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Tax and Accounting Research: Tax Updates September 2021 - November 2020

September 2021

Accounting

IRS Issues September 2021 Applicable Federal Rates: In Rev. Rul. 2021-16, the IRS provides various prescribed rates for federal income tax purposes for September 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.

Credits

Taxpayer Caring for Brother's Children Qualifies for Child-related Tax Benefits: In Griffin v. Comm'r, T.C. Summary 2021-26, the Tax Court held that a taxpayer who took care of her disabled brother's children for more than one-half of the tax year was entitled to dependency exemption deductions for the children, child tax credits, and the earned income tax credit. The court noted that the children stayed overnight with the taxpayer all summer and on weekends, during school closures, and on holidays during the school year; the children also stayed with her when they had to leave school early or when the school could not reach their father.

Employee Benefits

Interim Remedial Amendment Deadline Modified: In Rev. Proc. 2021-38, the IRS modified the interim amendment deadline set forth in Section 15.04(1) of Rev. Proc. 2016-37, as modified by Rev. Proc. 2017-41 and Rev. Proc. 2020-40. Under the revenue procedure, an interim amendment made to a pre-approved plan qualified under Code Sec. 401(a) is timely if the amendment is adopted by the end of the second calendar year after the calendar year in which the change in qualification requirements is effective with respect to the plan.

IRS Sets Forth Procedures for Opinion Letters on Section 403(b) Plans: In Rev. Proc. 2021-37, the IRS sets forth procedures for issuing opinion letters regarding the satisfaction in form of Code Sec. 403(b) Pre-approved Plans with respect to the requirements of Code Sec. 403(b) for the second Remedial Amendment Cycle. The revenue procedure also sets forth the rules for determining when Remedial Amendment Periods expire for Code Sec. 403(b) Pre-approved Plans.

Foreign

Procedure Addresses the Computation of Minimally Effectively Connected Income: In Rev. Proc. 2021-41, the IRS provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Code Sec. 842(b) for tax years beginning after December 31, 2019. The Code Sec. 842(b) percentages to be used for the 2020 tax year are based on tax return data from the 2018 tax year.

Taxpayers That Switch to Claiming Foreign Tax Credits Need to File Amended Returns: In CCM 202133013, the Office of Chief Counsel advised that, while a corporate taxpayer has the option of changing its election to deduct foreign taxes to instead claim credits for such taxes, the taxpayer cannot claim both a deduction and a credit for the same foreign tax and cannot both retain the foreign tax deduction on its originally filed returns and claim a credit for the same taxes on an amended return. Thus, the Chief Counsel's Office concluded, a corporation should not be eligible to claim the foreign tax credits without also amending its earlier returns on which deductions for those taxes were claimed and paying any associated tax deficiency.

Innocent Spouse

Taxpayer Abused by Husband Qualifies for Innocent Spouse Relief: In Grady v. Comm'r, T.C. Summary 2021-29, the Tax Court rejected an IRS determination that a taxpayer was not entitled to relief from liability for underpayments of joint federal income tax for the five years at issue. The court found that the taxpayer had been emotionally abused and neglected by her husband and that she did not gain any significant benefit from the nonpayment of the joint income tax liabilities.

Like-Kind Exchanges

Court Refuses to Dismiss Case Involving a Like-Kind Exchange That Went Wrong: In Oak Hill Management, Inc., v. Edmund & Wheeler, Inc., 2021 PTC 276 (D. Vt. 2021), a district court refused to dismiss a case against a corporation and its Vice President, who had held himself out as a Code Sec. 1031 exchange expert, involving a like-kind exchange that went bad for a couple that had hired the corporation to help them with a commercial real estate transaction. The couple file suit in 2020 (2020 PTC 403 (D. Vt. 2020)) seeking to recover over $3.5 million in losses as well as punitive damages as a result of the defendants' alleged fraud, negligence, breach of fiduciary duty, breach of contract, and sale of unregistered securities.

Procedure

IRS Will Not Issue Ruling on Certain Self-Dealing Transactions: In Rev. Proc. 2021-40, the IRS sets forth areas on which the IRS will not issue letter rulings or determination letters. In particular, the revenue procedure announces that the IRS will not issue letter rulings on whether certain transactions are self-dealing within the meaning of Code Sec. 4941(d).

