Document summaries for the week of July 3, 2017
Chief Counsel’s Office advises on correcting errors in federal income tax withholding
The Office of Chief Counsel advised that, generally, an employer may correct nonadministrative errors in federal income tax withholding on an adjusted employment tax return only if the errors are discovered in the same calendar year that the employer paid the wages. Moreover, for an overcollection, an employer may correct federal income tax withholding only if the employer also repaid or reimbursed the employees in the same year. CCA 201727008 (7/7/17).
Company’s reliance on an undersupervised, underqualified employee to pay taxes was not reasonable
The Tax Court held that a company’s reliance on an undersupervised, underqualified, part-time employee to pay its employment tax liabilities was insufficient to establish ordinary business care and prudence and avoid penalties under Secs. 6651(a)(1), 6651(a)(2), and 6656. Xibitmax, LLC, T.C. Memo. 2017-133 (7/5/17).
Chief Counsel’s Office advises on interaction between RIC or REIT deficiency dividends deductions and tax-related penalties
The Office of Chief Counsel advised that, in general, a regulated investment company (RIC) or a real estate investment trust (REIT) that is allowed a deficiency dividends deduction under Sec. 860(a) is not liable on a return for the same tax year for an addition to tax under Sec. 6651(a)(1) or (2) for failure to timely file the return or timely pay the amount shown on it, or for any accuracy-related penalty under Sec. 6662 on an underpayment resulting from the deemed increase in tax under Sec. 860(c). CCA 201727004 (7/7/17).
Tax Court denies innocent spouse relief where taxpayer had prior opportunity to raise a claim
The Tax Court held that a taxpayer, who had completed law school and was still married to her husband, was barred from obtaining relief from joint and several liability for a joint tax return that she filed with her husband that had been the subject of a prior court proceeding. In so holding, the court noted that Sec. 6015 relief was not designed to protect willful blindness or to encourage the deliberate cultivation of ignorance, and Sec. 6015(g)(2) was not designed to provide a second chance at relief for a litigant who had the wherewithal and the opportunity to raise a claim earlier. Rogers, T.C. Memo. 2017-130 (7/3/17).
Taxpayer cannot exclude proceeds from discrimination lawsuit from gross income
The Tax Court held that a taxpayer could not exclude from gross income under Sec. 104(a)(2) as damages received “on account of personal physical injuries or physical sickness,” proceeds that he received under a settlement agreement with his former employer. Under the origin-of-claim test, the court concluded that the damages related to discrimination by the employer based on the taxpayer’s disability, and nowhere in the taxpayer’s complaint or in his rebuttal to his employer’s response to that complaint did he allege any physical injury or physical sickness. Rajcoomar, T.C. Memo. 2017-129 (7/3/17).
Court disallows interest on remittance where taxpayer failed to prove it constituted an overpayment
The Tax Court concluded that a couple were not entitled to interest under Sec. 6611 on a $207,000 remittance that the husband made by check to a certain U.S. attorney’s office in connection with a criminal case then pending against him, because he failed to prove that the remittance constituted an overpayment for purposes of Sec. 6611(a) and not a deposit. The court also found that the IRS accurately calculated under Sec. 6601 the amount of interest that the IRS assessed for the couple’s tax years at issue and the couple were not entitled to an abatement of that interest. Garavaglia, T.C. Memo. 2017-131 (7/3/17).
IRS announces nonacquiescence in earned income tax credit case
The IRS announced its nonacquiescence to the Tax Court’s decision in Tsehay, T.C. Memo. 2016-200, that a taxpayer whose filing status is married filing separately is entitled to an earned income tax credit. AOD 2017-05 (7/3/17).
IRS advises on allocating joint estimated payments to separate returns
The Office of Chief Counsel advised that an overpayment a taxpayer elected to apply to estimated tax and a payment made with an automatic extension of time to file could both be treated as estimated tax payments for purposes of allocating between spouses payments made or applied jointly for a year in which the spouses wound up filing separate returns. The taxpayers may allocate the payments in any consistent manner that they agree upon, the Chief Counsel’s Office said; and if they cannot agree, the payments must be allocated in proportion to the tax liabilities reported on their separate tax returns. CCA 201727007 (7/7/17).
Retirement payments to firefighter hurt on the job are includible in gross income
The Tax Court held that distributions from North Carolina disability retirement plans were not excludable from a firefighter’s gross income under Sec. 104 as workers’ compensation for injuries or sickness because they were retirement pension payments determined by reference to the firefighter’s age or length of service or to his prior contributions. Taylor, T.C. Memo. 2017-132 (7/5/17).
Neither spouse qualifies as a real estate professional; negligence penalties upheld
The Tax Court held that a married couple did not qualify as a real estate professionals because neither spouse performed more than one-half of personal services during the tax years at issue in real property trades or businesses in which he or she materially participated. Thus, their rental real estate activity was passive, and they were not entitled to offset losses against their other income except to the extent determined by the IRS under Sec. 469(i). Further, because the couple failed to maintain adequate logs and records to document their gross receipts and substantiate their deductions, their underpayments of federal income tax were attributable to negligence. Ellison, T.C. Memo. 2017-134 (7/5/17).
Appeals court affirms dismissal of innocent spouse petition
The Second Circuit upheld a Tax Court order, dismissing the taxpayer's petition for innocent spouse relief because it was filed one day after the 90-day period specified in Sec. 6015(e)(1)(A). Matuszak, No. 16-3034 (2d Cir. 7/5/17).
Chief Counsel’s Office releases training materials on qualified derivative dealers
The Office of Chief Counsel released two sets of slide presentations dated May 2 and 3, 2017, of training on qualified derivative dealers, addressing issues such as who can apply to become qualified derivatives dealers, their duties and obligations, application of Sec. 871(m), and withholding and reporting obligations. CCA 201727006 and CCA 201727005 (7/7/17).
IRS announces disciplinary actions
The IRS Office of Professional Responsibility announced recent disciplinary sanctions involving attorneys, CPAs, enrolled agents, and unenrolled tax return preparers. Announcement 2017-5 (7/3/17).
Treasury identifies eight significant, burdensome regulations
The Treasury Department has identified eight regulations issued in 2016 and 2017 as financially burdensome or unduly complex under presidential Executive Order 13789, for which it will propose reforms as required by the order. Notice 2017-38 (7/7/17) (see related news story).
Omission of value of remainder interest contributed to charity precludes charitable deduction
The Tax Court held that a partnership’s omission from its Form 8283, Noncash Charitable Contributions, of its cost or other adjusted basis in a remainder interest contributed to a charity violated the substantiation requirement of Regs. Sec. 1.170A-13(c)(4)(ii)(E), and because the omission failed to alert the IRS to a potential overvaluation of that property, the omission could not be excused on the grounds of substantial compliance. Thus the charitable deduction was denied in full. Further, because the value that the partnership assigned to the remainder interest it transferred to the charity was more than 400% of that interest’s actual fair market value, the partnership’s claimed charitable contribution deduction resulted in a gross-valuation misstatement and the partnership was liable for related penalties. RERI Holdings I, LLC, 149 T.C. No. 1 (7/3/17).