Document Summaries for the Week of Sept. 12, 2016
Gross receipts from substantial renovations qualify as DPGR under Sec. 199
In a heavily redacted technical advice memorandum, the Office of Chief Counsel advised that projects where a national construction contractor’s activities qualify as substantial renovation, construction, or erection of certain property constitute construction of real property, and gross receipts from such projects qualify as domestic production gross receipts (DPGR) under Regs. Sec. 1.199-3(m). The memorandum notes that the taxpayer does not receive any income or gross receipts from the actual sale of the units ultimately produced; the taxpayer’s gross receipts are derived from various projects that involve installing or replacing components at the sites. TAM 201638022 (9/16/16).
Corporation, not its owners, is entitled to cattle ranching losses
The Tax Court held that a C corporation involved in cattle ranching, and not the brothers who operated the corporation, was the taxpayer to whom the net losses from the cattle ranching operation for the tax years at issue were attributable. The court also concluded that the corporation was not acting as an agent of the brothers with respect to the cattle ranching operation and that the brothers were liable for accuracy-related penalties under Sec. 6662(a) as a result of claiming the corporation’s losses on their individual returns. Barnhart Ranch, Co., T.C. Memo. 2016-170 (9/14/16).
IRS seeks comments on qualified plan document requirements compliance
The IRS requested comments on ways in which it can facilitate compliance with the qualification requirements for qualified plan documents in light of the changes to the determination letter program described in Rev. Proc. 2016-37. Announcement 2016-32 (9/16/16).
No innocent spouse relief where taxpayer should have known of tax understatements
The Tax Court held that it was not inequitable to deny the taxpayer, who worked as a financial management analyst, innocent spouse relief under Sec. 6015(b) or equitable relief under Sec. 6015(f). After examining all the factors under Sec. 6015(b), the court found that the taxpayer should have reviewed the tax returns, as a reasonable person would do. In addition, the taxpayer was not eligible for equitable relief under Rev. Proc. 2013-34 because none of the factors for granting relief weighed in the taxpayer’s favor and several, including the fact that the taxpayer failed to prove she did not know or have reason to know of the tax understatements, weighed against relief. Canty, T.C. Memo. 2016-169 (9/13/16).
Poor recordkeeping leads to lost deductions and significant penalty assessment
The Tax Court held that because of a traveling salesman’s poor recordkeeping—and for some categories of expenses, no recordkeeping at all—he was not entitled to business expense deductions beyond what the IRS had already allowed. In addition, the Tax Court upheld the IRS’s 20% penalty assessment under Sec. 6662(a) because the taxpayer had a substantial understatement of tax. Galbraith, T.C. Memo. 2016-168 (9/12/16).
Pastor not exempt from federal income and self-employment taxes
The Tax Court held that a pastor’s use of a corporation sole and vow of poverty did not exempt him from federal income taxes because he did not remit his income back to the church. The court also concluded that he was not exempt from self-employment taxes because he did not file a timely application for exemption from self-employment tax under Sec. 1402(e) for any of the years at issue. White, T.C. Memo. 2016-167 (9/12/16).
Lack of substantiation precludes medical and unreimbursed business deductions
The Tax Court held that a taxpayer was not entitled to deductions for medical expenses and unreimbursed employee business expenses in excess of amounts the IRS allowed because she failed to substantiate the deductions. Additionally, the court found her liable for the accuracy-related penalty under Sec. 6662(a). Czekalski, T.C. Summ. 2016-56 (9/15/16).
Taxpayer fails tests to claim mother and nephews as dependents
The Tax Court held that a taxpayer was not entitled to dependency exemption deductions, earned income tax credits, and the additional child tax credit for his two nephews because they were not qualifying children and because the taxpayer’s adjusted gross income exceeded the applicable amount for claiming the earned income credit. Nor was the taxpayer entitled to a dependency exemption deduction for his mother because he presented no evidence of her having been his dependent. Gomez, T.C. Memo. 2016-173 (9/15/16).
Contingent Enron legal payments were alimony; IRS erred in not considering collection alternatives
The Tax Court held that (1) contingent legal payments earned by a taxpayer’s ex-husband for representing plaintiffs in a class action lawsuit against Enron and paid to the taxpayer under a divorce settlement were taxable alimony to the taxpayer; (2) $405,000 that the taxpayer paid in a diamond scam was a theft loss; and (3) the taxpayer was liable for certain late filing and accuracy-related penalties. However, the court also concluded that an IRS settlement officer’s failure to consider a collection alternative requested by the taxpayer was an abuse of discretion. Leslie, T.C. Memo. 2016-171 (9/14/16).
Taxpayer liable for substantial understatement of tax penalties after failing to prove she relied on professionals
The Tax Court held that a taxpayer was liable for an accuracy-related penalty under Sec. 6662(a) on the basis of a substantial understatement of income tax. In rejecting her argument that the penalty should be voided because she relied on two financial advisers, the court noted that she failed to prove that she gave necessary and accurate information to the advisers and failed to prove that the two financial advisers actually opined on the legitimacy of the reporting that the taxpayer ended up making relating to retirement distributions. Perry, T.C. Memo. 2016-172 (9/14/16).
IRS to further restrict foreign tax credit splitter arrangements
The IRS announced that it intends to issue final regulations that will require companies to repatriate earnings to the United States before they can claim a credit for foreign taxes paid on the income. Notice 2016-52 (9/15/16) (see related news story).
New address for electric vehicle certifications and reports
The IRS issued a notice, modifying both Notice 2009–89, as modified by Notice 2012–54, and Notice 2013–67, changing the address to which a manufacturer (or, in the case of a foreign manufacturer, its domestic distributor) sends quarterly reports and/or vehicle certifications under Notice 2009-89 and Notice 2013-67 regarding qualified plug-in electric drive motor vehicles. The notice also obsoletes Notice 2012–54. Notice 2016-51 (9/12/16).
Tax Court upholds IRS levy notice
The Tax Court upheld an IRS levy notice to collect a taxpayer’s unpaid tax liability for 2009. The court said it could find nothing in the record to suggest that the IRS Appeals Office abused its discretion in issuing the notice. Satchell, T.C. Summary 2016-55 (9/14/16).
IRS addresses employment and income tax treatment of Louisiana program for flood victims
The IRS issued guidance on the income and employment tax treatment of cash payments made by employers under leave-based donation programs set up for the relief of Louisiana storm and flood victims. Under the leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to Sec. 170(c) charitable organizations. Notice 2016-55 (9/16/16).
Interest rates remain unchanged for quarter beginning Oct. 1
The IRS issued the quarterly rates for interest on tax overpayments and underpayments for the fourth calendar quarter, beginning Oct. 1, 2016. The interest rates will be 4% for overpayments (3% in the case of a corporation), 4% for underpayments, 1.5% for the portion of a corporate overpayment exceeding $10,000, and 6% for large corporate underpayments. Rev. Rul. 2016-23 (9/14/16).
October AFRs issued
The IRS issued the applicable federal rates for October 2016. Rev. Rul. 2016-25 (9/16/16).
Bankruptcy disclosure answer denied
The Office of Chief Counsel advised that an individual trustee was not also the trustee of an unspecified entity. Based on this determination, the Chief Counsel’s Office said, a bankruptcy disclosure answer under Sec. 6103(e)(5) had to be denied. CCA 201638023 (9/16/16).