Document Summaries for the Week of April 3, 2017
Employer can access workers’ tax returns to determine if taxes were paid on Form 1099 amounts
The Tax Court held that the disclosure of third-party taxpayer information to absolve an employer of its Sec. 3402(a) tax liabilities is not barred by Sec. 6103(h), and thus an employer could access the tax returns of workers it labeled as independent contractors to determine if they had paid income tax on the amounts the employer reported on Form 1099. The court also concluded that the fact that the burden of proof is on the employer to show its workers paid income tax does not make their confidential return information nondiscoverable. Mescalero Apache Tribe, 148 T.C. No. 11 (4/5/17).
Legal fees were related to company’s product sales before Sec. 199 took effect
The Office of Chief Counsel advised that, for purposes of calculating a company’s Sec. 199 deduction, certain legal fees allocated and apportioned under the Sec. 861 method against a parent company’s gross income were not attributable to domestic production gross receipts for purposes of computing the parent’s qualified production activities income. The Chief Counsel’s Office noted that the legal fees at issue were factually related to a class of gross income attributable to the manufacture and sales of company products made prior to the effective date of Sec. 199. CCA 201714029 (4/7/17).
Failure to prove support nixes dependency exemption and child-related tax credits
The Tax Court held that, because a taxpayer did not prove that he provided more than one-half of the support for a child of whom he had partial custody, the child was not the taxpayer’s qualifying child under Sec. 152(d) for 2013. Thus, the taxpayer was not entitled to a dependency exemption deduction, a child tax credit, an earned income tax credit, and head-of-household filing status for that year. Jenkins, T.C. Summ. 2017-22 (4/3/17).
Law firm partner liable for failing to correctly report partnership income and other items
The Tax Court held that a partner in a law firm and his wife failed to report a distribution from an inherited individual retirement account, failed to correctly report distributive shares of ordinary income from the law firm, but instead reported the income on Schedule C, and were not entitled to deduct more than $8,000 of rental expenses and many other unsubstantiated expenses. The court also found that the couple were limited in the amount of foreign housing costs that they could exclude from income, were liable for self-employment taxes on the husband’s law firm income, and were not entitled to the foreign tax credits they claimed. In addition, the couple were liable for various penalties the IRS assessed. Larkin, T.C. Memo. 2017-54 (4/3/17).
Couple liable for substantial-underpayment penalties for failing to report various types of income
The Tax Court held that a couple who operated a seafood business failed to report certain wage and rental income for 2006 and 2007, failed to report gambling winnings for 2006 and 2008, and had no intention of repaying alleged loans received from their corporation and thus those amounts should have been included in income. The court also found that the couple, who used a CPA to prepare their returns, were nevertheless liable for penalties for substantial understatement of tax because they misled their CPA about whether the amounts they received were bona fide loans. Zang, T.C. Memo. 2017-55 (4/3/17).
Wife who prepared return is not entitled to innocent spouse relief
The Tax Court held that a taxpayer failed to carry her burden of establishing that it would be inequitable to hold her liable for tax deficiencies relating to joint tax returns filed by her and her husband and, thus, she was not entitled to innocent spouse relief under Sec. 6015(f). The court concluded that the IRS had proved that the taxpayer had actual knowledge of her husband’s gambling losses at the time she signed the joint returns reporting the losses and that she, and not her husband, had prepared the joint returns reporting the gambling losses that were subsequently disallowed. Yancey, T.C. Memo. 2017-59 (4/6/17).
Court upholds penalty assessed on the taxpayer for promoting frivolous arguments
The Tax Court held that the IRS had good cause to levy on a taxpayer who had not filed tax returns since 2000 and lifted a suspension that had been placed on the levy. The court also agreed with the IRS that a Sec. 6673 penalty was appropriate as a result of the taxpayer’s advancing frivolous arguments despite numerous warnings not to do so. Williams, T.C. Memo. 2017-58 (4/6/17).
Wife escapes liability for fraud penalties assessed on husband for underreporting business income
The Tax Court held that a couple’s joint tax return understated income and overstated deductions relating to a print and copy business that the husband formed and that specialized in unauthorized duplication of copyrighted works. While the court upheld fraud penalties against the husband for two of the three years at issue, the court found that the wife bore no liability for the penalties. Ballard, T.C. Memo. 2017-57 (4/6/17).
Tax Court sustains levy against taxpayer
The Tax Court sustained an IRS determination to file a Notice of Federal Tax Lien and a proposed levy to collect the taxpayer’s unpaid 2009 tax liability, rejecting the taxpayer’s claim that he had not received an earlier notice of deficiency. The court concluded that the taxpayer had not shown any abuse of discretion underlying an IRS settlement officer’s determination about the taxpayer’s overdue tax liability and the record indicated that the deficiency notice had been mailed to his last known address, even if he had never received it. Rivas, T.C. Memo. 2017-56 (4/3/17).
IRS announces start of private debt collection
The IRS announced that starting the week of April 3, 2017, it began sending letters to taxpayers whose overdue tax accounts are being assigned to a private debt collection agency. IR-2017-74 (4/4/17).
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.