Document summaries for week of July 24, 2017
Final regs. define ‘controlled group’ for branded prescription drug fee
The IRS issued final regulations defining a “controlled group” for purposes of the branded prescription drug fee under Section 9008 of the Patient Protection and Affordable Care Act, P.L. 111-148. The final regulations adopt 2014 temporary and proposed regulations without change. T.D. 9823 (7/24/17).
IRS issues final regs. for premium tax credit
New final regulations under Sec. 36B provide guidance on the health insurance premium tax credit for domestic abuse victims and how self-employed taxpayers who take a deduction under Sec. 162(l) for their health insurance premiums should calculate their premium tax credit. T.D. 9822 (7/24/17) (see related news story).
Penalties upheld for early retirement distributions
The Tax Court sustained a deficiency, additional tax under Sec. 72(t)(1) for early distributions from a qualified plan, and an accuracy-related penalty against a taxpayer who failed to repay a loan from his Sec. 401(k) retirement plan, beginning with installments due in August 2012. The taxpayer, a CPA, argued that the loan default or cure period extended into January 2013, but the court, citing Regs. Sec. 1.72(p)-1, Q&A-10(a), agreed with the IRS that it ended on Dec. 31, 2012, the last day of the second calendar quarter following the calendar quarter in which the first unpaid installment was due. Thus, a deemed distribution occurred in that tax year, the court stated. Gowen, T.C. Summ. 2017-57 (7/24/17).
Unreimbursed employee business expense deductions denied
The Tax Court sustained the IRS’s denial, after concessions, of a taxpayer’s remaining claimed unreimbursed employee expenses for travel and meals. The court determined that automobile expenses of commuting to temporary work sites were properly denied because none of the sites were outside the metropolitan areas where the taxpayer normally worked. For the meal expenses, the taxpayer presented no evidence he was away from home within the meaning of Sec. 162(a)(2). Wooten, T.C. Summ. 2017-58 (7/24/17).
Innocent spouse equitable relief denied
The Tax Court agreed with the IRS that a taxpayer was not entitled to equitable relief under Sec. 6015(f) from joint and several liability with her husband for tax years 2009 and 2012. Although the taxpayer learned the details of the outstanding tax liabilities for those years only in May 2014, she previously had knowledge that at least part of the tax was unpaid and had reason to know the tax shown on the returns would not be paid, the court held. Ryke, T.C. Memo. 2017-144 (7/25/17).
Couple did not substantiate most of their expenses; accuracy-related penalty upheld
The IRS disallowed most expense deductions a couple claimed for businesses they operated through a jointly owned S corporation. The husband provided business and financial consulting services that included tax preparation, and the wife was an artist. The Tax Court upheld the IRS’s decision to disallow most of the deductions because the taxpayers lacked substantiation and kept poor records. The court, however, allowed a number of the expenses for the wife’s art business, rejecting the IRS’s claim that it was not run through the S corporation. The court also upheld an accuracy-related penalty. Brookes, T.C. Memo. 2017-146 (7/26/17).
Taxpayer can challenge her liability for tax
The taxpayer excluded a $20,056 distribution from a teacher’s retirement fund from income on her tax return because she mistakenly thought she had rolled the funds over, but, in fact, she had not deposited the funds in a qualified account. She filed her return claiming a refund of $8,380, which the IRS originally paid. The IRS subsequently issued a notice of deficiency denying the claim, which the taxpayer never received. She claimed that the refund precluded the IRS from asserting the deficiency. The Tax Court granted the IRS summary judgment on this issue but denied it with respect to a proposed levy, finding that the taxpayer never had a chance, either in response to the notice or subsequently in a collection due process proceeding, to challenge the tax deficiency, which the court said it would review de novo. McCree, T.C. Memo. 2017-145 (7/26/17).
