Document summaries for the week of May 1, 2017

C CORPORATIONS

Expenditures do not qualify as deductible R&D under Sec. 174, but may be deductible under Sec. 617

Citing Rev. Rul. 74-67 and Rev. Rul. 75-122, the Office of Chief Counsel advised a corporation that expenditures it incurred in looking into the development of a plant to extract coal from land it owned were exploration costs under Sec. 174(d) and thus were not deductible as research and experimental expenditures under Sec. 174(a); however, those expenditures were deductible under Sec. 617, which allows a deduction for certain mining exploration expenditures if the taxpayer makes the appropriate election. Further, because the expenditures did not qualify under Sec. 174, they accordingly could not qualify for the Sec. 41 research credit. CCA 201718011 (5/5/17).

IRS ruling addresses north-south transactions during certain reorganizations

The IRS issued a ruling on the federal tax treatment of "north-south" transactions that occur during certain reorganizations. The guidance, which modifies Rev. Proc. 2017-3, describes two north-south transactions: one involving steps that are respected as separate and another involving steps that are integrated. Rev. Rul. 2017-9 (5/3/17).

IRS grants emergency relief for removal of fuel from Milwaukee terminals resulting from shutdown of the West Shore Pipeline

The IRS has granted 180-day emergency relief for fuel removals from Milwaukee terminals due to the permanent shutdown of the West Shore Pipeline. Once the 180-day emergency relief expires, the IRS is providing a temporary mechanism for refunds of the Sec. 4081(a)(1) excise tax imposed upon removals of undyed diesel fuel from a Milwaukee terminal when that fuel is transported to and entered into a Green Bay terminal and subsequently removed from that Green Bay terminal as dyed fuel destined for a nontaxable use. Notice 2017-30 (5/3/17).

INDIVIDUALS

Failure to substantiate expenses precludes their deduction; penalties upheld

The Tax Court held that, due to a lack of substantiation, a couple were not entitled to deductions for (1) charitable contributions in excess of the amount the IRS allowed, and (2) certain miscellaneous itemized deductions the IRS disallowed. The court also upheld accuracy-related penalties assessed against the couple. Okiyi, T.C. Summ. 2017-28 (5/1/17).

Settlement award from employer was taxable; penalties upheld

The Tax Court held that a settlement award the taxpayer received from her former employer as a result of a lawsuit filed after the taxpayer injured her back on the job was includible in income because the payment amounts were for emotional distress, not for physical injury. In addition, the court said there was no credible evidence that the taxpayer and her husband made reasonable efforts to assess their proper federal income tax liability or believed in good faith that the liability was accurately reported and thus they were liable for the 20% accuracy-related penalty under Sec. 6662(a). Bates, T.C. Memo. 2017-72 (5/1/17).

Taxpayer had large amounts of income excluded from his tax returns

The Tax Court held that a real estate entrepreneur, who failed to keep accurate records and some of whose records had been stolen, recognized income from amounts he received from obligors of certain third-party notes relating to a venture formed in China that was intended to capitalize on the 2008 Summer Olympics. He also failed to report other large amounts of income he received from his real estate business. While the court allowed deductions for certain sole proprietorship expenses relating to that and other ventures, it also upheld accuracy-related penalties assessed against the taxpayer because the taxpayer did not provide accurate information to the attorney who prepared the returns and did not review the returns. Borna, T.C. Memo. 2017-73 (5/1/17)

Court disallows deduction relating to property used for personal purposes

The Tax Court held that a taxpayer’s deductions for passthrough losses from his wholly owned limited liability company were limited by Sec. 280A because the property to which the deductions related was used by the taxpayer for personal purposes for more than 14 days during the years at issue. Further, because the taxpayer failed to keep adequate records and did not prove he gave his CPA accurate information about the property, the court upheld the IRS’s assessment of a penalty for negligence. Cooke, T.C. Memo. 2017-74 (5/1/17).

IRS issues indexing adjustments for certain Affordable Care Act provisions

The IRS issued indexing adjustments for certain provisions under Sec. 36B and Sec. 5000A. In particular, the IRS updated the Applicable Percentage Table in Sec. 36B(b)(3)(A)(i), which is used to calculate an individual's premium tax credit under the Patient Protection and Affordable Care Act, and the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II), which is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Sec. 36B and whether the individual is exempt from the Sec. 5000A shared-responsibility payment because of a lack of affordable coverage. Rev. Proc. 2017-36 (5/4/17).

2018 HSA inflation adjustments released

The IRS issued the inflation-adjusted figures for calendar year 2018 for the annual contribution limits for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. Rev. Proc. 2017-37 (5/4/17) (see related news story).

INTERNATIONAL

No foreign tax credit allowed for taxes refunded

The Tax Court held that repayments of U.K. income tax that a taxpayer received during 2003–2005 represented previously paid foreign tax that was “refunded in whole or in part” within the meaning of Sec. 905(c)(1)(C). As a result, the taxpayer was not entitled to the foreign tax credits she had taken on her return for those taxes. Sotiropoulos, T.C. Memo. 2017-75 (5/1/17).

IRS PROCEDURE

Qualified mortgage bond median gross income figures released

The IRS provided the United States and area median gross income figures that are to be used by issuers of qualified mortgage bonds, as defined in Sec. 143(a), and issuers of mortgage credit certificates, as defined in Sec. 25(c), in computing the income requirements described in Sec. 143(f). Rev. Proc. 2017-35 (5/2/17).

PARTNERSHIPS

Deficiency procedures apply to a partner where there was no adjustment to partnership items

The Tax Court rejected arguments by a partner in a partnership that it lacked jurisdiction over a penalty relating to his inconsistent reporting of partnership items and that deficiency procedures did not apply to penalties, additions to tax, and additional amounts assessed on him. According to the court, since there were no adjustments to partnership items, deficiency procedures applied to the penalties asserted by the IRS. Malone, 146 T.C. No. 16 (5/1/17).