Document Summaries for the Week of Aug. 15, 2016
Disregarded entity employees must be allowed to participate in Sec. 403(b) plan
The Office of Chief Counsel advised that employees of a single-member LLC disregarded entity are permitted to participate in the Sec. 403(b) plan of a Sec. 501(c)(3) organization member and, further, the employees of the single-member LLC disregarded entity must be allowed to participate to the extent necessary to comply with the universal availability requirement. In addition, the employees of a single-member LLC disregarded entity are not required to participate because no universal availability requirement exists under Sec. 457, but may be permitted to participate in the Sec. 457(b) plan. CCA 201634021 (8/19/16).
Private foundations liable under Sec. 6901 as transferees of a transferee
The Tax Court held that certain transfers to two Sec. 501(c)(3) private foundations were fraudulent under state and federal law and that, because the taxpayers were transferees of a transferee under New York law, they were also liable under Sec. 6901. The court also held that the statute of limitation had not expired when the IRS issued its deficiency notices to the taxpayers. Salus Mundi Foundation, T.C. Memo. 2016-154 (8/15/16).
Difficulties reasonably caused taxpayer’s failure to timely filing her return and pay tax
The Tax Court held that the taxpayer’s failure to timely file her income tax return and pay tax for 2009 was due to reasonable cause and not willful neglect. The court reached that conclusion after finding that (1) the taxpayer’s life was in upheaval after two earlier apartment fires; (2) during 2009, she lived at a YWCA under conditions she considered dehumanizing; (3) the taxpayer experienced bouts of depression and fell from a subway platform in 2009, fracturing her skull; (4) she was subject to continuous monitoring and psychiatric examination while hospitalized; (5) she did not resume the business she had operated from her apartment; and (6) her living conditions and her resulting depression made it reasonable for her to believe that she could claim a casualty loss in 2009 (despite its being the wrong year) that would have obviated any filing requirement for that year. Rogers, T.C. Memo. 2016-152 (8/15/16).
Court denies advertising deduction for Tour de France expenses
The Tax Court denied a taxpayer’s $30,890 advertising expense deduction relating to his participation in the Tour de France because he failed to adequately establish that the amount was a valid advertising expense. The court also held that the taxpayer’s sole proprietorship changed its method of accounting in 2006, requiring a Sec. 481 adjustment. Nebeker, T.C. Memo. 2016-155 (8/16/16).
Taxpayer qualifies for innocent spouse relief where husband controlled financial matters
The Tax Court held that the taxpayer was eligible for innocent spouse relief under Sec. 6015(f) for 2008–2010 because (1) her husband controlled all their household finances; (2) her husband maintained a personal and a business bank account in his sole name; (3) to make certain household purchases, the taxpayer had to ask her husband to sign a personal check or to let her use one of his credit cards; (4) at times, her husband locked her out of a home office containing their household financial documents; (5) her husband solely met with their return preparer, who he provided certain information to assist in the preparation of their joint returns in question; and (6) except for signing the returns, the taxpayer’s involvement in preparing and filing them was limited to giving her husband her Forms W-2. The court concluded that the taxpayer established that it would be inequitable to hold her liable for the couple’s unpaid tax liabilities for 2008–2010. Simonetta, T.C. Summ. 2016-43 (8/16/16).
No deduction for aviation activity that was not yet an active trade or business
The Tax Court held that a United Airlines captain and U.S. Air Force veteran was not entitled to a deduction of $13,295 for a loss she sustained in 2010 in connection with an aviation activity. While the court said it found the taxpayer’s testimony credible and was persuaded that she fully intended to enter into an aviation business for profit, it could not say that her activities had ripened into an active trade or business in 2010. Tizard, T.C. Summ. 2016-42 (8/15/16).
No innocent spouse relief where income was entirely attributable to spouse requesting relief
The Tax Court held that a taxpayer was not entitled to relief from joint and several liability under Sec. 6015(b), (c), or (f) for 2009 for a proposed income tax liability arising from unreported taxable wages, interest, and cancellation-of-debt income attributable entirely to her. Bullock, T.C. Summ. 2016-44 (8/17/16).
