Document summaries for the week of Aug. 28, 2017

CORPORATIONS

Percentages and yields to calculate insurance company investment income released

The IRS provided the domestic asset/liability percentages and domestic investment yields used by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Sec. 842(b) for tax years beginning after Dec. 31, 2015. Rev. Proc. 2017-44 (8/28/17).

Guidance on application of Sec. 305 to stock distributions by RICs and REITs

The IRS issued guidance regarding the application of Sec. 305 to a stock distribution by a publicly offered regulated investment company (RIC) or real estate investment trust (REIT). Rev. Proc. 2017-45 (8/28/17).

 

EMPLOYEE BENEFITS

IRS extends temporary nondiscrimination relief for closed defined benefit plans

The IRS extended the temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5 by making that relief available for plan years beginning before 2019 if the conditions of Notice 2014-5 are satisfied. This extension anticipates the issuance of final amendments to the Sec. 401(a)(4) proposed regulations, and the IRS expects that the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2019. Notice 2017-45 (8/31/17). 

 

ESTATES, TRUSTS & GIFTS

Effective interest rates on Farm Credit System loans

The IRS issued the 2017 list of the average annual effective interest rates on new loans under the Farm Credit System to be used in computing the special-use value of farm real property for which an election is made under Sec. 2032A. The revenue ruling also contains a list of the states within each Farm Credit System Bank Territory. Rev. Rul. 2017-16 (8/28/17).

 

INDIVIDUALS

Dental hygienist failed to report wages

The Tax Court held that a dental hygienist failed to report wages from a dental practice of $5,655, as well as federal income tax withheld of $164, and did not offer any evidence to support her contention that such amounts, which were reported by the dental practice on a Form W-2, Wage and Tax Statement, were not accurate. As a result, the court concluded that the tax deficiency assessed by the IRS was correct. Michaels, T.C. Summ. 2017-70 (8/29/17).

Tax Court sustains levy against return preparer who failed to satisfy EITC due-diligence requirements

The Tax Court granted an IRS motion for summary judgment and sustained a proposed levy action against a CPA who operated a tax return preparation business. The levy related to penalties owed by the CPA as a result of his failure to satisfy earned income tax credit (EITC) due-diligence requirements. Mohamed, T.C. Summ. 2017-69 (8/29/17).

Couple liable for late-filing penalty

The Tax Court held that a couple were liable for a late-filing penalty under Sec. 6651(a)(1) because they filed their tax return for the year at issue after the due date. The court found that the couple did not present sufficient evidence to disprove the IRS’s claim that it did not receive a extension request from them. Laidlaw, T.C. Memo. 2017-167 (8/28/17).

Couple liable for increase in tax resulting from advance premium tax credit

The Tax Court held that a couple whose financial circumstances changed during the year at issue were liable for an increase in tax due to receiving an advance premium tax credit under the Patient Protection and Affordable Care Act. However, noting that the couple did not receive a Form 1095-A, Health Insurance Marketplace Statement, showing the advance premium payments made on their behalf, the court expressed sympathy for the couple’s situation and held they were not liable for the underpayment-of-tax penalty. McGuire, 149 T.C. No. 9 (8/28/17).

Court finds sufficient evidence to estimate coin dealer’s cost of goods sold

The Tax Court held that a taxpayer, who bought and sold coins and engaged in exchange transactions for which he prepared handwritten split invoices showing both purchases and sales, did not substantiate his costs of goods sold and did not maintain adequate books and records. However, while the IRS determined the taxpayer’s costs of goods sold by totaling distributions from his bank accounts and effectively disregarding purchases made through exchange transactions, the court found that there was sufficient evidence to estimate the taxpayer’s costs of goods sold using his markup over cost. Mileham, T.C. Memo. 2017-168 (8/28/17).

No litigation fees awarded where IRS position was substantially justified in innocent spouse case

The Tax Court held that a taxpayer was not entitled to an award for reasonable litigation or administrative costs relating to his tax dispute with the IRS. The court concluded that the IRS’s position disallowing the taxpayer’s claim for full relief under the innocent spouse rules of Sec. 6015(b), in both the administrative and judicial phases of the case, was substantially justified. Roeckel, T.C. Summ. 2017-68 (8/28/17).

Taxpayer cannot recoup tax overpayment where she filed return late

The Tax Court held that a taxpayer who filed her 2012 tax return late was not entitled to a refund under the three-year lookback rule of Sec. 6512(b)(3) because her tax payments were made outside the applicable lookback period, keyed to the date on which the IRS mailed the notice of deficiency. In addition, because the taxpayer did not file the return before the notice of deficiency was issued and did not pay her tax liability within two years of the mailing of the deficiency notice, the Tax Court lacked jurisdiction to award a refund or credit for the taxpayer’s tax overpayment. Borenstein, 149 T.C. No. 10 (8/30/17).

