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Tax Updates September 2019 - January 2019

September 2019

AFRs

IRS Issues September 2019 Applicable Federal Rates: In Rev. Rul. 2019-20, the IRS issued a ruling which prescribes the applicable federal rates for September 2019. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

August 2019

AFRs

IRS Issues August AFRs: In Rev. Rul. 2019-17, the IRS issued the applicable federal rates for August 2019. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.

Bankruptcy

Bankruptcy Court Allows Debtor to Exempt Certain Retirement Accounts from Estate: In In re Hoffman, 2019 PTC 281 (Bankr. N.D. Ga. 2019), as a result of a bank filing objections with respect to a debtor's exclusion of his retirement accounts from the bankruptcy estate, a bankruptcy court was asked to decide whether the debtor's retirement accounts were excludible from the estate, or, in the alternative, whether they were exempt under Georgia law. The court granted the bank's objection as to the debtor's Roth IRAs and an IRA distribution, but denied the bank's objection with respect to the debtor's traditional IRA and 401(k).

Credits

EITC May Be Banned for Taxpayer's Children after Taxpayer Improperly Claimed One Child: In CCA 201931008, the Office of Chief Counsel advised that, where a taxpayer claimed the earned income tax credit (EITC) for three children and the credit was disallowed for one of those children yet the taxpayer continued to claim the credit for that one child in succeeding years, the taxpayer is subject to the two-year ban on claiming the EITC under Code Sec. 32(k)(1), assuming a determination is made that the taxpayer's claim for that one child was due to reckless or intentional disregard for the rules and regulations. According to the Chief Counsel's Office, the two-year ban applies even though the taxpayer otherwise would have been entitled to the EITC for her other two children.

IRS Provides Indexing Adjustments for Premium Tax Credit: In Rev. Proc. 2019-29, the IRS provides indexing adjustments applicable to certain calculations of the Code Sec. 36B premium tax credit. Specifically, the revenue procedure updates the applicable percentage table used to calculate an individual's premium tax credit for tax years beginning in calendar year 2020 and updates the required contribution percentage for plan years beginning after calendar year 2019.

Deductions

Taxpayer Entitled to Deductions Relating to Girlfriend's Grandchildren: In Gutierrez v. Comm'r, T.C. Summary 2019-23, the Tax Court held that a taxpayer was entitled to dependency exemption deductions for his girlfriend's two grandchildren, whom he shared custody with, because, under the tie-breaker rule, his income was higher than his girlfriend's income. Additionally, the court concluded that the taxpayer also (1) qualified for filing as a head of household; (2) was entitled to an earned income credit with respect to the two children; (3) was entitled to a child tax credit for the children; and (4) was not liable for the accuracy-related penalty assessed by the IRS.

Couple Operating Foster Care Business Can Deduct Home-Related Expenses: In Kho v. Comm'r, T.C. Summary 2019-18, the Tax Court held that a couple operating a foster care business was entitled to depreciation deductions attributable to the use of their home for their foster care business and other foster care related deductions for the business use of their home. However, the court denied dependency exemption deductions relating to the couple's foster care clients.

Taxpayer Can't Deduct Educational Expenses for Son as a Business Expense: In Cristo v. Comm'r, 2019 PTC 275 (9th Cir. 2019), the Ninth Circuit affirmed a Tax Court decision that the taxpayer was not entitled to deduct educational expenses for his son as a business expense under Code Sec. 162. Further, contrary to the taxpayer's contention, the court found no authority that dictated that the Tax Court should have shifted the burden of proof to the IRS.

Employee Benefits

IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-48, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).

IRS Extends Temporary Nondiscrimination Relief for Closed Defined Benefit Plans: In Notice 2019-49, the IRS extended the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5 by making that relief available for plan years beginning before 2021 if the conditions of Notice 2014-5 are satisfied. The extension in Notice 2019-49 is in anticipation of the issuance of final amendments to the Code Sec. 401(a)(4) regulations and modifies Notice 2014-5, Notice 2015-28, Notice 2016-57, Notice 2017-45, and Notice 2018-69.

Employment Taxes

IRS Issues Second Draft of 2020 Form W-4: On its website, IRS.gov, the IRS issued a second early release draft of the 2020 IRS Form W-4 so that taxpayer can begin programming of payroll systems. The IRS advised that (1) while the title of Form W-4 has been changed to Employee's Withholding Certificate (removing the word "Allowance"), the computation of withholding has not changed from the first early release posting; (2) the next early release of Publication 15-T will discuss separate computations for calculating withholding for employees who file a 2020 Form W-4 in 2020 and for a 2019 or earlier Form W-4; and (3) although the final Form W-4 will not be posted for a few months, there will be no further substantive changes.

Court Denies Refund Claim Where Overpaid Amounts Were Part of an Earlier Refund: In Birger Engineering, Inc. v. U.S., 2019 PTC 291 (D. Mass. 2019), a district court held that the IRS did not owe the taxpayer a refund with respect to employment taxes the taxpayer claimed to have overpaid in 2011. The court agreed with the government that, while the taxpayer paid $14,860 more than it reportedly owed for the fourth quarter of 2011, the IRS properly transferred the overpayment amounts, pursuant to Code Sec. 6402(a), as credits toward other tax liabilities, namely to the third and fourth quarters of 2009 and, thus, a refund that was made to the taxpayer for 2009 included the amount that the taxpayer overpaid in 2011.

IRS Launches New Tax Withholding Estimator: In IR-2019-139, the IRS announced the launch of a new redesigned online tool to make it easier to do a paycheck checkup to ensure the right amount of taxes are being paid throughout the year. According to the IRS, the new Tax Withholding Estimator offers a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.

Estates, Gifts, and Trusts

Court Will Look to Bahamian Law to Determine a Taxpayer's Rights in Property: In Nineveh Investments Limited v. U.S., 2019 PTC 312 (E.D. Pa. 2019), a district court held that, with respect to a trust created under Bahamian law, the court would first look to Bahamian law to determine what rights the taxpayer has in the property that the U.S. government seeks to reach. The court further held that, for all issues other than the interpretation of the trust instrument, the court will assume that Bahamian law is the same as Pennsylvania law.

Gross Income

Alimony Is Includible in Taxpayer's Income but She Avoids Penalty on Underpayment: In Faust v. Comm'r, T.C. Memo. 2019-105, the Tax Court held that a taxpayer had to include more than $27,000 of alimony that she received from her ex-husband in 2015 in income. However, the court cited the taxpayer's limited English proficiency and history of abuse by her ex-husband in concluding that the taxpayer was not liable for an accuracy-related penalty assessed by the IRS because she acted with reasonable cause and in good faith in not including the alimony income on her tax return. Faust, T.C. Memo. 2019-105 (8/20/19).

Insurance Companies

Automatic IRS Consent Granted for Insurance Company Accounting Method Changes: In Rev. Proc. 2019-34, the IRS issued simplified procedures for insurance companies to obtain the automatic consent of the IRS to change their methods of accounting for life insurance reserves, amounts under Code Sec. 807(c)(3), and specified policy acquisition expenses under Code Sec. 848, as applicable, to comply with Code Sec. 807 and Code Sec. 848, as amended by the Tax Cuts and Jobs Act, for tax years beginning after December 31, 2017. However, the IRS noted that this procedure is only available for one tax year and, as a result, the timing of the issuance of the procedure may pose challenges to an insurance company that has already prepared its tax return for the first tax year beginning after December 31, 2017; but, the IRS said that the procedure does provide accommodations for such an insurance company.

IRS Revises Insurance Discount Factors: In Rev. Proc. 2019-31, the IRS revised insurance discount factors for the 2018 accident year, as well as discount factors for the 2019 accident year. These discount factors will be used to compute discounted unpaid losses under Code Sec. 846 and discounted estimated salvage recoverable under Code Sec. 832. IRS Simplifies Accounting Method Change Procedures for Insurance Companies: In Rev. Proc. 2019-30, the IRS issued simplified procedures for an insurance company to obtain automatic IRS consent to change its methods of accounting for discounting unpaid losses and expenses unpaid, estimated salvage recoverable, and unearned premiums attributable to title insurance, to comply with Code Sec. 846, as amended by the Tax Cuts and Jobs Act of 2017. The new procedures apply for tax years beginning after December 31, 2017, and ending on or before December 31, 2019.

International

Ninth Circuit Sides With Amazon on Definition of "Intangible" in Cost-Sharing Case: In Amazon.Com, Inc. v. Comm'r, 2019 PTC 308 (9th Cir. 2019), a Ninth Circuit panel affirmed a Tax Court decision, which sided primarily with the taxpayer, in an appeal involving the regulatory definition of intangible assets and the method of their valuation in a cost-sharing arrangement. The panel concluded that the definition of "intangible" does not include residual-business assets, and that the definition is limited to independently transferable assets.

IRS Issues Prop. Regs on Classification of Cloud and Digital Content Transactions: In T.D. 9865, the IRS issued proposed regulations regarding the classification of cloud transactions for purposes of the international tax provisions. The proposed regulations also modify the rules for classifying transactions involving computer programs, including by applying the rules to transfers of digital content.

IRS Issues Final Regs Dealing with Allocation by Partnerships of Foreign Income Taxes: In T.D. 9871, the IRS issued final regulations on the allocation by a partnership of foreign income taxes. According to the IRS, these regulations are necessary to improve the operation of an existing safe harbor rule that determines whether allocations of creditable foreign tax expenditures are deemed to be in accordance with the partners' interests in the partnership and the regulations affect partnerships that pay or accrue foreign income taxes and partners in such partnerships.

Partnerships

Eleventh Circuit Agrees That Tax Court Doesn't Have Jurisdiction in Partnership Case: In Highpoint Tower Technology Inc. v. Comm'r, 2019 PTC 276 (11th Cir. 2019), the Eleventh Circuit affirmed a Tax Court's decision that it did not have jurisdiction over gross valuation misstatement penalties imposed against a partnership previously determined to be a "sham" and "lacking economic substance." The court agreed with the IRS's characterization of the penalty at issue as relating to an adjustment to a partnership item and noted that an adjustment to a partnership item is explicitly excluded from the Tax Court's deficiency jurisdiction.

Deemed Distribution in Assets-Over Merger Is Treated as an Exchange: In TAM 201929019, the National Office advised that a deemed distribution of a partnership interest in an assets-over merger of two partnerships under Reg. Sec. 1.708-1(c)(3)(i) is, pursuant to Code Sec. 761(e), treated as an exchange that requires a mandatory downward inside-basis adjustment under Code Sec. 743(b) when the resulting partnership has a substantial built-in loss. In addition, the National Office stated that cancellation of indebtedness income that is deferred under Code Sec. 108(i) is not included in calculating a transferee partner's share of adjusted basis to the partnership of partnership property for purposes of Reg. Sec. 1.743-1(d)(1).

Procedure

Same EIN Must Be Used for Forms 945 and Related Information Returns: In PMTA 2019-10, the Office of Chief Counsel advised that the IRS has the authority to require taxpayers that file Forms 945, Annual Return of Withheld Federal Income Tax, to use the same employer identification number (EIN) when filing related information returns. The IRS has ample authority under the Internal Revenue Code and regulations, the Chief Counsel's Office said, to impose the requirement that the same EIN be used on both the Form 945 and the information returns furnished to payees that report the federal income tax withholding reported on the Form 945 and that no legislative change is necessary to effectuate this requirement.

Taxpayer Can't Use Tenth Circuit Decision to Avoid Federal Jurisdiction: In U.S. v. Springer, 2019 PTC 319 (N.D. Ok. 2019), a district court denied a Native American taxpayer's motion for relief from judgment after finding that the judgment was not void for lack of jurisdiction as had been argued by the taxpayer. With respect to the taxpayer's reliance on the Tenth Circuit's decision in Murphy v. Royal, 875 F.3d 896 (10th Cir. 2017), cert granted, Royal v. Murphy, 138 S. Ct. 2026 (2018), the court said that, while Murphy held that the Oklahoma state courts did not have jurisdiction over the taxpayer by virtue of his being a Native American in what was Indian country, it did not address any potential limits to federal jurisdiction in Indian country and the instant case deals with federal law.

Third Party Can't Pay Another Party's Tax Liability and Then Sue for a Refund: In CCA 201933011, the Office of Chief Counsel advised that Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4) supersede U.S. v. Williams, 514 U.S. 527 (1995), and thus third parties cannot pay another party's tax liability and then sue for a refund. This advice, the Chief Counsel's Office said, reflects the position taken in Rev. Rul. 2005-50, which is a position it continues to follow.

