Document summaries for the week of Dec. 3, 2018

EMPLOYEE BENEFITS

IRS provides relief from the "once-in-always-in" condition for excluding part-time employees from making elective deferrals under a Sec. 403(b) plan

The IRS issued guidance providing transition relief from the "once-in-always-in" (OIAI) condition for excluding part-time employees under Regs. Sec. 1.403(b)‑5(b)(4)(iii)(B) from the "universal availability" nondiscrimination requirement that permits all employees to make elective deferrals where the employer maintains a Sec. 403(b) plan. Under the OIAI exclusion condition, for a Sec. 403(b) plan that excludes part-time employees from making elective deferrals, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that the employee is a part-time employee. Notice 2018-95 (12/4/18).

IRS provides initial guidance on new tax benefit for stock options and restricted stock units

The IRS issued interim guidance, for private corporations and their employees, on the new tax benefit for stock options and restricted stock units (RSUs) that was enacted in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and that allows qualified employees of privately held corporations to elect to defer paying income tax, for up to five years, on the value of qualified stock options and RSUs granted to them by their employers. If the election is made, then income is included in the tax year of the employee that includes the earliest of (1) the first date the qualified stock becomes transferable; (2) the date the employee first becomes an "excluded" employee; (3) the first date on which any stock of the issuing corporation becomes readily tradable on an established securities market; (4) the date that is five years after the first date the rights of the employee in such stock are transferable or not subject to a substantial risk of forfeiture, whichever occurs earlier; or (5) the date on which the employee revokes the election (at such time and in such manner as the secretary of the Treasury provides). Notice 2018-97 (12/7/18) (see related news story).

INDIVIDUALS

Failure to ask employer for reimbursement of employment-related expenses precludes deduction

The Tax Court held that a couple were not entitled to deductions claimed on Schedule A, Itemized Deductions, for unreimbursed employee business expenses for car and truck and cellphone expenses related to the husband's employment because the husband did not seek reimbursement from his employer for some of the expenses and could not document the payment of the cellphone expenses or distinguish between charges for business and personal use of the cellphone. While the court said it understood the taxpayer's reluctance to seek reimbursement for fear of losing his job, it nonetheless concluded that no authority allows deductions of otherwise reimbursable employee business expenses  where the employee does not seek reimbursement. Archuleta, T.C. Summ. 2018-55 (12/3/18).

Court reject's IRS theory that taxpayer was in common law marriage and thus had to file as married filing separately

The Tax Court held that a taxpayer was eligible for the earned income tax credit (EITC) because (1) she was an "eligible individual" under Sec. 32(c)(1)(A)(i); (2) three of her children were qualifying children under Sec. 152(c); and (3) she received wages that constituted earned income for purposes of the EITC. The court also concluded that the taxpayer qualified to file as head of household and rejected the IRS's arguments that the taxpayer was in a common law marriage and thus should have filed as married filing separately. Hassan, T.C. Summ. 2018-56 (12/6/18).

Court finds taxpayer omitted income but is entitled to child tax credit and EITC

In a case related to Hassan, The Tax Court held that a taxpayer was liable for tax deficiencies for failing to include in his 2014 and 2015 income $899 of wages and $5,310 of gambling income and was not eligible for head-of-household filing status. However, the Tax Court also held that the taxpayer was eligible for child tax credits for each of his qualifying children who satisfied the age limitation under Sec. 24, and was also entitled to the earned income tax credit (EITC) because (1) he was an "eligible individual" within the meaning of Sec. 32(c)(1)(A)(i); (2) three of his children were qualifying children under Sec. 152(c); and (3) he received wages that constituted earned income for purposes of the EITC. Kaviro, T.C. Summ. 2018-57 (12/6/18).

Tax shelter transaction lacked economic substance

The Fourth Circuit affirmed a Tax Court decision disallowing a married couple's deduction of losses attributable to a Custom Adjustable Rate Debt Structure transaction, holding that the transaction lacked economic substance. The court also upheld the imposition of gross valuation misstatement penalties under Secs. 6662 and 6664. Baxter, No. 17-2402 (4th Cir. 12/7/18).

