Document Summaries for the Week of June 20, 2016
Shareholders liable as transferees for unpaid taxes after company assets were sold
The Tax Court held that members of a family-owned business were liable as transferees for the company’s unpaid taxes after the company sold its assets and made liquidating distributions to its shareholders. The court rejected the taxpayers’ good-faith defense claim and found that the shareholders had constructive knowledge that the tax debts would not be paid. Estate of Marshall, T.C. Memo. 2016-119 (6/20/16).
Final regs. on computing medical loss ratio
Final regulations provide guidance to Blue Cross and Blue Shield and certain other health insurance organizations on how to compute and apply the medical loss ratio and the consequences of not meeting the medical loss ratio threshold. T.D. 9772 (6/22/16).
Taxpayer cannot take a Sec. 199 deduction for advertising as a component of foreign-made clothing
The IRS Chief Counsel’s Office (OCC) advised that a taxpayer’s gross receipts derived from the sale of clothing, accessories, and nonclothing gift items, which were manufactured, produced, grown, or extracted outside the United States, were not domestic production gross receipts (DPGR). The OCC rejected the taxpayer’s position that it was eligible to claim a Sec. 199 deduction for its print advertising produced in the United States by third parties. The advertising was a component of the clothing and accessories it sold, the OCC said, concluding that it was inappropriate for the taxpayer to claim any of its gross receipts from the sale of its products were DPGR from advertising. CCA 201626024 (6/24/16).
Proposed regulations issued on nonqualified deferred compensation plans
The IRS issued proposed regulations that would clarify and modify the regulations governing nonqualified deferred compensation plans under Sec. 409A. REG-123854-12 (6/22/16) (see related news story).
Deductions for consulting business disallowed for lack of substantiation
The Tax Court upheld the IRS’s disallowance of deductions for three categories of expenses, which the taxpayer allegedly incurred in his consulting business, for lack of substantiation. The court noted that, while the taxpayer’s Nigerian bank account records were introduced into evidence showing numerous payments by check or bank transfer, they showed no payments to the vendors the taxpayer supposedly paid, and the cash receipts he submitted “do not bear the earmarks of authenticity.” Amadi, T.C. Memo. 2016-120 (6/21/16).
Couple cannot deduct losses from Amway activity
The Tax Court held that a couple did not engage in their Amway Corp. activity for profit and, thus, could not deduct losses from the activity. Applying the factors for determining whether they intended to make a profit, the court noted, among other things, that while the couple generated total gross receipts of $5,098 from 2007 to 2011, they reported a total net loss of $99,000 during the same period. The magnitude of the losses in comparison with its revenues indicated that the couple did not have a profit motive. Hess, T.C. Summ. 2016-27 (6/20/16).
Taxpayers cannot deduct interest capitalized in their mortgage principal
The Tax Court held that the taxpayers, as cash basis taxpayers, could not deduct unpaid interest that was capitalized in their mortgage principal. Moreover, because they conceded that the IRS’s adjustments to their unreported interest income, their rental real estate loss deductions, and their state and local tax refunds were correct, the couple were liable for accuracy-related penalties. Slavin, T.C. Summ. 2016-28 (6/21/16).
Uneducated taxpayer who relied on professional tax return preparer escapes underpayment penalties
The Tax Court held that the taxpayer had unreported income, received income in the form of cancellation of indebtedness, and was entitled to deduct a Sec. 1231 loss in an amount greater than the IRS determined. For the total underpayment of tax, however, the court held that the taxpayer was neither “educated school-wise” nor at all experienced in tax matters and had relied on a tax professional to prepare his return. Thus, he was not liable for underpayment penalties. Tzivleris, T.C. Summ. 2016-26 (6/20/16).
Taxpayer liable for self-employment tax but avoids substantial understatement penalty
The Tax Court held that the taxpayer was liable for self-employment tax on commission income earned as a real estate agent. However, the court found that the taxpayer was not liable for the substantial understatement penalty because the underpayment of tax did not exceed the greater of 10% of the tax required to be shown on the return or $5,000 and the IRS had not pursued the negligence penalty contained in the notice of deficiency at trial. Wang, T.C. Memo. 2016-123 (6/21/16).
No deduction for replacing laptop used at work by taxpayer’s choice
The Tax Court denied most of a couple’s deductions, including charitable contributions, the cost of work clothing, and the cost of replacing the wife’s personal laptop computer after it was damaged. She preferred to use her own laptop at work rather than one her employer had provided. Because the taxpayers failed to keep adequate records to substantiate most of their deductions and did not offer a meaningful defense to the imposition of an accuracy-related penalty under Sec. 6662(a) other than to assert that the IRS erred in determining a deficiency and that they were not well-versed in tax matters, the court found that they did not have reasonable cause with respect to their tax deficiency and upheld the penalty. Haag, T.C. Summ. 2016-29 (6/22/16).
