Document summaries for the week of Sept. 25, 2017

C CORPORATIONS

Company owner received unreported dividend income; company liable for penalties for underreporting income

The Tax Court held that an individual received dividend income from his wholly owned C corporation, which he failed to report on his tax return, in the amounts of $82,461 and $102,507 for 2011 and 2012, respectively. The court also concluded that the C corporation was liable for Sec. 6662 penalties for both years because it exhibited a lack of ordinary and reasonable care by (1) improperly claiming cost of goods sold allowances; (2) improperly claiming deductions for advertising and other expenses; (3) improperly claiming a net operating loss deduction for 2012; and (4) not maintaining adequate books or records to substantiate the cost of goods sold allowances and the deductions. Western Property Restoration, Inc., T.C. Memo. 2017-190 (9/26/17).

Federal tax liens filed against taxpayer for FICA tax liability are proper

In a heavily redacted memorandum, the Chief Counsel’s Office responded to a request for technical assistance relating to a federal tax lien for the assessment of a business’s FICA tax liability that the notices of federal tax lien filed against the taxpayer were proper. CCA 201739011 (9/29/17).

INDIVIDUALS

Court denies innocent spouse relief

The Tax Court held that an individual was not entitled to innocent spouse relief. While two factors weighed in favor of, and two factors against, granting relief, the court said its decision was heavily influenced by the totality of the circumstances, and that it would not be inequitable to deny the taxpayer relief, particularly since he knew or had reason to know that his ex-spouse would not pay the tax liabilities reported on their 2011 joint tax return. Cojocar, T.C. Memo. 2017-189 (9/26/17).

Taxpayer’s failure to show he practiced law precludes deductions for alleged law practice

The Tax Court held that a couple were not entitled to deduct expenses on Schedule C, Profit or Loss From Business, attributable to a law practice that the husband allegedly conducted with his son because there was no evidence that they practiced law in either jurisdiction where they claimed to have done so . The court also held that the couple were not entitled to deduct rental real estate losses in excess of amounts allowed by the IRS because the wife did not qualify as a real estate professional during the years at issue. Simonelli, T.C. Memo. 2017-188 (9/26/17).

Couple’s refund reduced by advance payments of premium assistance tax credits to dependent son

The Tax Court held that advance payments of premium assistance tax credits were made on behalf of a couple’s dependent son under Sec. 36B despite the son’s claims to the contrary and despite his denial that he ever received a Form 1095-A, Health Insurance Marketplace Statement, showing the payments. Because the couple’s income made them ineligible for the premium assistance tax credit, the court agreed with the IRS that their tax liability should be increased, reducing their claimed refund. Gibson, T.C. Memo. 2017-187 (9/25/17).

Per diem rates issued for 2017–2018

The IRS issued its annual updates of per diem rates for use in substantiating expenses when traveling away from home on or after Oct. 1, 2017. Notice 2017-54 (9/25/17) (see related news story).

Settlement proceeds on account of disability-based discrimination are includible in income

The Tax Court held that a couple could not exclude from gross income under Sec. 104(a)(2), as damages received “on account of personal physical injuries or physical sickness,” proceeds that the wife received under a settlement agreement with her employer, because those proceeds compensated the wife for damages she suffered on account of disability-based discrimination, reprisal for engaging in protected Equal Employment Opportunity activity, and an improper medical inquiry. Since no portion of the settlement proceeds represented damages on account of personal injury or physical sickness, the entire proceeds were includible in the couple’s income. Stepp, T.C. Memo. 2017-191 (9/27/17).

Taxpayer who submitted returns listing zero income was liable for frivolous return penalties

The Tax Court held that a taxpayer was liable for two of three frivolous return penalties that the IRS assessed under Sec. 6702(a), after the IRS conceded that one of the penalties was assessed in error.  The court agreed with the IRS that the taxpayer’s actions in submitting tax returns and/or Forms 1099 with zero income and claiming only withholding warranted the penalty assessments. Whitaker, T.C. Memo. 2017-192 (9/27/17).

Erroneous claim of single status by married taxpayer does not preclude couple from switching to a joint return

The Tax Court held that a 2012 return filed by a married taxpayer, which erroneously reported the filing status as “single,” did not constitute a separate return within the meaning of Sec. 6013(b). Thus, the taxpayer and his wife were entitled to file a joint tax return in 2016 for 2012 and pay their 2012 tax at the joint tax return rates and not the married-filing-separately rates as the IRS had argued. Camara, 149 T.C. No. 13 (9/28/17).

Final regs. on gambling winnings from horse races, dog races, and jai alai

Final regulations were issued regarding the withholding from, and information reporting on, certain payments of gambling winnings from horse races, dog races, and jai alai and on certain other payments of gambling winnings. T.D. 9824 (9/27/17).

