Document summaries for the week of June 26, 2017
Transfer of partnership interest in certain corporate liquidations and reorgs is a sale or exchange for purposes of Sec. 743(b)
The Office of Chief Counsel advised that the transfer of a partnership interest in a complete liquidation to which Sec. 332(a) applies or in a reorganization to which Sec. 368(a)(1)(A) and/or (D) applies is considered a transfer by sale or exchange for purposes of Sec. 743(b) and that Sec. 743(b) adjustments are not subject to reallocation under Sec. 704(b) because they are personal to the transferee and do not affect common basis. The Chief Counsel’s Office also found that, with respect to a particular taxpayer group, Regs. Sec. 1.1502-13 does not permit the taxpayer group to claim increased deductions for depreciation and amortization that are attributable to Sec. 743(b) adjustments arising from the transfer of a partnership interest in an intercompany reorganization to which Sec. 368 applies and from the distribution of a partnership interest in an intercompany liquidation to which Sec. 332(a) applies. CCA 201726012 (6/30/17).
IRS combines master and prototype and volume submitter programs
The IRS updated its procedures for issuing opinion letters regarding the qualification in form of preapproved plans under Secs. 401, 403(a), and 4975(e)(7). The revenue procedure also modifies the IRS preapproved letter program by combining the master and prototype (M&P) and volume submitter (VS) programs into a new opinion letter program. Rev. Proc. 2017-41 (6/30/17).
IRS issues cumulative list of changes in plan qualification requirements
The IRS issued its cumulative list of changes in plan qualification requirements for preapproved defined contribution plans for 2017. The 2017 cumulative list identifies changes in the qualification requirements of the Internal Revenue Code that are required to be taken into account in a plan document submitted to the IRS under the preapproved plan program for purposes of receiving an opinion letter. Notice 2017-37 (6/30/17).
Court reduces amount of bank deposits IRS claimed was taxable income
The Tax Court held that the IRS was justified in using the bank deposits method to reconstruct the taxpayer’s income because he did not keep adequate records. But the court reduced the amount of the receipts that were included in the taxpayer’s taxable income by $24,000 for a check he received from his son because there was no evidence that the taxpayer was performing legal services for his son, and the check was either a nontaxable gift or a repayment of a loan. The court also concluded that the amount of deposits the IRS determined was includible in the taxpayer’s income should be reduced by an additional $100,000 that the IRS did not prove was taxable income. Canatella, T.C. Memo. 2017-124 (6/26/17).
Providing pregame meals to hockey players and team personnel is a de minimis fringe
The Tax Court held that the provision by the Boston Bruins’ owners of pregame meals to Bruins’ players and team personnel at away city hotels qualifies as a de minimis fringe under Sec. 274(n)(2)(B). As a result, the court concluded that the cost of those meals is not subject to the 50% limitation of Sec. 274(n)(1). Jacobs, 148 T.C. No. 24 (6/26/17) (see related news story).
Lack of documentation precludes deduction for unreimbursed volunteer expenses
The Tax Court held that a taxpayer who worked as a physical education teacher and who coached basketball as a volunteer for two not-for-profit organizations could not deduct unreimbursed volunteer expenses he had taken on his tax return because he did not provide contemporaneous written acknowledgment from the not-for-profits on whose behalf he allegedly incurred the expenses. The court also denied deductions for business mileage taken by the taxpayer and his wife because the deductions related to the costs of commuting from the couple’s home to their place of employment and thus were nondeductible personal expenses. Martinez, T.C. Summ. 2017-42 (6/26/17).
Partial IRA distribution to wife before divorce did not qualify under the QDRO rules
The Tax Court held that a taxpayer, who indirectly provided half of his individual retirement account (IRA) to his soon-to-be ex-wife as part of an amicable divorce settlement without lawyers, was liable for the 10% additional tax imposed by Sec. 72(t)(1) on early distributions from a qualified retirement plan. The court concluded that the taxpayer did not meet the technical requirements in Sec. 72(t)(2)(C), which provides an exception from the tax for a distribution made to an “alternate payee” under a qualified domestic relations order (QDRO). Summers, T.C. Memo. 2017-125 (6/26/17).
Taxpayer’s stock trading was a business activity, so related expenses are deductible
The Tax Court held that a taxpayer who made more than 500 stock trades from which he reported a profit of over $48,000 during the year at issue had a daily stock trading business activity rather than an investment activity. Thus, he could deduct expenses relating to that activity. However, because he could not substantiate the costs of operating his home or the specific portion of his home that was exclusively dedicated to the trading activity, the court disallowed his home office deduction. Crissey, T.C. Summ. 2017-44 (6/28/17).
