Document Summaries for the Week of March 13, 2017
ESTATES, TRUSTS & GIFTS
Offer in compromise made before death fell below reasonable collection potential
The Tax Court held that the IRS properly calculated the reasonable collection potential of a decedent before his death and that the IRS appropriately rejected the decedent’s offer in compromise on that ground. The court also found the IRS settlement officer’s determination to reject the offer in compromise on the grounds that it fell below the taxpayer’s reasonable collection potential was not arbitrary, capricious, or without a sound basis in fact or law; it was instead based on a reasonable application of the IRS’s published guidelines, which the court declined to second-guess. Estate of Konkus, T.C. Memo. 2017-45 (3/16/17).
No deduction allowed for unsubstantiated business expenses
The Tax Court held that a couple was not entitled to deductions for the wife’s unreimbursed business expenses or to deductions for the husband’s trade or business expenses on Schedule C. The court concluded that the couple did not establish that the wife’s employer would not have reimbursed her for the expenses and they failed to substantiate them. In addition, the husband did not establish that he was engaged in a trade or business and also failed to substantiate his expenses. Beckey, T.C. Summ. 2017-13 (3/13/17).
S shareholder had to recognize passthrough income where he did not explain why the K-1 was incorrect
The Tax Court held that a taxpayer had income of $451,531 from his 50% shareholder interest in a construction company taxed as an S corporation, and that the IRS did not abuse its discretion in sustaining a levy notice. The court noted that the taxpayer did not explain why the final corporate return and K-1s were incorrect and did not offer any collection alternatives other than a $10,000 offer in compromise that the IRS rejected. Dalton, T.C. Memo. 2017-43 (3/13/17).
Couple fails to meet requirements to deduct rental real estate losses
The Tax Court held that a couple was not entitled to deduct rental real estate losses for 2009 and 2010 where the husband, who had a full-time job during those years, failed to qualify as a real estate professional. In addition, because the couples’ modified adjusted gross income was more than $150,000, the couple did not qualify for the Sec. 469(i) exception to deducting rental real estate losses. Rapp, T.C. Summ. 2017-14 (3/13/17).
Couple cannot deduct moving expenses; unpaid work for future employer did not meet time requirement
The Tax Court held that a couple were not entitled to a moving expense deduction where the husband changed jobs but was not a full-time employee at his new place of employment for at least 39 weeks during the one-year period beginning with his arrival in the general location of his new principal place of work. The court was not persuaded by the couple’s argument that the husband should be considered a full-time employee where personnel of his future employer requested his assistance in preparing marketing materials and where he engaged in training activities. Employment generally is considered to begin when the employer is under an obligation to pay the employee, the court noted, which was not the case for the activities in question. Anderson, T.C. Summ. 2017-17 (3/16/16).
Court denies $18,000 charitable deduction for alleged donation of clothing
The Tax Court held that a couple were not entitled to an $18,000 charitable contribution deduction for an alleged donation of clothing that the wife testified at trial were made to a church that “might or might not still be in existence.” The court also disallowed unsubstantiated deductions claimed on the couple’s Schedule C and upheld the imposition of Sec. 6662(a) accuracy-related penalty for the years in issue on several grounds, including negligence or disregard of rules or regulations and substantial understatement of income tax. Gaines, T.C. Summ. 2017-15 (3/16/17).
Notarized statements from customers proved cosmetologist qualified for earned income credit
The Tax Court held that an unlicensed, self-employed cosmetologist who engaged in hairstyling but who did not maintain a bank account or maintain any contemporaneous business records showing income and expenses attributable to her business nonetheless established that she did have earned income and thus qualified for the earned income credit and the additional child tax credit. The court found that notarized written statements from the taxpayer’s clients corroborated the taxpayer’s testimony that she was paid to provide cosmetology services to at least 12 regular customers. However, the court found the taxpayer’s gross receipts to be less than reported and, while no penalty was at issue in this case, noted that failure to maintain adequate records to support items on a return can result in an accuracy-related penalty under Sec. 6662(a). Lopez, T.C. Summ. 2017-16 (3/16/17).
