Document summaries for the week of Oct. 16, 2017
Pension plan contribution limits for 2018
Indirect loans to plan participant’s employer causes church plan to fail Sec. 403(b)(9) requirements
The Office of Chief Counsel advised that the rule prohibiting loans from a Sec. 403(b)(9) retirement account to the participant’s employer under the exclusive-benefit requirement of Regs. Sec. 1.403(b)-9(a)(2)(i)(C) applies not only to loans made directly from the account assets but also to indirect loans. The Chief Counsel’s Office reviewed transactions in two situations involving a church’s plan and concluded that the transactions caused plan to fail to meet the Sec. 403(b)(9) requirements. CCA 201742022 (10/20/17).
Default on retirement account loan results in taxable distribution, addition to taxes, and penalties
The Tax Court held that an individual failed to report as income a taxable retirement distribution of $26,954 from Fidelity Investments and was thus liable for the 10% addition to tax under Sec. 72(t) on the early distribution and a Sec. 6662(a) accuracy-related penalty. The distribution resulted from a loan that the individual took from his Fidelity Investment account that he failed to repay in full. Bormet, T.C. Memo. 2017-201 (10/16/17).
Couple hit with penalties after making frivolous argument about income not being taxable
The Tax Court held that a couple were taxable on more than $500,000 of income they did not report, rejecting their argument that the income was not taxable because they were private-sector citizens (i.e., nonfederal employees) employed by a private-sector company (i.e., a nonfederal entity) as defined in Sec. 3401(c)(d). The court also found them liable for an accuracy-related penalty and fined them $1,000 for making a frivolous argument. Jagos, T.C. Memo. 2017-202 (10/16/17).
IRS did not abuse discretion in rejecting installment offer that included $4,400 in monthly school tuition for children
The Tax Court granted summary judgment to the IRS for tax deficiencies and penalties owed by a married couple who filed tax returns for 2009, 2011, 2012, and 2013 late and did not pay the tax due with those returns. The court concluded that the IRS did not abuse its discretion in denying the couple's installment offer, which asserted that monthly tuition expenses of $4,457 be allowed in determining their ability to pay. Moriarty, T.C. Memo. 2017-204 (10/17/17).
Taxpayer can change filing status to claim earned income credit
The Tax Court, citing its recent decision in Camara, 149 T.C. No. 13 (2017), held that a taxpayer who erroneously elected a filing status of head of household could subsequently change it to married filing jointly to claim the earned income credit. The court rejected the IRS’s argument that the taxpayer was bound by her original election and, because she was married but did not originally elect to file a joint return, she was precluded from claiming the earned income credit. Knez, T.C. Memo. 2017-205 (10/18/17).
No reasonable cause where adviser lacked independence
The Tax Court held that a married couple were liable for penalties relating to a tax underpayment with respect to a distressed asset/debt (DAD) tax shelter transaction. The court concluded that the couple failed to show that they had reasonable cause for the underpayment where an adviser on whose opinion they relied was not independent. Among indications of the adviser’s lack of independence was that the couple were told that the adviser always gave favorable opinions on the referring firm’s DADs. McNeill, T.C. Memo. 2017-206 (10/18/17).
2018 inflation adjustments issued
IRS issues November 2017 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for November 2017. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. The rates are determined as prescribed by Sec. 1274. Rev. Rul. 2017-21 (10/17/17).
Regulations defining political subdivision are withdrawn
The IRS announced that it is withdrawing proposed regulations (REG-129067-15) under Sec. 103 regarding the definition of a political subdivision for tax-exempt bond purposes. Withdrawal of Notice of Proposed Rulemaking (10/19/17).
IRS nonacquisces in real estate professional case
The IRS announced its nonacquiescence to the decision of a federal district court in Stanley, No. 5:14-cv-5236 (W.D. Ark. 11/12/15), that mere possession of a stock certificate, disregarding other conditions, restrictions, or limitations on the possessor’s rights regarding the stock, constitutes ownership for purposes of Sec. 469(c)(7)(D)(ii) and work performed by the taxpayer in a rental real estate activity for purposes of Sec. 469(c)(7)(A) may also constitute work performed by the taxpayer in nonrental business activities of the taxpayer for other purposes of Sec. 469. AOD 2017-07 (10/16/17).
