Document Summaries for the Week of April 18, 2016
Proposed regs. cover excise taxes on highway vehicles
The IRS issued proposed regulations that provide guidance on the excise taxes imposed on the sale of highway tractors, trailers, trucks, and tires; the use of heavy vehicles on the highway; and the definition of highway vehicles for these and other taxes. The proposed regulations would also replace most of the temporary excise tax regulations under the Highway Revenue Act of 1982, P.L. 97-424, and reflect statutory changes and court decisions. REG-103380-05 (4/18/16).
Chief Counsel’s Office gives legal advice on cash balance plans
The Office of Chief Counsel advised that, as of the effective date of the 2014 revisions to Regs. Sec. 1.411(b)(5)-1 (which generally apply for plan years beginning on or after Jan. 1, 2017), cash balance plans with a single-sum distribution that is determined as the present value of a participant’s accrued benefit using the actuarial assumptions specified in Sec. 417(e)(3) are not eligible for the safe-harbor rule for plans with lump-sum-based benefit formulas under Sec. 411(b)(5)(A) and Regs. Sec. 1.411(b)(5)-1(b)(1) (which applies to many cash balance plans using the safe-harbor formula measure described in Regs. Sec. 1.411(b)(5)-1(b)(1)(i)(B)). However, these plans are generally eligible for the safe-harbor rule for plans with indexed benefits under Sec. 411(b)(5)(E) and Regs. Sec. 1.411(b)(5)-1(b)(2). CCA 201617006 (4/22/16).
Final regs. issued on private foundation program-related investments
The IRS issued final regulations that expand the types of investments that private foundations may make without violating the rule that private foundations not make a “jeopardizing investment,” which subjects them to an excise tax under Sec. 4944(a). T.D. 9762 (4/22/16) (see related news story).
Attorney failed to substantiate alleged job-related deductions; accuracy-related penalty upheld
The Tax Court held that an attorney failed to substantiate alleged job-related expenses underlying miscellaneous itemized deductions she claimed for 2009 and 2010 in excess of the amounts the IRS allowed. The court also upheld the assessment of a Sec. 6662(a) accuracy-related penalty for 2010. Callender, T.C. Memo. 2016-68 (4/18/16).
Taxpayer’s losses indicate jet aircraft activity was a hobby
Where a taxpayer purchased interests in jet aircraft in anticipation of leasing the aircraft to a company that subsequently failed, the taxpayer did not establish that the losses incurred were unavoidable or that the taxpayer engaged in the activity for profit, the Tax Court held. In assessing the manner in which the taxpayer carried this activity, the court found it important that the taxpayer was willing to incur avoidable losses. Hoffmann, T.C. Memo. 2016-69 (4/19/16).
Taxpayer cannot use late husband’s AMT credit carryforward
In a case of first impression, the Tax Court held that a taxpayer could not use an alternative minimum tax credit carryforward that was generated by her late husband in a year he filed a joint return with a former wife. In reaching this conclusion, the court relied on authorities limiting the transfer of net operating loss carryovers between spouses. Vichich, 146 T.C. No. 12 (4/21/16).
Woman is taxable on more than $1 million received from elderly man
The Tax Court held that the more than $1 million the taxpayer received from an elderly and infirm man in the last two years of his life were the proceeds of undue influence and elder abuse and were thus taxable. The funds she received were not loans or gifts, but compensation, which meant that she was also liable for self-employment tax. Further, the court upheld the IRS’s assessment of a fraud penalty. Alhadi, T.C. Memo. 2016-74 (4/21/16).
Taxpayer liable for tax and penalties on unreported annuity income
The Tax Court held that the taxpayer owed tax on unreported taxable income for 2011 of approximately $32,000 consisting of an annuity distribution less contributions to his retirement plan. The court also upheld the IRS’s assessment of a penalty for failing to timely file a return and failing to timely pay the amount due. Chambers, T.C. Memo. 2016-72 (4/21/16).
Taxpayer’s losses from hair braiding activity are deductible
The Tax Court rejected the IRS’s argument that a taxpayer’s hair-braiding business, which was housed in a booth in a mall, was not engaged in for profit. The court concluded that the taxpayer engaged in this activity during 2011 with the genuine (if optimistic) intent to earn a profit. Delia, T.C. Memo. 2016-71 (4/20/16).
