Document summaries for the week of July 10, 2017
Minnesota law does not allow transactions to be collapsed using substance over form
In denying the IRS’s motion for summary judgment, the Tax Court held that the IRS had failed to establish that there was not an issue of material fact whether the taxpayers were liable as transferees. In partially granting the taxpayers’ motion for summary judgment, the Tax Court found that it could not collapse a series of transactions in which a corporation sold all of its assets and engaged in subsequent transactions that left the IRS unable to collect taxes on the large tax liability because it was prohibited under Minnesota’s Uniform Fraudulent Transfer Act from combining the transactions. The court further held that it would deny the taxpayer’s summary judgment motion to the extent that there were material facts in dispute whether the taxpayers’ actually intended to enter into fraudulent transfers. Buckrey, T.C. Memo. 2017-138 (7/11/17).
Foreign corporation not liable for U.S. income tax on gain relating to redemption
The Tax Court held that a gain realized by a foreign corporation from its redemption of an interest in a U.S. partnership was capital gain that was not U.S.-source income and that was not effectively connected with a U.S. trade or business. In addition, the court held that it would not follow Rev. Rul. 91-32, and the foreign corporation was therefore not liable for U.S. income tax on the disputed gain. Grecian Magnesite Mining, Industrial & Shipping Co., SA, 149 T.C. No. 3 (7/13/17).
IRS withdraws prop. regs. on transactions involving the transfer of no net value
The IRS withdrew proposed regulations that would have required that there be an exchange of net value in order for certain corporate formations and reorganizations to qualify for nonrecognition treatment. REG-139633-08 (7/12/17) (see related news story).
IRS issues guidance on corporate bond monthly yield curve
The IRS issued a notice 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) for July 2017. In addition, the notice provides guidance on 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 2017-39 (7/14/17).
Couple cannot deduct $145,000 for alleged donation of 20,000 items to Goodwill
The Tax Court held that a couple were not entitled to a $145,000 charitable contribution deduction for the alleged donation of more than 20,000 items to Goodwill. The court found implausible the couple’s allegations that they made these contributions, noted that the couple could not substantiate the value of the items allegedly contributed, and upheld a 20% accuracy-related penalty. Ohde, T.C. Memo. 2017-137 (7/10/17).
Couple liable for 10% penalty tax on early retirement plan distribution
The Tax Court held that a couple were liable for the 10% penalty tax imposed by Sec. 72(t)(1) on a distribution from their retirement plan because they did not meet any of the exceptions under Sec. 72(t)(2). The court rejected the couple’s contention that the court should add the following two exceptions to Sec. 72(t)(2): an exception for reasonable cause and an exception where the taxpayer uses the retirement distribution to pay outstanding federal and/or state income tax liabilities. Pritchard, T.C. Memo. 2017-136 (7/10/17).
Taxpayer is not entitled to litigation costs award in innocent spouse case in which she did not prevail
The Tax Court held that because the taxpayer (who was a lawyer) was not a prevailing party in her innocent spouse case, she was not entitled to litigation and administrative costs. The court said that even if she had been a prevailing party, she did not prove that she incurred meaningful costs because she represented herself in the case and had not submitted the required affidavit attesting to those costs. Kazazian, T.C. Memo. 2017-135 (7/10/17).
IRS’s denial of face-to-face hearing does not constitute abuse of discretion
The Tax Court sustained an IRS collection action against a taxpayer after finding no abuse of discretion on the IRS’s part. The court noted that an IRS settlement officer’s denial of a face-to-face hearing does not constitute an abuse of discretion where a taxpayer declines to provide the necessary financial information and file delinquent tax returns. Metzger, T.C. Summ. 2017-47 (7/10/17).
Taxpayer can deduct $10,000 payment as alimony after court finds his explanation plausible
The Tax Court held that a $10,000 payment that a taxpayer made under a court stipulation and a final divorce decree was a deductible alimony payment. The court found the taxpayer’s testimony to be a plausible explanation of what was intended in the stipulation and final divorce decree and also found the taxpayer to be a credible witness whose testimony was not contradicted by any other witnesses. McIntee, T.C. Summ. 2017-48 (7/11/17).
Taxpayer on maternity leave liable for early distribution taxes and penalties on 401(k) loan
The Tax Court held that a taxpayer who took a loan from her 401(k) right before she went on maternity leave had a taxable distribution when her company inadvertently failed to withhold loan repayments from her paycheck as it had been instructed to do. The taxpayer was also liable for the 10% penalty tax on early retirement plan distributions, but the court found that she had reasonable cause for the underpayment of tax and rejected the IRS’s assessment of a 20% penalty under Sec. 6662. Frias, T.C. Memo. 2017-139 (7/11/17).
Lack of substantiation precludes nurse from deducting expenses
The Tax Court held that a nurse who worked for home health care companies and also provided consulting services to unspecified hospice care providers as an independent contractor could not deduct business expenses beyond what the IRS had already allowed due to lack of substantiation. The court also upheld a Sec. 6662(a) accuracy-related penalty. Balyan, T.C. Memo. 2017-140 (7/11/17).
Legal fees did not relate to S corp. activity and thus were not fully deductible
The Tax Court held that legal fees a couple paid in 2010 were not deductible as an ordinary and necessary business expense relating to the husband’s activity as a sole shareholder of an S corporation but instead were deductible as a miscellaneous itemized deduction, subject to applicable limitations, since the fees related to the husband’s separation from a company he worked for before incorporating the S corporation. However, even though the taxpayers were both CPAs, the court rejected the IRS’s argument that they should be subject to an accuracy-related penalty under Sec. 6662(a) for the tax deficiency relating to the legal fees. Dulik, T.C. Summ. 2017-51 (7/13/17).
Taxpayer must include proceeds from settlement with Home Depot in gross income
The Tax Court held that there was no indication in a settlement agreement a taxpayer signed with Home Depot that she was compensated for a physical injury or physical sickness or emotional distress attributable to it. The court thus concluded that the settlement proceeds were includible in the taxpayer’s gross income. Maciujec, T.C. Summ. 2017-49 (7/12/17).
Couple must repay advance credit received to pay for health insurance
The Tax Court held that a couple had to repay an advance premium tax credit that their insurance company told them they qualified for, because their household income exceeded applicable limitations. The court thus upheld the tax deficiency of almost $13,000 assessed against the couple. Walker, T.C. Summ. 2017-50 (7/12/17).
IRS corrects Rev. Proc. 2017-40
The IRS issued a correction to Rev. Proc. 2017-40, which contained a revised IRS Publication 1167, General Rules and Specifications for Substitute Forms and Schedules. As corrected, the revenue procedure supersedes Rev. Proc. 2016-34, not Rev. Proc. 2015-55. Announcement 2017-8 (7/10/17).
Chief Counsel’s Office discusses ‘return information’ in relation to Sec. 6103
In response to a request relating to Sec. 6103 and confidentiality and disclosure of returns and return information, the Office of Chief Counsel advised that return information is any information gathered, collected, or created by the IRS as part of a determination of liability (or possible liability) under the Code. CCA 201728022 (7/14/17).
Cash-basis S corporation can currently deduct reclamation and closing costs
The Tax Court held that, where a cash-method S corporation is legally required to pay reclamation and closing costs if and when it closes a landfill that it operates, it may deduct those expenses currently if it has made the appropriate election under Sec. 468. According to the Tax Court, the term “taxpayer” in Sec. 468 includes cash-method taxpayers and is not limited, as the IRS had argued, to accrual-method taxpayers. Gregory, 149 T.C. No. 2 (7/11/17).
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.