Document summaries for the week of Oct. 29, 2018
Prop. regs. would exempt corporate US shareholders from Sec. 956
The IRS issued proposed regulations under which Sec. 956, which requires an income inclusion by U.S. shareholders of controlled foreign corporations that invest in U.S. property, would not apply to corporate U.S. shareholders. REG-114540-18 (10/31/18) (see related news story).
Former shareholders cannot use statute of limitation defense to avoid transferee liability
The Tax Court held that the IRS mailed notices of transferee liability to former shareholders of a corporation within the statute of limitation specified in Sec. 6901(c). The corporation was the subject of a “Midco” transaction, in which shareholders sold their stock to a transient intermediary company that offset built-in gain with artificially high basis. According to the court, the former shareholders’ assertion that the notice of deficiency issued to the corporation was void was not supported by precedent. Trust U/W/O BH and MW Namm F/B/O Andrew I. Namm, T.C. Memo. 2018-182 (10/29/18).
IRS releases 2019 pension and retirement-related cost-of-living adjustments
The IRS announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019. While the limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000, the additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and thus remains $1,000. Notice 2018-83 (11/1/18) (see related news story).
Couple not entitled to overseas investment loss deduction
The Tax Court held that a couple were not entitled to an almost $3 million loss deduction allegedly attributable to an overseas investment that the couple claimed became worthless during 2013 or, alternatively, gave rise to a theft deduction. The court also concluded that the couple were liable for a substantial-understatement penalty under Secs. 6662(a) and (b)(2). Giunta, T.C. Memo. 2018-180 (10/29/18).
Failure to file joint return precludes innocent spouse relief
The Tax Court held that a taxpayer was not entitled to innocent spouse relief because she did not file a joint return, a prerequisite for the court to grant relief under Sec. 6015. The court also said that, while it did not have jurisdiction to order the IRS to make a refund, she may be entitled to file a claim for refund on the basis that she was not liable for tax paid toward her husband’s liability. Abdelhadi, T.C. Memo. 2018-183 (10/29/18).
Couple avoid penalty after IRS fails to show managerial approval
The Tax Court held that a couple were not liable for a $950 accuracy-related penalty for failing to report on their tax return a retirement plan distribution the husband received in 2015. The court found that, because the IRS did not introduce any evidence an IRS supervisor had approved the penalty, it had not met its burden of production under Sec. 6751(b) and thus did not present sufficient evidence showing that the penalty was appropriate. Curtis, T.C. Summ. 2018-50 (11/1/18).
Foreign students in US summer work program cannot deduct meal and travel expenses
The D.C. Circuit affirmed a Tax Court decision that nonresident aliens who were full-time students at foreign universities were not entitled to deduct their expenses for airfare and meals and entertainment paid in connection with their participation in the U.S. State Department’s Summer Work Travel Program because they were not “away from home in the pursuit of a trade or business” under Sec. 162(a)(2). Liljeberg, No. 17-1204 (D.C. Cir. 11/2/18).
IRS posts specifications for substitute forms and schedules
The IRS posted the 2018 version of Publication 1167, General Rules and Specifications for Substitute Forms and Schedules, providing guidelines and general requirements for the development, printing, and approval of substitute tax forms. Rev. Proc. 2018-51 (10/29/18).
IRS did not abuse discretion in denying actor’s offer in compromise
The Tax Court held that, in view of a taxpayer’s failure to provide bona fide documentation to prove his assets and financial condition, as well as the disparity in his offer in compromise (OIC) versus his reasonable collection potential as determined by the IRS, an IRS settlement officer did not abuse her discretion by rejecting the taxpayer’s OIC, refusing to conduct an expedited transferee investigation, or sustaining the filing of a Notice of Federal Tax Lien. The taxpayer, a movie actor, had made a cash OIC of approximately $842,000, less than 4% of his total underlying tax liability. Snipes, T.C. Memo. 2018-184 (11/1/18).
Taxpayers are denied deductions, partially escape penalties
The Tax Court held that various expenses deducted by a limited liability company (LLC) were not established as incurred for the LLC’s business, did not meet substantiation requirements, lacked documentation, or, to the extent documented, were in furtherance of a tax shelter scheme and thus were not deductible. While the court upheld penalties for 2006 and 2007, it did not uphold them for 2008 because they were determined before written supervisory approval was obtained. Sugarloaf Fund, LLC, T.C. Memo. 2018-181 (10/29/2018).
Insurance company cannot use different morbidity tables for tax and book purposes
The IRS National Office advised that the federally prescribed reserves for a life insurance company’s reinsured risks under long-term-care insurance contracts as of the close of a particular year and thereafter should be computed under Sec. 807(d) using the morbidity assumptions the company used for statutory reserve purposes as of the close of the same year and thereafter. The National Office rejected the taxpayer’s argument that it should use the original morbidity tables to compute the reserve for tax purposes even though it used different morbidity tables for statutory reserve purposes. TAM 201844009 (11/2/18).
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.