Document Summaries for the Week of Jan. 11, 2016
IRS issues assumed interest rates for insurance company reserves
The IRS issued a ruling setting forth the prevailing state assumed interest rates that are used by insurance companies to determine their reserves under Sec. 807 for contracts that are issued in 2015 and 2016. The ruling supplements Rev. Rul. 92-19. Rev. Rul. 2016-2 (1/12/16).
Insurance company should not reduce gross investment income by investment expenses
With respect to an insurance company taxpayer, the Office of Chief Counsel advised that the taxpayer should not reduce its gross investment income by investment expenses when computing its Sec. 812(d) gross investment income. The Chief Counsel’s Office also concluded that it is consistent with Regs. Sec. 1.801-8(e) for the taxpayer to include in amount retained the amount transferred from a separate account and paid by the taxpayer to its nonlife affiliate as investment fees. CCA 201603023 (1/15/16).
Chief Counsel’s Office and taxpayers disagree on inclusion of amounts in income
The Office of Chief Counsel disagreed with the taxpayers’ positions in the taxpayers’ Response to the Notices of Proposed Adjustments. The disagreement relates to proposed adjustments to the taxpayers’ income tax returns based on compensation deferred under an option to purchase common stock of a parent that was, the Chief Counsel’s Office argued, required to be included in the taxpayers’ gross income under Sec. 409A(a). CCA 201603025 (1/15/16).
Guidance on retroactive application of transit benefit parity
The IRS issued procedures for employers to use to handle the retroactive application of the increased amount of the 2015 income exclusion for monthly transit benefits. Notice 2016-6 (1/12/16) (see related news story).
IRS updates foundation status determination letter procedures
The IRS issued updated procedures for issuing determination letters on private foundation status under Sec. 509(a), operating foundation status under Sec. 4942(j)(3), and exempt operating foundation status under Sec. 4940(d)(2). Rev. Proc. 2016-10 (1/11/16).
Use of fictitious trust leads to penalties for failure to timely pay tax
The Tax Court held that, because a taxpayer’s trust was fictitious and based solely on his convoluted and frivolous characterization of the effect of the Social Security system, he was liable for the Sec. 6651(a)(2) penalty for filing to pay tax in a timely manner. According to the Tax Court, the taxpayer’s last-minute relinquishment of his frivolous position did not excuse or erase his intent at the time that his tax returns were due but were not filed, but it did help the taxpayer avoid the $25,000 penalty under Sec. 6673 for beginning or maintaining an action primarily for delay. Crummey, T.C. Memo. 2016-9 (1/12/16).
No innocent spouse relief where divorce decree indicated some of the tax liability was to be shared
The Tax Court held that a taxpayer was not entitled to relief from joint and several liability under Sec. 6015(f) for 2011 with respect to unpaid tax of nearly $4,000 that was reported on the joint federal income tax return he filed with his former spouse. In addition to many factors not weighing in the taxpayer’s favor, the court noted that the divorce decree, entered after the taxpayer filed the joint return showing the tax owed, and after the IRS sent notices the tax was owed, indicated that at least some of the remaining tax liability was to be shared between the parties. Elbe, T.C. Summ. 2016-2 (1/11/16).
Foreclosure loss on beach property was capital, not ordinary, loss
The Tax Court held that a taxpayer’s loss in a foreclosure action from the sale of his Newport Beach, Calif., property was deductible as a capital loss in 2008 and that it had no effect on his 2009 tax liability. According to the court, this would have been the case even if the sale had produced an ordinary loss in 2008. The taxpayer thus was liable for penalties under Secs. 6651(a)(1) and (2) for failing to timely file a return and pay the tax due. Evans, T.C. Memo. 2016-7 (1/11/16).
