Document Summaries for the Week of Dec. 12, 2016
IRS clarifies guidance on the beginning of construction for Sec. 45 and Sec. 48
The IRS updated and clarified guidance in prior IRS notices regarding the beginning of construction for Sec. 45 and Sec. 48 purposes. Specifically, the IRS clarified issues regarding the extension and modification of the continuity safe harbor, the prohibition against combining methods by which to satisfy the beginning of construction requirement, and the costs that may be included in the 5% safe harbor for retrofitted renewable energy facilities. Notice 2017-4 (12/15/16).
IRS issues monthly corporate bond yield curve and average segment rates
The IRS issued 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). In addition, the IRS issued the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2016-78 (12/13/16).
IRS issues required amendments list for qualified plans
The IRS issued the 2016 required amendments list for individually designed qualified retirement plans. The list identifies certain changes in qualification requirements that became effective in 2016 that may require a retirement plan to be amended to remain qualified, and establishes the date by which any necessary amendment must be made. Notice 2016-80 (12/13/16).
ESTATES, TRUSTS & GIFTS
No deduction allowed for trust payments not made under governing instrument
The Office of Chief Counsel advised that certain payments made by a trust were not deductible under Sec. 642(c)(1) because the payments were not made under the trust’s governing instrument. In addition, the Chief Counsel’s Office noted, the trust was not entitled to a deduction under Sec. 661 for payments to certain foundations because Sec. 642(c)(1) is the exclusive income tax provision for deductibility of payments by a trust or estate to a charitable beneficiary. CCA 201651013 (12/16/16).
IRS properly revoked corporation’s nonprofit status
The Tax Court held that the IRS properly revoked a corporation’s tax-exempt status because it was not operated exclusively for an exempt purpose. According to the court, the corporation failed to satisfy the operational test because it did not engage in any activity that accomplished one or more of the exempt purposes in Sec. 501(c)(3). Community Education Foundation, T.C. Memo. 2016-223 (12/12/16).
IRS announces standard mileage rates for 2017
The standard mileage rate for business use of a car, van, pickup truck, or panel truck for 2017 will be 53.5 cents per mile. Driving for medical or moving purposes may be deducted at 17 cents per mile. Notice 2017-79 (12/13/16) (see related news story).
Lawyer is limited by Sec. 469 on real estate loss deductions, penalized for deducting 100% of meals and entertainment expenses
The Tax Court agreed with the IRS and held that a lawyer was limited under the passive loss rules in Sec. 469 as to the amount of commercial real estate expenses he could deduct on his tax return and, because his income exceeded a certain amount, he could not rely on relief provisions in Sec. 469(i). Further, the court upheld penalty assessments where the lawyer deducted 100% of his meals and entertainment expenses, noting that, with his advanced education, the lawyer should have known the deductions were limited to 50%. Ekeh, T.C. Summ. 2016-80 (12/12/16).
Taxpayer lacked qualifying income for recovery rebate credit
The Tax Court held that a taxpayer erroneously received an advance refund pursuant to Sec. 6428(g) of a “recovery rebate credit” of $300 in 2008. The court held that, although the taxpayer reported income from a one-time sale of tools on line 1 of his Form 1040, he had no earned income within the meaning of Sec. 32(c)(2) and, thus, lacked “qualifying income” required to be eligible for the credit. Berry, T.C. Summ. 2016-81 (12/13/16).
Tax return preparer liable for deficiencies and penalties on unreported income
The Tax Court held that a tax return preparer was liable for tax deficiencies for unreported income on his own return. Further, because the taxpayer’s deficiency exceeded the greater of $5,000 or 10% of the amount of tax required to be shown on the return, the Tax Court concluded that his underpayment of tax was substantial and that he had not shown reasonable cause for it. Thus, he was liable for assessed penalties. Chibanguza, T.C. Summ. 2016-84 (12/13/16).
Kuwait earnings of an Army civilian employee are not excludable from income
The Tax Court held that a civilian employee of the U.S. Army was not entitled to exclude under Sec. 911 income earned while deployed in Kuwait during 2010. The court noted that Sec. 911(b)(1)(B)(ii) specifically excludes from foreign earned income eligible for the exclusion amounts paid by the United States or an agency thereof to an employee of the United States or an agency thereof. Owens, T.C. Summ. 2016-83 (12/13/16).
Taxpayer subject to self-employment tax despite financial straits
The Tax Court held that a taxpayer who performed consulting services and odd jobs owed self-employment tax on self-employment income reported on his 2013 tax return. The court acknowledged the taxpayer’s argument that he was in dire financial straits but said that had no bearing on whether he owed self-employment tax. Stinson, T.C. Summ. 2016-82 (12/13/16).
