Document Summaries for the Week of Aug. 8, 2016
Corporation is not entitled to deduct $900,000 of alleged compensation
The Tax Court held that a corporation—owned by, through, or on behalf of family members of a taxpayer who had not filed a federal income tax return since 1991—was not entitled to deduct almost $900,000 of alleged compensation paid to a “consultant” during the year in issue where the checks were made payable to “cash” and were negotiated by various individuals, some of whom had no visible role with respect to the corporation. The court noted that the corporation claimed to have no employees and no written contracts with any independent contractors, issued no information reports to any independent contractors, and enjoyed enormous amounts of income during the tax year in issue without paying any dividends to its shareholders. Little Mountain Corp., T.C. Memo. 2016-147 (8/8/16).
IRS issues monthly guidance on corporate bond yield curve and other rates
The IRS issued guidance on 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 August 2016. In addition, the notice provides the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2016-47 (8/9/16).
ESTATES, TRUSTS & GIFTS
IRS provides CRAT sample provision
The IRS provided a sample provision that may be included in the governing instrument of a charitable remainder annuity trust (CRAT) providing for annuity payments payable for one or more measuring lives followed by the distribution of trust assets to one or more charitable remaindermen. Rev. Proc. 2016-42 (8/9/16).
Income from nonprofit’s sale of items on a large scale is unrelated trade or business income
The IRS National Office advised that a nonprofit’s sale of unidentified items through its online store, from its printed catalog, and at various unrelated retail outlets is an unrelated trade or business generating unrelated trade or business income. The National Office noted that the quantity of the items kept on hand was in excess of the amount necessary to effectuate the organization’s purpose and the business of selling the items was conducted on a larger scale than was reasonably necessary for the performance of the organization’s exempt functions. TAM 201633032 (8/12/16).
Real estate losses were not passive, but failure to accurately report rental income leads to penalty
The Tax Court held that, because a taxpayer proved that she materially participated in operating numerous rental properties and therefore qualified as a real estate professional, her rental losses were not subject to the passive loss limitations imposed by Sec. 469. However, the court also found that, because the taxpayer made no attempt to explain her failure to accurately report rental income or to properly substantiate expenses, she was liable for the Sec. 6662(a) accuracy-related penalties for negligence. Hailstock, T.C. Memo. 2016-146 (8/8/16).
Carpenter cannot deduct unsubstantiated business expenses; penalties upheld
The Tax Court held that the taxpayer could not deduct expenses he allegedly incurred in his carpentry business beyond what he could substantiate. In upholding the Sec. 6662(a) accuracy-related penalty, the court rejected the taxpayer’s argument that he relied on a tax return preparer, noting that that there was no evidence that the return preparer was competent and was provided all relevant information. Jauregui, T.C. Summ. 2016-39 (8/8/16).
No earned income exclusion is available to Merrill Lynch employee who lived in Israel
The Tax Court held that the taxpayer, who was a citizen of both the United States and Israel and whose primary residence was in Israel, was not entitled to the foreign earned income exclusion because his tax home was in the United States and his choice to work in Israel was made solely for personal reasons. The court noted that the taxpayer’s employer, Merrill Lynch, identified the taxpayer’s authorized work location as the company’s New Jersey office. Hirsch, T.C. Summ. 2016-37 (8/8/16).
Professor and librarian cannot deduct expenses incurred to add to their “general knowledge”
The Tax Court held that a professor and his wife, who worked as a campus librarian, were not entitled to deduct unreimbursed employee business expenses for home internet, cell phones, computer equipment, maintaining a professional library of CDs and DVDs, satellite television, and depreciation for property allegedly purchased in prior years, all of which the couple said were incurred for the purpose of adding to their “general knowledge.” While the court found credible the couple’s testimony that they spent significant time and resources educating themselves, the court did not believe the expenses were ordinary and necessary for the trades of being a professor or a campus librarian but rather were personal, living, or family expenses that are nondeductible under Sec. 262(a). Tanzi, T.C. Memo. 2016-148 (8/9/16).
Court unable to determine whether alleged tax overpayments can be credited, refunded, or applied to 2011 tax year
The Tax Court held that it lacked jurisdiction over the taxpayer’s returns for 2006 through 2010 and was unable to determine whether alleged overpayments for those years could be credited, refunded, or applied to the taxpayer’s 2011 tax year. However, the court did conclude that the taxpayer could deduct various charitable contributions of personal property and food because her records substantiated a portion of her claimed contributions, and the court accepted the estimated fair market values she provided. Kaplan, T.C. Memo. 2016-149 (8/9/16).
