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Tax and Accounting Research: Tax Updates June 2021 - July 2020

June 2021

Accounting

IRS Issues June 2021 Applicable Federal Rates: In Rev. Rul. 2021-9, the IRS provides various prescribed rates for federal income tax purposes for June 2021, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by Code Sec. 1274.

C Corporations

Acquiring Corporation Cannot Change Reporting of Asset Sale: In New Capital Fire, Inc. v. Comm'r, T.C. Memo. 2021-67, the Tax Court held that, in a merger between two corporations, the acquiring corporation was estopped under the doctrine of equitable estoppel from changing the reporting of its bases in the acquired target's assets because the statute of limitations barred assessment of tax against the target. The court also rejected the taxpayer's argument that it did not realize the capital gains it had originally reported on the sale of the target's assets.

Charitable Contributions

Tax Court Won't Certify Conservation Easement Question to Alabama Supreme Court: In Montgomery-Alabama River, LLC v. Comm'r, T.C. Memo. 2021-62, the Tax Court held that it would not certify to the Supreme Court of Alabama the question of whether, under Alabama law, the taxpayer (a limited liability company (LLC)) would be entitled to the full proceeds of any sale if a conservation easement that was the subject of a charitable donation was extinguished. The court concluded that there was no ambiguity in Alabama law with respect to this issue.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-27, 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).

Estates, Gifts, and Trusts

Estate That Intentionally Undervalued Assets Hit with 40 Percent Penalty: In Est. of Morrissette v. Comm'r, T.C. Memo. 2021-60, the Tax Court held that a decedent's sons knowingly hired an appraiser who would undervalue the decedent's rights to payments under split-dollar agreements for estate tax purposes. As a result, the estate was liable for a 40 percent penalty for the gross valuation misstatement of those rights.

Foreign

U.S. and Switzerland Update Treaty for Retirement Arrangements: In Announcement 2021-11, the IRS stated that the competent authorities of the United States and Switzerland have updated the U.S. - Switzerland Treaty for certain U.S. and Swiss pension or other retirement arrangements, including individual retirement savings plans, that may be eligible for benefits under the Treaty. The updated Treaty supersedes the competent authority arrangement entered into on December 10, 2004.

IRS Procedure Addresses Accounting for Controlled Foreign Corporations: In Rev. Proc. 2021-26, the IRS issued a procedure dealing with accounting method changes made on behalf of certain foreign corporations. The procedure (1) expands, for a limited period, the availability of automatic consent for controlled foreign corporations (CFCs) to change their methods of accounting for depreciation to the alternative depreciation system under Code Sec. 168(g) in order to ease the burden on CFCs of conforming their income and earnings and profits computations with their qualified business asset investment computations; (2) prescribes terms and conditions for accounting method changes made on behalf of CFCs, to ensure that Code Sec. 481(a) adjustments resulting from CFCs' method changes are properly included in computations of tested income and tested loss; (3) clarifies certain aspects of the "150 percent rule" that limits audit protection for CFCs and 10/50 corporations.

Court Upholds Verdict Finding Taxpayer Willfully Failed to Report Foreign Accounts: In U.S. v. DeMauro, 2021 PTC 145 (D. N.H. 2021), a district court rejected a taxpayer's request to amend the verdict and judgment against her in U.S. v. DeMauro, 2020 PTC 400 (D. N.H. 2020), where the court found that the taxpayer failed to timely report the existence of nearly $3 million she had hidden away in foreign bank accounts and that the failure was willful and thus subject to enhanced penalties. The court concluded that the taxpayer identified no clear error of law in the court's analysis and the taxpayer failed to persuade the court that it misapprehended or misevaluated any fact that was material to the court's conclusion that the taxpayer failed to timely file foreign bank account reports willfully.

Insurance

IRS Rejects Sixth Circuit's Holding in Split-Dollar Life Insurance Policy Case: In AOD 2021-2, the IRS issued a nonacquiescense in the Sixth Circuit's decision in Machacek v. Comm'r, 2018 PTC 347 (6th Cir. 2018), rev' T.C. Memo. 2016-55. In Machacek, which was a case of first impression, the Sixth Circuit reversed the Tax Court and held that the economic benefits flowing from the increase in value of a split-dollar life insurance policy to an employee-shareholder of an S corporation was a distribution in respect of stock, even though the employee-shareholder received the benefits under a compensatory split-dollar arrangement.

Net Operating Losses

Corporation Can't Make Separate Election to Carryback Specified Liability Losses: In CCM 202120015, the Office of Chief Counsel advised that a corporation that elected to waive its right to carryback its entire net operating loss (NOL) under Code Sec. 172(b)(3) and Reg. Sec. 1.1502-21(b)(3)(i) cannot make a separate election to carryback specified liability losses 10 years under Code Sec. 172(b)(1)(C) where such specified liability losses are not composed of product liability losses. The Chief Counsel's Office also noted that there is no provision in the Code or the regulations which suggests that there can be multiple NOLs in a tax year for purposes of the election under Code Sec. 172(b)(3).

Partnerships

Partnership Adjustment Originated with Taxpayer and Not Another Partnership: In ES NPA Holding, LLC v. Comm'r, T.C. Memo. 2021-68, the Tax Court held that an IRS adjustment to a partnership's 2011 gross income was properly classified as a partnership item and rejected the partnership's assertion that the adjustment originated with another partnership in which the partnership had an interest. The Tax Court also held that there was a genuine dispute of material fact involving the partnership's entitlement to a flowthrough compensation deduction equal to the value of a membership interest it received in exchange for services provided (or to be provided) and the court thus concluded that summary judgment was inappropriate with respect to this issue.

Penalties

Notice 2007-83 Does Not Violate the Administrative Procedure Act: In Mann Construction, Inc. v. U.S., 2021 PTC 134 (E.D. Mich. 2021), a district court concluded that the IRS's issuance of Notice 2007-83, which requires taxpayers to disclose their participation in listed transactions or face substantial penalties under Code Sec. 6707A and which was issued without a public notice and comment period, did not violate the Administrative Procedure Act. While the court held that Congress authorized the IRS to issue Notice 2007-83 without a notice and comment period, it emphasized that its holding was a narrow one.

Taxpayers Convicted of Securities Fraud Scheme Owe Additional Taxes: In Jenkins v. Comm'r, T.C. Memo. 2021-54, the Tax Court held that a taxpayer, who owned a software company in the early 2000's and ran a pump-and-dump investment scheme that landed him in prison for money laundering, tax evasion, wire fraud, and other assorted crimes was taxable on income forfeited as a result of his criminal conviction. Similarly, the court also concluded that the taxpayer's partner in the scheme was liable for tax on $500,000 paid to him in 2000 but never reported to the IRS.

Procedure

Interest Rates Unchanged for Third Quarter of 2021: In Rev. Rul. 2021-10, the IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2021, beginning July 1, 2021. The interest rates, which are the same as they were for the second quarter of 2021, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, and 5 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent.

Taxpayer Penalized for Failing to Account for Sales Reported to Him on Form 1099-K: In Legoski v. Comm'r, T.C. Summary 2021-15, the Tax Court held that a taxpayer, who purchased items from third parties and then sold them online on Amazon, and received the sales proceeds through Amazon, was taxable on the Amazon payments that were reported to him on Form 1099-K, Payment Card and Third Party Network Transactions. Because the taxpayer failed to investigate the proper tax treatment of such drop-shipping activities or maintain any documentation of his activities, the court concluded he was liable for the accuracy-related penalty assessed by the IRS.

IRS Must Release Levies on FEMA COVID-19 Funeral Assistance Funds: In SBSE-05-0421-0031, the IRS issued temporary guidance on levy actions involving FEMA COVID-19 funeral assistance funds. When a taxpayer indicates that a levy has attached to FEMA COVID-19 Funeral Assistance funds, IRS employees must request documentation to verify the date and amount of funds received and, when the taxpayer provides sufficient documentation that shows a levy attached to an account containing FEMA Funeral Assistance funds deposited within the previous eight weeks, the employees must release the levy on the FEMA funds.

IRS Failure to Show It Issued Deficiency Notice Precludes Dismissal of Refund Claim: In Jolly v. U.S., 2021 PTC 144 (Fed. Cl. 2021), the Court of Federal Claims denied the government's attempt to dismiss a taxpayer's claims relating to allegations that the IRS incorrectly and without notice levied taxes on her for 2016 and 2017 and erred in applying her 2018 and 2019 refunds to a balance due for 2017. In reaching its decision, the court found that the government failed to demonstrate that the IRS issued a notice of deficiency to the taxpayer for the 2017 tax assessment.

Qualified Opportunity Zones

Qualified Opportunity Zone Boundaries Are Unaffected by 2020 Census: In Announcement 2021-10, the IRS responded to questions from the public on the effect, if any, of the 2020 decennial census on boundaries of qualified opportunity zones (each, a QOZ) listed in Notice 2018-48 or Notice 2019-42 (each, a Designated QOZ). The IRS confirmed that the boundaries of the Designated QOZs were established at the time they were designated and are not subject to change.

Tax Accounting

Taxpayer Must Capitalize Payments Relating to Promotional Program: In TAM 202121009, the National Office advised that a taxpayer's payments to a company that finances purchases of the taxpayer's products, in order to shift the cost of a below-market interest rate promotional program from the finance company to the taxpayer, are not deductible under Code Sec. 162 as sales and marketing expenses. According to the National Office, the payments are made to acquire an intangible debt instrument and therefore must be capitalized under Reg. Sec. 1.263(a)-4(b)(1)(i) and Reg. Sec. 1.263(a)-4(c)(1).

Tax-Exempt Organizations

Former State Senator Was a Disqualified Person with Respect to Nonprofit: In Fumo v. Comm'r, T.C. Memo. 2021-61, the Tax Court held that a former Pennsylvania state senator, who was convicted of mail and wire fraud, was a "disqualified person" with respect to a nonprofit that he helped to organize because he was in a position to exercise substantial influence over the organization's affairs. However, the court denied an IRS motion for summary judgment on the question of whether the taxpayer received "excess benefits" from the nonprofit during 2002-2004, saying it saw nothing to be gained by addressing that question now.

May 2021

Accounting

IRS Issues May 2021 Applicable Federal Rates: In Rev. Rul. 2021-8, the IRS provides various prescribed rates for federal income tax purposes for May 2021, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by Code Sec. 1274.

Bankruptcy

Circumventing IRS to Just "Get-by Financially" Precludes Discharge of Tax Debts: In Tomberlin v. Multibank 2009-1 CML-ADM Venture, LLC, 2021 PTC 129 (11th Cir. 2021), the Eleventh Circuit declined to reverse an order of a bankruptcy court, which was affirmed by a district court, which found that a taxpayer was not entitled to a discharge of his tax debts under 11 U.S.C. Section 727 after he admitted that he intended to hinder or delay payment to the IRS when he channeled his personal income into a corporate account. The court rejected his argument that he lacked the requisite intent because his intent was just to "get-by financially" and was not the type of intent Congress considered so abusive that it merited denial of a discharge.

Deductions

Former CPA Can't Deduct Home Office or Legal Expenses: In Bailey v. Comm'r, T.C. Memo. 2021-55, the Tax Court held that a former CPA, who had his license revoked, failed to show that Code Sec. 280A(a), which bars deductions for a home used by the taxpayer as a residence during the tax year, did not apply to home office expenses he deducted on his tax return. The court also held that the taxpayer could not deduct legal fees relating to an unsuccessful malpractice suit the taxpayer began against his attorney and an expert witness, who had assisted him in an earlier unsuccessful district court case relating to an income tax refund, because the legal fees were nondeductible personal expenses.

Estates, Gifts, and Trusts

Chief Counsel Addresses Numerous Trust and Gift Tax Issues: In CCA 202118008, the Office of Chief Counsel addressed several issues relating to an exam of a taxpayer's Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return, including various trust-related issues, as well as issues relating to trust property treated as qualified terminable interest property. Specifically, the Chief Counsel advised that: (1) the commutation of a trust for which an election under Code Sec. 2056(b)(7) is effective is a disposition of the surviving spouse's qualifying income interest that is subject to Code Sec. 2519; (2) the distribution of all of the trust property to the surviving spouse constitutes a transfer of the remainder interest and a gift by the remainder beneficiaries under Code Sec. 2511; (3) the commutation of the trust and the distribution of all of the trust property to the surviving spouse are separate gift transfers by separate donors, the surviving spouse and the remainder beneficiaries, that do not offset each other; (4) the value of the surviving spouse's Code Sec. 2519 gift to the remainder beneficiaries is the fair market value of all of the interests in the trust less the present value of the qualifying income interest on the date of disposition (as determined under Code Sec. 7520); and (5) the value of the remainder beneficiaries' gifts under Code Sec. 2511 to the surviving spouse is the value of their remainder interest in the trust.

Income

Taxpayer Can't Reduce 2016 Social Security Income for Amounts Repaid in 2020: In Fletcher v. Comm'r, T.C. Summary 2021-9, the Tax Court held that social security disability benefits paid to a taxpayer in 2016, which the taxpayer had to subsequently repay in 2020, were still includible in the taxpayer's 2016 income. The taxpayer's repayment in 2020 of social security benefits received in 2016, the court said, does not affect her 2016 tax liability.

Installment Sales

Monetized Installment Sale Transactions Scrutinized: In CCA 202118016, the Office of Chief Counsel analyzed monetized installment sale transactions. According to the Chief Counsel's Office, because the transactions involve multiple promoters/sub-promoters, there can be variations in the way transactions are structured and, as a result, variations in the types of issues that can emerge.

Procedure

Bank Is Not Required to Surrender Amounts Deposited after IRS Levy: In CCA 202118010, the Office of Chief Counsel was asked whether it is the date, or the specific time, that matters when determining whether a bank failed to honor an IRS levy and whether a bank must surrender amounts in a taxpayer's account that the taxpayer deposited on the same day on which a levy is made, but at a time after the levy was made. The Chief Counsel's Office responded that, a bank is not required to surrender amounts in a taxpayer's account that are deposited on the same day on which the levy is made, but at a time after the levy was made.

April 2021

Accounting

IRS Issues April 2021 Applicable Federal Rates: In Rev. Rul. 2021-07, the IRS provides various prescribed rates for federal income tax purposes for April 2021, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by Code Sec. 1274.

Chief Counsel Analyzes Costs Appropriately Capitalized to Inventory: In CCA 20214019, the Office of Chief Counsel concluded that, where a taxpayer has inventories comprised solely of goods that are purchased and resold by the taxpayer and is not applying Code Sec. 263A or Code Sec. 471(c) in determining the cost of its inventory, the taxpayer may only capitalize to goods in its inventory the invoice price of the resale goods (less certain trade or other discounts) and the transportation or other necessary charges incurred in acquiring possession of the goods. According to the Chief Counsel's Office, all other amounts incurred by the taxpayer are not considered to be part of the "cost" of the merchandise under Reg. Sec. 1.471-3(b) and, as such, these amounts are not permissibly capitalizable, but may instead be deducted as period costs assuming that such costs have been incurred under Code Sec. 461 and are otherwise permissibly deductible.