Feigned Incompetency Results in Increase in Prison Sentence for Tax Evasion: In U.S. v. Nygren, 2019 PTC 296 (1st Cir. 2019), in a case of first impression, the First Circuit held that the feigned incompetency of a taxpayer convicted of tax evasion may comprise the basis for an obstruction-of-justice enhancement and, thus, support an upward offense-level adjustment of the taxpayer's prison term. As a result, the court affirmed the taxpayer's prison sentence.

Judge Reassigns President's Lawsuit Involving NY Tax Returns to Another Judge: In Trump v. Committee on Ways and Means, U.S. House of Representatives, 2019 PTC 282 (D. D.C. 2019), a case involving a lawsuit brought by the President of the United States against the U.S. House of Representatives' Committee on Ways and Means alleging violations of Article I of the United States Constitution and House Rules and violations of the First Amendment, a district court judge disagreed that the instant case was related to another earlier-filed case involving some of the same parties because, the court said, the focus of the earlier-filed case is a federal statute that involves acquiring the President's federal tax returns from a federal agency while the instant case involves New York law and the President's New York state tax returns. As a result, the judge said the instant case was not a related case over which he should also preside and ordered the case to be transferred for random reassignment to another judge.

IRS Sending Letters to Virtual Currency Owners Advising Them to Pay Back Taxes: In IR-2019-132, the IRS said that it has begun sending letters to taxpayers, who have engaged in virtual currency transactions and who have potentially failed to report income and pay the resulting tax from such transactions or who did not report their transactions properly. The IRS said that such taxpayers should review their tax filings and, when appropriate, amend past returns and pay back taxes, interest and penalties with respect to transactions involving virtual currency which may not have been properly reported. Chief Counsel Opines on Medicare Taxes and Deficiency Procedures: In PMTA 2019-6, the Office of Chief Counsel advised that the additional Medicare tax imposed under Code Sec. 1401(b)(2) is subject to the deficiency procedures under Code Sec. 6211 through Code Sec. 6213 because it is an income tax, but the additional Medicare tax imposed under Code Sec. 3101(b)(2) is not subject to such deficiency procedures because it is considered an employment tax. According to the Chief Counsel's Office, for purposes of the deficiency procedures under Code Sec. 6211 through Code Sec. 6213, the term "deficiency" is limited to income, estate, and gift taxes, as well as certain excise taxes.

Court Rejects IRS Attempt to Dismiss Taxpayer's FOIA Action: In Cause of Action Institute v. IRS, 2019 PTC 270 (D. D.C. 2019), a district court rejected an IRS argument that the court lacked subject-matter jurisdiction over a taxpayer's FOIA request for records involving certain communications and records exchanged between the IRS and the Joint Committee on Taxation from 2009 until present. The court said that the IRS will have ample opportunity to dispute the taxpayer's claim when it addresses the merits of the taxpayer's complaint in a future motion for summary judgment; and in the meantime, and for the purpose of the IRS's motion to dismiss, the court found that the taxpayer's allegations must be accepted as true, and they are manifestly sufficient to state a claim for violation of the FOIA.

Agent Risks Unauthorized Disclosure of Return Info by Having a Friend Drive Him to an Appointment: In PMTA 2019-7, the Office of Chief Counsel advised that there may be a risk of unauthorized disclosure of confidential return information under Code Sec. 6103 where a revenue agent has a friend or relative drive him or her to an appointment at a taxpayer's residence. While there is no prohibition to using alternative methods of transportation, the Chief Counsel's Office stated that agents should be sure that no direct or indirect disclosure is made when using a third party for transportation to a taxpayer's location.

Taxpayer Can't Recoup Costs for Hiring Out-of-District Counsel: In Audio Technical U.S., Inc. v. U.S., 2019 PTC 269 (N.D. Ohio 2019), a district court held that a taxpayer who had taken the government to court to obtain a refund of several years' worth of research tax credits and who received a unanimous verdict from the jury, was not entitled to fees incurred for travel expenses for out-of-district counsel. The court rejected as without merit the taxpayer's argument that it was unfair and inequitable to punish the taxpayer for not hiring "less knowledgeable" local counsel merely for their proximity to the courthouse after noting that (1) the forum in which the case was heard was large and contained many capable and specialized attorneys and large and sophisticated law firms, (2) obtaining in-forum counsel does not require parties to retain an attorney with an office next to the courthouse, nor is it a "requirement" in its own sense, and (3) travel expenses for out-of-district counsel are not enumerated under the law as expenses for which the taxpayer could be reimbursed.

Retirement Plans

Early Distribution from 401(k) Plan Doesn't Qualify for First-Home-Purchase Exception: In Amadi, T.C. Summary 2019-19, the Tax Court held that a taxpayer, who received an early distribution from her 401(k) retirement plan in order to help with the purchase of her first home, did not qualify for the Code Sec. 72(t)(2)(F) first-home-purchase exception to the 10 percent penalty tax on early retirement plan distributions. The court noted that the taxpayer did not qualify for the first-home-purchase exception because it applies only to distributions from individual retirement accounts and the distribution the taxpayer received was from a 401(k) plan.

Tax Accounting

Promissory Note Is Included in Accrual-Method Taxpayer's Income: In King Solarman, Inc. v. Comm'r, T.C. Memo. 2019-103, the Tax Court held that a corporation that manufactures and sells solar equipment was required to include in income sales proceeds received in the form of a promissory note. The court rejected the taxpayer's argument that it was a cash method taxpayer and thus did not have to include those amounts in income after finding that the taxpayer elected the accrual method of accounting and actually used that method.

Tax-Exempt Organizations

Final Regs Address Notification Requirement for 501(c)(4) Organizations: In T.D. 9873, the IRS issued final regulations relating to the requirement that Code Sec. 501(c)(4) organizations must notify the IRS, no later than 60 days after their establishment, of their intent to operate under Code Sec. 501(c)(4). The notification to the IRS must be made on Form 8976, Notice of Intent to Operate Under Section 501(c)(4), no later than 60 days after the date the organization is organized.

July 2019

Bankruptcy

Taxpayer Forfeited Right to Exempt IRA From Bankruptcy: In In re Yerian, 2019 PTC 244 (11th Cir. 2019), the Eleventh Circuit affirmed decisions by a district court and a bankruptcy court and held that a taxpayer forfeited the right to exempt his individual retirement accounts (IRAs) from bankruptcy administration and shield his IRA from creditors when he engaged in self-dealing transactions prohibited by the IRA's governing instruments. The taxpayer, who titled IRA-owned cars in his own name and his wife's name and used IRA funds to purchase a condo which he used for personal purposes, had incurred over $100,000 in tax penalties for abusing his IRA.

Credits

IRS Tolls and Extends Continuity Safe Harbor to Mitigate National Security Concerns: In Notice 2019-43, the IRS updates and clarifies the guidance provided in prior IRS notices regarding the beginning of construction for purposes of Code Sec. 45 and Code Sec. 48, generally referred to as the production tax credit and the investment tax credit, respectively. Specifically, the notice provides that the Continuity Safe Harbor may be tolled and extended in certain limited circumstances involving significant national security concerns.

Deductions

Gambler Lacked Requisite Profit Objective to Deduct Losses on Schedule C: In Zalesiak v. Comm'r, T.C. Summary 2019-16, the Tax Court held that, while a taxpayer was entitled to $16,841 in deductible gambling losses for 2015, the taxpayer could not deduct such losses on his Schedule C as a professional gambler but could only deduct them on Schedule A as an itemized deduction. While the court did not question that the taxpayer wished to win at poker, the taxpayer did not have the requisite profit objective to qualify his gambling activity as a trade or business for 2015.

Employee Benefits

Proposed Regs Would Affect Multiple Employer Plans: In REG-121508-18, the IRS sets forth proposed regulations relating to the tax qualification of plans maintained by more than one employer. The proposed regulations would provide an exception, if certain requirements are met, to the application of the ''unified plan rule'' for a defined contribution multiple employer plan (MEP) in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement and would affect MEPs, participants in MEPs (and their beneficiaries), employers participating in MEPs, and MEP plan administrators.

IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-44, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).

Innocent Spouse

Tax Court Rejects Innocent Spouse Claim: In Ogden v. Comm'r, T.C. Memo. 2019-88, the Tax Court held that, because a taxpayer did not establish that she requested innocent spouse relief within two years from the IRS's commencing collection activities, she did not qualify for innocent spouse relief under Code Sec. 6015(b) or Code Sec. 6015(c). Furthermore, the court concluded that she did not qualify for equitable relief under Code Sec. 6015(f) beyond the amount the IRS previously granted because the liability from which she was seeking relief was attributable to her income and she failed to show that, because of prior abuse and fear of her ex-husband's retaliation, she was not able to challenge the exclusion of a particular item of income from one year's tax return and was not able to question the payment of the balance due reported on the following year's return.

International

Court Denies Summary Judgment for Taxpayer in FBAR Case: In U.S. v. Dadurian, 2019 PTC 247 (S.D. Fla. 2019), a district court held that, regardless of whether it used "recklessness," "willful blindness," or even "knowingly" to define the term "willfulness" in determining if a taxpayer willfully failed to file financial bank account reports (FBARs), circumstantial evidence existed that the taxpayer willfully failed to file FBARs for five financial accounts. Accordingly, the court denied the taxpayer's motion for partial summary judgment and found that there were genuine issues for trial as to whether the taxpayer may be penalized for failing to report such financial accounts.

IRS Issues Final and Temp Regs on GILTI, Subpart F, and Foreign Tax Credit: In T.D. 9866, the IRS issued (1) final and temporary regulations that provide guidance to determine the amount of global intangible low-taxed income (GILTI) included in the gross income of certain U.S. shareholders of foreign corporations, including the U.S. shareholders that are members of a consolidated group, (2) final regulations relating to the determination of a U.S. shareholder's pro rata share of a controlled foreign corporation's subpart F income included in the shareholder's gross income, as well as certain reporting requirements relating to inclusions of subpart F income and global intangible low-taxed income, and (3) final regulations relating to certain foreign tax credit provisions applicable to persons that directly or indirectly own stock in foreign corporations. This guidance obsoletes Notice 2009-7 and Notice 2010-41.

Prop. Regs Address Tax Treatment of Domestic Partnerships with Foreign Partners: In REG-101828-19, the IRS issued proposed regulations on the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations. The IRS also issued proposed regulations under the global intangible low-taxed income provisions regardi-g gross income that is subject to a high rate of foreign tax.

IRS Provides Guidance on Passive Foreign Investment Companies: In REG-105474-18, the IRS withdrew previously proposed regulations and replaced them with new proposed regulations under Code Sec. 1291, Code Sec. 1297, and Code Sec. 1298 regarding the determination of ownership in a passive foreign investment company and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation for purposes of Code Sec. 1297. The regulations (1) provide guidance regarding when a foreign corporation is a qualifying insurance corporation (QIC) under Code Sec. 1297(f) and the amounts of income and assets that a QIC excludes from passive income and assets pursuant to Code Sec. 1297(b)(2)(B) (i.e., the PFIC insurance exception) for purposes of Code Sec. 1297(a); (2) clarify the application and scope of certain rules that determine whether a U.S. person that directly or indirectly holds stock in a PFIC is treated as a shareholder of the PFIC, and whether a foreign corporation is a PFIC; and (3) affect U.S. persons with direct or indirect ownership interests in certain foreign corporations.

Penalties

No Reduction in Prison Sentence for Taxpayer Who Scammed Investors: In U.S. v. Rosen, 2019 PTC 245 (8th Cir. 2019), the Eighth Circuit upheld a more than five-year prison sentence handed down by a district court to a taxpayer who pled guilty to one count of engaging in monetary transactions involving property derived from unlawful activity and one count of tax fraud. The taxpayer had sold multiple investors on his business plans regarding the training and sale of highly-trained security dogs and the creation of a luxury dog-boarding facility, but used the investors' money instead to bankroll his daughter's wedding and his lifestyle, which included luxury vacations, designer handbags and watches, and diamond jewelry.

Company Should Have Disclosed Insurance Transaction Similar to a Listed Transaction: In Interior Glass Systems v. U.S., 2019 PTC 241 (9th Cir. 2019), the Ninth Circuit affirmed a district court and held that a company that joined a group life insurance term plan to fund a cash-value life insurance policy, which was owned by the company's sole shareholder and only employee, was liable for penalties for failing to disclose the existence of the transaction, which the court found to be substantially similar to a listed transaction. The court also held that the taxpayer's procedural due process rights were not violated when it was required to pay penalties for non-disclosure in full before seeking judicial review.