Taxpayer hit with penalty tax on early IRA distribution
The Tax Court held that an unemployed teacher was liable for the 10% penalty tax on an early distribution from his individual retirement account (IRA) and rejected his argument that he withdrew the money to pay for qualified higher education expenses. The court noted that, while a taxpayer may be able to reduce the amount of an early distribution from an IRA that is subject to the penalty tax by the amount of qualified higher education expenses paid in the year of the early distribution, the taxpayer failed to provide evidence that he was enrolled in an eligible educational institution in the year of the distribution. Parisi, T.C. Summ. 2016-40 (8/9/16).
Companion sitters may be household employees if applicable employer-employee tests are met
The Office of Chief Counsel advised that a companion sitter—a person providing personal attendance, companionship, or household care services to children, the elderly, or the disabled—could be considered a household employee of the recipient of the services where the sitter is not dealing with or paid by a companion sitting placement service. Whether the companion sitter is a household employee, the Chief Counsel’s Office noted, depends on the common law factors used in determining whether an employer-employee relationship exists. CCA 201633034 (8/12/16).
Failure to obtain Form 8332 from children’s mothers precludes dependency exemption deductions
The Tax Court held that a taxpayer was not entitled to claim dependency exemption deductions for three children who did not live with him and, as a result, was not entitled to head-of-household filing status and child tax credits. Although divorce court orders granted the taxpayer dependency exemption deductions if he kept current on his child support payments—which he did—since he did not obtain an executed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, from the children’s mothers, he was not entitled to the deductions. Cappel, T.C. Memo. 2016-150 (8/10/16).
Taxpayer penalized for taking foreign tax credit on income excluded under Sec. 911
The Tax Court held that a U.S. citizen who lived and worked in Germany as a North Atlantic Treaty Organization (NATO) contractor was allowed to claim a Sec. 911 foreign earned income exclusion, but not a foreign tax credit because it would be an impermissible double benefit to exclude income and then claim a credit for that same income. The Tax Court also held that the taxpayer was liable for the Sec. 6662(a) accuracy-related penalty because it was negligent to take the impermissible double benefit. Gerencser, T.C. Memo. 2016-151 (8/10/16).
D.C. Circuit reverses Tax Court and remands case with instructions to do a more thorough analysis of foreign tax credit issue
The D.C. Circuit reversed a Tax Court decision that certain French taxes could not be taken as part of a couple’s foreign tax credit against their U.S. income tax liability because the taxes were social security taxes covered by the United States–France totalization agreement. The D.C. Circuit remanded the case to the Tax Court and instructed the court to do a more in-depth analysis in determining if the French taxes at issue, which were enacted after the U.S.–France totalization agreement was entered into, were subject to the totalization agreement. Eshel, No. 14-1215 (D.C. Cir. 8/5/16).
IRS did not abuse its discretion in collection proceeding where couple was given opportunity for IRS hearing
The Tax Court held that a couple was given a reasonable opportunity for an IRS hearing with respect to a collection proceeding against them but failed to avail themselves of it. Accordingly, the court found no abuse of discretion on the IRS’s part and sustained the collection action against the couple. Carter, T.C. Summ. 2016-38 (8/8/16).
IRS explains reporting requirements for options fees paid to pawnbrokers
The Office of Chief Counsel advised that a pawnbroker that accepts merchandise under a contract for purchase (i.e., a contract for a pawn loan) has engaged in a retail sale of a consumer durable, for purposes of the reporting requirement in Regs. Sec. 1.6050I-1(c)(1)(iii) (requiring reporting receipt of more than $10,000 of cash in a trade or business), when the contracts are renewed with the payment by the customer of an option fee. According to the Chief Counsel’s Office, however, when the customer pays an option fee to the pawnbroker to rescind the sale, that is not considered a retail sale by the pawnbroker back to the customer. CCA 201633033 (8/12/16).
Prop. regs. issued on income inclusion under investment credit
Proposed regulations provide guidance on the income inclusion rules under Sec. 50(d)(5) that apply to a lessee of investment credit property when a lessor of that property elects to treat the lessee as having acquired the property. They also provide rules on income inclusion upon a lease termination, lease disposition by a lessee, or disposition of a partner’s or S corporation shareholder’s entire interest in a lessee partnership or S corporation outside the recapture period. REG-102516-15 (8/8/16).
S corporation’s property exchange qualifies for nonrecognition treatment under Sec. 1031
The Tax Court held that an S corporation’s disposition of property in exchange for another property qualified for Sec. 1031 nonrecognition treatment. The court rejected the IRS’s argument that the S corporation already owned the acquired property before the exchange took place. Estate of Bartell, 147 T.C. No. 5 (8/10/16).
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.