Document summaries for the week of May 8, 2017
Chief Counsel’s Office warns of promoters peddling self-funded health and wellness plans claiming reduced employment taxes
The Office of Chief Counsel advised that a benefit paid under an employer-provided self-funded health plan is included in employees’ income and wages for reasons including, but not limited to, the following: (1) The employer-provided self-funded health plan does not involve insurance risk, and accordingly, is not insurance for federal income tax purposes (including Sec. 104(a)(3)); and/or (2) the ratio of the average amounts the employees receive for participating in health-related activities to the after-tax contributions by the employees demonstrates that the amounts the employees receive are attributable to contributions by the employer (and not employee after-tax contributions) so that the exclusion under Sec. 104(a)(3) does not apply. According to the Chief Counsel’s Office, certain promoters are selling self-funded health and wellness plans claiming that the benefits do not constitute income or wages and thereby reduce the employer and employee share of employment taxes. CCA 201719025 (5/12/17).
IRS issues guidance on corporate bond monthly yield curve
The IRS issued a notice on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2) for May 2017. In addition, the notice provides guidance on the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I) for April 2017. Notice 2017-31 (5/11/17).
Distribution from retirement account should have been reported in income; accuracy-related penalty applied
The Tax Court held that a taxpayer (who died after trial) should have included in taxable income a distribution of approximately $57,000 that he received from a retirement account during 2012. The court also concluded that an accuracy-related penalty applied to the unreported income. Estate of Lin, T.C. Memo. 2017-77 (5/8/17).
Most of inherited annuity is taxable; no income tax deduction allowed for father's funeral and estate administration expenses
The Tax Court held that a taxpayer could exclude from income only a very minor portion of an annuity she received as a beneficiary of her father's estate from the New York City Employees' Retirement System. Further, the court found that the taxpayer and her husband were not entitled to a deduction for any expenses paid or incurred for her father's funeral or the administration of his estate because those were personal or family expenses. Harrell, T.C. Memo. 2017-76 (5/8/17).
Taxpayer cannot deduct networking, job-search, and home office expenses but can deduct certain volunteer expenses
The Tax Court held that because a taxpayer did not provide testimony or other evidence to establish a bona fide business purpose for networking expenses nor provide any evidence of whether the expenses were ordinary or necessary and reasonable in amount, the expenses were not deductible. Also, because the taxpayer merely stated that he had "sought interviews and exploratory conversations with a range of financial services companies," of which he listed only three as potential employers, he was not entitled to deduct job-search-related expenses. Finally, because the taxpayer chose to maintain a home office and work from home for his own convenience, comfort, and economy and did not demonstrate that the home office was the focal point of his business activity, he was not entitled to home office expense deductions. However, because the taxpayer credibly testified that he volunteered for a charitable organization and paid expenses to maintain the organization's website, he could deduct those expenditures. Brown, T.C. Summ. 2017-29 (5/8/17).
Property tax assessor's apportionment between land and improvements determines depreciable amount
The Tax Court held that depreciation of rental property owned by a couple was limited to the amounts determined by the IRS, which based its calculations on ratios used by the Los Angeles County Office of the Assessor in apportioning value between improvements and land. Although the court acknowledged that the owner of property is qualified by ownership alone to testify as to its value, the court said it was unaware of any authority that suggested such qualification extended to an allocation of the value of property between land and improvements. Nielsen, T.C. Summ. 2017-31 (5/8/17).
Taxpayer who failed to prove insolvency is liable for taxes on discharged credit card debt
The Tax Court held that a taxpayer who claimed to be insolvent failed to prove that her liabilities exceeded the fair market value of her assets immediately preceding a discharge of debt by a credit card company. Consequently, the court upheld the IRS's determination that the taxpayer was liable for an income tax deficiency of $462 for 2013 as a result of receiving discharge-of-indebtedness income. Reed, T.C. Summ. 2017-30 (5/8/17).
Payments of excess alimony and other unsubstantiated amounts are not deductible
The Tax Court held that an oral modification of a separation agreement, where the taxpayer agreed to pay his wife more than the written separation agreement called for, did not entitle the taxpayer to an alimony deduction in excess of the amounts specified in the written agreement. The court also disallowed the taxpayer’s deductions for interest expense and a net operating loss because the taxpayer did not substantiate any of those amounts. It also upheld IRS penalties, rejecting the taxpayer’s argument that TurboTax was responsible for the mistakes in his return. Bulakites, T.C. Memo. 2017-79 (5/11/17).
Deduction for unreimbursed business expenses denied where taxpayer failed to seek reimbursement
Although a taxpayer who worked for Department of Homeland Security (DHS) was entitled to seek reimbursement from DHS for any of his purported work-related expenses, the fact that he did not seek reimbursement for those expenses, or show that they were not reimbursable, precluded him from deducting those expenditures as unreimbursed employee business expenses. Further, due to lack of substantiation, the court disallowed a deduction for legal expenses supposedly incurred in filing an Equal Employment Opportunity Commission lawsuit against DHS, but which the IRS claimed were for a personal bankruptcy proceeding. Humphrey, T.C. Memo. 2017-78 (5/11/17).
Failure to substantiate deductions leads to negligence and accuracy-related penalties
The Tax Court held that a taxpayer failed to produce sufficient evidence to substantiate the majority of deductions denied by the IRS, many of which were disallowed because they were personal expenses. Because the taxpayer failed to make a reasonable attempt to comply with the tax laws and had not shown reasonable cause, substantial authority, or any other basis for treating personal expenses as business expenses, he was liable for a negligence penalty and an accuracy-related penalty. Khinda, T.C. Summ. 2017-32 (5/11/17).
Chief Counsel’s Office addresses overpayments of tax during OVDP disclosure period
The Office of Chief Counsel was asked whether, in the context of the Offshore Voluntary Disclosure Program (OVDP), an overpayment attributable to one tax year may offset the miscellaneous offshore penalty or tax due in a different year in the OVDP disclosure period. The Chief Counsel’s Office concluded that, unless the taxpayer files a claim for refund that is timely pursuant to Sec. 6511, the IRS is prohibited by Sec. 6514 from crediting or refunding the taxpayer’s overpayment. However, an extension of the statute of limitation may affect the determination whether the taxpayer filed a timely refund claim. CCA 201719026 (5/12/17).
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.