Document summaries for the week of April 2, 2018

EMPLOYEE BENEFITS

IRS requests comments on potential expansion of pension plan determination letter program

The IRS is requesting comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond the provision of determination letters for initial qualification and qualification upon plan termination. In reviewing those comments, the Department of the Treasury and the IRS will consider the factors regarding the scope of the determination letter program set forth in Section 4.03(3) of Rev. Proc. 2016-37 and will issue guidance if they identify any additional types of plans for which plan sponsors may request determination letters during the 2019 calendar year. Notice 2018-24 (4/5/18).

IRS cannot recharacterize DISC commissions paid to Roth IRA

The First Circuit reversed a Tax Court decision and held that the taxpayers’ contributions to their Roth IRAs were not excess contributions subject to excise tax because their use of domestic international sales corporations (DISCs) and Roth IRAs fell within the congressionally sanctioned purposes for both. Benenson, No. 16-2066 (1st Cir. 4/6/18).

IRS changes Form 5310 user fee

The IRS changed one user fee set forth in Appendix A of Rev. Proc. 2018-4, Schedule of User Fees, with respect to applications on Form 5310, Application for Determination for Terminating Plan. That user fee is reduced from $3,000 to $2,300, effective Jan. 2, 2018. Applicants who paid the $3,000 user fee listed in Rev. Proc. 2018-4 will receive a refund of $700. Rev. Proc. 2018-19 (4/2/18).

 

EXEMPT ORGANIZATIONS

Court sustains IRS revocation of tax exempt status of Association for Honest Attorneys

The Tax Court sustained the IRS’s determination to revoke, effective as of Jan. 1, 2010, the tax-exempt status of the Association for Honest Attorneys (AHA) because, effective as of that date, AHA no longer operated in accordance with Sec. 501(c)(3). The court found that the individual who operated AHA (who also had been sanctioned by Kansas for the unauthorized practice of law) had made payments from AHA's bank account for her son's tuition to military school, veterinary bills, and to exhume and DNA test her father’s remains. Association for Honest Attorneys, T.C. Memo. 2018-41 (4/3/18).

 

INDIVIDUALS

Court denies vehicle and other expense deductions for unsubstantiated expenses

The Tax Court held that a couple was not entitled to deductions claimed on Schedule A, Itemized Deductions, for unreimbursed employee business expenses in excess of the amounts the IRS allowed because the couple generally failed to substantiate the disallowed deductions. With respect to deductions relating to the couple’s vehicle, the court found that they failed to submit for any year at issue any documentation, such as mileage logs, odometer readings, diaries, or trip sheets, to substantiate the extent to which the vehicle was actually used for business purposes. Edwards, T.C. Memo. 2018-44 (4/4/18).

Expectation of benefit from easement donation precludes charitable deduction

The Tax Court held that, because a taxpayer donated an easement expecting to receive a substantial benefit, no charitable-contribution deduction was allowed. Alternatively, the court also noted that an easement must have value for it to generate a charitable-contribution deduction and, because there was no evidence in the record of sales of easements comparable to the easement the taxpayer contributed, the value of the easement was equal to the value of the land before the easement minus the value of the land after the easement and that value was zero. Wendell Falls Development, LLC, T.C. Memo. 2018-45 (4/4/18).

Mileage and travel expenses relating to renovation project are capital expenditures

The Tax Court held that a couple could not deduct mileage and travel expenses from the husband’s activity of remodeling a house that was uninhabitable, under either Sec. 162 or Sec. 212. The court also found that because the remodeling project added to the property’s value and extended its life, all expenses from the project were capital expenditures. Havener, T.C. Summ. 2018-17 (4/4/18).

Court lacked jurisdiction to examine IRS remittance of tax overpayment to SBA

The Tax Court sustained an IRS notice of determination and a related collection action against a taxpayer who owed taxes for 2012 and 2014. The court also said that it lacked jurisdiction to review the taxpayer’s argument that the IRS improperly remitted a tax overpayment by the taxpayer’s wholly owned company to the Small Business Administration (SBA) to cover a delinquency company owed to the SBA. Vest, T.C. Summ. 2018-18 (4/4/18).

Court sustains IRS levy; rejects taxpayer’s tax protester arguments

The Tax Court granted an IRS motion for summary judgment and sustained the IRS’s collection by levy of a taxpayer’s unpaid liability for assessed Sec. 6702 penalties for 2011 and unpaid income tax liability for 2012. The court rejected the taxpayer’s incomprehensible argument regarding a Pennsylvania state court judgment, as well as the taxpayer’s tax-protester arguments, and found that no genuine dispute existed as to any material fact and, thus, the IRS’s determination to collect the taxpayer’s unpaid liabilities by levy should be sustained. Jennette, T.C. Memo. 2018-47 (4/5/18).

