Document Summaries for the Week of Dec. 5, 2016
Corporation can deduct loss on sub stock in year when sub leaves consolidated group
The Office of Chief Counsel advised that, where a corporation met the general requirements under Sec. 165 to deduct a loss on the worthlessness of the stock of a subsidiary during the years at issue, Regs. Sec. 1.1502-80(c)(1) deferred the taxpayer’s loss deduction until the earliest of one of four identifiable events. The only identifiable event that occurred during the years at issue occurred in year 6 when the taxpayer elected to change the classification of the subsidiary from a corporation to an entity disregarded as separate from the taxpayer, which caused the subsidiary to cease to be a member of the taxpayer’s consolidated group. CCA 201650013 (12/9/16).
Corporation performing grading and soil compaction activities for home foundations can use completed-contract method
The Office of Chief Counsel advised that a corporation that actively participates in private subdivision housing projects and has long-term construction contracts requiring grading and soil compaction of the pad area necessary for the construction of foundations for the houses, may use the completed-contract method of accounting. According to the Chief Counsel’s Office, grading and soil compaction of the pad area necessary for the construction of foundations are construction activities for the dwelling units per Sec. 460(e)(6)(A)(i) and are as essential to support the houses as the foundations themselves. Therefore they should be considered construction of a portion of the dwelling units. TAM 201650014 (12/9/16).
Chief Counsel’s Office addresses qualified research and internal-use computer software issues
The Office of Chief Counsel advised that Sec. 41(d)(4)(E) is not self-executing (i.e., effective without regulations) for determining whether research with respect to computer software developed primarily for internal use is qualified research. Further, the Chief Counsel’s Office stated, a taxpayer may choose to apply either all of the internal use provisions in T.D. 8930 or all of the IUS provisions in the 2001 proposed internal use regulations for purposes of the three-part high-threshold-of-innovation test for tax years ending before the issuance of the 2015 proposed regulations and for which there are no final regulations in effect. CCA 201650012 (12/9/16).
Bill allows for health reimbursement arrangements
Congress passed an act that, among other things, permits certain small businesses to use health reimbursement arrangements (HRAs) without incurring penalties under the Patient Protection and Affordable Care Act, P.L. 111-148. 21st Century Cures Act, H.R. 34 (12/7/16) (see related news story).
ESTATES, TRUSTS & GIFTS
IRS advises on options available for making portability election when Form 706 isn’t timely filed
The Office of Chief Counsel advised that, where a taxpayer has a gross estate of more than $5 million and fails to timely file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the taxpayer misses out on the portability election and there is no relief available to him, even if the estate is nontaxable due to the marital deduction. If a taxpayer has a gross estate of less than $5 million and misses the deadline for timely filing a Form 706, the Chief Counsel’s Office said, the taxpayer’s only recourse for obtaining the portability election is to seek relief through the private letter ruling process, which the office said would likely be granted. Merely filing a late Form 706 will be ineffective, and the election will not be respected. CCA 201650017 (12/9/16).
Law firm partner liable for employment tax penalties
The Tax Court sustained a proposed levy to collect Sec. 6672(a) trust fund recovery penalties from the partner of a law firm for failing to collect and pay over employment taxes of the law firm. The court found that the IRS settlement officer did not abuse her discretion in declining to grant further delays in collection to provide the taxpayer additional time to develop an issue that he was not entitled to raise. Anderson, T.C. Memo. 2016-219 (12/5/16).
Court upholds penalties where taxpayer gave false impression that he had a Schedule C business rather than a partnership
The Tax Court sustained tax deficiencies assessed by the IRS in a case in which the taxpayer did not explain to the IRS until trial that he had a partnership with his brother, rather than a Schedule C business, and gave the IRS the false impression that he had paid disputed Schedule C expenses related to businesses that were exclusively his. Further, because the court found that the taxpayer manipulated documents in an attempt to show that he had made payments that were actually made by his brother, the court upheld accuracy-related penalties assessed against the taxpayer. Nwabasili, T.C. Memo. 2016-220 (12/5/16).
No deduction allowed for $100 million in alleged losses from CARDS transactions
The Tax Court rejected a taxpayer’s deductions of $100 million in losses relating to custom adjustable rate debt structure (CARDS) transactions because the deal relating to the transactions was the “stuff of tax wizardry.” As a small consolation, the court did allow deductions for certain costs relating to foreign-currency exchange contracts. Putanec, T.C. Memo. 2016-221 (12/6/16).
Lawyer penalized for unsubstantiated deductions
The Tax Court held that a lawyer (1) was not entitled to deductions for many of the alleged legal-related expenses or to a foreign tax credit he claimed on his tax returns, (2) was not entitled to deduct a net-operating-loss (NOL) carryforward, (3) owed additional self-employment tax, and (4) was liable for Sec. 6651(a)(1) additions to tax and Sec. 6662(a) accuracy-related penalties for the years at issue. In reaching its conclusion, the court noted that, in addition to not keeping adequate records to substantiate many of the expenses he reported, he failed to prove that he had any NOLs to carry forward, and he filed his tax returns late. Chaganti, T.C. Memo. 2016-222 (12/9/16).
Tax benefit rule does not require recapture of inherited farm inputs
The Tax Court held that the tax benefit rule did not require the recapture upon a taxpayer’s death in 2011 of deductions he claimed in 2010 for his expenditures on farm inputs (i.e., tangible property used in farming, such as seed and fuel). The court further held that the Sec. 6662 accuracy-related penalty for a substantial understatement did not apply since the decedent’s deductions were appropriate under Sec. 162 and the only deduction denied by the IRS and conceded by the taxpayer was not large enough to merit imposition of the penalty. Estate of Backemeyer, 147 T.C. No. 17 (12/8/16).