Alternative Minimum Tax

Couple Cannot Deduct Attorney's Fees for AMT Purposes: In Colton v. Comm'r, T.C. Memo. 2021-44, the Tax Court held that a married couple was liable for $3,003 of alternative minimum tax (AMT) for their 2016 tax year. The AMT assessment resulted because the couple claimed a deduction for attorney's fees incurred in connection with litigation and such expenses are not deductible for AMT purposes.

Bankruptcy

Protections Accorded Exempt Property Do Not Prevail Over Government's Right: In In re Wood, 2021 PTC 99 (4th Cir. 2021), the Fourth Circuit held that, because it ruled in Copley v. U.S., 2020 PTC 146 (4th Cir. 2020), that the Code accords a special priority to the Treasury's right of setoff as against a bankrupt taxpayer's right of exemption, the protections typically accorded properly exempted property under 11 U.S.C. Section 522(c) do not prevail over the government's Code Sec. 6402(d) right to offset mutual debts. Furthermore, the court said, although the government exercised this right too hastily, before first requesting relief from the bankruptcy court's automatic stay, it could see no reason to abridge the government's right under 11 U.S.C. Section 362(d) to file a motion seeking the stay's annulment and the Fourth Circuit therefore remanded the case for further proceedings in accordance with its decision.

Corporations

Tax Court Revises Original Complex Media Decision: The Tax Court issued a revised decision in Complex Media Inc. v. Comm'r, T.C. Memo. 2021-14, which deals with the step-transaction doctrine and was originally issued in February. The updated decision reflects a revision on the last line of page 74, where the word "limit" is revised to "limn".

Credits

IRS Publishes 2021 Adjustment Factors for Certain Energy-Related Credits: In the April 26, 2021, Federal Register, the IRS published the inflation adjustment factors and reference prices for calendar year 2021 for certain energy-related credits. The adjustment factors are used to calculate the credit for renewable electricity production, refined coal production, Indian coal production, renewable electricity production, and refined coal production as required by Code Sec. 45.

Deductions

Clothing Designer Can't Take Research Credit for Process of Designing Garments: In Max v. Comm'r, T.C. Memo. 2021-37, the Tax Court held that a successful clothing designer and businessman was not entitled to credits under Code Sec. 41 for increasing research activities for 2011 and 2012. According to the court, the activities in the design process for which the credit was taken - such as taking hand-drawn sketches and using knowledge that is common to people in the field of clothing design to turn such sketches into garments - do not constitute qualified research and, thus, the expenses do not qualify for the research credit.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-22, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-27, 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

IRS Provides Penalty Relief for Failure to Deposit Certain Employment Taxes: In Notice 2021-24, the IRS issued guidance supplementing previously issued guidance in Notice 2020-22, which provides for penalty relief under Code Sec. 6656 for an employer's failure to timely deposit employment taxes with the IRS. The notice extends the penalty relief provided in Notice 2020-22 to apply to deposits of employment taxes reduced in anticipation of the following credits: (1) paid sick and family leave credits, as enacted under the Families First Coronavirus Response Act and subsequently amended, for the period beginning January 1, 2021, and ending March 31, 2021; (2) paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, as added by the American Rescue Plan Act of 2021 (ARPA), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021; (3) the employee retention credit, enacted under the Coronavirus Aid, Relief, and Economic Security Act and subsequently amended, with respect to the period beginning January 1, 2021, and ending June 30, 2021; (4) the employee retention credit under Code Sec. 3134, as added by ARPA, with respect to qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and (5) the credit for Continuation Coverage Premium Assistance under Code Sec. 6432, as added by ARPA, for COBRA continuation coverage premiums not paid by assistance eligible individuals for such coverage during the period beginning April 1, 2021, and ending September 30, 2021.

Empowerment Zones

IRS Grants Empowerment Zone Extensions: In Rev. Proc. 2021-18, the IRS provides an automatic procedure for a state or local government in which an empowerment zone is located to extend the empowerment zone designation made under Code Sec. 1391(a). Specifically, the procedure (1) provides that a state or local government that nominated an empowerment zone is deemed to extend until December 31, 2025, the termination date designated by that state or local government in its empowerment zone nomination (designated termination date), as described in Code Sec. 1391(d)(1)(B), and (2) provides the procedure for such state or local government to decline this deemed extension of its designated termination date.

Foreign

Prop. Regs. Address Requirements for Foreign Investors in Qualified Opportunity Funds: In REG-121095-19, the IRS issued proposed qualified opportunity fund regulations that provide requirements that certain foreign persons and certain foreign-owned partnerships must meet in order to elect the federal income tax benefits provided by Code Sec. 1400Z - 2. The proposed regulations (1) allow, under certain circumstances, for the reduction or elimination of withholding under Code Secs. 1445, 1446(a), or 1446(f) on transfers that give rise to gain that is deferred under Code Sec. 1400Z-2(a), and (2) provide guidance regarding the 24-month extension of the working capital safe harbor in the case of federally declared disasters.

Foreign Bank Account Reports

Filers Who Miss April 15 FBAR Deadline Will Get Automatic Extension to October 15: In IR-2021-83, the IRS reminds U.S. citizens, resident aliens, and any domestic legal entity that the deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is still April 15, 2021, and that the extension of the federal income tax filing due date and other tax deadlines for individuals to May 17, 2021, does not affect the FBAR requirement. However, the IRS goes on to say that filers missing the April 15 deadline will receive an automatic extension until October 15, 2021, to file the FBAR and such filers do not need to request the extension.

Gross Income

Receipt of Bitcoin Cash Results in Gross Income: In CCA 202114020, the Office of Chief Counsel advised that a taxpayer who received Bitcoin Cash as a result of an August 1, 2017, Bitcoin hard fork, which occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a permanent diversion from the legacy or existing distributed ledger, has gross income because the taxpayer had an accession to wealth under Code Sec. 61. According to the Chief Counsel's Office, the date of receipt and the fair market value to be included in income are dependent on when the taxpayer obtained dominion and control over the Bitcoin Cash.

Innocent Spouse Relief

Failure to Face Financial Problems Precludes Innocent Spouse Relief: In Sleeth v. Comm'r, 2021 PTC 74 (11th Cir. 2021), the Eleventh Circuit held that the Tax Court did not abuse its discretion when it denied a taxpayer's request for innocent spouse relief with respect to unpaid taxes on joint tax returns filed for 2008 - 2010. The court said it was appropriate for the Tax Court to deny relief after concluding that the taxpayer's unwillingness to confront the financial problems she and her husband faced weighed strongly against relief.

Penalties

Taxpayer Who Failed to Review Her Tax Return Can't Escape Accuracy-Related Penalty: In Walton v. Comm'r, T.C. Memo. 2021-40, the Tax Court held that an independent contractor who failed to include almost $170,000 of nonemployee compensation in her 2015 federal income tax return did not qualify for the reasonable cause exception to the accuracy-related penalty where she did not review her tax return before its filing. The court concluded that she failed to do the bare minimum or expend reasonable effort in ensuring that all income was included on her tax return.

Taxpayer Hit With 50 Percent Penalty for Failing to File FBAR: In Kimble v. U.S., 2021 PTC 75 (Fed. Cir. 2021), the Federal Circuit affirmed the Federal Claims Court and held that a taxpayer's conduct in failing to file a Foreign Bank Account Report (FBAR) was willful and that the IRS did not abuse its discretion in assessing a 50 percent penalty on the failure to file such report. In rejecting her arguments that she should not be liable for the penalty because she was not an active manager of the account and was not the sole beneficiary, the court said such arguments were irrelevant.

Race Car Driver Beats Substantial Underpayment Penalty Due to IRS Mistake: In Martin v. Comm'r, T.C. Memo. 2021-35, the Tax Court held that a successful race car driver and his wife were not entitled to many of the deductions they took because they failed to substantiate the deductions. However, while the court upheld the assessment of penalties under Code Sec. 6651(a) for the couple's late filing of their 2009 tax return, it concluded that the couple did not owe the 20 percent penalty for substantial understatement of income tax for both 2009 and 2010 because the IRS failed to show that the penalty had been personally approved in writing by the supervisor of the IRS agent assessing the penalty.

Procedure

2021 Annual Inflation Procedure Updated to Reflect American Rescue Plan Act Changes: In Rev. Proc. 2021-23, the IRS modified and superseded portions of the 2021 inflation revenue procedure, Rev. Proc. 2020-45, to reflect statutory amendments made by the American Rescue Plan Act of 2021. Specifically, the new procedure modifies inflation adjusted amounts for the child tax credit, the earned income credit, and the applicable percentage table for Code Sec. 36B. Rev. Proc. 2021-23.

Public Comments Requested on 2021-2022 Priority Guidance Plan: In Notice 2021-28, the IRS asked for the public to submit recommendations for items to be included on its July 1, 2021- June 30, 2022 Priority Guidance Plan. The IRS uses such Plans 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.

IRS Did Not Abuse Its Discretion in Rejecting Installment Agreement: In American Limousines, Inc. v. Comm'r, T.C. Memo. 2021-36, the Tax Court held that the IRS could proceed with collecting a corporation's unpaid employment taxes by levy. The court concluded that (1) it was not an abuse of discretion for IRS Appeals to reject an installment agreement relating to those unpaid taxes where it appeared that the corporation could not fund the agreement, and (2) it was not an abuse of discretion for Appeals to refuse to classify the corporation's account as currently not collectible because, even though the corporation did not have sufficient funds to make installment payments, it had assets that could be liquidated to make payments on its past-due taxes.

IRS Releases Median Gross Income Figures for Bond Issuers: In Rev. Proc. 2021-19, the IRS issued a revenue procedure listing the area median gross income figures for use 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). Additionally, the IRS stated that it has decided to publish this revenue procedure as permanent guidance and to cease publishing annual revenue procedures providing income figures for purposes of computing the income requirements of Code Sec. 143(f).

IRS Issues Purchase Price Amounts for Residences for Bond Issuers: In Rev. Proc. 2021-17, the IRS provides issuers of qualified mortgage bonds, as defined in Code Sec. 143(a), and issuers of mortgage credit certificates, as defined in Code Sec. 25(c), with (1) the nationwide average purchase price for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.

S Corporations

S Corporation Only Slightly Overpaid Rent for Building Leased from Shareholders: In Plentywood Drug, Inc. v. Comm'r, T.C. Memo. 2021-45, the Tax Court held that an S corporation renting space in a building owned by its four shareholders was paying only slightly more rent in two years of the three years at issue, thus making some of that rent a nondeductible dividend. The court rejected the IRS's assessment of penalties, however, because the S corporation showed that the underpayments were due to reasonable cause and that the corporation acted in good faith.

Tax Shelters

Deductions and Credits Denied in Solar Power Tax Shelter Scheme: In Olsen v. Comm'r, T.C. Memo. 2021-41, the Tax Court held that investors in a solar power tax shelter scheme were not entitled to depreciation deductions and tax credits attributable to light-concentrating lenses, which were supposedly going to be used as components of a system to generate electricity, because the solar power project never got past the research and development stage and the lenses were never placed in service to produce energy. However, because the IRS did not secure timely supervisory approval for the accuracy-related penalties assessed on the taxpayers, the court did not uphold those penalties.

March 2021

Accounting

IRS Issues April 2021 Applicable Federal Rates: In Rev. Rul. 2021-07, the IRS provides various prescribed rates for federal income tax purposes for April 2021, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by Code Sec. 1274.

IRS Releases March 2021 Applicable Federal Rates: In Rev. Rul. 2021-5, the IRS issued the applicable federal rates for March 2021 for purposes of Code Sec. 1274(d), Code Sec. 1288(b) and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) and the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520.

Deductions

Taxpayer's Roping of Cows and Steers Was Not an Activity Engaged in for Profit: In Gallegos v. Comm'r, T.C. Memo. 2021-25, the Tax Court held that an insurance businessman could not offset expenses from team-roping, an activity involving the roping cows or steers, against his profitable insurance business. The court examined the nine factors in Reg. Sec. 1.183-2(a) for determining whether a taxpayer intends to make a profit from an activity and concluded that the taxpayer did not engage in team roping with the intent to earn a profit and, for that reason, the related expenses were nondeductible.

Lawyer's Failure to Document Charitable Contributions Precludes Deductions: In Chiarelli v. Comm'r, T.C. Memo. 2021-27, the Tax Court held that a taxpayer was not entitled to charitable contribution deductions taken on his tax returns because the Forms 8283, Noncash Charitable Contributions, submitted with his returns were almost entirely incomplete and lacked the necessary signatures. The court also upheld the accuracy-related penalties assessed by the IRS after noting that the taxpayer, as the return preparer and as an attorney, could not reasonably claim that his reliance on an appraiser constituted reasonable cause for the omissions on his returns.

Foreign

IRS Issues 2021 Section 911 Housing Cost Adjustments: In Notice 2021-18, the IRS issued the annual Code Sec. 911 adjustments, which determine housing cost amounts eligible for exclusion or deduction in 2021. The notice is effective for tax years beginning on or after January 1, 2021; however, taxpayers may apply the 2021 adjusted housing limitations contained in Section 3 of the notice to tax years beginning in 2020.

Procedure

Tax Court Won't Review Preliminary Award Recommendation by WBO: In McCrory v. Comm'r, 156 T.C. No. 6 (2021), the Tax Court held that a preliminary whistleblower award recommendation under Code Sec. 7623(a) by the IRS Whistleblower Office (WBO) did not constitute a "determination" within the meaning of Code Sec. 7623(b)(4). Thus, the court rejected the taxpayer's request for a review of the preliminary award recommendation and granted the IRS's motion to dismiss for lack of jurisdiction.

Tax Court Holds That Taxpayer Can Withdraw Sec. 6404(h) Petition: In Mainstay Business Solutions v. Comm'r, 156 T.C. No. 7 (2021), the Tax Court held that it had discretion to allow a taxpayer, who had petitioned the Tax Court pursuant to Code Sec. 6404(h) to review the IRS's failure to abate interest, to withdraw the petition. In ordering the petition withdrawn and the case dismissed, the Tax Court cited its decisions in Jacobson v. Comm'r, 148 T.C. 68 (2017); Davidson v. Comm'r, 144 T.C. 273 (2015); and Wagner v. Comm'r, 118 T.C. 330 (2002).

