Document summaries for the week of April 9, 2018
ESTATES, TRUSTS & GIFTS
IRS to issue regs. clarifying effective date for trusts with income payable to a former spouse
The IRS announced that it intends to issue regulations clarifying the effective date provisions of the repeal of Sec. 682 by P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (TCJA), and its interaction with the repeal of Sec. 71’s treatment of alimony. According to the IRS, the regulations will provide that Sec. 682, as in effect before Dec. 22, 2017 (the date of TCJA’s enactment), will continue to apply to trust income payable to a former spouse who was divorced or legally separated under a divorce or separation instrument executed on or before Dec. 31, 2018, unless the instrument is modified after that date and the modification provides that the changes made by the TCJA apply to the modification. Notice 2018-37 (4/13/18).
Irregularities in taxpayer’s claimed mileage preclude deduction for vehicle costs
The Tax Court held that a taxpayer who was renovating properties and deducted related vehicle mileage costs based on the IRS standard mileage rate failed to meet the strict substantiation requirements of Sec. 274(d) and thus was not entitled to the deduction. The court stated that the taxpayer’s mileage summary contained too many irregularities, errors, and improbable entries to be considered reliable. Dimitrov, T.C. Summ. 2018-21 (4/9/18).
Loan from taxpayer’s IRA was a prohibited transaction in 2005, causing the account to cease being an IRA
The Tax Court held that a taxpayer’s income for 2013 did not include $98,000 resulting from a distribution of two promissory notes from her individual retirement account (IRA), and thus she was not liable for the Sec. 72(t) 10% penalty tax or the Sec. 6662 penalty. Both parties and the court determined that a loan in 2005 from the taxpayer’s IRA to her father was a prohibited transaction, and the account therefore had ceased to be an IRA. Thus, the taxpayer’s income for 2013 should not include a taxable distribution from the account, the court held. Marks, T.C. Memo. 2018-49 (4/10/18).
Taxpayer cannot deduct losses relating to ranching operations; court sustains penalties
The Tax Court, after applying the nine factors in Regs. Sec. 1.183-2(b), held that a taxpayer did not have an actual, honest profit objective in operating his ranching activities for the years at issue, and thus the deductions relating to those activities were limited by Sec. 183. The court upheld penalties after finding that the taxpayer failed to establish reasonable cause and good faith with respect to the resulting tax underpayments. Williams, T.C. Memo. 2018-48 (4/9/18).
Court sustains levy on taxpayer who failed to file returns for 2005 through 2010
The Tax Court sustained IRS notices of intent to levy and federal tax lien to a taxpayer who failed to file federal tax returns for 2005–2010. The court concluded that the IRS settlement officer involved in the case had met the verification requirements of Sec. 6330 and did not abuse her discretion. Williams, T.C. Memo. 2018-50 (4/10/18).
Court rejects couple’s attempt to avoid liquidating retirement funds to pay taxes
The Tax Court held that the IRS did not abuse its discretion in (1) filing notices of federal tax lien for a couple’s unpaid federal income tax liabilities for the tax years 2011–2013, and (2) issuing a notice of intent to levy on the couple’s unpaid federal income liability for the 2013 tax year. The court found that the couple, a university professor and a law firm partner whose taxable income during those periods ranged from $345,000 to $441,000 per year, had access to their retirement funds, which the IRS wanted them to liquidate despite the couple’s arguments to the contrary, and thus the rejection of the couple’s proposed installment agreement was not an abuse of discretion, especially because the couple had consistently failed to make estimated tax payments. Scanlon, T.C. Memo. 2018-51 (4/12/18).
Cash awards received from a state’s student loan repayment program are not income to recipients
The Office of Chief Counsel advised that cash award payments received by doctors who received payments from a state’s student loan repayment program were excludable from the doctors’ gross income under Sec. 108(f)(4). Further, the Chief Counsel’s Office advised, the state was not required to file or furnish any information returns reporting payments made to recipient doctors. CCA 201815016 (4/13/18).
New guidance reflects law change to housing credit ceiling and corrects error in trust and estate AMT amount
The IRS issued a procedure that modifies and supersedes Sections 3.08 and 3.10 of Rev. Proc. 2018-18, to reflect an increase in the state housing credit ceiling enacted as part of the Consolidated Appropriations Act of 2018, P.L. 115-141, and to correct an error in the alternative minimum tax phaseout threshold amount for estates and trusts. The phaseout threshold amount should have been $81,900, not $500,000. Rev. Proc. 2018-22 (4/13/18).
STATE & LOCAL
IRS procedure addresses certain remedial actions bond issuers may take
The IRS issued a procedure that provides certain remedial actions that issuers of state and local tax-exempt bonds and other tax-advantaged bonds may take to preserve the tax-advantaged status of the bonds when nonqualified uses of the bond proceeds occur. The revenue procedure applies to a nonqualified use that occurs on or after April 11, 2018, and may be applied to a nonqualified use that occurs before April 11, 2018. Rev. Proc. 2018-26 (4/11/18).
Taxpayers receiving advance payments may continue to rely on Rev. Proc. 2004-34
In light of the enactment by P.L. 115-97 of a new provision in Sec. 451(c) dealing with the tax treatment of advance payments, the IRS has provided transitional guidance until more permanent guidance can be issued. According to the IRS, a taxpayer receiving advance payments, regardless of whether the taxpayer has applicable financial statements, may continue to rely on Rev. Proc. 2004-34 until further guidance is issued. Notice 2018-35 (4/12/18).
Sec. 1274A inflation-adjusted amounts announced
The IRS announced the Sec. 1274A inflation-adjusted numbers for cash-method debt instruments and qualified debt instruments. Inflation-adjusted amounts for Sec. 1274A for 2018 are $5,831,500 for qualified debt instruments and $4,165,300 for cash-method debt instruments. Rev. Rul. 2018-11 (4/11/18).
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.