Document summaries for the week of Jan. 29, 2018

INDIVIDUALS

Virgin Islands information sharing with IRS amounts to filing of the taxpayers’ return

The Tax Court held that, where a couple sent their income tax return to the Virgin Islands Bureau of Internal Revenue and the first two pages of it somehow (and without their knowledge or explicit approval) ended up at the Philadelphia office of the IRS, the couple were treated as having filed their return with the IRS, and that started the running of the statute of limitation. The court noted that it is not unprecedented for a court to determine that a return filed in one tax jurisdiction may begin the running of the statute of limitation in a second tax jurisdiction, and, while the couple might not have sent the forms to the IRS themselves, the court could find no authority saying they had to do so if the IRS received it from another source. Hulett, 150 T.C. No. 4 (1/29/18).

Court sustains levy on taxpayer for failing to pay trust fund recovery penalties

The Tax Court sustained an IRS determination to collect by levy a taxpayer’s unpaid trust fund recovery penalties under Sec. 6672. The court held that there was no abuse of discretion in the IRS’s refusal to accept the taxpayer’s offer in compromise and that the taxpayer’s repeated rejections of a proposed installment agreement did not result in an abuse of discretion. Preston, T.C. Summ. 2018-4 (1/29/18).

Court rejects taxpayer’s request for litigation fees, finding he was not the prevailing party

The Tax Court held that, with respect to litigation between a taxpayer and the IRS involving the allocation of retirement plan deductions to the taxpayer, the taxpayer was not the prevailing party under Secs. 7430(a) and (c)(4) because the position of the United States was substantially justified within the meaning of Sec. 7430(c)(4)(B). The court thus denied the taxpayer’s motion for fees and costs relating to the litigation. Bruner, T.C. Memo. 2018-10 (1/30/18).

Alimony deduction denied; taxpayers’ intent irrelevant

The Tax Court held that a taxpayer was not entitled to a deduction for alimony paid to his former spouse in excess of the amount the IRS had allowed because the disputed payments were voluntary and hence did not qualify as alimony under Sec. 71(a) and Sec. 215(a). As for the taxpayer’s assertion that he had intended that the payments he made to his former spouse through the end of 2013 would be treated as alimony and that his former spouse agreed, the court noted that Congress eliminated any consideration of intent in determining the deductibility of a payment as alimony in favor of the objective test that rests entirely on fulfilling Sec. 71’s explicit requirements. Devaleria, T.C. Summ. 2018-5 (1/31/18).

No whistleblower claim allowed where IRS did not act on publicly available information submitted by former GAO auditor

The Tax Court granted an IRS motion for summary judgment after finding that the IRS Whistleblower Office (WO) did not initiate an administrative or judicial action on the basis of information that a former auditor for the Government Accountability Office supplied and did not collect any proceeds as a result of that information. The former auditor had theorized that the IRS was not receiving notice of many large jury awards or settlements and began filing whistleblower claims, on the basis of publicly available information, with the WO to test her theory. McCrory, T.C. Memo. 2018-12 (1/31/18).

Court disallows deductions for personal and capitalizable expenses but rejects assessment of penalty

The Tax Court held that a taxpayer could not immediately deduct a majority of expenditures disallowed by the IRS for 2010 and 2011 because they were either personal expenses or  capital items, such as the construction of a drainage system and the improvement of roads on her property. However, the court found the taxpayer had reasonable cause for her tax deficiency and rejected the assessment of the accuracy-related penalty after considering all of the taxpayer’s testimony, the documentary evidence she submitted, and taking into account her relative inexperience in preparing tax returns, her lack of knowledge about the sometimes complicated issue of whether an expenditure must be capitalized, and the fact that she had extensive detailed records for l the expenditures. Wells, T.C. Memo. 2018-11 (1/31/18).

 

IRS PROCEDURE

IRS issues guidance on income tax withholding rules

The IRS issued guidance that (1) extends the effective period of Forms W-4, Employee’s Withholding Allowance Certificate, furnished to claim exemption from income tax withholding under Sec. 3402(n) for 2017 until Feb. 28, 2018, and temporarily permits employees to claim exemption from withholding under Sec. 3402(n) for 2018 by using the 2017 Form W-4; (2) suspends the requirement that employees must furnish their employers new Forms W-4 within 10 days of changes of status resulting in fewer withholding allowances; (3) provides that the optional withholding rate on supplemental wage payments is 22% for tax years 2018 through 2025; and (4) provides that, for 2018, withholding on annuities or similar periodic payments where no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances under Sec. 3405(a)(4). The IRS said it is currently working on revising Form W-4 to reflect the changes made by P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017, and as a result, the 2018 Form W-4 may not be released until after Feb. 15, 2018. Notice 2018-14 (1/29/18) (see related news story).

Taxpayer liable for Sec. 6701 penalty for preparing reports mischaracterizing the life of depreciable property

The Office of Chief Counsel advised that an individual  is liable for the Sec. 6701 penalty for aiding and abetting understatements of tax liability for returns on which his clients claimed incorrect depreciation deductions in accordance with a report, which he had  furnished  and which mischaracterized the life of certain property. According to the Chief Counsel’s Office, when the individual furnished to clients a report that mischaracterized components of 39-year depreciable property as property with a shorter 5-year useful life, he  aided in  preparing the returns of clients who understated their tax liability by claiming excessive depreciation deductions and the individual knew that the report would be used in connection with a material matter under the internal revenue laws. CCA 201805001 (2/2/18).

 

TAX ACCOUNTING

Business activities conducted through a partnership and three separate S corps cannot be treated as a single activity for Sec. 465 purposes

The Office of Chief Counsel was asked whether business activities conducted through a partnership and three separate S corporations could be aggregated and treated as a single activity for purposes of the Sec. 465 at-risk rules under the facts  detailed in a memorandum. The Chief Counsel’s Office advised that the organization of the four activities into separate legal entities that limit the liability of their owners weighed heavily against treating the four activities as a single trade or business that would allow them to be aggregated and treated as a single activity for  Sec. 465 purposes. CCA 201805013 (2/2/18).

Newsletter Articles

PRACTICE MANAGEMENT

Tax software survey

Our annual survey offers a look at how CPAs judged their tax preparation software in a wide range of types of practices.

NEWS

Congress enacts tax reform

Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted.