Document Summaries for the Week of Feb. 15, 2016
Proposed regulations focus on supporting organizations
Proposed regulations more specifically define a Sec. 509(a)(3) supporting organization to reflect changes made by the Pension Protection Act of 2006, P.L. 109-280. The proposed regulations also provide more requirements for Type III supporting organizations to meet the responsiveness test and to qualify as functionally integrated organizations. REG-118867-10 (2/18/19).
Damages awarded for emotional distress resulting from employment discrimination were not excludable from income
The Tax Court held that a $70,000 award received by the taxpayer for emotional distress as a result of employment discrimination could not be excluded from income. The court noted that under Sec. 104(a), damages received for emotional distress are not excludable from gross income unless they are for medical care attributable to the emotional distress. Because the damages the taxpayer received were not for physical injury or physical sickness, they were not excluded by Sec. 104(a)(2). Barbato, T.C. Memo. 2016-23 (2/16/16).
Lack of substantiation precludes deductions; penalties assessed
The Tax Court held that a couple could not deduct multiple business expenses and charitable contributions because the amounts either were not deductible or were not properly substantiated. The court also upheld a penalty assessment. Garcia, T.C. Memo. 2016-21 (2/16/16).
Qualified appraisal needed for donation of coin collection
The Office of Chief Counsel advised that a qualified appraisal is required under Sec. 170(f)(11) when a taxpayer contributes a coin or collection of coins with a claimed value in excess of $5,000. The “readily valued property” cash exception to the appraisal requirements in Sec. 170(f)(11)(A)((ii)(I) does not apply to the coins unless (1) their value, as claimed by the donor, does not exceed their face amount and (2) the coins are acceptable as legal tender. CCA 201608012 (2/19/16).
Bartender cannot deduct high-end clothing purchased so he could look his best at his job
The Tax Court held that a bartender in a New York City restaurant could not deduct clothing expenses related to his job because his employer did not require him to wear any particular type of clothing and the clothing that he did wear was of a kind adaptable generally to wear away from work as well as at work. As a result, the clothing costs were nondeductible personal expenses, even though the taxpayer felt it was necessary to wear high-quality clothes to look his best as one of the faces of the restaurant. Beltifa, T.C. Summ. 2016-8 (2/18/16).
LLC cannot challenge employment tax liabilities; IRS did not abuse its discretion in levying against taxpayer
The Tax Court held that a limited liability company could not challenge its underlying employment tax liabilities for various quarters in 2011 and 2012 and that the IRS Appeals Office did not abuse its discretion in sustaining a Notice of Federal Tax Lien and proposed levy against the taxpayer. Thus, the court sustained the IRS’s determination. LG Kendrick, LLC, T.C. Memo. 2016-22 (2/16/16).
Taxpayers received prior consideration from IRS and thus were statutorily barred from challenging liability
The Tax Court held that, despite the merits of the taxpayers’ arguments about their underlying tax liability, the taxpayers received prior consideration from IRS Appeals before their collection hearing requests and thus were statutorily barred from challenging their underlying liability. As a result, the IRS did not abuse its discretion by sustaining the filing of a lien with respect to the taxpayers’ 1983 tax year. Mangum, T.C. Memo. 2016-24 (2/16/16).
IRS can obtain employee benefit plan information from anyone with authority to bind the LLC
The Office of Chief Counsel advised that when the IRS needs information on a plan sponsored by a limited liability company (LLC), it can deal with anyone who has authority under state law to act on behalf of or bind the LLC. According to the Chief Counsel’s Office, rules under the Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248, do not come into play because the IRS is not auditing the LLC or disclosing the LLC’s return information. CCA 201608015 (2/19/16).
FPAA can be issued for year of partnership sale
In a heavily redacted memorandum, the Office of Chief Counsel advised that a final partnership administrative adjustment (FPAA) could be issued only for the year in which a partnership sold an item, as the item’s basis was itself a partnership item. The fact that the basis of the item was also a partnership item in a previous year did not change this answer. CCA 201608014 (2/19/16).
Taxpayer cannot challenge IRS collection actions by denying he received notices
The Tax Court rejected a taxpayer’s “self-serving” testimony that he did not receive notices of tax deficiencies and held that he could not challenge IRS collection actions. The court also held that the IRS did not abuse its discretion in sustaining collection actions against the taxpayer’s wife since she did not provide Form 8857, Request for Innocent Spouse Relief; raise any collection alternatives; or articulate a basis for innocent spouse relief more specific than that she had no income. Stanley, T.C. Memo. 2016-26 (2/17/16).
Chief Counsel addresses “rule of three” for grouping return information for statistical purposes
With respect to statistical sampling, the Office of Chief Counsel advised that the IRS uses a general “rule of three” for grouped return information; i.e., the information must include data from at least three taxpayers to be statistical. However, the Chief Counsel’s Office noted that, depending on the specific circumstances, three taxpayers may be too few to mask their identities. In that case, when possible, the IRS should include more taxpayers’ data until their identities are appropriately masked. CCA 201608013 (2/19/16).
Notice partner was late in filing Tax Court petitions
The Tax Court held that where a notice partner other than the tax matters partner (TMP) filed Tax Court petitions more than 150 days after the IRS mailed final partnership administrative adjustments (FPAAs) to the TMPs, the petitions were late. Thus, the case was dismissed for lack of jurisdiction. Berkshire 2006-5, LLP, T.C. Memo. 2006-25 (2/17/16).
March AFRs issued
The IRS issued the applicable federal rates for March 2016. Rev. Rul. 2016-7 (2/17/19).
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.