Document Summaries for the Week of Jan. 18, 2016
IRS did not abuse its discretion in determining that an ESOP was not a qualified trust
The Tax Court held that the IRS did not abuse its discretion when it ruled that an entity’s employee stock ownership plan (ESOP) failed in operation to satisfy the anti-alienation requirements of Sec. 401(a)(13) and Regs. Sec. 1.401(a)-13 and failed to follow the plan document in operation, as required by Regs. Secs. 1.401-1(a)(2) and (b)(3). Thus, the ESOP was not qualified under Sec. 401(a) for its 2010 and subsequent plan years, and the related trust was not exempt under Sec. 501(a). Family Chiropractic Sports Injury & Rehab Clinic, Inc., T.C. Memo. 2016-10 (1/19/16).
IRS delays date by which organizations must notify it of intention to operate under Sec. 501(c)(4)
The IRS announced that it is extending the date by which social welfare organizations must notify it of their intent to operate under Sec. 501(c)(4), as required by new Sec. 506, added by the Consolidated Appropriations Act, 2016, P.L. 114-113. With respect to the separate process by which an organization may, at its option, request a determination that it qualifies for Sec. 501(c)(4) tax-exempt status, the IRS stated that organizations seeking recognition of Sec. 501(c)(4) status should continue using Form 1024, Application for Recognition of Exemption Under Section 501(a), until further guidance is issued, and clarified that filing Form 1024 will not relieve an organization of its requirement to submit the Sec. 506 notification. Notice 2016-9 (1/19/16).
Taxpayer cannot include home office costs in bases of properties sold
The Tax Court held that while the cost of improvements that a taxpayer operating a real property business made to his properties before he sold them were properly included in the properties’ bases, his home office expenses were a cost of doing business that should have been included on Schedule C, Profit or Loss From Business, and not in the bases of his properties. The court also held that the taxpayer was liable for accuracy-related penalties for one of the two years at issue, but not for the other, because he relied on a tax professional to file his return for that year. Niemann, T.C. Memo. 2016-11 (1/19/16).
German citizen is liable for tax
The Tax Court held that a German citizen who made an installment sale of his stock in a U.S. corporation did not expatriate until six years after the stock sale, when he formally abandoned his status as a lawful permanent U.S. resident. In addition, he was a covered expatriate under Sec. 877A and, as a result, was liable for tax on the gains from the installment sale on the day before his expatriation. Topsnik, 146 T.C. No. 1 (1/20/16).
Credit card statements were insufficient to substantiate business expense deductions
The Tax Court held that a couple could not deduct over $27,000 of unreimbursed business expenses relating to the wife’s performance of statistical analytic work at home. The couple’s credit card statements, the court said, did not properly substantiate that expenses incurred for computers, statistical programs, printers, paper, reference books, travel, and expenses for taking an online statistics course were business expenses as opposed to personal expenses. Bernstein, T.C. Summ. 2016-3 (1/20/16).
IRS to amend FATCA regulations on reporting certain foreign accounts
The IRS announced that it will amend the regulations under the Foreign Account Tax Compliance Act (FATCA, which added Secs. 1471–1474) to: (1) modify the date for submitting to the IRS the preexisting account certifications required of certain foreign financial institutions (FFIs); (2) specify the period and date for submitting to the IRS the periodic certification of compliance described in Regs. Sec. 1.1471-5(f)(1)(ii)(B) for a registered deemed compliant FFI; and (3) modify the transitional information reporting rules for accounts of nonparticipating FFIs to eliminate the requirement to report on gross proceeds for 2015. The IRS also intends to amend the regulations to specify the circumstances under which a withholding agent may rely on electronically furnished forms in the W-8 series and Form W-9, Request for Taxpayer Identification Number and Certification, collected by intermediaries and flowthrough entities. Notice 2016-8 (1/19/16).
Tax Court lacks authority to issue injunction
The Tax Court held that, because it is authorized to restrain assessment or collection of a tax only where a timely petition has been filed for the tax in question, it lacked authority to issue the injunction one of the taxpayers sought. According to the court, the IRS’s case against the partnerships it claimed were tax shelters was separate from the promoter’s case for which he had been assessed Sec. 6707 penalties. The Tax Court had no jurisdiction over the promoter’s penalty and there was no basis to suspend the partnership cases over which it did have jurisdiction while the promoter penalties were determined. Endeavor Partners Fund, LLC, T.C. Memo. 2016-12 (1/20/16).
Single-member LLC cannot contest most of its employment tax liabilities
The Tax Court held that (1) it did not have jurisdiction to review a Notice of Federal Tax Lien (NFTL) filing for the Dec. 31, 2010, Form 941, Employer’s Quarterly Federal Tax Return, liability of a single-member LLC’s franchise business because the notice of determination lacked sufficient information to determine whether the IRS Appeals Office had made a determination for that period; (2) the LLC could not challenge the underlying employment tax liabilities for the periods over which the Tax Court had jurisdiction; and (3) the Appeals Office did not abuse its discretion in sustaining the NFTL filing and the proposed levy action over the periods other than the Dec. 31, 2010, period. LG Kendrick, LLC, 146 T.C. No. 2 (1/21/16).
Tax Court rejects IRS motion for summary judgment
The Tax Court held that the taxpayers’ claim that they never received a notice of deficiency presented a genuine question of material fact sufficient to require denial of the IRS’s motion for summary judgment. The court further held that the taxpayers’ claim that the IRS settlement officer who conducted their Appeals hearing refused to consider their underlying liability and would not discuss the issue raised a genuine question of material fact regarding the adequacy of the opportunity the taxpayers had to challenge their liability and thus provided an additional ground for the Tax Court’s denial of the IRS’s motion for summary judgment. Allen, T.C. Memo. 2016-13 (1/21/16).
Adjustment theory may apply to adjust COD income after statute closes
The IRS Office of Chief Counsel advised that the adjustment theory may apply when IRS attorneys or revenue agents encounter a situation involving a misstatement or error in a Sec. 108(i) deferral (i.e., where a taxpayer elects to take cancellation-of-debt (COD) income in connection with a reacquisition of a debt instrument occurring in 2009 or 2010 into gross income ratably over a five-year period). According to the Chief Counsel’s Office, in cases where the limitation period has closed before the error is discovered, the IRS may be able to apply the adjustment theory to adjust the amount of COD income that a taxpayer has elected to defer under Sec. 108(i), but agents should contact the IRS National Office for taxpayer-specific advice. CCA 201604017 (1/22/16).
Updated mailing address for penalty rescission requests
The IRS has updated the address to which written requests should be sent for rescission of a penalty imposed by either Sec. 6707 or Sec. 6707A with respect to a reportable transaction that is not a listed transaction. Announcement 2016-1 (1/19/16).
IRS revokes Rev. Rul. 2008-15 on reinsurance policies
The IRS has reconsidered Rev. Rul. 2008-15 in view of the decision of the District of Columbia Circuit in the case of Validus Reinsurance, Ltd., 786 F.3d 1039 (2015), and will no longer apply the Sec. 4371(3) 1% excise tax to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer under the situations described in Rev. Rul. 2008-15. Rev. Rul. 2008-15 is revoked. Rev. Rul. 2016-3 (1/19/16).
January 2016 AFRs Issued
The IRS issued the applicable federal rates for January 2016. Rev. Rul. 2016-4 (1/19/16).
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.