Document Summaries for the Week of April 24, 2017
Specifications for substitute Forms 941 updated
The IRS provided the general rules and specifications for paper and computer-generated substitutes for Form 941, Employer's Quarterly Federal Tax Return, and its schedules: Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors; Schedule D, Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations; and Schedule R, Allocation Schedule for Aggregate Form 941 Filers. Also included was Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Rev. Proc. 2017-32 (4/24/17).
Stock was subject to substantial risk of forfeiture
The Tax Court held that (1) stock received by the taxpayers and labeled "restricted stock" was subject to a substantial risk of forfeiture when issued to them; (2) certain transactions involving the taxpayers' closely held S corporation and a related employee stock ownership plan did not lack economic substance; (3) a transaction by which the taxpayers' shares of S corporation stock were surrendered and repurchased lacked economic substance and thus resulted in taxable compensation income to the taxpayers; (4) because each taxpayer acquired sufficient basis in S corporation shares as a result of the compensation income recognized in (3), a separate dividend that the S corporation paid was not separately taxable to the shareholders; and (5) the taxpayers were liable for accuracy-related penalties. Austin, T.C. Memo. 2017-69 (4/24/17).
Taxpayer is real estate professional
The Tax Court held that despite working as a stockbroker during the year at issue, a taxpayer spent more than 750 hours and more than half of her total personal service hours in a real property trade or business and materially participated in her rental real estate activities. Thus, the court held, she qualified as a real estate professional entitled to deduct rental real estate losses. However, the court found she was not entitled to most claimed deductions for business and unreimbursed employee business expenses and that if their disallowance resulted in a substantial understatement of income tax under Sec. 6662(a), she would be liable for an accuracy-related penalty. Windham, T.C. Memo. 2017-68 (4/24/17).
SIFL cents-per-mile rates issued
The IRS issued the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2017 for purposes of Regs. Sec. 1.61-21(g), relating to the rule for valuing noncommercial flights provided as an employee fringe benefit on employer-provided aircraft. Rev. Rul. 2017-10
Tax Court disallows deduction for expenses incurred in obtaining E.M.B.A. degree
The Tax Court disallowed deductions for travel, tuition, fees, and associated education expenses relating to a taxpayer’s attendance and graduation from an executive master of business administration (E.M.B.A.) program because the program qualified her for a new trade or business. The court also upheld accuracy-related penalties after finding the taxpayer’s general statements that she and her husband relied on their accountant for the correct preparation of their return to be insufficient and that the taxpayers failed to prove that they provided their accountant with accurate information. Creigh, T.C. Summ. 2017-26 (4/27/17).
Taxpayer cannot claim dining room as principal place of business
The Tax Court held that a taxpayer who operated a landscape design business, which he ran from his home, was not entitled to deduct fees for legal and professional services relating to litigation involving the ownership of his home. The court also rejected the taxpayer’s argument that his dining room was exclusively used on a regular basis as the principal place of business for his landscape design business, concluding that the fact that the taxpayer may have used the dining room for business purposes for some portion of the time was insufficient to allow any deduction attributable to that use. Wilson, T.C. Summ. 2017-25 (4/27/17).
Wages earned by prisoner in state hospital cannot be used in determining EITC eligibility
The Tax Court granted summary judgment to the IRS, holding that wages received by a taxpayer during the time he was confined to a state hospital while incarcerated were excluded in determining eligibility for the earned income tax credit (EITC) because, under Sec. 32(c)(2)(B)(iv), income earned while an inmate in a penal institution is excluded in determining eligibility for the EITC. The court rejected the taxpayer’s assertion that, during his time at the state hospital, he ceased to be an inmate because the hospital was not a penal institution. Skaggs, 148 T.C. No. 15 (4/26/17).
Memory loss and PTSD from serving in Afghanistan do not negate effect of late-filed Sec. 911 election
The Tax Court held that a taxpayer who served in Afghanistan as a U.S. Marine and came back to Afghanistan in a civilian position in 2010 was not entitled to the foreign earned income exclusion under Sec. 911 for 2010 because he failed to file a return for that year until four months after the IRS prepared a substitute return and thus failed to timely make the required election. While the court acknowledged that the taxpayer’s military service resulted in memory loss and post-traumatic stress disorder, that was relevant only to a dispute over any assessment of interest and penalties. Redfield, T.C. Memo. 2017-71 (4/26/17).
Lack of evidence proving amount taxpayer provided for children’s support precludes child-related deductions
The Tax Court held that a taxpayer was not entitled to dependency exemption deductions, a child tax credit, and an additional child tax credit for his two minor children because the taxpayer did not prove that the children lived with him for more than one-half of the year or that he provided more than one-half of their support during the year. Because the children’s mother was the custodial parent and did not file a Form 8332 releasing her right to claim the children, the taxpayer could not take the deductions and credits. The court also found the taxpayer liable for an accuracy-related penalty after he offered no defense to his underpayments of tax other than that the IRS was wrong. Roach, T.C. Summ. 2017-27 (4/27/17).
IRS publishes oil recovery and marginal production reference price for 2016
The IRS published the calendar year 2016 reference price under Sec. 45K(d)(2)(C) for determining the amount of the enhanced oil recovery credit under Sec. 43, the marginal well production credit under Sec. 45I, and the percentage depletion for oil produced from marginal properties under Sec. 613A. Notice 2017-24 (4/24/17).
IRS announces 2017 enhanced oil recovery credit inflation adjustment
The IRS announced the inflation-adjustment factor and phaseout amount for the Sec. 43 enhanced oil recovery credit for tax years beginning in 2017. Notice 2017-25 (4/24/17).
IRS announces 2017 applicable depletion percentage for oil produced from marginal properties
The IRS announced that under Sec. 613A(c)(6)(C), the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2017 is 15%. Notice 2017-26 (4/24/17).
IRS extends due date of disclosure obligation for certain syndicated conservation easement transactions
In Notice 2017-10, the IRS identified certain syndicated conservation easement transactions and substantially similar transactions as listed transactions for purposes of Regs. Sec. 1.6011-4(b)(2) and Secs. 6111 and 6112 and provided that, in the case of a participant with a disclosure obligation for these transactions, the disclosure was due to the IRS Office of Tax Shelter Analysis on June 21, 2017. The IRS has now extended the due date for filing these disclosures from June 21, 2017, until Oct. 2, 2017. Notice 2017-29 (4/27/17).