Father not entitled to dependency exemptions without Form 8332
The Tax Court held that a father was not entitled to dependency exemptions for his three children because he was not the custodial parent and the custodial parent did not execute a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar written statement giving him the dependency exemption. The court noted that while the children spent time with their father, the time spent with him was less than any of the children spent living with their mother, which meant that she was the custodial parent, even if the father provided more than half of the children’s support. Eichinger, T.C. Summ. 2016-18 (4/21/16).
Foreign tax is considered paid by the taxpayer even if the employer pays the tax
The Office of Chief Counsel advised that a taxpayer whose employer paid the foreign tax due on his earnings is considered to be paying the foreign tax him- or herself and must recognize the taxes the employer paid in income. Therefore, the employee is eligible for a foreign tax credit for those wages because foreign law imposes legal liability for the tax on the employee. Regs. Sec. 1.901-2(f)(1) confirms that a foreign tax is considered paid by the taxpayer on whom foreign law imposes legal liability even if another party pays. CCA 201617009 (4/22/16).
IRS did not abuse its discretion in rejecting taxpayer’s offer in compromise
The Tax Court held that the IRS did not abuse its discretion when it rejected a taxpayer’s offer in compromise for doubt as to collectability. As a result, the court said that the IRS could proceed with collection by levy of unpaid trust fund recovery penalties assessed against the taxpayer. Strong, T.C. Memo. 2016-70 (4/19/16).
Annual advance pricing agreement report issued
The IRS issued its annual report on the experience, structure, and activities of the Advance Pricing and Mutual Agreement Program for calendar year 2015. Announcement 2016-12 (4/18/16).
May 2016 AFRs issued
The IRS issued the applicable federal rates for May 2016. Rev. Rul. 2016-11 (4/19/16).
Sec. 6512 does not prevent litigant from disputing a tax liability, but “law of the case” doctrine might
The Office of Chief Counsel advised that both Sec. 6512(a) and Regs. Sec. 301.6512-1(a) are limited by their plain language to petitions timely filed after the IRS issues a statutory notice of deficiency under Sec. 6212(a) and, thus, do not prevent a litigant from disputing in a refund suit a tax liability determined in a collection proceeding in Tax Court. However, the “law of the case” doctrine might prevent relitigation of the underlying liability. CCA 201617007 (4/22/16).
Either account holder or withholding agent is considered to be claiming a refund of the Chapter 3 or 4 withholding taxes
In response to a question as to whether it mattered who was claiming a refund of the Chapter 3 or 4 withholding taxes for purposes of determining the 180-day period during which interest is not paid to the taxpayer—the account holder on its income tax return or the withholding agent on its Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons—the Office of Chief Counsel advised that the statute says it applies to “any overpayment resulting from tax deducted and withheld under chapter 3 or 4.” Thus, the Chief Counsel’s Office said, because the language of the statute does not indicate that the identity of the person claiming the refund is relevant, the 180-day period applies regardless of who claims the refund. CCA 201617005 (4/22/16).
Taxpayer liable for penalties where he could not establish reasonable cause for not timely paying his taxes
The Tax Court held that the taxpayer did not establish that his failure to timely pay his 2008 income tax liability was due to reasonable cause despite the taxpayer’s argument that he had relied on his accountant to prepare an accurate return. When the taxpayer disagreed with the return that his accountant had originally prepared, he waited 18 months before contacting another preparer. Thus, the court upheld the IRS’s determination of an addition to tax under Sec. 6651(a)(2) for the taxpayer’s failure to timely pay his 2008 income tax. Miller, T.C. Memo. 2016-73 (4/21/16).
TIGTA reports on 2016 filing season
The Treasury Inspector General for Tax Administration (TIGTA) issued its preliminary report on the 2016 filing season. TIGTA Rep’t No. 2016-40-034 (4/21/16) (see related news story).
Chief Counsel cannot determine a partner’s outside basis but can determine partnership-level components in FPAA
The Office of Chief Counsel advised that it could not determine a partner’s outside basis in a Final Partnership Administrative Adjustment (FPAA) (absent a Sec. 754 election) because it is not a partnership item. But the Chief Counsel’s Office said it can determine the partnership-level components (i.e., contributions, distributions, etc.) in the FPAA. CCA 201617008 (4/22/16).
STATE & LOCAL
Supreme Court reverses Nevada damage award against California
The Full Faith and Credit clause prohibits Nevada from imposing damages against California in excess of the amounts permitted in Nevada against its own agencies. Franchise Tax Bd. of Calif. v. Hyatt, No. 14-1175 (U.S. 4/19/16) (see related news story).
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.