Taxpayer liable for penalties for late return filing and late tax payment

The Tax Court held that: (1) a taxpayer was liable for the additions to tax under Sec. 6651(a)(1), Sec. 6651(a)(2), and Sec. 6654(a) for 2013; (2) the IRS Appeals Office did not did abuse its discretion in not applying a $16,000 remittance the taxpayer made against the taxpayer’s 2013 individual tax liability; and (3) the IRS Appeals Office did not abuse its discretion in sustaining the IRS notice of federal tax lien filing for 2012 and 2013. The court found that the taxpayer was liable for the penalties because she did not have reasonable cause for the late filing and payment. Jivani, T.C. Summ. 2018-20 (4/5/18).

Court upholds IRS determination to collect by levy a taxpayer’s unpaid tax liabilities

The Tax Court upheld an IRS determination to collect by levy a taxpayer’s unpaid tax liabilities for 2011, 2013, 2014, and 2015. The court noted that the taxpayer failed to respond to an IRS motion as ordered by the Tax Court and also failed to demonstrate that there was a genuine dispute over any material fact to be resolved at trial. Moreno, T.C. Summ. 2018-19 (4/5/18).

Car dealership manager can deduct mileage expenses for travel to auto auctions

The Tax Court held that certain employee business expense deductions for mileage were deductible by a taxpayer, who was a manager at a car dealership and who was required by his job to go to auto auctions regularly. The court also held that the taxpayer was not liable for IRS penalties because (1) after allowing the mileage deductions, the taxpayer may not have still had a substantial understatement of income tax, and (2) the IRS failed to include evidence that the assessed penalties had been approved by an IRS supervisor as required under Sec. 6751(b)(1). Rademacher, T.C. Memo. 2018-43 (4/4/18).

Attorney liable for tax deficiencies and penalties after failing to property substantiate car and truck expense deductions

The Tax Court held that an attorney who was licensed in California and Ohio and who represented clients before the Tax Court did not adequately establish each element of his claimed car and truck expense deduction and thus was not entitled to the deduction. The court also concluded that the attorney did not act with reasonable cause and in good faith in taking the deduction and thus was liable for IRS penalties. Velez, T.C. Memo. 2018-46 (4/5/18).

Couple’s losses from charter aircraft activity are subject to passive loss restrictions

The Tax Court held that (1) a couple’s claimed flow-through loss deduction resulting from a charter aircraft activity was subject to the Sec. 469 passive activity loss restrictions, and (2) the husband was liable for an accuracy-related penalty. The court found that, even if the husband had proven that he devoted the required 100+ hours to the charter aircraft activity, he did not meet the second prong of the “significant participation” test, which required that he devote 500+ hours in the aggregate to significant participation activities. Brumbaugh, T.C. Memo. 2018-40 (4/3/18).

Alimony deduction denied but taxpayer’s reliance on CPA precludes penalty

The Tax Court held that, because a taxpayer failed to establish that his obligation to pay his ex-wife’s share of their joint debts (without the right of contribution) would terminate upon her death, he had not satisfied Code Sec. 71(b)(1)(D) and could not deduct the payments as alimony. However, the court also held that the taxpayer was not liable for penalties because he established that (1) he reasonably believed that the CPA he used to prepare his returns was a competent tax adviser, (2) he had provided the CPA with adequate information, and (3) he relied on the CPA in good faith. Davidson, T.C. Memo. 2018-38 (4/2/18).

Taxpayer must include annuity from CalPERS in income

The Tax Court held that a taxpayer was required to report as income a large portion of the annuity payments received from the California Public Employees Retirement System (CalPERS), a qualified employer retirement plan. The court rejected the taxpayer’s argument that the inclusion of those amounts in his income was unfair because it would take him 30 years to recover his investment in the contract, at which time he would be 85 years old. Oliver, T.C. Summ. 2018-16 (4/3/18).

Funds from related companies used to pay off loans of wholly owned business were really taxable distributions and wages

The Tax Court held that the owner of a real estate brokerage firm, which racked up a lot of liabilities trying to build a hospital in Algeria and used funds from related companies to pay off those loans, could not deduct the payments on those loans as bad debts. The court agreed with the IRS that those payments were really distributions and wage income and that the owner owed taxes on those amounts. Povolny Group, Inc., T.C. Memo. 2018-37 (4/2/18).

Retirement benefits received from Mary Kay are subject to self-employment tax

The Tax Court held that retirement benefits a former national sales director received from Mary Kay, Inc. were subject to self-employment tax. The court cited its decision in Peterson, T.C. Memo. 2013-271, in which it held that payments under the same retirement program were subject to self-employment tax. Sherman, T.C. Summ. 2018-15 (4/2/18).