Taxpayer qualifies for partial innocent spouse relief

The Tax Court held that, while a taxpayer was not entitled to innocent spouse relief under Sec. 6015(b) and Sec. 6015(f), she partially qualified for relief under Sec. 6015(c). The court concluded that partial relief was appropriate because the deficiency for the year at issue partially resulted from the overstatement of expenses on the taxpayer’s husband’s Schedule C and she had no actual knowledge of that fact. Busch, T.C. Memo. 2017-169 (8/30/17).

Taxpayer’s criminal restitution did not settle his civil tax liabilities

The Tax Court held that a taxpayer, who was convicted of failing to include bribe income on his tax return and who signed a redacted plea agreement in which he agreed to pay $325,000 in restitution, was liable for fraud penalties assessed by the IRS. The court rejected the taxpayer’s argument that he was not liable for the fraud penalties because his criminal restitution agreement settled his civil tax liabilities. Cantrell, T.C. Memo. 2017-170 (8/30/17).

Per-diem allowances are includible in taxpayer’s income; IRS’s AMT calculation is correct

The Tax Court held that per-diem allowances received by a taxpayer were includible in the taxpayer’s income because they were not paid under an accountable plan. As a result, for the year at issue, the court found the IRS’s calculation of alternative minimum tax (AMT) liability to be correct. Johnson, T.C. Summ. 2017-71 (8/30/17).

Couple cannot deduct losses relating to child’s pageant activity; however, penalties do not apply

The Tax Court held that a couple were not entitled to loss deductions attributable to expenses incurred with respect to their child’s pageant activity because the prize winnings earned by the child were includible in her gross income, and only the child could deduct expenses related to that income. However, the court held that, because the couple hired an accountant to help with their returns, they had reasonable cause and acted in good faith with respect to their deductions and, thus, were not liable for the accuracy-related penalties. Lopez, T.C. Memo. 2017-171 (8/30/17).

 

IRS PROCEDURE

IRS announces disciplinary sanctions

The IRS Office of Professional Responsibility announced recent disciplinary sanctions against various attorneys, CPAs, and enrolled agents. Announcement 2017-9 (8/28/17).

IRS provides relief for Hurricane Harvey victims

The IRS issued various relief provisions for victims of the flooding caused by Hurricane Harvey. This relief includes an extension of time to file certain individual and business tax returns and make certain tax payments; allowing Sec. 401(k) plans and similar employer-sponsored retirement plans to make loans and hardship distributions; and not imposing a penalty when dyed diesel fuel is sold for use or used on highways. IR-2017-135 (8/29/17); Announcement 2017-11 (8/30/17); IR-2017-142 (9/3/17) (see related news story).

IRS announces e-Services changes and outages

The IRS announced changes to its e-Services that will affect all users, including taking several services offline temporarily. IRS website (8/30/17) (see related news story).

Employment tax audit did not make a worker classification determination; IRS can assess additional taxes

The Office of Chief Counsel was asked whether an employment tax audit of an unidentified taxpayer involved a worker classification determination for the tax periods and tax years at issue when the taxpayer used the services of a professional employer organization (PEO) to pay compensation to its sole corporate officer and the IRS determined that the taxpayer was liable for additional employment taxes due to the IRS’s recharacterization of payments made by the taxpayer to its corporate officer as wages. In response, the Chief Counsel’s Office cited two Tax Court orders—in Martin S. Azarian. P.A., No. 28957-15, and Patricia Arroyo DDS. Corp., No. 5874-15—in concluding that the IRS did not make a worker classification determination with regard to the corporate officer when it concluded that the taxpayer underreported reasonable wage compensation and, thus, the IRS should also assess employment taxes under Sec. 6201 against the portion of the payment being recharacterized as wages. CCA 201735021 (9/1/17).

 

PARTNERSHIPS

Partnership satisfied substantiation requirements for conservation easement donation

The Tax Court held that a partnership was entitled to a charitable deduction for its donation of a conservation easement. According to the court, while the partnership did not receive from the donee organization a contemporaneous written acknowledgment (CWA), it nevertheless satisfied the statutory substantiation requirements in Sec. 170(f)(8) because the deed of easement constituted a de facto CWA. Big River Development, L.P., T.C. Memo. 2017-166 (8/28/17). 

Partnerships get penalty relief for untimely returns

The IRS provided penalty relief to partnerships that filed returns or requests for extension of time for the first tax year beginning after Dec. 31, 2015, after the March 15, 2017, due date under Sec. 6072 as amended by the Surface Transportation Act but by the 15th day of the fourth month following the close of that tax year (the due date before amendment by the Surface Transportation Act). Notice 2017-47 (9/1/17).

Newsletter Articles

PRACTICE MANAGEMENT

Tax software survey

Our annual survey offers a look at how CPAs judged their tax preparation software in a wide range of types of practices.

NEWS

Congress enacts tax reform

Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted.