Document summaries for the week of Aug. 21, 2017
Appropriate percentage depletion is 14% for company’s mined calcium carbonates
The Tax Court held that the applicable depletion percentage rate for a company’s mined calcium carbonates is 14% under Sec. 613(b)(7), rather than the 15% contained in an out-of-date regulation. The court also rejected the company’s argument that the costs of certain materials purchased from third parties and mixed with the company’s calcium carbonates in making finished cement should be included in “mining costs” for purposes of calculating the company’s “gross income from mining” under the proportionate profits method, and instead concluded that those costs are included in total costs. Mitsubishi Cement Corp., T.C. Memo. 2017-160 (8/21/17).
ESTATES, TRUSTS & GIFTS
Estate’s payment of decedent’s gift tax liability on gifts to nieces is not deductible
The Tax Court held that, because an estate’s payment of a decedent’s gift tax liability would have given rise to a claim for reimbursement from the nieces to whom the decedent had made valid gifts, the gift tax owed on those gifts at the decedent’s death was not deductible under Sec. 2053(a). The court further held that, under the New Jersey estate tax apportionment statute, no portion of any estate tax due could be apportioned to the nieces. Estate of Sommers, 149 T.C. No. 8 (8/22/17).
Court upholds levy against couple who rejected IRS installment agreement without offering an alternative
The Tax Court upheld a levy on the taxpayers, noting that the levy properly balanced the need for efficient collection of taxes with a couple’s legitimate concern that the collection action be no more intrusive than necessary. The court noted that the couple rejected the IRS settlement officer’s (SO) proposed installment agreement without offering an alternative, and the SO acted reasonably in closing the case; because the IRS did not abuse its discretion, the court granted the IRS motion for summary judgment and sustained the proposed levy. Bullock, T.C. Memo. 2017-161 (8/21/17).
Couple’s payments to their captive insurance company are not deductible insurance premiums
The Tax Court disallowed deductions a couple claimed under Sec. 162 for amounts paid by passthrough entities they owned to a captive insurance company, which they wholly owned, and to an off-shore company, which reinsured a portion of its risk with the couple’s captive insurance company, because the payments did not qualify as insurance premiums. The court also concluded that the captive insurance company’s elections under Sec. 831(b) to be treated as a small insurance company and under Sec. 953(d) to be taxed as a domestic, i.e., not foreign, corporation were invalid. Avrahami, 149 T.C. No. 7 (8/21/17).
Because pilot’s home was in the U.S. he was not eligible for the foreign earned income exclusion
The Tax Court held that a pilot for a South Korean airline company, who owned a home in New Hampshire where his family lived, was not a “qualified individual” for purposes of the Sec. 911(a) foreign earned income exclusion because his home was in the United States for purposes of Sec. 911(d)(3) and he was not a bona fide resident of South Korea for purposes of Sec. 911(d)(1)(A). The court noted that the taxpayer’s time in the United States with his family far exceeded mere visits of convenience. Acone, T.C. Memo. 2017-162 (8/22/17).
IRS provides monthly national average premium for bronze-level health plans
The IRS issued a revenue procedure that provides the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through exchanges for taxpayers to use in determining their maximum individual shared-responsibility payment under Sec. 5000A(c)(1)(B) and Regs. Sec. 1.5000A-4 for tax years ending after Dec. 31, 2016. Rev. Proc. 2017-48 (8/22/17).
Parents’ gift of their interest in home to their son increased the son’s basis
The Tax Court held that, while a taxpayer was required to recognize long-term capital gain from the sale of his personal residence to his parents in 2007, the gain was not as large as the IRS determined because the taxpayer’s basis in the home was increased by a gift of an interest in the house that his parents had was made to him. Regarding the liability remaining due for 2007 and the taxpayer’s failure to file the return for that year until 2013, the court upheld the IRS’s determination that he was liable for the addition to tax under Sec. 6651(a)(1) and the accuracy-related penalty under Sec. 6662(a). Fiscalini, T.C. Memo. 2017-163 (8/24/17).
Big-game hunter is limited to comparable sales valuation of hunting trophy donations
The Tax Court held that donations to an ecological foundation by a big-game hunter of his less desirable hunting trophy specimens should be valued using the comparable-sales method and not replacement cost. In upholding the IRS’s tax deficiency notice, the court rejected the taxpayer’s theory that the replacement cost was appropriate because the items he donated were pristine specimens of excellent provenance that would be ideal for museum study and research. Gardner, T.C. Memo. 2017-165 (8/24/17).
Retired officer cannot deduct losses from collecting and selling law enforcement badges
The Tax Court held that a retired law enforcement officer who collected and sold law enforcement patches and badges was not engaged in a trade or business activity during the year in issue because he did not conduct the activity in a businesslike manner and did not engage in it with the requisite profit objective. Thus, he was not entitled to deduct losses from the activity for tax purposes. Grago, T.C. Summ. 2017-67 (8/24/17).
IRS intends to delay effective date of Sec. 871(m) regulations
The IRS announced that it intends to amend the Sec. 871(m) regulations to delay the effective/applicability date of certain rules in those final regulations and extend the phase-in period in Notice 2016-76 for certain provisions of the Sec. 871(m) regulations. Notice 2017-42 (8/21/17).
Model amendments to add bifurcated distribution options to defined benefit plans
The IRS issued a notice providing model amendments that a sponsor of a qualified defined benefit plan may use to amend its plan document to offer bifurcated benefit distribution options to participants in accordance with final regulations issued under Sec. 417(e). The model amendments are aimed at helping stakeholders in light of the changes to the determination letter program that are set forth in Rev. Proc. 2016-37. Notice 2017-44 (8/20/17).
IRS extends catastrophic coverage voluntary reporting
The IRS extended issuer voluntary reporting for 2017 catastrophic coverage enrolled in through an Affordable Insurance Exchange. In addition, issuers may rely on this notice to voluntarily report catastrophic plan coverage enrolled in through an exchange for coverage years after 2017 to the extent final regulations requiring issuer reporting of catastrophic plan coverage enrolled in through an exchange are not applicable. Notice 2017-41 (8/21/17).
IRS provides arbitrage rebate rules
The IRS provided guidance to issuers of tax-advantaged bonds on the time for filing claims for recovery of overpayments of arbitrage rebate, payments of penalty in lieu of rebate, and yield reduction payments under Sec. 148. Rev. Proc. 2017-50 (8/25/17).
Deed of easement satisfied substantiation requirements for conservation donation
The Tax Court held that a partnership satisfied the substantiation requirements in Sec. 170(f)(8) with respect to a charitable contribution of a conservation easement. Citing several prior Tax Court decisions, the court concluded that a deed of easement that the donee executed contemporaneously with the gift constituted a de facto contemporaneous written acknowledgment and thus satisfied the applicable substantiation requirements. 310 Retail, LLC, T.C. Memo. 2017-164 (8/24/17).
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.