IRS decision to cancel two APAs was an abuse of discretion
The taxpayer, a multinational corporate manufacturing group, entered into two advance-pricing agreements (APAs) with the IRS for its 2001–2005 and 2006–2010 tax years. The IRS withdrew both agreements in 2011 retroactively, claiming the taxpayer did not comply in good faith with the APAs’ terms and conditions and their reporting requirements. The court found that the taxpayer had substantially complied with the terms of the agreements, and any errors it had made were immaterial. The court found that an APA is a binding agreement that can only be canceled according to the terms in revenue procedures, which the IRS did not do. The court rejected the IRS’s alternative argument that the corporation transferred intangibles subject to Sec. 367(d). It also allowed the company to currently deduct bonuses paid to company executives under Sec. 162. Eaton Corp., T.C. Memo. 2017-147 (7/26/17).
IRS partially prevails in CFC case
The taxpayer is the parent of a group of companies that include a number of controlled foreign corporations (CFCs) that the IRS claimed had invested substantial amounts of untaxed earnings and profits in U.S. property by using intercompany loan transactions, guarantees, and trade receivables. As a result, the parent had to include those amounts in its income under Sec. 951(a)(1)(B). The Tax Court partially granted the IRS’s motion for summary judgment for several of the transactions but found a remaining issue of material fact as to whether one of the trade receivables was ordinary and necessary and therefore not subject to Sec. 951. Crestek, Inc., 149 T.C. No. 5 (7/27/17).
IRS moves for stay of PTIN fee injunction
The IRS filed a motion in U.S. District Court for the District of Columbia for a stay of an order the court issued earlier enjoining the Service from charging a user fee for preparer tax identification numbers (PTINs). In a memorandum in support of the stay motion, the IRS said it was deciding whether to appeal the court’s decision and argued that, if it does, it is likely to win. Steele, No. 14-cv-1523-RCL (D.D.C. 7/24/17) (memorandum in support of motion for stay) (see related news story).
CDP appeal is not mooted by release of lien and penalty abatement
The Tax Court denied the IRS’s motion to dismiss as moot a taxpayer’s Collection Due Process (CDP) appeal where the IRS abated penalties for frivolous tax submissions under Sec. 6702 and released a lien, but the Service did not concede that the taxpayer was not liable for the penalties and had retained an option to refile the lien. Vigon, 149 T.C. No. 4 (7/24/17).
IRS to pilot Appeals web-based videoconferencing
The IRS will test in a pilot program a new web-based videoconferencing service for meetings by taxpayers and their representatives with Appeals officers. Currently, only a limited number of IRS offices support videoconferencing. The pilot begins Aug. 1, 2017. News Release IR-2017-122 (7/24/17) (see related news story).
IRS did not abuse its discretion in issuing Notice of Federal Tax Lien
The Tax Court granted the IRS summary judgment in a case involving a taxpayer with unpaid tax liabilities from 2009 to 2013 who had previously had an offer in compromise (OIC) accepted but never made a payment on it. The IRS refused the taxpayer’s offer to reinstate the OIC and issued a Notice of Federal Tax Lien. The taxpayer claimed that his account should be placed in currently not collectible status because he could not pay the balance due, as he was sick and disabled. The IRS, however, found that he had over $1,000 a month available to pay his tax debts, and the taxpayer never responded to the IRS’s request to substantiate his medical expenses. Feldman, T.C. Memo. 2017-148 (7/27/17).
Sec. 385 documentation requirement delayed until 2019
The IRS announced that Regs. Sec. 1.385-2, which requires taxpayers to prepare and maintain documentation to evidence specified “indebtedness factors” for purported debt instruments, will now apply only to interests issued or deemed issued on or after Jan. 1, 2019. It previously had an effective date of Jan. 1, 2018. The Sec. 385 regulations (T.D. 9790), which address whether interests in corporations are treated as debt or equity, were on a list of significant tax regulations requiring further review issued by the Treasury Department in July 2017. Notice 2017-36 (7/28/17).
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.