Document Summaries for the Week of July 11, 2016


Nonqualified stock options were compensation; railroad companies not entitled to employment tax refunds

An Illinois district court held that several railroad companies were not entitled to refunds for federal employment taxes paid under the Railroad Retirement Tax Act (RRTA) with respect to nonqualified stock options granted to employees. The court agreed with the IRS that the nonqualified stock options were a “form of money remuneration” and thus “compensation” subject to employment taxes under the RRTA. Wisconsin Central Ltd., No. 1:14-cv-10243 (N.D. Ill. 7/8/16).

Because acquired company did not properly account for certain deferred revenue obligations, NUBIG is zero

The Office of Chief Counsel advised that a company acquired by the taxpayer in a reverse merger did not properly treat deferred revenue obligations stemming from millions of dollars of prepaid income the company received before the Sec. 382 ownership change in exchange for services to be performed after the change date in determining its net unrealized built-in gain or loss (NUBIG/NUBIL). Accordingly, the Chief Counsel’s Office said that because the acquired company’s NUBIG would not exceed the lesser of $10 million or 15% of the fair market value of its assets (excluding cash and cash items) immediately before the ownership change, the company’s NUBIG was zero for purposes of Sec. 382. CCA 201629007 (7/15/16).

Proposed regs. clarify device prohibition and active business requirement

Proposed regulations issued under Sec. 355 would clarify the application of the device prohibition (for determining whether a transaction was principally used for the distribution of earning and profits) and the active business requirement. REG-134016-15 (7/15/16).

IRS provides safe harbors for acquisition of control in certain transactions

The IRS provided safe harbors for corporations under which it will not assert that a distributing corporation lacks control of another corporation within the meaning of Sec. 355(a)(1)(A). Rev. Proc. 2016-40 (7/15/16) (see related news story).



Prop. regs. issued on deferred compensation plans of state and local governments and exempt organizations

The IRS issued proposed regulations providing rules for determining when amounts deferred under Sec. 457 plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. REG-147196-07 (7/11/16).



No innocent spouse relief for taxpayer responsible for underreporting of income

The Tax Court held that the taxpayer was not entitled to innocent spouse relief for any of the years at issue because, among other reasons, she had knowledge of the understatements of tax or deficiencies on their joint income tax returns. According to the court, the taxpayer was directly responsible for and knew of the underreporting of income for a horse care and boarding business that she managed, and she knew of or should have known of the underreporting of income and excessive expense deductions attributable to her ex-husband’s home-improvement business because she was his bookkeeper and office manager. Armour, T.C. Memo. 2016-129 (7/11/16).

Collapse of retaining wall was due to progressive deterioration; no casualty loss deduction allowed

In a case on remand from the Second Circuit (Alphonso, 708 F.3d 344 (2d Cir. 2013)), the Tax Court held that the collapse of a taxpayer’s retaining wall was not a casualty under Sec. 165(c)(3). According to the court, the cause of the collapse was progressive deterioration in and around that wall that had begun at least 20 years before the collapse occurred. Thus, the taxpayer was not entitled to any loss deduction under Sec. 165(a) with respect to the wall’s collapse. Alphonso, T.C. Memo. 2016-130 (7/14/16). 



Regulations allow third-party participation in summons interviews

The IRS published final regulations governing when persons the IRS has contracted with for services under Sec. 6103(n) may be designated to receive summonsed books, papers, records, or other data and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a witness summonsed by the IRS to provide testimony under oath. T.D. 9778 (7/13/16).

Employer has until Jan. 31 of year following audit year in which to file corrected Forms W-2c

The Office of Chief Counsel advised that an employer has until Jan. 31 of the year following the year in which an audit concludes to file Form W-2c, Corrected Wage and Tax Statement. Thus, the Chief Counsel’s Office said, the IRS cannot assert the Secs. 6721 and 6722 penalties against the employer for failure to file and furnish Forms W-2c at the conclusion of an audit, but it can assert the penalties if the employer fails to file and furnish the Forms W-2c by the due date. CCA 201629008 (7/15/16).



Untreated landfill gas qualifies for Sec. 45K credit, but poor documentation kills most of credit

The Tax Court held that untreated landfill gas is “qualified fuel” within the meaning of Sec. 45K and that, for a landfill gas production facility, the placed-in-service date under Sec. 45K is the date when a gas-to-energy system becomes available for its specific function on a regular basis, not the date the first well is drilled. The court concluded that two statutory trusts that elected to be taxed as partnerships and that purportedly produced and sold landfill gas were not entitled to credits under Sec. 45K because of inadequate substantiation of their alleged production and sale of landfill gas, except as to one landfill each and only for the period during which gas-to-electricity equipment was running at those landfills. Green Gas Delaware Statutory Trust, 147 T.C. No. 1 (7/14/16).

Tax Insider Articles


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.