Horse-racing losses disallowed, but reliance on accountant saves taxpayer from most penalties
The Tax Court held that a taxpayer’s horse-racing activity was not engaged in for profit and, thus, the taxpayer’s loss deductions were disallowed. However, because the taxpayer relied on the advice of his accountant regarding the deductibility of his horse-racing expenses, the court found that he had reasonable cause and good faith for taking the deductions and was not liable for the penalties the IRS assessed for those deductions, but was liable for any penalties assessed for unsubstantiated charitable deductions. Carmody, T.C. Memo. 2016-225 (12/14/16).
Taxpayer’s corporation is a surrogate foreign corporation to which Sec. 7874(b) applies
In a heavily redacted memorandum, the Office of Chief Counsel addressed a situation involving the Sec. 7874 rules relating to expatriated entities and their foreign parents. The Office of Chief Counsel advised that a new company set up by the taxpayer was a surrogate foreign corporation within the meaning of Sec. 7874(a)(2)(B) and is treated as a domestic corporation under Sec. 7874(b). CCA 201651015 (12/16/16).
Final regs. issued under Sec. 367 on outbound transfers of intangibles
The IRS issued final regulations intended to prevent taxpayers from avoiding the recognition of gain or income attributable to high-value intangible property by asserting that an inappropriately large share of the value of the property transferred is foreign goodwill or going concern value that is eligible for favorable treatment under Sec. 367. T.D. 9803 (12/15/16) (see related news story).
IRS did not abuse its discretion when it proceeded with collection of delinquent taxes
The Tax Court held that the IRS had a valid assessment of tax against the taxpayer and its notice and demand for payment of tax was sent to the taxpayer within 60 days of assessment. As a result, the court found that the IRS’s determination to proceed with collection was not an abuse of discretion, and the court sustained the IRS’s filing of the Notice of Federal Tax Lien and the proposed levy. Morton, T.C. Memo. 2016-227 (12/14/16).
Partnerships growing almond trees must capitalize property taxes and interest
The Tax Court held that Sec. 263A(a)(2)(B) required a partnership to capitalize property taxes corresponding to the portion of its land on which it grew almond trees because a portion of the taxes was an allocable, indirect cost of the partnership’s growing (and thus producing) the almond trees. Similarly, the partnership and other related partnerships in the same line of business had to capitalize interest corresponding to the portion of its land on which it grew the almond trees. Wasco Real Properties I, LLC, T.C. Memo. 2016-224 (12/13/16).
Regulations proposed on fractions rule for partnerships with tax-exempt partners
The IRS issued proposed regulations that provide guidance on applying the Sec. 514(c)(9)(E) fractions rule to partnerships that hold debt-financed real property and have one or more (but not all) qualified tax-exempt organization partners within the meaning of Sec. 514(c)(9)(C). REG-136978-12 (12/12/16).
After vacating prior decision, Tax Court still finds partnerships’ transactions lacked economic substance
The Tax Court vacated its prior decision in the instant case on the grounds that newly discovered evidence demonstrated that one of the IRS’s expert witnesses lied in both his expert report and his trial testimony about his expert qualifications. However, after reconsidering the case and disregarding the prior testimony of the disqualified witness, the Tax Court reached the same conclusion as before—that the IRS’s adjustments to certain partnerships’ losses were appropriate because the transactions generating the losses had no business purpose other than tax avoidance and the transactions lacked economic substance. AD Investment 2000 Fund LLC, T.C. Memo. 2016-226 (12/14/16).
IRS addresses allocations of low-income housing credits
The IRS issued a ruling on allocations of low-income housing credits to projects and clarified that Sec. 42(m)(1)(A)(ii) neither requires nor encourages state housing credit allocating agencies to reject the proposed development of a low-income housing project that does not obtain the approval of the locality where the project is proposed to be developed. Rev. Rul. 2016-29 (12/12/16).
IRS guidance addresses housing projects located in a qualified census tract
The IRS issued guidance relating to allocations of low-income housing credits to certain projects, reminding taxpayers that a project located in a qualified census tract is not described in Sec. 42(m)(1)(B)(ii)(III) unless the project’s development contributes to a concerted community revitalization plan. The IRS also noted that it has not yet issued guidance defining the term “concerted community revitalization plan” and requested comments. Notice 2016-77 (12/12/16).
Unamortized debt issuance costs are not deducible in year debentures are converted to warrants
The Office of Chief Counsel advised that, under Rev. Rul. 72-348 and the cases cited therein, an issuer’s unamortized debt issuance costs of convertible debentures, upon the conversion of the debentures into warrants exercisable into the issuer’s common stock, assume the character of a capital expenditure in connection with the issuance of the stock. Where the debentures were converted into warrants and the exercise price of the warrants was a nominal sum, the Chief Counsel’s Office concluded that the warrants are treated as stock and, thus, the issuer is not entitled to deduct its remaining unamortized debt issuance costs in the tax year of the conversion. CCA 201651014 (12/16/16).
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.