Document summaries for the week of Jan. 22, 2018
IRS issues discount factors and salvage discount factors
The IRS issued a revenue procedure that prescribes the unpaid loss discount factors and salvage discount factors for the 2017 accident year for use by insurance companies in tax years beginning on or before Dec. 31, 2017. These discount factors are used to compute discounted unpaid losses under Sec. 846 and discounted estimated salvage recoverable under Sec. 832, respectively. The revenue procedure also contains new discount factors required by P.L. 115-97, known as the Tax Cuts and Jobs Act, and obsoletes Table 6 of Rev. Rul. 2017-24. Rev. Proc. 2018-13 (1/25/18).
Safe harbors for continuity of interest requirement
The IRS provided safe harbors that taxpayers may use to value stock for purposes of the Regs. Sec. 1.368-1(e) continuity of interest requirement. Rev. Proc. 2018-12 (1/23/18).
IRS issues procedures for applications by Sec. 501(c)(4) organizations
The IRS issued a revenue procedure that modifies Rev. Proc. 2018-5 by applying the procedures for Exempt Organizations determination letters to new Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code. The procedure provides that Sec. 501(c)(4) organizations may choose to seek a determination letter recognizing exemption under Sec. 501(c)(4) by filing Form 1024-A, but are not required to do so except in certain cases (e.g., situations involving Sec. 6033(j)(2), regarding failures to file annual information returns or annual electronic notifications required under Sec. 6033(a) or Sec. 6033(i)). Rev. Proc. 2018-10 (1/24/18).
Court limits couple’s real estate losses, deductions, and contributions but reject’s penalty assessment
The Tax Court held that the owner of a custom home building corporation and his wife (1) were limited under Secs. 212 and 163(d)(1) in the amounts they could deduct for real estate activities conducted by limited liability companies they owned; (2) were only entitled to a capital loss from the sale of certain real property they owned, (3) were not entitled to deductions for losses from their real estate investment businesses because they were disallowed as passive losses under Sec. 469 and (4) were not limited in their deduction for a contribution of land to a charity to the difference between the land’s sale price, and its cost basis, but could instead deduct the difference between the sale price and the land’s fair market value because they held the land for investment. The court also found that, because the couple provided complete records to their tax return preparer and reasonably relied on his advice, they were not liable for the accuracy-related penalties assessed by the IRS under Sec. 6662(a). Conner, T.C. Memo. 2018-6 (1/22/18).
Taxpayer had unreported income from embezzled funds
The Tax Court held that a taxpayer had unreported income as a result of embezzling funds from the company that she worked for. The court also found the taxpayer liable for almost $70,000 in fraud penalties under Sec. 6663, as well as a Sec. 6651(a)(1) addition to tax and, because the IRS established by clear and convincing evidence that the taxpayer filed false or fraudulent returns with the intent to evade tax, held that the assessment period remained open. Byrum, T.C. Memo. 2018-9 (1/25/18).
Taxpayer not entitled to loss deductions relating to music club
The Tax Court held that a taxpayer was not entitled to loss deductions from a music club she owned because running the music club was primarily motivated by personal pleasure, not profit, and the taxpayer was simply using the club’s losses to offset trust and capital gain income. However, the court rejected the IRS’s assessment of Sec. 6662(a) accuracy-related penalties because the IRS failed to present any evidence that the penalties were personally approved (in writing) by the immediate supervisor of the individual assessing the penalties. Ford, T.C. Memo. 2018-8 (1/25/18).
Leaving tax return “under the mat” of wife’s house was not reasonable cause for late filing
The Tax Court held that a taxpayer, who separated from his wife in December 2007, was liable for penalties for failing to timely file his 2007 return and rejected his argument that he had reasonable cause and did not willfully neglect his filing obligation for 2007 because he signed a joint return on April 15, 2008, and then left it and a check for the liability reported on that return “under the mat” of his wife’s house. However, the court did not sustain the IRS’s assessment of penalties under Sec. 6651(a)(2) for failing to pay the tax shown on the return and under Sec. 6654 for failing to pay estimated taxes because, the court said, the IRS failed to carry its burden of proof. Plato, T.C. Memo. 2018-7 (1/24/18).
Prop. regs. on business needs exclusion from foreign personal holding company income
Proposed regulations provide guidance on the treatment of foreign currency gain or loss of a controlled foreign corporation (CFC) under the business needs exclusion from foreign personal holding company income. They also provide an election for a taxpayer to use a mark-to-market method of accounting for foreign currency gain or loss attributable to Sec. 988 transactions. REG-119514-15 (1/22/18).
Flora rule applies where preparer does not file refund claim within appropriate time
The Office of Chief Counsel advised that the Flora rule (i.e., the rule based on Flora, 362 U.S. 145 (1960), which provides that a taxpayer generally must pay the full amount of an income tax deficiency assessed by the IRS before he may challenge its correctness) applies where a preparer does not file suit within 30 days/six months of filing the refund claim (using the Sec. 6694(c) exception). Thus, the Chief Counsel’s Office said, a preparer will need to file suit within 30 days and six months of filing the refund claim; otherwise, the preparer will have to pay the penalty in full in order for the court to have jurisdiction over the claim. CCA 201804008 (1/26/18).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.