Document summaries for the week of Nov. 26, 2018

INDIVIDUALS

Failure to properly document time spent on rental activities precludes loss deductions

The Tax Court held that a couple (1) were not entitled to rental real estate loss deductions they claimed for the three years at issue, beyond the amounts the IRS allowed under Sec. 469(i); and (2) were liable for accuracy-related penalties for two of the years. The court found that the couple did not properly document their time spent on rental activities and concluded that, given that the husband was a CPA with a professional degree in taxation, the couple did not show reasonable cause or good faith to avoid the penalties. Ballard, T.C. Summ. 2018-53 (11/27/18).

 

INTERNATIONAL

Foreign tax credit rules proposed

The IRS issued proposed regulations on the allocation and apportionment of expenses for determining the Sec. 904 limitation on the foreign tax credit. REG-105600-18 (11/29/18) (see related news story).

 

IRS PROCEDURE

IRS issues interim guidance on 2019 withholding rules

The IRS issued interim guidance for the 2019 calendar year on income tax withholding from wages and from retirement and annuity distributions. Notice 2018-92 (11/26/18) (see related news story).

IRS proposes changes to penalties for failure to file correct information returns

The IRS issued proposed regulations that would amend the penalties for failure to file correct information returns or furnish correct payee statements and provide safe-harbor rules that, for penalty purposes, generally treat as correct payee statements or corresponding information returns that contain errors relating to de minimis incorrect dollar amounts. REG-118826-16 (11/26/18).

Sec. 7491(c) transfers burden of production to IRS where an estate’s liability for a penalty is at issue

The Tax Court held that where a taxpayer, who had offset passive rental real estate losses against business income, died after filing a Tax Court petition but before a trial contesting the IRS’s recharacterization of that income, it is the IRS, and not the taxpayer’s estate, that has the burden of producing evidence that penalties assessed against the taxpayer were approved in writing by an IRS supervisor. In the instant case, after the IRS reclassified the taxpayer’s business income as active, the taxpayer’s estate had sought to reclassify the real estate losses as active losses due to the decedent being a real estate professional, and the Tax Court concluded that Sec. 7491(c) transfers the burden of production to the IRS in cases where an estate’s liability for a penalty is at issue. Estate of Ramirez, T.C. Memo. 2018-196 (11/28/18).

IRS extends due dates for certain health-care-related information reporting

The IRS extended the due dates for certain 2018 information-reporting requirements for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Sec. 6055 and for applicable large employers under Sec. 6056, and also extended transitional good-faith relief from Sec. 6721 and Sec. 6722 penalties to the 2018 information-reporting requirements under Sec. 6055 and Sec. 6056. According to the IRS, the due dates for furnishing to individuals the 2018 Form 1095-B, Health Coverage, and the 2018 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, have been extended from Jan. 31, 2019, to March 4, 2019. The due date for supplying those forms to the IRS, however, has not been extended and remains Feb. 28, 2019, if not filed electronically and April 1, 2019, if filed electronically. Notice 2018-94 (11/29/18).

 

TAX ACCOUNTING

Prop. regs. govern new business interest expense limitation

The IRS issued proposed regulations that would govern the new business interest limitation in Sec. 163(j). REG-106089-18 (11/27/18) (see related news story).

IRS provides safe harbor for businesses to qualify as electing real property trades or business and escape limitation on interest expense deduction

The IRS provided a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as electing real property trades or businesses under Sec. 163(j)(7)(B). Taxpayers that make an election for an infrastructure trade or business to be an electing real property trade or business under Sec. 163(j)(7)(B) are not subject to the limitation on business interest expense under Sec. 163(j) but must use the alternative depreciation system of Sec. 168(g) to depreciate property described in Sec. 168(g)(8). Rev. Proc. 2018-59 (11/27/18).

New procedure provides automatic IRS consent to change accounting method to comply with Sec. 451(b)

The IRS issued a revenue procedure that provides that a taxpayer may obtain automatic IRS consent under Sec. 446 and Regs. Sec. 1.446-1(e) to change a method of accounting to comply with Sec. 451(b), as amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The revenue procedure also provides procedures for certain qualifying taxpayers to make a method change to comply with Sec. 451(b) without filing Form 3115, Application for Change in Accounting Method. Rev. Proc. 2018-60 (11/29/18) (see related news story).

Sec. 280E prevents marijuana dispensary business from deducting ordinary and necessary business expenses

The Tax Court held that Sec. 280E prevents a medical-marijuana dispensary business from deducting ordinary and necessary business expenses, and the fact that a previous civil-forfeiture action against the dispensary had been dismissed did not bar subsequent deficiency determinations. The court also concluded that (1) while the business engaged in other activities, it was engaged in only one trade or business — the trafficking in a controlled substance — and thus could not deduct business expenses relating to those other activities, and (2) the business was a reseller for purposes of Sec. 471 and must adjust for its cost of goods sold according to Regs. Sec. 1.471-3(b). Patients Mutual Assistance Collective Corp., 151 T.C. No. 11 (11/29/18).

Newsletter Articles

TAX REFORM

Traps for the unwary: Tax Cuts and Jobs Act changes

By now many of us are familiar with the various provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Here is a list of changes together with (perhaps) unexpected nuances.

DEDUCTIONS

Qualified business income deduction regs. and other guidance issued

The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.