Couple incurs penalties for failure to substantiate charitable deductions
The Tax Court held that the taxpayers were not entitled to $169,000 in claimed noncash charitable contribution deductions for donations of used clothing and household items in 2010 and 2011. According to the court, the couple failed to keep adequate records or comply with the rules and regulations. Their lack of reasonable cause for the failures also supported the imposition of Sec. 6662(a) accuracy-related penalties. Payne, T.C. Summ. 2016-30 (6/23/16).
IRS collection actions not sustained where deficiency notices sent to wrong address
The Tax Court refused to sustain IRS collection actions against the taxpayer after finding that the liabilities the IRS was seeking to collect for tax years 2000 through 2003 were invalidly assessed. The court noted that supplemental notices from the IRS, while concluding that the taxpayer was not entitled to relief from the filing of a notice of federal tax lien or from the proposed levy, conceded that the IRS was unable to show that a statutory notice of deficiency had been mailed to the taxpayer at the correct address for any of the years at issue. Buffano, T.C. Memo. 2016-122 (6/21/16).
Taxpayer received notices of deficiency and thus cannot challenge underlying tax liabilities
The Tax Court held that the same taxpayer as in the case above received notices of deficiency for 2004 and 2005 and, thus, could not challenge his underlying tax liabilities for those years. As a result, the Tax Court sustained the IRS Appeals’ determination that the taxpayer was not entitled to any relief from the proposed levy at issue. Buffano, T.C. Memo. 2016-121 (6/21/16).
Form 872 should include all relevant EINs
The IRS Office of Chief Counsel, in a heavily redacted memorandum, advised that, with respect to listing a taxpayer’s correct name on Form 872, Consent to Extend the Time to Assess Tax, IRS examiners should include all relevant employer identification numbers (EINs), since some large companies have multiple EINs. CCA 201626023 (6/24/16).
Chief Counsel addresses applicability of Sec. 6611(e) for refund claims on Form 1042
With respect to whether a claim for refund made by a withholding agent on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for amounts that it paid to the IRS is subject to the 180-day, interest-free period in Sec. 6611(e)(4), the Office of Chief Counsel (OCC) advised that such refunds do not arise from overpayments “resulting from tax deducted and withheld under chapter 3 or 4” as stated in Sec. 6611(e)(4). Thus, the OCC concluded that the 45-day period of Sec. 6611(e)(1) should be applied. CCA 201625017 (6/17/16).
Taxpayer’s jurat language retained the meaning and intent of official IRS form
The IRS Chief Counsel’s Office advised that the jurat of a taxpayer “looked fine,” since the meaning behind the language the taxpayer used, including “penalties of perjury” and “true, correct and complete,” retained the meaning and intent of the jurat/signature statements in the official IRS form. CCA 201625016 (6/17/16).
IRS may require FFIs to submit compliance certifications electronically
The IRS Office of Chief Counsel advised that the IRS may require foreign financial institutions (FFIs) that agree to fulfill their reporting obligations to submit their compliance certifications electronically, without offering an alternative means for submission. CCA 201625015 (6/17/16).
Chief Counsel’s Office advises on offset of a refund involving an identity theft return
The IRS Office of Chief Counsel (OCC) advised that there was no violation of the two-year limitation period under Sec. 6532(b) for recovering an erroneous refund when an offset occurred within two years of an earlier offset for the same taxpayer that had recovered a refund from a fraudulent identity theft return. CCA 201625014 (6/17/16).
Change in timing of allocation of depreciation or amortization of certain foreign assets is an accounting method change
The IRS Office of Chief Counsel (OCC) advised that the determination of how depreciation is calculated under Sec. 167 or Sec. 168, or amortization is calculated under Sec. 167, for an asset subject to either the foreign sales corporation (FSC) regime or extraterritorial income (ETI) exclusion provisions hinges on: (1) the type of asset, (2) whether the annual depreciation or amortization deductions are determined by using the adjusted or unadjusted basis of the asset, and (3) whether the asset’s recovery period or useful life ended before or after the end of the transaction(s) that qualified for FSC or ETI exclusion treatment, as applicable. Additionally, the OCC said, a change in when the depreciation or amortization of such an asset that is allocated to the exempt foreign trade income under the FSC regime or subject to the ETI exclusion provisions is recovered is a change in method of accounting. CCA 201625011 (6/17/16).
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.