Document summaries for the week of May 7, 2018

EMPLOYEE BENEFITS

IRS issues monthly corporate yield curve and segment rates

The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance on the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2018-53 (5/10/18).

 

INDIVIDUALS

After including son’s savings account in couple’s income, couple is solvent

The Tax Court held that a couple who had a large amount of debt discharged during the year at issue were really the owners of their son’s savings account because they had transferred the money into the savings account and enjoyed the benefits of the funds in the account. As a result, the court concluded that the couple were not insolvent and thus had to include the discharged debt in income. Hamilton, T.C. Memo. 2018-62 (5/8/18).

IRS issues 2019 inflation-adjusted HSA amounts

The IRS announced the following 2019 inflation-adjusted amounts for health savings accounts (HSAs) for calendar year 2019: (1) The annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan (HDHP) is $3,500; and (2) the annual limitation on deductions for an individual with family coverage under an HDHP is $7,000. Also for calendar year 2019, the IRS said that an HDHP is defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and where annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 for self-only coverage or $13,500 for family coverage. Rev. Proc. 2018-30 (5/10/18) (see related news story).

Couple cannot deduct payments to children and for vacations, meals; penalties upheld

The Tax Court held that a couple were not entitled to deductions for payments on behalf of the couple’s children and other reported expenses of the wife’s business, such as dry cleaning, meals, entertainment, and vacations to Jamaica. Further, because the couple presented no evidence or claim that they consulted competent tax professionals, the court was not persuaded that they had reasonable cause for the underpayment of tax or that they reported those personal expenses as business expenses in good faith and, thus, upheld the imposition of penalties. Wax, T.C. Memo. 2018-63 (5/10/18).

 

MISCELLANEOUS

IRS issues guidance on area median gross income figures

In a revenue procedure, the IRS provided guidance with respect to the U.S. and area median gross income figures that are to be used by issuers of qualified mortgage bonds, as defined in Sec. 143(a), and issuers of mortgage credit certificates, as defined in Sec. 25(c), in computing the housing cost/income ratio described in Sec. 143(f)(5). Issuers must use the U.S. and area median gross income figures specified in the revenue procedure for commitments to provide financing that are made, or (if the purchase precedes the financing commitment) for residences that are purchased, in the period that begins on April 1, 2018, and ends on the date when these U.S. and area median gross income figures are rendered obsolete by a new revenue procedure. Rev. Proc. 2018-33 (5/10/18).

 

PARTNERSHIPS

IRS does not bear burden of production for Sec. 7491 penalties in a partnership-level proceeding

The Tax Court held that, unlike the situation in Graev, 149 T.C. No. 23 (2017), in which it held that the IRS bears the burden of production when individuals are assessed penalties under Sec. 7491(c), the IRS does not bear the burden of production in a partnership-level proceeding. The court also found that, where the IRS does not bear the burden of production as to penalties, the lack of supervisory approval of penalties may be raised as a defense to those penalties; however, because the taxpayers did not raise the lack of supervisory approval of penalties as a defense to the penalties at issue, that defense was waived. Dynamo Holdings Limited Partnership, 150 T.C. No. 10 (5/7/18).



TAX ACCOUNTING

IRS modifies guidance on recognizing built-in gain or loss under Sec. 382(h)

The IRS modified the Sec. 338 and Sec. 1374 approaches set forth in Notice 2003-65 for determining recognized built-in gains or losses under Sec. 382(h). According to the IRS, the hypothetical cost recovery deductions that would have been allowable had an election under Sec. 338 been made or had an asset been purchased at fair market value are determined without regard to the additional first-year depreciation deduction in Sec. 168(k). This new rule applies to any ownership changes that occur after May 8, 2018. Notice 2018-30 (5/8/18).

Advances were bona fide loans, but assets transferred at less than FMV were gifts resulting in deemed distributions

The Tax Court held that advances by a Canadian real estate development corporation, which had expanded its operations into the United States by shifting assets to entities in a U.S.-based structure, were bona fide loans to a related U.S. partnership and the partnership could deduct the interest. However, the court also found that some of the assets transferred to the U.S. entities were transferred at less than fair market value and thus were gifts that resulted in deemed distributions up the Canadian ownership chain followed by deemed gifts to the owners of the U.S.-based structure. Dynamo Holdings Limited Partnership, T.C. Memo. 2018-61 (5/7/18).

IRS issues new automatic accounting method change to conform with FASB ASC Topic 606 regarding recognition of certain income

The IRS modified Rev. Proc. 2017-30 by providing a new automatic method change for taxpayers to use in changing their accounting methods to conform with FASB Accounting Standards Codification Topic 606, which concerns the recognition of revenue from contracts with customers. Under the new FASB accounting standards, an entity must recognize revenue, for financial statement purposes, for goods and services promised to customers in an amount that reflects what the entity expects to receive in exchange for those goods and services. Rev. Proc. 2018-29 (5/10/18).

IRS updates list of automatic accounting method changes

The IRS updated the revenue procedure that lists the automatic changes to which the automatic change procedures in Rev. Proc. 2015-13 apply. The updated list is effective for a Form 3115, Application for Change in Accounting Method, filed on or after May 9, 2018, for a year of change ending on or after Sept. 30, 2017, that is filed under the automatic change procedures of Rev. Proc. 2015-13, as subsequently modified by Rev. Proc. 2015-33, Rev. Proc. 2017-59, and Rev. Proc. 2016-1. Rev. Proc. 2018-31 (5/9/18) (see related news story).

Newsletter Articles

SPONSORED REPORT

Tax reform changes are now in effect

With all the recent tax law changes, this year it’s more important than ever to make sure your clients’ tax situations are squared away before year end. This report provides necessary guidance to ensure 2019 starts without a hitch.

DEDUCTIONS

Understanding the new Sec. 199A business income deduction

The new deduction allows certain business owners to keep pace with the significant corporate tax cut provided by the Tax Cuts and Jobs Act.