Document summaries for the week of Oct. 8, 2018
IRS proposes removing documentation regulations
The IRS proposed removing final regulations that set forth minimum documentation requirements that ordinarily must be satisfied for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes. REG-130244-17 (10/9/18).
Unreliable records preclude deductions for rental real estate losses
The Tax Court held that a couple were not entitled to rental real estate loss deductions claimed on their Schedules E, Supplemental Income and Loss, under Sec. 469 for the years at issue. The court reached its decision after finding that (1) there were no supporting documents to substantiate the hours worked by the taxpayer-wife, (2) the taxpayer-wife’s time logs were not reliable, and (3) the taxpayer-wife did not meet the 750-hour requirement for the years at issue and thus was not a real estate professional eligible to deduct those losses. Antonyshyn, T.C. Memo. 2018-169 (10/10/18).
Pastor has taxable income after receiving more than $200,000 congregation
The Tax Court held that more than $200,000 in cash and personal checks a pastor and his wife received from the pastor’s congregation constituted taxable income rather than nontaxable gifts. In addition, because the court could find no evidence that the pastor and his wife attempted to compute their tax liability properly, the court upheld the penalties the IRS assessed against the couple. Felton, T.C. Memo. 2018-168 (10/10/18).
Incorrectly captioned statute-of-limitation extensions are valid
The Office of Chief Counsel was asked to opine on the validity of two statute-of-limitation extensions, both of which had been incorrectly captioned, and concluded that both were valid extensions under equitable grounds because a court could reform the captions to conform to the parties’ intent by simply changing the captions. In addition, the IRS field agent was concerned that the extensions had been signed by someone who no longer had the authority to bind the company, but the Chief Counsel found that, because the person had continued to represent himself as the company’s president when he was no longer an officer, the taxpayer should be estopped from disavowing his signature. CCA 201841005 (10/12/18).
Court reviews couple’s dispute involving application of tax payments only for abuse of discretion
The Tax Court held that a challenge to the proper crediting of payments for back taxes is not a challenge to the underlying tax liability but is instead a question of whether the liability remained unpaid. As a result, the court said it would review a couple’s dispute as to the application of tax payments only for abuse of discretion. Melasky, 151 T.C. No. 8 (10/10/18).
IRS can apply proceeds from a levy on a bank account against 1995 tax deficiency
The Tax Court held that, because a check that a couple gave to the IRS to apply against their 2009 tax liability was dishonored by the bank after the IRS levied on the couple’s bank account, the IRS did not abuse its discretion in applying the proceeds from the levy against the couple’s 1995 taxes. The court also concluded that the IRS’s determination to deny the couple’s installment agreement proposal was not an abuse of discretion. Melasky, 151 T.C. No. 9 (10/10/18).
Chief Counsel addresses calculation of a DRE’s net value when an intercompany obligation is involved
In addressing the calculation of the net value of a disregarded entity (DRE), the Office of Chief Counsel advised that an intercompany obligation running between a corporate owner and its DRE would, if enforceable and subject to a creditor’s claims under local law (a real question of fact and local law), be includible in computing the DRE’s net value under Regs. Sec. 1.752-2(k). According to the Chief Counsel’s Office, characterizing an intercompany loan involving a DRE as loaning money to oneself does not always hold true under Regs. Sec. 1.752-2(k) because Regs. Sec. 1.752-2(k)(2)(A) provides in a parenthetical that a DRE’s enforceable rights to contributions from its owner that are subject to a creditor’s claims are includible in computing the DRE’s net value, whereas outside of Regs. Sec. 1.752-2(k), that situation would be considered the owner’s obligation to contribute money to itself, a nonevent. CCA 201841006 (10/12/18).
Economic benefits from compensatory split-dollar arrangement are distributions, not income
The Sixth Circuit reversed a Tax Court decision and held that the economic benefits arising from an S corporation’s payment on the sole shareholder’s life insurance policy under a compensatory split-dollar arrangement should be treated as a shareholder distribution and not income. Machacek, No. 17-1131 (6th Cir. 10/12/18).
IRS to remove advance payment and long-term contract regulations
The IRS is proposing to remove Regs. Sec. 1.451-5, dealing with advance payments and long-term contracts, to reflect amendments to Sec. 451 made by P.L. 115-97. REG-104872-18 (10/12/18) (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.