Document summaries for the week of Aug. 27, 2018
IRS issues guidance for insurance companies to compute minimum effectively connected net investment income
The IRS issued a revenue procedure that provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Sec. 842(b) for tax years beginning after Dec. 31, 2016. Instructions are provided for computing foreign insurance companies’ liabilities for the estimated tax and installment payments of estimated tax for tax years beginning after Dec. 31, 2016. Rev. Proc. 2018-45 (8/27/18).
Cost of seismic surveys should be treated as geological and geophysical expenditures under Sec. 167(h)
The Office of Chief Counsel advised that the cost of seismic surveys used by a taxpayer engaged in offshore oil and gas drilling and development activities within the United States to optimize the placement of offshore oil and gas development wells should be treated as geological and geophysical (G&G) expenditures under Sec. 167(h) and not intangible drilling costs under Sec. 263(c) and Regs. Sec. 1.612-4(a). The Chief Counsel’s Office noted that the taxpayer did not use this data to prepare for the drilling of a specific well or wells but to determine where generally to drill within two project areas and, accordingly, under the rationale of Louisiana Land & Exploration Co., 7 T.C. 507 (1946), acq. 1946-2 C.B. 3, aff’d, 161 F.2d 842 (5th Cir. 1947), the costs that the taxpayer incurred to acquire the seismic survey are G&G expenditures. CCA 201835004 (8/31/18).
IRS issues monthly corporate yield curve and segment rates
The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2018-65 (8/27/18).
IRS issues guidance on new $500 credit for dependents
The IRS announced that it intends to issue proposed regulations clarifying the definition of “qualifying relative” in Sec. 152(d) for purposes of various provisions of the Code, including the new $500 credit for other dependents under Sec. 24(h)(4) and head-of-household filing status under Sec. 2(b), for tax years in which the Sec. 151(d) exemption amount is zero (i.e., tax years 2018–2025). According to the IRS, the proposed regulations will provide that the reduction of the personal exemption amount to zero will not be taken into account for purposes of the $500 credit and head-of-household filing status, and, instead, the exemption amount for the application of these provisions will be treated as $4,150, as adjusted for inflation, for years in which the exemption amount is zero. Notice 2018-70 (8/28/18) (see related news story).
Court rejects taxpayer’s loss deduction for allegedly worthless partnership interests
The Tax Court held that a taxpayer, who was a partner in several real estate partnerships, was not entitled to deduct losses relating to his interest in any of the partnerships because he failed to show that his interests in any of the partnerships were worthless as of Dec. 31, 2008. To the contrary, the court said there was value remaining in the partnerships and pointed to the fact that the partnerships renegotiated the financing of certain construction loans through 2011 to add value for the partners by minimizing losses. Forlizzo, T.C. Memo. 2018-137 (8/27/18).
Taxpayer fined $5,000 for taking misguided positions
The Tax Court rejected a taxpayer’s arguments that payments he received for services, as well as retirement distributions, were not taxable as income and upheld the IRS’s tax deficiency assessment. The court also imposed a $5,000 penalty under Sec. 6673 and warned the taxpayer that, if he did not abandon his misguided positions, a greater penalty might be imposed in the future. MacDonald, T.C. Memo. 2018-138 (8/27/18).
Lack of substantiation for numerous expenses precludes deductions for those expenses
The Tax Court held that a taxpayer was not entitled to a deduction for unreimbursed employee business expenses where the taxpayer introduced no evidence at trial to substantiate those deductions. In addition, the court denied the taxpayer’s deductions for vehicle expenses after finding that the taxpayer’s mileage logs did not meet the requirements of Temp. Regs. Secs. 1.274-5T(c)(2)(i) and (ii) and also denied deductions for various other expenses due to lack of substantiation. Weaver, T.C. Summ. 2018-40 (8/27/18).
