Document summaries for the week of Dec. 17, 2018

CORPORATIONS

IRS issues unpaid loss discount and salvage factors for 2018

The IRS issued a revenue procedure applicable to insurance companies prescribing the unpaid loss discount factors and salvage discount factors for the 2018 accident year that are used to compute discounted unpaid losses under Sec. 846 and discounted estimated salvage recoverable under Sec. 832, respectively. Rev. Proc. 2019-6 (12/19/18).

Medical-marijuana dispensary not liable for accuracy-related penalties

The Tax Court held that a medical-marijuana dispensary, the business expense deductions of which were disallowed under Sec. 280E, was not liable for accuracy-related penalties under Sec. 6662(a). According to the court, the corporation’s main argument against applying Sec. 280E was not yet the subject of a final, unappealable decision, and a trade or business that “consists of” trafficking in a controlled substance under Sec. 280E is subject to more than one reasonable interpretation. Patients Mutual Assistance Collective Corp., T.C. Memo. 2018-208 (12/20/18).

C corporation and related S corporation may not deduct marijuana business expenses

The Tax Court held that a C corporation that operated a medical-marijuana dispensary and an S corporation that handled daily operations for the corporation were precluded by Sec. 280E from deducting Sec. 162 business expenses. As a result, the court also concluded, the S corporation’s shareholders had underreported their flowthrough income. Alternative Health Care Advocates, 151 T.C. No. 13 (12/20/18).

 

INDIVIDUALS

Court sustains $5,000 penalty on taxpayer who filed a frivolous tax return

The Tax Court granted an IRS motion for summary judgment and sustained an IRS determination to proceed with a collection action against a taxpayer whom it had assessed a $5,000 penalty for filing a frivolous tax return and who had made frivolous arguments in connection with his filing of Form 12153, Request for a Collection Due Process or Equivalent Hearing. The court concluded that the IRS settlement officer in charge of the case did not abuse her discretion in sustaining the collection action. Burnett, T.C. Memo. 2018-204 (12/18/18).

Taxpayer cannot deduct expenses relating to son’s divorce and resulting property distributions

The Tax Court held that a taxpayer was not entitled to deduct legal and professional fees she and her deceased husband paid on behalf of themselves and their son in connection with criminal investigations involving the taxpayer and her son, her son’s divorce proceedings, and litigation over a ranch in which the taxpayer and her husband had invested and that was part of the son’s divorce litigation. The court rejected the taxpayer’s argument that the expenses were related to rental properties and deductible as paid or incurred for the production of income or the management, conservation, or maintenance of income-producing property, after noting that the properties at issue had not been rented and some of the expenses the taxpayer sought to deduct were clearly marked as being for child-care services for her son’s children. Sholes, T.C. Memo. 2018-203 (12/17/18).

Taxpayer partially entitled to innocent spouse relief

The Tax Court held that a taxpayer did not meet the requirements for innocent spouse relief for 2009 and 2010 where the underpayments of tax were attributable solely to her income and did not qualify for an exception to the threshold test in Sec. 6015(f) for the tax attributable to her income for 2005, 2007, and 2008. The court did conclude that the taxpayer was entitled to innocent spouse relief for 2005, 2007, and 2008 to the extent allowed by the IRS. Heydon-Grauss, T.C. Memo. 2018-209 (12/20/18).

Court upholds Notice of Federal Tax Lien

The Tax Court granted summary judgment to the IRS and upheld a Notice of Federal Tax Lien against a taxpayer who had unpaid tax liabilities for 2007 and 2009. The taxpayer argued that the IRS failed to consider the doctrine of equitable recoupment to allow her to recoup time-barred overpayments. However, the court rejected this argument because the taxpayer supplied no reason to believe that the doctrine had any bearing on the case. Obeirne, T.C. Memo. 2018-210 (12/20/18).

Appeals court applies civil willfulness standard in FBAR case

The Third Circuit held that to prove a willful violation of the regulations requiring taxpayers to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), the government must satisfy the “civil willfulness” standard, which includes both knowing and reckless conduct. Bedrosian, No. 17-3525 (3d Cir. 12/21/18).

