Document summaries for the week of Sept. 10, 2018
Mining company cannot increase depletion deduction by increasing gross sales
The Tax Court held that, in determining a mining corporation’s gross sales of cement for calculating its percentage depletion deductions under the proportionate profits method, the corporation failed to establish that its own sales to noncontrolled purchasers were representative of typical sales in the corporation’s market for the years in issue and, thus, the company could not use those sales to increase its depletion deduction. The court agreed with the IRS that the corporation had to use the gross sales amounts that it originally reported on its tax returns and could not increase gross sales for the purpose of the proportionate profits method by applying the average prices per ton that noncontrolled purchasers paid for finished cement to its sales to subsidiaries. Mitsubishi Cement Corp., T.C. Memo. 2018-152 (9/13/18).
IRS issues guidance on the corporate bond monthly yield curve and segment rates
The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2018-73 (9/14/18).
Charitable registration requirement does not violate Constitution
The Ninth Circuit held that the California attorney general’s requirement that charities submit to the state their annual Form 990, Schedule B, Schedule of Contributors, containing names and addresses of donors, is substantially related to the important state interest in policing charitable fraud and does not violate the charities’ First Amendment right to free association. Americans for Prosperity Found. v. Becerra, No. 16-55727 (9th Cir. 9/11/18).
Capital loss denied where taxpayer continued to pursue return of “worthless” investment
The Tax Court held that a taxpayer was not entitled to a short-term capital loss of $85,000 that he reported on his 2010 Schedule D, Capital Gains and Losses, for the worthlessness of an investment he made in a fitness center through a limited liability company in which he owned a 98% interest. According to the court, the taxpayer’s payment of legal fees to recover his investment until 2014 indicated that he did not think the investment was worthless at the end of 2010. Ence, T.C. Memo. 2018-151 (9/11/18).
Tax Court does not have jurisdiction to order a credit or refund of a tax overpayment
The Tax Court, citing Greene-Thapedi, 126 T.C. 1 (2006), held that Sec. 6330(d)(1) gave it no jurisdiction to determine and order a credit or refund of an overpayment of tax a taxpayer claimed for any of the years in issue. The court’s holding was in response to the taxpayer’s request that the Tax Court determine an overpayment of his 2008 federal income tax and order a refund of that amount after the IRS conceded the taxpayer’s entitlement to certain deductions in a supplemental hearing following a Tax Court remand of the case. McLane, T.C. Memo. 2018-149 (9/11/18).
Taxpayer with income below poverty level not entitled to premium tax credit
The Tax Court held that a taxpayer was not entitled to a premium tax credit (PTC) under Sec. 36B for the year in issue. The court noted that the taxpayer did not qualify as an applicable taxpayer within the meaning of Sec. 36B(c)(1)(A) because his modified adjusted gross income was below 100% of the federal poverty line (FPL) and he did not qualify for the special rule prescribed in Reg. Sec. 1.36B-2(b)(6)(i) for taxpayers with household income below 100% of the FPL. Gartlan, T.C. Summ. 2018-42 (9/11/18).
Wife’s active and extensive management of real estate qualified her as a real estate professional
The Tax Court held that, on the basis of a couple’s testimony about the wife’s active and extensive management of their rental real estate properties and the record as a whole, the wife materially participated in the real estate activities and is a real estate professional. Accordingly, the court found that the couple’s loss attributable to their rental real estate properties was not limited by the Sec. 469 passive activity loss rules. Birdsong, T.C. Memo. 2018-148 (9/10/18).
Couple entitled to deduct $120,000 of legal fees, but not wages and start-up expenses
The Tax Court held that a couple could deduct $120,000 for legal fees incurred by their single-member LLC after proving that the fees were incurred before the LLC joined a partnership. The husband, however, was not entitled to deduct salary payments his company purportedly made because he failed to substantiate the payments, and his wife could not deduct her business expenses until her business actually began operating. In addition, the couple were liable for an accuracy-related penalty because they did not give their CPA accurate information when he prepared their returns. Yapp, T.C. Memo. 2018-147 (9/10/18).
Taxpayer must include most of disability payments, as well as attorney’s fees, in income
The Tax Court held that a taxpayer (1) had to include in income long-term disability benefits she received in 2011 because she did not fall within an exception to the claim-of-right doctrine; (2) had to include in income a portion of the social security disability (SSD) benefits that she received in 2011; and (3) had to include in income the $6,000 of SSD benefits withheld in 2011 by the Social Security Administration for payment of the taxpayer’s attorney’s fees. The court noted that the taxpayer could deduct the attorney’s fees as a miscellaneous itemized deduction, but only to the extent they exceed 2% of the taxpayer’s adjusted gross income. Clay, T.C. Memo. 2018-145 (9/10/18).
IRS provides guidance on effect of certain foreign income on REIT gross income test
The IRS issued a revenue procedure that provides guidance on how certain items of income are treated for purposes of determining whether a real estate investment trust (REIT) satisfies the gross income test in Sec. 856(c)(2). The types of income addressed are: (1) amounts required to be included in gross income under Sec. 951(a)(1) (except by reason of Sec. 965), Sec. 951A(a), Sec. 1291(a), Sec. 1293(a)(1), and Sec. 1296(a); and (2) amounts required to be taken into account under Sec. 986(c) as foreign currency gain with respect to distributions of previously taxed earnings and profits. Rev. Proc. 2018-48 (9/13/18).
Court upholds collection action; husband’s use of certain terminology contradicted his claims of ignorance and confusion
The Tax Court sustained an IRS collection action against a couple after finding that they were not entitled to challenge their underlying tax liabilities. Among the reasons the court gave for its holding was the fact that the husband’s story about his failure to follow up regarding the status of an IRS audit after receiving a letter in 2014 was not plausible and the husband’s continued use of certain terminology that the court said contradicted his claims of ignorance and confusion. Henderson, T.C. Memo. 2018-150 (9/11/18).
Court finds no abuse of discretion during CDP hearing
The Tax Court held that, because a taxpayer did not properly raise his underlying tax liabilities in an Appeals hearing, he was precluded from addressing the underlying income tax liabilities for the years at issue in the Tax Court. The court also held that the IRS settlement officer working on the taxpayer’s case did not abuse her discretion during the collection due process hearing. Venable, T.C. Memo. 2018-144 (9/10/18).
Hurricane Florence victims given filing extensions
The IRS announced that Hurricane Florence victims will have until Jan. 31, 2019, to file certain individual and business returns. IR-2018-187 (9/15/18) (see related news story).
Court rejects $10.4 million charitable contribution deduction for conservation easement
The Tax Court held that a limited liability company taxed as a partnership was not entitled to a $10.4 million charitable contribution deduction for a donation of a qualified conservation contribution for the 2010 tax year because it did not satisfy the conservation purpose requirement of Sec. 170(h). The court rejected the taxpayer’s argument that it made the contribution of the easement to preserve open space under a Georgia law after the court concluded that the Georgia statute did not support an “identified conservation project” and there was no evidence that the program implemented by the Georgia statute designated the easement area as worthy of protection for conservation purposes. Champions Retreat Golf Founders, LLC, T.C. Memo. 2018-146 (9/10/18).
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.