Court Finds Whistleblower Claim Involving Couple's Landlord Not Credible: In Chow v. Comm'r, T.C. Memo. 2021-106, the Tax Court held that a married couple's whistleblower claim involving their former landlord was not credible and thus agreed with the IRS Whistleblower Office that the couple was not entitled to a whistleblower award for such information. The court also concluded that the IRS did not abuse its discretion when it did not offer the couple an opportunity to supplement their claim before rejecting it.

IRS Extends Period for Telephonic Hearings: In Rev. Proc. 2021-39, 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 COVID-19 pandemic, the IRS is extending until March 31, 2022, the time period described in Section 4.02 of Rev. Proc. 2020-21, as modified by Rev. Proc. 2020-49, during which certain telephonic hearings are permitted.

IRS Did Not Provide Reasonable Notice Before Contacting Third Parties: In U.S. v. Vaught, 2021 PTC 264 (D. Id. 2021), a district court held that, under the totality of the circumstances in a case dealing with the question of whether or not the IRS provided reasonable notice to a taxpayer before contacting third parties regarding certain installment sale transactions, it could not find that either the general notice provided in Publication 1, or in an unidentified statement on December 16, 2015, provided the taxpayer with reasonable advance notice that the IRS could contact third parties in the course of its investigation. Because the IRS failed to satisfy the pre-contact notice requirement of Code Sec. 7602(c)(1), the court concluded the government could not meet its burden of showing it complied with the administrative steps required under the Code before issuing the summonses relating to the transactions it was investigating.

Overpayment and Underpayment Interest Rates Remain the Same for Fourth Quarter: In Rev. Rul. 2021-17, the IRS issued the rates for interest on tax overpayments and underpayments for the fourth calendar quarter of 2021, beginning October 1, 2021. The interest rates, which are the same as they were for the third 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.

August 2021

Accounting

IRS Issues August 2021 Applicable Federal Rates: In Rev. Rul. 2021-14, the IRS provides various prescribed rates for federal income tax purposes for August 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

Withholding Rule Applies to Debtor's Joint Tax Refund: In In re Culp, 2021 PTC 246 (Bankr. E.D. Mich. 2021), a bankruptcy court agreed with a bankruptcy trustee that the "withholding rule," rather than the "50/50 rule," applied to determine the portion of a debtor's 2018 joint tax refund that belonged to the debtor's bankruptcy estate. The court noted that the debtor's spouse did not earn any income and did not make any tax payments toward the federal income tax for 2018 and thus concluded that the entire refund was the property of the debtor and his bankruptcy estate, subject to any allowed exemption that the debtor might have.

Tax Distributions to LLC Members Did Not Hurt Creditors: In In re F-Squared Investment Management, LLC, 2021 PTC 260 (Bankr. D. Del. 2021), a bankruptcy court ruled against a bankruptcy trustee and held that an investment company's payments of tax distributions to its members did not make the investment company (or its creditors) worse off because the investment company used the promise of such payments to induce its members to vote in favor of converting to a limited liability company (LLC) by promising that the company would make them whole for any tax obligations that were passed-through to them. The court noted that, had the members not voted to permit the company to convert from a C corporation to an LLC, the company would have had to pay income tax on its revenue and would have paid its tax obligations directly to the U.S. Treasury rather than making the tax distributions to its members; thus, the company's creditors were not made worse off by the distributions.

Credits

IRS Provides Work Opportunity Tax Credit Transition Relief: In Notice 2021-43, the IRS provides transition relief for certain employers claiming the work opportunity credit under Code Sec. 51 for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an Empowerment Zone, defined in Code Sec. 1393(b), to be extended from December 31, 2020, through December 31, 2025. Specifically, the notice provides transition relief by extending the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after January 1, 2021, and before October 9, 2021, is a member of the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.

Deductions

Code Section 280E Does Not Violate the Constitution, Tax Court Says: In Today's Health Care II, LLC v. Comm'r, T.C. Memo. 2021-96, the Tax Court held that Code Sec. 280E, which provides that no deduction or credit is allowed for amounts paid or incurred in carrying on any trade or business if that trade or business consists of trafficking in controlled substances which are prohibited by law, does not violate the Eighth or Sixteenth Amendment to the Constitution. The court thus rejected challenges by a corporation that sought to deduct expenses relating to the growing, producing, and selling of medical marijuana products.

