Document summaries for the week of May 21, 2018
Company owner was responsible person
The Third Circuit upheld the imposition of trust fund recovery penalties against the owner of a woodwork fabrication company that did not fully pay its payroll taxes, finding that he was a responsible person and willfully caused the taxes not to be paid. Commander, No. 17-2443 (3d Cir. 5/25/18).
Taxpayer had a profit motive for music business, but failed to substantiate expenses
The Tax Court held that while a music business started by a former aerospace engineer who had had a successful music career many years ago, was a legitimate trade or business, the expenses the business incurred were not deductible because the taxpayer could not substantiate the amounts and business purposes of those expenses. In addition, the court upheld the IRS’s assessment of a penalty for failure to timely file a tax return after rejecting the taxpayer’s explanation that he was waiting for the IRS to resolve any conflicts resulting from the fact that someone stole his identify and had filed a return for the year at issue under his name. Barker, T.C. Memo. 2018-67 (5/21/18).
Court denies deductions for unsubstantiated personal and capital expenditures but rejects penalty assessment
The Tax Court held that a former tax return preparer who had his CPA license revoked was not entitled to large deductions for his business activities due to lack of substantiation and because some of the expenses were either personal or capital expenditures. However, because the IRS failed to produce evidence that it complied with Sec. 6751 by obtaining written IRS approval of the penalties assessed on the taxpayer and his wife, the couple were not liable for the fraud or accuracy-related penalties. Becker, T.C. Memo. 2018-69 (5/21/18).
No bad debt deduction allowed where taxpayer failed to prove debt was worthless
The Tax Court held that a taxpayer’s wholly owned S corporation was not entitled to a bad debt deduction of $363,210 for 2011 because the taxpayer failed to present any evidence that the alleged debt was objectively worthless in 2011 and failed to establish that the advances that made up the debt constituted a bona fide debt and that the parties intended to create a bona fide debtor-creditor relationship. The court also rejected the taxpayer’s argument that distributions from the S corporation created a debt that he owed to the corporation, and it held that the distributions had to be reported as income and treated as capital gain to the extent that they exceeded the taxpayer’s basis in the S corporation stock. Sarvak, T.C. Memo. 2018-68 (5/21/18).
Failure to meet 39-week test precludes deduction for moving expenses
The Tax Court held that a couple (1) were not entitled to deduct moving expenses for each of the years in issue; (2) were not entitled to itemized deductions they claimed on Schedules A, Itemized Deductions, for the years in issue; and (3) were liable for the accuracy-related penalties under Sec. 6662(a). The court concluded that the husband, who worked in various parts of the country as a field engineer, had not established that he stayed and worked in a new location for the requisite 39 weeks to be eligible to deduct moving expenses and had not substantiated the other expenses they deducted. Benjamin, T.C. Memo. 2018-70 (5/22/18).
Lawyer’s failure to provide required information is enough reason to deny collection alternatives
The Tax Court sustained a proposed IRS collection action against a lawyer who had outstanding tax liabilities of almost $200,000. The court noted that at his Collection Due Process hearing, the lawyer sought a collection alternative but did not supply any of the required forms or necessary financial information and had not filed his tax returns for a number of years; thus, it was not an abuse of discretion for the IRS to reject collection alternatives and sustain the collection action. Solny, T.C. Memo. 2018-71 (5/22/18).
IRS updates indexing adjustments for 2019 premium tax credit
The IRS issued a revenue procedure that provides indexing adjustments for certain provisions under Sec. 36B. In particular, it updates for 2019 the Applicable Percentage Table in Sec. 36B(b)(3)(A)(i) that is used to calculate an individual’s premium tax credit and the required contribution percentage under Sec. 36B(c)(2)(C)(i)(II). Rev. Proc. 2018-34 (5/22/18).
Taxpayers not entitled to deduct car and truck expenses
The Tax Court held that a couple were not entitled to Schedule C deductions for car and truck expenses for 2013 and 2014 related to the husband’s real estate activity because, although the husband was a licensed real estate agent during those years, he did not earn any commissions and was not in the trade or business of being a real estate agent; thus the car and truck expenses were not incurred in the ordinary course of a trade or business. Additionally, the court concluded the couple were liable for accuracy-related penalties under Sec. 6662(a) because they had substantial understatements of income tax for the years at issue and failed to exercise due care in preparing their tax returns. Samadi, T.C. Summ. 2018-27 (5/24/18).
Guidance issued on 2018 standard mileage rates
The IRS issued guidance to taxpayers about changes in the use of standard mileage rates and increased depreciation limits for passenger automobiles as a result of P.L. 115-97, known as the Tax Cuts and Jobs Act, which made amendments to Secs. 67 and 217. Notice 2018-42 (5/25/18) (see related news story).
Population figures provided for various tax provisions
The IRS issued the population figures to use in calculating: (1) the 2018 calendar-year population-based component of the state housing credit ceiling under Sec. 42(h)(3)(C)(ii); (2) the 2018 calendar-year volume cap under Sec. 146; and (3) the 2018 volume limit under Sec. 142(k)(5). Notice 2018-45 (5/21/18).
Partnership does not qualify as small partnership under TEFRA
The D.C. Circuit held that a partnership was not eligible for the Sec. 6231(a)(1)(B) small partnership exception under the Tax Equity and Fiscal Responsibility Act because its single-member LLC partners were passthrough partners, which disqualified it as a small partnership under Regs. Sec. 301.6231(a)(1)-1(a)(2). Mellow Partners, No. 16-1454 (D.C. Cir. 5/22/18).
STATE & LOCAL TAXES
IRS to issue regs. on state charitable funds
The IRS announced that it plans to issue regulations in response to state legislation creating charitable funds that are designed to help taxpayers avoid the $10,000 limitation on the deduction for state and local taxes under Sec. 164 as amended by P.L. 115-97, known as the Tax Cuts and Jobs Act. Notice 2018-54 (5/23/18) (see related news story).
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.