property, with respect to determining a possible tax liability, are authorized under Code Sec. 6103. The Chief Counsel's Office also advised that the IRS appraiser should only disclose the minimum amount of return information possible to obtain the information needed.

IRS Issues Second Quarter Interest Rates for Tax Overpayments and Underpayments: In Rev. Rul. 2022-5, the IRS issued the rates for interest on tax overpayments and underpayments for the second calendar quarter of 2022. The rates for interest determined under Code Sec. 6621 for the calendar quarter beginning April 1, 2022, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 6 percent for large corporate underpayments, and 1.5 percent on the portion of a corporate overpayment exceeding $10,000.

Retirement Plans

IRS Temporarily Suspends IRS Prototype IRA Opinion Letter Program: In Announcement 2022-6, the IRS notified taxpayers of a temporary suspension of the IRS prototype individual retirement account (IRA) opinion letter program. The announcement also advises taxpayers that, until further notice, adopters of prototype IRAs, SEPs, and SIMPLE IRA plans may rely on a previously received favorable opinion letter, and that taxpayers may use existing model forms to maintain current plans and accounts or establish new plans and accounts.

Tax Return Preparers

IRS Proposes User Fee Hike for Enrolled Retirement Plan Agents: In REG-114209-21, the IRS issued proposed regulations that will increase the renewal user fee for enrolled retirement plan agents from $67 to $140. In addition, the proposed regulations increase both the enrollment and renewal user fee for enrolled agents from $67 to $140 and affect individuals who are, or will be applying to, become enrolled agents and enrolled retirement plan agents.

IRS Finalizes Regs Increasing User Fee for Each Part of Enrolled Agents Exam to $99: In T.D. 9962, the IRS issued final regulations increasing the amount of the user fee for each part of the enrolled agents exam from $81, plus an amount payable to a third-party contractor, to $99, plus an amount payable to a third-party contractor. The final regulations also remove the user fee for the special enrollment examination for enrolled retirement plan agents (ERPA SEE) because the IRS no longer offers the ERPA SEE or new enrollment as an enrolled retirement plan agent.

IRS Announces Disciplinary Sanctions Involving Practitioners: In Announcement 2022-5, the Office of Professional Responsibility announced recent disciplinary sanctions involving attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the IRS, which are set out in Treasury Department Circular No. 230, and which prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations.

February 2022

Accounting

IRS Issues February 2022 Applicable Federal Rates: In Rev. Rul. 2022-3, the IRS provides various prescribed rates for federal income tax purposes for February 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

Deductions

Psychiatrist Fined in Healthcare Fraud Is Not Eligible for Tax Refund under Sec. 1341: In Gross v. U.S., 2022 PTC 45 (S.D. Tex. 2022), a district court rejected a taxpayer's request for an $838,000 refund under Code Sec. 1341 after siding with the government's argument that the taxpayer, a former psychiatrist who pled guilty to healthcare fraud, failed to state a plausible claim because a criminal judgment arising out of his healthcare fraud plea agreement prevented the taxpayer from receiving a tax refund under Code Sec. 1341. The court found that because the $1.8 million penalty that the taxpayer paid was a "fine or similar penalty," it was ineligible for a deduction and he thus did not meet the requirements of Code Sec. 1341.

State Court Orders Don't Trump Tax Code; Court Rejects Dependency Deduction: In Ola-Buraimo v. Comm'r, T.C. Summary 2022-2, the Tax Court held that a taxpayer was not entitled to claim one of his children as a dependent after rejecting the taxpayer's argument that he was entitled to a dependency deduction for his son, as well as other child-related tax credits, because a state court order in his divorce proceedings provided for such treatment. The court noted that the taxpayer did not meet the criteria under Code Sec. 152 to take a dependency deduction, nor did he meet other criteria for additional child-related deductions and credits, and stressed that state court orders do not determine a taxpayer's eligibility for federal income tax deductions and credits.

Employee Benefits

2022 Cumulative List for Section 403(b) Pre-approved Plans Released: In Notice 2022-8, the IRS issued guidance setting forth the requirements for Section 403(b) Pre-approved Plans (2022 Cumulative List). The 2022 Cumulative List will assist providers of Code Sec. 403(b) pre-approved plans in applying for opinion letters for the second remedial amendment cycle (i.e., Cycle 2) under the IRS's Section 403(b) pre-approved plan program.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2022-7, 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 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).

Excise Taxes

Credit Card Company Is Not Proper Party to Seek Refund of Airline Excise Taxes: In JetPay v. U.S., 2022 PTC 42 (5th Cir. 2022), the Fifth Circuit affirmed a district court and held that a credit card processing company seeking a refund of federal excise taxes initially paid by airline customers but later reimbursed to those customers by the credit card company, was not the proper party to seek a refund. According to the court, the airline customers, not the credit card company, were assessed the tax and, more importantly, the credit card company did not pay the IRS but rather "merely decided to reimburse" the customers who purchased airline tickets.

Foreign

Final Regs under Sec. 958 Provide Guidance on Determining Stock Ownership: In T.D. 9960, the IRS issued final regulations on the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations and affect U.S. persons that own stock of foreign corporations through domestic partnerships and domestic partnerships that are U.S. shareholders of foreign corporations. The IRS notes that (1) these regulations treat domestic partnerships as an aggregate of their partners for purposes of Code Sec. 951, which reduces the burden on taxpayer partners that are not U.S. shareholders of a controlled foreign corporation (CFC) owned by a partnership because these partners are no longer subject to Code Sec. 951 inclusions with respect to CFCs held by the partnership; (2) the regulations may also reduce burden on domestic partnerships that hold CFCs because these partnerships are no longer required to calculate their partners' distributive share of the partnerships' Code Sec. 951 inclusions, which will likely lower their compliance costs; and (3) the regulations do not impose a collection of information burden on any person, including small entities.

Prop. Regs Address Ownership of PFICs and their Partners and Shareholders: In REG-118250-20, the IRS issued proposed regulations on the treatment of domestic partnerships and S corporations that own stock of passive foreign investment companies (PFICs) and their domestic partners and shareholders. The proposed regulations also provide guidance regarding the determination of the controlling domestic shareholders of foreign corporations, the owner of a controlled foreign corporation or qualified electing fund that makes an election under Code Sec. 1411, the treatment of S corporations with accumulated earnings and profits under subpart F, and the determination and inclusion of related person insurance income under Code Sec. 953(c).

Innocent Spouse Relief

No Innocent Spouse Relief Where Taxpayer Provided Husband with W-2s and Other Info: In Jones v. Comm'r, 2022 PTC 30 (9th Cir. 2022), the Ninth Circuit affirmed the Tax Court's denial of innocent spouse relief with respect to a 2010 joint tax return after concluding that the Tax Court correctly articulated the governing legal standard when it found that the taxpayer tacitly consented to filing the 2010 joint tax return because she had provided her then-husband with her W-2s and other tax information; she failed to file a separate income tax return; and she later allowed her spouse in a subsequent marriage to sign her name to their joint tax returns. Although the last of those facts, the Ninth Circuit said, was not especially probative, and although the taxpayer had remarried by the time her ex-husband signed her name on the 2010 joint tax return, those considerations were insufficient to establish that the Tax Court clearly erred.

IRS

IRS Transitioning Away from Verification Involving Facial Recognition: In IR-2022-27 (2/7/22), the IRS announced it will transition away from using a third-party service for facial recognition to help authenticate people creating new online accounts. According to the IRS, the transition will occur over the coming weeks in order to prevent larger disruptions to taxpayers during filing season and, during the transition, the IRS will quickly develop and bring online an additional authentication process that does not involve facial recognition.

IRS Recruiting Volunteers to Serve on the Taxpayer Advocacy Panel: In 87 Fed. Reg. 8340 (2/14/22), the IRS issued a notice inviting individuals to apply to be members of the Taxpayer Advocacy Panel (TAP) where they would listen to taxpayers, identify issues that affect taxpayers, and make suggestions for improving IRS service and customer satisfaction. Specifically, the IRS is seeking applicants who have an interest in good government, a personal commitment to volunteer approximately 200 to 300 hours a year, and a desire to help improve the IRS.