Couple Not Entitled to Worthless Stock Deduction under Section 1244: In Ushio v. Comm'r, T.C. Summary 2021-27, the Tax Court held that a couple was not entitled to an ordinary loss of $50,000 under Code Sec. 1244 for the worthlessness of stock they had purchased, but was entitled to deduct $3,000 as a capital loss for each of the years at issue. The court held that, while the couple met one of the requirements of Code Sec. 1244 because they purchased the stock for money, they did not meet the other two requirements because (1) the company whose stock was purchased did not meet the Code Sec. 1244 definition of a "small business corporation," and (2) during its existence, the company was not an operating company because more than 50 percent of its aggregate gross receipts were not from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities and it thus did not meet the Code Sec. 1244 gross receipts requirements.

Couple Can Partially Deduct Ponzi Scheme Losses: In Vennes v. Comm'r, T.C. Memo. 2021-93, the Tax Court held that a couple met the requirements of Rev. Proc. 2009-20 and were thus entitled to a theft loss deduction incurred in 2008 as a result of a Ponzi scheme run by a well-known local businessman. However, the court found that, with respect to another investment loss which the taxpayers attempted to deduct, the husband either knew or deliberately avoided knowing the fraudulent nature of the scheme and thus was not entitled to a theft loss deduction for that investment.

Wealthy Investor Cannot Carryback Losses Resulting from Investments in Films: In Swartz v. U.S., 2021 PTC 230 (E.D. N.Y. 2021), a district court held that a retired engineer and wealthy investor, who invested $4.5 million in two limited liability companies that financed films, was not entitled to carry back losses incurred on those investments because the investments were capital assets. Even if the investments were non-capital assets, the court said, the taxpayer would still not be able to carryback the losses because they were not incurred in the taxpayer's trade or business.

Employee Benefits

IRS Issues Notice on ARP Changes to Pension Plan Funding: In Notice 2021-48, the IRS issued guidance on the changes to the funding rules for single-employer defined benefit pension plans under Code Sec. 430 that were made by the American Rescue Plan Act of 2021 (ARP). Some of the issues addressed include the ARP changes to the adjusted 24-month average segment rates, the applicability of the ARP segment rates, the extension of the amortization period for shortfall amortization bases, and reporting requirements.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-50, the IRS sets forth updates on the corporate bond monthly yield curve, the corresponding spot segment rates for August 2021 used under Code Sec. 417(e)(3)(D). The notice also includes the 24-month average segment rates applicable for August 2021, and the 30-year Treasury rates, as reflected by the application of Code Sec. 430(h)(2)(C)(iv).

Foreign

Thirty-Five Percent Penalty Applies to Owner of Foreign Trust Who Filed Return Late: In Wilson v. U.S., 2021 PTC 242 (2d Cir. 2021), the Second Circuit vacated a district court judgment and remanded for further proceedings after concluding that the sole owner and beneficiary of a foreign trust was liable for the 35 percent penalty under Code Sec. 6048(b) for late filing of the annual trust return. The Second Circuit disagreed with the district court's finding that, because the beneficiary was the owner of the trust, the government could impose only a 5 percent penalty.

Procedure

Salesman's Incentive Payments Are Reportable as Other Income, Not Schedule C Income: In Monroe v. Comm'r, T.C. Summary 2021-24, the Tax Court held that a car salesman, who received a Form W-2 for commissions received on cars he sold for a car dealership and received a Form 1099-MISC for performance incentive payments he received from the dealership's parent company, was required to report his incentive payments as "Other Income" on Form 1040, and could not report it as Schedule C income. Similarly, the related deductible business expenses incurred with respect to the incentive pay income were reportable on Schedule A, rather than Schedule C.

Extended Statute of Limitations Did Not Apply to Real Estate Bad Debt: In Devine v. U.S., 2021 PTC 20 (Fed. Cl. 2021), the Court of Federal Claims rejected a taxpayer's motion for reconsideration of the court's earlier judgment (2021 PTC 9 (Fed. Cl. 2021)) in which the court held that advances made by the taxpayer to his partner in a real estate endeavor were not debt and, as a result, the taxpayer could not take advantage of the extended statute of limitations in Code Sec. 6511(d) for filing refund claims reserved for business bad debts. In the earlier decision, the court concluded that the funds advanced by the taxpayer were capital investments in the real estate project and did not constitute a business debt.