Procedure

Trustee Who Is Not a Licensed Attorney Cannot Represent Trust in Court: In U.S. v. Lain, 2019 PTC 260 (10th Cir. 2019), the Tenth Circuit affirmed a district court's denial of a taxpayer's right to intervene pro se in a case involving a trust of which the taxpayer is a trustee. In the appeal, which arose from an action to enforce federal tax liens and sell real property owned by the trust, the Tenth Circuit said that, because the taxpayer is not a licensed attorney, he can only represent himself before the court; he cannot prosecute an appeal for another party.

No Increase in Attorney's Fees Allowed for Legal Hours Unreasonably Expended: In Tolin v. Comm'r, 2019 PTC 254 (8th Cir. 2019), the Eighth Circuit affirmed a Tax Court decision that a taxpayer who was awarded attorney's fees after prevailing in a deficiency proceeding was not entitled to an enhancement of the hourly statutory $180 fee rate. The Eighth Circuit also upheld the Tax Court's reduction in the number of compensable hours after finding that it had no reason to second-guess the Tax Court's assessment that the legal hours were unreasonably expended in relation to the task at hand.

Supreme Court Refuses to Overrule Deference Doctrine: In Kisor v. Wilkie, 2019 PTC 248 (S. Ct. 2019), the Supreme Court refused to overrule the decisions in Auer v. Robbins, 519 U.S. 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945) and thus rejected calls to discard the deference those decisions give to government agencies. However, the Court said the deference doctrine is not always appropriate and remanded the case to the Federal Circuit to decide whether that doctrine applies to a decision by the Board of Veterans' Appeals, which was based on its interpretation of a Department of Veterans Affairs rule governing the retroactivity of a veteran's claim for disability benefits.

Interest Is Allowable on Payment Incorrectly Applied by IRS: In CCA 201926001, the Office of Chief Counsel advised that interest was allowable on the refund of a remittance made by a non-liable spouse that the IRS incorrectly applied to the liable spouse's tax liability. The interest is allowable on the overpayment from the date the remittance was received and applied by the IRS to the date the overpayment is either credited or refunded.

Retirement Plans

IRS Can Levy on 401(k) Funds; Early Withdrawal Penalty Doesn't Apply: In CCA 201927019, the Office of Chief Counsel advised that the IRS can levy on funds accumulated in a 401(k) account in accordance with the procedures and policies set out in the Internal Revenue Manual (IRM) and, as the IRM states, the early withdrawal penalty would not apply. The Chief Counsel's Office noted that the procedures for levying on retirement income are found in IRM Section 5.11.6.2 and, relevant to the issue at hand, procedures for levying on funds in pension retirement plans - including 401(k)s - are found in IRM 5.11.6.3.

Tax Accounting

IRS Removes Advance Payment Deferral Regs in Light of TCJA Changes: In T.D. 9870, the IRS issued final regulations removing Reg. Sec. 1.451-5, which generally allowed accrual method taxpayers to defer the inclusion of income for advance payments for goods and long-term contracts. The Tax Cuts and Jobs Act of 2017 (TCJA) enacted new Code Sec. 451(c), which overrides the deferral method provided in Reg. Sec. 1.451-5 and generally requires an accrual method taxpayer that receives any advance payment described in Code Sec. 451(c)(4) during the tax year to include the advance payment in income in the tax year of receipt or make an election to: (1) include any portion of the advance payment in income in the tax year of receipt to the extent required under new Code Sec. 451(b); and (2) include the remaining portion of the advance payment in income in the following tax year.

Tax Return Preparer Penalties

Court Affirms Taxpayer's Prison Sentence for Aiding the Filing of False Returns: In Kadiri v. U.S., 2019 PTC 242 (4th Cir. 2019), the Fourth Circuit affirmed a district court's 48-month sentence imposed on a taxpayer after a jury convicted her of two counts of aiding or assisting in the filing of false tax returns in violation of Code Sec. 7206(2), and two counts of willfully failing to file tax returns in violation of Code Sec. 7203. The court rejected the taxpayer's challenges to the district court's application of an abuse-of-trust enhancement, as well as the court's reliance on the findings underlying the enhancement to justify an upward variance sentence.

Tax-Exempt Organizations

Prop. Regs Provide Guidance on Net Investment Excise Tax for Colleges and Universities: In REG-106877-18, the IRS issued proposed regulations for determining the Code Sec. 4968 excise tax applicable to the net investment income of certain private colleges and universities, as provided by the Tax Cuts and Jobs Act of 2017. The proposed regulations clarify a number of definitions related to the excise tax and make use of a number of existing statutory and regulatory provisions in defining students, tuition, exempt purpose, fair market value, net investment income and related organizations.

June 2019

Accounting

IRS Releases Draft of Newly Designed Form W-4 for Use in 2020: The IRS issued a draft of the 2020 Form W-4, Employee's Withholding Allowance Certificate, which has been redesigned in light of changes made by the Tax Cuts and Jobs Act of 2017. In the new version of Form W-4, withholding allowances are no longer used since personal exemptions, to which the withholding allowances were previously tied, were eliminated by the TCJA for years 2018 - 2025. Draft Form W-4 and W-4 FAQ (IRS website). Read More...

IRS Issues June 2019 Applicable Federal Rates: In Rev. Rul. 2019-14, the IRS provides the applicable federal rates for June 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Bankruptcy

Shared Responsibility Penalty Is Not a Tax, According to N.C. Bankruptcy Court: In In re Bailey, 2019 PTC 205 (Bankr. E.D. N.C. 2019), a bankruptcy court held that the shared responsibility penalty (SRP), imposed by Code Sec. 5000A(b) on a couple who failed to comply with the Affordable Care Act's individual mandate to maintain minimum essential health care coverage, is a penalty and not a tax, as had been argued by the IRS. As a result, the IRS was not entitled to priority status for the SRP owed by the couple and instead had a general unsecured claim.

Credits

Notice 2019-32 Deadline for Comments on Section 45Q Issues Corrected: In Announcement 2019-6, the IRS issued a correction of a typographical error in the first sentence of Section 4.01 of Notice 2019-32, a notice in which the IRS requests comments on Code Sec. 45Q issues. The sentence states that comments may be submitted in writing on or before Thursday, June 4, 2019, but the correct date is July 4, 2019.

Deductions

Couple Can't Deduct Losses from Thoroughbred Horse Activity: In Donoghue v. Comm'r, T.C. Memo. 2019-71, the Tax Court held that a couple was not engaged in their thoroughbred horse activity for profit and thus were not entitled to deduct losses from that activity. The court also found the couple liable for accuracy-related penalties after noting that both taxpayers were college-educated business people and neither sought any advice regarding the deductibility of their horse activity losses for any of the years at issue.

Taxpayer Can't Deduct Evangelization Expenses: In Oliveri v. Comm'r, T.C. Memo. 2019-57, the Tax Court held that a taxpayer could not deduct as charitable contributions the majority of unreimbursed expenses incurred in his evangelization activities because the expenses were either incurred in whole or in part for personal purposes or were not properly substantiated. The court also concluded that the denial of these deductions did not violate the Constitution and that the taxpayer was liable for a penalty under Code Sec. 6651(a) for not timely filing the return at issue; however, he was not liable for the accuracy related penalty under Code Sec. 6662 because the IRS did not show that it had obtained the proper written supervisory approval for assessing that penalty.

Employee Benefits

IRS Issues Corporate Bond Monthly Yield Curve and Other Rates: In Notice 2019-40, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Code Sec. 430(h)(2)(C)(iv).

Innocent Spouse

Failure to File Return and Knowledge of Understatements Precludes Innocent Spouse Relief: In Briley v. Comm'r, T.C. Memo. 2019-55, the Tax Court held that a taxpayer was not entitled to innocent spouse relief after finding that she failed to file her 2016 tax return, and she had reason to know of the understatements of tax liability on the joint returns at issue. The court concluded that, because the remaining factors it considered in determining whether the taxpayer qualified for innocent spouse relief were neutral, it would not be inequitable to hold the taxpayer liable for the payment of tax at issue.

Insurance

Final Regs Address Insurance Discounting Rules: In T.D. 9863, the IRS issued final regulations on discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for federal income tax purposes. The final regulations update and replace existing regulations to implement recent legislative changes to the Code and make a technical improvement to the derivation of loss payment patterns used for discounting.

International

Prop. Regs. Provide Exception from Tax for Gain or Loss on Certain Foreign Pension Funds: In REG-109826-17, the IRS issued proposed regulations on the exception from taxation with respect to gain or loss of a qualified foreign pension fund attributable to certain interests in U.S. real property. The proposed regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in U. S. real property and affect certain holders of certain interests in U.S. real property and withholding agents that are required to withhold tax on certain dispositions of, and distributions with respect to, such property.

Ninth Circuit Panel Again Reverses Tax Court; Rules Reg. 1.482-7A(d)(2) Valid: In Altera Corporation & Subs v. Comm'r, 2019 PTC 216 (9th Cir. 2019), the Ninth Circuit panel reversed, for the second time, a decision of the Tax Court that Reg. Sec. 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements (QCSAs), was invalid under the Administrative Procedure Act. The panel explained that Code Sec. 482 does not speak directly to whether the IRS may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The panel held that the IRS reasonably interpreted Code Sec. 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute and, thus, should be given deference.

Like-Kind Exchanges

Exchange of Property Between Related Parties Doesn't Qualify as Sec. 1031 Exchange: In The Malulani Group, Limited and Subsidiary v. Comm'r, 2019 PTC 224 (9th Cir. 2019), the Ninth Circuit affirmed a Tax Court holding that a 2007 real estate exchange between related parties did not qualify for deferred recognition of gain under the like-kind exchange rules of Code Sec. 1031 because the transaction was structured with a tax avoidance purpose. The Ninth Circuit agreed with the Tax Court's conclusion that, because the aggregate tax liability arising out of the exchange was significantly less than the hypothetical tax liability that would have arisen from a direct sale between the related parties, the like-kind exchange served tax-avoidance purposes.

Penalties

Sixth Circuit Affirms Convictions of Siblings that Filed Fictitious Tax Returns: In U.S. v. Gandy, 2019 PTC 217 (6th Cir. 2019), the Sixth Circuit affirmed a district court's decision that found the taxpayer, his brother and sister, and his brother-in-law guilty of obtaining over $360,000 in tax refunds after submitting fictitious tax returns that claimed refunds for nonexistent excess withholding. The court affirmed the taxpayers' convictions for mail fraud, conspiracy to commit mail fraud, aggravated identity theft, conspiracy to commit identity theft, and illegal monetary transactions.

Court Rejects Argument That Notice 2016-66 Violates Law: In CIC Services, LLC v. IRS, 2019 PTC 202 (6th Cir. 2019), the Sixth Circuit affirmed a district court's dismissal of a taxpayer's complaint that alleged that Notice 2016-66, which identified certain micro-captive transactions as reportable transactions of interest, was issued in violation of the Administrative Procedure Act and the Congressional Review Act. By deeming these transactions to be reportable transactions, Notice 2016-66 imposed requirements and potential significant penalties under various Code provisions (e.g., Code Secs. 6011, 6707A(b), 6111, and Code Sec. 6707(b)) on taxpayers engaging in them, and on material advisors aiding in them.

Restitution Includes Tax Debt That Taxpayer Tried to Discharge in Bankruptcy: In U.S. v. Yurek, 2019 PTC 197 (10th Cir. 2019), the Tenth Circuit affirmed a taxpayer's conviction for tax evasion and bankruptcy fraud but vacated the sentence because the district court applied the wrong test when deciding whether to grant a mitigating-role adjustment. The court also concluded that the intended loss attributable to her, and for which she was ordered to provide restitution, equaled the monetary harm that she intended to cause her creditors and included the amount of federal tax debt that she tried to discharge in bankruptcy.

Procedure

IRS Did Not Abuse Its Discretion in Refusing to Discharge Company's $4.8 Million Debt: In Indus Group, Inc. v. Comm'r, T.C. Memo. 2019-68, the Tax Court held that an IRS settlement officer did not abuse his discretion in declining a company's proposal to discharge its almost $4.8 million federal tax liability in exchange for installment payments of $5,500 per month. The court also sustained a proposed collection action against the company.

IRS Issues Third Quarter Interest Rates for Tax Underpayments and Overpayments: In Rev. Rul. 2019-15, the IRS announced that the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning July 1, 2019, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent.

