Document summaries for the week of Nov. 19, 2018
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 as to 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 2018-86 (11/20/18).
IRS updates the Required Amendments List for 2018
The IRS issued the Required Amendments List for 2018 (2018 RA List). The IRS noted that (1) Section 5 of Rev. Proc. 2016-37 provides that, in the case of an individually designed plan, the remedial amendment period for a disqualifying provision arising as a result of a change in qualification requirements generally is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appears, and (2) there are no entries listing changes in qualification requirements on the 2018 RA List. Notice 2018-91 (11/21/18).
ESTATES, TRUSTS & GIFTS
Estate is not required to reduce marital deduction by federal estate and state death taxes owed
The Tax Court held that a decedent’s estate is not required to reduce the marital deduction by the amounts of the federal estate and state death taxes it owes because (1) those taxes are attributable solely to the value of property included in the gross estate under Sec. 2036, (2) the executor has a right under Sec. 2207B to recover from the beneficiaries, who received the property during the decedent’s lifetime, an amount equal to the federal estate and state death taxes plus interest attributable to those transfers, and (3) the executor must exercise the right of recovery under Sec. 2207B to prevent the marital deduction property from bearing the decedent’s estate’s tax burden contrary to the decedent’s intent. The court also held that the decedent’s estate may not increase the marital deduction by the amount of post-death income generated by the marital deduction property. Estate of Turner, 151 T.C. No. 10 (11/20/18).
Clawback of estate and gift tax exclusion addressed in prop. regs.
The IRS issued proposed regulations addressing issues around the temporary increase in the unified estate and gift tax exclusion amount, including what happens when the new, higher exclusion amount reverts to $5 million in 2026 if decedents have already used up more than that amount when making previous gifts. REG-106706-18 (11/21/18) (see related news story).
Appeals court affirms denial of innocent spouse relief
The Seventh Circuit affirmed a Tax Court decision denying innocent spouse relief under Sec. 6015(b) or (f) to a taxpayer who meaningfully participated in a prior Tax Court case that held her and her husband liable for a tax deficiency. Rogers, No. 17-3358 (11/19/18).
Couple cannot avoid AMT by arguing that wife’s gambling addiction led to the liability
The Tax Court held that (1) a couple were liable for the additional tax on an early individual retirement account (IRA) distribution and that the wife’s disability in 2012 did not qualify her for an exception to the penalty tax under Sec. 72(t)(2); (2) the couple could not avoid the alternative minimum tax, which was allegedly incurred as a result of the wife’s prescription-drug-induced gambling addiction; and (3) the IRS settlement officer (SO) did not abuse his discretion by not accepting the couple’s public policy or equity offer in compromise (OIC) under Regs. Sec. 301.7122-1(b)(3)(ii). With respect to the IRS’s rejection of the couple’s OIC, the court noted, as did the IRS SO’s report, that the side effects of the drug that the wife was taking — specifically, compulsive gambling — have been known since 2006 and that the wife made the choice to continue taking the medication, and thus her actions did not meet the Internal Revenue Manual requirements for the accepting an OIC because they were not reasonable or responsible. Gillette, T.C. Memo. 2018-195 (11/20/18).
US security consultant was Iraq resident and thus entitled to foreign earned income exclusion
The Tax Court held that a taxpayer who provided security services in Iraq under a contract with a private security company was a “qualified individual” who was entitled to exclude from income portions of the wages he earned in Iraq in 2010 and 2011 under the Sec. 911(a) foreign earned income exclusion provision. After examining 11 factors relevant to determining whether a taxpayer is a bona fide resident of a particular location, the court concluded that the taxpayer’s tax home was in Iraq during the years in issue and that he was a bona fide resident of Iraq for purposes of the foreign earned income exclusion. Wentworth, T.C. Memo. 2018-194 (11/20/18).
IRS provides safe harbor for covered health reimbursement arrangements and Sec. 105 requirements
The IRS issued a notice that addresses concerns relating to certain proposed regulations and questions concerning the application of Sec. 4980H, relating to the employer shared-responsibility rules, and Sec. 105(h), relating to discriminatory self-insured group health plans. To facilitate the offering of covered health reimbursement arrangements (HRAs) as anticipated by the proposed regulations, the IRS anticipates that future guidance will provide that a covered HRA will be treated as not failing to meet the requirement in Regs. Sec. 1.105-11(c)(3)(i) that any maximum limit attributable to employer contributions must be uniform for all participants, if the covered HRA provides the same maximum dollar amount to all employees who are members of a particular class of employees, limited to the classes specified under the proposed regulations (which includes combinations of specified classes) and subject to the exceptions set forth in Prop. Regs. Sec. 54.9802-4(c)(3). Notice 2018-88 (11/20/18).
