Document Summaries for the Week of July 13, 2015

C Corporations

Vehicle collision damage was not a casualty loss

The Office of Chief Counsel advised that collision damage to a taxpayer’s rental vehicles was not a casualty loss within the meaning of Sec. 165 because such damage is not unusual in the ordinary course of the taxpayer’s business of renting cars. CCA 201529008 (7/17/15).


Employee Benefits

Taxpayer’s hardship distributions from 401(k) subject to 10% penalty

The Tax Court held that Regs. Sec. 1.401(k)-1(d)(3)(iii)(B)(4) only permitted the taxpayer’s 401(k) retirement plan to make a hardship distributions to him to prevent eviction from his principal residence or prevent foreclosure; it did not exempt the distributions from the additional 10% tax under Sec. 72(t). The taxpayer was also liable for the penalty for substantial understatement of income tax. Kott, T.C. Summ. 2015-42 (7/14/15)

Shareholder-employees must recognize income from split-dollar life insurance arrangement

The Tax Court held that life insurance policies that were issued on the lives of four shareholder/employees incident to their corporations’ participation in a purported welfare benefit plan were part of a split-dollar life insurance arrangement. As a result, the four shareholder-employees with insurance on their lives realized income, and none of the corporate employers could deduct payments to the purported welfare benefit plan. Finally, the taxpayers were liable for accuracy-related penalties. Our Country Home Enters., Inc., 145 T.C. No. 1 (7/13/15)



Missing Form 8332 precludes deductions

The Tax Court held that the taxpayer was not entitled to a dependency exemption deduction or a child tax credit for his three children because Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar written statement, signed by his ex-wife was not attached to his tax return. Stokes, T.C. Summ. 2015-41 (7/14/15)

Tax Court denies deductions for inadequately substantiated expenses

The Tax Court held that, although a married couple established by a preponderance of evidence that some of the income the IRS alleged was unreported was nontaxable loan proceeds, the balance constituted taxable income. Further, the court said that the couple adequately substantiated some, but not all of the expenses for which the husband’s wholly owned S corporation claimed deductions, and the IRS properly disallowed deductions for expenses that were not adequately substantiated. Finally, the husband and wife were liable for the accuracy-related penalty. Holden, T.C. Memo. 2015-131 (7/16/15)

Taxpayer cannot deduct contribution made to wholly owned company

The Eighth Circuit affirmed the Tax Court’s holding that the taxpayer could not deduct on his individual tax return (1) charitable contributions made by his wholly owned company because he could not prove that he reimbursed the company for those contributions; (2) death benefit payments to the widow of a former colleague because he could not prove that the payments were deductible business expenses; and (3) payments labeled as “consulting services” because he could not adequately explain the nature of the services for which the payments were made. Zavadil, No. 14-1053 (8th Cir. 7/16/15)

Gambler denied deductions for losses

The Tax Court held that the taxpayer (1) was not a professional gambler and thus could not deduct his gambling losses on Schedule C, Profit or Loss From Business; (2) could not deduct his gambling losses on Schedule A, Itemized Deductions, because those losses are only deductible to the extent of winnings and he did not keep contemporaneous records of his winnings and losses to adequately substantiate them; (3) could not deduct medical transportation expenses because he did not adequately substantiate the expenses; (4) could not deduct as nonbusiness bad debts amounts lent to family members and others because transfers to family members are presumed to be gifts and he did not prove  that the amounts were bona fide loans; and (5) was liable for the additional tax on an early distribution from his qualified retirement plan because he did not qualify for any of its exceptions. Boneparte, T.C. Memo. 2015-128 (7/13/15)

No home office deduction where taxpayer could not prove business use

The Tax Court held that the taxpayer was not entitled to a home office deduction because she could not prove that she rented a dwelling unit or that a portion of the unit was regularly and exclusively used for business purposes. The court also denied other deductions for lack of substantiation and concluded that, because the taxpayer received over $17,000 in nonemployee compensation for the year, she was required to file a return. Grossnickle, T.C. Memo. 2015-127 (7/13/15)


IRS Procedure

Collection action is not abuse of IRS discretion

The Tax Court held that the IRS’s determination to proceed with a collection action for the taxpayer’s unpaid income tax liabilities was not an abuse of discretion. Hartmann, T.C. Memo. 2015-129 (7/13/15)

National Taxpayer Advocate releases midyear report to Congress

The National Taxpayer Advocate released her midyear report to Congress, reporting on this year’s tax season and making recommendations. Objectives Report to Congress (7/15/15) (see related news story)

August 2015 applicable federal rates released

The IRS issued the applicable federal rates for August 2015. Rev. Rul. 2015-16 (7/17/15)

IRS updates corporate weighted average interest rates, etc., for July 2015

The IRS updated the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2) for July 2015. Notice 2015-50 (7/14/15)



Deeds relating to easement properties violated perpetuity requirement

The Tax Court held that two partnerships could not take charitable deductions for easement donations because deeds relating to the easements permitted modifications of the property boundaries,  which violated the Sec. 170(h)(2)(C) perpetuity requirement. The court also held that certain property transfers by the partnerships were really disguised sales of partnership property. Finally, the court held that the partnerships were liable for gross-valuation-misstatement penalties with respect to the easement donation deductions. Bosque Canyon Ranch, L.P., T.C. Memo. 2015-130 (7/14/15)


S Corporations

S corporations should receive overpayment interest at individual rate

The Federal Claims Court agreed with the IRS and held that five mining companies, organized as S corporations, should have been paid interest on their excise tax overpayments at the interest rate paid to corporations and not the higher interest rate paid to individuals. Eaglehawk Carbon, Inc., No. 1:13-cv-01021 (Fed. Cl. 7/16/15)


Tax Accounting

Losses were not Sec. 475 mark-to-market losses

The Office of Chief Counsel advised that book reserve losses reported by the taxpayer from its repurchase and indemnity obligations arising from its breach of mortgage sale contract warranty and representations (W&R obligations) were not properly treated as Sec. 475 mark-to-market losses on securities. According to the Chief Counsel’s Office, the W&R obligations were not Sec. 475 securities. CCA 201529006 (7/17/15)

Draft revised Form 3115 posted

The IRS posted a draft version of a revised Form 3115, Application for Change in Accounting Method, that incorporates revisions to the process for requesting accounting method changes that were made by Rev. Proc. 2015-13. Draft Form 3115 (7/15/15) (see related news story)

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.