The Filing of Forms 4549 and 982 Constituted Two Separate and Timely Refund Claims: In CCA 201921013, the Office of Chief Counsel concluded that, following examinations of the taxpayer's return by the IRS Automated Underreporter Program (AUR) and an IRS Field Examiner (Exam), a Form 4549, Income Tax Examination Changes, signed by a taxpayer's POA and a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), submitted by the Taxpayer Advocate Service on behalf of the taxpayer, were two separate refund claims. According to the Chief Counsel's Office, (1) because the IRS Letter 105C did not disallow the claim contained in the Form 4549, the Code Sec. 6532 period for filing suit had not begun to run, and (2) because the Form 4549 was a timely informal claim that was never disallowed, Code Sec. 6514 did not prevent the IRS from making a credit or refund to the taxpayer.

Underpayment of Tax Interest Is Not Suspended for Deposit Subsequently Returned: In CCA 201922029, the Office of Chief Counsel cited Section 8 of Rev. Proc. 2005-18 for the proposition that, if a remittance that is held as a deposit is returned at the taxpayer's written request, with or without interest, and a deficiency is later assessed for that period and type of tax, the running of interest will not be suspended during the period for which the remittance was held as a deposit. The Chief Counsel's Office also stated that, if the taxpayer identified any or part of the deposit as being for a disputable tax, the taxpayer is entitled to overpayment interest on the returned deposit under Code Sec. 6603(d) and the interest rate is the federal short-term rate determined under Code Sec. 6621(b), compounded daily.

Ex-wife Who Paid Off Lien That Encumbered Mutually Owned Property Not Entitled to Refund: In CCA 201922028, the Office of Chief Counsel advised that a taxpayer's ex-wife, who had paid off her ex-husband's tax lien/liabilities which encumbered mutually owned property and then sought a refund for having paid off a senior lien on the property, did not have a refund claim. According to the Chief Counsel's Office, the only remedy available to a person in her position is to request a discharge under Code Sec. 6325(b)(4) and then file a refund suit under Code Sec. 7426.

Tax Preparers

Law Firm Must Turn Over Client Info; Court Rejects Blanket Assertion of Privilege: In Taylor Lohmeyer Law Firm PLLC v. U.S., 2019 PTC 190 (W.D. Tex. 2019), a district court granted a government motion to enforce an IRS summons seeking certain information related to the clients of a law firm, which had previously assisted one of its clients in setting up foreign accounts, foreign trust, and foreign corporations to avoid paying U.S. taxes for which he was liable. In rejecting the law firm's blanket assertion that such information was covered by attorney-client privilege, the court said that if the law firm wishes to assert any claims of privilege as to any responsive documents, it may do so provided that any such claim of privilege is supported by a privilege log which details the foundation for each claim on a document-by-document basis.

Tax-Exempt Bonds

Guidance Issued on Tax-Exempt State, Local, and Indian Tribal Government Bonds: In Notice 2019-39, the IRS issued guidance regarding the issuance of tax-exempt state and local bonds under Code Sec. 103 and tax-exempt Indian tribal government bonds under Code Sec. 7871 in current refunding issues to refund (directly or indirectly in a series of current refunding issues) original bonds issued in eligible targeted bond programs. The guidance supersedes Notice 2012-3 and Notice 2014-9.

Withholding Taxes

Prop. Regs. Provide Withholding Rules for Certain Periodic and Nonperiodic Payments: In REG-132240-15, the IRS issued proposed regulations relating to withholding on certain periodic and nonperiodic distributions under Code Sec. 3405, other than eligible rollover distributions. The proposed regulations are based on guidance provided in Notice 87-7 with clarifications for (1) situations where the payee has an Army Post Office, Fleet Post Office, or Diplomatic Post Office address, and (2) situations where the payee provides the payor with a residence address located within the United States but provides payment instructions that request delivery of the designated distribution to a financial institution or other person located outside of the United States.

May 2019

Accounting

IRS Issues May 2019 Applicable Federal Rates: In Rev. Rul. 2019-12, the IRS provides the applicable federal rates for May 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Credits

IRS Requests Comments on Section 45Q Issues: In Notice 2019-32, the IRS requests general comments on issues arising under Code Sec. 45Q, as well as specific comments concerning the secure geological storage and measurement of qualified carbon oxide, the recapture of the benefit of the credit for carbon oxide sequestration, and other issues described in Section 3 of the Notice. The IRS anticipates issuing regulations and other guidance to implement the provisions of Code Sec. 45Q, as amended by Section 41119 of the Bipartisan Budget Act of 2018.

No R & D Credit for Couple That Failed to Adequately Explain Entitlement to Credit: In Harper v. U.S., 2019 PTC 155 (S.D. Calif. 2019), a district court rejected a couple's claim that their wholly owned corporation was entitled to Code Sec. 41 tax credits of more than $400,000 for increasing research and development (R&D) activities. The court agreed with the IRS that the claims for the tax credit failed to adequately set forth the grounds and facts entitling the corporation to any R&D credit, and such failure deprived the court of subject matter jurisdiction over the refund suit.

Alternative Premium Tax Credit Is Zero for Couple Who Married During the Year: In Fisher, T.C. Memo. 2019-44, the Tax Court held that the tax liability of a couple who had married during the year at issue was appropriately increased by the amount of the advance Code Sec. 36B premium assistance tax credit (PTC), which was applied against the wife's monthly health insurance premium, because the couple's income exceeded 400 percent of the amount of the federal poverty line. According to the court, the couple's alternative marriage-year tax credit was equal to the sum of their alternative premium assistance amounts for the pre-marriage months (zero) and their premium assistance amounts for the marriage months and, accordingly, the couple's alternative marriage-year tax credit was zero.

IRS Issues Area Median Gross Income Figures for Mortgage Credit Certificates: In Rev. Proc. 2019-21, the IRS provides guidance with respect to the United States and area median gross income figures that are to be used by issuers of qualified mortgage bonds, as defined in Code Sec. 143(a), and issuers of mortgage credit certificates, as defined in Code Sec. 25(c), in computing the income requirements described in Code Sec. 143(f). Code Sec. 143(f) imposes eligibility requirements concerning the maximum income of mortgagors for whom financing may be provided by qualified mortgage bonds and Code Sec. 25(c)(2)(A)(iii)(IV) provides that recipients of mortgage credit certificates must meet the income requirements of Code Sec. 143(f).

Deductions

Couple Can't Deduct Mortgage Interest Reported to Them But Not Paid: In Milkovich v. U.S., 2019 PTC 195 (W.D. Wash. 2019), a district court held that a couple who filed for bankruptcy, and whose home the bankruptcy trustee abandoned due to lack of equity, could not deduct unpaid interest that had accrued on the home's mortgage and which their mortgagor reported to them on Form 1098-MISC. In reaching its conclusion, the court cited the decision in Estate of Franklin v. Comm'r, 544 F.2d 1045 (9th Cir. 1976), in which the Ninth Circuit disallowed an interest deduction because the transaction in question had no economic substance beyond the creation of tax benefits.

Employee Benefit Plans

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-35, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

2019 Maximum Values for Vehicle Cents-Per-Mile and Fleet-Average Valuation Issued: In Notice 2019-34, the IRS issued a notice which provides (1) the inflation-adjusted maximum value of a vehicle (including cars, vans and trucks) for 2019 for use with the fleet-average and vehicle cents-per-mile valuation rules, (2) information about where this maximum value will be published in the future, and (3) flexibility for 2018 and 2019 in the consistency requirements in the existing regulations relating to use of the fleet-average and vehicle cents-per-mile rules. The IRS noted that while Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e) provide special valuation rules for employers to use in determining the amount to include in employee income for personal use of employer-provided vehicles, employers can only use these rules for vehicles with fair market values that do not exceed a maximum value that is adjusted for inflation each year under Code Sec. 280F.

Healthcare

Benefit Plan Isn't Entitled to Refund of Annual Health Insurer Fee: In Iowa Bankers Benefit Plan v. U.S., 2019 PTC 172 (Fed. Cl. 2019), the Court of Federal Claims held that a benefit plan was not excluded from the Affordable Care Act's (ACA) definition of a "covered entity" subject to the annual fee on health insurance providers and thus was not entitled to a $3.7 million refund for annual fees paid in 2014, 2015, and 2016. According to the court, Reg. Sec. 57.2(b)(2)(iv) disqualifies multiple employer welfare arrangements from being excluded from the annual fee and the benefit plan waived the argument that it was an employer that self-insures its employees' health risks and thus not liable for the annual fee because it was late in raising that point.

Information Returns

Service Provider Isn't an Applicable Entity and Isn't Required to File Forms 1099-C: In PLR 201917002, the IRS ruled that a service provider, that also provided financing to its customers for services, was not required by Code Sec. 6050P and Reg. Sec. 1.6050P-1 to file Forms 1099-C to report discharges of indebtedness because the service provider is not an applicable entity under Code Sec. 6050P(c). The IRS noted that the service provider was involved in the founding of other entities that may be applicable financial entities, but that these other entities were not the taxpayer and were not the subject of this ruling.

International

Final Regs Affect Taxpayers Owning Qualified Business Units: In T.D. 9857, the IRS issued final regulations relating to combinations and separations of qualified business units (QBUs) subject to Code Sec. 987 and the recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and certain other transactions involving partnerships. In addition, the IRS withdrew temporary regulations regarding the allocation of assets and liabilities of certain partnerships for purposes of Code Sec. 987.

Prop. Regs. Would Address Ownership Attribution Relating to Controlled Foreign Corps: In REG-125135-15, the IRS issued proposed regulations that provide rules regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Code Sec. 954(d)(3). The proposed regulations, which would affect U.S. persons with direct or indirect ownership interests in certain foreign corporations, also provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income (FPHCI).

IRS

IRS Invites Comments on 2019-2020 Priority Guidance Plan: In Notice 2019-30, the IRS invites public comment on recommendations for items that should be included on the 2019-2020 Priority Guidance Plan. The Treasury Department's Office of Tax Policy and the IRS use the Priority Guidance Plan each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance and the 2019-2020 Priority Guidance Plan will identify guidance projects that the Treasury Department and the IRS intend to actively work on as priorities during the period from July 1, 2019, through June 30, 2020.

Procedure

Renewal User Fee Increased for Enrolled Retirement Plan Agents and Enrolled Agents: In T.D. 9858, the IRS issued final regulations that (1) remove the initial enrollment user fee for enrolled retirement plan agents because the IRS no longer offers initial enrollment as an enrolled retirement plan agent, and (2) increase the amount of the renewal user fee for enrolled retirement plan agents from $30 to $67. In addition, the final regulations increase the amount of both the enrollment and renewal user fee for enrolled agents from $30 to $67.

IRS Performed Adequate Search for Information Sought by Taxpayer: In Powell v. IRS, 2019 PTC 182 (D. D.C. 2019), a district court granted an IRS motion for summary judgment in a case brought by a taxpayer seeking additional information from the IRS concerning his grandfather, his father, a printing business once owned by his family, and himself in an effort to uncover information regarding asset distributions following the death of his father in 1992. The court sided with the IRS which had argued that it did not receive most of the taxpayer's requests, that it performed an adequate search for the request that did arrive, and that the taxpayer had failed to exhaust the required administrative remedies before bringing the issue before the court.

Firm Must Provide Privilege Log If It Wants to Protect Clients from IRS Investigation: In Taylor Lohmeyer Law Firm PLLC v. U.S., 2019 PTC 190 (W.D. Tex. 2019), a district court rejected a law firm's petition to quash a John Doe summons issued by the IRS and aimed at obtaining information relating to the firm's clients between 1995-2017 with respect to its investigation of the tax liability of taxpayers who used the firm to create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries. The court rejected the firm's blanket assertions of privilege but said that, if the firm wished to assert any claims of privilege as to any particular documents, it may later do so provided that such claim of privilege is supported by a privilege log which details the foundation of each claim on a document-by-document basis.

IRS Entitled to Consultant's Earnings Because It Filed Its Notices First: In AES-Apex v. Rotondo, 2019 PTC 192 (6th Cir. 2019), the Sixth Circuit affirmed a district court and held that the IRS was entitled to money earned by a consultant who was behind on his taxes rather than the company for whom he did consulting work and another company to which he owed money. The court noted that the decision as to who is entitled to the money comes down to the timing of the IRS's federal tax lien versus the timing of state security interests and the court concluded that the IRS filed its notices of tax liens first.

