Document Summaries for the Week of May 23, 2016
Corporation with revoked charter is precluded from suing IRS
The Tax Court granted an IRS motion to dismiss a case for lack of jurisdiction on the ground that the taxpayer corporation’s corporate charter had been revoked and, thus, the taxpayer lacked legal capacity to prosecute its case. The Maryland Department of Assessments and Taxation had revoked and annulled the corporation’s corporate charter for failing to file a required property tax return. Allied Transportation, Inc., T.C. Memo. 2016-102 (5/25/16).
Taxpayer lacks legal capacity to sue on behalf of his corporation
The Tax Court dismissed a case signed by the taxpayer in his individual capacity but with an attached deficiency notice that had been issued to his wholly owned corporation. The taxpayer did not prove he had the legal capacity to litigate in the Tax Court on behalf of his corporation, the court held. Even if it were to find that the taxpayer had the capacity to represent the corporation, it would still dismiss the case, the court held, because the petition was not filed in accordance with its rule requiring cases to be brought in the name of the person against whom the IRS determined a deficiency or liability. Marco A. Frausto, Inc., T.C. Memo. 2016-106 (5/26/16).
ESTATES, TRUSTS & GIFTS
Mitigation procedures cannot help estate that did not timely file amended Forms 1041
The IRS Office of Chief Counsel advised that the mitigation provisions of Secs. 1311–1314 were not properly invoked by an estate that was seeking a refund after untimely filing amended Forms 1041, U.S. Income Tax Return for Estates and Trusts. As a result, the Chief Counsel’s Office concluded that the estate’s refund claims should be denied as untimely. CCA 201622032 (5/27/16).
Tax-exempt organization files declaratory judgment suit, permitting donations
The IRS served notice to potential donors of an organization that recently filed a timely declaratory judgment suit under Sec. 7428, challenging revocation of its status as an eligible donee under Sec. 170(c)(2). Under Sec. 7428(c), donors may make tax-deductible contributions up to certain limits from the date the notice of revocation is published in the Internal Revenue Bulletin until the date a court first determines that an organization does not qualify for exemption. Announcement 2016-20 (5/23/16).
Taxpayer had no property interest in refund attributable to former husband’s tax payment
Rejecting a wife’s claim for innocent spouse relief, the Tax Court held that the wife was not entitled to a tax refund for 2011 because she did not contribute any funds to the payment of the joint 2013 tax liability that resulted in an overpayment, which was subsequently applied against the 2011 liability. The court concluded that the wife did not acquire a property interest in the 2013 overpayment because the tax liability for that year was paid wholly by her former husband’s tax withholding. Domaschko, T.C. Summ. 2016-24 (5/23/16).
Licensed vocational nurse hit with penalties for unreported income and overstated deductions
The Tax Court held that a licensed vocational nurse, who sometimes worked as an independent contractor, had unreportedfs income and was liable for tax deficiencies. Because the taxpayer did not show reasonable cause for either his unreported income or certain disallowed deductions or credits, he was liable for accuracy-related penalties. Kavuma, T.C. Memo. 2016-101 (5/23/16).
Sales consultant’s retirement payments subject to self-employment tax
The Eleventh Circuit held that payments a retired Mary Kay sales consultant received from the cosmetics company were deferred compensation subject to self-employment taxes and were not payments for a covenant not to compete. Peterson, No. 14-15773 (11th Cir. 5/24/16) (see related news story).
Taxpayers may not exclude canceled debt income from tax return
The Tax Court agreed with the IRS that a couple did not provide any credible testimony or evidence to support their position that certain canceled debts were qualified principal residence indebtedness, since the record did not show the debts financed their principal residence. Similarly, the record did not support their alternative claim that the debts were qualified real property business indebtedness, i.e., that they financed real property used in the taxpayers’ trade or business and were the subject of a tax return election. Thus, income from the canceled debts had to be reported on the taxpayers’ tax return. Ogamba, T.C. Memo. 2016-105 (5/26/16).
Taxpayers cannot group business activities with airplane activity not operated for profit
The Tax Court held that (1) a couple’s elections to group certain activities with their airplane activity as a single activity for Sec. 183 purposes were not valid elections for the years in issue, and (2) the airplane activity on its own was not entered into for profit for 2008 and 2009. The court therefore denied the taxpayers’ claimed flowthrough losses. The court also found the taxpayers liable for a Sec. 6662(a) accuracy-related penalty for a substantial understatement of income tax for one year; however, the court concluded that the taxpayers had reasonable cause for grouping the activities in two of the other years at issue because they relied on professional advice. Steinberger, T.C. Memo. 2016-104 (5/25/16).
Cash rewards to employees participating in wellness programs are taxable
The IRS Office of Chief Counsel advised that an employer may not exclude from an employee’s income under Sec. 105 or Sec. 106 cash rewards paid to the employee for participating in a wellness program. Similarly, the Chief Counsel’s Office said, an employer may not exclude from an employee’s income under Sec. 105 or Sec. 106 reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through a Sec. 125 cafeteria plan. CCA 201622031 (5/27/16).
Lien against taxpayer sustained; no miscalculation of tax liabilities found
The Tax Court held that the IRS Appeals Office did not err in sustaining a lien against the taxpayer. With respect to the taxpayer’s claim that the IRS miscalculated his liabilities, the court noted that the taxpayer’s position was not supported by any submitted proposed findings of fact. Drilling, T.C. Memo. 2016-103 (5/25/16).
Taxpayer’s refund or credit is barred by statute of limitation
The Tax Court held that (1) a taxpayer was entitled to a reduction in the deficiency determined by the IRS; (2) no additions to tax under Secs. 6651(a)(1) and (2) and Sec. 6654(a) were due; and (3) although the taxpayer had an overpayment of $1,856, a refund or credit was barred by the statute of limitation because the amount was not deemed paid during the two-year lookback period from a notice of deficiency. McAuliffe, T.C. Summ. 2016-25 (5/26/16).
Rental real property trades or businesses were not passive activities
The Tax Court held that activity logs prepared by a wife satisfied the requirements of Sec. 469(c)(7)(B) and, as a result, rental property trades or businesses owned by the husband and wife were not per se passive. Because the wife materially participated in the businesses, the rental real property trades or businesses were not passive activities. However, because the couple did not comply with the Sec. 274(d) substantiation requirements, the IRS carried its burden of proving that the couple was not entitled to deductions for the depreciation on a GMC truck that they claimed was used 100% for business. They were also subject to accuracy-related penalties on those amounts. Moon, T.C. Summ. 2016-23 (5/23/16).
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.