Company Can't Contest Liability Where It Had a Prior Opportunity to Challenge It: In Patrick's Payroll Services, Inc. v. Comm'r, 2021 PTC 57 (6th Cir. 2021), the Sixth Circuit affirmed the Tax Court and held that a payroll services company did not have the right to challenge its tax liability under Code Sec. 6330 because that provision allows taxpayers to challenge the existence or amount of their tax liability only if they did not receive any statutory notice of deficiency for such liability or did not otherwise have an opportunity to dispute such tax liability and neither situation applied to the taxpayer. The court rejected the taxpayer's argument that it was entitled to contest its liability even though it had a prior opportunity to dispute its liability because Code Sec. 6330(c)(2)(B) should be read disjunctively to allow taxpayers to dispute liability anytime the taxes in issue are not the type of taxes for which deficiency notices are issued.

IRS Issues Second Quarter Interest Rates: In Rev. Rul. 2021-6, the IRS issued the rates for interest on tax overpayments and underpayments for the second calendar quarter of 2021, beginning April 1, 2021. The interest rates will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and .5 percent on the portion of corporate overpayments exceeding $10,000.

Submission of Whistleblower Information Does Not Create a Contract with the IRS: In Meidinger v. U.S., 2021 PTC 60 (Fed. Cir. 2021), the Federal Circuit affirmed the Court of Federal Claims and held that a taxpayer's submission of whistleblower information does not create a contract with the IRS. As a result, the court held that the IRS did not breach its contractual duties and responsibilities to collect taxes and do an investigation based on information submitted by the taxpayer and thus was not liable for damages for breach of contract.

Court Allows Service to Taxpayer by Email and Text Message: In U.S. v. Fleming, 2021 PTC 69 (S.D. Ill. 2021), a district court granted the government's motion to allow alternate service to a taxpayer, who has substantial unpaid federal tax liabilities and who the government alleged had been evading service of court documents. As a result, the court agreed that the government could serve the taxpayer by email and text message.

Retirement Plans

Separation from Service Exception to Penalty Doesn't Apply to IRA Distribution: In Catania v. Comm'r, T.C. Memo. 2021-33, the Tax Court held that the Code Sec. 72(t)(2)(A)(v) separation from service exception to the 10 percent additional tax on early retirement plan distributions did not apply to the taxpayer. The court noted that, although the taxpayer had a Code Sec. 401(k) plan when he worked for Home Depot and was 55 years old when he retired from Home Depot, he transferred the funds from that account to a traditional IRA and, because he withdrew the distribution from a traditional IRA at age 57, Code Sec. 72(t)(2)(A)(v) did not apply.

February 2021

Accounting

IRS Issues February 2021 Applicable Federal Rates: In Rev. Rul. 2021-4, the IRS issued a ruling containing the applicable federal rates for February 2021 for purposes of Code Sec. 1274(d), Code Sec. 1288(b), and Code Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Code Sec. 42(b)(1) for buildings placed in service during the current month, the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Code Sec. 7520, and the deemed rate of return for transfers made during calendar year 2021 to pooled income funds described in Code Sec. 642(c)(5) that have been in existence for less than three tax years immediately preceding the tax year in which the transfer was made.

Bankruptcy

Debtor Allowed to Change Applicable Currency Rate In Determining Creditor's Claim: In U.S. v. EB Holdings II, Inc., 2021 PTC 44 (D. Nev. 2021), a district court (1) affirmed a bankruptcy court's order allowing a debtor to change the applicable currency rate used to determine a creditor's loan claim where the change in exchange rates was based on a Wall Street Journal database, and (2) concluded that the bankruptcy court did not abuse its discretion in allowing the change in exchange rates because its factual findings were neither illogical, implausible, nor without support in inferences drawn from the facts in the record. In response to the IRS's questioning of the propriety of relying on the Wall Street Journal's published historical currency exchange rates and whether the bankruptcy court looked at all the relevant evidence, the district court stated that bankruptcy courts do not have to show their work like high school algebra students when calculating allowed claims, provided claims' inputs are part of the record and the conclusions are correct.

Compensation

2021 Covered Compensation Tables Released: In Rev. Rul. 2021-3, the IRS provides tables of covered compensation under Code Sec. 401(l)(5)(E) for the 2021 plan year. Code Sec. 401(l)(5)(E)(i) defines "covered compensation" with respect to an employee as the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

Credits

No Research Tax Credit Allowed for Costs Incurred by Shipbuilding Subsidiary: In Little Sandy Coal Company, Inc. v. Comm'r, T.C. Memo. 2021-15, the Tax Court held that, in determining the tax credit for increasing research activities, the requirement in Code Sec. 41(d)(1)(C) and Reg. Sec. 1.41-4(a)(6) that at least 80 percent of a taxpayer's research must constitute elements of a process of experimentation applies to activities and not to physical components of the product being developed or improved. Consequently, the court said, the requirement is not satisfied simply because at least 80 percent of the product's elements differ from those of products the taxpayer previously developed.

IRS Notice Addresses Section 45 and Section 48 Tax Credit Projects: In Notice 2021-5, the IRS clarified and modified prior notices addressing the beginning of construction requirement for qualified facility and energy property projects under Code Sec. 45 and Code Sec. 48, respectively. The notice provides that a qualified facility or energy property construction project that is an Offshore Project or a Federal Land Project (as defined in the notice) satisfies the Continuity Safe Harbor (as defined in the notice) if a taxpayer places the qualified facility or energy property that is the subject of the project into service within 10 calendar years after the calendar year during which construction of the project began.

Temporary Relief for Certain Low-Income Housing Projects Extended: In Notice 2021-12, the IRS extended the temporary relief from certain requirements under Code Sec. 42 for qualified low-income housing projects and under Code Sec. 142(d) and Code Sec. 147(d) for qualified residential rental projects that was provided in Notice 2020-53. In addition, the IRS is also providing relief for additional Code Sec. 42 requirements not previously addressed in Notice 2020-53.

Deductions

Farming Activity Was Not Engaged in for Profit; Loss Deductions Denied: In Whatley v. Comm'r, T.C. Memo. 2021-11, the Tax Court held that a banker, who worked about 70 hours a week, and his wife could not deduct losses incurred on their farm because it was not an activity engaged in for profit. The court also held that, because the couple could not substantiate that interest paid on their main residence was acquisition indebtedness, such interest was also not deductible.

IRS Extends Safe Harbor for Certain Mortgage Instruments: In Rev. Proc. 2021-12, in light of the continuing COVID-19 pandemic, the IRS is extending the expiration dates relevant to the application of the safe harbors in Rev. Proc. 2020-26, which protect the federal income tax status of real estate mortgage investment conduits and investment trusts that provide certain forbearances of mortgage loans they hold or that acquire mortgage loans that have received certain forbearances. Additionally, the IRS is extending the expiration dates relevant to the application of the safe harbors in Rev. Proc. 2020-34, which protect the federal income tax status of certain investment trusts whose trustees request or agree to certain forbearances of mortgage loans, make certain modifications of real property leases, or accept certain cash contributions.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-16, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-9, 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).

Excise Taxes

Final Regs on Air Transportation Excise Taxes Issued: In T.D. 9948, the IRS issued final regulations relating to the excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the final regulations relate to the exemption for amounts paid for certain aircraft management services and also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published guidance.

Exclusions from Income

Settlement Payment from Employer Is Not Excludible from Income: In Stassi v. Comm'r, T.C. Summary 2021-5, the Tax Court held that a taxpayer could not exclude from income under Code Sec. 104(a)(2) a $69,650 settlement payment she received from her employer. The court noted that while the taxpayer provided evidence that she suffered from shingles, she failed to establish that the occurrence of her shingles was related to or caused by her employment and, additionally, the settlement payment did not state that the payment was in lieu of damages for physical injury or physical sickness.

Gross Income

Settlement Payment for Legal Malpractice Isn't Excludible from Gross Income: In Blum v. Comm'r, T.C. Memo. 2021-18, the Tax Court held that a $125,000 payment in settlement of a lawsuit a taxpayer had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit, could not be excluded from income as damages received on account of personal physical injuries or physical sickness under Code Sec. 104(a)(2). In reaching its decision, the court pointed out that the settlement agreement clearly states that the amount paid was not directly linked to personal injuries suffered by the taxpayer but was instead compensation for legal malpractice.

Repayment of Disability Benefits Doesn't Reduce Taxpayer's Prior Year Income: In Hairston v. Comm'r, T.C. Summary 2021-2, the Tax Court held that a taxpayer was treated as having received $35,999 in social security disability benefits in 2014 as a result of receiving $28,276 in social security disability payments and $7,723 in workers compensation offset attributable to workers' compensation he received in 2013. The court also found that the taxpayer's gross income for 2014 was not reduced where, beginning in 2017, he was required to repay social security disability benefits as a result of his receipt in 2016 of workers' compensation payments retroactive to 2014.

Income

Inventor Not Entitled to Capital Gain Treatment Transfer of Patent Rights: In Filler v. Comm'r, T.C. Memo. 2021-6, the Tax Court held that a taxpayer, who is a highly educated doctor, lawyer, professor, and inventor, was not entitled to Code Sec. 1235 treatment on his receipt of $100,000 of income that related to the transfer of his rights in a patent, nor was he entitled to long-term capital gain treatment because he did not satisfy the holding period requirement and failed to prove that he had a "sale or exchange." In addition, the court found that he was (1) liable for self-employment tax on the $100,000; (2) failed to establish entitlement to a deduction for a loss originating in 2012, and thus was not entitled to a net operating loss carryover deduction claimed for tax year 2014; and (3) was liable for a penalty under Code Sec. 6662(a) for substantial understatement of income tax.

Information Reporting

IRS Notifies Lenders of Forms 1099-MISC Requirements Relating to Covid Relief: In Announcement 2021-2, the IRS notified lenders who have filed or furnished Forms 1099-MISC, Miscellaneous Information, reporting certain payments on loans subsidized by the Administrator of the U.S. Small Business Administration (SBA) as income of the borrower, that they must file and furnish corrected Forms 1099-MISC that exclude these subsidized loan payments. According to the IRS, this accords with Section 278(e)(1) of the COVID-related Tax Relief Act, which provides that these payments are not includible in the gross income of the borrowers, and Notice 2021-6, waiving Form 1099-MISC reporting requirements for these payments.

Innocent Spouse Relief

Court Rejects Innocent Spouse Relief Request: In Rogers v. Comm'r, T.C. Memo. 2021-20, the Tax Court held that a taxpayer was not entitled to innocent spouse relief with respect to taxes owed for joint returns filed with her ex-husband prior to their divorce. The court found that the record did not support the taxpayer's claims of spousal abuse; nor did it support her claims that she was not involved in handling the household expenses or in preparing the joint tax returns for the years at issue.

Partnerships

Partnership's Cancelled Debt Was Really a Partner Contribution: In Hohl v. Comm'r, T.C. Memo. 2021-5, the Tax Court held that a partnership, and thus its partners, received cancellation of indebtedness income from the discharge of loans made to the partnership which the partners tried, but failed, to recharacterize as partner contributions. The court rejected an argument from one of the partners that he was insolvent and thus the cancellation of indebtedness was not includible in his income.

IRS Waives Requirement to File Certain Information Returns: In Notice 2021-6, the IRS waived the requirement to file certain information returns or furnish certain payee statements otherwise required pursuant to Section 279 of the COVID-related Tax Relief Act of 2020 (COVID Relief Act), enacted as part of the Consolidated Appropriations Act, 2021 (Pub. L. 116-260). Specifically, the IRS (1) waived the requirement to file certain information returns or furnish certain payee statements otherwise required with respect to amounts excluded from gross income by reason of the Paycheck Protection Program in Section 7A(i) of the Small Business Act or Sections 276(b), 277, or 278 of the COVID Relief Act, and (2) obsoleted Announcement 2020-12.

Paycheck Protection Program

SBA Issues New Versions of PPP First Draw and Second Draw Borrower Applications: On February 17, the Small Business Administration (SBA) released a revised version of the Paycheck Protection Program (PPP) Borrower Application (Borrower Application - Updated Round One, Revised 2021-02-17). The SBA also issued a revised version of the PPP Second Draw Borrower Application (Borrower Application Second Draw, Revised 2021-02-17).

Procedure

IRS Notice Sent to Sole Proprietorship, Rather Than Individual Owner, Is Valid: In BM Construction v. Comm'r, T.C. Memo. 2021-13, the Tax Court held that the IRS timely mailed a notice of intent to levy to taxpayer's sole proprietorship in order to collect amounts owed for backup withholding, additions to tax, and associated interest. The Tax Court stated that, while it has not previously addressed the question of whether an IRS notice mailed to a sole proprietorship, rather than to the individual owner, is valid, the same rule applies as would apply to a single member limited liability company and its owner and, thus, a notice mailed to a sole proprietorship, rather than the individual owner, is valid.

IRS Can Collect Restitution-Based Assessment Ordered by Court: In Reynolds, T.C. Memo. 2021-10, the Tax Court held that a taxpayer, who developed strategies to use corporations to conceal assets and evade income tax, was liable for restitution-based assessments (RBAs) arising from a federal district court order that required him to pay criminal restitution. The court cited Carpenter, 152 T.C. 12 (2019) in rejecting the taxpayer's argument that the IRS lacked the legal authority to take administrative collection action to collect RBAs.

IRS Provides Underpayment of Estimated Tax Relief Relating to Sec. 461(l) Provision: In Notice 2021-8, the IRS waived the addition to tax under Code Sec. 6654 for underpayment of estimated income tax by individual taxpayers, where the underpayment is attributable to the amendment to Code Sec. 461(l)(1)(B) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The relief provided does not waive the addition to tax under Code Sec. 6654 that is attributable to other CARES Act provisions, including the CARES Act amendment to Code Sec. 172(b).

Qualified Opportunity Funds

IRS Extends Relief under Sec. 7508A for Qualified Opportunity Funds: In Notice 2021-10, the IRS issued a notice providing additional relief under Code Sec. 7508A for qualified opportunity funds (QOFs) and their investors in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The notice also provides additional relief pursuant to Code Sec. 1400Z-2(f)(3) and the regulations under Code Sec. 1400Z-2 and extends the relief for QOFs and their investors provided by Notice 2020-39.

Retirement Plans

Section 72(t) Penalty Tax Is Not Subject to Supervisory Approval: In Grajales v. Comm'r, 156 T.C. No. 3 (2020), the Tax Court held that the Code Sec. 72(t) exaction is a "tax" rather than a "penalty," "addition to tax," or "additional amount" and thus is not subject to the written supervisory approval requirement of Code Sec. 6751(b). The court also held that a taxpayer, who took early distributions from her retirement plan and did not report the amounts as income, was liable for the 10 percent additional tax under Code Sec. 72(t).