IRS extends due date of disclosure obligation for certain syndicated conservation easement transactions
The IRS further extended the due date for participants affected by Hurricanes Harvey, Irma, and Maria to file disclosures under Regs. Sec. 1.6011-4(e)(2)(i) regarding syndicated conservation easement transactions from Oct. 2, 2017, to Oct. 31, 2017. Notice 2017-58 (10/16/17).
Prop. regs. would streamline private activity bond public approval process
Proposed regulations would update and streamline the public approval requirement provided in Sec. 147(f) applicable to tax-exempt private activity bonds issued by state and local governments. REG-128841-07 (10/16/17).
Low-income housing credit carryover allocations published
The IRS published the amounts of unused housing credit carryovers allocated to qualified states under Sec. 42(h)(3)(D) for calendar year 2017. Rev. Proc. 2017-54 (10/16/17).
No statutory notice of deficiency required to assess and take action
The Tax Court upheld an IRS levy with respect to a married couple’s unpaid 2003 and 2007 federal income tax. The court held that it lacked jurisdiction over the couple’s claim to a credit from a year not before the court and further held that no statutory notice of deficiency was required before the IRS could assess and take action to collect the couple’s unpaid tax, as well as additions to tax and interest, resulting from the couple’s mathematical and clerical errors and overstatements of estimated tax. Robinson, T.C. Memo. 2017-207 (10/19/17).
Return disclosure criteria are satisfied if the information on the return directly affects the resolution of an issue in a proceeding
The Office of Chief Counsel advised that, with respect to facts not disclosed in the advice, disclosure of a return or return information may be permissible where the transaction test of Sec. 6103(h)(4)(C) is satisfied. According to the Chief Counsel’s Office, under the transaction test, if there is a transactional relationship, and the information on a return directly affects the resolution of an issue in a proceeding, then the information may be disclosed. CCA 201742024 (10/20/17).
Chief Counsel’s Office addresses impact of Privacy Act on disclosure of documents
The Office of Chief Counsel advised informally that the Privacy Act (5 U.S.C. §552a) provides that, to disclose records within the agency, the records must either be needed for officers and employees to perform their duties or the agency must be able to show that there is a “routine use” for that information. Citing Sullivan v. United States Postal Serv., 944 F. Supp. 191 (W.D.N.Y. 1996), the Chief Counsel’s Office noted that compiling data into a new type of record counts as disclosure under the Privacy Act. CCA 201742023 (10/20/17).
Sec. 6701 penalty requires the IRS to identify documents a person helped prepare or present
The Office of Chief Counsel, in responding to a request regarding a Sec. 6701 penalty, advised that the section requires the IRS to identify what documents the person liable for the penalty helped prepare or present that also meet the criteria in Secs. 6701(a)(2) and (3). The Chief Counsel’s Office also noted that penalties are imposed with respect to each document identified in Sec. 6701(a)(1) that meets the latter criteria. CCA 201742021 (10/20/17).
Chief Counsel’s Office advises on who can be a TMP
The Office of Chief Counsel cited Regs. Sec. 301.6231(a)(7)-1(b)(1) in advising that, to be a tax matters partner (TMP), a person has to be a general partner at some time during the tax year for which the designation is made or when the designation is made. According to the Chief Counsel’s Office, for purposes of a limited liability company, a general partner is a member-manager. CCA 201742025 (10/20/17).
S corporation's payment of management fees exceeded arm's-length amount
The Tax Court held that two S corporations owned by a married couple were not entitled to deduct management fees to the extent they exceeded an arm's-length amount the IRS determined. The court also concluded that, because the amount resulted in a substantial understatement of income tax and they did not reasonably rely on the tax experts they cited, the couple were liable for a Sec. 6662 accuracy-related penalty. Wycoff, T.C. Memo. 2017-203 (10/16/17).