Court denies tax return preparer’s theft loss deduction
The Tax Court held that a tax return preparer could not deduct theft losses she said she sustained as a result of an alleged investment in a mining company that was conducting a Ponzi scheme because, after testifying that she did not make a cash investment in the mining company, she failed to credibly explain how she received the alleged investment. The court noted that, while the preparer testified that she received an ownership interest in the mining company as partial compensation for her tax preparation services to the company in addition to cash payments for her services, she failed to provide any invoices or other documentation of the services she provided to the company and did not adequately explain the basis for her receiving compensation from the company nor did she include the alleged compensation in income on her earlier tax returns. Evensen, T.C. Memo. 2018-141 (8/29/18).
Tax Court denies couple’s request for remand
The Tax Court denied a couple’s request for a remand on the basis of changed circumstances after concluding that the request was without merit. In essence, the court said, the couple were seeking a second chance to engage in negotiations that either they or their representatives allowed to lapse and there was no legal, equitable, or practical reason to remand the case to allow a second chance. McAvey, T.C. Memo. 2018-142 (8/30/18).
Taxpayer cannot use insolvency exceptions to exclude COD income from gross income
The Tax Court held that a taxpayer (1) was not entitled to exclude cancellation-of-debt income from his 2010 gross income under the insolvency exception in Sec. 108(a)(1)(B) or the qualified principal residence exception in Secs. 108(a)(1) and (2); and (2) was liable for penalties for failing to file a return or pay his taxes on time. The court noted that, while the taxpayer testified as to his economic misfortune and entered into evidence a handwritten document listing purported assets and liabilities, the record lacked any further substantive evidence, documentary or otherwise, to corroborate his insolvency claim or his qualified principal residence claim. Smethers, T.C. Memo. 2018-140 (8/29/18).
IRS implements nonresident alien deposit interest regulations
The IRS added two countries, Argentina and Moldova, to the list of countries with which the United States has in force an information exchange agreement such that interest paid to residents of those jurisdictions must be reported by payers to the extent required under Regs. Sec. 1.6049-8(a) and Regs. Sec. 1.6049-4(b)(5). The IRS also added one jurisdiction, Greece, to the list of jurisdictions with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under those regulatory provisions. Rev. Proc. 2018-36 (8/31/18).
IRS did not abuse its discretion in proceeding with collection action
The Tax Court held that, because there was no genuine dispute as to any material fact, the IRS was entitled to summary judgment sustaining a proposed levy action to collect a taxpayer’s unpaid federal income tax liability for 2012. The court concluded that, because the IRS verified that all applicable laws and administrative procedures were met and because the taxpayer did not offer a collection alternative, the IRS did not abuse its discretion in proceeding with the collection action. The taxpayer was also subject to penalties because she failed to establish reasonable cause and had already had had other penalties abated in an earlier year under the first-time abatement program. Kopstad, T.C. Memo. 2018-139 (8/29/18).
Taxpayer with refund claim before IRS seeks a private letter ruling that might present an issue relevant to the refund claim
The Office of Chief Counsel advised the IRS that a taxpayer who filed a refund claim being considered by the IRS is now seeking a private letter ruling requesting an extension of time to sever a trust and to make a qualified terminable interest property election under Sec. 2056(b)(7). The Chief Counsel’s Office noted that the taxpayer’s request for a private letter ruling may present an issue that is relevant to the IRS’s consideration of the taxpayer’s refund claim. CCA 201835005 (8/31/18).
Long-term lessee does not qualify for façade contribution deduction
The Tax Court held that a partnership, which was a long-term lessee of two buildings, did not hold a fee interest in the buildings and was thus not entitled to a charitable contribution deduction for the donation of a façade easement. The court noted that, in making the donation, the taxpayer gave up contractual rights it held under the terms of its lease. However, a contract right in a long-term lease is not a qualified real property interest, and the waiver of contract rights under such a lease does not give rise to a charitable contribution deduction contemplated under Secs. 170(f)(3)(B)(iii) and (h). Harbor Lofts Assocs., 151 T.C. No. 3 (8/27/18).
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.