IRS Chief Counsel's Office Looking for 200 Experienced Attorneys: In IR-2022-17, the Office of Chief Counsel announced that it plans to hire up to 200 additional attorneys to help the agency combat syndicated conservation easements, abusive micro-captive insurance arrangements, and other tax schemes. According to the announcement, the positions will be available in more than 50 locations, including Washington D.C., and those hired will provide legal advice to IRS professionals as they conduct audits of complex corporate and partnership issues and increasingly sophisticated and abusive transactions.

Procedure

Taxpayer Who Diverted Money to Shell Corporations Is Guilty of Tax Evasion: In U.S. v. Primm, 2022 PTC 25 (E.D. Mo. 2022), a district court rejected a taxpayer's claim that he was entitled to a judgment of acquittal with respect to his tax-evasion prosecution as a result of the government not meeting its burden of proof with respect to willfulness and venue. The court noted that the trial evidence clearly showed that the taxpayer acknowledged his bookkeeping problems to a friend, hired a bookkeeper, met with an accounting firm but then not only stymied their efforts to bring him into compliance with his tax obligations but also directed his business associates to divert money to shell corporations.

New Procedure Addresses Tax Court Petitions Dealing With Section 7436: In Rev. Proc. 2022-13, the IRS issued a guidance that provides information about when and how the IRS will issue a Notice of Employment Tax Determination Under IRC Sec. 7436 and how taxpayers petition for Tax Court review of certain IRS determinations under Code Sec. 7436. The revenue procedure modifies and supersedes Notice 2002-5.

Tax Accounting

IRS Updates List of Automatic Tax Accounting Method Changes: In Rev. Proc. 2022-14, the IRS provides a list of automatic changes to which the automatic change procedures in Rev. Proc. 2015-13, as subsequently modified, apply. The definitions in Section 3 of Rev. Proc. 2015-13 apply to Rev. Proc. 2022-14.

January 2022

Accounting

IRS Issues January 2022 Applicable Federal Rates: In Rev. Rul. 2022-1, the IRS provides various prescribed rates for federal income tax purposes for January 2022, 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. These rates are determined as prescribed by Code Sec. 1274.

ICYMI: Parker's Top 12 Tax Developments of 2021: The year began and ended with legislative developments, as Congress enacted the American Rescue Plan (ARP) Act in March and the Infrastructure Investment and Jobs Act (IIJA) in November, but came to an impasse in December over the Build Back Better (BBB) Act... Read more.

ICYMI: Parker's 2021 Tax Planning Guides: Client Letters Included. For an In-Depth Look at Tax Planning for INDIVIDUALS, Click Here. For an In-Depth Look at Tax Planning for BUSINESSES, Click Here.

Compensation

2022 Covered Compensation Tables Released: In Rev. Rul. 2022-2, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2022 plan year. Code Sec. 401(l)(5)(E)(i) defines "covered compensation" with respect to an employee as the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

Credits

IRS Provides Relief from Certain Residential Housing Project Requirements: In Notice 2022-5, the IRS advised that because of the continuing covid pandemic, it is providing temporary relief from certain requirements under Code Sec. 42 for qualified low-income housing projects and under Code Sec. 142(d) and Code Sec. 147(d) for qualified residential rental projects.

Employee Benefits

IRS Issues Indexing Factor for Use by Health Plans and Insurers: In Rev. Proc. 2022-11, the IRS issued guidance on the indexing factor group health plans and health insurance issuers must use to calculate the qualifying payment amount (QPA) for items or services provided in 2022. The IRS noted that it issued temporary regulations in July of 2021 that provide the methodology for calculating the QPA, which is generally the plan's median contracted rate for the same or similar item or service, indexed for inflation, and provide that the Treasury Department and IRS will identify the annual indexing factor in guidance, rounded to 10 decimal places.

Employment Taxes

Income Tax Refund under Tax Equalization Program Is Not Refundable to Employer: In CCM 202202010, the IRS Office of Chief Counsel advised that, when an employer pays an employee on a foreign assignment a stated amount of remuneration that is subject to income tax withholding under Code Sec. 3402, and pays the income tax withholding attributable to the remuneration on behalf of the employee, then the income taxes the employer pays to the IRS are considered withheld from the employee and are not refundable to the employer after the calendar year in which the wages were paid. The situation at issue involved an employer who used a tax equalization program to adjust the employee's pay so that the employee would have no net economic gain or loss with respect to tax liability because of the foreign assignment.