Couple Can't Use Common-Law Mailbox Rule to Prove Timely Filing of Petition: In Waltner v. Comm'r, 2019 PTC 169 (9th Cir. 2019), the Ninth Circuit affirmed the Tax Court and held that a couple's appeal of an earlier Tax Court decision was untimely and that the evidence they produced in the earlier trial was not sufficient to prove their Tax Court appeal had been timely mailed. The court noted that the law in the Ninth Circuit has changed with respect to how a taxpayer can prove timely filing of an undelivered tax document, and that the rules in Reg. Sec. 301.7502-1(e)(2)(i) replaced the common-law mailbox rule under which a taxpayer could prove timely filing by testimonial or circumstantial evidence.

Court Rejects Taxpayer's Self-Serving Affidavit That Lacked Admissible Facts: In Stein v. U.S., 2019 PTC 151 (11th Cir. 2019), the Eleventh Circuit rejected a taxpayer's self-serving affidavit, which the taxpayer argued was specific, relevant, and detailed enough to preclude summary judgment, and affirmed a district court's holding that reduced to judgment assessments against the taxpayer for taxes, interest, and penalties on five federal tax returns that she filed late. According to the Eleventh Circuit, the taxpayer's affidavit that the IRS assessments were erroneous had to satisfy certain criteria such as setting out facts that would be admissible in evidence, and the affidavit had to do more than present conclusory allegations that have no probative value.

False Documents Provided to Government Met Obstruction Nexus Requirement: In U.S. v. Sutherland, 2019 PTC 148 (4th Cir. 2019), the Fourth Circuit affirmed the conviction of a taxpayer, who owned several insurance businesses that sold products out of the United States and Bermuda, for filing false tax returns and obstructing a grand jury proceeding. The court rejected the taxpayer's argument that providing fabricated loan documents to a U.S. Attorney's office was too distant from an ongoing grand jury proceeding to meet the nexus requirement between an obstructive act and an official proceeding as set forth in U.S. v. Aguilar, 515 U.S. 593 (1995), and Marinello v. U.S., 2018 PTC 77 (S. Ct. 2018).

Retirement Plans

IRS Expands Determination Letter Program for Certain Retirement Plans: In Rev. Proc. 2019-20, the IRS provides for a limited expansion of the determination letter program with respect to individually designed retirement plans. The revenue procedure also provides for a limited extension of the remedial amendment period under Code Sec. 401(b) and Rev. Proc. 2016-37, under specified circumstances, and for special sanction structures that apply to certain plan document failures discovered by the IRS during the review of a plan submitted for a determination letter pursuant to this revenue procedure.

April 2019

Accounting

IRS Issues April 2019 Applicable Federal Rates: In Rev. Rul. 2019-8, the IRS the applicable federal rates for April 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

MOST POPULAR - IRS Broadens Penalty Relief for Underpayment of 2018 Estimated Tax: The IRS modified previous guidance, which had waived the penalty under Code Sec. 6654 for the underpayment of 2018 estimated individual income tax. Notice 2019-25 supersedes Notice 2019-11 and (1) reduces the percentage threshold for penalty relief to individuals whose total withholding and estimated tax payments equal or exceed 80 percent of their total tax liability for 2018, (2) provides updated procedures for requesting the penalty waiver, and (3) provides procedures for taxpayers who paid the penalty for tax year 2018, but who qualify for relief, to request a refund. Notice 2019-25. Read More...

Bankruptcy

Section 5000A Shared Responsibility Payment Is Nondischargeable in Bankruptcy: In In re Cousins, 2019 PTC 137 (Bankr. E.D. La.), a bankruptcy court held that the primary function and purpose of Code Sec. 5000A's shared responsibility payment (SRP) is to support the government and, thus, the provision functions like a tax. Accordingly, the court concluded that the SRP is a nondischargeable "tax" entitled to priority status within the meaning of Bankruptcy Code Section 507(a)(8).

Debtor Can Exempt IRA Funds Temporarily Withdrawn to Buy Lottery Tickets: In In re Jones, 2019 PTC 143 (Bankr. S.D. Ill), a district court overruled a bankruptcy trustee's objection and held that a debtor could exempt funds that were withdrawn from his individual retirement account (IRA), deposited into a checking account, and re-deposited back into the IRA. The debtor had withdrawn the funds to purchase lottery tickets as part of a strategy to win money, pay debts, and avoid bankruptcy but, when that didn't work, $20,000 of the withdrawn funds were redeposited back into the IRA within 60 days of being withdrawn and before the taxpayer filed his bankruptcy petition.

Company Did Not Have Its Liability for Premiums under Coal Act Discharged: In In re Hillsborough Holdings Corp., 2019 PTC 114 (Bankr. M.D. Fla. 2019), a bankruptcy court held that a taxpayer, which previously shared common ownership with a coal mine operator and was sued for unpaid Coal Act premiums as a "related person," did not have discharged, as part of an earlier chapter 11 bankruptcy case, its liability under the Coal Act for premiums that came due after its confirmed bankruptcy plan. According to the court, because Coal Act premiums are in the nature of a tax, any premiums that came due after the effective date of the taxpayer's confirmed plan were not discharged in the earlier bankruptcy case.

Corporations

IRS Withdraws Proposed Continuity of Interest Regs: In REG-124627-11, the IRS withdrew proposed regulations that would have provided guidance on determining whether certain transactions satisfy the continuity of interest (COI) requirement under Reg. Sec. 1.368-1(e) after concluding that current law generally provides sufficient guidance to taxpayers with respect to the COI requirement. The IRS did note that it had issued Rev. Proc. 2018-12 earlier in the year and that procedure provides the circumstances under which the IRS will not challenge a taxpayer's use of certain stock valuation methods to value certain issuing corporation stock for purposes of determining whether the COI requirement is satisfied.

C Corporations

Cash Grants Were Nontaxable Contributions to Capital: In Brokertec Holdings, Inc., T.C. Memo. 2019-32, the Tax Court held that cash grants to members of a taxpayer's consolidated group as part of their participation in the State of New Jersey's Business Employment Incentive Program did not constitute taxable income to the affiliates as the IRS had argued but, instead, were contributions to the capital of the affiliates pursuant to Code Sec. 118(a). According to the court, the circumstances surrounding the payments were substantially similar to those in Brown Shoe Co., 175 F.2d 305 (8th Cir. 1949) and McKay Products Corp., 178 F.2d 639 (3d Cir. 1949), and manifested the definite purpose of enlarging the working capital of the taxpayer's affiliates.

Credits

Phase Out for Credit for GM Qualified Plug-In Electric Drive Motor Vehicles Announced: In Notice 2019-22, the IRS announced the credit phase-out schedule for new qualified plug-in electric drive motor vehicles sold by General Motors, LLC as a result of sales of the vehicles reaching the 200,000-vehicle limit listed in Code Sec. 30D(e) during the calendar quarter ending December 31, 2018. Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold by GM will begin to phase out on April 1, 2019.

Deductions

Tax Court Reject's Theft Deduction Loss: In McNely v. Comm'r, T.C. Memo. 2019-39, the Tax Court held that a couple could not deduct theft losses of more than $400,000 that they alleged were incurred by their wholly owned S corporation in 2011 as a result of real estate fraud. The Tax Court found that the S corporation did not have a subjective belief that there was no reasonable prospect of recovery as late as 2015 and, after reviewing both objective and subjective factors, the Tax Court concluded that the S corporation's prospect of recovery was simply unknowable and nothing more than speculation and conjecture at the end of 2011.

Taxpayer's Customized Solution to Avoid Taxes Did Not Meet the Economic Substance Test: In Tucker v. Comm'r, 2019 PTC 116 (5th Cir. 2019), the Fifth Circuit affirmed the Tax Court and rejected a $39 million loss deduction that a couple claimed, which resulted from the husband's execution of a "customized solution" to mitigate the couple's income tax. The court found that, while the "customized solution" involved highly complex, interrelated foreign currency option investment transactions, which complied with a literal reading of the Tax Code and generated millions in paper gains and losses, it did not meet the economic substance test.

Employee Benefits

Self-Correction Program in EPCRS Expanded: In Rev. Proc. 2019-19, the IRS updates the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Code Secs. 401(a), 403(a), 403(b), 408(k), or 408(p), but that have not met these requirements for a period of time. In the procedure, the IRS expands the use of the Self-Correction Program (SCP) in the Employee Plans Compliance Resolution System (EPCRS) to permit correction of certain plan document failures and certain plan loan failures, including the ability to correct defaulted plan loans, the failure to obtain spousal consent on a plan loan, and the failure of permitting plan loans that exceed the number of plan loans permitted under the terms of the plan and also provides an additional method of correcting operational failures by plan amendment under the SCP. Rev. Proc. 2019-19 (4/19/19).

Foreign

Government Didn't Need to Devote Additional Resources to Reassess Liability: In Dewees v. U.S., 2019 PTC 140 (D.C. Cir. 2019), the D.C. Circuit held that a district court properly dismissed a taxpayer's complaint involving the assessment of penalties under the 2009 Offshore Voluntary Disclosure Program (Disclosure Program) after finding that it was rational for the government to impose different penalties under the Disclosure Program and the Streamlined Program where there was any reasonably conceivable state of facts that could provide a rational basis for different penalties. The court noted that the purpose of the Streamlined Program was to encourage taxpayers to come forward and, since the taxpayer had already come forward, it was reasonable for the government to decline to devote further resources to reassess his liability under the Streamlined Program's revised penalty structure.

Time Period Waived for Taxpayers to Make Foreign Earned Income Exclusion Election: In Rev. Proc. 2019-15, the IRS provides a waiver of the time requirements for individuals who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country, to elect to exclude their foreign earned income from gross income. The IRS added the Democratic Republic of the Congo, Cuba, Iraq, and Nicaragua to the list of countries for tax year 2018 for which the minimum time requirements are waived.

Foreign Housing Adjustments Released for 2019: In Notice 2019-24, the IRS provided adjustments to the limitation on housing expenses for purposes of Code Sec. 911. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States and, if the limitation on housing expenses is higher for tax year 2019 than the adjusted limitations on housing expenses provided in Notice 2018-44, qualified taxpayers may apply the adjusted limitations for tax year 2019 to their 2018 tax year.

IRS Can Serve Summons for French Authorities Seeking Financial Info on LLC: In Vistadis, LLC, v. U.S., 2019 PTC 119 (E.D. Pa. 2019), a district court rejected a petition by a limited liability company (LLC) to quash an IRS summons delivered to Wells Fargo seeking information requested by French tax authorities with respect to the LLC and pursuant to a treaty between the United States and France. The court rejected the LLC's argument - that it has no nexus to France and is not subject to French tax and, therefore, the United States may not provide the French government any documents - after the court concluded that the relevant question is whether the IRS issued the summons in good faith, not whether the LLC is subject to French taxes.

IRS Releases Annual Report on Advance Pricing Agreements: In Announcement 2019-3, which was issued pursuant to Section 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999, the IRS released an annual report by Secretary of the Treasury concerning advance pricing agreements (APAs) and the Advance Pricing and Mutual Agreement Program (APMA Program), formerly known as the Advance Pricing Agreement Program (APA Program). This twentieth report describes the experience, structure, and activities of the APMA Program during calendar year 2018.

Penalties

Preparer of Fraudulent Returns Is Liable for $2 Million in Restitution: In U.S. v. Tolentino, 2019 PTC 117 (5th Cir. 2019), the Fifth Circuit affirmed a district court's decision that the total loss amount that arose from a tax preparer's preparation of returns with fraudulent education credits, and for which she was liable for restitution, was $2 million. While the preparer argued that the $2 million of restitution was more than she bargained for when she pled guilty, the court noted that the returns on which the IRS's loss was calculated were those that were submitted using the preparer's identification number.

Procedure

Whistleblower Case Remanded to Whistleblower Office: In Whistleblower 769-16W v. Comm'r, 152 T.C. No. 10 (2019), the Tax Court granted an IRS motion to remand a whistleblower case to the Whistleblower Office for further consideration. The court rejected the whistleblower's objection to the motion after finding that, in appropriate circumstances, the Tax Court may remand a whistleblower case to the Whistleblower Office.

Untimely Third Motion to Vacate Tax Court Decision Does Not Restart Appeal Deadline: In Annamalai v. Comm'r, 2019 PTC 136 (5th Cir. 2019), the Fifth Circuit dismissed a couple's motion to vacate a judgment by the Tax Court and held that the couple's untimely third motion to vacate the judgment could not restart the time for appeals. The court noted that the deadline to file a notice of appeal was 90 days after the Tax Court denied the couple's first motion to vacate the judgment.

