Documents summaries for the week of Dec. 24, 2018

INDIVIDUALS

Taxpayer received income when she defaulted on loan from a deferred compensation plan

The Tax Court held that a loan a taxpayer obtained from a deferred compensation plan, but which she subsequently defaulted on, was a taxable distribution under Sec. 72(p). The court noted that the defaulted loan became taxable under Sec. 72(p)(1)(A), in the same manner that a distribution would have been taxable if the taxpayer had simply closed the account and withdrawn the balance. Lim, T.C. Summ. 2018-59 (12/26/18).

Construction worker can deduct costs of work clothes and small tools

The Tax Court held that a taxpayer, who worked construction jobs, credibly testified as to his job and safety-related need for small tools, steel-toed boots, and special overalls and gloves, and thus was entitled to deduct the costs of those items. However, because the taxpayer could not prove that the demands of his job required him to sleep or rest during the weeks he paid for hotel stays while working at construction sites away from home, he was not entitled to deduct the costs of the overnight hotel stays and a number of unreimbursed expenses that he did not substantiate. However, the court did not uphold an accuracy-related penalty because it found the taxpayer had reasonably relied on his accountant to prepare his return. Triggs, T.C. Summ. 2018-58 (12/26/18).

IRS failed to establish that taxpayer who had been convicted of filing false returns intended to evade tax

The Tax Court held that the IRS failed to establish by clear and convincing evidence that a taxpayer, who operated a multilevel marketing activity on the internet, filed false and fraudulent returns with the intent to evade tax for 2007 and 2008, even though the taxpayer had been convicted under Sec. 7206(1) of filing false returns for years 2004 through 2008. The court also concluded that the IRS was barred by the statute of limitation from assessing deficiencies and alternative Sec. 6662(a) accuracy-related penalties against the taxpayer for 2007 and 2008. Mathews, T.C. Memo. 2018-212 (12/26/18).

Court upholds collection action against minister for delinquent taxes

The Tax Court granted summary judgment to the IRS and upheld its issuance of a notice of intent to levy on a minister who owed federal income taxes for 2009 and 2010. With respect to the minister’s argument that the IRS should have offered collection alternatives, the court observed that it has consistently held that it is not an abuse of discretion for an IRS Appeals officer to reject collection alternatives and sustain a collection action where a taxpayer has failed, after being given repeated opportunities, to supply the information the IRS requested. Terrell, T.C. Memo. 2018-216 (12/27/18).

Award that extinguished taxpayer’s debt to Merrill Lynch was ordinary income and not capital gain

The Tax Court held that an award by the Financial Industry Regulatory Authority Dispute Resolution Panel that extinguished a debt owed by the taxpayer to Merrill Lynch, Pierce, Fenner & Smith Inc. was taxable as ordinary income and not as capital gain as the taxpayer had argued. The court noted that the taxpayer had the burden of answering the question “in lieu of what were the damages awarded?” and concluded that the taxpayer did not meet the burden of establishing that the amount at issue was solely for the acquisition of the taxpayer’s book of business and thus entitled to capital gain treatment. Connell, T.C. Memo. 2018-213 (12/26/18).

FBAR violations were willful; court upholds imposition of higher penalty

The Court of Federal Claims granted a motion for summary judgment to the government, holding that an individual’s failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), was willful. The court also held that the $100,000 cap on FBAR penalties in 18 C.F.R. Section 1010.820(g)(2) is no longer valid, having been superseded by subsequent legislation. Kimble, No. 17-421 (12/27/18).

 

IRS PROCEDURE

IRS issues maximum values for 2018 for use with vehicle cents-per-mile valuation rule

The IRS issued the 2018 maximum values for use with the vehicle cents-per-mile valuation rule under Regs. Sec. 1.61-21(e) and the fleet-average valuation rule, which is an optional component of the automobile lease valuation rule under Regs. Sec. 1.61-21(d). The IRS also issued interim guidance on new procedures for calculating the inflation adjustments to the maximum values for use with the special valuation rules under Regs. Sec. 1.61-21(d) and Regs. Sec. 1.61-21(e) using Sec. 280F(d)(7), as modified by the law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97. Notice 2019-08 (12/21/18).