Chief Counsel addresses certain Indian tribal refund claims
The Office of Chief Counsel advised that it had no objection to an IRS office’s allowing certain refund claims made by individuals to exclude from income payments they received from an Indian tribal government upon the death of a member of the tribe. CCA 201711011 (3/17/17).
Eligibility requirements of Sec. 911(d)(1) waived for South Sudan
The IRS issued a revenue procedure that waives the eligibility requirements of Sec. 911(d)(1) for any individual who failed to meet the requirements because of adverse conditions in a foreign country. The revenue procedure waives the eligibility requirements of Sec. 911(d)(1) for South Sudan as of July 10, 2016 so that individuals who left South Sudan on or after that date will qualify, but individuals who arrived after that date will not. Rev. Proc. 2017-26 (3/13/17).
IRS issues annual adjustments to housing expense limitation for purposes of Sec. 911
The IRS provided its annual adjustments to the limitation on housing expenses for purposes of Sec. 911 for specific locations for 2017. These adjustments are made on the basis of geographic differences in housing costs relative to housing costs in the United States. Notice 2017-21 (3/13/17).
Foreign students in U.S. summer work program cannot deduct meal and travel expenses
The Tax Court held that nonresident aliens who were full-time students at foreign universities were not entitled to deduct their expenses for airfare and meals and entertainment paid in connection with their participation in the U.S. State Department’s Summer Work Travel Program because they were not “away from home in the pursuit of a trade or business” for purposes of Sec. 162(a)(2). Additionally, the court said the students could not deduct their expenses for travel health insurance under Sec. 162(a)(2) but could deduct those expenses under Sec. 213(a) to the extent they satisfied the applicable requirements. Liljeberg, 148 T.C. No. 6 (3/16/17).
IRS provides residential purchase prices to issuers of qualified mortgage bonds and mortgage credit certificates
The IRS issued a revenue procedure that provides issuers of qualified mortgage bonds and issuers of mortgage credit certificates with the nationwide average purchase prices for residences in the United States. The revenue procedure also provides average area purchase price safe harbors for residences in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. Rev. Proc. 2017-27 (3/17/17).
Tax Court petition denied due to untimely filing
The Tax Court dismissed a taxpayer’s petition, which he prepared himself and mailed after applying postage using a private postage meter, because it did not satisfy the requirements of Regs. Sec. 301.7502-1(c)(1)(iii)(B)(2). The court noted that it did not receive the petition within 30 days of the date of the IRS notice of determination that the petition was addressing and, further, the petition was received by the Tax Court later than a document would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service on the last day of the period prescribed for filing the petition. Grimm, T.C. Memo. 2017-44 (3/16/17).
Assessment for inconsistent treatment under Sec. 6222 is an administrative proceeding
The Office of Chief Counsel advised that an assessment for inconsistent treatment under Sec 6222 is an administrative proceeding for purposes of Sec. 6103(h)(4). The Chief Counsel’s Office noted that an administrative proceeding under Sec. 6103(h)(4) means any procedure or other action arising out of or in connection with a determination or collection of a person’s liability or potential liability under the internal revenue laws or related statutes and tax conventions to which the United States is a party and in which a person whose liability, potential liability, or collection is or may be at issue is given notice and opportunity to present information to the IRS. CCA 201711010 (3/17/17).
Redacted memorandum addresses gross valuation misstatement
In a heavily redacted memorandum, the Office of Chief Counsel addressed whether a taxpayer is subject to the accuracy-related penalty based on an underpayment attributable to a substantial or gross valuation misstatement where the IRS calculated the penalty by valuing only a limited number of the items of property claimed by taxpayer on certain returns. CCA 201711009 (3/17/17).
Form 1099 not fraudulent even though recipient refused to cash check
The Seventh Circuit held that a taxpayer did not commit tax fraud by issuing a Form 1099 to report a $149,000 payment when the payee had refused to cash the check for the payment. Shiner v. Turnoy, No. 14-2999 (7th Cir. 3/16/17) (see related news story).
April 2017 AFRs issued
The IRS issued the applicable federal rates (AFRs) for April 2017. Rev. Rul. 2017-8 (3/16/17).
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.