Document summaries for the week of June 25, 2018
Nuclear Waste Fund fees do not result in NOL
The Eleventh Circuit held that a company that operated nuclear power plants could not claim a refund for net operating losses resulting from fees it paid to the Nuclear Waste Fund for disposal of radioactive waste because they did not qualify as decommissioning expenses under Sec. 172. Nextera Energy, Inc., No. 17-12304 (11th Cir. 6/28/18).
IRS abused its discretion in revoking favorable ESOP ruling
The Tax Court held that the IRS abused its discretion in retroactively revoking a determination letter that had found that the taxpayer’s employee stock ownership plan (ESOP) was qualified under Sec. 401(a) and that the ESOP’s related trust (ESOT) was exempt from tax under Sec. 501(a) for the ESOT’s plan year ending March 31, 2001, and all subsequent plan years. The court rejected the IRS’s argument that a restated plan document was never adopted, after finding that the document and amendments were adopted shortly after the taxpayer received the determination letter. Val Lanes Recreation Center Corp., T.C. Memo. 2018-92 (6/26/18).
Exempt status of organizations revoked
The IRS announced that it has revoked its determination that various organizations qualified as organizations described in Secs. 501(c)(3) and 170(c)(2). Announcement 2018-10 (6/25/18).
Taxpayer not entitled to innocent spouse relief from taxes paid from life insurance proceeds
The Tax Court rejected a taxpayer’s request for innocent spouse relief and held that the taxpayer was not entitled to a refund of any amounts she paid in satisfaction of her and her late husband’s federal income tax liabilities for the years in issue. The court concluded that, because the tax liabilities for the years in issue were paid out of the proceeds of life insurance the husband had purchased and funded with his own income, the taxpayer did not suffer economic hardship as a result of the satisfaction of those liabilities, which weighed against granting the relief. Hale, T.C. Memo. 2018-93 (6/26/18).
Tax Court upholds couple’s deficiencies for unreported income and denied deductions
The Tax Court held that a couple (1) had unreported income of almost $57,000 from the sale of stock during 2008; (2) had unreported gross receipts from the husband’s wholly owned S corporation of more than $341,000 for 2008 and 2010; and (3) was not entitled to a deduction in 2012 of more than $43,000 for a net operating loss. The court also held that, due to lack of substantiation, the S corporation could not exclude from gross receipts or sales in 2013 the entire claimed amount of cost of goods sold and could not deduct the entire amount of rent and other claimed expenses. Amelsberg, T.C. Memo. 2018-94 (6/28/18).
Unemployment compensation is taxable despite offset of taxpayer’s back pay award
The Tax Court upheld a tax deficiency assessed against a taxpayer who failed to report $1,678 of wages and $7,756 of unemployment compensation he received. The court rejected the taxpayer’s argument that he should not have to pay tax on the unemployment compensation because it was used to offset back pay that he was subsequently awarded. Nelson, T.C. Memo. 2018-95 (6/28/18).
Court upholds tax deficiencies and fraud penalties on charitable deduction
The Tax Court upheld tax deficiencies and fraud penalties assessed against a taxpayer who claimed a charitable contribution deduction for donating stock in his closely held corporation to a charity he founded. The court noted that another court convicted the taxpayer of filing false tax returns for the years at issue upon finding that he had not transferred ownership of the stock to the charity. Guess, T.C. Memo. 2018-97 (6/28/18).
Couple cannot deduct total costs of providing gluten-free food for individual in their foster care
The Tax Court denied a couple a deduction for total grocery expenses of providing a gluten-free diet to a man with developmental disabilities for whom the couple provided foster care in their home. The court noted that any excess cost in providing gluten-free meals had already been accounted for in the amount that the IRS allowed as a deductible expense for groceries, and that any additional expenses were personal. Kho, T.C. Summ. 2018-32 (6/27/18).
IRS posts draft 2018 Form 1040
The IRS posted a draft version of the 2018 Form 1040, U.S. Individual Income Tax Return. The draft form is significantly shorter than prior years’ versions. Draft Form 1040 (6/29/18) (see related news story).
IRS postpones applicability of Sec. 987 regulations
The IRS postponed the applicability date of final and temporary Sec. 987 regulations (T.D. 9794 and T.D. 9795) for one year. The final regulations will apply to tax years beginning on or after Jan. 1, 2020; the temporary regulations, which expire Dec. 6, 2019, will not become applicable. Notice 2018-57 (6/25/18).
Tax Court has jurisdiction to consider innocent spouse relief on a deficiency notice petition
In a memorandum discussing Tax Court jurisdiction in innocent spouse cases involving a statutory notice of deficiency, the Office of Chief Counsel advised that the court has jurisdiction to consider innocent spouse relief for an underpayment in a case it on a petition from a deficiency notice, pursuant to the court’s broad authority in Sec. 6213 and Sec. 6214. The Chief Counsel’s Office cited Naftel, 85 T.C. 527 (1985), in which the Tax Court held that, where a taxpayer files a petition for a redetermination of a deficiency, the court has jurisdiction over the entire tax liability, not just the items determined to be erroneous in the notice of deficiency. Consequently, where a taxpayer raises an affirmative defense to a deficiency determination, the court needs no additional basis for the authority to render an opinion on such issues because the affirmative defense is part of the deficiency proceeding over which the court has jurisdiction. CCA 201826011 (6/29/18).
Chief Counsel advises a closing agreement may include interest due
The Office of Chief Counsel advised that, in Tax Court cases settled by Appeals, there is normally no agreement regarding interest due on a deficiency because the Tax Court does not have jurisdiction over interest. However, the Chief Counsel’s Office noted, a document in Chief Counsel Directives Manual Exhibit 35.11.1-125 contains “below the line” stipulations that suggest interest is due and that it may be immediately assessed. Thus, a closing agreement regarding interest as part of a settlement of the deficiencies at issue would be appropriate. CCA 201826010 (6/29/18).
Partnerships’ option transactions lacked economic substance; IRS’s failure to secure supervisory approval precludes penalties
The Tax Court upheld IRS adjustments of more than $300 million to several partnerships’ income after concluding that the partnerships engaged in transactions involving paired foreign-currency options that lacked any economic substance. However, while finding that the partnerships’ conduct plainly deserved penalties, the court could not sustain accuracy-related penalties assessed under Sec. 6662(a) after the IRS conceded that it did not secure written supervisory approval of the penalties prior to issuing final partnership administrative adjustments, as required by Sec. 6751(b)(1). Endeavor Partners Fund, LLC, T.C. Memo. 2018-96 (6/28/18).