IRS PROCEDURE

IRS issues quarterly interest rates for tax overpayments and underpayments

The IRS issued the rates for interest on tax overpayments and underpayments for the first calendar quarter of 2019, beginning Jan. 1, 2019. The interest rates will be 6% for overpayments (5% in the case of a corporation and 3.5% for the portion of a corporate overpayment exceeding $10,000), 6% for underpayments, and 8% for large corporate underpayments. Rev. Rul. 2018-32 (12/6/18).

Court upholds IRS levy aimed at collecting unpaid employment taxes

The Tax Court upheld an IRS notice of intent to levy to collect a corporation's unpaid employment tax liabilities. With respect to the corporation's argument that a settlement officer should have allowed an installment agreement or offer in compromise, the court noted that the corporation had failed to provide certain documents the settlement officer requested to consider a collection alternative. The Community Law Firm, Inc., T.C. Memo. 2018-198 (12/3/18).

No abuse of discretion where taxpayer failed to meet criteria for a face-to-face hearing

The Tax Court sustained an IRS determination to proceed with a tax collection action against a taxpayer who had not filed returns for 1998 through 2012, after finding that the IRS Appeals Office did not abuse its discretion in sustaining the proposed levy. The court noted that the IRS had offered to consider the taxpayer's request for a face-to-face hearing if he filed his 2012 tax return but that the taxpayer failed to do so. Davis, T.C. Memo. 2018-197 (12/3/18).

Court upholds collection action against taxpayer who failed to take necessary actions to have federal tax lien withdrawn

The Tax Court sustained a proposed collection action against a taxpayer, who had outstanding tax liabilities for his 2007, 2008, 2011, 2012, and 2013 tax years, after finding that the IRS settlement officer properly discharged all of his responsibilities under Sec. 6330(c) and that there was no abuse of discretion in any respect. The court noted that the taxpayer failed to take the necessary steps to apply for withdrawal of a Notice of Federal Tax Lien (NFTL) and to provide requested financial information during a Collection Due Process hearing and, thus, the IRS did not abuse its discretion when it declined to withdraw the NFTL. Namakian, T.C. Memo. 2018-200 (12/6/18).

Failure to file administrative refund claim dooms taxpayer's suit

The Ninth Circuit upheld a district court decision dismissing a taxpayer's refund suit because he did not file administrative refund claims first, as required by Sec. 7422(a). Duggan, No. 17-35814 (9th Cir. 12/4/18).

PARTNERSHIPS

Taxpayer's share of partnership liabilities should have been determined in prior proceeding

In a case involving the correct determination of a taxpayer's share of partnership liabilities for purposes of determining the taxpayer's correct basis for deducting losses, the Tax Court granted an IRS motion to dismiss for lack of jurisdiction. Citing the regulations under Sec. 6231(a)(3), the court noted that the determination of a partner's share of partnership liabilities is a partnership item and, thus, the taxpayer's share of partnership liabilities was, or should have been, determined in a prior partnership-level proceeding. Akay, T.C. Summ. 2018-54 (12/3/18).

Tax shelter transaction lacked economic substance

The Eleventh Circuit affirmed a Tax Court decision disallowing a limited liability company's deduction of losses attributable to a Custom Adjustable Rate Debt Structure transaction, holding that the transaction lacked economic substance. The court also upheld the imposition of gross valuation misstatement penalties under Secs. 6662 and 6664. Curtis Investment Co., LLC, No. 17-14573 (11th Cir. 12/7/18).

TAX ACCOUNTING

Court denies summary judgment for advance payment

The Tax Court refused to grant an IRS request for summary judgment in a case involving a taxpayer's deferral of an advance payment that resulted when the taxpayer's auditor reclassified the payment as a deposit on the theory that it might have to be repaid. The court found that genuine disputes of material fact existed as to whether the taxpayer had adopted the deposit method of accounting for customer payments or whether the change in treatment of the advance payment resulted from a change in underlying facts. Thrasys, Inc., T.C. Memo. 2018-199 (12/4/18).