IRS gave taxpayers appropriate notice of transferee liability, on which they owed interest
On reconsideration of its previous decision finding the taxpayers liable for transferee liability, the Tax Court rejected the taxpayers’ argument that they could not be liable for interest on the tax due because the IRS had failed to give them appropriate notice of transferee liability. Despite the fact that notices of liability sent to the taxpayers were titled “notice of deficiency,” the court concluded that the notices met and exceeded the applicable requirements. Shockley, T.C. Memo. 2016-8 (1/11/16).
Chief Counsel’s Office opines on penalty computation for failure to file on electronic media
Noting that the Code, regulations, and Internal Revenue Manual are silent on how to compute the applicable percentage aggregate amount of a penalty on a person who intentionally disregards the Sec. 6011(e) requirement to file on electronic media if the person files more than 250 returns a year, the Office of Chief Counsel advised that the computation is a policy decision best left to the IRS Office of Servicewide Penalties’ discretion, but should be consistently applied nonetheless. Accordingly, the Chief Counsel’s Office proposed several options for computing the penalty and emphasized that, to deter violators, the calculation that would result in the highest penalty should be used. CCA 201603031 (1/15/16).
IRS employees should attend initial interview in an employee tax audit
In response to a question as to whether IRS employees must attend the initial interview in an employee tax audit, the Office of Chief Counsel advised that, where an employee audit is an investigation relating to the integrity of that employee, the employee does not have the right to send his or her representative to the interview without accompanying the representative. The Chief Counsel’s Office said it believes the IRS may take the position that employee investigations of employees in auditable positions, which involve tax administration, are investigations relating to integrity, whereas investigations of employees in non-auditable positions are not necessarily investigations relating to integrity. CCA 201603030 (1/15/16).
Indirect partner’s bankruptcy has no effect on its ability to sign a statute extension on behalf of an entity-partner
The Office of Chief Counsel advised that it does not believe that an indirect partner’s bankruptcy has any effect on the indirect partner’s ability to sign a statute extension on behalf of an entity-partner. In reaching this conclusion, the Chief Counsel’s Office noted that the entity-partner did not file for bankruptcy and the indirect partner is acting as a representative of that entity and not in his individual capacity. CCA 201603029 (1/15/16).
Chief Counsel’s Office clarifies rules on Sec. 199 and computer software
The Office of Chief Counsel analyzed the Reg. Sec. 1.199-3(i)(6)(iii) exceptions permitting gross receipts derived by a taxpayer from providing computer software to customers for the customers’ direct use while connected to the internet to qualify as domestic production gross receipts for purposes of the domestic production activities deduction. The Chief Counsel’s Office noted that the online software exceptions have been narrowly tailored and are intended to apply only to gross receipts derived from providing customers access to computer software for the customers’ direct use while connected to the internet and only when the taxpayer (or another person) also derives gross receipts from the disposition of the computer software (or substantially identical software) affixed to a tangible medium or by download. CCA 201603028 (1/15/16).
Rev. Rul. 99-40 does not apply to Form 1042
The Office of Chief Counsel advised that Rev. Rul. 99-40, as it relates to unpaid installments of estimated tax, does not apply to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, because the filers of those returns are not required to make estimated payments of income tax. CCA 201603027 (1/15/16).
Taxpayer’s refund claim is not time-barred
After reviewing the various tax return due dates for 2011 and the date in 2014 that a taxpayer filed a refund claim, the Office of Chief Counsel advised that the refund claim, filed April 17, 2014, when the original return was filed on April 18, 2011, because of a holiday, was not time-barred. The Chief Counsel’s Office likened this situation to Situation 3 in Rev. Rul. 2003-41. CCA 201603026 (1/15/16).
IRS provides rules for claiming 2015 biodiesel mixture and alternative fuel excise tax credits
The IRS has provided rules for claimants to make one-time claims for the 2015 biodiesel mixture and alternative fuel excise tax credits that were retroactively extended by the Consolidated Appropriations Act, 2016, P.L. 114-113. The IRS has also provided guidance for claimants to claim the other retroactively extended credits for 2015, including the alternative fuel mixture excise tax credit. Notice 2016-5 (1/14/16).
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.