Document summaries for the week of June 4, 2018
Rev. Rul. 68-59 obsoleted
The IRS obsoleted Rev. Rul. 68-59, which ruled that, in computing its net operating loss under Sec 172, an exempt organization must exclude the Sec. 512(b)(12) specific deduction of $1,000. Sec. 512(b)(12) was amended in 1969 to codify Rev. Rul. 68-59. Rev. Rul. 2018-14 (6/4/18).
Revenue rulings on advance ruling process obsoleted
The IRS obsoleted five old revenue rulings: Rev. Ruls. 74-487, 75-211, 77-115, 77-407, and 80-113. These rulings provided guidance on the advance ruling process under former Regs. Secs. 1.170A-9(e)(5) and 1.509(a)-3(d). T.D. 9549 subsequently eliminated the advance ruling process for determining whether a newly created Sec. 501(c)(3) organization is not a private foundation. Rev. Rul. 2018-15 (6/4/18).
IRS issues guidance in advance of proposed regulations on excise tax on educational institutions
The IRS announced that it intends to issue proposed regulations clarifying the calculation of net investment income for purposes of the imposition of the 1.4% excise tax on an educational institution’s net investment income under Sec. 4968. In the meantime, the IRS said taxpayers can rely on interim guidance that provides that, in the case of property held by an applicable educational institution on Dec. 31, 2017, and continuously thereafter to its disposition date, the basis of that property for determining gain will be deemed to be not less than its fair market value on Dec. 31, 2017, plus or minus all adjustments after Dec. 31, 2017, and before the date of disposition, consistent with the existing Sec. 4940(c) regulations, which govern the excise tax on private foundations. Notice 2018-55 (6/8/18).
Letters from school and doctor show that a child lived with the parent claiming tax benefits
The Tax Court held that, because a minor child whom the taxpayer claimed as a dependent had the same principal place of abode as the taxpayer for more than one-half of 2014, the taxpayer was entitled to a child tax credit, an earned income tax credit, and head of household filing status with respect to the child for 2014. The court relied on the fact that correspondence from the child’s pediatrician and school both indicated that the child lived with the taxpayer. Engesser, T.C. Summ. 2018-29 (6/4/18).
Taxpayer entitled to energy credit and bonus depreciation deduction in solar venture
The Tax Court held that a taxpayer established a basis in solar panels and related equipment for purposes of claiming an energy credit, but that the basis did not include (1) a down payment on which the taxpayer defaulted and toward which he did not pay any amount during the tax year or (2) a credit for utility company rebates assigned to the panels’ seller, which was really a price reduction. The court also concluded that the taxpayer was entitled to the 100% bonus depreciation deduction under Sec. 168(k)(5). For purposes of claiming a net loss in his solar energy venture, the taxpayer had sufficient amounts at risk under Sec. 465 and materially participated in the venture under Sec. 469, the court held. In addition, the court held he was not liable for the accuracy-related penalty assessed under Sec. 6662(a). Golan, T.C. Memo. 2018-76 (6/5/18).
Court upholds levy notices against taxpayer owing trust fund recovery penalties
The Tax Court granted summary judgment to the IRS and upheld two notices of intent to levy relating to the IRS’s effort to collect trust fund recovery penalties assessed against the taxpayer. The court concluded that the IRS settlement officer did not abuse her discretion in declining to accept a $104,000 offer in compromise for assessed penalties exceeding $800,000, when the taxpayer’s reasonable collection potential was $231,657. The court also found no need to decide whether Sec. 6751(b) applied because the record included a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, reflecting supervisory approval of the trust fund recovery penalties in question. Gallagher, T.C. Memo. 2018-77 (6/6/18).
No theft loss deduction allowed where couple couldn’t substantiate amount of the loss
The Tax Court held that a couple were not entitled to a theft loss deduction for personal and business items stolen from their vacant garage because (1) the couple did not offer a competent appraisal of the stolen property; (2) the couple presented no evidence demonstrating the missing items’ costs or adjusted bases; (3) many of the missing items were previously expensed on the couple’s tax returns; and (4) the court was not convinced that the recovery of their insurance claim was so unlikely that they could claim a deduction for the year at issue, especially since they spent the next six years pursuing the insurance company claim. The court also disallowed many other expenses deducted by the couple due to lack of substantiation. Gaunt, T.C. Memo. 2018-78 (6/6/18).