Taxpayer who failed to file 2012 tax return liable for all assessed deficiencies and penalties
The Tax Court upheld IRS deficiency notices against a taxpayer who failed to file his 2012 federal tax return and did not respond to IRS requests for information. The court held that the taxpayer was entitled to no deductions, exemptions, or credits, aside from the standard deduction and one personal exemption allowed in the notice of deficiency, and upheld various penalties. Barrion, T.C. Memo. 2016-153 (8/15/16).
Court upholds deficiencies and penalties against taxpayer who failed to exercise due care
The Tax Court upheld numerous tax deficiencies and penalties assessed against the taxpayer, finding that she failed to make a reasonable attempt to comply with the provisions of the Code or to exercise ordinary and reasonable care in the preparation of her tax returns. Further, the court said, the IRS established that the taxpayer (1) failed to keep books and records to adequately substantiate her claimed deductions for 2009 and 2010 and (2) failed to prove that she acted in good faith and with reasonable cause. Gaston, T.C. Summ. 2016-41 (8/15/16).
Prop. regs. on information reporting of catastrophic health coverage
The IRS issued proposed regulations that address various issues under Sec. 6055, including identifying the health insurance issuer as the reporting entity for catastrophic health coverage enrolled in through the Health Insurance Marketplace, and clarifying when reporting is not required for individuals who are covered by more than one plan or program that is minimum essential coverage. The proposed regulations also modify the taxpayer identification number (TIN) solicitation requirements that Sec. 6055 reporting entities must follow to qualify for relief from penalties for a failure to report a TIN. REG-103058-16 (8/15/16).
Taxpayer’s request for a CDP hearing was timely and suspended the statute of limitation
The Tax Court held that, when the date appearing on a levy notice is earlier than the date of mailing, the 30-day period prescribed by Sec. 6330(a)(2) and Sec. 6330(a)(3)(B) is calculated by reference to the mailing date. As a result, the taxpayer’s request for a CDP hearing was timely. Weiss, 147 T.C. No. 6 (8/17/16) (see related news story).
Interest on a nonprofit’s tax refund is calculated at the lower corporation rate
The Sixth Circuit affirmed a district court and held that, because a nonprofit entity incorporated under state law is treated as a corporation, the lower interest rate in Sec. 6621(a)(1) for corporate tax refunds also applies to tax refunds to nonprofit corporations. The word “corporation,” the court noted, ordinarily refers to both for-profit and nonprofit entities, and other uses of the word “corporation” throughout the Code include incorporated nonprofit organizations. Detroit Medical Center, No. 15-1279 (6th Cir. 8/17/16).
“Short-week” payments are not excluded from wages for FICA purposes
The Office of Chief Counsel advised that “short-week“ payments made to workers who work less than 36 hours in a week or who could not work due to weather are not excluded from wages subject to FICA tax because they do not satisfy the narrow exception set forth in Rev. Rul. 90-72 for state unemployment compensation. This conclusion is also consistent with Letter Rulings 200322012 and 9734035, which stated that automatic short-week benefits are wages for FICA and FUTA purposes, unless the benefits are made to individuals who otherwise qualify for excludable regular benefits because the automatic short-week benefits immediately precede or follow a week in which an employee receives regular benefits. CCA 201634023 (8/19/16).
IRS proposes new fees for installment agreements
The IRS issued proposed regulations that would change the fees taxpayers must pay to enter into installment agreements, starting Jan. 1, 2017. REG-108792-16 (8/19/16) (see related news story).
September 2016 AFRs Issued
The IRS issued the applicable federal rates for September 2016. Rev. Rul. 2016-20 (8/18/16).
IRS does not have authority to regroup taxpayer’s activities
The Office of Chief Counsel advised that, as applied to a particular taxpayer’s situation, the five-factor test of Regs. Sec. 1.469-4(c) indicated that there may be more than one reasonable method for grouping the taxpayer’s activities into appropriate economic units. As a result, the Chief Counsel’s Office concluded that the IRS did not have authority to regroup the taxpayer’s interests in several activities as a single activity under Regs. Sec. 1.469-4(f) to prevent tax avoidance. TAM 201634022 (8/19/16).
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.