Document Summaries for the Week of Feb. 1, 2016
How air transportation excise tax applies
The IRS Office of Chief Counsel advised about two situations in which the Sec. 4261 air transportation excise tax applies. In the first, it stated that amounts banks paid to airlines for marketing frequent flier miles programs could be bifurcated from amounts paid for air mileage and would not be subject to tax. In the second, the Chief Counsel’s Office said that the excise tax is triggered when an amount is paid for frequent flier miles, not when the frequent flier miles are deposited into (or credited to the benefit of) the customers’ accounts. CCA 201606028 (2/5/16).
IRS updates weighted average interest rates, yield curves, and segment rates for January
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 January 2016. Notice 2016-7 (2/1/16).
Schools get transition relief to comply with market reform provisions of PPACA
Colleges and universities were given temporary relief to address compliance with certain group market reform provisions of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. The Treasury Department, the Department of Labor, and the Department of Health and Human Services will not assert that a premium reduction arrangement fails to satisfy those provisions if the arrangement is offered in connection with other student health coverage (insured or self-insured) for a plan year or policy year beginning before Jan. 1, 2017. Notice 2016-17 (2/5/16).
Taxpayer does not meet Oklahoma common-law-marriage test
The Tax Court held that the taxpayer did not qualify as being married because he did not satisfy all five elements of Oklahoma’s common-law-marriage test. The taxpayer and his live-in girlfriend did not prove that they held themselves out as married in any formal settings during the year at issue. The court concluded, however, that the taxpayer was entitled to a dependency exemption for his girlfriend because he provided more than half of her support but could not claim dependency exemptions and child tax credits for the girlfriend’s daughter and granddaughter, and he was not entitled to the earned income credit or to file as head of household. Morris, T.C. Summ. 2016-6 (2/3/16).
10% additional tax on early IRS distribution is not deductible
The Tax Court held that the taxpayer could not deduct the 10% additional tax he paid to the IRS. He claimed the amount was deductible under Sec. 62(a)(9), which permits a deduction for amounts forfeited to banks for early withdrawals. The taxpayer was also required to include in his taxable income the $1,000 he received from a casino in a lottery. Martin, T.C. Memo. 2016-15 (2/3/16).
Rental income from taxpayers’ S corporation is reclassified as nonpassive income
The Fifth Circuit affirmed the Tax Court and held that, while Sec. 469 does not specifically refer to S corporations, it need not do so for it to apply to S corporations because S corporations are merely passthrough entities. Thus, Regs. Sec. 1.469-4(a), which refers to taxpayers’ activities conducted through S corporations, is valid. The court also held that the self-rental rule of Regs. Sec. 1.469-2(f)(6) applied to the taxpayers and therefore the rental income they received from their S corporation’s lease of property to their wholly owned C corporation should be reclassified as nonpassive income. Williams, No. 15-60341 (5th Cir. 2/2/16).
IRS can reinspect same books and records when auditing a different tax year
The Seventh Circuit affirmed a district court decision holding that Sec. 7605(b), which provides that only one inspection of a taxpayer’s books of account can be made for each tax year unless the IRS notifies the taxpayer in writing that an additional inspection is necessary, does not apply when the IRS seeks the same records for an audit of a different tax year. Sec. 7605(b) applies if the IRS seeks to inspect a taxpayer’s records when auditing a tax liability for a given year only when the agency has already inspected the records in auditing the taxpayer’s liability for that same tax year. Titan International, Inc., No. 14-3789 (7th Cir. 2/1/16).
Tax Court sustains levy actions against doctor and wife
The Tax Court held that the IRS did not err in sustaining the filing of notices of federal tax lien and proposed levy actions against a doctor and his wife who filed returns late and did not pay the tax due. The court found that the IRS settlement officer followed applicable law and administrative procedure requirements and properly balanced the need for the efficient collection of taxes with the taxpayers’ legitimate concern that any collection action be no more intrusive than necessary. Morris, T.C. Memo. 2016-16 (2/4/16).
Chief Counsel’s Office addresses partnership guarantees and basis allocation rules
The Office of Chief Counsel advised that, if a partner guarantees a partnership obligation and the guarantee is sufficient to cause the guaranteeing partner to bear the economic risk of loss under Regs. Sec. 1.752-2(b)(1), the guaranteed debt is properly treated as recourse financing for the Sec. 752 basis allocation rules. CCA 201606027 (2/5/16).
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.