Document Summaries for the Week of Aug. 22, 2016
First Circuit affirms district court holding that Puerto Rico’s corporate AMT violates federal laws
The First Circuit held that a federal district court had jurisdiction over Wal-Mart Puerto Rico Inc.’s lawsuit against the Puerto Rico Secretary of Treasury that challenged the lawfulness of Puerto Rico’s corporate alternative minimum tax (AMT), as amended in May 2015. The First Circuit affirmed the district court’s decision, which enjoined the enforcement of the AMT after concluding that the AMT violates the dormant Commerce Clause; the Federal Relations Act, 48 U.S.C. Section 741a; and the Equal Protection Clause. Wal-Mart Puerto Rico, Inc., Nos. 16-1370, 16-1406 (1st Cir. 8/24/16).
IRS removes two no-rule areas under Sec. 355
The IRS issued a revenue procedure modifying Rev. Proc. 2016-3, which sets forth areas on which the IRS will not issue letter rulings or determination letters (i.e., no-rule areas), by removing two no-rule areas on distributions of stock of controlled corporations under Sec. 355. The two areas that are no longer no-rule areas are significant legal issues relating to (1) the requirement under Regs. Sec. 1.355-2(b) that a distribution be carried out for a corporate business purpose (the corporate business purpose requirement), and (2) the requirement under Sec. 355(a)(1)(B) and Regs. Sec. 1.355-2(d) that a transaction not be used principally as a device for the distribution of earnings and profits of the distributing corporation, the controlled corporation, or both (a device). Rev. Proc. 2016-45 (8/26/16).
IRS lists organizations failing to meet Sec. 501(c)(3) requirements
The IRS revoked the tax-exempt status of five organizations for failure to meet the requirements of Sec. 501(c)(3). Individual donors’ contributions to the organizations are no longer deductible under Sec. 170(b)(1)(A). Announcement 2016-28 (8/22/16).
IRS provides relief for taxpayers who miss 60-day rollover deadline
The IRS announced that a taxpayer who fails to meet the requirement to roll over distributions from retirement accounts within the normal 60-day period can make a written self-certification to an IRA trustee or plan administrator that a contribution meets one of the 11 specific reasons listed in the revenue procedure for excusing the missed 60-day deadline. Rev. Proc. 2016-47 (8/24/16) (see related news story).
Discrimination lawsuit proceeds are taxable; legal fees are deductible from gross income
The Tax Court held that a taxpayer could not exclude from gross income under Sec. 104(a)(2) as damages received on account of personal physical injuries or physical sickness $45,000 that he received under a settlement agreement with his former employer. However, the court concluded that the taxpayer could deduct his legal fees from gross income, rather than as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor, because the legal fees were paid to secure a settlement of his claim for unlawful employment discrimination and Sec. 62(a)(20) entitled him to an above-the-line deduction for them. George, T.C. Memo. 2016-156 (8/22/16).
Army officer not financially disabled; statute of limitation ran on collecting tax refund
The Tax Court held that an Army officer who suffered significant injuries while deployed in Iraq was not entitled to a refund of overpaid taxes because he did not qualify as “financially disabled” and, thus, the statute of limitation period for claiming a refund was not suspended under Sec. 6511(h). While sympathetic, the court noted that, during the period at issue (1) the taxpayer was capable of managing one of his rental properties and overseeing the management of another; (2) the taxpayer was able to pay his bills and manage financial transactions, such as paying rent while he was stationed in South Korea; and (3) the taxpayer’s doctor did not offer an opinion that the taxpayer’s condition prevented him from managing his personal financial affairs. Peck, T.C. Summ. 2016-45 (8/22/16).
Lack of substantiation precludes deduction of NOL carryovers
The Tax Court held that a couple (1) did not substantiate that they incurred net operating losses (NOLs) in 1999–2002 that would be available as carryover NOL deductions against income for 2007–2011, and (2) received taxable distributions from the husband’s wholly owned S corporation because his stock basis in the corporation for the tax years at issue was zero. As a result, the court concluded that the taxpayers were liable for accuracy-related penalties under Sec. 6662(a). Power, T.C. Memo. 2016-157 (8/22/16).
Taxpayer failed to report COD income and to substantiate business deductions and dependency exemptions
The Tax Court held that a taxpayer failed to report cancellation-of-debt income and that he was not entitled to deductions for unsubstantiated business expenses. Further, the court concluded that the taxpayer was not entitled to dependency exemption deductions for his four children because he could not prove that any of them lived with him more than half the year or that he provided more than half their support. Rivas, T.C. Memo. 2016-158 (8/22/16).
Couple subject to penalty tax for early withdrawal from IRA
The Tax Court held that a couple was liable for the additional 10% penalty tax imposed by Sec. 72(t)(1) with respect to a distribution that the wife, who had not reached the age of 59½, received from an individual retirement account (IRA) she maintained. The court also held that the couple was not entitled to a deduction under Sec. 219(a) with respect to a contribution that the husband made to an IRA account he maintained. Barie, T.C. Memo. 2016-160 (8/23/16).
Lack of substantiation for ambulance transport business expenses kills deduction
The Tax Court held that (1) a taxpayer was not entitled to certain deductions claimed on Schedule C, Profit or Loss From Business, for her ambulance transport business for 2010, 2011, and 2012, and (2) because she did not establish reasonable cause and good faith for filing her 2011 tax return late, she was liable for an addition to tax under Sec. 6651(a)(1) for 2011. However, the court concluded that the taxpayer reasonably relied on an accountant for the preparation of the returns at issue and, thus, she was not liable for accuracy-related penalties under Sec. 6662(a). Walker, T.C. Memo. 2016-159 (8/23/16).