Tax Court Abused Its Discretion By Entering Decision for the IRS: In Dollarhide v. Comm'r, 2021 PTC 249 (9th Cir. 2021), the Ninth Circuit held that it was an abuse of discretion for the Tax Court to grant an IRS motion for entry of decision based upon the IRS and taxpayers' Stipulation of Settled Issues. The court noted that the IRS subsequently conceded that there was no conclusive settlement agreement between the parties with respect to whether the taxpayers were due a refund for tax year 2006 and, because there was no settlement agreement between the parties with respect to this disputed issue, the Tax Court abused its discretion by granting the IRS motion and entering a judgment enforcing the parties' purported settlement of the issue.

Couple's Informal Refund Claim to Be Resolved by Jury: In Libitzky v. U.S., 2021 PTC 253 (N.D. Calif. 2021), a district court concluded that, with respect to a couple's tax refund claim, there remained questions of fact that need to be resolved by a jury in order to determine if the couple made a timely and adequate informal claim such that their 2011 tax overpayment of $692,690 is recoverable under Code Sec. 6511(b)(2)(A). The court observed that this case would be appealable to the Ninth Circuit and cited the Ninth Circuit's decision in Comm'r v. Ewing, 439 F.3d 1009 (9th Cir. 2006), which recognizes the informal claim doctrine.

Loss Calculation Is Reduced by Value Provided by Taxpayer to Employer: In U.S. v. Bhikha, 2021 PTC 257 (N.D. Calif. 2021), a district court held that, in calculating the loss resulting from a taxpayer's fraud on his employer, where the taxpayer accepted kickbacks from a third party company in exchange for facilitating a business relationship with his employer and fraudulently obtained contracts from his employer for companies under his control, the kickbacks were counted in the loss calculation and any loss resulting from the employer's payments to the taxpayer's own companies are offset by the fair market value of the services that those companies provided to the employer. The court noted that, in calculating loss, courts cannot ignore economic benefits that a defendant provides to the victim.

Retirement Plans

Mandatory Victims Restitution Act Permits Seizure of Embezzler's 401(k): In U.S. v. Frank, 2021 PTC 261 (4th Cir. 2021), the Fourth Circuit agreed with a district court that the Mandatory Victims Restitution Act of 1996 (MVRA) permits the seizure of a 401(k) retirement account from a taxpayer who was convicted of embezzling over $19 million from his former employer and who was ordered to pay restitution. However, the court clarified that when the government enforces a restitution order under the MVRA, it stands in the shoes of the taxpayer himself, acquiring whatever rights to 401(k) retirement funds he possesses - no less, but also no more - and thus remanded the case back to the district court to determine what present property right the taxpayer has in his 401(k) account and, by extension, what funds from that account the government may garnish pursuant to the court's restitution order.

Tax Accounting

IRS Issues New Procedure Regarding Credit Card Fee Treatment: In Rev. Proc. 2021-35, the IRS issued a revenue procedure that reflects changes made to the treatment of certain credit card fees by Code Sec. 451(b), Reg. Sec. 1.451-3, and Reg. Sec. 1.1275-2(l). The procedure modifies Rev. Proc. 2013-26, which allows a taxpayer to use a safe harbor method of accounting for original issue discount on a pool of credit card receivables for purposes of Code Sec. 1272(a)(6).

Tax-Exempt Organizations

Entity Owned and Controlled by Married Couple Does Not Qualify As Tax-Exempt: In New World Infrastructure Organization v. Comm'r, T.C. Memo. 2021-91, the Tax Court held that an entity owned and controlled exclusively by a married couple did not qualify as a tax-exempt organization under Code Sec. 501(c)(3). The court concluded that, because the entity was owned and controlled exclusively by the couple, the benefits relating to the entity would inure to the couple and thus the entity is not operated for the benefit of the public.

