Document Summaries for the Week of Sept. 19, 2016
Transfer of power plants for an interest in financial instruments does not qualify as Sec. 1031 exchange
The Tax Court held that where a corporation sold its fossil fuel power plants for $4.813 billion and then engaged in a series of like-kind exchanges employing sale-leaseback strategies with unrelated third parties, the transactions were not true leases but rather were properly characterized as loans since the transactions did not transfer the benefits and burdens of ownership to the corporation. In addition, the corporation, which treated the transactions as like-kind exchanges under Sec. 1031, did not satisfy the requirements of Sec. 1031 since it exchanged power plants for an interest in financial instruments. Exelon Corp., 147 T.C. No. 9 (9/19/16).
Short-week benefits paid by multiple-employer SUB trust are includible in wages subject to FICA
The Office of Chief Counsel advised that “short-week benefits” paid by a multiple-employer “SUB trust” to workers who worked less than a certain amount in the prior month are not excluded from wages for purposes of Federal Insurance Contributions Act tax as supplemental unemployment benefits. The Office of Chief Counsel said that the benefits do not satisfy the applicable requirements of Rev. Ruls. 56-249 and 90-72 and thus are includible in wages. CCA 201639015 (9/23/16).
IRS extends nondiscrimination relief for defined benefit plans
Employers that sponsor both a closed defined benefit plan and a defined contribution plan will be allowed to continue to use the aggregated plans to comply with the nondiscrimination requirements of Sec. 401(a)(4) through 2017. Notice 2016-57 (9/19/16) (see related news story).
ESTATES, TRUSTS & GIFTS
Decedent’s insurance policy payments were not excludable from income
The Tax Court held that amounts received by a decedent prior to death under an insurance policy that had its own brokerage account were not from an accident or health plan as defined in Sec. 105(a) and, because the payments were not computed with reference to the nature of the injury suffered by the decedent, the payments were not excludable from income under Sec. 105(c). The court also held that the decedent’s estate was liable for a Sec. 6662(a) accuracy-related penalty. Estate of Barnhorst, T.C. Memo. 2016-177 (9/20/16).
IRS lists organization failing to meet Sec. 501(c)(3) requirements
The IRS revoked the tax-exempt status of an organization for failure to meet the requirements of Sec. 501(c)(3). Individual donors’ contributions to the organization are no longer deductible under Sec. 170(b)(1)(A). Announcement 2016-31 (9/19/16).
Because taxpayer was not “away from home,” unreimbursed employee business expenses are not deductible
The Tax Court held that a couple was not entitled to certain unreimbursed employee business expense deductions because the husband was not away from home when he paid for meals, incidentals, and automobile trips between his hotel and worksites. The court held that, because the couple made a good-faith effort to assess their proper tax liability, they were not liable for the accuracy-related penalty with respect to underpayments attributable to disallowed deductions for overnight travel and mileage expense, but they were liable for penalties with respect to the underpayment attributable to disallowed deductions for tools and certain other expenses. Collodi, T.C. Summ. 2016-57 (9/19/16).
Student enrolled in a five-credit-hour class cannot take American opportunity tax credit
The Tax Court held that a taxpayer was not entitled to the American opportunity tax credit because, while she was a student at an eligible institution, she was not enrolled for at least one-half of the normal full-time workload for the course of study she was pursuing. The court noted that the community college the taxpayer attended defined a full-time workload as 12 academic credits, and the taxpayer was formally enrolled in only a physiology course worth five credit hours. Pilmer, T.C. Summ. 2016-59 (9/21/16).
No penalty applies to taxpayer unsophisticated in tax matters who attempted to comply with rules
The Tax Court held that a taxpayer was entitled to a mileage expense deduction as an unreimbursed employee business expense because he credibly testified as to the expenses incurred; however, he failed to satisfy the strict substantiation expense rules with respect to his deduction for tolls and thus could not deduct those amounts. The court also rejected cellphone and clothing expense deductions but concluded that the taxpayer was not liable for a Sec. 6662(a) accuracy-related penalty because he was relatively unsophisticated as to tax matters and made a reasonable attempt to accurately prepare his return. Sanek, T.C. Summ. 2016-60 (9/22/16).
IRS can proceed with levy action; taxpayer proposed no collection alternative
The Tax Court held that there was no abuse of discretion in an IRS settlement officer’s determinations that an IRS lien against the taxpayer be sustained and that the IRS’s proposed levy action against the taxpayer should proceed. The court noted that the taxpayer had failed to propose any collection alternative. Harris, T.C. Memo. 2016-175 (9/19/16).
Court fines taxpayer $1,000 for wasting the court’s resources on frivolous arguments
The Tax Court held that a taxpayer was liable for income tax deficiencies on income he failed to report. Further, the court upheld penalties for late filing and late payment of tax and, because the taxpayer’s arguments were frivolous and a waste of the court’s resources, the court fined the taxpayer $1,000 under Sec. 6673(a)(1). Klein, T.C. Summ. 2016-58 (9/19/16).
IRS correctly refused to abate interest on late tax payment
The Tax Court held that interest accrued on a couple’s account because they knowingly failed to pay a large amount of tax due, not because of an IRS failure to perform a critical ministerial act of issuing a notice of the balance due on the taxpayers’ account. According to the court, the couple’s decision not to include a payment of tax due with the filing of amended returns reflected a conscious decision on their behalf not to satisfy their federal income tax liabilities until the conclusion of an IRS audit and, thus, there was no abuse of discretion by the IRS in denying the couple’s claim for abatement of interest on the amounts due. Prakash, TC. Memo. 2016-176 (9/20/16).
IRS announces recent disciplinary sanctions
The IRS Office of Professional Responsibility announced recent disciplinary sanctions involving attorneys and CPAs. Announcement 2016-26 (9/19/16).
IRS warns of email scam using fake CP2000s
The IRS warned that scammers are sending emails purportedly from the IRS containing fake CP2000 notices and tax bills. IR-2016-123 (9/22/16) (see related news story).
E-Services will require re-registration in October
The IRS announced that it is strengthening the authentication process for identifying IRS e-services users and that the new, more stringent procedures will require existing users to re-register starting Oct. 24. IRS website (9/22/16) (see related news story).
LLC substantially complied with charitable contribution substantiation requirements
The Tax Court held that, for purposes of a charitable deduction taken by a limited liability company (LLC) taxed as a partnership on property partially sold and partially contributed, various elements of the LLC’s appraisal report either substantially or strictly complied with the requirements governing appraisals; a 1937 general highway and transportation map digitally converted and posted on a government-sponsored website met the applicable federal evidence requirements for the ancient document exception to the rule against hearsay and was therefore admissible; the LLC had an express easement to access the land when the LLC sold it; and the LLC had an implied easement to access the land under Arizona law when the LLC sold it. Finally, the court held that the LLC’s appraisal report reflected a reasonable value. Cave Buttes, LLC, 147 T.C. No. 10 (9/20/16).
Payment to purported employee welfare benefit plan is not deductible by S corporation
The Tax Court held that a $450,000 payment by an S corporation to purchase a purported employee welfare benefit plan was not deductible by the S corporation and thus did not flow through as a deduction to the S corporation’s sole shareholder. Because the payment was not made to a fund that was part of a 10-or-more-employer plan that does not maintain experience-rating arrangements with respect to individual employers, it did not meet the applicable requirements under Sec. 419A, the court said. Schechter, T.C. Memo. 2016-174 (9/19/16).
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.