Document summaries for the week of Feb. 19, 2018

C CORPORATIONS

Certain life insurance contracts may continue in force after insured individual attains age 100

The IRS issued a procedure that provides that the safe harbor set forth in Rev. Proc. 2010-28, concerning the application of Sec. 7702 and Sec. 7702A to life insurance contracts that have mortality guarantees based on the 2001 CSO tables (i.e., the Commissioners’ Standard Ordinary Mortality Tables), may continue in force after the day on which an insured individual attains age 100. The safe harbor is extended to life insurance contracts that have mortality guarantees based on the 2017 CSO tables and any other prevailing commissioners’ standard tables that extend beyond age 100. Rev. Proc. 2018-20 (2/23/18).


INDIVIDUALS

No deductions where taxpayer commingled business funds in his personal bank account

The Tax Court held that a taxpayer, who was operating a landscaping business and who owned three vehicles, could not take deductions for a vehicle used in his business because he failed to keep a diary, a mileage log, trip sheets, or similar records to document the vehicle’s business use. In addition, because the taxpayer commingled in his personal bank account landscaping business expenses, expenses relating to a nonprofit he started, and personal expenses, the Tax Court could not estimate any expenses that the taxpayer might otherwise be entitled to deduct. Bass, T.C. Memo. 2018-19 (2/21/18).

Losses on scuba diving venture were not deductible as bad debt losses

The Tax Court held that an investment a taxpayer made in a scuba diving business started by a friend was an equity investment and, thus, the taxpayer was not entitled to a bad debt deduction when the business failed. However, the court noted, the taxpayer might be entitled to a capital loss deduction when he disposes of his stock in the business. Burke, T.C. Memo. 2018-18 (2/21/18).

Taxpayer’s transfer of $100,000 to wife pursuant to divorce proceeding was a taxable IRA distribution to him

The Tax Court held that a taxpayer’s transfer of $100,000 from his IRA to his wife’s IRA in a divorce proceeding in which the court ordered him to transfer $100,000 to his wife was not a nontaxable transfer of an account incident to divorce under Sec. 408(d)(6). Instead, citing the decision in Bunney, 114 T.C. 259 (2000), the court found the distribution from the taxpayer’s IRA to be taxable income to the taxpayer under Sec. 408(d)(1). Kirkpatrick, T.C. Memo. 2018-20 (2/22/18).

Sale of marital home does not produce alimony

The Seventh Circuit held that an individual could not claim an alimony deduction for paying his former wife half of the proceeds from the sale of their marital home, as required by their divorce agreement. Hexum, No. 17-2460 (2/22/18).


IRS PROCEDURE

Statutory notice of deficiency should be sent to all POAs

The Office of Chief Counsel answered a question about an estate’s power of attorney (POA), and a concern that a statutory notice of deficiency gets to the estate so that the IRS is not later vulnerable to a claim that the statutory notice of deficiency was invalid because the IRS failed to send it to the last known address. The Chief Counsel’s Office advised that if an estate has one or more POAs authorized to receive tax information, then it is safest to send a copy of the statutory notice of deficiency not only to the taxpayers but also to all the POA representatives. CCA 201808017 (2/23/18).

Tax overpayments are credited to other assessed tax liabilities before refunds can be made

In response to a question regarding other tax liabilities to which the IRS will credit tax overpayments, the Office of Chief Counsel advised that the IRS credits those overpayments to other assessed federal tax liabilities under Sec. 6402 before it allows or makes refunds. According to the Chief Counsel’s Office, this is a statutory provision and not a policy, and because nothing in Sec. 7508A, which postposes deadlines in disaster areas, overrides this provision, a taxpayer with both an overpayment (in one module) and an assessed balance-due liability (in another module) will have the overpayment first offset against the assessed balance-due liability. CCA 201808015 (2/23/18).

Entire administrative record should be submitted to Tax Court with a motion for summary judgment

The Office of Chief Counsel was asked whether the entire administrative record should be submitted to the Tax Court with a motion for summary judgment. The Chief Counsel’s Office responded that, given the Tax Court’s desire for information in those cases, it would be advisable to include the entire administrative record with the motion for summary judgment. CCA 201808014 (2/23/18).

Chief Counsel’s Office asked to opine on employer’s ability to offset self-employment tax erroneously paid by employees

The Office of Chief Counsel concluded that Sec. 6521 allows an employer to offset self-employment taxes erroneously paid by its employees against its liability for the employees’ share of FICA where Sec. 3509 does not apply and Sec. 6521 applies to the employees. The Chief Counsel’s Office also opined that  the employer may still be liable for penalties for failing to collect and pay over FICA. CCA 201808016 (2/23/18).


PARTNERSHIPS

Prop. regs. on adjusted partnership tax attributes

The IRS issued proposed regulations providing rules addressing how partnerships and their partners adjust tax attributes to take into account partnership adjustments under the centralized partnership audit regime. REG-118067-17 (2/20/18) (see related news story).

Partnership’s sale of real property generated capital gain, not ordinary income

The Tax Court held that gain recognized on the sale of real property in 2012 and subsequent years by a partnership, which was formed to acquire and develop property into single-family residential building lots and commercial tracts, was properly characterized as capital gain and not ordinary income as the IRS argued. The court found that the partnership was not engaged in a development business after 2008, never attempted to subdivide the properties, and had held them as investments at the time of sale. Sugar Land Ranch Development, LLC, T.C. Memo. 2018-21 (2/22/18).


TAX-EXEMPT ORGANIZATIONS

Court denies nonprofit’s request for an award of administrative and litigation costs

The Tax Court held that a nonprofit, whose application for exempt status languished for over a year at the IRS, was not entitled to an award of reasonable administrative and litigation costs under Sec. 7430 after the nonprofit filed a Tax Court petition aimed at getting the IRS to approve its application. The Tax Court held that, because no invoices documented administrative costs, the nonprofit was not entitled to those costs, and the nonprofit was not entitled to litigation costs because the IRS conceded the case shortly after the nonprofit filed its Tax Court petition. Friends of the Benedictines in the Holy Land, Inc., 150 T.C. No. 5 (2/21/18).

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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.