Tax-Exempt Organizations

Final Regs Address Excess Tax-Exempt Organization Executive Compensation: In T.D. 9938, the IRS issued final regulations under Code Sec. 4960, which imposes an excise tax on remuneration in excess of $1,000,000 and any excess parachute payment paid by an applicable tax-exempt organization to any covered employee. Until January 15, 2021, taxpayers may rely on the guidance provided in Notice 2019-09 in its entirety or on the proposed regulations in their entirety; alternatively, taxpayers may choose to apply these final regulations to tax years beginning after December 31, 2017, and on or before December 31, 2021, provided they apply the final regulations in their entirety and in a consistent manner.

January 2021

Accounting

Top 10 Tax Developments of 2020: The top tax developments of 2020 generally fell into two categories: (1) legislation, executive action, and IRS guidance providing tax relief for individuals and businesses affected by the ongoing COVID-19 pandemic.; and (2) the IRS's ongoing effort to finish implementing the changes brought on by the Tax Cuts and Jobs Act of 2017 (TCJA). Read now.

Credits

Final Regs Provide Guidance on the Carbon Oxide Sequestration Credit: In T.D. 9944, the IRS issued final regulations that provide guidance regarding the credit for carbon oxide sequestration under Code Sec. 45Q. The final regulations affect persons who physically or contractually ensure the capture and disposal of qualified carbon oxide, use of qualified carbon oxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, or utilization of qualified carbon oxide in a manner that qualifies for the credit.

Continuity Safe Harbor for Offshore Project and Federal Land Projects Extended: In Notice 2021-5, the IRS amended prior notices in which it addressed the beginning of construction requirement for qualified facility and energy property projects under Code Sec. 45 and Code Sec. 48, respectively. Specifically, the notice provides that a qualified facility or energy property construction project that is an Offshore Project or a Federal Land Project satisfies a Continuity Safe Harbor (as defined in the notice) if a taxpayer places the qualified facility or energy property that is the subject of the project into service within 10 calendar years after the calendar year during which construction of the project began.

Deductions

Certain Residential Living Facilities Are Treated as Real Property Trades or Businesses: In Rev. Proc. 2021-9, the IRS provides a safe harbor, the rules of which apply to tax years beginning after December 31, 2017, that allows a trade or business that manages or operates a qualified residential living facility to be treated as a real property trade or business, solely for purposes of qualifying to make the election under Code Sec. 163(j)(7)(B) to be an electing real property trade or business for purposes of the limitation on the deduction of business interest. Taxpayers are not eligible to rely on the safe harbor if a principal purpose of an arrangement or transaction is to avoid Code Sec. 163(j) and its regulations and in a manner that is contrary to the purpose of the revenue procedure.

Recovery Period Criteria for Solar Property and Bonus Depreciation Addressed: In CCA 202053011, in response to a question regarding the recovery period requirement for purposes of determining if a solar energy system qualifies for the bonus depreciation deduction under Code Sec. 168(k), the Office of Chief Counsel observed that, pursuant to Code Sec. 168(k)(2)(A)(i)(I), one of the requirements to be eligible for bonus depreciation is that the property must have a recovery period of 20 years or less under Code Sec. 168. Accordingly, the Chief Counsel's Office advised that, if the solar energy system at issue is described in Code Sec. 48(a)(3)(A), it will have a five-year recovery period under Code Sec. 168(c) and would thus meet the 20-year-or-less recovery period requirement under Code Sec. 168(k)(2)(A)(i)(I) for purposes of qualifying for bonus depreciation.

Estates, Gifts, and Trusts

New User Fee Established for Estate Tax Closing Letters: In REG-114615-16, the IRS issued proposed regulations establishing a user fee for authorized persons who request the issuance of IRS Letter 627, also referred to as an estate tax closing letter. The IRS noted that, while it used to issue a closing letter for every estate tax return filed, for estate tax returns filed on or after June 1, 2015, the IRS changed its practice and now offers an estate tax closing letter only upon the request of an authorized person.

Partnerships

IRS Issues Final Regulations under Section 1061: In T.D. 9945, the IRS finalized the regulations under Code Sec. 1061 which characterize certain net long-term capital gains of a partner that holds one or more applicable partnership interests as short-term capital gains. The regulations (1) define an applicable partnership interest as an interest in a partnership that is transferred to or held by a taxpayer, directly or indirectly, in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business; (2) amend existing regulations on holding periods to clarify the holding period of a partner's interest in a partnership that includes in whole or in part an applicable partnership interest and/or a profits interest; and (3) affect taxpayers who directly or indirectly hold applicable partnership interests in partnerships and the passthrough entities through which the applicable partnership interest is held.

Procedure

Refund Claim Was Timely Based on Covid-related Guidance Extending Deadlines: In CCA 202053015, the Office of Chief Counsel advised that, while a taxpayer's 2016 refund claim on a delinquent return was originally due by April 15, 2020, Notice 2020-23 postponed the due date for such claim to July 15, 2020. Thus, when the taxpayer filed his refund claim in June of 2020, the claim was timely.

Extension Allowed for Filing 2019 Returns Doesn't Affect Refund Claims for 2019 Taxes: In CCA 202053013, the Office of Chief Counsel advised that, although Notice 2020-23 gives taxpayers until July 15, 2020, to file their 2019 returns, it does not affect the date on which any withheld tax or estimated tax for 2019 is deemed paid. Thus, if a taxpayer wants to claim a refund of estimated tax or withheld tax for 2019, the taxpayer cannot wait until July 17, 2023, to file a claim, but instead must file that refund claim on or before April 17, 2023.

Tax-Exempt Bonds

New Procedures Released for Issuers of Tax-Advantaged Bonds: In Rev. Proc. 2021-10, the IRS provides procedures for an issuer of tax-advantaged bonds (as defined in Reg. Sec. 1.150-1(b)) to request an administrative appeal to the IRS Independent Office of Appeals (Appeals) of a proposed adverse determination made by the office that is responsible for examinations of tax-advantaged bonds with respect to issues within the scope of the revenue procedure. No user fee applies to either a request for an appeal pursuant to the revenue procedure or a closing agreement resulting from the appeal and the revenue procedure modifies and supersedes Rev. Proc. 2006-40.

December 2020

Accounting

IRS Issues December 2020 Applicable Federal Rates: In Rev. Rul. 2020-26, the IRS issued a ruling which prescribes the applicable federal rates for December 2020. 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.

Credits

IRS Extends Deadline for Certain Employers Claiming Work Opportunity Credit: In Notice 2020-78, the IRS provides transition relief for certain employers claiming the Work Opportunity Tax Credit under Code Sec. 51. Specifically, the IRS is extending the 28-day deadline for employers to request certification from a designated local agency that an individual hired on or after January 1, 2018, and before January 1, 2021, is a member of the designated community resident targeted group or the qualified summer youth employee targeted group.

Premium Tax Credit is Unaffected by Suspension of Personal Exemption Deduction: In T.D. 9912, the IRS issued final regulations under Code Sec. 36B and Code Sec. 6011 which clarify that the Tax Cuts and Jobs Act of 2017 (TCJA) reduction of the Code Sec. 151 personal exemption deduction to zero for tax years beginning after December 31, 2017, and before January 1, 2026, does not affect an individual taxpayer's ability to claim the premium tax credit. In the preamble to the regulations, the IRS notes that the conference report to the TCJA states that the reduction of the personal exemption to zero should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction under Code Sec. 151.

IRS Releases Draft Form and Instruction for Qualified Sick and Family Leave Credits: The IRS has issued a draft Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, and related instructions, which self-employed individuals will use to calculate qualified sick and family leave credits under the Families First Coronavirus Response Act (FFCRA) for their 2020 tax returns. These credits are equivalent to the amount of paid sick or family leave the self-employed individual would be entitled to receive under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act, two separate provisions of the FFCRA, if the individual were an employee of an employer (other than himself or herself).

Deductions

Easement Contributions Are Deductible In Full: In Kumar v. Comm'r, T.C. Memo. 2020-159, the Tax Court held that partners in a partnership, which reported deductions of almost $5 million for the charitable donation of conservation easements to a qualified charitable organization, were entitled to the deductions as reported because the easement deeds did not violate the Code Sec. 170(h)(2)(C) perpetuity requirement and the easements were not valued so high as to create deficiencies. While noting that the facts of the case were odd compared to most conservation-easement cases, the court found that it was reasonable to rely, for purposes of valuing the easements, on recent property sales.

Exclusions from Income

Pilot Not Entitled to Foreign Earned Income Exclusion: In Cutting v. Comm'r, T.C. Memo. 2020-158, the Tax Court held that a pilot, who flew mostly international routes, was not entitled to the foreign earned income exclusion under Code Sec. 911(d)(1) because his tax home was in California and he was not a bona fide resident of a foreign country. The court also concluded that the taxpayer had to include in income a California state income tax refund because he had previously claimed a deduction on his federal income tax return for state income taxes paid to California.

Foreign

Financial Page Articles Involving Crackdown on FBARs Are Admissible in Trial: In U.S. v. Briguet, 2020 PTC 369 (S.D. N.Y. 2020), in a jury trial involving a taxpayer's failure to file a Form TD F 90-22.1 (Foreign Bank Account Report (FBAR)), a district court denied the taxpayer's motion to preclude the admission of 96 newspaper articles contained in the financial or business sections of the New York Times and Wall Street Journal, sections the taxpayer testified he read regularly, regarding the United States' crackdown on U.S. taxpayers with foreign bank accounts. Specifically, the court reserved decision on admitting articles published after the taxpayer's 2008 FBAR filing deadline and rejected the taxpayer's arguments that the newspaper articles were (1) inadmissible hearsay; (2) irrelevant insofar as the taxpayer had not admitted to reading the articles; and (3) unduly prejudicial.

IRS Finalizes Regs on Source of Income from Certain Sales of Personal Property: In T.D. 9921, the IRS issued final regulations on determining the source of income from sales of inventory produced within the United States and sold without the United States or vice versa. The final regulations also contain new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States and modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the United States.

Final Regs Coordinate Extraordinary Disposition and Disqualified Basis Rules: In T.D. 9934, the IRS issued (1) final regulations under Code Sec. 245A and Code Sec. 951A that coordinate the extraordinary disposition rule under Code Sec. 245A with the disqualified basis and disqualified payment rules under Code Sec. 951A, and (2) final regulations under Code Sec. 6038 regarding information reporting to facilitate administration of the final regulations under Code Sec. 245A and Code Sec. 951A. The final regulations affect corporations that are subject to the extraordinary disposition rule and the disqualified basis rule or the disqualified payment rule and finalizes proposed regulations published on August 27, 2020.

Healthcare

Final Regs Address Grandfathered Group Health Plans and Group Insurance Coverage: In T.D. 9928, the IRS issued final regulations regarding grandfathered group health plans and grandfathered group health insurance coverage that amend current rules to provide greater flexibility for certain grandfathered health plans to make changes to certain types of fixed amount cost-sharing requirements without causing a loss of grandfather status under the Patient Protection and Affordable Care Act. The final rules only address the requirements for grandfathered group health plans and grandfathered group health insurance coverage and do not apply to or otherwise change the current requirements applicable to grandfathered individual health insurance coverage.

IRS Updates Fees Relating to Insured and Self-Insured Health Plans: In Notice 2020-84, the IRS stated that the applicable dollar amount used to calculate the fee under Code Sec. 4375, relating to the fee on the issuer of a specified health insurance policy, and the fee under Code Sec. 4376, relating to the fee on the plan sponsor of an applicable self-insured health plan, for policy years and plan years that end on or after October 1, 2020, and before October 1, 2021, is $2.66. According to the IRS, the increase from the prior amount was calculated by multiplying the adjusted applicable dollar amount for policy years and plan years ending in the previous federal fiscal year, $2.54, by the percentage increase of the projected per capita amount of National Health Expenditures published by the Department of Health and Human Services on March 19, 2020.

Miscellaneous

No Tax Court Opinions Being Issued Until New Case Management System Goes Live: In CC-2021-002, the Office of Chief Counsel issued guidance to Chief Counsel attorneys and support staff on navigating the U.S. Tax Court's ongoing transition from the current eAccess case management system to its new DAWSON case management system and advised that, as part of the transition, there is a blackout period for new electronic filings that began on November 20, 2020, and will continue until DAWSON is available to practitioners and taxpayers. According to the Chief Counsel's Office, the Tax Court anticipates the blackout period for electronic filings will end no later than December 27, 2020, and, to assist taxpayers and practitioners during the transition period, the Tax Court does not intend to issue any opinions or orders during the transition period.

Penalties

Property's Value Is Zero for Penalty Purposes Where Transfer Was an Incomplete Gift: In Fakiris v. Comm'r, T.C. Memo. 2020-157, the Tax Court supplemented its prior opinion in Fakiris v. Comm'r, T.C. Memo. 2017-126, and held that the terms of the donation of a theater to a tax-exempt organization contained restrictions so substantial that dominion and control over the theater was not relinquished and therefore no charitable contribution deduction was allowed because no gift had occurred. According to the court, since the transfer of the theater was not a completed gift, and thus no property had been transferred, the correct value of the property was zero for purposes of determining the applicability of the accuracy-related penalty under Code Sec. 6662(h).

Retirement Plans

IRS Issues Guidance on Provisions of SECURE Act Dealing with Safe Harbor Plans: In Notice 2020-86, the IRS provides guidance in the form of questions and answers with respect to Section 102 and Section 103 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Section 102 of the SECURE Act increases the 10 percent cap for automatic enrollment safe harbor plans and Section 103 of the Secure Act eliminates certain safe harbor notice requirements for plans that provide for safe harbor non-elective contributions and adds new provisions for the retroactive adoption of safe harbor status for those plans.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-87, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

IRS Publishes the 2021 Tier 2 Tax Rates: In 85 Fed. Reg. 77486, the IRS published the tier 2 tax rates as required by Code Sec. 3241(d). The rates for 2021 under Code Sec. 3201(b) on employees is 4.9 percent of compensation; the tier 2 tax rate for 2021 under Code Sec. 3221(b) on employers is 13.1 percent of compensation, and the tier 2 tax rate for 2021 under Code Sec. 3211(b) on employee representatives is 13.1 percent of compensation.

IRS Issues 2020 Required Amendments List for Certain Retirement Plans: In Notice 2020-83, the IRS issued the 2020 Required Amendments List (2020 RA List), which applies to both individually designed plans qualified under Code Sec. 401(a) (qualified individually designed plans) and individually designed plans that satisfy the requirements of Code Sec. 403(b) (Code Sec. 403(b) individually designed plans). December 31, 2022, generally is the last day of the remedial amendment period with respect to (1) a disqualifying provision arising as a result of a change in qualification requirements that appears on the 2020 RA List, and (2) a form defect arising as a result of a change in Code Sec. 403(b) requirements that appears on the 2020 RA List.

November 2020

Accounting

IRS issues November 2020 Applicable Federal Rates: In Rev. Rul. 2020-22, the IRS issued a ruling which prescribes the applicable federal rates for November 2020. 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

Court Erred in Finding Father's Security Interest Was Not Entitled to Priority Status: In U.S. v. Allahyari, 2020 PTC 353 (9th Cir. 2020), a Ninth Circuit panel reversed a district court's determination that a taxpayer's alleged security interest in property owned by his son, a tax delinquent, was not entitled to priority over later-recorded federal tax liens and remanded the case to the district court for reconsideration. The panel held that the district court erred by: (1) holding that the deed of trust between father and son was not entitled to priority over the later-recorded federal tax liens under local law; and (2) failing to consider whether past consideration was sufficient to support an agreement giving rise to a security interest under Washington state law.

IRS Not Entitled to Priority Status for Couple's Shared Responsibility Payment: In In re Huenerberg, 2020 PTC 337 (E.D. Wisc. 2020), a district court upheld a bankruptcy court's decision that the IRS was not entitled to priority treatment for its claim for taxes relating to a couple's shared responsibility payment under Code Sec. 5000A, which was enacted as part of the Patient Protection and Affordable Care Act. The court agreed with the bankruptcy court and the debtors that the shared responsibility payment is a penalty, not a tax, and thus the IRS's claim relating to that penalty was not eligible for priority status.

Deductions

Court Allows Charitable Deduction for Easements That Imposed Material Restrictions: In Kissling v. Comm'r, T.C. Memo. 2020-153, the Tax Court held that, because facade easements contributed by a couple imposed material restrictions that lowered the value of the three buildings on which the easements were contributed, the taxpayers were entitled to a charitable contribution deduction for the easements. In addition, because the Tax Court determined that the value of the easements claimed on the taxpayers' returns was only 15 percent more than the value determined by the Tax Court, the couple was not liable for penalties assessed by the IRS under Code Sec. 6662(h).

Failure to Meet All-Events Test Precludes Deduction of Accrued Production Costs: In Morning Star Packing Company, LP v. Comm'r, T.C. Memo. 2020-142, the Tax Court held that two partnerships, which provide bulk-packaged tomato products to food processors and customer-branded finished products to the food service and retail trades, could not increase their cost of goods sold for the amount of accrued production costs because (1) the partnerships had not shown that all events had occurred to establish the fact of the liabilities, and (2) economic performance had not occurred with respect to the liabilities. The court also rejected the partnerships' assertion that multi-year production contracts with various customers established the fact of their liabilities because, the court found, the partnerships' efforts to comply with their customers' specifications were production-run specific and the accrued production costs in issue were for goods and services provided after the production runs.

No Deduction for Easement That Failed to Protect Conservation Purposes in Perpetuity: In Glade Creek Partners v. Comm'r, T.C. Memo. 2020-148, the Tax Court held that a partnership (1) was not entitled to a charitable contribution deduction for a conservation easement contributed to a charitable organization because the deed of easement did not protect the conservation purposes in perpetuity as required by Code Sec. 170(h)(5), but (2) was entitled to deduct a $35,077 cash charitable contribution that the IRS had denied. The court also sustained a 20 percent accuracy-related penalty assessed against the partnership for a substantial valuation misstatement for the adjustment in excess of the easement's fair market value, but rejected the assessment of a 20 percent penalty on the remainder of the adjustment.

Estates, Gifts, and Trusts

Estate Owes $6.4 Million for Decedent's Failure to File FBARs: In U.S. v. Est. of Danielson, 2020 PTC 352 (M.D. Fla. 2020), a district court granted the government's request for a default judgment against a decedent's estate for civil penalties and fees of more than $6.4 million as a result of the decedent's failure to file foreign bank account reports (FBARs). The court noted that the decedent had filed FBARs in 1994 and 1995 thus proving that he knew of his obligation to file an FBAR in subsequent years, but yet had, under penalty of perjury and with knowledge of his bank accounts in Lichtenstein and Canadian, checked "no" on his tax returns when asked if he had a foreign bank account which, the court said, proved that he acted willfully in failing to report his ownership and interests in his foreign bank accounts.

Income

Taxpayer Entitled to Refund Where Stock Received in a Lawsuit Was Overvalued by IRS: In Lucero v. U.S., 2020 PTC 344 (D. N.M. 2020), a district court held that a taxpayer was entitled to a refund for income taxes she paid as a result of the fair market value of stock she received in a legal settlement being overvalued at $2.38 per share when $0.57 per share was the correct fair market value. The court found that the valuation by the taxpayer's expert was more accurate than the IRS's expert and that it was proper for the taxpayer's expert to use his professional judgment and value the stock at fair market value, rather than fair value, and to apply an 18 percent discount for marketability and a 25 percent discount for minority status.

Innocent Spouse Relief

Taxpayer Prevented from Participating in Tax Prep Entitled to Innocent Spouse Relief: In Leith v. Comm'r, T.C. Memo. 2020-149, the Tax Court held that a taxpayer was entitled to relief from joint and several liability pursuant to Code Sec. 6015(f) to the extent of the tax items attributable to her ex-husband. Because the ex-husband's controlling and abusive behavior hindered the taxpayer's ability to question the understatements of income and the underpayment of tax, the taxpayer satisfied the lack of knowledge requirement for the years at issue even if she had actual or constructive knowledge of the understatements of income and tax underpayment.

Insurance Companies

IRS Issues Discount Factors for 2020 Accident Year: In Rev. Proc. 2020-48, the IRS prescribes discount factors for the 2020 accident year for use by insurance companies in computing discounted unpaid losses under Code Sec. 846 and discounted estimated salvage recoverable under Code Sec. 832. The revenue procedure also provides discount factors for losses incurred in the 2019 accident year and earlier accident years for use in tax years beginning in 2020.

Partnerships

Chief Counsel Addresses Civil Fraud Penalty Determinations for BBA Partnerships: In CCA 202044009, the Office of Chief Counsel advised that procedures for determining the applicability of the civil fraud penalty against a partnership subject to the Bipartisan Budget Act of 2015 (BBA) that participated in a syndicated conservation easement (SCE) transaction are the same as those for establishing civil fraud against a partnership subject to BBA generally; i.e., through all facts and circumstances that establish the willful intent to evade tax at the partnership level. Under BBA, the Chief Counsel's Office stated, if the IRS determines a civil fraud penalty at the partnership level, then the partnership is liable for the penalty on any imputed underpayment computed on the adjustments for that tax year or, if the partnership elects to push out the adjustments, the reviewed year partners are liable for the fraud penalty on any correction amount that is greater than zero.

Procedure

Certain IRS Telephonic Hearings Extended: In Rev. Proc. 2020-49, the IRS provides temporary guidance regarding the public approval requirement under Code Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the continuing Coronavirus Disease 2019 (COVID-19) pandemic, the revenue procedure extends until September 30, 2021, the time period described in Section 4.02 of Rev. Proc. 2020-21, during which certain telephonic hearings are permitted.

IRS Lien Has Priority over Homeowner's Association Lien: In Shirehampton Drive Trust v. Dept. of Treasury, 2020 PTC 347 (9th Cir. 2020), the Ninth Circuit affirmed a district court and held that IRS tax liens placed on a delinquent taxpayer's condominium have priority over a homeowner's association (HOA) lien because the HOA lien was not perfected at the time that the IRS recorded its notice of tax liens. The court rejected the HOA's assertion that its lien became choate as soon as the taxpayer failed to make an on-time payment because, the court noted, the relevant date for choateness purposes is the date of the first administrative step and the HOA took no administrative step to establish the lien until after the IRS recorded its notice of tax liens.

Statute Remains Open for Taxpayer Who Filed Numerous False Withholdings: In CCA 202044007, the Office of Chief Counsel advised that the statute of limitations does not bar assessment of a Code Sec. 6676 penalty in a situation in which, more than three years ago, a taxpayer filed an income tax return claiming a substantial number of false withholdings, resulting in an erroneous refund. Because the claiming of the withholdings was fraudulent, the Chief Counsel's Office said, the statute of limitations does not bar assessment of the Code Sec. 6676 penalty.

Retirement Plans

Distribution from SEP-IRA to Taxpayer Was Taxable Even Though Repaid: In Ball v. Comm'r, T.C. Memo. 2020-152, the Tax Court held that a taxpayer, who caused his SEP-IRA to lend $209,600 to a limited liability company (LLC) which he controlled, had to include the distribution in gross income, even though it was repaid with interest, because the taxpayer had unfettered control over the distribution. Further, because the taxpayer was not 59 1/2 years of age, he was liable for the 10 percent additional tax under Code Sec. 72(t), as well as an accuracy-related penalty.

IRS Implements Extended Due Date for Contributions to Defined Benefit Plans: In Notice 2020-82, the IRS said it will treat a contribution to a single-employer defined benefit pension plan with an extended due date of January 1, 2021 pursuant to Section 3608(a)(1) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as timely if it is made no later than January 4, 2021 (which is the first business day after January 1, 2021). According to the IRS, the extension of the due date for contributions covered by Section 3608(a)(1) of the CARES Act is intended to allow employers sponsoring these plans to defer these payment obligations until calendar year 2021 and that the deferral of these payment obligations until calendar year 2021 will help employers to alleviate an additional adverse impact on their businesses that were already harmed by the COVID-19 pandemic.

Final Regs Update Life Expectancy and Distribution Period Tables: In T.D. 9930, the IRS issued final regulations relating to the life expectancy and distribution period tables that are used to calculate required minimum distributions from qualified retirement plans, individual retirement accounts and annuities, and certain other tax-favored employer-provided retirement arrangements. These regulations affect participants, beneficiaries, and plan administrators of these qualified retirement plans and other tax-favored employer-provided retirement arrangements, as well as owners, beneficiaries, trustees and custodians of individual retirement accounts and annuities and apply to distribution calendar years (as defined in Reg. Sec. 1.401(a)(9) - 5, Q&A - 1(b)), beginning on or after January 1, 2022.

IRS Seeks Comments on Application of Annuity and Spousal Rights Provisions in ERISA: In Notice 2020-80, the IRS is requesting comments on the application of the annuity and spousal rights provisions of Section 205 of the Employee Retirement Income Security Act of 1974, as amended (ERISA), in connection with a distribution of an individual custodial account (ICA) in kind from a terminating Code Sec. 403(b) plan. The IRS noted that, although no Code Sec. 403(b) plans are subject to the annuity and spousal rights provisions of Code Sec. 401(a)(11) and Code Sec. 417, some Code Sec. 403(b) plans that are subject to ERISA (such as a plan of a non-church tax-exempt employer that provides for matching contributions) are subject to the parallel annuity and spousal rights provisions of Section 205 of ERISA.

IRS Rules on Distributions Upon a Termination of a Section 403(b) Plan: In Rev. Rul. 2020-23, the IRS addressed two situations involving a Code Sec. 403(b) retirement plan, which is funded by Code Sec. 403(b)(7) custodial accounts, and whether the plan was terminated in accordance with the rules of Reg. Sec. 1.403(b)-10(a) upon taking certain actions. With respect to a distribution by the plan of an individual custodial account (ICA) in kind to a participant or beneficiary, the IRS ruled that such distribution is not includible in the participant's or the beneficiary's gross income until amounts are actually paid out of the ICA, so long as the ICA maintains its status as a Code Sec. 403(b)(7) custodial account, and any other amount distributed from a custodial account to a participant or beneficiary to effectuate a termination of the plan is includible in gross income, except to the extent the amount is rolled over to an individual retirement account or other eligible retirement plan by a direct rollover or by a transfer made within 60 days.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-81, 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).

October 2020

C Corporations

IRS Issues Final Consolidated Return Regulations: In T.D. 9927, the IRS issued final regulations under Code Sec. 1502 and Code Sec. 1503. The regulations (1) provide guidance implementing recent statutory amendments to Code Sec. 172 relating to the absorption of consolidated net operating loss carryovers and carrybacks, and (2) update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.

CARES Act

IRS Cannot Withhold Recovery Rebate Payments from Incarcerated Individuals: In Scholl v. Mnuchin, 2020 PTC 308 (N.D. Cal. 2020), a district court held that the Department of Treasury and the IRS cannot withhold recovery rebate payments (also known as economic impact payments), which were authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), from individuals on the sole basis of those individuals being incarcerated. The court gave the Treasury Department 30 days to reconsider any claim filed through the "non-filer" online portal or otherwise that was previously denied solely on the basis of the claimant's incarcerated status and ordered the Treasury Department to, within 45 days, file a declaration confirming all steps ordered by the court have been implemented.

Lenders Should Not File Information Returns for Loans Forgiven under PPP: In Announcement 2020-12, the IRS notified lenders that they should not file information returns or furnish payee statements under Code Sec. 6050P to report the amount of qualifying forgiveness with respect to covered loans made under the Paycheck Protection Program (PPP), a program authorized by the CARES Act. According to the IRS, when all or a portion of the stated principal amount of a covered loan is forgiven because the eligible recipient satisfies the applicable forgiveness requirements, an applicable entity is not required to, for federal income tax purposes only, and should not, file a Form 1099-C, Cancellation of Debt, information return with the IRS or provide a payee statement to the eligible recipient under Code Sec. 6050P as a result of the qualifying forgiveness.

Deductions

Personal Bankruptcy Petition Can't Be Used to Substantiate Business Expenses: In Ronning v. Comm'r, 2020 PTC 322 (11th Cir. 2020), the Eleventh Circuit affirmed the Tax Court and held that a taxpayer, whose business records were destroyed after he failed to pay storage fees at the facility where he kept his records, could not use his personal bankruptcy petition to substantiate business expenses in the form of interest that he contended had accrued on 12 bank loans listed as unsecured debts in the petition. The court also agreed with the Tax Court that the taxpayer was a cash method taxpayer and thus could not deduct expenses for interest that accrued but were never paid.

No Theft Loss Deduction Allowed; Loss Wasn't Claimed in "Discovery" Year: In Giambrone v. Comm'r, T.C. Memo. 2020-145, the Tax Court held that two brothers, who went into business together and founded a bank, were not entitled to a theft loss deduction under Rev. Proc. 2009-20 on their 2012 tax returns as a result of actions by a bank officer who looted the bank and forced it into receivership. The court concluded that, because the indictment of that bank officer happened in 2010, that was the year the loss was discovered for purposes of Rev. Proc. 2009-20.