Royalty income was ordinary income, not capital gain
The Tax Court held that because a taxpayer did not transfer all substantial rights to certain technology in an exchange involving that technology, the royalties he received were not eligible for capital gain treatment under Sec. 1235. The court agreed with the IRS’s characterization of the royalty income as ordinary income. Spireas, T.C. Memo. 2016-163 (8/24/16).
Taxpayer’s settlement not excludable from income
The Tax Court held that the taxpayer could not exclude from income a $45,000 settlement from an insurance company under Sec. 105 because the amount was not paid for the loss of a function of his body. Nor, the court said, could the taxpayer exclude the settlement from income under Sec. 104(a)(2) because neither the complaint nor the agreement showed that the $45,000 was paid on account of physical injuries or physical sickness. Braddock, T.C. Summ. 2016-46 (8/24/16).
Taxpayer liable for taxes and deficiencies for unreported wages and gambling income
The Tax Court held that a taxpayer had taxable wages and gambling earnings that he did not report on his federal income tax return, but that he instead filed claiming zero income. The court thus concluded that he was responsible for deficiencies assessed by the IRS when it prepared substitute returns as well as penalties under Secs. 6651(a)(1) and (2). Canzoni, T.C. Memo. 2016-165 (8/25/16).
No dependency exemption deduction available for taxpayer’s emancipated children
The Tax Court held that a taxpayer was not entitled to head-of-household filing status and thus was also not entitled to dependency exemption deductions for two children. The court concluded that the children were considered emancipated under California law and, as a result, the taxpayer had to prove he provided more than one-half of the children’s support, which he did not do. Conti, T.C. Memo. 2016-162 (8/24/16).
Former spouse’s agreement to assume responsibility for tax deficiency does not relieve taxpayer from deficiency
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 an understatement of tax for the 2011 tax year. According to the court, the taxpayer could not be granted relief under Sec. 6015 merely because his former spouse agreed to assume responsibility for the assessed deficiency, particularly since the entire deficiency was attributable to a Social Security disability benefit payable to him. Hunter, T.C. Memo. 2016-164 (8/25/16).
Student allowed education credit for tuition but not for computer purchase
The Tax Court held that a taxpayer was entitled to an education credit of $350 for tuition paid in 2012, but was not entitled to a credit for the cost of his computer. According to the court, the taxpayer had not shown that purchasing the computer was a condition of enrollment or attendance as required by Regs. Sec. 1.25A-2(d)(2)(ii). Mameri, T.C. Summ. 2016-47 (8/24/16).
Taxpayer with no knowledge of items giving rise to deficiency is entitled to innocent spouse relief
The Tax Court held that a taxpayer was entitled to innocent spouse relief under Sec. 6015(c) for tax years 2010 and 2011 because the taxpayer did not have actual knowledge of the items that gave rise to the deficiency for those years and those items were allocable to her ex-husband. White, T.C. Summ. 2016-48 (8/25/16).
Revenue procedure deals with management contracts and governmental tax-exempt bonds
The IRS issued a revenue procedure providing safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Sec. 141(b) or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under Sec. 145(a)(2)(B) to be met. The safe harbors apply to any management contract that is entered into on or after Aug. 22, 2016, and an issuer may apply these safe harbors to any management contract that was entered into before Aug. 22, 2016. Rev. Proc. 2016-44 (8/22/16).
IRS corrects enhanced oil recovery credit inflation adjustment
The IRS published a correction to a calculation in Notice 2016-44, which contained the inflation adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in 2016. Announcement 2016-29 (8/22/16).
Eleventh Circuit remands case to Tax Court to determine if taxpayer was a bona fide USVI resident
The Eleventh Circuit vacated and remanded a case to the Tax Court in which the Tax Court held that a decedent had been a bona fide U.S. Virgin Islands resident during the years at issue and, as a result, the statute of limitation had run on IRS deficiency notices. The Eleventh Circuit held that the statute of limitation period was only triggered by the taxpayer’s filings with the USVI Bureau of Internal Revenue if he was, in fact, a bona fide USVI resident and the court concluded that the facts the Tax Court relied upon were insufficient to demonstrate bona fide residency. Estate of Sanders, No. 15-12582 (11th Cir. 8/24/16).
Guidance on amending returns to claim PATH Act depreciation changes
The IRS issued guidance for taxpayers to take advantage of a number of tax provisions that had expired at the end of 2014 but were retroactively extended to the beginning of 2015 in December 2015. Specifically, the procedure addresses Sec. 179 expensing, bonus depreciation, and the election to take a credit against alternative minimum tax (AMT) liability in lieu of bonus depreciation for “round 5 extension property.” Rev. Proc. 2016-48 (8/26/16) (see related news story).
Repayment of loans to S corporation shareholder were not wages subject to employment taxes
The Tax Court held that the owner of an S corporation was the S corporation’s employee. The court also said it believed that the S corporation shareholder-owner intended that certain advances to his S corporation to be loans and that his intention was reasonable for a substantial portion of the loans, at least until the business became unprofitable and would not have been able to borrow from a third party; thus, the court said the corporation’s repayments of those loans were valid and should not be characterized as wages subject to employment taxes. The advances made after the business began losing money were contributions to capital, though. Scott Singer Installations, Inc., T.C. Memo. 2016-161 (8/24/16).
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.