Document summaries for the week of March 5, 2018
Chief Counsel addresses application of Secs. 401(a)(4) and 401(a)(26) to a cash balance plan that offsets benefits with benefits under a defined contribution plan
In response to a question involving an employer that has a cash balance plan and a defined contribution plan, the Office of Chief Counsel advised that the special rule of Regs. Sec. 1.401(a)(4)-3(f)(9), under which an employee’s accrued benefit under a qualified plan includes that portion of the benefit that is offset by benefits under another plan, applies only to the extent that the benefit is attributable to pre-participation service or past service. The Chief Counsel’s Office also stated that the special rule of Regs. Sec. 1.401(a)(26)-5(a)(2)(iii), under which an offset of benefits under a defined benefit plan by benefits under another plan is disregarded, does not apply to an offset that applies only to a subset of participants in the defined benefit plan. CCA 201810008 (3/9/18).
Employer’s provision of tax prep services to employees is includible in employees’ income
The Office of Chief Counsel was asked to address a number of issues involving a large American company that employs thousands of U.S. citizens or residents in many countries around the world and maintains a tax equalization policy to facilitate the transfers of its employees to and from its international affiliates. The Chief Counsel’s Office advised that: (1) the tax preparation services provided by the employer for the benefit of its employees working in foreign countries are includible in the employees’ gross income; (2) the amount includible in the employees’ gross income is the fair market value (FMV) of the tax preparation services; (3) the FMV of the tax preparation services constitutes wages for Federal Insurance Contributions Act (FICA) tax purposes; and (4) the FMV of the tax preparation services constitutes wages for purposes of federal income tax withholding, unless the employer has a reasonable belief that that value would be excludable from the employees’ gross income under Sec. 911 or the employer is required by the law of a foreign country to withhold income taxes on that value. CCA 201810007 (3/9/18).
Architect was a real estate professional entitled to deduct rental real estate losses
The Tax Court held that a self-employed architect was entitled to deduct a loss of $42,882 resulting from his rental real estate activities. The court found that the taxpayer qualified as a real estate professional and that his activities were regular, continuous, and substantial within the meaning of Sec. 469(h)(1) and thus were not disallowed under the passive activity loss rules of Sec. 469, as the IRS had argued. Franco, T.C. Summ. 2018-9 (3/6/18).
Family members liable for tax on excess Roth IRA contributions routed through family business
The Tax Court held that, where several family members entered into a prepackaged plan to save taxes by routing funds from their family business through a Bermuda-based foreign sales corporation (FSC) and then into Roth IRAs, the family members, and not their Roth IRAs, were the owners of the FSC stock, and the dividends paid by the FSC were income to the family members. The court also held that the family members were liable under Sec. 4973 for excise taxes on excess contributions to their Roth IRAs but, because they reasonably relied on professional advice, were not liable for penalties under Secs. 6651(a)(1) and (2). Mazzei, 150 T.C. No. 7 (3/5/18).
Court denies additional education credits due to lack of substantiation of expenses
The Tax Court held that a couple were entitled to no greater an amount of education credits than those for which $1,690 in qualified tuition and related expenses was substantiated. Abdel-Fatah, T.C. Summ. 2018-8 (3/6/18).
Tax Court denies inmate’s motions due to lack of jurisdiction
The Tax Court granted an IRS motion to dismiss for lack of jurisdiction a prison inmate’s numerous motions relating to alleged deficiency notices, on the grounds that the IRS had not issued the inmate a statutory notice of deficiency for the years at issue. In addition, the inmate’s motion for an appointment of counsel was denied. Allen, T.C. Memo. 2018-24 (3/6/18).
IRS issues transition relief regarding the application of Sec. 223 to certain health plans
The IRS issued guidance clarifying that a health plan providing benefits for male sterilization or male contraceptives as preventive care under Sec. 223(c)(2)(C) without a deductible, or with a deductible below the minimum deductible for a high-deductible health plan (HDHP) under Sec. 223(c)(2)(A), is not an HDHP under current guidance. The guidance further provides transition relief for periods before 2020, during which coverage has been provided, so that states may change their laws requiring preventive-care benefits for male sterilization or male contraceptives to be provided with low or no deductibles. Notice 2018-12 (3/5/18).
Taxpayer entitled to innocent spouse relief for most of tax liability shown on joint return
The Tax Court held that a taxpayer was entitled to equitable innocent spouse relief under Sec. 6015(f) for most of the tax liability owed on a joint return he filed with his former wife. Of the $1,206 owed to the IRS, the court said the taxpayer was liable for $147 of that amount, which was attributable to the taxpayer’s wages reported on the return. The taxpayer’s ex-wife was responsible for the remainder of the tax due. Heedram, T.C. Memo. 2018-25 (3/7/18).
Taxpayer’s rental real estate losses were limited by passive activity loss rules
The Tax Court held that a taxpayer’s rental real estate activities were passive activities under Sec. 469, and, therefore, her loss deductions from those activities were limited by Sec. 469(i). The court noted that the taxpayer did not keep contemporaneous records of time spent in the real property activities and rejected the taxpayer’s assertion that she was a real estate professional after concluding that she spent only 416 hours during each year under audit in real property trade or business activities. Pourmirzaie, T.C. Memo. 2018-26 (3/8/18).
Taxpayer’s real estate losses were capital, not ordinary, losses
The Tax Court held that a taxpayer’s losses from real estate activities were capital losses, rather than ordinary losses as the taxpayer claimed, because the activities did not constitute a trade or business. Additionally, the court said that even if the taxpayer were a real estate professional as he claimed he was, Sec. 469 would not operate to recharacterize the capital losses as ordinary losses. Levitz, T.C. Summ. 2018-10 (3/8/18).
IRS intends to expand the list of jurisdictions that do not issue TINs
The IRS issued supplemental guidance to Notice 2017-46, which (1) provides guidance modifying the requirements of Temp. Regs. Sec. 1.1441-1T(e)(2)(ii)(B) for withholding agents to obtain and report foreign taxpayer identification numbers (TINs) of their account holders; (2) extends the date on which the requirement to obtain foreign TINs takes effect to Jan. 1, 2018; (3) provides transitional rules for withholding agents obtaining a foreign TIN for an account holder documented with an otherwise valid Form W-8 that was signed before Jan. 1, 2018; and (4) provides exceptions to obtaining foreign TINs for certain categories of account holders. The supplemental guidance explains that the IRS will amend Temp. Regs. Sec. 1.1441-1T(e)(2)(ii)(B) to expand the list of jurisdictions that do not issue TINs to their residents to include jurisdictions that make a request to the U.S. competent authority to be included on that list. Notice 2018-20 (3/5/18).
OPR announces disciplinary sanctions against practitioners
The IRS Office of Professional Responsibility (OPR) announced recent disciplinary sanctions involving attorneys, CPAs, and enrolled agents. Announcement 2018-04 (3/5/18).
IRS updates 2018 inflation adjustments
The IRS issued updated inflation adjustments for 2018, reflecting changes made by P.L. 115-97. Rev. Proc. 2018-18 (3/5/18) (see related news story).
IRS provides guidance on claiming biodiesel and alternative fuels credits and payments
The IRS issued guidance on the procedures that claimants must follow to make a one-time claim for payment of the credits and payments allowable under Secs. 6426(c), 6426(d), and 6427(e) for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar year 2017, which were retroactively extended by the Bipartisan Budget Act of 2018, P.L. 115-123. The guidance also provides instructions for how a claimant may offset its Sec. 4081 liability with the Sec. 6426(e) alternative fuel mixture credit for 2017, as well as instructions for how a claimant may make certain income tax claims relating to biodiesel, second generation biofuel, and alternative fuel. Finally, the guidance addressed the Sec. 4611 oil spill liability tax that expired at the end of 2017, which was reinstated beginning March 1, 2018, through Dec. 31, 2018, also by the budget act, Notice 2018-21 (3/7/18).
IRS issues quarterly interest rates for tax overpayments and underpayments
The IRS issued the rates for interest on tax overpayments and underpayments for the second calendar quarter of 2018, beginning April 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. 2018-07 (3/7/18).
Successive motions do not extend statute of limitation
The Fifth Circuit held that successive motions to vacate or revise a Tax Court decision, raising substantially the same grounds as the first motion, will not affect the time period in which a party may appeal a Tax Court decision. Annamalai, No. 17-60255 (5th Cir. 3/8/18).
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.