Employee Benefits

IRS Issues 2021 Inflation-Adjusted Maximum Dollar Amount for Excepted Benefit HRAs: In Rev. Proc. 2020-43, the IRS issued the inflation-adjusted maximum dollar amount that may be made newly available for excepted benefit health reimbursement arrangements or other account-based group health plans for plan years beginning after December 31, 2020, and before January 1, 2022. Due to indexing methodology requiring rounding down to the nearest $50 increment, the amount remains $1,800 for the 2021 plan year.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-77, 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).

Excise Taxes

Final Regs Provide Guidance on Excise Tax on Certain Colleges and Universities: In T.D. 9917, the IRS issued final regulations for determining the excise tax under Code Sec. 4968, as enacted by the Tax Cuts and Jobs Act of 2017, on the net investment income of an applicable educational institution. The final regulations provide that an "applicable educational institution" is any eligible educational institution (as defined in Code Sec. 25A(f)(2) and Reg. Sec. 1.25A-2(b)(1) that had at least 500 tuition-paying students attending the institution during the preceding tax year; (2) more than 50 percent of whose tuition-paying students are located in the United States; (3) that is not described in the first sentence of Code Sec. 511(a)(2)(B) (relating to state colleges and universities); and (4) the aggregate fair market value of the assets of which at the end of such preceding tax year (other than those assets that are used directly in carrying out the institution's exempt purpose) is at least $500,000 per student attending the institution.

Foreign

IRS Modifies Source-of-Income Rules: In T.D. 9921, the IRS issued final regulations modifying the rules for determining the source of income from sales of inventory produced within the United States and sold without the United States or vice versa. The final regulations also (1) contain new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States, and (2) modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the United States.

Final Regulations Address Multiple Foreign-Related Tax Issues: In T.D. 9922, the IRS issued final regulations addressing the following issues: (1) the allocation and apportionment of deductions under Code Sec. 861 through Code Sec. 865, including rules on the allocation and apportionment of expenditures for research and experimentation, stewardship, legal damages, and certain deductions of life insurance companies; (2) the allocation and apportionment of foreign income taxes; (3) the interaction of the branch loss and dual consolidated loss recapture rules with Code Sec. 904(f) and (g); (4) the effect of foreign tax redeterminations of foreign corporations, including for purposes of the application of the high-tax exception described in Code Sec. 954(b)(4) (and for purposes of determining tested income under Code Sec. 951A(c)(2)(A)(i)(III)), and required notifications under Code Sec. 905(c) to the IRS of foreign tax redeterminations and related penalty provisions; (5) the definition of foreign personal holding company income under Code Sec. 954; (6) the application of the foreign tax credit disallowance under Code Sec. 965(g); and (7) the application of the foreign tax credit limitation to consolidated groups. The final regulations also address (1) the reduction to a hybrid deduction account under Code Sec. 245A(e) by reason of an amount included in the gross income of a domestic corporation under Code Sec. 951(a) or Code Sec. 951A(a) with respect to a controlled foreign corporation (CFC); (2) the treatment of a hybrid instrument as a financing transaction for purposes of the conduit financing rules under Code Sec. 881; and (3) the treatment under Code Sec. 951A of certain prepayments made to a related CFC after December 31, 2017, and before the CFC's first tax year beginning after December 31, 2017.

IRS Proposes Foreign Tax Credit Regulations: In REG-101657-20, the IRS released proposed regulations relating to the foreign tax credit, including guidance on (1) the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; (2) the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; (3) the definition of a foreign income tax and a tax in lieu of an income tax; (4) transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by reason of the Coronavirus Aid, Relief, and Economic Security Act; (5) the definition of foreign branch category and financial services income; and (6) the time at which foreign taxes accrue and can be claimed as a credit.

Innocent Spouse

Innocent Spouse Relief Granted to Taxpayer Who Gave Up Spousal Support in Divorce: In Robinson v. Comm'r, T.C. Memo. 2020-134, the Tax Court granted innocent spouse relief to a taxpayer who, as part of her divorce agreement, agreed to waive spousal support and any rights to her husband's business assets in exchange for her husband's assumption of their 2010 tax liability. The court noted that the taxpayer did not receive a significant benefit from the nonpayment of the 2010 taxes while her husband did receive a benefit from the nonpayment, including the earning of social security credits.

Procedure

Second Circuit Rejects President's Appeal Relating to Accounting Firm's Documents: In Trump v. Vance, 2020 PTC 327 (2d Cir. 2020), the Second Circuit affirmed a district court and held that a grand jury subpoena issued by the District Attorney of the County of New York to President Trump's accounting firm was not overly broad nor was it issued in bad faith. According to the court (1) the President's bare assertion that the scope of the grand jury's investigation was limited only to certain payments made by Michael Cohen in 2016 amounted to nothing more than implausible speculation; (2) without the benefit of this linchpin assumption, all other allegations of overbreadth - based on the types of documents sought, the types of entities covered, and the time period covered by the subpoena, as well as the subpoena's near identity to a prior Congressional subpoena - fell short of meeting the plausibility standard; and (3) the President's allegations of bad faith failed to raise a plausible inference that the subpoena was issued out of malice or an intent to harass.

Wind Farm's Indemnification Agreement Doesn't Affect Suit Against the Government: In Pacific Wind, LLC v. U.S., 2020 PTC 328 (Fed. Cl. 2020), the Court of Federal Claims denied a government motion to dismiss a complaint by the owner of a wind farm who alleged that the government underpaid it by more than $8.4 million when it made a grant to the taxpayer pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009. The court rejected the government's argument that an indemnification agreement under which the seller of the wind farm agreed to indemnify the wind farm for any Section 1603 grant shortfall meant that the taxpayer lacked standing to bring the case and instead held that the government's obligation to the wind farm was not affected by the fact that it had an indemnification agreement in place.

New Procedure Aims to Facilitate Market's Transition Away from LIBOR: In Rev. Proc. 2020-44, the IRS issued guidance aimed at facilitating the market's transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates by mitigating certain potential tax consequences of adopting fallback language recommended by the Alternative Reference Rates Committee (ARRC) and the International Swaps and Derivatives Association (ISDA). The guidance generally provides that modifying certain contracts to incorporate the ARRC's and ISDA's recommended fallback language will not result in a realization event and, generally, such modifications will not result in legging out of an integrated transaction or in the disposition or termination of either leg of a hedging transaction.

IRS Abused Its Discretion in Denying Whistleblower Claim: In Doyle v. Comm'r, T.C. Memo. 2020-139, the Tax Court held that the rejection by the IRS Whistleblower Office (WBO) of a whistleblower claim was not supported by the administrative record and thus constituted an abuse of discretion. The court also found that because the WBO's determination was not based on the non-collection of proceeds, the IRS could not rely on that supposed ground to defend its rejection of the claim.

Form 1040-NR Removed from List of Returns Exempt from Electronic Filing: In Notice 2020-70, the IRS modified Notice 2011-26 to generally remove Form 1040-NR, U.S. Nonresident Alien Income Tax Return, from the list of returns that are administratively exempt from the electronic filing requirement imposed on specified tax return preparers by Code Sec. 6011(e)(3) and Reg. Sec. 301.6011-7, and to provide the circumstances under which the Form 1040-NR remains subject to the exemption. In addition, the notice provides that future updates to the list of returns in Notice 2011-26 that are administratively exempt from the electronic filing requirement due to IRS e-file limitations will be provided for in IRS Publication 4164, Modernized e-File (MeF) Guide for Software Developers and Transmitters.

IRS Issues Transition Relief for Certain Employer Health Coverage Reporting: In Notice 2020-76, the IRS extended the due dates for certain health insurance reporting under Code Sec. 6055 and Code Sec. 6056 from January 31, 2021, to March 2, 2021, for insurers, self-insuring employers, applicable large employers, and certain other providers of minimum essential coverage to furnish to individuals the 2020 Form 1095-B, Health Coverage, and the 2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. The IRS also said that it will not impose a penalty under Code Sec. 6722 for failures to furnish a Form 1095-B to responsible individuals and is providing a final extension of transitional good-faith relief from Code Sec. 6721 and Code Sec. 6722 penalties to the 2020 information reporting requirements under Code Sec. 6055 and Code Sec. 6056.

IRS Special Agent Guilty of Filing False Returns, Stealing, and Obstructing Justice: In U.S. v. Aleykina, 2020 PTC 306 (9th Cir. 2020), the Ninth Circuit affirmed a district court's judgment which found a former IRS Special Agent, who investigated criminal tax fraud, guilty of filing false tax returns, stealing government money, and obstructing justice. The court rejected her argument that she did not destroy evidence and thus did not obstruct justice after finding that, while she failed in her attempt to destroy files on her computer, in her attempt to do so she still altered evidence and thus obstructed justice.

Additional Examples of Disclosure of Third-Party Tax Information Released: In CC-2020-008, the Office of Chief Counsel supplemented CC-2006-003 and CC-2006-006 to provide five additional examples, in Q&A format, relating to disclosures of third-party tax information in syndicated conservation easement matters. In Q&A-3, the Chief Counsel's Office stated that, pursuant to Code Sec. 6103(l)(4)(B), third party returns or return information can be disclosed to the IRS Office of Professional Responsibility as part of a referral or investigation of a tax return preparer or an appraiser.

September 2020

Accounting

IRS issues September 2020 Applicable Federal Rates: In Rev. Rul. 2020-16, the IRS issued a ruling which prescribes the applicable federal rates for September 2020. 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

Debtor Can't Invoke CARES Act Provision to Extend Term of Bankruptcy Plan: In In re Roebuck, 2020 PTC 287 (Bankr. W.D. Pa.), a bankruptcy court rejected confirmation of a debtor's proposed amended bankruptcy plan, which had the support of the bankruptcy trustee and which relied on Section 1329(d) of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and which sought to extend the term of the plan beyond five years. The court held that the debtor could not invoke Section 1329(d) of the CARES Act because that provision applies only to plans confirmed under Bankruptcy Code Section 1325(a) before March 27, 2020, and the debtor's interim confirmation plan did not qualify as a confirmed plan under Section 1325.

Provision in Bankruptcy Plan Dealing with Tax Refunds Is Invalid: In In re Diaz, 2020 PTC 270 (5th Cir. 2020), the Fifth Circuit held that a provision in a local chapter 13 bankruptcy plan, which requires that debtors in the Western District of Texas turn over to the bankruptcy trustee any tax refund received in excess of $2,000 is invalid because it abridges debtors' substantive rights and conflicts with the Supreme Court's guidance on 11 U.S.C. Section 1325(b)(2) in Hamilton v. Lanning, 560 U.S. 505 (2010). As a result, the court vacated the bankruptcy court's confirmation of a debtor's bankruptcy plan and remanded to allow the debtor to file a new plan.

Credits

Final Regs Clarify Effect of Personal Exemption on Premium Tax Credit: In T.D. 9912, the IRS issued final regulations under Code Sec. 36B and Code Sec. 6011 that clarify that the reduction of the personal exemption deduction to zero for tax years beginning after December 31, 2017, and before January 1, 2026, does not affect an individual taxpayer's ability to claim the premium tax credit. The final regulations affect individuals who claim the premium tax credit.

Rehabilitation Credit Regs Finalized Without Any Modifications: In T.D. 9915, the IRS finalized proposed regulations, without any modifications, which provide that the rehabilitation credit is properly determined in the year a qualified rehabilitated building (QRB) is placed in service but allocated ratably over the five-year period beginning in such year as required by the Tax Cuts and Jobs Act of 2017 (TCJA), rather than being allocated entirely to the tax year the QRB is placed in service as under Code Sec. 47 before the TCJA. The final regulations, which add Reg. Sec. 1.47-7(a) through (f), include: (1) a general rule for calculating the rehabilitation credit; (2) definitions of ratable share and rehabilitation credit determined; (3) a rule coordinating the changes to Code Sec. 47 with the special rules in Code Sec. 50; and (4) examples illustrating the interaction of Code Sec. 47 with rules in Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property), and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).

Deductions

Taxpayer Can't Deduct Expenses for Meals with Current and Former Spouse: In Franklin v. Comm'r, T.C. Memo. 2020-127, the Tax Court held that a taxpayer who deducted numerous expenses for meals, entertainment, and travel failed to adequately substantiate and document such expenses. The court noted that the taxpayer's meal log included several charges for meals with his former spouse and his current spouse and had asserted unconvincingly that the purpose of these meetings was to discuss real estate opportunities.

Processed Marine Seismic Data Is Not Qualifying Property under Former Sec. 199: In TGS-NOPEC Geophysical Company and Subsidiaries v. Comm'r, 155 T.C. No. 3 (2020), the Tax Court held that a company's processed marine seismic data is not qualifying production property within the meaning of former Code Sec. 199(c)(5) because it is neither tangible personal property nor a sound recording and, as a result, the company was not entitled to a deduction under former Code Sec. 199 on its 2008 tax return with respect to such property. The court also concluded that (1) the company's processing of marine seismic data constitutes engineering services performed in the United States with respect to the construction of real property under former Code Sec. 199(c)(4), but its gross receipts from such services are domestic production gross receipts (DPGR) only to the extent that such construction activities are within the United States; and (2) to the extent that the company received gross receipts from its parent company for processing services of its parent's data for the parent's clients, such revenue does not constitute DPGR for purposes of former Code Sec. 199.

Final Regs Address Deductions for Contributions to Nuclear Decommissioning Trusts: In T.D. 9906, the IRS issued final regulations under Code Sec. 468A relating to deductions for contributions to trusts maintained for decommissioning nuclear power plants and the use of the amounts in those trusts to decommission nuclear plants. The regulations revise and clarify certain provisions in existing regulations to address issues that have arisen as more nuclear plants have begun the decommissioning process.

Employee Benefits

IRS Expands Situations Where Certain Plan Amendment Deadlines Can Be Expanded: In Rev. Proc. 2020-40, the IRS modified Section 15.05 of Rev. Proc. 2016-37, and Section 12.02 of Rev. Proc. 2019-39, to expand the situations in which the plan amendment deadline for discretionary amendments made to qualified pre-approved plans and Code Sec. 403(b) pre-approved plans may be extended. These modifications are consistent with the extensions of the plan amendment deadlines for discretionary amendments set forth in Section 8.02 of Rev. Proc. 2016-37 with respect to qualified individually designed plans and Section 6.02 of Rev. Proc. 2019-39 with respect to Code Sec. 403(b) individually designed plans.

Excise Taxes

Powered Glider Kit Refurbished Tractors Did Not Qualify for Excise Tax Safe Harbor: In Schneider National Leasing, Inc. v. U.S., 2020 PTC 292 (E.D. Wisc. 2020), a district court held that 912 of a trucking company's purchase of 976 tractors were not repaired or modified and thus did not fall within the safe harbor provisions of Code Sec. 4052(f) and were subject to the 12 percent excise tax under Code Sec. 4051(a)(1)(E). The court agreed with the IRS that, with respect to the taxpayer's 912 powered glider kit refurbished tractors, the taxpayer's manufacture and subsequent use or lease of the refurbished tractors did not meet the safe harbor because the taxpayer had not "repaired or modified" articles for purposes of that provision.

