Document summaries for the week of Oct. 2, 2017

EMPLOYEE BENEFITS

IRS updates defined benefit plan mortality table for 2018

The IRS set forth the mortality table for purposes of determining minimum present value under Sec. 417(e)(3) and Section 205(g)(3) of the Employee Retirement Income Security Act of 1974 (ERISA) for distributions with annuity starting dates that occur during stability periods beginning in the 2018 calendar year. The IRS noted that the mortality table is a modified unisex version of the mortality tables specified under Sec. 430(h)(3)(A), which have been revised pursuant to Sec. 430(h)(3)(B) for plan years beginning in 2018. Notice 2017-60 (10/3/17).

IRS issues procedure for requesting approval to use plan-specific mortality tables

The IRS set forth the procedure by which the sponsor of a defined benefit plan that is subject to the funding requirements of Sec. 430 may request approval from the IRS to use plan-specific substitute mortality tables in accordance with Sec. 430(h)(3)(C) and Regs. Sec. 1.430(h)(3)-2. The procedure is an update of Rev. Proc. 2008-62, which was issued in conjunction with final regulations under Sec. 430(h)(3)(C) that were published on Oct. 6, 2008. Rev. Proc. 2017-55 (10/3/17).

Additional hurricane relief provided for employee benefit plans

The IRS provided relief in connection with certain employee benefit plans because of damage caused by Hurricanes Harvey and Irma. The relief is in addition to any relief already provided to victims of the hurricanes by the IRS, the Department of Labor’s Employee Benefits Security Administration, and the Pension Benefit Guaranty Corporation. Notice 2017-49 (10/2/17).

Final regs. give mortality tables for defined benefit plans

The IRS issued final regulations that prescribe the mortality tables to be used by most defined benefit plans. T.D. 9826 (10/5/17).

IRS updates fee for health insurance policies

The IRS provided the adjusted applicable dollar amount ($2.39) to be multiplied by the average number of covered lives for purposes of the fee imposed by Sec. 4375 (the health insurance policy fee paid by issuers of the policy) and Sec. 4376 (the fee applicable to self-insured health plans) for policy years and plan years that end on or after Oct. 1, 2017, and before Oct. 1, 2018. Notice 2017-61 (10/6/17).

Guidance issued on leave-based donation programs to aid hurricane victims

The IRS issued guidance on the treatment of leave-based donation programs to aid victims of Hurricane Maria. Notice 2017-62 (10/6/17). 

EXEMPT ORGANIZATIONS

Guidelines issued for advising private foundations on grants

The IRS issued guidelines that qualified tax practitioners may use for preparing written advice on which a private foundation (or a sponsoring organization of a donor-advised fund) ordinarily may rely in making a good-faith determination that a grantee is a qualifying public charity. Rev. Proc. 92-94 was modified and superseded. Rev. Proc. 2017-53 (10/2/17).

INTERNATIONAL

Canadian citizen’s U.S.-source unemployment compensation is subject to U.S. income tax

The Tax Court held that a Canadian citizen who lived and worked in the United States from 2010 until November 2011, and who collected unemployment compensation in 2012 from Ohio while living in Canada, was not entitled to exclude the unemployment benefits from gross income under the U.S.–Canada treaty. The court agreed with the IRS that Article XV of the treaty, which covers dependent personal services, did not apply to the taxpayer and that Article XXII, which covers other income, did apply to allow the United States to tax unemployment income. Guo, 149 T.C. No. 14 (10/2/17).

IRS announces intention to amend Sec. 987 regulations

The IRS announced its intention to amend the final regulations and certain provisions of the temporary regulations under Sec. 987 to defer their applicability date by one year. The final regulations were identified in Notice 2017-38 as significant tax regulations requiring additional review pursuant to Executive Order 13789. Notice 2017-57 (10/2/17).

INDIVIDUALS

Taxpayer’s travel expenses were incurred while away from home, but lack of substantiation precludes deductions

The Tax Court held that, with respect to claimed travel expenses,, Las Vegas was the tax home of a video producer who lived there but performed services in Washington, D.C., for a client. However, the court concluded that because the taxpayer did not properly substantiate many of the expenses, he was limited to deducting those the IRS had already allowed and was subject to assessed penalties.  Barrett, T.C. Memo. 2017-195 (10/2/17).

