Document summaries for the week of May 28, 2018
10% increase applicable to dispositions of property contributed to an Alaska Native Settlement Trust is a tax, not a penalty
The Office of Chief Counsel, citing statutory language and a Supreme Court case, advised that the 10% increase applicable to a disposition of property that had been contributed to an Alaska Native Settlement Trust and subject to an election under Sec. 247(g) is a tax, even though the legislative history refers to the additional 10% amount as a penalty. The Chief Counsel’s Office also discussed what information an electing trust must provide to meet the statutory requirements that the property subject to the election be described with “reasonable particularity,” quoting Sec. 6039H(e)(2). CCA 201822026 (6/1/18).
Chief Counsel addresses confusion caused by IRS training materials
The Office of Chief Counsel was asked whether certain IRS training materials were correct in citing Regs. Sec. 31.6413(a)-2(c)(2) for the proposition that “[a]n employer CANNOT claim an adjustment for [Income Tax Withholding] and additional Medicare taxes after the close of the calendar year for the employee.” The Chief Counsel’s Office advised that, in answering that question, it became clear that there is widespread confusion concerning the actions an employer must take by calendar year end and what actions are permitted after the calendar year end and cited Rev. Rul. 2009-39 for the correct treatment in situations in which there is an overpayment of income tax withholding and the error is ascertained in the same year the wages were paid (i.e., before the calendar year end). CCA 201822028 (6/1/18).
Rollover fee debited to IRA was not a taxable distribution; failure to substantiate expenses precludes deductions
The Tax Court held that a couple (1) were not entitled to deduct any expenses claimed on their Schedule C, Profit or Loss From Business, for 2008 and 2009 due to lack of substantiation; (2) were not entitled to charitable contribution deductions for the same years also due to lack of substantiation; and (3) were liable for penalties for failing to timely file their returns, but they were not subject to penalties under Sec. 6662 as a result of the IRS’s failing to satisfy its burden of production with respect to Sec. 6751(b)(1). The Tax Court also concluded that a $28 rollover fee that was debited directly from the husband’s individual retirement account constituted a nontaxable administrative fee and, therefore, was not a taxable distribution under Sec. 408(d) and was not subject to the 10% penalty tax under Sec. 72(t). Azam, T.C. Memo. 2018-72 (5/29/18).
Taxpayer could have deducted business expenses as statutory employee with proper substantiation; other deductions lack substantiation
The Tax Court held that a taxpayer was a “statutory employee” for employment tax purposes, and not a common law employee as the IRS had argued, and thus could report business income and expenses on Schedule C and avoid the Schedule A limitations on deductions. The court also held that the couple (1) incurred deductible medical expenses when they enrolled in a weight-loss program but could not deduct them because they failed to substantiate them; (2) did not properly substantiate business expenses on Schedule C and thus could not deduct them; (3) had unreported pension income; (4) and could not deduct unsubstantiated charitable contributions. Finally, the IRS was permitted to reopen the record to submit the Civil Penalty Approval Form required under Sec. 6751(b) and, if the computations showed that the couple substantially understated their tax liability, then the couple were also liable for penalties for negligence and disregard of the rules and regulations. Fiedziuszko, T.C. Memo. 2018-75 (5/31/18).
Treasurer of tax-exempt organization was responsible person subject to penalties for nonpayment of employment taxes
The Tax Court held that a taxpayer, who was on the board of directors of a tax-exempt organization and was treasurer for a two-year period in which employment taxes were not paid over to the IRS, was a responsible person for those taxes and was liable for trust fund recovery penalties under Sec. 6672. The court rejected the taxpayer’s argument that the penalties were not valid because they had not been approved by an IRS supervisor, concluding that the IRS complied with the Sec. 6751(b)(1) requirements. Jarrett, T.C. Memo. 2018-73 (5/31/18).