Gross Income

Convertible Virtual Currency Received for Performing Microtasks Is Ordinary Income: In CCA 202035011, the Office of Chief Counsel advised that an individual who receives convertible virtual currency for performing a microtask through a crowdsourcing or similar platform has received consideration in exchange for performing a service, and the receipt of such currency is taxable as ordinary income. In addition, the Chief Counsel's Office stated that such compensation may also be subject to self-employment tax. CCA 202035011 (8/28/20).

Insurance Companies

Final Insurance Regulations Implement Legislative Changes: In T.D. 9911, the IRS issued final regulations that provide guidance on the computation of life insurance reserves and the change in basis of computing certain reserves of insurance companies. The final regulations implement recent legislative changes and affect entities taxable as insurance companies.

International

Soldier's Ties to U.S. Preclude Eligibility for Foreign Earned Income Exclusion: In Haskins v. Comm'r, 2020 PTC 289 (11th Cir. 2020), the Eleventh Circuit affirmed a Tax Court holding that an Army intelligence officer who lived and worked on a base in Afghanistan was not eligible for the foreign earned income exclusion under Code Sec. 911(a) given her strong ties to the United States and her weak ties abroad. The court noted that the taxpayer maintained strong connections to the United States in the form of her driver's license, home in Arizona, and bank account and that she continued to be involved in her family's finances, as reflected by her supporting her son's schooling, paying household bills, and buying gift cards for her husband.

IRS Defers Applicability Date One Year for Foreign-Related Regs: In Notice 2020-73, the IRS announced its intention to amend the applicability dates in Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and 1.989(a)-1 of the 2016 final regulations and Reg. Sec. 1.987-2 and Reg. Sec. 1.987-4 of the related 2019 final regulations to provide that the 2016 final regulations and the related 2019 final regulations apply to tax years beginning after December 7, 2021 (the amended applicability date). Previously, the regulations were set to apply to tax years beginning after December 7, 2020.

IRS Finalizes Base-Erosion and Anti-Abuse Tax Regulations: In T.D. 9910, the IRS issued final regulations that provide guidance on the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties.

IRS Issues Final Regs under Secs. 245A and 954: In T.D. 9909, the IRS issued final regulations under Code Sec. 245A and Code Sec. 954 that limit the deduction for certain dividends received by United States persons from foreign corporations under Code Sec. 245A and the exception to subpart F income under Code Sec. 954(c)(6) for certain dividends received by controlled foreign corporations. The IRS also issued final regulations under Code Sec. 6038 regarding information reporting to facilitate administration of the final regulations.

Prop. Regs Address Extraordinary Dispositions and Disqualified Basis Rules: In REG-124737-19, the IRS issued proposed regulations under Code Sec. 245A and Code Sec. 951A that coordinate the extraordinary disposition rule under Code Sec. 245A with the disqualified basis rule under Code Sec. 951A. The IRS also issued proposed regulations under Code Sec. 6038 regarding information reporting to facilitate administration of the proposed regulations.

Procedure

Interest Rates for the Fourth Quarter of 2020 Remain Unchanged: In Rev. Rul. 2020-18, the IRS announced that the interest rates for the fourth quarter of 2020 will be the same as they were for the third quarter of 2020. Thus, the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning October 1, 2020, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent.

Whistleblower's Claim Rejected, Even After Court Allows Additional Evidence: In Bemmelen v. Comm'r, 154 T.C. No. 4 (2020), the Tax Court granted a whistleblower's motion to supplement the administrative record on his case with a 2012 submission that had been made to the IRS, but rejected the whistleblower's motion to supplement the record with respect to a 2019 document. The court also concluded that because the Director of the IRS Whistle Blower Office (WBO) did not improperly redelegate his authority to analyze the whistleblower's information, and because the WBO's rejection of the whistleblower's claim was supported by the administrative record, as completed, and was not arbitrary, capricious, or an abuse of discretion, or otherwise not in accordance with law, the IRS's motion for summary judgment should be granted.

Tax Court Has Jurisdiction under Supreme Court Precedent to Enforce Prior Decisions: In Whistleblower 21276-13W v. Comm'r, 155 T.C. No. 2 (2020), the Tax Court held that, with respect to two prior decisions (the "Decisions") entered by the court that set forth the dollar amounts of two whistleblowers' awards, the Tax Court had jurisdiction to enter the Decisions because a remand to the IRS Whistleblower Office for further proceedings would have been futile as only one disposition was possible as a matter of law on the issue before the Tax Court. The court further held that, as a court of record, it has jurisdiction to enforce the Decisions under longstanding Supreme Court precedent and the court rejected the whistleblowers' motions for relief because they ignored the terms of the partial settlement and misinterpreted the Decisions.

S Corporations

IRS Plans to Issue Regs Dealing with S Corporations and Foreign-Related Income: In Notice 2020-69, the IRS announced that it intends to issue regulations addressing the application of Code Sec. 951 and Code Sec. 951A to certain S corporations with accumulated earnings and profits and stated that, for those S corporations electing the treatment provided in the regulations, global intangible low-taxed income (GILTI) inclusions would create an accumulated adjustments account. The IRS also announced that it will issue rules (1) which address the treatment of qualified improvement property under the alternative depreciation system of Code Sec. 168(g) for purposes of calculating qualified business asset investment for purposes of the foreign-derived intangible income and GILTI provisions, and (2) which, when issued, would implement recent clarifications enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

August 2020

Accounting

IRS Issues August 2020 Applicable Federal Rates: In Rev. Rul. 2020-15, the IRS issued a ruling which prescribes the applicable federal rates for August 2020. 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.

CARES Act

Court Allows Challenge to CARES Act Economic Impact Payment Rule to Move Forward: In Amador v. Mnuchin, 2020 PTC 237 (D. Md. 2020), a district court denied a motion by the U.S. government to dismiss a case challenging the constitutionality of Code Sec. 6428(g)(1)(B), which operates in tandem with Code Sec. 6428(g)(2) to exclude otherwise eligible individuals and their children from receipt of economic impact payments (EIPs) authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) if they file a joint tax return and if their spouse lacks a social security number (SSN). The plaintiffs are 16 American citizens, some with U.S. citizen children, who are married to individuals who use an individual taxpayer identification number (ITIN) to file a federal tax return and who, but for their spouse's lack of a SSN, would otherwise be eligible to receive an EIP.

IRS Reopens Registration for Certain Individuals to Claim $500 CARES Act Rebate: In IR-2020-180, the IRS stated that it reopened the registration period from August 15, 2020, to September 30, 2020, for recipients of social security, railroad retirement, SSI and VA benefits who did not file a tax return in 2018 or 2019 to register to receive the additional $500 per-child Economic Impact Payment (EIP) amount. The IRS stated that eligible recipients could expect to receive these EIP payments in October of 2020 and that those who miss the September 30 deadline will need to file a 2020 return in order to receive the payments. Previously, in IR-2020-86 (5/1/20), the IRS had stated that non-filers had until May 6, 2020, to register for these payments.

Individuals Receiving Economic Impact Statement Should Hang onto Notice 1444: The IRS is advising that anyone who received an Economic Impact Payment (EIP) this year should keep Notice 1444, Your Economic Impact Payment, with their tax records. This notice, which the IRS said it mailed to each recipient's last known address within 15 days after the payment went out, provides information about the amount of the recipient's payment, how the payment was made, and how to report any payment that wasn't received.

Credits

COVID-19-Related Relief Provided for Certain Rehabilitation Credit Deadlines: In Notice 2020-58, the IRS provides COVID-19-related relief pursuant to Code Sec. 7508A(a) for certain requirements relating to the rehabilitation credit under Code Sec. 47. The relief relates to the measuring period under the substantial rehabilitation test and the deadline for a Tax Cuts and Jobs Act transition rule relating to the measuring period in which the requisite amount of qualified rehabilitation expenditures have to be paid or incurred in order to satisfy a substantial rehabilitation test for a building.

Deductions

Studying for Real Estate Exam Doesn't Qualify Towards Meeting 750 Hour Test: In Johnson v. U.S., 2020 PTC 230 (D. Nev. 2020), a district court held that a couple's activities related to their Schedule E real estate rental losses were passive and therefore not deductible after the court determined that the wife did not qualify as a real estate professional because she did not meet the requisite 750 hours of work in real estate activities that is necessary for qualifying for the real estate professional exemption. The court rejected the couple's argument that the time spent by the wife studying for the California real estate exam had to be counted in determining if she met the 750 hours test after noting that a license is not a requirement for meeting the material participation rules under Reg. Sec. 1.469-5T.

Marine Can Deduct Portion of Basic Housing Allowance Paid to Ex-Wife as Alimony: In Winslow v. Comm'r, T.C. Summary 2020-22, the Tax Court held that of the $24,000 of payments made by Marine for the support of his former wife and their child, the Marine was entitled to deduct $17,820 as alimony. The court noted that the Marine family support policy requires family support payments equal to two-thirds of a marine's basic housing allowance but, if no child is involved, the Marine policy is to pay one-half of the basic housing allowance which, in the taxpayer's case, was $17,820 per year.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-64, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).

IRS Issues Guidance on Pension Plans for Community Newspapers: In Notice 2020-60, the IRS issued guidance on the election of alternative minimum funding standards for certain defined benefit pension plans under Code Sec. 430(m), which was added by Section 115 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). In addition to summarizing the relevant provisions of Code Sec. 430(m), the guidance (1) specifies the applicable U.S. Treasury obligation yield curve that is used to determine the present value of certain increases in benefits; (2) sets forth rules and procedures relating to the election under Code Sec. 430(m), including a limited period for plan sponsors to make the election for prior years; (3) provides relief related to the impact of the election on the application of Code Sec. 436; (4) provides additional flexibility under Code Sec. 430 to facilitate retroactive elections; and (5) provides guidance on the reporting requirements that reflect the effect of the election.

IRS to Change User Fees for Certain Employee Plan Rulings: In Announcement 2020-14, the IRS announced changes to user fees relating to certain requests for letter rulings and determinations that will take effect on January 4, 2021. According to the IRS, the increased user fees will be reflected in Rev. Proc. 2021-4.

Excise Taxes

IRS Issues Proposed Regulations Relating to Air Transportation Excise Taxes: In REG-112042-19, the IRS issued proposed regulations relating to excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the proposed regulations (1) address the exemption for amounts paid for certain aircraft management services; (2) amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete; (3) generally update the existing regulations to incorporate statutory changes, case law, and other published guidance; and (4) withdraw a provision that was included in a prior notice of proposed rulemaking that was never finalized and re-propose it.

Deadline Extended for First Quarter Excise Tax for Sport Fishing or Archery Equipment: In Notice 2020-55, the IRS postponed until October 31, 2020, the deadline for excise tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for taxpayers who owe a federal excise tax for sales of sport fishing or archery equipment for the first quarter of 2020. Previously, in Notice 2020-48, the IRS postponed certain federal tax filing and payment deadlines related to second quarter 2020 sport fishing and archery equipment excise taxes.

Gross Income

Native American Treaties Don't Create Individual Exemption from Taxes: In Perkins v. Comm'r, 2020 PTC 249 (2d Cir. 2020), the Second Circuit, in an issue of first impression, agreed with the Tax Court that neither the 1794 Treaty of Canandaigua nor the 1842 Treaty with the Seneca Nation of Indians create an individualized exemption from federal income taxes for income derived from Seneca land. The court (1) rejected an argument that suggested otherwise made by a couple operating a company that sold gravel mined from land belonging to the Seneca Nation of Indians because, the court said, the couple's view was premised upon the erroneous presumption that an exemption from federal taxes for income derived from land held in trust for American Indians extends to land that remains in the possession of the Seneca Nation of Indians and (2) concluded that, to the extent the 1842 Treaty with the Seneca created an exemption from taxes on Seneca land, that exemption does not cover income derived from Seneca land by individual enrolled members of the Seneca Nation.

Procedure

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

IRS Announces That Taxpayers Can Now Submit Amended Returns Electronically: In IR-2020-182 (8/17/20), the IRS announced that taxpayers can now submit Form 1040-X, Amended U.S. Individual Income Tax Return, electronically using commercial tax-filing software. The IRS noted that for the initial phase, only tax year 2019 Forms 1040 and 1040-SR can be amended electronically, and that taxpayers still have the option to submit a paper version of the Form 1040-X.

Couple Can't File Refund Actions Where They Didn't Sign Amended Returns: In Clark v. U.S., 2020 PTC 219 (Fed. Cl. 2020), the Federal Claims Court held that a couple could not file a refund claim action in the court because they did not first "duly file" claims for tax refunds with the IRS. The court agreed with the government that because the taxpayers did not sign their amended tax returns and verify them under penalty of perjury, Code Sec. 7422(a) precluded the court from exercising subject-matter jurisdiction over their refund claims and thus granted the government's motion to dismiss the taxpayers' complaint.

Public Utilities

Normalization Requirements for TCJA Corporate Tax Reduction Clarified: In Rev. Proc. 2020-39, the IRS issued a revenue procedure clarifying the normalization requirements following the corporate tax rate reduction enacted as part of the Tax Cuts and Jobs Act (TCJA). The revenue procedure applies to public utilities subject to normalization that have a difference in tax rates due to accelerated depreciation resulting from the corporate tax rate reduction.

Retirement Plans

IRS Modifies Safe Harbor Explanations for Sec. 402(f) Notice on Rollover Distributions: In Notice 2020-62, the IRS modifies the two safe harbor explanations in Notice 2018-74, that may be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The safe harbor explanations, as modified, take into consideration certain legislative changes, including changes related to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was enacted as part of the Further Consolidated Appropriations Act, 2020.

IRS Provides Special Guidance Relating to CARES Act Changes for Defined Benefit Plans: In Notice 2020-61, the IRS provides guidance regarding the special rules on single-employer defined benefit pension plans under Sec. 3608 of the CARES Act. According to the IRS, an employer may elect to apply the benefit restrictions applicable to underfunded plans under Code Sec. 436 for the 2020 plan year (or a fiscal plan year that contains any part of 2020) using the plan's funded status for the last plan year ending in 2019.