Gambling losses are deductible only as an itemized deduction

The Tax Court held that a taxpayer who worked full time as an agent at the Lincoln Tunnel in New York City and who also traveled frequently to Atlantic City, N.J., to gamble at horse tracks and in casinos, was not a professional gambler and thus was limited to an itemized deduction for his gambling losses in 2012. The taxpayer was also liable for a penalty for failing to file his 2012 tax return on time and a negligence penalty relating to his underpayment of taxes. Boneparte, T.C. Memo. 2017-193 (10/2/17).

Taxpayer fails to prove he was entitled to innocent spouse relief

The Tax Court held that a taxpayer who filed a joint return with his wife for the year at issue did not meet his burden of proving that he was entitled to innocent spouse relief with respect to the couple’s tax liability. The court noted that the taxpayer was not a party to an offer-in-compromise agreement his wife had signed with the IRS for the tax liability at issue. Harris, T.C. Summ. 2017-77 (10/3/17).

Court denies commuting expense deductions but rejects penalty on related tax deficiencies

The Tax Court held that a taxpayer was not entitled to deduct vehicle expenses attributable his daily round-trip mileage between his employer’s office and his normal construction job worksite in the San Francisco Bay area because they were nondeductible commuting expenses. However, after considering facts and circumstances including the taxpayer’s lack of sophistication regarding tax matters, the complexity of the tax laws governing commuting expenses, and the fact that the taxpayer had lost his original mileage logs, the court concluded that the taxpayer had shown reasonable cause and that he acted in good faith with respect to the portions of the underpayments attributable to the disallowed vehicle expenses. Thus, he was not liable for penalties relating to that portion of his tax underpayment. Tiller, T.C. Summ. 2017-76 (10/2/17).

Couple are not liable for penalty relating to disallowed deductions

The Tax Court held that an attorney and his wife (1) were not entitled to deduct settlement expenses of $331,455 reported on their Schedule C, Profit or Loss From Business, or additional settlement expenses of $168,900 asserted in their Tax Court petition; (2) were not entitled to deduct legal and professional services expenses beyond the $49,549 that the IRS had allowed; and (3) were liable for a portion of the accuracy-related penalty under Sec. 6662(a) assessed by the IRS. The court found that, with respect to the portion of the deficiency relating to the legal and professional services deduction, the couple had reasonable cause for claiming the deduction and thus were not liable for the portion of the Sec. 6662 penalty relating to that deduction. Smiling, T.C. Memo. 2017-196 (10/3/17).

SIFL cents-per-mile rates issued

The IRS issued the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the second half of 2017 for purposes of Regs. Sec. 1.61-21(g), relating to the rule for valuing noncommercial flights provided as an employee fringe benefit on employer-provided aircraft. Rev. Rul. 2017-19 (10/2/17).

Petition seeking redetermination of transferee liability cannot be dismissed without entering a decision as to liability amount

An individual petitioned the Tax Court seeking a redetermination of his liability as a transferee under Sec. 6901(a) and then moved to dismiss the petition with prejudice. The Tax Court, in denying the motion to dismiss, held that it was required to decide the amount of the transferee liability because such a liability is assessed, paid, and collected in the same manner and subject to the same provisions and limitations as a tax deficiency. The court relied on its holding in Estate of Ming, 62 T.C. 519 (1974), and said that a dismissal of a petition for redetermination of transferee liability, just as for a redetermination of a deficiency, for any reason other than lack of jurisdiction, requires it to enter a decision as to the amount of the liability. Thus, the court ordered the parties to submit an agreed stipulated decision document. Schussel, 149 T.C. No. 16 (10/5/17).

Taxpayer who drove a cab and operated a tax prep business had unreported income and was liable for penalties

The Tax Court held that a taxpayer who drove vehicles for hire or as an employee and operated a tax return preparation business failed to carry his burden of establishing that (1) he was entitled to deduct the claimed Schedule A, Itemized Deductions, expenses at issue; (2) he did not have the unreported Schedule C, Profit of Loss From Business, gross receipts from the businesses that he operated; and (3) he was entitled to deduct certain claimed Schedule C expenses. The court also found that the taxpayer failed to carry his burden of proving that he was not liable for the accuracy-related penalties assessed by the IRS for the years at issue. Justine, T.C. Memo. 2017-198 (10/4/17).

