Document Summaries for the Week of May 9, 2016
Family corporation’s compensation to brothers held reasonable
The Tax Court held that compensation paid to two brothers who were vice presidents of a family concrete contractor business were reasonable and, thus, the company could deduct those amounts. The court further held that the company was entitled to deduct a $500,000 payment to a concrete supplier as an ordinary and necessary expense because it was normal for a concrete contractor to pay to ensure a reliable supply of concrete in the face of shortages, and the expenditure was helpful to the company’s business, allowing it to meet customer demand when other companies were hampered by the shortages. H.W. Johnson, Inc., T.C. Memo. 2016-95 (5/11/16).
Couple cannot deduct advances to a corporation in which they held a 50% interest
The Tax Court held that a couple could not deduct on their individual income tax returns advances made to a C corporation in which they held a 50% interest. The court noted that for an advance to be deductible under Sec. 162(a), it must be an expense paid or incurred in carrying on a trade or business, not an investment in it, as the advances were. Aleamoni, T.C. Summ. 2016-21 (5/12/16).
IRS corrects prior list of organizations with revoked tax-exempt status
The IRS revoked Announcement 2016-4, which contained incorrect information. In its place, the IRS posted a corrected list of organizations for which it has revoked its determination that they qualify as organizations described in Secs. 501(c)(3) and 170(c)(2). Announcement 2016-18 (5/9/16).
IRS corrects prior list of organizations that have filed declaratory judgment suits
The IRS revoked Announcement 2016-5, which contained incorrect information. In its place, the IRS posted a corrected notice to potential donors that the listed organizations recently filed a timely declaratory judgment suit under Sec. 7428 challenging revocation of their status as eligible donees under Sec. 170(c)(2). Announcement 2016-19 (5/9/16).
Tax Court finds taxpayer’s testimony inadequate for most of her deductions
The Tax Court held that a taxpayer’s testimony alone did not meet the substantiation requirements of Sec. 274(d) applicable to her deduction of gifts and travel, automobile, and cellphone expenses. However, her testimony was adequate to substantiate her moving and storage expenses. Nkonoki, T.C. Memo. 2016-93 (5/10/16).
No AOTC allowed where taxpayer’s tuition was paid with tax-free educational assistance
The Tax Court held that a taxpayer was not eligible for the American opportunity tax credit because, although the taxpayer was an eligible student, he paid no qualified tuition and related expenses. Rather, the court noted, the taxpayer’s tuition and related expenses were paid directly to the University of Phoenix by the U.S. Department of Veterans Affairs as tax-free educational assistance under the Post-9/11 GI Bill. Lara, T.C. Memo. 2016-96 (5/12/16).
Taxable Social Security includes worker’s comp payments that reduce Social Security benefits
The Tax Court held that, pursuant to Sec. 86(d)(3), a couple had taxable Social Security income of $30,519 for 2011 as a result of worker’s compensation payments that the husband received during that year. The court noted that taxable Social Security benefits include worker’s compensation payments to the extent that they reduce, or offset, the total Social Security benefits to which the recipient is entitled, even though the Social Security Administration does not pay those benefits. Thompson, T.C. Summ. 2016-20 (5/12/16).
Communications to taxpayer’s representative constitute notice to the taxpayer
The Tax Court upheld a Notice of Federal Tax Lien issued by the IRS and a notice of intent to levy on the taxpayer. With respect to the taxpayer’s allegation that he did not provide the IRS settlement officer with certain requested information because his representative did not communicate the relevant deadlines to him, the IRS noted that, when a taxpayer is represented, communications to that representative generally constitute notice to the taxpayer. Bailey, T.C. Memo. 2016-94 (5/10/16).
Taxpayer collaterally estopped from innocent spouse relief after intervening in ex-wife’s claim
The Tax Court held that the taxpayer’s 2006 tax return was not a joint return because, in his ex-wife’s innocent spouse case, the court found that the ex-wife had signed that return under duress. Thus, the taxpayer was collaterally estopped from claiming innocent spouse relief under Sec. 6015 for himself with respect to that return. Hiramanek, T.C. Memo. 2016-92 (5/10/16).
Procedure updated for issuers of qualified mortgage bonds and mortgage credit certificates
The IRS issued a revenue procedure revising the U.S. and area median gross income figures to be used by issuers of qualified mortgage bonds (as defined in Sec. 143(a)) and mortgage credit certificates (as defined in Sec. 25(c)) in computing the income requirements described in Sec. 143(f). Issuers must use the figures specified in Section 3.01 of the procedure for financing commitments made, or (if the purchase precedes the financing commitment) for residences purchased, in the period beginning March 28, 2016, and ending on the date they are rendered obsolete by a new revenue procedure. Rev. Proc. 2016-26 (5/11/16).
Court sustains collection action where couple failed to provide IRS with additional financial information
The Tax Court granted an IRS motion for summary judgment and sustained a proposed collection action against a couple. The court noted that the couple repeatedly failed to supply an IRS settlement officer with the additional financial information requested and, thus, the settlement officer did not abuse her discretion by rejecting a collection alternative. Drew, T.C. Memo. 2016-97 (5/12/16).
Owner of disregarded entity is not a general partner and cannot be a TMP
The Office of Chief Counsel advised, in a heavily redacted response, that a partnership’s tax matters partner (TMP) was a limited liability company (LLC) and that only a general partner (or member manager) may be a TMP. The Chief Counsel’s Office noted that this is a state law concept, and the fact that an entity is disregarded under federal tax laws cannot change state agency law and convert the owner of a disregarded entity into a general partner with power under state law to bind other partners. CCA 201620010 (5/13/16).
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.