Exempt Organizations

IRS Revises Exempt Status Application to Allow Electronic Filing: In Rev. Proc. 2022-8, the IRS updated the procedures for exempt organizations determination letters with respect to the electronically submitted Form 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code, which is the application used to apply for recognition of exemption as an entity described in Code Sec. 501(a) (other than those described in Code Sec. 501(c)(3) or Code Sec. 501(c)(4)) and Code Sec. 521. The procedure provides that the electronic submission process is generally the exclusive means of submitting a completed Form 1024 and the procedure modifies which individuals or representatives are authorized to sign the Form 1024.

HealthCare

Applicable Dollar Amount for Determining 2021 - 2022 PCORTF Fee Issued: In Notice 2022-4, the IRS issued the adjusted applicable dollar amount that is multiplied by the average number of covered lives for purposes of calculating the Code Sec. 4375 and Code Sec. 4376 fee imposed for policy years and plan years ending on or after October 1, 2021, and before October 1, 2022. The fee, which helps to fund the Patient-Centered Outcomes Research Trust Fund (PCORTF), is calculated using the average number of lives covered under the policy or plan and the applicable dollar amount for that policy year or plan year.

International

IRS Issues Final Foreign Tax Credit Regs: In T.D. 9959, the IRS issued final regulations relating to the foreign tax credit, including the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; the definition of a foreign income tax and a tax in lieu of an income tax; the definition of foreign branch category income; and the time at which foreign taxes accrue and can be claimed as a credit. The final regulations, which are generally effective on March 7, 2022, also clarify rules relating to foreign-derived intangible income (FDII) and affect taxpayers that claim credits or deductions for foreign income taxes, or that claim a deduction for FDII.

IRS Issues Guidance on Transition from Interbank Offered Rates to Other Rates: In T.D. 9961, the IRS issued final regulations which provide guidance on the tax consequences of the discontinuation of interbank offered rates (IBORs) that is expected to occur in the United States and many foreign countries. The final regulations mitigate many of the tax consequences that might otherwise arise when a taxpayer modifies a contract that references a discontinuing IBOR in anticipation of that discontinuation.

Procedure

IRS Examiner's Immediate Supervisor Is Qualified to Approve Penalties: In Long Branch Land, LLC v. Comm'r, T.C. Memo. 2022-2, the Tax Court held that the IRS complied with Code Sec. 6751 in assessing penalties on a taxpayer with respect to a disallowed charitable contribution deduction because the IRS examiner's immediate supervisor approved the penalties. The court noted that, even if that supervisor somehow lacked authority to serve as the IRS examiner's "acting team manager," she properly approved the penalty determinations as his "immediate supervisor."

Taxpayer's Husband Can't Avoid Tax Judgments by Hiding Property Under Her Name: In Boykin v. U.S., 2022 PTC 3 (W.D. N.C. 2022), a district court held that, because the United States is not subject to the four-year statute of limitation of the North Carolina Uniform Voidable Transaction Act and because the United States timely obtained a judgment against the taxpayer's husband that remains enforceable pursuant to Code Sec. 6502(a), the United States is not time barred from seeking a judgment against the taxpayer or her property to collect on her husband's tax debt of approximately $4.5 million. The court found that the taxpayer's argument regarding the statute of limitations was misguided as it has long been established that the federal government may use state-law creditor remedies and not be subject to a state's statute of limitations when collecting unpaid federal taxes.

Fifth Circuit Holds That Taxpayer Was Deprived of Statute of Limitations Defense: In U.S. v. Pursley, 2022 PTC 10 (5th Cir. 2022), the Fifth Circuit vacated and remanded a district court decision that dealt with an intricate tax-fraud scheme involving various offshore accounts, a myriad of transactions, and millions in untaxed funds, after concluding that the taxpayer was deprived of his statute of limitations defense and, because the taxpayer timely raised this defense, was entitled to have it considered and to have the jury instructed on it. As a result, the Fifth Circuit held that the taxpayer was entitled to have the district court (1) fully consider his statute of limitations defense, (2) calculate the exact time the statute of limitations ran under existing precedent, (3) dismiss any charge that was untimely under that calculation, and (4) instruct the jury on the statute of limitations defense.

Pilot Program Provides for Fast Tracking of Certain Letter Ruling Requests: In Rev. Proc. 2022-10, the IRS issued guidance that establishes an 18-month pilot program aimed at providing an opportunity for fast-track processing of certain letter ruling requests solely or primarily under the jurisdiction of the Associate Chief Counsel (Corporate). According to the IRS, if a request for fast-track processing is granted, the IRS will try to complete processing of the letter ruling request and, if appropriate, to issue the letter ruling within the time period specified by the branch reviewer (specified period) and that specified period will be 12 weeks unless a shorter or longer period is requested and granted pursuant to the revenue procedure.

Taxpayer and His Lawyers Not Entitled to Notice of Bank Summonses: In Polselli v. U.S., 2022 PTC 4 (6th Cir. 2022), the Sixth Circuit affirmed a district court decision in which the lower court held that a taxpayer, who owed the IRS more than $2 million in unpaid tax liabilities, and the taxpayer's lawyers were not entitled to notice of administrative summonses the IRS issued to the banks used by the taxpayer's wife and lawyers. The court concluded that, because the IRS was seeking the bank records "in aid of the collection" of the taxpayer's assessed liability, the taxpayer and his lawyers were not entitled to notice under Code Sec. 7609(c)(2)(D)(i).

Lenders or Servicers of Certain Student Loans Should Not Issue Forms 1099-C: In Notice 2022-1, the IRS announced that lenders or servicers of certain student loans should not file Forms 1099-C, Cancellation of Debt, or submit payee statements, for student loan debt described in Sec. 9675 of the American Rescue Plan Act of 2021 (ARP). The IRS reminded the lenders or servicers of such loans that debt discharge with respect to those loans is excluded from gross income under Code Sec. 108(f)(5), as amended by ARP, for tax years 2021 to 2025.

IRS Can Use Amounts Labeled by Taxpayer as a Deposit to Pay Taxes in Full: In Ahmed v. Comm'r, T.C. Memo. 2021-142, the Tax Court dismissed a taxpayer's case on the grounds of mootness after concluding that the taxpayer, who the IRS said was liable for trust fund recovery penalties (TFRPs), had fully paid the TRFP liabilities for the period at issue even though the taxpayer claimed that the amounts used by the IRS were a deposit only and not a payment of taxes. The court disagreed and noted that the taxpayer had received all the relief that Code Sec. 6330 authorized the Tax Court to provide and that, if the taxpayer wanted to seek a refund or overpayment credit or other relief, then any legal remedy would lie in a U.S. District Court or the U.S. Court of Federal Claims rather than in the Tax Court.

IRS Appeals Office Abused Its Discretion in Sustaining a Collection Action: In Pfetzer v. Comm'r, T.C. Memo. 2021-145, the Tax Court held that an IRS settlement officer (SO) did not fulfil her duty of verification under Sec. 6330(c)(1) with respect to tax deficiency assessments on a taxpayer who alleged that he never received any notices of deficiency from the IRS. As a result, (1) the court concluded that it could not sustain the SO's conclusion that applicable legal and administrative requirements had been met with respect to the assessment of deficiencies on the taxpayer for 2004 through 2012 as required by Code Sec. 6330(c)(1), and (2) the court found that IRS Appeals abused its discretion in sustaining the filing of a Notice of Federal Tax Lien with respect to the taxpayer's unpaid income tax liabilities for 2004 through 2012.

Tax Court's Decision Upheld; Attorney Reprimanded for Bringing Frivolous Appeal: In Wegbreit v. Comm'r, 2021 PTC 408 (7th Cir. 2021), the Seventh Circuit upheld a Tax Court decision which found that a married couple underreported their income by nearly $15 million and engaged in a pattern of conduct intended to defraud the government. After finding that the couple's appeal raised a bevy of legal topics wholly irrelevant to the Tax Court's decision and included flagrant violations of the requirement to support each argument with citations to the authorities and parts of the record on which each argument relied, the court also (1) ordered the taxpayer's attorney to show cause within 14 days as to why he should not be sanctioned for bringing an "utterly frivolous appeal in violation of Rule 38 of the Federal Rules of Appellate Procedure"; and (2) directed the Clerk of Court to forward the court's opinion to the Illinois Attorney Registration and Disciplinary Commission for any action it deems appropriate

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