Document summaries for the week of Nov. 5, 2018

CORPORATIONS

Companies were not “same taxpayer” under interest-netting provisions

The Federal Circuit affirmed a lower court decision, denying the taxpayer interest payments on previous tax overpayments because the taxpayer and its foreign sales corporation were not the same taxpayer for purposes of the Sec. 6621(d) interest-netting provisions. Ford Motor Co., No. 2017-2360 (Fed. Cir. 11/9/18).

 

EMPLOYEE BENEFITS

Changes proposed to regulations on hardship distributions

The IRS issued proposed regulations relating to hardship distributions from Sec. 401(k) plans, reflecting recent statutory changes, including changes to the personal casualty loss deduction rules. REG-107813-18 (11/9/18).

 

INDIVIDUALS

Taxpayer could deduct long-term capital loss but lacked basis for passthrough losses

The Tax Court held that a taxpayer could deduct $300,000 as a long-term capital loss resulting from his investment in a defunct real estate project in Texas but that he did not have sufficient basis in an S corporation to deduct certain passthrough losses for 2010 and 2011. The court also found that the taxpayer was not entitled to net operating loss carryforward deductions for 2010 and 2011 and was liable for accuracy-related penalties under Sec. 6662(a) for those years. Gianulis, T.C. Memo. 2018-187 (11/5/18).

Taxpayers failed to substantiate job search and medical expenses

The Tax Court held that a couple could not deduct almost $40,000 in job search expenses incurred in 2013 and 2014, consisting mostly of meals, entertainment, and transportation costs, because the taxpayer incurring the expenses did not meet the substantiation requirements in Sec. 274(d) and failed to keep any contemporaneous documentation. Also, most of the out-of-town travel for which the taxpayer reported expenses appeared to be for personal reasons. The court also rejected the couple’s deduction for medical expenses that it held were not properly substantiated. Sutherland, T.C. Memo. 2018-186 (11/5/18).

2019 Social Security wage base announced

The Social Security Administration announced that the maximum amount of wages subject to the old age, survivors, and disability insurance (OASDI) tax will increase to $132,900 for 2019. OASDI and SSI Program Rates & Limits (see related news story).

Attorney cannot deduct expenses incurred to obtain LL.M.

The Tax Court held that a taxpayer who had earned a law degree in Spain was not entitled to deduct education expenses incurred in 2014 as a result of pursuing a master of laws (LL.M.) degree from New York University. The court concluded that, although the taxpayer may have improved his skills as an international attorney by obtaining his LL.M., the degree qualified him for a new trade or business — the practice of law in New York. Dancausa Valle, T.C. Summ. 2018-51 (11/5/18).

Failure to satisfy requirements of Sec. 911 precludes pilot from taking foreign earned income exclusion

The Tax Court held that a taxpayer, who worked for a U.S. Defense Department contractor and spent part of the years at issue piloting aircraft in support of the U.S. armed forces stationed in Afghanistan and other regions, was not entitled to exclude any foreign earned income from taxation for 2012 and 2013 because he was not a “qualified individual” for purposes of Sec. 911(a)(1). However, the court concluded that the taxpayer was not subject to the 20% penalty for an underpayment attributable to a substantial understatement of income tax for either year because the IRS failed to meet the burden of production as required by Sec. 6751(b). Leuenberger, T.C. Summ. 2018-52 (11/8/18).

Court rejects couple’s common tax protester arguments and affirms penalties

The Tax Court rejected a couple’s assertions that they were not employees and that their W-2 wages did not constitute taxable income, saying it would not “refute [the couple’s] arguments with somber reasoning and copious citations as if such arguments possessed some colorable merit.” The court upheld penalties of approximately $15,000 assessed under Secs. 6651(a)(1) and (2) and Sec. 6654. Wells, T.C. Memo. 2018-188 (11/8/18).

 

IRS PROCEDURE

IRS can proceed with collection after couple fail to submit documents or call in to hearing

The Tax Court held that the IRS’s determination to proceed with actions to collect a couple’s unpaid tax liabilities was proper and not an abuse of discretion. The court noted that, after the couple and an IRS officer exchanged letters and telephone calls concerning the couple’s tax matters, the couple failed to submit any of the documents requested by the IRS or call the IRS Appeals officer for their telephone Collection Due Process hearing on the appointed date. Hoglund, T.C. Memo. 2018-185 (11/5/18).

IRS issues updates amount for determining health insurer fee

The IRS issued guidance that provides that the adjusted applicable dollar amount for determining the Patient-Centered Outcomes Research Trust Fund (PCORTF) fee for policy years and plan years ending on or after Oct. 1, 2018, and before Oct. 1, 2019, is $2.45. The IRS noted that Sec. 4375 and Sec. 4376 impose a fee on, respectively, issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans to help fund the PCORTF. Notice 2018-85 (11/5/18).

 

PRACTICE & STANDARDS

Final regs. issued on tax preparer due diligence

Final regulations govern the penalty for tax return preparers who do not follow due-diligence requirements when preparing returns that claim head-of-household filing status, the earned income tax credit, the child tax credit, the additional child tax credit, or the American opportunity tax credit. T.D. 9842 (11/6/18) (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.