Taxpayer Penalized Almost $300,000 for Excess Benefit Transactions: In Ononuju v. Comm'r, T.C. Memo. 2021-94, the Tax Court held that a taxpayer was a disqualified person with respect to a tax-exempt organization and that she failed to report that she was engaged in excess benefit transactions with that organization during 2014. As a result, the taxpayer was liable for a first-tier tax of $32,500 under Code Sec. 4958(a) and, because she failed to correct the improper transactions during the applicable period, a second-tier tax of $260,000 under Code Sec. 4958(b) applied as well as additions to tax under Code Sec. 6651(a)(1) and (2).

July 2021

Accounting

IRS Issues July 2021 Applicable Federal Rates: In Rev. Rul. 2021-12, the IRS provides various prescribed rates for federal income tax purposes for July 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.

Credits

Alternative Fuel Mixture Credit Does Not Apply to Mixture of Butane and Gasoline: In U.S. Venture, Inc. v. U.S., 2021 PTC 189 (7th Cir. 2021), the Seventh Circuit affirmed a district court and held that the IRS properly rejected a claim for an alternative fuel mixture credit under Code Sec. 6426 by a taxpayer that mixed butane with gasoline. The court found that the language employed in Code Sec. 6426(e) clearly supported the IRS's position and that it did not need to resort to the parties' arguments based on legislative history.

IRS Ruling Addresses Carbon Oxide Sequestration Credit: In Rev. Rul. 2021-13, the IRS ruled that, for purposes of the credit for carbon oxide sequestration in Code Sec. 45Q, the acid gas removal unit at a methanol plant that produces methanol from petroleum coke in a multistep industrial process is carbon capture equipment within the meaning of Reg. Sec. 1.45Q-2. In addition, the IRS stated that an investor in the facility is not required to own every component of carbon capture equipment within a single process train at the facility to be the person to whom the Code Sec. 45Q credit is attributable under Reg. Sec. 1.45Q-1(h).

IRS Provides Beginning-of-Construction Guidance to Address Covid-Related Delays: In Notice 2021-41, the IRS clarified and modified prior IRS notices addressing the beginning of construction requirement for both the production tax credit for qualified facilities under Code Sec. 45 and the investment tax credit for energy property under Code Sec. 48. Safe harbor guidance previously provided in Notice 2013-60 and Notice 2018-59 and extended in subsequent IRS notices is further extended, as a result of Covid-related delays, for property the construction of which began in 2016 through 2020.

Deductions

Court Disallows Alimony Deductions for Amounts Paid to Daughter's Ex-Husband: In Berger v. Comm'r, T.C. Memo. 2021-89, the Tax Court held that a married couple could not take as an alimony deduction amounts paid to their daughter's ex-husband as a result of guaranteeing their daughter's divorce obligations to her ex-husband. The court also disallowed amounts included on the couple's Schedule F, Profit or Loss From Farming, relating to a cannabidiol oil extraction venture that the husband started with his son but then discontinued after the son's death.

Educational Activities Do Not Count in Determining Status as Real Estate Professional: In Johnson v. U.S., 2021 PTC 182 (9th Cir. 2021), the Ninth Circuit affirmed a district court's holding that a married couple was not entitled to deduct rental property losses as non-passive losses. The court concluded that the wife could not count time spend on educational activities in determining the number of hours spent in real property trades or businesses in which she materially participated and, as a result, she did not meet the more-than-750 hours requirement in Code Sec. 469(c)(7)(B).

Taxpayer Cannot Use Google Maps to Substantiate Miles Traveled: In Geiman v. Comm'r, T.C. Memo. 2021-80, the Tax Court disallowed most of a taxpayer's travel expense deductions because the taxpayer did not meet the heightened substantiation requirements of Code Sec. 274. The court rejected the taxpayer's use of Google Maps printouts as substantiation for the number of business miles traveled.

Acceptance of Amended Returns Does Not Preclude Disallowance of NOL Carryovers: In Mancini v. Comm'r, 2021 PTC 186 (9th Cir. 2021), the Ninth Circuit held that the Tax Court properly concluded that the IRS's acceptance of a taxpayer's amended tax returns for the 2008 and 2009 tax years did not preclude the disallowance of his claimed net operating loss carryover deductions for the 2010 tax year. The court also found that the Tax Court properly upheld the IRS's deficiency determination with respect to the taxpayer's gambling losses after finding that such losses did not qualify as deductible casualty losses.