Taxpayer not entitled to tax benefits for his children because they were not his ‘qualifying’ children
The Tax Court upheld the IRS’s disallowance of a taxpayer’s claimed dependency exemption deductions, additional child tax credit, and earned income tax credit (EITC) for his children after concluding that they were not his qualifying children for purposes of claiming those tax benefits. However, the court did hold that the taxpayer on his own qualified for the EITC because his earned income was below the threshold for individuals without qualifying children. Johnson, T.C. Summ. 2018-31 (6/6/18).
Taxpayer is entitled to per diem deductions for tending to timberland
The Tax Court held that a taxpayer was entitled to per diem deductions when he spent 167 days away from his home to tend to his timberland in another, remote part of Washington state. The court rejected the IRS’s position that the taxpayer’s tax home was where the timberland was located in Washington or that the taxpayer was considered an “itinerant” because he did not have a tax home. Maki, T.C. Summ. 2018-30 (6/6/18).
Court refuses to accept as evidence couple’s Forms 1098
The Tax Court held that, for mortgage interest deductions in 2013 and 2014 a couple took for property they allegedly owned, it could not rely on Forms 1098, Mortgage interest Statement, offered into evidence, and thus could not allow the deductions, because (1) the couple’s address was not shown in their 2013 and 2014 tax returns; (2) the record did not establish the property or properties to which the forms pertained; (3) the record did not establish that the couple owned the property or properties to which the forms pertained; and (4) the record did not establish whether the property or properties to which those forms pertained constituted the couple’s primary residence, secondary residence, or investment properties. The court also disallowed other deductions the couple took because they were unsubstantiated and upheld accuracy-related penalties. Singh, T.C. Memo. 2018-79 (6/7/18).
IRS announces Sec. 965 penalty relief
The IRS announced relief from late-payment penalties and that it will allow late elections for taxpayers subject to the new Sec. 965 transition tax on deemed repatriated foreign earnings, which was enacted by P.L. 115-97, known as the Tax Cuts and Jobs Act. IR-2018-131 (6/4/18) (see related news story).
IRS issues quarterly interest rates for tax overpayments and underpayments
The IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2018, beginning July 1, 2018. The interest rates will be 5% for overpayments (4% in the case of a corporation), 5% for underpayments, 2.5% for the portion of a corporate overpayment exceeding $10,000, and 7% for large corporate underpayments. Rev. Rul. 2018-18 (6/7/18).
Chief Counsel’s Office addresses informal refund claims
The Office of Chief Counsel advised that, while the regulations under Sec. 6402 set forth the formal requirements for filing a refund claim, the courts have long recognized that an informal refund claim may suffice (e.g., Kales, 314 U.S. 186 (1941)). According to the Chief Counsel’s Office, if the IRS believes that a taxpayer can successfully show, based on records of communication with the IRS, that the IRS knew or should have known that the taxpayer was requesting a refund, it would be appropriate for the IRS to consider those facts in determining whether there has been an informal refund claim. CCA 201823005 (6/8/18).
Depending on the circumstances, mitigation rules may allow a refund for a closed year
The Chief Counsel’s Office was asked to opine on whether the mitigation rules apply to allow taxpayers to claim refunds by carrying back certain net operating losses (NOLs) to closed years when an examination of an open year leads to the disallowance of a carryforward of a different NOL and reveals a taxpayer’s errors in carrying forward the NOLs without electing to waive the carryback period. In a heavily redacted memorandum, the Chief Counsel’s Office advised that, for mitigation to apply, the following circumstances must exist: (1) correction in the error year is barred by a law or rule of law; (2) there is a determination as defined under Sec. 1313(a); (3) there is a circumstance of adjustment as defined under Sec. 1312; and (4) there is a condition necessary for adjustment as defined under Sec. 1311(b). CCA 201823004 (6/8/18).
IRS posts draft 2019 Form W-4 and instructions
The IRS issued a draft version of the 2019 Form W-4, Employee’s Withholding Allowance Certificate, and its instructions. Draft Form W-4 (6/7/18) (see related news story).
IRS willfully violated bankruptcy court's discharge order
The First Circuit held that by attempting to collect a taxpayer's tax liabilties, an IRS employee willfully violated a bankruptcy court's discharge order discharging the taxpayer's debts. Murphy, No. 17-1601 (1st Cir. 6/7/18).
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.