Companies That Had Their California Rights Suspended Can't Litigate in Tax Court: In Timbron International Corporation v. Comm'r, T.C. Memo. 2019-31, the Tax Court granted an IRS motion to dismiss a petition filed by two related corporations that had their powers, rights, and privileges suspended by California because of their failure to pay state taxes. The court concluded that the corporations did not have the legal capacity to litigate in the Tax Court.

Only Individuals with TINs May Request EINs: In IR-2019-58, the IRS announced that, starting May 13, only individuals with tax identification numbers may request an Employer Identification Number (EIN) as the "responsible party" on the application. The change will prohibit entities from using their own EINs to obtain additional EINs and the requirement will apply to both the paper Form SS-4, Application for Employer Identification Number, and online EIN application.

Tax-Exempt Bonds

IRS Issues Guidance on General Public Use Requirement for Certain Rental Projects: In Rev. Proc. 2019-17, the IRS provides guidance regarding the general public use requirements for qualified residential rental projects financed with tax-exempt bonds under Code Sec. 142(d). Specifically, it coordinates these requirements with the provisions in Code Sec. 42(g)(9), which provides that a project does not violate the general public use requirement under Code Sec. 42 as a result of specified occupancy restrictions or preferences (for example, certain housing preferences for military veterans).

Final Regs Address Arbitrage Investment Restrictions: In T.D. 9854, the IRS issued final regulations regarding the arbitrage investment restrictions under Code Sec. 148 applicable to tax-exempt bonds and other tax-advantaged bonds issued by state and local governments. The final regulations clarify existing regulations regarding the definition of "investment-type property" by expressly providing an exception for investment in capital projects that are used in furtherance of the public purposes of the bonds.

Tax-Exempt Organizations

Rehearing Denied on California's Form 990, Schedule B, Requirement: In Americans for Prosperity Foundation v. Becerra, 2019 PTC 108 (9th Cir. 2019), the Ninth Circuit denied petitions for a rehearing en banc in a case in which the California Attorney General's Service Form 990, Schedule B requirement, which obligates charities to submit the information they file each year with the IRS pertaining to their largest contributors, survived exacting scrutiny as applied to the tax-exempt plaintiffs because it was substantially related to an important state interest in policing charitable fraud. Several judges dissented, with one noting that, given the inability of governments to keep data secure, the standard of disclosing the contributors to the state puts anyone with controversial views at risk.

March 2019

Accounting

IRS Provides Safe Harbor Accounting Method for Automobile Depreciation Deductions: The IRS has provided a safe harbor method of accounting for determining depreciation deductions for passenger automobiles that qualify for the 100 percent additional first year depreciation deduction under Code Sec. 168(k) (as amended by the Tax Cuts and Jobs Act of 2017 (TCJA)) and that are subject to the luxury automobile depreciation limitations under Code Sec. 280F(a) (as amended by the TCJA). According to the IRS, the safe harbor mitigates the anomalous result that occurs in tax years after the placed-in-service year and before the first year succeeding the end of the recovery period for a passenger automobile. Rev. Proc. 2019-13. Read More...

Bankruptcy

Bankruptcy Court Won't Abstain from Exercising Jurisdiction in Debtors' Case: In In re Jung, 2019 PTC 61 (Bankr. W.D. Wisc.), a bankruptcy court rejected an IRS motion to dismiss for lack of subject matter jurisdiction a petition by the debtors to have the bankruptcy court determine the dischargeability of taxes and penalties assessed by the IRS. The court held that it had subject-matter jurisdiction and that it would not abstain from exercising such jurisdiction.

Corporations

IRS Suspends Two Rulings Over Active Trade or Business Concerns: In Rev. Rul. 2019-9, the IRS suspended Rev. Rul. 57-464 and Rev. Rul. 57-492 pending the completion of a study regarding the active trade or business (ATB) requirement under Code Sec. 355(a)(1)(C) and Code Sec. 355(b). The IRS noted that the ATB analysis underlying the holdings in the rulings focuses, in significant part, on the lack of income generated by the activities under consideration and, consequently, the rulings could be interpreted as requiring income generation for a business to qualify as an ATB.

Charitable Org. Is Classified as a Corporation for Purposes of Interest on Overpayments: In Wichita Center for Graduate Medical Education, Inc. v. U.S., 2019 PTC 77 (10th Cir. 2019), the Tenth Circuit affirmed a district court and held that a charitable organization incorporated under the laws of Kansas was required to repay the IRS part of the interest that had been incorrectly calculated on the organization's tax refund. The court noted that, under Code Sec. 6621(a)(1), corporate taxpayers receive a lower refund interest rate than other taxpayers and that, even though the taxpayer does not issue stock or generate a profit, it must be treated as an ordinary corporation for purposes of Code Sec. 6621(a)(1)).

Credits

IRS Amends Utility Allowance Regulations Relating to Low-Income Housing Credit: In T.D. 9850, the IRS issued final regulations that amend the utility allowance regulations concerning the low-income housing credit under Code Sec. 42. The final regulations extend the principles of the current submetering rules and address situations in which a building owner purchases a utility from a utility company and then separately charges the tenants for the utility.

Deductions

JCT Overview of Deduction for Qualified Business Income: On its website, the Joint Committee on Taxation (JCT) released a slide show on the Code Sec. 199A deduction. In it, the JCT projects the following: (1) 39.2 million returns will include business income from Schedules C, E, or F and, on 26.8 million of these returns, taxpayers will take the Code Sec. 199A deduction; (2) the share of taxpayers that take the Code Sec. 199A deduction who are below the income threshold specified in Code Sec. 199A(e)(2) will be 95.1 percent; (3) the share of taxpayers with Schedule C, E, or F income for which a Code Sec. 199A deduction is allowed will be 68.4 percent; and (4) the share of Schedule C, E, or F income for which a Code Sec. 199A deduction is allowed will be 91.5 percent.

Taxpayer's Business of Restoring Fairey Firefly Did Not Have Profit Motive: In Kurdziel v. Comm'r, T.C. Memo. 2019-20, the Tax Court held that a former fighter pilot, who is the only individual in the United States that owns, and is licensed to fly, a Fairey Firefly, could not deduct losses he incurred in restoring the WWII fighter and anti-submarine aircraft because the restoration business lacked a profit motive. However, because the IRS did not meet its burden of complying with Code Sec. 6751(b)(1), the court concluded that the taxpayer was not liable for the accuracy-related penalties that had been assessed against him for the years at issue.

Marijuana Dispensary Loses Bid to Quash Summonses: In High Desert Relief, Inc. v. U.S., 2019 PTC 76 (10th Cir. 2019), the Tenth Circuit affirmed two district court decisions which rejected a New Mexico marijuana dispensary's petitions to quash third-party summonses issued by the IRS in an attempt to obtain audit information on the taxpayer. The court rejected the taxpayer's arguments that (1) the summonses were issued for an improper purpose - specifically, that the IRS, in seeking to determine the applicability of Code Sec. 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act (CSA), and (2) enforcement of Code Sec. 280E was improper because an official federal policy of non-enforcement of the CSA against medical marijuana dispensaries had rendered that statute's proscription on marijuana trafficking a "dead letter" incapable of engendering adverse tax consequences for the taxpayer.

Taxpayer Can't Reduce Settlement Award for Alleged Pain and Suffering: In Doyle v. Comm'r, T.C. Memo. 2019-8, the Tax Court held that a taxpayer, who had been fired from his job and subsequently awarded "alleged unpaid wages" and "alleged emotional distress" in the settlement of a lawsuit against the employer, could not reduce the award to zero by deducting amounts for pain and suffering. The court noted that the taxpayer had followed his CPA's advice and that the CPA testified at the trial that he did some research and went to a seminar and determined that the payments were nontaxable under Code Sec. 104(a)(2).

Disaster Relief

Victims of Alabama Tornado Given Additional Time to File Returns and Payments: In IR-2019-20 (3/7/19), the IRS gave victims of the recent tornadoes and severe storms in Alabama until July 31, 2019, to file certain individual and business tax returns and make certain tax payments. The July 31, 2019, deadline also applies to (1) quarterly estimated income tax payments due on April 15 and June 17, 2019, (2) quarterly payroll and excise tax returns normally due on April 30, 2019, (3) tax-exempt organizations, operating on a calendar-year basis, that have a Form 990 information return due on May 15, 2019, and (4) businesses, including corporations, S corporations and partnerships, that have a 2018 return due during this period.

Employee Benefits

Mortality Improvement Rates and Static Mortality Tables Updated: In Notice 2019-26, the IRS issued updated mortality improvement rates and static mortality tables that are used for purposes of determining (1) the minimum funding requirements under Code Sec. 430(h)(3) for 2020, and (2) the minimum present value under Code Sec. 417(e)(3) for distributions with annuity starting dates that occur during stability periods beginning in the 2020 calendar year. The notice also includes a modified unisex version of the mortality tables for use in determining minimum present value under Code Sec. 417(e)(3) and Section 205(g)(3) of ERISA for distributions with annuity starting dates that occur during stability periods beginning in the 2020 calendar year.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-21, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Covered Compensation Tables Released for 2019 Plan Year: In Rev. Rul. 2019-6, the IRS issued tables of covered compensation under Code Sec. 401(l)(5)(E) and related regulations for the 2019 plan year. Covered compensation is the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which an employee attains social security retirement age.

IRS No Longer Intends to Amend RMD Rules: In Notice 2019-18, the IRS informed taxpayers that it no longer intends to amend the required minimum distribution (RMD) regulations under Code Sec. 401(a)(9) to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments. The IRS had previously said, in Notice 2015-49, that it intended to propose amendments to the RMD regulations under Code Sec. 401(a)(9) to address the use of lump-sum payments to replace ongoing annuity payments under a qualified defined benefit plan.

Employment Taxes

Owner of Company Liable as Responsible Person for Failing to Pay Employment Taxes: In U.S. v. Nutter, 2019 PTC 67 (S.D. Ohio 2019), a district court held that the owner and president of a business properly withheld employment taxes from the company's employees' paychecks but used those withholdings to pay the operating expenses of the business rather than paying them to the IRS. The court also found that the taxpayer acted willfully and was a responsible person liable in full for the trust fund recovery penalties assessed under Code Sec. 6672.

Estates, Gifts, and Trusts

Decedent's Heirs Liable for Estate Taxes, Interest, and Penalties: In U.S. v. Ringling, 2019 PTC 63 (S.D. 2019), a district court granted summary judgment to the IRS on claims that three siblings and the son of one of the siblings were liable for unpaid federal estate tax, penalties, and interest. The court noted that the estate tax for the decedent was not paid when due, that the siblings and the grandson had received property included in the decedent's gross estate, that the decedent's heirs failed to establish that they had reasonable cause for failing to make the required payments, and that the IRS was not barred from its assessments by the statute of limitations.

Foreign

Currency of Country in Which Foreign Corporation Is Located Is Used Calculating Gain or Loss: In TAM 201902030, the Office of Chief Counsel advised that, in calculating any Code Sec. 988 foreign currency gain or loss with respect to payments of principal and interest on loans relating to the sale of a foreign corporation to a U.S. partnership, the functional currency of the country in which the foreign corporation is located, and not the functional currency of the country in which the partnership is located, should be used. According to the Chief Counsel's Office, the versions of Reg. Sec. 1.989(a)-1 and Reg. Sec. 1.988-4(b) that were in effect before their modification in T.D. 9794 are applicable to the years at issue.

International

IRS Finalizes Verification Requirements for Certain Foreign Entities: In T.D. 9852, the IRS finalized regulations which provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs), trustees of certain trustee-documented trusts, registered deemed-compliant FFIs, and financial institutions that implement consolidated compliance programs. These final regulations affect certain financial institutions and NFFEs. The final regulations retain the requirement that a sponsoring entity have a written sponsorship agreement in place with each sponsored FFI but, in response to comments, the IRS decided that it is not necessary for the sponsorship agreement to be a standalone agreement.

FBAR Penalty Not Limited to $100,000: In U.S. v. Garrity, 2019 PTC 75 (D. Conn. 2019), a district court held that a taxpayer who was found guilty of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) was liable for a penalty equal to 50 percent of the balance in the taxpayer's account in the year he failed to file the FBAR. The court rejected the taxpayer's arguments that the maximum civil penalty for failing to file an FBAR is $100,000 and that, under the Eighth Amendment, the civil penalty had to be reduced to an amount that was proportional to the harm caused by the failure to file the FBAR.

Prop. Regs Address Deduction for Foreign-Derived Intangible Income and GILTI: In REG-104464-18, the IRS issued proposed regulations that provide guidance to determine the amount of the deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). The proposed regulations also contain rules coordinating the deductions for FDII and GILTI with other Code provisions.