Employee Benefits

IRS Issues Guidance on Pension Benefit Guarantee Corporation Assistance: In Notice 2021-38, the IRS issued guidance under Code Sec. 432(k) to sponsors of multiemployer defined benefit pension plans that are required to reinstate certain previously suspended benefits as a condition of receiving special financial assistance under Section 4262 of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The guidance also (1) addresses whether make-up payments with respect to previously suspended benefits under Code Sec. 432(k)(2)(A)(ii) are eligible to be rolled over to another eligible retirement plan under Code Sec. 402(c), and (2) addresses how to apply the rule in Code Sec. 432(k)(2)(D)(i) under which any special financial assistance received by the plan is not taken into account in determining contributions required under Code Sec. 431.

IRS Updates Employee Plans Correction Methods: In Rev. Proc. 2021-30, the IRS updated the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Code Secs. 401(a), 403(a), 403(b), 408(k), or 408(p), but that have not met these requirements for a period of time. The IRS noted that the Employee Plans Compliance Resolution System permits plan sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.

IRS Extends Guidance on Employees' Use of Benefits for COVID-19-Related Charities: In Notice 2021-42, the IRS is extending through 2021 the guidance previously issued in Notice 2020-46, which provides that cash payments employers make to charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave which their employees forgo will not be treated as compensation. Similarly, the employees will not be treated as receiving the value of the leave as income and cannot claim a deduction for the leave that they donated to their employer; however, employers may deduct the cash payments as a business expense or as a charitable contribution deduction if the employer otherwise meets the applicable requirements.

Employment Taxes

Penalties Apply Where Corporation Failed to Classify Officers as Employees: In Blossom Day Care Centers, Inc. v. Comm'r, T.C. Memo. 2021-86, the Tax Court held that a corporation, which operated several day care centers (1) failed to classify its corporate officers as employees, and (2) was not entitled to relief under the Revenue Act of 1978. The court also concluded that the corporation was liable for unpaid employment taxes relating to the corporate officers, penalties under Code Sec. 6656 for failing to deposit employment taxes, and accuracy-related penalties under Code Sec. 6662(a).

Healthcare

Temp. and Interim Final Regs Implement Provisions of the No Surprises Act, 2021: In T.D. 9951 and REG-107706-21, the IRS issued proposed, temporary, and interim final regulations which implement provisions of the No Surprises Act, which was enacted as part of the Consolidated Appropriations Act, 2021 (Pub. L. 116-260) and protects participants, beneficiaries, and enrollees in group and individual health plans from surprise medical billing and excessive cost-sharing where emergency services and non-emergency services are received from nonparticipating providers at participating facilities. The IRS noted that surprise billing is often used as leverage by providers to get higher in-network payments, which result in higher premiums, higher cost sharing for consumers, and increased health care spending overall.

Income

Uber Driver Taxed on Amounts Earned by Others Driving Under His Account: In Nurumbi v. Comm'r, T.C. Memo. 2021-79, the Tax Court held that a taxpayer who earned income by driving for Uber and by having others drive for Uber under his account had unreported income of more than $540,000 based on the amounts reported to him on the Forms 1099-K and 1099-MISC. While the court allowed a deduction for amounts the taxpayer paid to the other drivers from his Uber-connected bank account, it determined there was no documentation on which to estimate how much the taxpayer paid out to the other drivers in cash and therefore the taxpayer was not entitled to a deduction for such cash payments.

Procedure

Relator Can Move Forward with False Claims Act Lawsuit Against IBM: In Cimino v. International Business Machines Corporation, 2021 PTC 211 (D.C. Cir. 2021), a case involving a lawsuit in which a relator charged that the International Business Machines Corporation (IBM) violated the False Claims Act (FCA) by (1) using a false audit to fraudulently induce the IRS to enter into a $265 million license agreement for software the IRS did not want or need, and (2) presenting false claims for payment for software that the IRS never received, the D.C. Circuit Court affirmed a district court's dismissal of one of the relator's complaints but reversed the district court's dismissal of the relator's fraudulent inducement claims and remanded for further proceedings. In light of Supreme Court precedents interpreting the FCA to incorporate the common law, the D.C. Circuit held that but-for causation is necessary to establish a fraudulent inducement claim under the FCA and the relator plausibly pleaded causation, as well as materiality, and could therefore proceed with his fraudulent inducement claims on remand.