Uncle is entitled to dependency deduction and child-related credits but cannot apply tool expenses toward education credit

The Tax Court held that a taxpayer was entitled to a dependency exemption, a child and earned income tax credit, and a filing status of head of household with respect to his niece. However, the court also held that, while the taxpayer was entitled to an education credit for the year at issue, he could not include expenses for tools used in a weekly workshop in calculating the credit because those expenses did not constitute fees paid to an eligible education institution. Ochoa, T.C. Summ. 2017-78 (10/4/17).

Tax Court rejects taxpayer’s frivolous arguments and warns against future ones

The Tax Court granted an IRS motion to dismiss a taxpayer’s petition, noting that the taxpayer had failed to assert any error in an IRS notice of deficiency and had drafted a rambling collection of tax-protester arguments. According to the court, the taxpayer’s arguments were frivolous, and the court cautioned him that raising similar arguments in the future would subject him to penalties under Sec. 6673. Zentmyer, T.C. Memo. 2017-197 (10/4/17).

IRS determination of employment status can be made only with respect to individuals

The Office of Chief Counsel advised that it agreed with Tax Exempt and Government Entities Division counsel that, based on Sec. 7436(a)(1), an IRS determination of employment status can be made only with respect to individuals. CCA 201740020 (10/6/17).

Puerto Rico and Virgin Islands residents get relief from physical-presence test

The IRS provided relief to residents of Puerto Rico and the U.S. Virgin Islands who evacuated or could not return because of Hurricane Irma or Hurricane Maria, so that they would not lose their status as “bona fide residents” of Puerto Rico or the U.S. Virgin Islands for tax filing and reporting purposes. The IRS extended the usual 14-day allowable absence period for the residency test to 117 days, beginning Sept. 6, 2017, and ending Dec. 31, 2017. Notice 2017-56 (10/4/17).

IRS PROCEDURE

Treasury to withdraw or amend 8 burdensome regulations

The Treasury Department announced that it will withdraw or amend tax regulations identified as burdensome under Executive Order 13789. Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (10/4/17) (see related news story).

IRS cannot assess underpayment interest and penalties on ordered restitution

The Tax Court held that Sec. 6201(a)(4) does not authorize the IRS to add underpayment interest or failure-to-pay additions to tax to a Title 18 restitution award that a couple were ordered to pay to the IRS as a result of underreporting their income for several years. The court also concluded that the IRS could not assess or collect underpayment interest or additions to tax without first determining the couple’s civil tax liabilities. Klein, 149 T.C. No. 15 (10/3/17).

Sec. 7508A suspends time for making assessments relating to taxpayers affected by Florida hurricane

With respect to a question relating to Florida hurricane disaster relief, the Office of Chief Counsel advised that Sec. 7508A would suspend the time for making assessments for the postponement time that applies to this disaster. The Chief Counsel’s Office also noted that there are examples in the regulations under that section. CCA 201740021 (10/6/17).

PARTNERSHIPS

Court finds that no party with legal standing remained to pursue litigation after general partner pleaded guilty to felony counts

The sole general partner who was also the tax matters partner of two limited partnerships pleaded guilty to felonies and consented to a state-appointed receivership, ceasing to be a general partner. The receiver petitioned for an adjustment of each partnership’s partnership items, which the Tax Court rejected. The court granted the IRS’s motions to dismiss for lack of jurisdiction after finding that the receivership had been terminated by state of New Jersey. Thus, there remained no party with legal standing to pursue the litigation. Cambridge Partners, L.P., T.C. Memo. 2017-194 (10/2/17). 

TAX ACCOUNTING

National Office issues guidance on calculating the alternative simplified research credit

The IRS National Office advised that, pursuant to Sec. 45C(c)(2), a taxpayer was required to include its prior-year qualified clinical testing expenses (QCTEs) when calculating the research credit by the alternative simplified credit (ASC) under Sec. 41(c)(5). According to the National Office, QCTEs must be included in base amount computations under Sec. 41(c), including the three-year-average base computation under Sec. 41(c)(5) applicable to the ASC. TAM 201740018 (10/6/17).