Life Insurance

Prop. Regs Address Reporting for Certain Life Insurance Contract Transactions: In REG-103083-18, the IRS issued proposed regulations providing guidance on new information reporting obligations under Code Sec. 6050Y related to reportable policy sales of life insurance contracts and payments of reportable death benefits. The proposed regulations also provide guidance on the amount of death benefits excluded from gross income under Code Sec. 101 following a reportable policy sale and affect parties involved in certain life insurance contract transactions, including reportable policy sales, transfers of life insurance contracts to foreign persons, and payments of reportable death benefits.

Partnerships

Prop. Rules Would Prevent Corporate Partner from Avoiding Gain on Certain Transactions: In REG-135671-17, the IRS issued proposed regulations which would prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities. The rules contain substantive modifications to the final regulations relating to the definition of "stock of the corporate partner."

Penalties

IRS Finalizes Penalty Regs Dealing with Reportable Transactions: In T.D. 9853, the IRS issued final regulations that provide guidance regarding the amount of the penalty under Code Sec. 6707A for failing to include on any return or statement any information required to be disclosed under Code Sec. 6011 with respect to a reportable transaction. Although no changes to the previously issued proposed regulations were made specifically in response to public comments, the IRS noted that Reg. Sec. 301.6707A-1(d)(1)(ii) was revised to clarify how the penalty is calculated in situations where a transaction becomes reportable after the filing of the return or returns reflecting participation in the transaction.

Court Affirms Convictions of Tax Shelter Promoters: In U.S. v. Donaldson, 2019 PTC 95 (11th Cir. 2019), the Eleventh Circuit affirmed the conviction of two taxpayers for conspiring to defraud the United States and willfully aiding the submission of false and fraudulent income tax returns after concluding that the taxpayers were guilty of promoting certain business-risk insurance policies that were really tax shelters and telling buyers that the policy expenses were deductible as Code Sec. 162 expenses.

Procedure

IRS Removes and Amends Hundreds of Regulations: In T.D. 9849, the IRS removed 296 regulations that it said are no longer necessary because they do not have any current or future applicability under the Internal Revenue Code. Simultaneously, the IRS amended 79 regulations to reflect the removal of the 296 regulations.

Government Must Have IRS Actuary Value Non-Delinquent Spouse's Homestead Interest: In U.S. v. Nelson, 2019 PTC 90 (D. S.D. 2019), a district court rejected an IRS determination that South Dakota's homestead exemption of $60,000 was the best way to value the homestead interest of a non-delinquent spouse upon the forced sale of property under Code Sec. 7403. The court noted that the government has the ability to have an IRS actuary prepare a valuation of a homestead interest as akin to a life estate, as was done in U.S. v. Caraway (W.D. Tex. 2008), and directed the government to do so with respect to the non-delinquent spouse's interest in the property as issue.

IRS Can Continue Receiving 100 Percent of Debtor's Social Security Income: In Holland v. U.S., 2019 PTC 80 (E.D. Mich. 2019), a district court denied a taxpayer's request for an order precluding the IRS, who is currently receiving 100 percent of the taxpayer's social security benefits as a result of a levy aimed at recouping nearly $20 million in federal income taxes owed by the taxpayer, from taking more than 15 percent of his monthly social security benefits. The court also found that the taxpayer plainly had a two-year window of opportunity to seek a judicial review once the Social Security Administration began to withhold his social security benefits in 2012, but noted that courts have uniformly declined to enlarge the time period for bringing a Code Sec. 7433(a) claim based on the continuing effects of a one-time levy.

IRS Did Not Provide Sufficient Notice That It Would Seek Documents from Third Party: In J.B. v. U.S., 2019 PTC 68 (9th Cir. 2019), the Ninth Circuit affirmed a district court's order quashing an IRS subpoena to the California Supreme Court, seeking documents in connection with a tax audit of a California couple. The Ninth Circuit agreed with the district court's conclusion that the IRS had not provided sufficient notice to the taxpayers that it would contact the California Supreme Court, in violation of Code Sec. 7602(c)(1)'s requirement that the IRS provide "reasonable notice in advance" to taxpayers.

Court Affirms That Marijuana Business Was Trafficking in a Controlled Substance: In Feinberg v. Comm'r, 2019 PTC 69 (10th Cir. 2019), the Tenth Circuit affirmed the Tax Court and held that a couple did not meet their burden of proving that the IRS's determination that the couple's wholly owned corporation, which engaged in selling medical marijuana, was unlawfully trafficking in a controlled substance was erroneous. With respect to the taxpayers' contention that placing the burden on them to prove the IRS's determination was erroneous violated their Fifth Amendment privilege, the court concluded that the allocation of the burden of proof does not constitute "compulsion" under the Fifth Amendment, and because the couple made no attempt to meet their evidentiary burden, it was appropriate to affirm the Tax Court's holding on the ground that Code Sec. 280E prohibited the deductions.

IRS Appeals Can Determine Whether It Will Accept Cases with No Tax Issues: In CCA 201902031, the Office of Chief Counsel advised that, while it is ultimately up to IRS Appeals to interpret its own provisions on the criteria for case consideration, Appeals may determine that its procedures allow it to decline to accept cases with no tax issues.

No Change in Quarterly Interest Rates: In Rev. Rul. 2019-5, the IRS provides that the interest rates for underpayments and overpayments for the calendar quarter beginning April 1, 2019, will be the same as the rates for the first quarter of 2019. The rates will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments, 8 percent for large corporate underpayments, and 3.5 percent for the portion of a corporate overpayment exceeding $10,000.

Court Affirms Dismissal of Lawsuit for Unauthorized Disclosure of W-2 Information: In Smith, et al. v. Tipton County Board of Education, 2019 PTC 59 (6th Cir. 2019), the Sixth Circuit affirmed a district court decision dismissing a lawsuit aimed at holding a Tennessee county board of education liable under Code Sec. 6103 for monetary damages as the result of the unauthorized disclosure of employee W-2 information to a third party. The court also rejected a claim for damages under Code Sec. 7431 for each disclosure of the W-2 information.

Couple's CP59 Response to IRS Did Not Qualify as an Informal Claim for Refund: In Linton v. Comm'r, 2019 PTC 64 (10th Cir. 2019), the Tenth Circuit affirmed a Tax Court decision granting partial summary judgment in favor of the IRS in a Collections Due Process (CDP) proceeding involving a couple's unpaid 2010 tax liability and sustaining the IRS's notice of deficiency with respect to the couple's 2009 and 2010 taxes. The Tenth Circuit agreed with the Tax Court's conclusions that (1) the couples' CP59 response, sent in reply to a CP59 notice they received from the IRS, did not qualify as an informal claim for credit or refund, because that response - which the Tax Court described as "premature and unspecific" - did not put the IRS on sufficient notice that a credit or refund was being sought; (2) even if the couple's CP59 response constituted a claim for credit or refund, their election on their later-filed 2008 tax return to have the overpayment refunded to them superseded their CP59 response; and (3) regardless of what the IRS representative may have said to the couple in a January 2013 telephone conference, the IRS has no authority to waive the statutory look-back limitations on credits and refunds.

RICs and REITs

Final RIC Regs Address Income Test to Determine If a Corporation Qualifies as a RIC: In T.D. 9851, the IRS issued final regulations relating to the income test used to determine whether a corporation may qualify as a regulated investment company (RIC) for federal income tax purposes. These final regulations provide guidance to corporations that intend to qualify as RICs.

IRS Revises Prop. Regs Relating to C Corporation and REIT Transactions: In REG-113943-17, the IRS withdrew proposed regulations issued in 2016 which, if adopted, would have provided guidance for transactions in which property of a C corporation becomes the property of a real estate investment trust (REIT) following certain corporate distributions of controlled corporation stock. The IRS issued new proposed regulations which provide revised guidance on the same subject and which would affect REITs, C corporations the property of which becomes property of a REIT, and their respective shareholders.

S Corporations

Court Rejects Personal Deductions for Costs Relating to Taxpayer's S Corporation: In Morowitz v. U.S., 2019 PTC 79 (D. R.I. 2019), a district court held that a lawyer improperly filed a Schedule C claiming deductions on his personal return relating to clients retained through his S corporation. Further, the court said the taxpayer could not deduct case costs he advanced from his personal funds because such payments constituted a loan or a contribution to the capital of the S corporation and are deductible, if at all, not by the shareholder, but by the corporation.

Tax-Exempt Bonds

IRS Provides Average Purchase Price Data: In Rev. Proc. 2019-14, the IRS provides issuers of qualified mortgage bonds and issuers of mortgage credit certificates with (1) the nationwide average purchase price for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. The average area purchase price safe harbors for each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam were last published in Rev. Proc. 2018-28 and guidance with respect to the United States and area median gross income figures that are to be used in computing the housing cost/income ratio was last published in Rev. Proc. 2018-33.

February 2019

Accounting

What to Do About Missing Forms W-2 and Forms 1099: While the receipt of Forms W-2 and Forms 1099 by the end of January are key for taxpayers wishing to get a jump on preparing their tax returns, knowing what to do if those documents aren't received is also important. Read More...

IRS Abused Its Discretion in Rejecting Taxpayer's Offer in Compromise: The Tax Court held that an IRS Appeals officer abused her discretion in a collections due process hearing by rejecting a taxpayer's offer in compromise. The court found that the Appeals officer improperly included assets held by an irrevocable grantor trust in the taxpayer's reasonable collection potential and failed to consider relevant facts in determining that the taxpayer wasted his wealth in investments in an effort to deprive the government of funds. Campbell v. Comm'r, T.C. Memo. 2019-4. Read More...

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2019-13, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

Employment Taxes

No New Trial for Partner Found to Be a Responsible Person: In Ireland v. U.S., 2019 PTC 40 (C.D. Calif. 2019), a district court refused to overturn an earlier jury verdict and held that the partial owner of a partnership that failed to make full payments of federal employment taxes for certain periods in 2008 and 2009 was not entitled to a refund of more than $333,000 of trust fund recovery penalties he had paid to the government and was not entitled to a new trial. The court found that there was ample evidence to support the jury's verdict that the taxpayer was a responsible person and that the jury was presented with sufficient evidence to support a finding that the taxpayer at least acted recklessly when he failed to inquire about whether the partnership had paid employment taxes for certain payroll quarters.

Gross Income

"Stress" Payments Received by Fired Employee Aren't Excludible from Income: In Doyle v. Comm'r, T.C. Memo. 2019-8, the Tax Court held that emotional-distress payments received by a taxpayer after he was fired from his job were not excludable from income as personal physical injuries or physical sickness under Code Sec. 104(a) and rejected the taxpayer's argument that the stress he suffered from the firing was physical and not the same as emotional distress. The court also held that the taxpayer and his wife were entitled to deduct as a miscellaneous itemized deduction certain legal fees incurred in 2010 in collecting amounts from the taxpayer's former employer but disallowed legal expense deductions taken in 2011 on Schedule C because there was no evidence that any claim necessitating the payment of legal fees arose in connection with the taxpayer's subsequent consulting business.

Procedure

Court Sustains Collection Actions Against a Taxpayer Who Never Filed Tax Returns: In Belanger v. Comm'r, T.C. Memo. 2019-1, the Tax Court held that a taxpayer, who worked as a truck driver averaging approximately $60,000 in gross wages for the nine years at issue and who had never filed a tax return, could not challenge his underlying income tax liabilities reported on substitute returns filed by the IRS. The court also held that the taxpayer had not satisfied his burden of showing that the IRS abused its discretion in sustaining a Notice of Federal Tax Lien filing and the court sustained the IRS's determination to proceed with collection actions against the taxpayer.

Couple Not Entitled to Refund on Taxes Relating to S Corp Shares They Said They Didn't Own: In Conzelman v. U.S., 2019 PTC 41 (C.D. Calif. 2019), a district court rejected a couple's request for a tax refund that they said they were owed under Code Sec. 7433 after the IRS "tricked" them into believing that they owned certain S corporation shares, which the couple claimed a bankruptcy trustee really owned, and held that they were liable for taxes on income allocated to those shares. The court also held that because the couple's complaint did not allege any collection activity and was based solely on a deficiency letter they received, the couple could not maintain an action against the government pursuant to Code Sec. 7433.

Tanning Bed Owner Subject to Collections Actions for Not Paying Excise Taxes: In Humiston v. Comm'r, T.C. Memo. 2019-9, the Tax Court held that an IRS settlement officer did not abuse his discretion in sustaining a notice of federal tax lien and a proposed collection action for trust fund recovery penalties relating to tanning excise taxes that were not paid by the owner of a tanning bed salon. The court found that the IRS's Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, established supervisory approval of the penalties under Code Sec. 6751(b).

Bank's Lien Has Priority over IRS Tax Liens: In First Sentinel Bank v. U.S., 2019 PTC 48 (W.D. Va. 2019), a district court held that a bank's mortgage lien survived a nonjudicial foreclosure sale of a taxpayer's real property and that tax liens against the property remained inferior to the bank's lien. The court rejected the government's argument that the bank's lien merged with its title when the bank purchased the property at the foreclosure sale, and therefore the bank's lien was extinguished and the tax liens were elevated in priority.

Tax Accounting

Taxpayer Can Use Revenue Proc. 2018-60 to Obtain IRS Consent for Method Change: In CCM 201852019, the Office of Chief Counsel advised that an accrual method taxpayer, whose current accounting method for an item of gross income is impermissible under Code Sec. 451(b)(1)(C), can use Rev. Proc. 2018-60 to obtain automatic IRS consent to change its accounting method to comply with Code Sec. 451(b)(1)(A), if the taxpayer otherwise satisfies the terms and conditions set forth in the revenue procedure. Rev. Proc. 2018-60 provides automatic consent for method changes to comply with Sec. 451(b)(1)(A), as amended by the Tax Cuts and Jobs Act of 2018, and the Chief Counsel's Office noted that, to satisfy Code Sec. 451(b)(1)(A), a taxpayer must also comply with the all events test as defined in Code Sec. 451(b)(1)(C).

January 2019

Accounting

IRS Issues January 2019 AFRs: In Rev. Rul. 2019-3 the IRS issued a ruling which prescribes the applicable federal rates for January 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Code Sec. 1274.

Bankruptcy

Debtor's Failure to Timely File Returns Precludes Discharge of Tax Debts: In re Fremont, 2019 PTC 19 (9th Cir. 2019), the Ninth Circuit affirmed a district court's decision, which upheld a bankruptcy court holding, that a debtor was not entitled to have his tax debts discharged. The court held that, because the debtor failed to provide the information required by a tax return until three to five years after the IRS assessed deficiencies for the debtor's 2001 - 2003 tax returns and, because he did not file a "return" within the meaning of 11 U.S.C. Sec. 523(a)(1)(B), his tax debts were excepted from discharge.

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Tax Debts Not Discharged in Bankruptcy Where Couple Filed Related Returns Late: In In re Nedelka, 2018 PTC 445 (Bankr. Del. 2018), a bankruptcy court held that a couple's 2004 tax liabilities were not discharged because the tax returns for the debts were not filed on time, or at least two years before the commencement of the couple's Chapter 13 case. The court noted that Bankruptcy Code Section 1328(a), read together with Bankruptcy Code Section 523(a)(1)(B), clearly excludes tax liabilities from discharge when the relevant tax return was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the bankruptcy petition.

Deductions

IRS Provides Deduction Safe Harbors Relating to Payments to Charitable Organizations: In Rev. Proc. 2019-12, the IRS provides safe harbors under Code Sec. 162 for certain payments made by a C corporation or a specified pass-through entity to or for the use of a charitable organization described in Code Sec. 170(c) if the C corporation or specified pass-through entity receives or expects to receive a state or local tax credit in return for such payment. The revenue procedure applies to amounts paid on or after January 1, 2018.

Amounts Paid for Work Clothes and Small Tools Are Deductible by Construction Worker: In Triggs v. Comm'r, T.C. Summary 2018-58, the Tax Court held that, because a construction worker credibly testified as to his job-related need for steel-toed boots, construction worker overalls and gloves, and small tools, he was entitled to deduct the costs of those items on his tax returns. While the court denied the taxpayer's deductions for hotel stays, it rejected the IRS's assessments of penalties after concluding that the taxpayer had reasonable cause to rely on the CPA that had prepared the tax returns at issue.

Employee Benefits

IRS Issues Guidance on Vehicle Cents-Per-Mile Valuation Rule: In Notice 2019-8, the IRS issued the 2018 maximum values for use with the vehicle cents-per-mile valuation rule under Reg. Sec. 1.61-21(e) and the fleet-average valuation rule, which is an optional component of the automobile lease valuation rule under Reg. Sec. 1.61-21(d). The IRS also issued interim guidance on new procedures for calculating the inflation adjustments to the maximum values for use with the special valuation rules under Reg. Sec. 1.61-21(d) and Reg. Sec. 1.61-21(e) using Code Sec. 280F(d)(7), as modified by the Tax Cuts and Jobs Act of 2017.

Estates, Gifts, and Trusts

IRS Can Enforce Lien Against Estate Property for $2.6 Million in Estate Taxes Owed: In U.S. v. Mengedoht, 2019 PTC 17 (D. Neb. 2019), a district court held that the executor of an estate did not show that he had a personal interest in certain real property of an estate that was superior to federal tax liens that attached to the subject property. The court concluded that the lien against the property, as a result of $2.6 million of unpaid estate taxes, should be enforced.

Excise Taxes

Additional Extension of Temporary Excise Fuel Tax Relief Provided: In Notice 2019-4, the IRS provided an additional extension of the temporary dyed fuel relief initially provided in Notice 2017-30, then extended through December 31, 2018, by Notice 2018-39. Under this additional relief, which will be available beginning on January 1, 2019, and ending on December 31, 2019, a claimant may submit a refund claim for the Code Sec. 4081(a)(1) excise tax imposed on undyed diesel fuel and kerosene for fuel that is (1) removed from a Milwaukee or Madison terminal; (2) entered into a Green Bay terminal within 24 hours of removal from the Milwaukee or Madison terminal; and (3) subsequently dyed and removed from that Green Bay terminal.

Healthcare

Notice Lists Additional Individual Shared Responsibility Payment Hardship Exemptions: In Notice 2019-5, the IRS supplemented guidance previously issued in Notice 2014-76 and Notice 2017-14 by identifying additional hardship exemptions from the individual shared responsibility payment under Code Sec. 5000A that a taxpayer may claim on a federal income tax return for the 2018 tax year without obtaining a hardship exemption certification from the Health Insurance Marketplace (Marketplace). The option to claim an exemption on a federal income tax return for the 2018 tax year applies in addition to the existing procedures for applying for hardship exemptions using the Marketplace exemption determination process.

Insurance Companies

IRS Provides Insurance-Related Factors for 2018 Accident Year: In Rev. Proc. 2019-6, the IRS issued unpaid loss discount factors for the 2018 accident year for use in computing discounted unpaid losses under Code Sec. 846. The unpaid loss discount factors also serve as salvage discount factors for the 2018 accident year for use in computing discounted estimated salvage recoverable under Code Sec. 832.

International

IRS Issues Prop. Regs on Hybrid Dividends and Hybrid Transactions: In REG-104352-18, the IRS issued proposed regulations implementing Code Sec. 245A(e) and Code Sec. 267A, provisions enacted as part of the Tax Cuts and Jobs Act of 2017, regarding hybrid dividends and certain amounts paid or accrued in hybrid transactions or with hybrid entities. The document also contains proposed regulations under Code Sec. 1503(d) and Code Sec. 7701 to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign country, as well as proposed regulations under Code Secs. 6038, 6038A, and 6038C to facilitate administration of certain rules in the proposed regulations.

Prop. Regs Address Base Erosion and Anti-Abuse Tax: In REG-104259-18, the IRS issued proposed regulations that provide guidance regarding the tax on base erosion payments of taxpayers with substantial gross receipts and reporting requirements thereunder. The proposed regulations would affect corporations with substantial gross receipts that make payments to foreign related parties and would affect any reporting corporations within the meaning of Code Sec. 6038A or Code Sec. 6038C.

Legislation

New Law Allows District Court Judges to Transfer Misfiled Cases to the Tax Court: On December 19, President Trump signed into law The Protecting Access to the Courts for Taxpayers Act (Pub. L. 115-332). The law amends 28 U.S.C. Sec. 1631 to authorize a U.S. district court, a U.S. court of appeals, the U.S. Court of Federal Claims, or the Court of International Trade to transfer to the U.S. Tax Court a misfiled case within the Tax Court's jurisdiction.

Partnerships

Two Easements Contributions Did Not Give Rise to Charitable Deductions: In Pine Mountain Preserve v. Comm'r, 151 T.C. No. 14 (2018), the Tax Court held that a partnership's donation of 2005 and 2006 easements did not restrict a specific, identifiable piece of real property because the easements allowed supposedly conserved land to be taken back and used for residential development and, thus, neither easement constituted a qualified real property interest that could give rise to a charitable contribution deduction under Code Sec. 170(h)(1)(A). However, the court concluded that the donation of a 2007 easement did give rise to a charitable deduction because it covered a specific, identifiable piece of real property, was granted in perpetuity under Code Sec. 170(h)(2)(C), was made exclusively for conservation purposes under Code Sec. 170(h)(1)(C), and constituted a qualified real property interest.

Court Splits Estimates of Easement's Value between Amounts Recommended by Experts: In Pine Mountain Preserve, LLLP v. Comm'r, T.C. Memo. 2018-214, the Tax Court held that the value of a partnership's 2007 conservation easement, for which the partnership took a charitable contribution deduction, was $4,779,500. The court concluded that neither side's valuation experts met the criteria in Reg. Sec. 1.170A-14(h)(3)(i) and, thus, the court gave equal weight to the values assigned by both sides.

Penalties

Marijuana Business Avoids Penalties on Disallowed Deductions: In Patients Mutual Assistance Collective Corporation v. Comm'r, T.C. Memo. 2018-208, the Tax Court held that a medical-marijuana dispensary, whose ordinary and necessary business expense deductions were disallowed under Code Sec. 280E, was not liable for accuracy-related penalties under Sec. 6662(a). According to the court, not only had the corporation's main argument for the inapplicability of Code Sec. 280E to its business not yet been the subject of a final unappealable decision, but the meaning of "consists of" as used in Code Sec. 280E is subject to more than one reasonable interpretation.

Procedure

Couple Must Follow Section 7433 Procedures Before Court Will Consider Refund Claim: In Waltner v. U.S., 2019 PTC 16 (D. Ariz. 2019), a district court held that Reg. Sec. 301.7433-1 applied to a couple filing for tax refunds and therefore they were required to exhaust their administrative remedies under Code Sec. 6532(a)(1) and Code Sec. 7422(a) and sue within two years of the action's accrual and must also follow the administrative procedures for filing a damages claim outlined in Reg. Sec. 301.7433-1. The court rejected the couple's argument that Reg. Sec. 301.7433-1 applied to them and that the regulation was unreasonable, nonbinding, and inconsistent with Code Sec. 7433.

Correspondence with IRS Didn't Extend Limitations Period for Refund Claim: In LSW Engineers Arizona Inc. v. U.S., 2019 PTC 21 (D. Ariz. 2019), a district court cited Code Sec. 6532 in rejecting a taxpayer's argument that correspondence between the taxpayer and the IRS with respect to a tax refund claim filed by the taxpayer caused the two-year statute of limitations period to start in 2017 instead of 2015. In addition, the court cited a Supreme Court decision which concluded there is no implied equitable exception to a limitations period in tax refund cases in holding that equitable considerations did not preclude the government from asserting that the statute of limitation applied to deny the taxpayer's refund claim.

Taxpayer to be Tried in Connection With Helping Son File a False Return: In U.S. v. Stinson, 2019 PTC 27 (6th Cir. 2019), the Sixth Circuit affirmed a district court's denial of a taxpayer's request to sever indictments relating to the taxpayer's failure to pay over to the IRS payroll taxes due from his and his wife's staffing company from indictments relating to the taxpayer's involvement in a false federal income tax return filed by his son. The court noted that the taxpayer's son testified that his father told him to list his half-brother as a dependent so he could increase his refund to get money for a spring break trip he wanted to take with his friends.

IRS Updates Procedure on Return Disclosures Necessary to Avoid Penalties: In Rev. Proc. 2019-9, the IRS updated Rev. Proc. 2018-11 and identified circumstances under which disclosures on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the understatement of income tax under Code Sec. 6662(d) (relating to the substantial understatement aspect of the accuracy-relate penalty), and for the purpose of avoiding the tax return preparer penalty under Code Sec. 694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns. Editorial changes have been made throughout this revenue procedure. According to the IRS, minor changes were made in order to update the tax years and tax forms to which this Rev. Proc. 2019-9 applies but no additional substantive changes were made.

 

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