Document summaries for the week of July 17, 2017
Final rules on streamlined application for tax exemption are released
The IRS issued final regulations and withdrew temporary regulations on the simplified process for certain smaller qualifying organizations to apply for recognition of their tax-exempt status using Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. T.D. 9819 (7/17/17).
Taxpayer whose wife filed separately cannot file a joint return
The Tax Court upheld the IRS’s $6,244 deficiency for a taxpayer who was divorced in 2014 and filed a 2013 joint return on which he claimed his and his wife’s children as dependents and an earned income tax credit. During their marriage, the couple had filed jointly, with the husband providing the information to their return preparer; the wife had previously signed filing authorizations, but did not do so for 2013 and claimed to be unaware her ex-husband had filed a joint return, despite asking him about it repeatedly. She then filed a separate return for 2013, also claiming the children. The court agreed with the IRS and the wife that she did not intend to file jointly for 2013, accepted her separate return, and upheld the IRS’s change of the husband’s status to filing separately with no dependents. Edwards, T.C. Summ. 2017-52 (7/17/17).
Taxpayer required to file return and pay tax
A taxpayer who did not file a 2012 income tax return was assessed a deficiency of $11,637 and additions to tax for failure to file, failure to pay tax, and failure to pay estimated tax. The taxpayer argued that he was not legally subject to income tax. The court found that the taxpayer was not pursuing this argument for purposes of delay and examined his claim. The court concluded that the taxpayer was indeed liable and warned him that he might be subject to a penalty of up to $25,000 if he pursues the same or a similar frivolous claim in the future. Siegel, T.C. Summ. 2017-53 (7/17/17).
Amateur stock trader must use FIFO method to calculate basis
A stock trader who originally failed to report his stock trades on his return conceded that he had unreported gain on his stock sales but argued that his basis should be calculated using the last-in, first-out (LIFO) method. The trading company had a notice on its website that all accounts would be subject to FIFO unless the customer notified the company otherwise. The trader claimed that he tried unsuccessfully to contact the company to make the election, but the court did not find his testimony credible. The court also upheld an accuracy-related penalty, finding the taxpayer’s efforts to notify the company lacking and noting that he had originally omitted all his stock sales from his return. Turan, T.C. Memo. 2017-141 (7/17/17).
Handyman cannot exclude income under Sec. 119 as lodging provided for the employer’s convenience
A handyman who fell behind on his rent provided services to the trust that owned the property he lived in, but he failed to report the imputed income on his tax return despite the trust’s issuing Form 1099-MISC, Miscellaneous Income, to him. The taxpayer claimed that he could exclude the income under Sec. 119, but the court found that he was not living in the property for the convenience of the trust and that he was an independent contractor, not an employee. He was also liable for an accuracy-related penalty for omitting the income. Welemin, T.C. Summ. 2017-54 (7/18/17).
Per-capita tribal gaming revenues paid to children are subject to kiddie tax
The IRS Office of Chief Counsel advised that per-capita payments of an Indian tribe’s gaming revenues, when paid to a child to whom Sec. 1(g) applies, are included in unearned income under that subsection and thus potentially taxed as if they were income of a parent (“kiddie tax”) because the child does not receive the payments as compensation for personal services rendered, which is required to be earned income. CCA 201729001 (7/21/17).
Stingray business never launched
The Tax Court upheld the IRS’s denial of purported business deductions by a taxpayer who claimed to have carried on a web-based business to allow users to bid on hiring contractors for products and repairs and another to develop a stingray-repelling sonar device to protect swimmers and surfers. Noting the activities produced no gross income, the court concluded that while the taxpayer may have researched the activities, neither ever commenced as a business during the years at issue. Carrick, T.C. Summ. 2017-56 (7/20/17).
Taxpayer’s ignorance not reasonable cause for underpayments
The Tax Court sustained accuracy-related penalties where the taxpayer testified he was unaware of his liability for alternative minimum tax or net investment income tax when he self-filed his return, noting that the taxpayer relied only on form instructions. Isaac, T.C. Summ. 2017-55 (7/20/17).
Unemployment benefits repaid in subsequent year not subject to rescission
A taxpayer who received $3,360 in unemployment compensation in 2012 repaid it in 2013, after a state agency determined he had not been entitled to the benefits. The Tax Court upheld a deficiency arising from his failure to include the benefits in gross income for 2012. The taxpayer’s argument that the doctrine of rescission excepted him from the claim-of-right doctrine was unavailing. Yoklic, T.C. Memo. 2017-143 (7/19/17).
IRS updates specifications for red-ink substitutes of Forms W-2 and W-3 for 2017
The IRS provided the specifications for the private printing of red-ink substitutes for 2017 Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements. This revenue procedure will be produced as the next revision of IRS Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3. Rev. Proc. 2016-54 is superseded. Rev. Proc. 2017-42 (7/17/17).
IRS announces increased enrolled agent user fee
Final regulations increase the user fee the IRS charges enrolled agent candidates for each part of the three-part special enrollment exam to $81 (lower than the proposed fee of $99), effective for registrations on or after March 1, 2018. Examinees must also pay a contractor’s fee for each part of $100.94 for the May 2017 to February 2019 testing periods, which will increase to $103.97 for the May 2019 to February 2020 testing period. T.D. 9820 (7/17/17).
IRS issues August 2017 AFRs
The IRS issued the applicable federal rates for the month of August 2017. Rev. Rul. 2017-15 (7/18/17).
Regs. updated with return due-date changes
In final, temporary, and proposed regulations, the IRS amended Treasury regulations to reflect recent statutory changes to due dates for a variety of tax and information returns. T.D. 9821; REG-128483-15 (7/20/17) (see related news story).
Hardest-hit homeowners’ safe harbor extended to 2021
The IRS extended through tax year 2021 its guidance in Notice 2015-77, including (1) the safe-harbor method of computing financially distressed homeowners’ deduction for home mortgage payments where payments are made to them or on their behalf under programs of Treasury’s Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets and (2) relief from information-reporting penalties for mortgage servicers and state housing finance agencies. Notice 2017-40 (7/20/17).
Block creator cannot avoid taxes by setting up partnership held by Roth IRAs
A successful inventor of interlocking concrete blocks tried to lower his estate and other taxes by forming a partnership to which he sold his patents and then creating Roth IRAs for himself and each of his family members. Each Roth IRA’s only contributed asset was an interest in the partnership, by which it received royalties. The IRS issued notices of deficiencies to the inventor and his family members and final partnership administrative adjustments to the partnership rejecting these transactions. The taxpayers argued that the IRS was required to notify the indirect partners (the inventor and his family) and not just the Roth IRAs about the partnership proceeding, but the court rejected that. The court also upheld the IRS’s finding that the Roth IRAs received excess contributions and thus were subject to Sec. 4973 excise taxes. Block Developers, LLC, T.C. Memo. 2017-142 (7/18/17).
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.