Document summaries for the week of Aug. 14, 2017
‘Treaty shopping’ taxpayer denied lower rates under tax treaty
The District Court for the District of Columbia denied a Swiss-domiciled taxpayer the benefit of the United States–Switzerland tax treaty’s lower tax rates on $191 million of dividends the taxpayer received because the primary purpose of the taxpayer's relocation to Switzerland was to obtain treaty benefits. Starr Int'l Co., No. 14-cv-01593 (D.D.C. 8/14/17).
Insurance company’s reserves for annuity contracts are not clearly life insurance reserves
The Office of Chief Counsel was asked to advise whether, when applying the reserve ratio test of Sec. 816(a), an insurance company’s reserves with respect to certain annuity contracts were “life insurance reserves” as defined by Sec. 816(b). The Chief Counsel’s Office concluded that the developed facts did not establish whether the reserves were life insurance reserves but noted that, if they were not life insurance reserves, they were not excluded from “total reserves” under Sec. 816(f). CCA 201733012 (8/18/17).
Chief Counsel says a carryover basis for a failed bank’s assets is contrary to Sec. 597
The Office of Chief Counsel responded to a request for its views on a taxpayer that acquired the assets of a failed bank in a prior tax year that is now closed and that improperly applied the rules under Sec. 597 in computing items arising from the acquisition. The Chief Counsel’s Office noted that it would be contrary to the purpose of Sec. 597 for an acquiring bank to hold a failed bank’s assets with a carryover basis, as proposed by the taxpayer. Therefore, the IRS could make appropriate adjustments consistent with that purpose, the Chief Counsel’s Office said. CCA 201733014 (8/18/17).
Country club had unrelated business taxable income and was liable for negligence penalties
The Tax Court held that (1) a country club’s nonmember sales activities were not entered into for profit and, contrary to the club’s argument, the Sec. 183 test of intent to make a profit does not apply to Sec. 501(c)(7) organizations; (2) the club’s nonmember sales could not offset the club’s investment income; and (3) the club’s investment income was unrelated business taxable income. The court also upheld the IRS’s assessment of Sec. 6662(a) and Sec. 6662(b)(1) accuracy-related penalties for negligence because the club failed to exercise due care in preparing its returns. Losantiville Country Club, T.C. Memo. 2017-158 (8/14/17).
Tax attorney intended to evade taxes; penalties upheld
The Tax Court held that a tax attorney intended to evade taxes when he signed a return that claimed a casualty loss deduction he knew was fictitious. The court also found the taxpayer and his wife liable for fraud penalties as well as tax deficiencies for failing to report discharge-of-indebtedness income and capital gain income arising from a partnership distribution. Kohn, T.C. Memo. 2017-159 (8/14/17).
Taxpayer’s real estate losses are limited by passive activity loss rules
The Tax Court held that (1) neither the taxpayer’s mortgage brokerage services nor his loan origination services were performed in a real property trade or business; (2) the hours the taxpayer spent on those two activities could not be counted for purposes of determining whether the taxpayer was a real estate professional; and (3) because the taxpayer did not meet the definition of a real estate professional under Sec. 469(c)(7)(B) for the years at issue, his rental real estate losses were limited by the passive activity loss rules in Sec. 469. However, even though the taxpayer did not keep accurate records of time spent on his activities, the court held that he was not liable for penalties because the question of whether he was a real estate professional was partially resolved on technical grounds—whether his mortgage brokerage services and loan origination services constituted real property trades or businesses under Sec. 469(c)(7)(C)—and thus the taxpayer acted reasonably and in good faith. Hickam, T.C. Summ. 2017-66 (8/17/17).
Taxpayer who failed to investigate preparer promising refunds too good to be true is liable for penalties
The Tax Court held that, with respect to the taxpayer’s 2014 tax return prepared by a return preparer who promised him a $20,000 tax refund, the taxpayer was liable for accuracy-related penalties because his return claimed deductions relating to a nonexistent business activity and overstated his itemized deduction. According to the court, a reasonably prudent person would investigate claims from his tax professional that are likely “too good to be true” and, the court said, suspicious tax savings should prompt a reasonable taxpayer to make a good-faith investigation. Bell, T.C. Summ. 2017-63 (8/16/17).
Failure to substantiate expenses precludes deductions for 2011 and 2013; penalties upheld
The Tax Court upheld most of the tax deficiencies assessed by the IRS on a taxpayer’s 2011 and 2013 tax returns due to a lack of substantiation of claimed business-related expenses. The court also sustained accuracy-related penalties relating to those deficiencies because the taxpayer failed to show that he provided his CPA with complete and accurate information relating to those returns and failed to explain why he did not include income from interest and cancellation of indebtedness. Howard, T.C. Summ. 2017-65 (8/17/17).
Court rejects Kenyan birth certificate obtained during trial showing the taxpayer to be over 59½ years old
The Tax Court held that, because the taxpayer offered no explanation for his failure to include retirement plan distributions in his 2010 income and had not persuaded the court that he in good faith believed himself old enough to have avoided the imposition of the Sec. 72(t) penalty, he was liable for that penalty, as well as the accuracy-related penalty under Sec. 6662. The court said it shared the IRS’s concerns about the accuracy of information shown on a birth certificate obtained from a Kenyan issuing agency, the information on which the taxpayer provided to the agency during the pendency of the case. While the birth certificate indicated the taxpayer was born in 1950, numerous other records and forms of identification showed him born in 1952 and thus under age 59½ at the time of the distributions. Omoloh, T.C. Summ. 2017-64 (8/16/17).
IRS nonacquiesces in non-safe-harbor reverse like-kind exchange case
The IRS announced its nonacquiescence to the holding in Estate of Bartell, 147 T.C. 140 (2016), that a taxpayer’s sale and acquisition of business property qualifies as a Sec. 1031 like-kind exchange even though 17 months before the purported exchange, an accommodating party facilitating the transaction acquired title to the replacement property and the taxpayer acquired the benefits and burdens of ownership of the property. AOD 2017-06 (8/14/17).
IRS corrects specifications for substitute information return printing
The IRS issued corrections to Rev. Proc. 2017-39, which provides the specifications for private printing of red-ink substitutes for the 2017 revisions of certain information returns. Announcement 2017-10 (8/14/17).
IRS issues September 2017 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for September 2017. This guidance provides various prescribed rates for federal income tax purposes, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. Rev. Rul. 2017-17 (8/17/17).
Court dismisses FATCA challenge for lack of standing
The Sixth Circuit dismissed a suit brought by Sen. Rand Paul, R-Ky., and other plaintiffs, challenging aspects of the Foreign Account Tax Compliance Act (FATCA) and the foreign bank account reporting requirements. The court held that the plaintiffs lacked legal standing to sue, affirming a lower court's decision. Crawford v. United States Dep't of the Treasury, No. 16-3539 (6th Cir. 8/18/17).
No automatic exception to general partnership filing requirement in Sec. 6031 or Sec. 6698
The Office of Chief Counsel advised that neither Sec. 6031 nor Sec. 6698 contains an automatic exception to the general partnership filing requirement in Sec. 6031(a). According to the Chief Counsel’s Office, although the Sec. 6698 penalty may be avoided if it is shown that the failure to file a complete or timely return was due to reasonable cause, such relief may also be granted under Rev. Proc. 84-35 if the partnership meets its requirements and examiners follow the procedures set forth in Internal Revenue Manual Section 18.104.22.168.3.1. CCA 201733013 (8/18/17).
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.