 

IRS PROCEDURE

Taxpayer was not entitled to notice before his state tax refund was confiscated by the IRS

The Tax Court held that the same taxpayer as the petitioner in Burnett, above, was not entitled to notice before his tax refund was levied upon after he failed to file his 2005 federal return. The court noted that Sec. 6330(f)(2) expressly provides an exception to the notice-before-levy requirement for a levy served on a state to collect a federal tax liability. Burnett, T.C. Memo. 2018-205 (12/18/18).

IRS did not abuse its discretion in determining that a taxpayer did not qualify for a face-to-face hearing

The Tax Court held that there was no abuse of discretion where the IRS determined that a taxpayer, who had tax filing obligations for 2010 through 2016 and failed to provide the IRS with any of the information requested relating to those years and who failed to participate in a telephone Collection Due Process hearing, did not qualify for a face-to-face conference with the IRS. As a result, the court granted the IRS’s motion for summary judgment. Steinhardt, T.C. Memo. 2018-206 (12/18/18).

Legislation allows transfer of cases to Tax Court

President Donald Trump signed into law the Protecting Access to the Courts for Taxpayers Act, which amends 28 U.S.C. Section 1631 to permit federal courts to transfer cases to the Tax Court if the petitioner has filed the action in a court that lacks jurisdiction to hear it. H.R. 3996 (12/19/18).

Certain information disclosures on returns can reduce penalties

The IRS issued a revenue procedure updating Rev. Proc. 2018-11 and identifying circumstances under which a disclosure on an income tax return is adequate to reduce the understatement of income tax under Sec. 6662(d) and to avoid the tax return preparer penalty under Sec. 6694(a). Rev. Proc. 2019-9 (12/20/18).

IRS did not abuse its discretion in proceeding with collection

The Tax Court held that an IRS settlement officer (SO) did not abuse her discretion by proceeding with collection action against a taxpayer who failed to meet a deadline to submit requested financial material. The court noted that, even if the documents the taxpayer submitted with its Tax Court petition and other filings supported its position, there were no grounds for the court to reweigh the SO’s determination. IBDR, Inc., T.C. Memo. 2018-207 (12/19/18).

IRS identifies additional hardship exemptions from shared responsibility payment

The IRS identified additional hardship exemptions from the individual shared responsibility payment under Sec. 5000A that a taxpayer may claim for the 2018 tax year without obtaining a hardship exemption certification from the Health Insurance Marketplace. Specifically, a person is eligible for a hardship exemption for at least the month before, the month(s) during, and the month after the specific event or circumstance that creates the hardship if the Marketplace determines that (1) financial or domestic circumstances, including an unexpected natural or human-caused event, caused a significant, unexpected increase in essential expenses that prevented him or her from obtaining qualified health plan coverage; (2) the plan’s expense would have seriously deprived the person of food, shelter, clothing, or other necessities; or (3) other circumstances prevented him or her from obtaining qualifying coverage. Notice 2019-05 (12/21/18).

IRS extends temporary dyed fuel relief

The IRS provided an additional extension through 2019 of the temporary dyed fuel relief initially provided in Notice 2017-30 and then extended through 2018 by Notice 2018-39. A claimant may submit a refund claim for the Sec. 4081(a)(1) tax imposed on undyed diesel fuel and kerosene for fuel that is (1) removed from a Milwaukee or Madison terminal; (2) entered into a Green Bay terminal within 24 hours; and (3) subsequently dyed and removed from the Green Bay terminal. Notice 2019-04 (12/19/18).

 

TAX ACCOUNTING

IRS may determine when centralized partnership audit regime does not apply to certain adjustments

The IRS announced its intention to propose regulations addressing certain special enforcement matters under Sec. 6241(11) including certain limited circumstances when the centralized partnership audit regime will not apply to adjustments to partnership-related items. Additionally, the regulations will provide that partnerships with a qualified Subchapter S subsidiary (QSub) partner are not eligible to elect out of the centralized partnership audit regime except by applying a rule similar to the rules for S corporations under Sec. 6221(b)(2)(A). Notice 2019-06 (12/20/18).

Newsletter Articles

TECHNOLOGY

2018 tax software survey

Among CPA tax preparers, tax return preparation software generates often extensive and ardent discussion. To get through the rigors of tax season, they depend on their tax preparation software. Here’s how they rate the leading professional products.

DEDUCTIONS

Qualified business income deduction regs. and other guidance issued

The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.