IRS settlement officer properly discharged his responsibilities in sustaining collection action

The Tax Court held that, because a taxpayer failed to  comply with his 2017 estimated tax obligation, the IRS settlement officer (SO)  did not abuse his discretion in sustaining a proposed levy against the taxpayer. The court concluded that the SO properly discharged all of his responsibilities under Sec. 6330(c). Ransom, T.C. Memo. 2018-211 (12/26/18).

IRS settlement officer did not abuse his discretion in rejecting a couple’s OIC

The Tax Court held that an IRS settlement officer (SO) did not abuse his discretion in denying a couple’s offer-in-compromise because the couple’s reasonable collection potential far exceeded their final offer amount. The court also concluded that (1) the SO did not err in calculating the value of the couple’s investment partnership and in calculating an allowance for health care and vehicle expenses, and (2) while the SO did err by including the cash value of the couple’s life insurance policy, that error was harmless because after omission of the value of the life insurance policy, the couple’s reasonable collection potential still exceeded their final offer. Gustashaw, T.C. Memo. 2018-215 (12/27/18).

 

PARTNERSHIPS

Two of taxpayer’s three conservation easement donations do not qualify for a charitable deduction

The Tax Court held that a taxpayer’s donation of 2005 and 2006 easements did not restrict a specific, identifiable piece of real property because they allowed supposedly conserved land to be taken back and used for residential development, and, thus, neither easement constituted a qualified real property interest that could give rise to a charitable contribution deduction under Sec. 170(h)(1)(A). However, the court concluded that the donation of a 2007 easement did give rise to a charitable deduction because it covered a specific, identifiable piece of real property, was granted in perpetuity under Sec. 170(h)(2)(C), was made exclusively for conservation purposes under Sec. 170(h)(1)(C), and constituted a qualified real property interest. Pine Mountain Preserve, LLLP, 151 T.C. No. 14 (12/27/18).

Court values easement by giving equal weight to taxpayer’s and IRS’s experts

In a case related to the above case, the Tax Court determined that the value of a taxpayer’s 2007 conservation easement, for which the taxpayer took a charitable contribution deduction, was $4,779,500. After finding that neither the taxpayer’s valuation expert nor the IRS’s valuation expert used valuation methods that met the requirements of Regs. Sec. 1.170A-14(h)(3)(i), the court estimated the value of the easement by giving equal weight to the values assigned by the taxpayer’s and the IRS’s experts. Pine Mountain Preserve, LLLP, T.C. Memo. 2018-214 (12/27/18).

 

TAX ACCOUNTING

IRS provides safe harbors for corporations or specified passthrough entities that receive state tax credits in exchange for certain payments

The IRS issued guidance providing that, if a C corporation makes a payment to or for the use of an organization described in Sec. 170(c) and receives or expects to receive a tax credit that reduces a state or local tax imposed on the C corporation in return for that payment, the C corporation may treat the payment as meeting the requirements of an ordinary and necessary business expense under Sec. 162(a) to the extent of the credit received or expected to be received. Similarly, if a specified passthrough entity, as defined in the guidance, makes a payment to or for the use of an organization described in Sec. 170(c) and receives or expects to receive a tax credit that the entity applies or expects to apply to offset a state or local tax other than a state or local income tax, the specified passthrough entity may treat that payment as meeting the requirements of an ordinary and necessary business expense. Rev. Proc. 2019-12 (12/28/18).

Newsletter Articles

TAX REFORM

Traps for the unwary: Tax Cuts and Jobs Act changes

By now many of us are familiar with the various provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Here is a list of changes together with (perhaps) unexpected nuances.

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.