Auto body technician underreported income from auto shop

The Tax Court held that, to determine income an auto body technician received from the auto shop where he worked, the 12 checks that the auto shop issued to him were the best evidence of his income from the auto shop. As a result, the court concluded that the taxpayer’s income from the auto shop was $9,134 for 2012 and, rather than underreporting his income, the taxpayer had overreported it. Trimble, T.C. Memo. 2018-36 (4/2/18).

Taxpayer cannot deduct losses from hunting consulting business

The Tax Court sustained IRS determinations disallowing deductions for a taxpayer’s Schedule C expenses from a hunting consulting business after finding the taxpayer’s testimony at trial to be mostly irrelevant and unhelpful. The court said that the taxpayer failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith for the underpayment for the tax year at issue and thus found the taxpayer liable for the Sec. 6662(a) accuracy-related penalty. Vallejo, T.C. Memo. 2018-39 (4/3/18).

 

INTERNATIONAL

IRS provides guidance on implementation of revised Sec. 965

The IRS issued additional guidance regarding the implementation of Sec. 965 as amended by P.L. 115-97, the Tax Cuts and Jobs Act (TCJA), which applies to deferred foreign income corporations. The guidance also announces relief from estimated tax penalties in connection with the amendment of Sec. 965 and the repeal of Sec. 958(b)(4) by TCJA. Notice 2018-26 (4/2/18).

IRS to provide interim regulations on recently enacted Sec. 1446(f)

The IRS announced that it intends to issue regulations under recently enacted Sec. 1446(f) regarding withholding on a disposition by a foreign person of a partnership interest that is not publicly traded. In the announcement, the IRS provides interim guidance that taxpayers may rely on pending the issuance of regulations. Notice 2018-29 (4/2/18).

Update to waiver of Sec. 911 time requirements for countries with adverse conditions

The IRS issued a procedure that provides a waiver of the time requirements for individuals electing to exclude their foreign earned income from gross income as a result of the individual having to leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. No country was added to the list of waiver countries for tax year 2017; however, the procedure adds Turkey to the list of waiver countries for tax year 2016. Rev. Proc. 2018-23 (4/6/18).

 

IRS PROCEDURE

IRS settlement officer did not abuse discretion in finding compliance with Sec. 6751(b)

The Tax Court held that there was sufficient evidence of supervisory approval of a trust fund recovery penalty so it was not an abuse of discretion for an IRS settlement officer (SO) to find compliance with Sec. 6751(b), which requires written supervisory approval of a penalty prior to assessment. The court concluded that the verification of compliance with Sec. 6751(b), which is required by Sec. 6330(c)(1), does not require an analysis of the immediate supervisor’s thought process, but only verification that the supervisor approved the initial determination of the penalty in writing. Blackburn, 150 T.C. No. 9 (2018).

Prop. regs. would implement passport denial rules

The IRS issued proposed regulations to implement the requirement of the Fixing America’s Service Transportation (FAST) Act, P.L. 114-94, that the State Department deny a passport (or the renewal of a passport) in the case of an individual if notified by the IRS that the individual has been certified as having a seriously delinquent tax debt. REG-129260-16 (4/2/18).

 

PARTNERSHIPS

Tax Court has jurisdiction over IRS adjustments disallowing losses from purported partnership

The Tax Court was asked to decide whether it had jurisdiction under Sec. 6221 to enter a decision concerning a deficiency and penalty relating to IRS adjustments that disallowed losses passing through to a taxpayer from a purported partnership in which he held an interest. The court concluded that Sec. 6221 did not limit its jurisdiction in the case because the purported partnership was not a partnership, nor did it file a federal partnership return for the year at issue; thus the purported loss deductions claimed as passthrough items from that entity were not partnership items under Sec. 6221 and the penalties arising from the IRS’s disallowance of those deductions did not relate to an adjustment to a partnership item. Marcy, T.C. Memo. 2018-42 (4/3/18).

 

TAX ACCOUNTING

IRS provides guidance on recently enacted business interest limitation rules

The IRS has provided guidance for computing the business interest expense limitation under amended Sec. 163(j), which was changed by P.L. 115-97, the Tax Cuts and Jobs Act. In general, Sec. 163(j) imposes a limitation on deductions for business interest incurred by certain large businesses and, for most large businesses, business interest expense is limited to any business interest income plus 30% of the business’s adjusted taxable income. Notice 2018-28 (4/2/18) (see related news story).

Newsletter Articles

SPONSORED REPORT

Tax reform changes are now in effect

With all the recent tax law changes, this year it’s more important than ever to make sure your clients’ tax situations are squared away before year end. This report provides necessary guidance to ensure 2019 starts without a hitch.

DEDUCTIONS

Understanding the new Sec. 199A business income deduction

The new deduction allows certain business owners to keep pace with the significant corporate tax cut provided by the Tax Cuts and Jobs Act.