Document summaries for the week of Oct. 1, 2018
IRS issues revenue procedure on certain divisive reorganizations
The IRS issued a revenue procedure for taxpayers requesting private letter rulings regarding certain issues pertaining to divisive reorganizations under Sec. 368(a)(1)(D) and Sec. 355, including representations, information, and analysis that taxpayers requesting these rulings should submit. Under the procedure, a taxpayer engaging in divisive reorganizations may request rulings that no gain or loss will be recognized to the distributing corporation (1) upon the corporation it control’s assumption of liability for an obligation of the distributing corporation under Sec. 357(a), and (2) upon the distributing corporation’s receipt of Sec. 361 consideration and its distribution of the Sec. 361 consideration to a creditor in satisfaction of the distributing corporation’s debt obligation. Rev. Proc. 2018-53 (10/3/18).
Sale-and-leaseback transactions do not qualify as like-kind exchanges
The Seventh Circuit affirmed a Tax Court decision that a corporation’s sale of its power plants followed by a series of sale-and-leaseback transactions did not qualify for nonrecognition under Sec. 1031. The court also upheld the imposition of $87 million in accuracy-related penalties. Exelon Corp., No. 17-2964 (7th Cir. 10/3/18).
Personal purchases using exempt organization funds are excess benefit transactions
The Tenth Circuit upheld a Tax Court decision that a taxpayer was liable for the Sec. 4958 excise tax on excess benefit transactions for using funds from her Sec. 501(c)(3) organization, the Association for Honest Attorneys, to make personal purchases. Farr, No. 18-9002 (10th Cir. 10/1/18).
Husband liable for civil fraud penalty for fraudulent Form 1040 filings
The Tax Court held that a couple engaged in a pattern of underreporting their gross receipts for at least three consecutive years, overstating expenses on their Schedules C, Profit or Loss from Business, and E, Supplemental Income and Loss, and claiming education credits to which they were not entitled. The court also found that because the husband had filed the couple’s Forms 1040, U.S. Individual Income Tax Return, fraudulently and with the intent to evade taxes and had not cooperated with IRS agents, he was liable for the Sec. 6663 civil fraud penalty for the years at issue. Dorval, T.C. Memo. 2018-167 (10/1/18).
Taxpayer liable for deficiency for unsupported Schedule C deductions but escapes penalty
The Tax Court held that an Uber driver was not entitled to expenses reported on his Schedule C Profit or Loss from Business, because he failed to provide any evidence supporting his deductions other than his testimony. However, the court also held that the IRS failed to carry the threshold burden under Sec. 6751(b)(1) for the court to sustain the accuracy-related penalty assessed on the taxpayer under Sec. 6662(a). Hagos, T.C. Memo. 2018-166 (10/1/18).
IRS clarifies criteria for deducting business meal expenses
The IRS issued transitional guidance on the deductibility of expenses for certain business meals under Sec. 274 in light of amendments made to the provision by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The guidance, which may be relied on before the issuance of regulations, provides that taxpayers may deduct 50% of an otherwise allowable business meal expense if five conditions are met. Notice 2018-76 (10/3/18) (see related news story).
Couple liable for penalties for deducting personal living expenses
The Tax Court held that a taxpayer, who earned his living producing videos in various formats and performing multiple roles in that activity, was not entitled to a majority of expenses deducted on Schedule A and Schedule C of the joint tax return he filed with his wife because he failed to adequately substantiate those expenses and the court determined some of them were nondeductible personal, living, or family expenses under Sec. 262(a). Further, the court found that, because the taxpayer and his wife failed to ascertain the correctness of the disallowed deductions or to comply with the provisions of the Code, they were liable for accuracy-related penalties under Sec. 6662(a). Eldred, T.C. Summ. 2018-49 (10/4/18).
Funds raised to support terminally ill husband made couple ineligible for premium assistance credit
The Tax Court held that a taxpayer and her late husband’s estate were not entitled to a premium assistance credit for 2014 and, thus, were required to repay the advance payments of the credit . As a result of the husband’s terminal illness, the couple needed additional money and sold family heirlooms and liquidated a life insurance policy, and that additional income put them over the applicable poverty line amount under which they would otherwise have qualified for the premium assistance credit. O’Connor, T.C. Summ. 2018-48 (10/4/18).
IRS delays Sec. 965 basis election deadline
The IRS announced that the due date for a basis election under Sec. 965, which would otherwise would be before planned final regulations are published, is extended to 90 days after the publication of the final regulations. The IRS also stated that (1) elections made in the interim will be revocable; (2) rules concerning the determination of aggregate foreign cash positions will be revised to be consistent with Section 3.04 of Notice 2018-7 (concerning consolidated groups); and (3) taxpayers affected by Hurricane Florence have an extension of time to make elections and file transfer agreements related to Sec. 965. Notice 2018-78 (10/1/18).
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.