Reprint of deficiency notice evidenced the creation of the notice before assessment
The Tax Court held that a reprint of a notice of deficiency for a taxpayer’s 2009 tax year evidenced the creation of the notice before assessment, even though the reprint was prepared more than two years after the alleged mailing of the original notice and omitted or misstated information that would have appeared on any notice actually mailed. In addition, the Tax Court concluded that (1) a certified mail list sufficient to evidence the mailing of a notice of deficiency need not use an official U.S. Postal Service form; (2) a valid notice of deficiency need not comply with the definition of that term provided in the Internal Revenue Manual and thus need not include all of the information listed in that definition; and (3) the omission from a notice of deficiency of the last day to file a timely petition for redetermination does not invalidate the notice. Gregory, T.C. Memo. 2018-192 (11/20/18).
IRS updates procedure dealing with time-sensitive acts
The IRS issued a revenue procedure updating Rev. Proc. 2007-56 to provide clear guidance for time-sensitive acts that may be postponed for taxpayers affected by a federally declared disaster, a terroristic or military action, or for individuals serving in a combat zone. The list of acts in the revenue procedure supplements the list of postponed acts in Sec. 7508(a)(1) and Regs. Sec. 301.7508A-1(c)(1)(vii). Rev. Proc. 2018-58 (11/20/18).
IRS extends transition relief for withholding and reporting payments from IRAs to state unclaimed property funds
The IRS extended the transition relief in Rev. Rul. 2018-17, relating to withholding and reporting of payments from individual retirement accounts (IRAs) to state unclaimed property funds. Under the extension, a person will not be treated as failing to comply with the withholding and reporting requirements described in Rev. Rul. 2018-17 for payments made before the earlier of Jan. 1, 2020, or the date it becomes reasonably practicable for the person to comply with those requirements. Notice 2018-90 (11/20/18).
Court denies motion to reconsider prior opinion rejecting easement contribution deduction
The Tax Court denied a taxpayer’s motion to reconsider a prior decision, in which the Tax Court denied a charitable contribution deduction for the donation of an easement, and also denied the taxpayer’s motion to vacate that decision. The court noted that a motion for reconsideration will generally not be granted unless the moving party shows unusual circumstances or substantial error, and the taxpayer did not meet those criteria. Wendell Falls Development, LLC, T.C. Memo. 2018-193 (11/20/18).
IRS grants automatic consent to change to certain methods under Sec. 263A
The IRS issued procedures by which a taxpayer may obtain automatic IRS consent to change to certain methods of accounting provided in Regs. Secs. 1.263A-1, 1.263A-2, and 1.263A-3, including methods described in recently issued final regulations under Sec. 263A. A taxpayer that wants to change to one or more of the methods described in the revenue procedure must, if eligible, use the automatic change procedures in Rev. Proc. 2015-13 and Rev. Proc. 2018-31, as modified by the newly released revenue procedure. Rev. Proc. 2018-56 (11/19/18).
IRS addresses treatment of leave-based donations relating to Hurricane Michael
The IRS issued guidance on income and employment tax issues relating to actions by employers who may have adopted or may be considering adopting leave-based donation programs in which employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Sec. 170(c). The IRS said that (1) it will not assert that cash payments an employer makes to Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are made to the Sec. 170(c) organizations for the relief of victims of Hurricane Michael and are paid to the Sec. 170(c) organizations before Jan. 1, 2020; (2) it will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees; (3) it will not assert that an employer is permitted to deduct these cash payments exclusively under the rules of Sec. 170 rather than the rules of Sec. 162; and (4) cash payments to which this guidance applies need not be included in box 1, 3 (if applicable), or 5 of Form W-2, Wage and Tax Statement. Notice 2018-89 (11/19/18).
Final regs. issued on Sec. 263A negative adjustments
The IRS issued final regulations providing rules for the treatment of negative adjustments related to certain costs required to be capitalized to property produced or acquired for resale under Sec. 263A. T.D. 9843 (11/19/18) (see related news story).
Automatic accounting method changes for Sec. 263A negative adjustments
The IRS also updated the procedures by which taxpayers can get automatic consent to change their methods of accounting to reflect changes made by T.D. 9843. Rev. Proc. 2018-56 (11/19/18) (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.