Document summaries for the week of Aug. 20, 2018
IRS provides initial guidance on new Sec. 162(m)
The IRS issued initial guidance on the application of Sec. 162(m), as amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The notice provides direction on the identification of covered employees and the operation of a grandfather rule included in Sec. 162(m). Notice 2018-68 (8/21/18) (see related news story).
Factoring fees and management fees were part of a tax shelter scheme and were not deductible by C corporations
The Tax Court held that a complex tax shelter scheme involving C corporations, individual shareholders in the C corporations, employee stock ownership plans, S corporations, and a partnership was in essence an attempt to eliminate the taxes on the operating profits at the C corporation level and defer indefinitely any tax on those profits at the individual shareholder level, even though the profits had been distributed ratably for each shareholder’s benefit. The court held that the C corporations’ “factoring fees” and most of their “management fees” were not deductible expenses but rather were disguised distributions of corporate profits and generally currently taxable to the individual shareholders of the C corporations as constructive dividends or as income improperly assigned to the S corporations. Pacific Management Group, BSC Leasing, Inc., T.C. Memo. 2018-131 (8/20/18).
IRS extends nondiscrimination relief for certain benefit plans
The IRS announced that it is extending the temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, by making that relief available for plan years beginning before 2020 if the conditions of Notice 2014-5 are satisfied. The IRS said it anticipates issuing final amendments to the Sec. 401(a)(4) regulations by which the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2020. Notice 2018-69 (8/24/18).
IRS issues interim and transition rules under Sec. 512(a)(6)
The IRS set forth interim and transition rules under Sec. 512(a)(6), which was enacted by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Sec. 512(a)(6) requires an organization that is subject to the unrelated business income tax and that has more than one unrelated trade or business to calculate unrelated business taxable income separately for each trade or business. The rules in the notice may be relied upon until the IRS issues proposed regulations. Notice 2018-67 (8/21/18).
ESTATES, TRUSTS & GIFTS
Effective interest rates on Farm Credit System loans
The IRS issued the 2018 list of the average annual effective interest rates on new loans under the Farm Credit System to be used in computing the special-use value of farm real property for which an election is made by an estate that values farmland under Sec. 2032A. The revenue ruling also contains a list of the states within each Farm Credit System Bank Territory. Rev. Rul. 2018-22 (8/20/18).
Couple cannot deduct losses from horse-breeding activity
The Tax Court held that a couple (1) were not entitled to deduct losses from a horse-breeding activity because it was not a trade or business engaged in for profit, and (2) were not entitled to a theft loss deduction with respect to money invested in the activity. The court also found that late-produced materials purporting to show that the couple materially participated in the horse-breeding activity were not reliable and, in fact, reduced the credibility of the couple’s testimony on other issues. Householder, T.C. Memo. 2018-136 (8/23/18).
Court rejects whistleblower’s claim that IRS was collecting monies based on his info
The Tax Court granted an IRS motion for summary judgment after the IRS provided information that it had examined bond issuances that a whistleblower claimed were not entitled to tax-exempt status, but for which it took no action and collected no proceeds. The court rejected the whistleblower’s assertion that the IRS had begun an administrative action and collected proceeds related to information he provided and was attempting to disguise that collection of proceeds. Scott, T.C. Memo. 2018-134 (8/22/18).
IRS entitled to summary judgment in whistleblower claim involving issuance of tax-exempt bonds
After finding there was no genuine issue as to any material fact and that it could render a decision as a matter of law, the Tax Court granted summary judgment to the IRS in a case involving a whistleblower who claimed that certain bonds issued as tax-exempt did not qualify as such and that he was due an award for money collected by the IRS as a result of his information. The court noted that the IRS, via sworn affidavit, stated that no proceeds were collected, and the court found that the whistleblower had presented no evidence to the contrary. Scott, T.C. Memo. 2018-133 (8/23/18).
Court denies casualty loss deduction and finds IRS did not abuse its discretion
The Tax Court denied a casualty loss deduction that a couple claimed they were entitled to as a result of: (1) a loss in equity from the sale of their residence to pay taxes that were not legitimately owed; (2) the abandonment of a negligence claim against return preparers who inaccurately reported the value of stock options granted to the taxpayer husband, resulting in overpayments of taxes; or (3) as a form of compensation for refund claims for those tax overpayments barred by the statute of limitation. The court also held that an IRS settlement officer did not abuse his discretion by determining that the couple were not entitled to a credit of $566,889 and by issuing a notice of determination sustaining a proposed levy action against the couple. Shuman, T.C. Memo. 2018-135 (8/23/18).
Court disallows unsubstantiated deductions but rejects penalty assessment
The Tax Court disallowed a deduction for cost of goods sold and expenses on Schedule C, Profit and Loss From a Business, that a couple reported for 2012 because the couple did not offer any receipts or other reliable evidence to show that their claimed expenses were actually paid in 2012. Instead, they offered vague and uncorroborated testimony, along with a statement of expense allegedly prepared by their deceased accountant. The court also (1) disallowed mortgage interest deductions for which no Form 1098, Mortgage Interest Statement, was produced; (2) disallowed real estate tax deductions for which the record included no supporting documentation; (3) disallowed various other losses that were not substantiated; but (4) rejected the IRS’s assessment of a penalty for which it failed to obtain the appropriate supervisory approval. Singh, T.C. Memo. 2018-132 (8/22/18).
Regs. remove W-2 and Form 1099 30-day automatic extensions
In a move intended to facilitate the IRS’s fight against tax return identity theft, the IRS issued regulations that finalize the removal of the 30-day automatic extension of time to file information returns that report wages and tax (the Form W-2 series) and that also remove the 30-day automatic extension of time to file forms that report nonemployee compensation (Forms 1099-MISC with information in box 7). T.D. 9838 (8/20/18).
IRS issues accounting guidance for eligible terminated S corporations
A revenue procedure provides guidance on new Sec. 481(d), which allows an eligible terminated S corporation that is required to change from the cash method of accounting to an accrual method as a result of revoking its S corporation election to take into account the resulting positive or negative adjustment required under Sec. 481(a) ratably during the six-year period beginning with the year of change. The procedure also states that an eligible terminated S corporation that is permitted to continue to use the cash method after the revocation of its S corporation election but changes to an accrual method for the C corporation’s first tax year after such revocation may also take into account the resulting adjustment over six years. Rev. Proc. 2018-44 (8/22/18).
STATE & LOCAL TAXES
Prop. regs. would limit deductibility of contributions to state charitable funds
The IRS issued proposed regulations under which transfers to a state agency or charitable organization in lieu of paying state and local taxes would be deductible as a charitable contribution only to the extent that the taxpayer making the donation did not receive a quid pro quo. REG-112176-18 (8/24/18) (see related news story).
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.