Document summaries for the week of Aug. 6, 2018

C CORPORATIONS

Company wins fight with IRS over strategy used to repatriate cash from European affiliates

The Tax Court held that a strategy used by a domestic corporation to repatriate cash from European affiliates to the United States, which combined intercompany debt with return-of-capital distributions, did not run afoul of the tax laws, as had been argued by the IRS, and thus did not result in additional tax liabilities and penalties to the company. The court rejected the IRS’s arguments that loans between two of the company’s controlled foreign corporations (CFCs) resulted in dividends to the taxpayer or, alternatively, that the domestic parent had insufficient basis in an upper-tier CFC to absorb the distributions as a return of capital. Illinois Tool Works Inc., T.C. Memo. 2018-121 (8/6/18).

Ninth Circuit withdraws opinion upholding transfer-pricing regulation

The Ninth Circuit announced that its withdrawal of its July 24 opinion that found Regs. Sec. 1.482-7A(d)(2) withstood scrutiny under general administrative law principles. Altera Corp., No. 16-70496 (9th Cir. 8/7/18) (see related news story).

 

EMPLOYEE BENEFITS

IRS issues monthly corporate yield curve and segment rates

The IRS issued guidance on the corporate bond monthly yield curve for July 2018, 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 (8/10/18).

 

INDIVIDUALS

Proposed regs. cover Sec. 199A deduction

The IRS issued proposed regulations concerning the deduction for qualified business income under Sec. 199A. REG-107892-18 (8/8/18) (see related news story). 

IRS did not abuse its discretion in failing to consider taxpayer’s personal loan repayment in calculating an installment obligation

The Tax Court held that a taxpayer who rejected the terms of an IRS installment agreement did not establish that a $315 monthly personal loan obligation constituted a necessary expense against the amount she could pay the IRS under the installment agreement. The court concluded that the IRS settlement officer (SO) did not abuse her discretion when she refused to lower the installment agreement amount and noted that the SO was not obligated to negotiate indefinitely or wait any specific time before issuing a determination. Randall, T.C. Memo. 2018-123 (8/6/18).

Couple fails to show that IRS should accept their return copy instead of prior filing

The Tax Court held that a couple failed to show that an electronic return for 2012, which the IRS processed on March 11, 2013, was not their 2012 return and that a purported 2012 return enclosed with a letter to them dated November 11, 2014, from Tax Brain, a tax return preparation service, was their 2012 return. The court noted that the Tax Brain letter was dated more than a year and a half after the normal April 15, 2013, due date for 2012 individual income tax returns and that it was incumbent on the couple to show error in a subsequent IRS notice that made adjustments to their 2012 return, which they did not do. Blair, T.C. Memo. 2018-125 (8/7/18).

Bankruptcy does not relieve couple from repaying excess advance premium tax credits

The Tax Court held that the IRS correctly determined that a couple’s 2014 tax liability should be increased by $6,090 of excess advance premium tax credits that had been applied against their monthly health insurance premiums during 2014. The court rejected the couple’s assertion that, for purposes of determining their eligibility for the premium tax credit, their 2014 household income should be reduced by payments they made pursuant to a chapter 13 bankruptcy plan. Palafox, T.C. Memo. 2018-124 (8/7/18).

Deficiencies and penalties upheld on taxpayer who underreported income and deducted personal expenses on his company’s return

The Tax Court held that a taxpayer who owned a consulting company had underreported the company’s gross receipts, deducted personal expenses paid from the company’s bank account on the company’s tax return, and did not properly substantiate other alleged business expenses. The court also upheld penalties assessed against the taxpayer for acting negligently and with disregard of the rules and regulations and for substantially understating his income tax. Imperato, T.C. Memo. 2018-126 (8/9/18).

Proposed revenue procedure addresses W-2 wage calculation for the Sec. 199A deduction

The IRS issued a proposed revenue procedure that provides guidance on methods available for calculating W-2 wages for purposes of computing the Sec. 199A deduction. The proposed procedure is similar to one issued under former Sec. 199 and provides three methods for calculating W-2 wages: the unmodified box method allows for a simplified calculation, while the modified Box 1 method and the tracking-wages method provide greater accuracy. Notice 2018-64 (8/8/18) (see related news story).

 

INTERNATIONAL

Cayman partnership liable for failing to withhold taxes on foreign partners

The Tax Court denied a motion to dismiss for lack of jurisdiction brought by a Cayman Islands partnership with both foreign and domestic partners. The IRS contended that the partnership was engaged in a U.S. trade or business and that all of its income was ordinary income effectively connected with the U.S. trade or business and, as a result, the partnership was required to withhold taxes on the effectively connected taxable income allocable to its foreign partners. The court held that the partnership’s liability for withholding tax under Sec. 1446 was properly before the court, which had jurisdiction under Sec. 6226(f) to redetermine partnership items including partnership liabilities. YA Global Investments, LP, 151 T.C. No. 2 (8/8/18).

 

IRS PROCEDURE

Settlement officer did not abuse discretion where taxpayer never submitted an offer in compromise

The Tax Court held that, because a taxpayer had an opportunity to dispute her liability for trust fund recovery penalties (TFRPs), she was precluded from disputing her TFRP liability a second time through the CDP process, and was likewise precluded from challenging that liability before the Tax Court. The court also held that the IRS settlement officer did not abuse his discretion by closing the taxpayer’s case and rejecting any collection alternative from the taxpayer because, although the taxpayer indicated an intention to submit an offer in compromise, neither she nor her representative ever did so. Kane, T.C. Memo. 2018-122 (8/6/18).

 

PARTNERSHIPS

Final regulations issued on partnership representatives

The IRS issued final regulations under Sec. 6223 on the procedures for designating a partnership representative and the representative’s authority under the centralized partnership audit regime. T.D. 9839 (8/7/18) (see related news story).

 

S CORPORATIONS

S corporation not entitled to deduct stock litigation costs

The Tax Court held that a couple’s S corporation was not entitled to deduct as ordinary and necessary business expenses under Sec. 162 litigation costs relating to stock owned by the couple. The court noted that the S corporation had no obligation to pay the litigation costs and that, while not as advantageous from a tax point of view, the couple could deduct such costs under Sec. 212 as nonbusiness income-producing expenses. Garcia, T.C. Summ. 2018-38 (8/7/18).

 

TAX ACCOUNTING

IRS provides automatic consent to change small business accounting methods under TCJA

The IRS issued guidance that details the procedures by which a small business taxpayer may obtain automatic consent to change its methods of accounting to reflect changes made by P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (TCJA) that expand the scope of business taxpayers eligible to use the cash method of accounting and exempt them from the requirements to capitalize costs to account for certain long-term contracts under Sec. 460 and to account for inventories under Sec. 471. The revenue procedure is generally effective for tax years beginning after Dec. 31, 2017, and obsoletes Rev. Procs. 2002-28 and 2001-10. Rev. Proc. 2018-40 (8/6/18).

Proposed regs. issued on bonus depreciation rules

The IRS issued proposed regulations providing guidance on Sec. 168(k), which was amended by P.L. 115-97, known as the Tax Cuts and Jobs Act, to increase the allowable first-year depreciation deduction for qualified property from 50% to 100%. REG-104397-18 (8/6/18) (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.