July 2020

Accounting

IRS Issues July 2020 Applicable Federal Rates: In Rev. Rul. 2020-14, the IRS issued a ruling which prescribes the applicable federal rates for July 2020. 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

Debtor's Objection to IRS's Proof of Claim Only Had to Be Filed with the IRS: In In re Nicolaus, 2020 PTC 186 (8th Cir. 2020), the Eighth Circuit reversed a bankruptcy court and a district court and held that, when the debtor objected to a proof of claim filed by the IRS, that objection only had to be filed with the IRS and was not required to be filed with the Attorney General or the local U.S. Attorney. The Eighth Circuit found that all the Federal Rules of Bankruptcy Procedure required at the time the objection was made was that the objection be filed with the IRS.

Bankruptcy Court Finds in Favor of Debtors' Exemptions: In In re Kauer, 2020 PTC 191 (Bankr. Ariz. 2020), an Arizona bankruptcy court held that the debtors who formerly lived in Idaho were entitled to elect the federal exemptions of 11 U.S.C. Sec. 522(d), including an exemption for their tax refund, and were not limited, as the bankruptcy trustee had argued, solely to exemptions permitted under the Idaho law that might otherwise apply since the debtors were not domiciled in Arizona for the 730 days preceding the filing of bankruptcy. The court found that the trustee did not point to a single exemption under Idaho law that the debtors could claim and, thus, to hold as the trustee had urged would result in a de facto denial of all exemptions to the debtors which, the court said, is counter to the well-established principle that exemption statutes are to be liberally construed in favor of the debtors.

COVID-19

IRS Extends Deadline for Sporting Goods Excise Tax Return and Payments: In Notice 2020-48, the IRS provides that any person with a federal sporting goods excise tax payment due, and a requirement to file a return, under the sport fishing and archery equipment numbers on Part II of Form 720, on July 31, 2020, is determined to be affected by the COVID-19 emergency and such deadline is automatically postponed to October 31, 2020. This relief is automatic and, thus, affected taxpayers do not have to call the IRS, file any extension forms, or send letters or other documents to receive this relief.

Credits

IRS Issues 2021 Inflation Adjustments for Premium Tax Credit: In Rev. Proc. 2020-36, the IRS issued calendar year 2021 indexing adjustments for the applicable percentage table in Code Sec. 36B(b)(3)(A)(i) that is used to calculate an individual's premium tax credit under Code Sec. 36B. The IRS also updated the required contribution percentage in Code Sec. 36B(c)(2)(C)(i)(II), which is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Sec. 36B, for plan years beginning after calendar year 2020.

IRS Issues Temporary Relief from Certain Low-Income Housing Credit Rules: In Notice 2020-53, the IRS issued temporary relief pursuant to Code Sec. 7508A(a) and Reg. Sec. 1.43-13(a) from certain requirements under the low-income housing tax credit rules of Code Sec. 42 for qualified low-income housing projects and under Code Sec. 142(d) and Code Sec. 147(d) for qualified residential projects. The notice, which is in response to the COVID-19 pandemic, amplifies Notice 2020-23, Rev. Proc. 2004-39, Rev. Proc. 2014-49, and Rev. Proc. 2014-50.

Deductions

IRS Issues Temporary Regs on Carrybacks of Consolidated Net Operating Losses: In T.D. 9900, the IRS issued temporary regulations under Code Sec. 1502 that permit consolidated groups that acquire new members that were members of another consolidated group to elect in a year subsequent to the year of acquisition to waive all or part of the pre-acquisition portion of an extended carryback period under Code Sec. 172 for certain losses attributable to the acquired members where there is a retroactive statutory extension of the NOL carryback period under Code Sec. 172. The regulations respond to the enactment of Section 2303 of the CARES Act (Pub. L. 116-136), which retroactively extends the carryback period under Code Sec. 172 for tax years beginning after 2017 and before 2021.

Prop. Regs Would Amend NOL Guidance for Consolidated Returns: In REG-125716-18, the IRS issued proposed regulations that would amend the rules under Code Sec. 1502 to provide guidance implementing recent statutory changes to Code Sec. 172 and would withdraw and re-propose certain sections of previously issued proposed regulations relating to the absorption of consolidated net operating loss carryovers and carrybacks. In addition, the proposed regulations update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes and would affect corporations that file consolidated returns.

Employee Benefits

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-57, 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

Restaurateur Who Lived "High on the Hog" Deserved Enhanced Prison Sentence: In U.S. v. Minner, 2020 PTC 178 (8th Cir. 2020), the Eight Circuit affirmed a 36-month prison sentence of a taxpayer, who owned a chain of restaurants called the Rowdy Beaver, after he was found guilty of failing to collect or pay employment taxes for his restaurants' employees. While the prison sentence was slightly higher than the guidelines of 27 to 33 months, the court said it was appropriate given that the taxpayer's fraud lasted nine years and, during that time, the taxpayer was "living high on the hog" with an expensive house, real estate, boats, and significant amounts of cash.

Christian Media Network Owner Can't Claim Religious Exemption from Taxes: In Lloyd v. Comm'r, T.C. Memo. 2020-92, the Tax Court held that a taxpayer who operated several Bible-focused websites and internet-based radio stations was liable for income and self-employment taxes, and substantial penalties for failing to file income tax returns and pay income and self-employment taxes for years 2005 - 2010. The court rejected the taxpayer's argument that he was a functioning church entitled to a religious exemption after noting that the income tax laws contain no exemption from tax for an individual "functioning as a church."

IRS Updates the Deferral of Employment Tax Deposit FAQs: On the IRS.gov website, the IRS updated its FAQs relating to the deferral of employment tax deposits and payments through December 31, 2020, as a result of the enactment of changes made by Section 3 of the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act). The IRS notes that the PPP Flexibility Act, enacted on June 5, 2020, amended Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act by striking the rule that would have prevented an employer from deferring the deposit and payment of the employer's share of social security tax after the employer receives a decision that its PPP loan was forgiven by the lender and, thus, an employer that receives a PPP loan is entitled to defer the payment and deposit of the employer's share of social security tax, even if the loan is forgiven.

Foreign

Final Regs Address Deduction for FDII and GILTI: In T.D. 9901, the IRS issued final regulations that (1) provide guidance on the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), and (2) coordinate the deduction for FDII and GILTI with other provisions in the Code. These regulations generally affect domestic corporations and individuals who elect to be subject to tax at corporate rates for purposes of inclusions under subpart F and GILTI.

IRS Finalizes Regs on Income Subject to a High Rate of Foreign Tax: In T.D. 9902, the IRS issued final regulations under the global intangible low-taxed income and subpart F income provisions regarding the treatment of income that is subject to a high rate of foreign tax. The final regulations affect U.S. shareholders of foreign corporations and relate to changes made by the Tax Cuts and Jobs Act of 2017.

IRS Addresses the Treatment of Certain Income Subject to a High Rate of Foreign Tax: In REG-127732-19, the IRS issued proposed regulations under the subpart F income and global intangible low-taxed income provisions regarding the treatment of certain income that is subject to a high rate of foreign tax. The proposed regulations also include information reporting provisions for foreign corporations to facilitate the administration of certain rules in the proposed regulations and would affect U.S. shareholders of controlled foreign corporations.

Healthcare

Prop. Regs Would Amend Rules for Grandfathered Group Health Plans: In REG-130081-19, the IRS issued proposed regulations regarding grandfathered group health plans and grandfathered group health insurance coverage that would, if finalized, amend current rules to provide greater flexibility for certain grandfathered health plans to make changes to certain types of cost-sharing requirements without causing a loss of grandfather status. In the IRS's view, the proposed amendments are appropriate because they would enable these plans to continue offering affordable coverage while also enhancing their ability to respond to rising healthcare costs and, in some cases, the proposed amendments would also ensure that the plans are able to comply with minimum cost-sharing requirements for high deductible health plans so enrolled individuals are eligible to contribute to health savings accounts.

Partnerships

Chief Counsel Addresses Section 965 Partnership Adjustments and Limitations Period: In PMTA-2020-8, the Office of Chief Counsel was asked for guidance on the statute of limitations for adjustments relating to Code Sec. 965 for various types of partnerships. In response, the Chief Counsel's Office advised that, provided no other extensions or suspensions of the statute of limitations on making assessments on Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and non-TEFRA/non-Bipartisan Budget Act of 2015 (BBA) partnerships or adjustments to BBA partnerships apply, then (1) for partnerships subject to TEFRA, assessments of tax related to adjustments to the partnership items of the partnership may be made (i) for all partners and all partnership items, within three years from the date the partnership return is filed (or the due date, if later), and (ii) for a specific partner who has a net tax liability described in Code Sec. 965(h)(6), within six years from the date the partner's return was filed (or due date, if later) for assessing the Code Sec. 965 net tax liability; (2) for partnerships subject to BBA, adjustments to the partnership-related items of the partnership may be made (i) for all partnership-related items, within three years of the date the partnership return is filed (or due date, if later) or the date an administrative adjustment request is filed, and (ii) within six years if any item of gross income required to be included under Code Sec. 951(a) (which includes the Code Sec. 965(a) inclusion amount) was omitted by the partnership; and (3) for partnerships not subject to BBA or TEFRA, assessments of tax may be made (i) within three years from the date the partner's return was filed (or the due date if later) for all items on the partnership return, or (ii) within six years for the net tax liability described in Code Sec. 965(h)(6).

Procedure

Sentence of Taxpayer Who Filed False Returns Based on "Legacy Trusts" Affirmed: In U.S. v. Blake, 2020 PTC 199 (7th Cir. 2020), the Seventh Circuit upheld a 36-month prison sentence of a taxpayer who had engaged in a fraudulent tax scheme that he claimed he only participated in after unnamed users in internet chat rooms persuaded him that the federal government was holding hidden bank accounts for its citizens - "legacy trusts" - that could be accessed through various legal maneuvers. The court found the prison sentence to be appropriate after noting that the taxpayer, who has a master's degree in business administration, filed false tax returns and received almost $150,000 from the IRS as a refund claimed on one of those returns.

Court Upholds Prison Sentence of Former IRS Employee Who Stole Taxpayer Checks: In U.S. v. Gambrell, 2020 PTC 187 (4th Cir. 2020), the Fourth Circuit affirmed the prison sentence of a former IRS employee who was found guilty of intercepting taxpayer checks and money orders and depositing them into her own bank account. While the government had recommended a lighter prison sentence than the sentence that was imposed, in part because of the IRS's culpability in hiring someone with a previous criminal record, the Fourth Circuit found that the increased prison time was appropriate in light of the severity of the charges and also concluded that the government had complied with its plea obligations to the former IRS employee.

Taxpayer's Case Is Moot Since No Live Controversy Remained: In Ruesch v. Comm'r, 154 T.C. No. 13, the Tax Court dismissed a challenge by the taxpayer to an IRS certification of her delinquent tax liability was a "seriously delinquent tax debt" under Code Sec. 7345 because the IRS subsequently reversed the certification as being erroneous. The court also concluded that, because it did not have jurisdiction under Code Sec. 7345 or any other provision to consider the taxpayer's challenge to her underlying liability for penalties, there remained no live controversy between the taxpayer and the IRS and the case was thus moot.

Chief Counsel Addresses Effect of Superseding Returns on the Statute of Limitations: In CCM 202026002, the Office of Chief Counsel advised that, for purposes of Code Sec. 6501 and the determination of when the statute of limitations begins in a situation where one tax return is filed and then a second tax return (a superseding return) is subsequently filed before the return due date, there is no effect on the statute of limitations because a return filed before the last day prescribed for filing is deemed filed on the last day. However, the Chief Counsel's Office noted, where the first return is filed before the last date prescribed for filing, and a second return is subsequently filed during the extension period, the statute of limitations begins running on different dates and, under Zellerbach Paper Co. v. U.S., 293 U.S. 172 (1934), the original return, not the superseding return, starts the limitations periods under both Code Sec. 6501 and, with respect to refunds, Code Sec. 6511.

Retirement Plans

Since Divorce Decree Was Not a QDRO, Ex-Spouse Not Entitled to Retirement Benefits: In Crowder v. Delta Airlines, Inc., 2020 PTC 184 (11th Cir. 2020), the Eleventh Circuit held that a taxpayer was not entitled to her ex-husband's retirement plan benefits after his death. The court noted that the taxpayer could have been entitled to such benefits if her divorce decree was a QDRO that gave her, as an alternate payee, rights to receive all or a portion of her ex-husband's plan benefits or directed that she, as the "former spouse . . . be treated as a surviving spouse of" her ex-husband.

Court Excuses Taxpayer from Penalty Assessed During Tumultuous Period in Her Life: In Seril v. Comm'r, T.C. Memo. 2020-101, the Tax Court held that, while a taxpayer who received distributions from her retirement account was taxable on the distributions, a portion of the distributions used for qualified higher education expenses was not subject to the penalty tax under Code Sec. 72(t). In addition, the court concluded that the taxpayer was not liable for the penalties assessed by the IRS because she exercised good faith in her tax reporting and the period during which the return was prepared was a very tumultuous period in her life.

IRS Clarifies Mid-Year Safe-Harbor Amendment Requirements: In Notice 2020-52, the IRS clarifies the requirements that apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan that reduces only contributions made on behalf of highly compensated employees. The notice also provides temporary relief in connection with the ongoing COVID-19 pandemic from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan adopted between March 13, 2020, and August 31, 2020, that reduces or suspends safe harbor contributions.

Tax-Exempt Organizations

Code Section 265 Can't Be Used to Disallow Contributions Used In Computing UBTI: In CCA 202027003, the Office of Chief Counsel advised that Code Sec. 265(a)(1) cannot be applied to disallow a Code Sec. 170 charitable contribution when calculating a tax-exempt organization's unelated business taxable income (UBTI) under Code Sec. 512(a)(1). The Chief Counsel's Office concluded that a charitable contribution is not allocable to tax-exempt income, but instead arises from a donor's charitable intent to voluntarily transfer money or property without receiving any benefit in return.

Tax Return Preparers

IRS Finalizes Regs Reducing Tax Return Preparer PTIN Fees: In T.D. 9903, the IRS issued final regulations relating to the user fees on tax return preparers which are substantially the same as the proposed regulations. The final regulations reduce the amount of the user fee to apply for or renew a preparer tax identification number (PTIN) from $33, plus $17 payable to a third-party contractor, to $21, plus $14.95 payable to a third-party contractor and affect individuals who apply for or renew a PTIN.

Appeals Court Affirms 96-Month Prison Sentence of Tax-Return Preparer: In U.S. v. Jeffries, 2020 PTC 200 (6th Cir. 2020), the Sixth Circuit affirmed the 96-month prison sentence and fine of $100,000 imposed on a tax-return preparer convicted of conspiring to defraud the United States and aiding the preparation and presentation of false income tax returns. The court noted that the taxpayer had secured large refunds for clients by filing false or misleading returns on their behalf, resulting in the underpayment of more than $1 million in taxes.

 

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