IRS updates lists of countries to which Rev. Proc. 2016-18 applies
The IRS updated Rev. Proc. 2016-18 to supplement the lists of (1) countries with which the reporting requirement of Regs. Sec. 1.6049-8(a) and Regs. Sec. 1.6049-4(b)(5) (relating to bank interest income of certain nonresident alien individuals) applies, and (2) countries with which Treasury and the IRS have determined that an automatic exchange of that interest income information is appropriate. One country (Saint Lucia) was added to the first list, and three countries (Israel, the Republic of Korea, and Saint Lucia) were added to the second list. Rev. Proc. 2016-56 (12/5/16).
Regs. issued on covered asset acquisitions under Sec. 901(m)
The IRS issued temporary regulations to prevent taxpayers from misapplying the Sec. 901(m) statutory disposition rule in certain dispositions of relevant foreign assets (RFAs), including where the gain or loss from the disposition of an RFA is recognized for U.S. income tax purposes but not for foreign income tax purposes, and cases in which no gain or loss is recognized for purposes of U.S. or foreign income tax from the disposition of an RFA. Simultaneously issued proposed regulations contain rules for computing the disqualified portion of foreign income taxes under Sec. 901(m), including definitions and rules for determining whether and to what extent basis difference assigned to a given tax year is carried over to subsequent tax years. T.D. 9800; REG-129128-14 (12/6/16) (see related news story).
IRS publishes final regs. under Sec. 987
The IRS issued final regulations under Sec. 987 regarding the determination of the taxable income or loss of a taxpayer for a qualified business unit (QBU) subject to Sec. 987, as well as the timing, amount, character, and source of any Sec. 987 foreign currency gain or loss. T.D. 9795 (12/8/16).
Regs. govern covered asset acquisitions under Sec. 901(m)
The IRS issued temporary regulations to prevent taxpayers from misapplying the Sec. 901(m) statutory disposition rule in certain dispositions of relevant foreign assets (RFAs), including where the gain or loss from the disposition of an RFA is recognized for U.S. income tax purposes but not for foreign income tax purposes, and cases in which no gain or loss is recognized for purposes of U.S. or foreign income tax from the disposition of an RFA. T.D. 9800 (12/6/16) (see related news story).
IRS issues interest rates for first quarter of 2017
The IRS issued the interest rates on tax overpayments and underpayments for the first calendar quarter of 2017. The interest rates will be 4% for overpayments (3% in the case of a corporation), 4% for underpayments, 1.5% for the portion of a corporate overpayment exceeding 10,000, and 6% for large corporate underpayments. Rev. Rul. 2016-28 (12/5/16).
OPR announces disciplinary sanctions
The IRS Office of Professional Responsibility (OPR) announced disciplinary sanctions against attorneys, CPAs, and one enrolled agent. Announcement 2016-40 (12/5/16).
IRS has authority to deny EINs to applicants without an SSN or ITIN
The Office of Chief Counsel advised that, in its view, Secs. 6011(b), 6109(a)(1), and 6109(c) and the underlying regulations give the IRS broad authority to deny an employer identification number (EIN) request if the applicant does not have a Social Security number or an individual taxpayer identification number, or has not filed a return. However, the Chief Counsel’s Office noted that, while it has the authority to deny an EIN request under these circumstances, this policy would be controversial, and a risk assessment analysis should be done before adopting it. CCA 201650020 (12/9/16).
Electronic signatures should only be accepted where there is published guidance or IRM provisions
The Office of Chief Counsel advised that an electronic signature should be accepted by the IRS only when there is published guidance or Internal Revenue Manual (IRM) provisions specifically authorizing their use for the specific form involved. Since there is no guidance or IRM provisions authorizing the use of an electronic signature on Forms 2678, Employer/Payer Appointment of Agent, the Chief Counsel’s Office recommended that the IRS not accept Forms 2678 signed electronically until the IRS authorizes it. CCA 20165019 (12/9/16).
Legally acceptable for IRS Exam Division to allow statute on Form 720 to expire
The Office of Chief Counsel advised that while it is legally acceptable for the IRS Examination Division to allow the statute of limitation on a Form 720, Quarterly Federal Excise Tax Return, to expire, the division must use its reasonable discretion and experience to determine when it is necessary to voluntarily allow a statute to expire. This discretion, the Chief Counsel’s Office noted, may be used as a cost-effective measure to preserve resources and workload when the Examination Division believes the return has a low likelihood of a subsequent barred deficiency; however, the Examination Division should attempt to revise the procedure at issue to ensure that this extra workload is not imposed, and additional costs and resources are not spent, on hindsight decisions. CCA 201650018 (12/9/16).
Accuracy-related penalties should not be in a statutory notice of deficiency
The Chief Counsel’s Office, citing Sec. 6230(a)(2), advised that the accuracy-related penalties should not be in a statutory notice of deficiency and are not subject to the deficiency procedures. However, the Chief Counsel’s Office said, it is proper to include the penalties in a notice of computational adjustment. CCA 201650015 (12/9/16).
IRS free to receive information from any lawful source
The Chief Counsel’s Office advised that there are no disclosure issues where disclosures are made to the IRS. Further, the Chief Counsel’s Office noted, the IRS is free to receive information from any lawful source. CCA 201650016 (12/9/16).
Regulations institute new due-diligence requirements for return preparers
The IRS issued temporary and proposed regulations that implement new due-diligence requirements that tax return preparers must follow when they prepare returns that claim a child tax credit, additional child tax credit, or American opportunity tax credit. T.D. 9799; REG-102952-16 (12/5/16) (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.