Real estate developer liable for 40% gross valuation misstatement penalty
The Tax Court held that a commercial real estate owner and developer was not entitled to claim carryover charitable contribution deductions in connection with a purported gift he made in 2004 of a theater building and was liable for a 40% gross valuation misstatement accuracy-related penalty for underpayments attributable to those carryover deductions. The court also assessed a 20% penalty for a tax underpayment relating to unreported interest income of almost $30,000. Fakiris, T.C. Memo. 2017-126 (6/28/17).
Financial hardship does not negate 10% tax on early retirement plan distribution
The Tax Court held that, while a couple was insolvent and experiencing financial hardship when they took an early retirement plan distribution, that did not negate the 10% early withdrawal penalty tax. However, considering the couple’s testimony, education, and belief that their medical bills and hardship were acceptable reasons for the withdrawal, the court concluded that the accuracy-related penalty did not apply. Fann, T.C. Summ. 2017-43 (6/28/17).
Whistleblower not entitled to reward where threshold requirements were not met
The Tax Court held that because a whistleblower did not meet the Sec. 7623(b) threshold requirements for receiving a whistleblower award, he was not entitled to relief from the IRS’s determination that he was not entitled to the award. The court noted that the Whistleblower Office had completed its consideration of the plaintiff’s whistleblower claim, and it did not initiate an administrative or judicial action or collect any tax proceeds from the target taxpayer. Kasper, T.C. Memo. 2017-128 (6/29/17).
Tax Court denies innocent spouse relief for taxpayer who took vacations while she was aware of tax problems
The Tax Court held that a taxpayer did not establish that she was entitled to innocent spouse relief from unpaid tax liabilities. The court noted that the taxpayer and her husband took vacations to Mexico and Florida while she was aware of their financial difficulties and said that, while the taxpayer’s income may have been at or below the applicable guidelines for granting innocent spouse relief, she failed to provide evidence of her share of living expenses and did not explain why she could not sell some of her assets to pay the tax liabilities due. Petree, T.C. Summ. 2017-46 (6/29/17).
Doctor cannot deduct recruiting loan repayment where original amount was not included in income
The Tax Court held that a doctor’s repayment of a portion of a recruitment payment made to him that was structured as a loan to entice him to commit to working in a medical practice for a certain number of years was not deductible because he never included the loan in income. The court further found that the taxpayer and his wife were liable for an accuracy-related penalty under Sec. 6662(a) resulting from the tax underpayment associated with the deduction. Salloum, T.C. Memo. 2017-127 (6/29/17).
Whistleblower did not make sufficient case for remaining anonymous
The Tax Court held that a retired CPA who moved to proceed anonymously in a whistleblower action involving his claim that a corporate taxpayer evaded paying nearly $100 million in taxes had not made a sufficient fact-specific case for anonymity. Noting that the plaintiff was using the Tax Court to bring serial whistleblower claims, the court rejected his argument that disclosure of his identity might alienate business partners who might have relationships with taxpayers he identifies and that disclosure might result in retribution from political figures close to those taxpayers. Whistleblower 14377-16W, 148 T.C. No. 25 (6/28/17).
Polish doctor cannot use U.S.–Poland treaty to avoid taxes on income from hospital
The Tax Court held that remuneration that a doctor who is a Polish citizen received during 2010 and 2011 from Washington Hospital Center in Washington, D.C., was not exempt from federal income tax under a U.S.–Poland tax treaty. The court rejected the taxpayer’s position that she was the recipient of “a grant, allowance, or award” as specified under the treaty or that the payments were exempt because Washington Hospital Center is a teaching hospital and therefore a recognized educational institution. Klubo-Gwiezdzinska, T.C. Summ. 2017-45 (6/28/17).
IRS updates specifications for certain substitute information returns
The IRS provided the specifications for private printing of red-ink substitutes for the 2017 revisions of certain information returns. This revenue procedure will be reproduced as the next revision of IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. Rev. Proc. 2016-35 was superseded. Rev. Proc. 2017-39 (6/26/17).
Updated rules and specifications for substitute forms and schedules posted
The IRS issued a revenue procedure containing a revised IRS Publication 1167, General Rules and Specifications for Substitute Forms and Schedules, providing guidelines and general requirements for the development, printing, and approval of substitute tax forms. Rev. Proc. 2015-55 was superseded. Rev. Proc. 2017-40 (6/26/17).
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.