Document summaries for the week of Aug. 13, 2018
Conversion of Freddie Mac participation certificates to be tax-free
The IRS issued guidance on the tax treatment of the conversion of participation certificates issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) for new uniform mortgage-backed securities to be issued by both Freddie Mac and the Federal National Mortgage Association (Fannie Mae). The conversion will not constitute a taxable exchange of property for purposes of Sec. 1001, the IRS ruled. Rev. Rul. 2018-24 (8/17/18).
Eighth Circuit reverses Tax Court in transfer-pricing case
The Eighth Circuit reversed a Tax Court decision, agreeing with the IRS that the lower court had applied the wrong transfer-pricing method when calculating arms'-length royalty rates for intercompany licenses. It remanded the case to the Tax Court for further proceedings.
Medtronic, Inc., No. 17-1866 (8th Cir. 8/16/18).
IRS extends deadline to submit opinion letter applications for certain defined contribution plans
The IRS modified Rev. Proc. 2017-41 to extend to Dec. 31, 2018, the deadline for submitting on-cycle applications for opinion letters for preapproved defined contribution plans for the third six-year remedial amendment cycle. Under Rev. Proc. 2017-41, the submission period had been scheduled to expire on Oct. 1, 2018. Rev. Proc. 2018-42 (8/15/18).
IRS can assess trust fund recovery penalties against owner while corporation is paying off the liability
The Tax Court upheld a Notice of Federal Tax Lien filed against a taxpayer for trust fund recovery penalties that had been assessed for unpaid employment taxes of a corporation of which the taxpayer was an officer and the sole shareholder. The court noted that, while the corporation had an installment agreement with the IRS and was making payments on the employment tax liabilities, Sec. 6672 allows the IRS to also collect against the taxpayer until the liabilities are paid in full. Bletsas, T.C. Memo. 2018-128 (8/14/18).
Court rejects majority of a couple’s deductions that led to reporting negative AGI on several tax returns
The Tax Court held that a couple were taxable on a settlement payment the husband received from Veterans Affairs as a result of a claim of discrimination and rejected the couple’s claim that the settlement resulted from injuries the husband suffered while he was stationed in Bosnia. The court also concluded that the couple did not qualify as real estate professionals, failed to report taxable interest income, failed to report rental income from numerous rental properties, did not properly substantiate many deductions taken on several tax returns that showed negative adjusted gross income, and were liable for various penalties. Smith, T.C. Memo. 2018-127 (8/13/18).
Couple liable for penalties for substantially understating tax liability
The Tax Court held that a couple who engaged in real estate activities and who operated a home care business were not entitled to deduct expenses relating to those businesses because they failed to provide any evidence at trial to substantiate the expenses. The court also upheld the IRS’s assessment of a 20% accuracy-related penalty because the couple substantially understated their income tax liability. Whiteford, T.C. Summ. 2018-39 (8/13/18).
Court rejects tax protester arguments and upholds tax deficiency and penalty
The Tax Court held that a taxpayer who filed an amended 2011 tax return filled out with zeros and the terms “unknown” and “n/a,” was liable for taxes owed on W-2 and gambling income reported by its payers to the taxpayer and the IRS. The court also upheld penalties assessed on the taxpayer after rejecting his arguments that his wages and gambling income were not taxable and that the requirement to file a tax return violated constitutional rights protecting taxpayers against self-incrimination. Canzoni, T.C. Memo. 2018-130 (8/15/18).
Couple’s failure to sufficiently document loans precludes bad debt deduction
The Tax Court held that a couple could not take bad debt deductions for loans made to a business where the husband did not obtain or request formal promissory notes documenting the loans and could not provide any fixed repayment schedule for them. The court found that that the transfers did not create bona fide debt. Advances are made to an insolvent debtor, as in this case, generally qualify as capital contributions or gifts, not debts for tax purposes, the court stated. Yaryan, T.C. Memo. 2018-129 (8/15/18).
IRS issues September 2018 applicable federal rates
The IRS issued the applicable federal rates for September 2018, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate, determined as prescribed by Sec. 1274. Rev. Rul. 2018-23 (8/17/18).
IRS issues monthly national average bronze premium
The IRS issued the 2018 monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through health care exchanges, for taxpayers to use in determining their maximum individual shared-responsibility payment under Sec. 5000A(c)(1)(B). The amount is $283 per individual and $1,415 for a shared-responsibility family with five or more members. Rev. Proc. 2018-43 (8/16/18).
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.