Document Summaries for the Week of Feb. 6, 2017
Regulations issued on RIC, REIT recognition period
The IRS issued final regulations that conform the length of the recognition period during which regulated investment companies (RICs) and real estate investment trusts (REITs) are subject to corporate-level tax on certain dispositions of property to the recognition period for S corporations. T.D. 9810 (2/6/17).
6-month calendar-year C corporation extensions confirmed
The IRS confirmed on its website that it is allowing calendar-year C corporations a six-month filing extension, instead of the five-month extension specified in the Code. “6-Month Extension Period for Calendar Year C Corporations—08-Feb-2017” (2/7/17) (see related news story).
Prop. regs. issued on qualified matching and nonelective 401(k) contributions
Proposed regulations would amend the Sec. 401(k) regulations to provide that amounts used to fund qualified matching contributions and qualified nonelective contributions must satisfy certain nonforfeitability and distribution requirements when they are allocated to participants’ accounts, not when they are first contributed to the plan. REG-131643-15 (2/6/17).
IRS issues monthly corporate bond yield curve notice
The IRS provided guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2017-18 (2/10/17).
Taxpayer cannot claim grandchildren as dependents even though she supported them
The Tax Court held that, under the tiebreaker rule in Sec. 152(c)(4), the taxpayer was not entitled to a dependency deduction and other tax benefits for her two grandchildren who lived with her and whom she supported in addition to supporting her son, the children’s father. The court noted that, according to testimony, the taxpayer’s son told the taxpayer she could claim the children as her dependents although he had already filed his own return claiming them. Smyth, T.C. Memo. 2017-29 (2/7/17).
Failure to establish time spent selling insurance precludes deduction of real estate rental losses
The Tax Court held that a couple could not deduct losses from their rental real estate activity because the husband could not prove that he spent more time performing services in that activity than he spent selling insurance for the insurance company he worked for. Jones, T.C. Summ. 2017-6 (2/7/17).
Regular poker tournament player was a professional gambler
The Tax Court held that a taxpayer who regularly played poker at poker tournaments and had total winnings of approximately $850,000 during a seven-year period was in the trade or business of gambling and could deduct related expenses and gambling losses against his winnings. However, the court also determined that the taxpayer had unreported gambling income and deducted unsubstantiated expenses and thus was liable for accuracy-related penalties on the resulting tax underpayment. Alabsi, T.C. Summ. 2017-5 (2/6/17).
Frivolous arguments net taxpayer a $10,000 fine
The Tax Court imposed a $10,000 penalty under Sec. 6673(a)(1) on a taxpayer who advanced frivolous and groundless arguments before the court after being cautioned not to do so in a prior case (when he was fined $5,000). The taxpayer had been challenging an IRS notice of intent to levy as a result of his failure to file tax returns for a number of years. Byers, T.C. Memo. 2017-28 (2/6/17).
Military retirement pay is includible in income even though it was excluded in prior years
The Tax Court held that the IRS was not estopped from denying that the taxpayer’s military retirement pay was excludable from gross income for 2010 by having accepted his amended tax returns for prior years on which he excluded the pay. As a result, the taxpayer’s military retirement pay was includible in his 2010 taxable income. Taylor, T.C. Summ. 2017-4 (2/6/27).
IRS issues covered compensation tables
The IRS has issued the tables of covered compensation under Sec. 401(l)(5)(E) and the its regulations for the 2017 plan year. Sec. 401(l)(5)(E)(i) defines covered compensation for an employee as the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains social security retirement age. Rev. Rul. 2017-5 (2/9/17).
Taxpayer entitled to innocent spouse relief after estranged husband has tax liability discharged in bankruptcy
The Tax Court held that a taxpayer was entitled to innocent spouse relief under Sec. 6015(f) where her estranged husband significantly benefited from the unpaid federal income tax for the year at issue while the taxpayer did not and the taxpayer, who already struggled to pay her living expenses, would suffer financial hardship if she were liable. The court also found that if relief were not available to the taxpayer, then her estranged husband would benefit from that unpaid tax to the taxpayer’s detriment because his liability for the unpaid tax was discharged in bankruptcy. Hudson, T.C. Summ. 2017-7 (2/8/17).
Husband was not wife’s authorized agent and thus could not submit joint return without her signature
The Tax Court held that, even if it were to conclude, based on the taxpayer husband’s assertion that his wife was mentally ill and therefore unable to file a return in 2009, the taxpayer did not comply with the provisions of Regs. Sec. 1.6012-1(a)(5) to become his wife’s duly authorized agent. The wife, who several years later was placed in a conservatorship with her daughters as conservators, delusionally believed she had lost a large sum of money in the Madoff Ponzi scheme, and had insisted on filing a return for the same year using the status of married filing separately to claim the theft loss. Moss, T.C. Memo. 2017-30 (2/8/17).
Interest in pension plan is not an asset to determine couple’s insolvency
The Tax Court held that a couple’s interest in a pension plan, from which the retired husband was receiving monthly benefits, was not an asset for determining whether the couple was insolvent and the cancellation of certain debt was therefore not taxable. The court noted that, other than the right to receive the monthly payments, the couple could not access the value in the plan, could not convert their interest in the plan to a lump-sum cash amount, could not sell or assign the interest, could not borrow against the interest, and could not borrow from the plan. Schieber, T.C. Memo. 2017-32 (2/9/17).
No innocent spouse relief granted where omitted income was attributable to the taxpayer
The Tax Court held that a taxpayer was not entitled to innocent spouse relief because the tax liability at issue related to omitted income attributable to her. The court also noted that the taxpayer failed to offer proof to substantiate her claim that she was entitled to innocent spouse relief. Smaaland, T.C. Memo. 2017-31 (2/8/17).
IRS updates withholding foreign partnership and trust agreements
The IRS updated the agreements entered into by withholding foreign partnerships and withholding foreign trusts, as provided in Rev. Proc. 2014-47. Rev. Proc. 2017-21 (2/6/17).
Return preparer fined for lack of due diligence
The Court of Federal Claims imposed a $2,500 fine under Sec. 6694(b) on a tax practitioner who prepared a return for a taxpayer claiming the earned income tax credit even though the taxpayer did not provide adequate documentation to support the claim. Foxx, No. 15-1266T (Fed. Cl. 2/6/17).
Tax Court grants taxpayer’s motion to dismiss her whistleblower case
The Tax Court granted a taxpayer’s motion asking the court to voluntarily dismiss her case, which involved a whistleblower award claim. The court, noting that the IRS had not objected to the taxpayer’s motion and would suffer no prejudice from dismissal of the case, applied the principles of Wagner, 118 T.C. 330 (2002), in granting the taxpayer’s motion. Jacobson, 148 T.C. No. 4 (2/8/17).
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.