Taxpayers lose on son-of-boss shelter transactions but slide on penalties
The Tax Court held that a lawyer and an accountant could not deduct losses passed through to them from alleged partnerships they had formed because the losses did not result from legitimate investments but instead resulted from son-of-boss shelter transactions, which do not generate deductible losses. However, the court also concluded that the IRS did not meet its burden under Sec. 7491(c) of proving that that accuracy-related penalties assessed against the taxpayers were personally approved (in writing) by an IRS supervisor, and thus the taxpayers were not liable for the 40% gross valuation misstatement penalties. Greenberg, T.C. Memo. 2018-74 (5/31/18).
Court denies deduction for clothing and meal expenses but allows deduction for certain unreimbursed travel expenses
The Tax Court held that a taxpayer who worked as a senior marketing communications specialist and was responsible for overseeing internal and external company events, including trade shows (1) could not deduct over $8,000 for clothing she claimed was required by her employment because those costs are only deductible if they are not suitable to be worn outside work; (2) could not deduct expenses for meals with clients because the receipts for those meals did not explain the business purpose or the business relationship with the clients; and (3) could not deduct unsubstantiated charitable contributions, including cash donations at church and out-of-pocket transportation expenses for performing donated services. However, because the record showed that the taxpayer’s tax home was the company’s office and she traveled away from home for three trade shows, the court concluded that the taxpayer was entitled to deduct the travel expenses, subject to the 2% limitation on miscellaneous itemized deductions and the 50% limitation under Sec. 274(n)(1) for meal expenses. Farolan, T.C. Summ. 2018-28 (5/30/18).
IRA trustee must report and withhold income tax when IRA escheats to state as unclaimed property
In a situation in which an individual has an interest in an individual retirement account (IRA) plan but has failed to make a withholding election with respect to that interest and where the individual’s interest in the IRA must be paid over to a state as unclaimed property, the IRS ruled that the payment by the IRA trustee to the state is subject to federal income tax withholding under Sec. 3405. The IRS also ruled that the payment by the trustee is subject to reporting under Sec. 408(i). Rev. Rul. 2018-17 (5/29/18).
Enhanced oil recovery credit inflation adjustments announced
The IRS announced the Sec. 43 inflation-adjustment factor and phaseout amount for the enhanced oil recovery credit for the 2018 calendar year. Notice 2018-49 (5/29/18).
Renewable electricity production and refined coal production credit amounts for 2018
The IRS reported the 2018 inflation-adjustment factor and reference prices used to determine the availability of the Sec. 45 credit for electricity produced from qualified energy resources and refined coal and includes the credit amounts for renewable electricity production and refined coal production. Notice 2018-50 (5/29/18).
2018 applicable percentage for determining depletion on marginal properties
The IRS announced that under Sec. 613A(c)(6)(C), the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2018 is 15%. Notice 2018-51 (5/29/18).
2017 applicable reference price for qualified marginal well production credit
The IRS announced the applicable reference price for qualified natural gas production from qualified marginal wells during tax years beginning in 2017 for purposes of the Sec. 45I marginal well production credit. Notice 2018-52 (5/29/18).
Certain taxpayers involved in identity theft are not entitled to refunds unless they timely filed informal refund claims
The Office of Chief Counsel, in addressing a situation involving unidentified taxpayers and identity theft, offset, and a claim for refund, advised that it agreed with unidentified advice from the Small Business/Self-Employed Counsel that the taxpayers at issue were not entitled to a refund since they had no filing requirement and thus the “three years from the time the return was filed” time frame in Sec. 6511(a) did not apply; instead the proper period was the two years from the date the tax was paid, which was the date that the IRS offset their refund with the balance due. Sec. 6511, the Chief Counsel’s Office noted, bars relief for the taxpayers unless they timely filed an informal refund claim, although the Chief Counsel indicated that this requirement could be met by evidence that the taxpayers called the IRS and indicated that they wanted the amount offset returned to them. CCA 201822027 (6/1/18).
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.