Document summaries for the week of Sept. 18, 2017
Guidance issued on examination of R&D credit expenses
The IRS’s Large Business & International division provided a safe-harbor method for determining the correct amount of a taxpayer’s qualified research expenses (QREs) for Sec. 41 credit examinations. For taxpayers that choose to apply the directive, the IRS examiner will accept the amount of the taxpayer’s financial statement research and development costs for the credit year as the amount of QREs for that year as determined under FASB Accounting Standards Codification Topic 730, Research and Development. LB&I-04-0917-005 (9/22/17).
IRS to issue letter rulings on tax-free stock distributions
Taxpayers will be able to request letter rulings from the IRS on transactions intended to qualify as tax-free stock distributions, such as spinoffs, split-offs, and spli-ups, under a pilot program the Service announced. Rev. Proc. 2017-52 (9/21/17) (see related news story).
IRS announces revocations of exempt status
The IRS issued a list of organizations for which it has revoked its determination that they are described in Secs. 501(c)(3) and 170(c)(2). Announcement 2017-12 (9/18/17).
Payments from qualified settlement fund are includible in taxpayer’s income
The Tax Court held that a payment received by a taxpayer in 2013 from a qualified settlement fund (QSF) established by Chase Bank and certain other lenders was includible in the taxpayer’s gross income. The fund made payments to borrowers who had been harmed by Chase Bank’s and others’ banking practices and who had pending or completed foreclosures with respect to their primary residences during a certain period. The court noted that, under the terms of the agreement, none of the payments received from the QSF were for any specific financial injury or harm, and they did not include any amounts for lost equity. Ritter, T.C. Memo. 2017-185 (9/19/17).
Taxpayer is eligible for foreign earned income exclusion because Iraq was his tax home
The Tax Court held that a U.S. citizen’s tax home was Iraq and, thus, he was a qualified individual who was eligible under the provisions of Sec. 911(a) to exclude from income portions of the wages that he earned in Iraq. However, the court denied deductions for travel expenses because the taxpayer did not prove he had a business reason for the expenses. The court also denied deductions for unreimbursed nontravel expenses to purchase items for which the taxpayer failed to establish the amount of his business use or that he sought reimbursement for them. Linde, T.C. Memo. 2017-180 (9/18/17).
Tax Court denies loss deduction for foreign currency option transactions but refuses to impose penalty
The Tax Court held that a couple were not entitled to deduct a loss of more than $39 million for 2000 on offsetting foreign currency options because the underlying option transactions lacked economic substance. However, despite the fact that the husband was a CPA, lawyer, and former partner at a large tax firm, the court held that the couple were not liable for an accuracy-related penalty under Sec. 6662 because the husband made a sufficient good-faith effort to assess his 2000 income tax and reasonably relied on professional advice. To find otherwise would require the taxpayers to challenge their attorneys, seek second opinions, or try to independently monitor their advisers on complex provisions of the Code, the court stated. Tucker, T.C. Memo. 2017-183 (9/18/17).
Tax Court rejects IRS motion for summary judgment in whistleblower case
The Tax Court rejected an IRS motion for summary judgment, finding it could not determine that there was no causal connection between a whistleblower’s claim and proceeds collected by the IRS. The court said it could not conclude that the whistleblower’s information was not used in the examination of a taxpayer or in an IRS administrative or judicial action. Whistleblower 14376-16W, T.C. Memo. 2017-181 (9/18/17).
IRS was correct to apply taxpayer’s tax overpayment to prior year
The Tax Court held that the IRS was correct in treating a $711 overpayment in tax claimed by a taxpayer on his 2013 income tax return as an offset against the taxpayer’s unpaid tax for another year. As a result, the court noted, the $711 overpayment was not available to offset a deficiency determined for the taxpayer’s 2013 tax year. Williams, T.C. Memo. 2017-182 (9/18/17).
Court allows couple some deductions based on estimates but finds them liable for early distribution and accuracy-related penalties
The Tax Court held that, while a couple provided scant documentation of business and other expenses deducted on their return and that the IRS had disallowed, there was sufficient evidence to permit the court to estimate some amount of deductible expenses and the dependency deductions for the children who lived with them. However, the court upheld the IRS’s disallowance of education credits, the 10% additional tax on early retirement plan distributions, and accuracy-related penalties for the years at issue. Pokawa, T.C. Memo. 2017-186 (9/21/17).
IRS issues October 2017 AFRs
The IRS issued a ruling that prescribes various applicable federal rates (AFRs) for October 2017 for federal income tax purposes, including the adjusted AFRs, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. Rev. Rul. 2017-20 (9/19/17).
IRS provides limited waiver of fuel penalty due to Hurricane Irma
In response to shortages of ultra-low-sulfur diesel fuel caused by Hurricane Irma, the IRS announced that it will not impose a penalty on certain uses of certain adulterated fuels that do not comply with Environmental Protection Agency regulations. IR-2017-157 (9/19/17).
Prop. regs. would allow truncated SSNs on W-2s
The IRS issued proposed regulations that would permit employers to use truncated taxpayer identification numbers (TTINs) on Forms W-2, Wage and Tax Statement, issued to employees. REG-105004-16 (9/19/17) (see related news story).
PRACTICE & STANDARDS
Representation of taxpayer without husband’s consent is a conflict of interest
The Tax Court held that a volunteer lawyer’s representation of a taxpayer in a matter in which he previously represented the taxpayer’s husband was a conflict of interest. The husband’s interests were materially adverse to those of the taxpayer, and the lawyer did not obtain the husband’s written informed consent. The court concluded that, to obviate the conflict of interest, the volunteer lawyer must either withdraw as the taxpayer’s counsel or take other steps to remove the conflict. Gebman, T.C. Memo. 2017-184 (9/18/17).
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.