Document Summaries for the Week of Jan. 30, 2017

EMPLOYEE BENEFITS

IRS proposes allowing electronic filing of Form 8963

The IRS proposed to amend the health insurance providers fee regulations to require certain covered entities engaged in the business of providing health insurance for United States health risks to electronically file Form 8963, Report of Health Insurance Provider Information. REG-123829-16 (1/30/17).

EXEMPT ORGANIZATIONS

IRS releases Form 990-EZ update with help icons

The IRS issued an updated PDF version of Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, which includes 29 “help icons” that pop open short IRS explanations. Form 990-EZ (1/30/17) (see related news story).

ESTATES, TRUSTS & GIFTS

Estate cannot claim tax payment from decedent’s husband’s estate as being for decedent’s taxes

The Tax Court rejected an estate’s contention that the estate of the decedent’s husband had meant to apply a check drawn from the husband’s estate towards the decedent’s unpaid 2007 tax liability. The court noted that the husband’s estate clearly instructed the IRS to apply its check against the husband’s 2007 liability and not that of the decedent. Estate of Beckenfeld, T.C. Memo. 2017-25 (1/31/17).

INDIVIDUALS

Couple avoids accuracy-related penalty on tax due from early retirement plan distributions

The Tax Court held that a couple owed taxes and early-distribution penalties on $15,221 in early retirement withdrawals. However, considering the couple’s background and circumstances, the court concluded they acted reasonably and were thus not liable for the accuracy-related penalty under Sec. 6662. Cheves, T.C. Memo. 2017-22 (1/30/17).

Couple cannot deduct legal fees related to wife’s former employment with bank

The Tax Court held that $25,000 and $55,798 that a couple deducted as negative “other income” for legal fees for 2010 and 2011, respectively, should have been claimed as miscellaneous itemized deductions subject to the limitation under Sec. 67(a). The court concluded that the legal fees arose as a result of the wife’s status as a former employee of a bank and not, as the couple alternatively argued, as ordinary and necessary business expenses of their accounting business. Sas, T.C. Summ. 2017-2 (1/30/17).

Tax Court sustains collection action against couple who did not provide required information

The Tax Court upheld a collection action against a couple after concluding that an IRS settlement officer did not abuse her discretion in denying the couple’s request for a collection alternative. The court noted that the couple had not provided the IRS with a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, as requested. Craven, T.C. Memo. 2017-23 (1/31/17).

Payments to ex-wife did not satisfy the definition of alimony and thus were not deductible

The Tax Court granted the IRS summary judgment, holding that payments a taxpayer made to his ex-wife did not constitute alimony and thus were not deductible. According to the court, because the settlement agreement between the taxpayer and his ex-wife provided that the unallocated support payments were excludable from income and not allowable as deductions, the payments did not satisfy the definition of alimony under Sec. 71(b)(1)(B). Quintal, T.C. Summ. 2017-3 (2/2/17). 

INTERNATIONAL

Failure to file Forms 5471 nets taxpayer a $110,000 penalty

The Tax Court held that a U.S. citizen living in Mexico was liable for $110,000 in penalties for failing to declare his ownership interests in two foreign entities and failing to file Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for nine years. Noting that the taxpayer had not provided his tax return preparer with the appropriate information, the court rejected the taxpayer’s argument that, because he relied on his tax return preparer, he had reasonable cause for the failures. Flume, T.C. Memo. 2017-21 (1/30/17).

Proposed regulations cover FATCA due diligence verification requirements

The IRS issued proposed regulations under Secs. 1471 through 1474 (FATCA) describing the verification requirements (including certifications of compliance) and events of default for entities that agree to perform the due diligence, withholding, and reporting requirements on behalf of certain foreign financial institutions or the due diligence and reporting obligations on behalf of certain non-financial foreign entities. REG-103477-14 (1/30/17).

Final regs. on FATCA information reporting and withholding

Final and temporary regulations under Secs. 1471 through 1474 (FATCA) govern information reporting by foreign financial institutions (FFIs) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities. T.D. 9809 (1/30/17).

Proposed withholding rules on U.S. source income paid to foreign persons

The IRS issued proposed regulations under chapter 3 of Subtitle A of the Code, which provides rules regarding withholding of tax on certain U.S. source income paid to foreign persons. REG-134247-16 (1/30/17).