Higher Penalty Applies to Taxpayer's Failure to File Foreign Bank Account Report: In U.S. v. Kahn, 2021 PTC 218 (2d Cir. 2021), the Second Circuit held that a district court correctly ruled that a penalty limitation provided in a 1987 regulation for a failure to file a Report of Foreign Bank and Financial Accounts (FBAR) was superseded by a 2004 statutory amendment increasing the penalty limitation and the taxpayer was thus liable for the higher penalty. As a result, the maximum penalty for the taxpayer's failure to file an FBAR was 50 percent of the aggregate balance in the accounts at the time of the failure and the district court was correct in rejecting the taxpayer's contention that the 1987 regulation limited the government's authority to impose penalties for willful FBAR violations to $100,000 per account.

Court Will Not Exclude Evidence of Taxpayer's Delinquent Tax Payments: In U.S. v. Thrush, 2021 PTC 187 (E.D. Mich. 2021), a district court rejected a request by the government to exclude evidence of a taxpayer's delinquent tax payments in the taxpayer's upcoming trial on charges that he willfully failed to pay over payroll taxes and willfully failed to file tax returns. The court noted that the taxpayer's argument that he didn't know that his bookkeeper had not filed the tax returns at issue nor paid the taxes due, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness, and the subsequent delinquent filings, if offered in conjunction with such assertions, could provide proof that the taxpayer had not "willfully" failed to pay the taxes.

IRS Can Continue Collecting Social Security Benefit after 10-year Statute Expires: In Dean v. U.S., 2021 PTC 188 (11th Cir. 2021), the Eleventh Circuit affirmed a district court and held that the IRS could continue seizing a taxpayer's monthly social security benefit to pay his delinquent tax debts after the expiration of the 10-year statutory collection period in Code Sec. 6502. The court noted that, while a levy made outside the statutory 10-year collection period generally must be released and a continuing levy on salary or wages must be released at the end of the 10-year collection period, Reg. Sec. 301.6343-1(b)(1)(ii) provides that a levy on a fixed and determinable right to payment, which right includes payments to be made after the 10-year period of limitations expires, does not become unenforceable upon the expiration of the period of limitations and will not be released until the liability is satisfied.

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.

Deductions

No Deduction Available for Reduction in FERS Annuity Payments: In Staples v. Comm'r, 2021 PTC 160 (10th Cir. 2021), the Tenth Circuit affirmed the Tax Court and held that a taxpayer, who was receiving social security disability insurance (SSDI) and annuity payments through the Federal Employees Retirement System (FERS), could not deduct as a loss the amount of the reduction made by the Office of Personnel Management (OPM) to his FERS disability annuity as a result of him also receiving the SSDI benefit. The court, in rejecting the taxpayer's contention that the Tax Court erred in concluding that OPM's reduction of his FERS annuity is not a deductible loss, stated that deductions are created by statute and the taxpayer had identified no statute authorizing the deduction he was seeking.

Employee Benefits

IRS Issues SIFL Rates for First Half of 2021: In Rev. Rul. 2021-11, the IRS issued the standard industry fare level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2021 for purposes of Reg. Sec. 1.61-21(g), relating to the rule for valuing noncommercial flights provided as an employee fringe benefit on employer-provided aircraft. The IRS noted that, because airline seat miles were reduced faster than airline industry expenses as a result of COVID-19, the SIFL rate for the 6-month tax period effective 1/1/2021 increased substantially.

IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2021-37, 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

Taxpayer Can't Use Offshore Employee Leasing Transactions to Avoid Payroll Taxes: In Bell Capital Management, Inc. v. Comm'r, T.C. Memo. 2021-74, the Tax Court held that the IRS properly determined that an individual, who incorporated a corporation and owned all of the corporation's stock, was legally classified as an employee of the corporation, despite a change in the compensation structure under which the owner's services were leased through offshore employee leasing transactions and no income or employment taxes were withheld. The Tax Court determined that the corporation was thus liable for the employment taxes it failed to withhold and, because it fraudulently failed to withhold such taxes, it was liable for fraud and failure to deposit penalties.

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.

IRS

Federal Circuit Upholds Dismissal of IRS Employee for Disclosing Taxpayer Information: In Vestal v. Dept. of Treasury 2021 PTC 171 (Fed. Cir. 2021), the Federal Circuit affirmed a decision by the Merit Systems Protection Board (the Board) sustaining the removal of an IRS employee for intentionally disclosing taxpayer information to an unauthorized person and, in doing so, rejected the former employee's argument that the penalty of removal was too severe. The court found that the Board's decision was supported by substantial evidence and that the penalty of removal under the circumstances was not so harsh and unconscionably disproportionate to the offense that it amounted to an abuse of discretion.

Like-Kind Exchanges

Exchanges of Cryptocurrencies Do Not Qualify as Like-Kind Exchanges: In CCM 202124008, the Office of Chief Counsel advised that, if completed before January 1, 2018, an exchange of (1) Bitcoin for Ether, (2) Bitcoin for Litecoin, or (3) Ether for Litecoin does not qualify as a like-kind exchange under Code Sec. 1031. With respect to the period after 2017, the Chief Counsel's Office noted that the Tax Cuts and Jobs Act of 2017 amended Code Sec. 1031 to provide that like-kind exchanges only apply to real property.

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

Tax Court Has Discretion to Grant Couple's Motion to Dismiss: In Stein v. Comm'r, 156 T.C. No. 11 (2021), the Tax Court held that it has discretion to grant a married couple's motion to dismiss a request to review an IRS denial of administrative costs under Code Sec. 7430(a) because the petition by the couple did not invoke the Tax Court's jurisdiction to redetermine a deficiency under Code Sec. 6213(a). As a result, the court found that it was not required to enter a decision under Code Sec. 7459(d) or any similar provision.

Retroactivity Doctrine Is Not an Exception to the Substantial-Variance Rule: In Elite Oil Field Enterprises, Inc. v. U.S., 2021 PTC 164 (D. Colo. 2021), a district court agreed with the IRS that the court lacked subject-matter jurisdiction over a company's refund claim relating to a net operating loss (NOL) carryback because, under the substantial-variance rule, the claim substantially varied from the factual bases set forth in the tax refund claim originally presented to the IRS. The court concluded that, while the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may apply retroactively to allow the NOL carryback at issue, the substantial-variance rule provides that a tax-refund suit is permitted only if the IRS was allowed to determine the legal and factual issues underlying the suit in the first instance and, the court noted, the taxpayer had cited no authority, binding or otherwise, that the retroactivity doctrine acts as an exception to the substantial-variance rule.

Declaratory Judgment Act's Federal-Tax Exception Is a Jurisdictional Condition: In Rivero v. Fidelity Investments, Inc., 2021 PTC 165 (5th Cir. 2021), the Fifth Circuit affirmed a district court's dismissal of a case in which a taxpayer was seeking a declaratory judgment that an IRS transfer certificate was not necessary to transfer ownership of her account with Fidelity Brokerage Services, LLC. The primary question was whether the Declaratory Judgment Act's federal-tax exception is a jurisdictional condition, requiring dismissal, or a nonjurisdictional condition, which could be waived, and the Fifth Circuit concluded that it was jurisdictional.

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

IRS Plans to Amend Qualified Derivative Payment Reporting Requirements: In Notice 2021-36, the IRS stated that it will amend regulations under Code Sec. 59A and Code Sec. 6038A to defer the applicability date of certain provisions of the regulations relating to the reporting of qualified derivative payments until tax years beginning on or after January 1, 2023. Specifically, the IRS said it will amend Reg. Sec. 1.6038A-2(g) to provide that Reg. Sec. 1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2023, and until Reg. Sec. 1.6038A-2(b)(7)(ix) applies, the rules described in Reg. Sec. 1.59A-6(b)(2)(iv) that apply during the transition period will continue to apply.

Chief Counsel Issues Guidance on 2020 Calculation of Business Interest Limitation: In CCM 202123007, the Office of Chief Counsel advised that, to determine the amount of interest allowed as a deduction for the 2020 tax year under the business interest limitation rules in Code Sec. 163(j), a taxpayer's adjusted taxable income (ATI) under Code Sec. 163(j)(8) includes those adjustments that are required under Code Sec. 481(a) for a change in method of accounting for depreciation. Additionally, for purposes of determining ATI, the addback of the depreciation amount, including any Code Sec. 481(a) adjustment for the year of change, is allowed only for tax years beginning before January 1, 2022.

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).

 

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