INTERNATIONAL

IRS issues guidance for financial institutions required to collect TINs and birthdates

The IRS announced that foreign financial institutions (FFIs) in Model 1 Intergovernmental Agreement (IGA) jurisdictions will not be in significant noncompliance with an applicable IGA during 2017, 2018, and 2019 solely as a result of a failure to report U.S. taxpayer identification numbers (TINs) for preexisting accounts, provided the FFI reports the account holder’s date of birth, makes annual requests for the TIN, and searches its electronic records for missing U.S. TINs before reporting information on 2017. The IRS also delayed, with respect to U.S. financial institutions, the start date of the requirement to collect foreign TINs for account holders to Jan. 1, 2018; provided a phase-in period for obtaining foreign TINs from account holders documented before Jan. 1, 2018; and narrowed the circumstances in which a foreign TIN is required. Notice 2017-46 (9/25/17).

IRS updates lists of countries to which Rev. Proc. 2016-18 applies

The IRS supplemented the lists of (1) countries with respect to which the reporting requirements of Regs. Secs. 1.6049-8(a) and 1.6049-4(b)(5) (relating to bank interest income of certain nonresident alien individuals) apply, and (2) countries with which Treasury and the IRS have determined that an automatic exchange of that interest income information is appropriate. Two countires (the Faroe Islands and Greenland) were added to the first list and two countries (Croatia and Panama) were added to the second list. Rev. Proc. 2017-46 (9/29/17).

IRS PROCEDURE

Chief Counsel recommends advocating for taxpayer refund in TAO

The Office of Chief Counsel was asked to advise whether the IRS should request a Taxpayer Assistance Order (TAO) for a taxpayer requesting a refund. The Chief Counsel’s Office did not see any legal prohibition against asking Appeals to expedite the review of the taxpayer’s refund claim and recommended that, in the TAO, the IRS should advocate for the taxpayer and explain why the refund should be granted. CCA 201739012 (9/29/17).

Analysis of credit of tax overpayment for refund purposes begins with Sec. 7422(d)

In response to a question about crediting a tax overpayment, a lawyer in the Office of Chief Counsel advised that he or she thinks it should works  as follows: Start with Sec. 7422(d), which provides that the credit of an overpayment is deemed to be the “payment” for refund suit purposes, and then take a look at Sec. 6407, which provides the date on which a credit is deemed made (it is the date on which the Treasury secretary first authorizes the scheduling of the overassessment). Accordingly, the lawyer agreed that the applicable “payments” applied to and were made when the taxpayer’s return was processed and the overpayment was approved. CCA 201739013 (9/29/17).

Chief Counsel explores narrow exceptions to IRS’s final action on a refund claim

Addressing a question involving a supplemental refund claim, the Office of Chief Counsel advised that a supplemental claim will not generally be considered an amendment of an original claim if the IRS took final action on the original claim. However, the Chief Counsel’s Office noted certain narrow exceptions to the rule concerning the IRS’s final action, including that the IRS’s disallowance of a claim will not constitute final action  if the IRS did not fully consider all grounds for the refund claim. CCA 201739014 (9/29/17).

Portion of taxpayer’s refund claim limited by Sec. 6511(b)(2)(B)

The Office of Chief Counsel was asked whether the period of limitation for a refund claim was opened by Sec. 6511(d)(2), which provides a special limitation period for a net operating loss. The Chief Counsel’s Office advised that the answer was “no” and, therefore, the taxpayer  could only use the two-year period provided by Sec. 6511(a) and, while the taxpayer’s claim was timely, a portion of the claim was disallowed under the limitation period  in Sec. 6511(b)(2)(B). CCA 201739015 (9/29/17).

IRS issues tax relief for certain CFC property temporarily stored in U.S. following hurricanes

In response to the damage caused by Hurricane Irma and Hurricane Maria, the IRS advised that certain controlled foreign corporations (CFCs) may need to transport property described in Sec. 1221(a)(1), and located in areas affected by the hurricanes, to the United States for safekeeping. As a result, the IRS is providing relief for  property that would otherwise constitute U.S. property and be subject to certain unfavorable tax rules for CFCs’ tax year quarters ending on or after Sept. 5, 2017 and on or before Jan. 31, 2018. Notice 2017-55 (9/27/17).

MISCELLANEOUS

Hurricane tax relief enacted

Legislation provides tax incentives for individuals and businesses affected by recent hurricanes, including allowing withdrawals and loans from qualified plans, creating an employee retension credit, and easing casualty loss rules for eligible taxpayers. The act also extended aviation taxes through March 31, 2018. Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63 (9/29/17).

S CORPORATIONS

Farm rental income received by couple’s wholly owned S corp. is not subject to self-employment tax

The Tax Court held that a couple had established that rent their wholly owned S corporation received from renting farm land to an unrelated entity, so that entity could raise chickens according to the entity’s specifications, was at or below fair market value. The court concluded that, because the IRS failed to show a sufficient nexus between the rental income and the couple’s obligations to participate in the production or management of the production of agricultural commodities, the rent the couple received was not includible in their net self-employment income. Martin, 149 T.C. No. 12 (9/27/17).

TAX ACCOUNTING

IRS gives drought-stricken farmers and ranchers more time to replace livestock for Sec. 1033 purposes

The IRS issued guidance extending the replacement period under Sec. 1033(e) for livestock sold on account of drought during the 12-month period ending Aug. 31, 2017. Notice 2017-53; IR-2017-164 (9/27/17).