Regs. issued on withholding on U.S. source income paid to foreign persons

The IRS issued final and temporary regulations regarding withholding of tax on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, and portfolio interest paid to nonresident alien individuals and foreign corporations. T.D. 9808 (1/31/17).

IRS PROCEDURE

Proposed regs. cover withholding on gambling winnings

The IRS issued proposed regulations under Sec. 3402(q) with respect to withholding on certain payments of gambling winnings from horse races, dog races, and jai alai and on certain other payments of gambling winnings. REG-123841-16 (1/30/17).

Regs. issued on reporting requirements for certain gambling payments

The IRS issued final regulations that replace the existing information reporting requirements under Temp. Regs. Sec. 7.6041-1 for persons who make reportable payments of bingo, keno, or slot machine winnings. T.D. 9807 (1/30/17).

Taxpayer was not misled by notice of deficiency

In an opinion with several concurrences and a dissent, the Tax Court held that the IRS showed that it had issued a valid notice of deficiency to a taxpayer despite the notice’s showing a $0 deficiency because the taxpayer was not misled by the notice. In so ruling, the court held that (1) when determining whether a notice of deficiency is valid, it will review the notice objectively to determine whether it is adequate to inform a reasonable taxpayer that the IRS has determined a deficiency; (2) if the test in (1) is satisfied, the notice of deficiency is considered valid and the court will not look beyond the notice; and (3) if a notice of deficiency is ambiguous as to whether the IRS has determined a deficiency, then the party seeking to establish Tax Court jurisdiction bears the burden of proving that the IRS has determined a deficiency and that the taxpayer was not misled by the ambiguous notice of deficiency. Dees, 148 T.C. No. 1 (2/2/17).

Court satisfied that IRS sent notices of deficiency to taxpayer’s last known address; collection action upheld

The Tax Court held that an IRS settlement officer properly verified that notices of deficiency sent to a taxpayer who had not filed returns for 25 years were mailed to the taxpayer at his last known address. As a result, the court sustained, with one exception, the IRS collection action against the taxpayer. Noyes, T.C. Memo. 2017-27 (2/1/17).

MISCELLANEOUS

Tax Court may rule on constitutionality of Sec. 7443(f)

The Tax Court held that, under the rule of necessity, it is proper for a Tax Court judge to rule on a couple’s contention that Sec. 7443(f), which authorizes the president to remove Tax Court judges in certain circumstances, is unconstitutional. The court further held that presidential authority to remove Tax Court judges does not violate the separation of powers principles because, while Tax Court judges exercise a portion of the judicial power of the United States, they exercise no portion of the judicial power reserved to Article III judges. Battat, 148 T.C. No. 2 (2/2/17).

Tax Court holds that Secs. 7443(f) and 6662A do not violate the Constitution

In a case involving the determination of liability for penalties under Sec. 6662(h) and Sec. 6662A, the Tax Court held, citing its opinion in Battat, discussed above, that Sec. 7443(f) does not violate the Constitution and, thus, the court  need not recuse itself from the taxpayers’ case on that basis. The court also held that the accuracy-related penalties under Sec. 6662A do not violate the Eighth Amendment as excessive fines. Thompson, 148 T.C. No. 3 (2/2/17). 

PARTNERSHIPS

Partner cannot deduct share of partnership losses where no basis in partnership was established

The Tax Court held that a partner could not deduct his alleged share of partnership losses where the court found his generally uncorroborated testimony inadequate to establish his basis in the partnership and the extent to which he was entitled to a distributive share of any losses. The court also upheld penalties for the taxpayer’s failure to timely file his return. Namen, T.C. Memo. 2017-24 (1/31/17). 

TAX ACCOUNTING

Company did not prove it was eligible to use completed-contract method

The Tax Court held that a corporation was not entitled to use the completed contract method of accounting for certain long-term contracts because it could not prove that the contracts met the two-year completion rule in Regs. Sec. 1.460-1(f)(4)(i) to be exempt from the percentage-completion method of accounting. The court also found the company liable for a 20% penalty for a substantial understatement of income tax because the company did not meet the reasonable-cause exception. Basic Engineering, Inc., T.C. Memo. 2017-26 (2/1/17).