Document summaries for the week of Sept. 24, 2018
Court sustains penalty on corporation using tax protester arguments
The Tax Court sustained IRS penalties for frivolous tax submissions under Sec. 6702 against a corporation after the corporation filed a refund claim showing that it had no employment tax liabilities for certain periods because, it argued, it is a “private sector non-federally-connected company” and is not an employer or taxpayer or a withholding agent as defined by the Internal Revenue Code. The court refused to address the taxpayer’s tax-protester type of arguments because to do so, the court said, might suggest that the taxpayer’s arguments had some merit. T-Star Engineering and Tech. Servs., Inc., T.C. Memo. 2018-162 (9/24/18).
IRS guidance addresses employer credit for paid family and medical leave
The IRS issued guidance on the Sec. 45S employer credit for paid family and medical leave that may be claimed by eligible employers and is equal to a percentage of wages paid to qualifying employees while they are on family and medical leave. The IRS addresses issues arising under Sec. 45S, including the requirements an employer must satisfy to be an eligible employer, the types of leave that are family and medical leave under Sec. 45S, the minimum paid leave requirements, the calculation of the credit, and the impact of state-mandated leave on the availability and calculation of the credit. Notice 2018-71 (9/24/18) (see related news story).
New IRS procedure addresses Employee Plans Compliance Resolution System (EPCRS)
The IRS issued a revenue procedure that supersedes Rev. Proc. 2016-51, which sets forth the Employee Plans Compliance Resolution System (EPCRS), a comprehensive system of correction programs administered by the Employee Plans Division (TE/GE) for sponsors of retirement plans that have failed to satisfy certain requirements under Sec. 401(a), Sec. 403(a), Sec. 403(b), Sec. 408(k), or Sec. 408(p). The IRS said that (1) the revenue procedure sets forth new procedures for using the www.pay.gov website to file VCP submissions and pay user fees; (2) beginning on April 1, 2019, the IRS will no longer accept paper VCP submissions or process user fees paid with a paper check; and (3) during the transition period from Jan. 1, 2019, through March 31, 2019, plan sponsors may file VCP submissions with the IRS either by using www.pay.gov in accordance with provisions in the revenue procedure or by filing paper VCP submissions in accordance with the procedures in Rev. Proc. 2016-51. Rev. Proc. 2018-52 (9/28/18).
Couple must include COD income and cannot deduct unsubstantiated business expenses
The Tax Court agreed with the IRS that a couple received cancellation-of-debt income as the result of the cancellation of a credit card debt, after the IRS submitted several pieces of evidence documenting the cancellation and the couple submitted no documentation to negate it. The court also denied, for lack of substantiation, the couple’s business expense deductions claimed on their Schedule C. Hernandez, T.C. Memo. 2018-163 (9/25/18).
Taxpayer who lacked knowledge of wife’s income qualifies for innocent spouse relief
The Tax Court held that a preponderance of the evidence submitted at trial did not establish that a taxpayer had actual knowledge of income received by his then-wife and that was not reported on their 2011 joint return, as would be required to disqualify him from innocent spouse relief under Sec. 6015(c). The court found that the contentions and testimony of the taxpayer’s now ex-wife, who had intervened in the case after the IRS had granted the taxpayer relief, that the taxpayer had actual knowledge of that income were implausible and without support from, and to some extent contradicted by, the record, and, thus, the taxpayer was not liable for the related tax deficiency. Merlo, T.C. Summ. 2018-47 (9/24/18).
Refunds of erroneously collected payments by bank are not includible in taxpayer’s income
The Tax Court held that $12,789 a taxpayer received from Bank of America (BOA) during 2014 was a reimbursement for erroneously collected payments that BOA made on the taxpayer’s accounts in prior years and thus was not taxable income as the IRS had argued even though BOA had issued a Form 1099-MISC, Miscellaneous Income. Another $719 the taxpayer received was interest that accrued on the payments that BOA erroneously collected and was includible in the taxpayer’s 2014 income. Park, T.C. Summ. 2018-46 (9/24/18).
IRS issues special per-diem rates and other rates taxpayers can use for substantiation
The IRS issued the special per-diem rates effective Oct. 1, 2018, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The IRS also issued the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Notice 2018-77 (9/26/18) (see related news story).
Court finds additional evidence is needed in charitable contribution case
The Tax Court denied summary judgment in a case in which the IRS argued that several taxpayers were liable for tax under the assignment-of-income doctrine on their transfers of stock to a charity for which they took charitable contribution deductions. The court also concluded that, because the record was silent concerning the advice (if any) that a CPA provided the taxpayers regarding certain substantiation and compliance issues relating to the donations and whether the taxpayers relied in good faith on whatever advice the CPA may have supplied, the taxpayers’ ability to rely on the reasonable-cause defense of Sec. 170(f)(11)(A)(ii)(II) presented genuine disputes of material fact that were not susceptible to resolution by summary judgment. Chrem, T.C. Memo. 2018-164 (9/26/18).
No deductions allowed for boat rental business where taxpayer had yet to begin boat rental activities
The Tax Court held that a taxpayer (1) was not entitled to deduct certain expenses attributable to a boat rental business he claimed to operate; (2) was not entitled to a net operating loss (NOL) carryover of $50,410; and (3) was liable for the additions to tax the IRS assessed. The court concluded that the taxpayer had yet to begin his boat rental activity and noted that (1) for the year at issue, the taxpayer did not rent out the boat to anyone; (2) since the taxpayer purchased the boat in 2004, the boat had been unusable and never in any condition to be rented; (3) the taxpayer never had any contracts or agreements to rent the boat; and (4) the taxpayer had never marketed the boat as available for charter or rental. De Sylva, T.C. Memo. 2018-165 (9/27/18).
IRS abused discretion when it refused to consider couples’ offer in compromise, installment agreement, and economic hardship argument
The Tax Court held that the IRS abused its discretion (1) where the IRS declined to review a couple’s offer in compromise because the couple had had a prior opportunity for a hearing, and (2) where the IRS declined to review the couple’s installment agreement and a claim of economic hardship without reviewing the financial information that the couple had previously provided. The court also held that a meeting with a collections officer is not a prior administrative proceeding under Sec. 6330(c)(4)(A)(i) and Regs. Sec. 301.6320-1(e)(1). Loveland, 151 T.C. No. 7 (9/25/18).
IRS did not abuse discretion in sustaining proposed levy
The Tax Court held that an IRS settlement officer (SO) did not abuse her discretion in sustaining a proposed levy against a taxpayer for unpaid employment taxes of more than $24,000 after finding that the SO met the applicable requirements under Sec. 6330(c)(3). The court noted that the taxpayer had not provided the SO with a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and supporting financial information that was necessary to determine whether the taxpayer’s tax liability was uncollectible. Eichler, T.C. Memo. 2018-161 (9/24/18).
Specifications for printing substitute information returns issued
The IRS provided specifications for the private printing of red-ink substitutes for the 2018 revisions of certain information returns. The revenue procedure will be reproduced as the next revision of IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. Rev. Proc. 2018-46 (9/24/18).
S corp. shareholder identified inconsistencies in tax returns
The Ninth Circuit held that a statement an S corporation shareholder included in his amended returns satisfied the requirement under Sec. 6037 that he identify inconsistencies between his personal tax returns and the S corporation’s returns. Rubin, No. 16-56633 (9th Cir. 9/24/18).
Prop. regs. to provide that market discount is not includible in income under Sec. 451(b)
The IRS intends to issue proposed regulations providing that market discount is not includible in income under Sec. 451(b). Sec. 451(b), which was added by the law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97, provides that the all-events test is met with respect to an item of gross income no later than when the taxpayer takes that item of gross income into account as revenue for financial accounting purposes in an applicable financial statement. The guidance in this notice applies as of Jan. 1, 2018. Notice 2018-80 (9/28/18).
IRS extends replacement period for livestock sold on account of drought
The IRS issued a notice extending the replacement period under Sec. 1033(e) for livestock sold on account of drought in counties specified in the Appendix to the notice. For a taxpayer who previously qualified for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2018 (or, in the case of a fiscal-year taxpayer, at the end of the tax year that includes Aug. 31, 2018), the replacement period will be extended under Sec. 1033(e)(2) and Notice 2006-82 if the applicable region includes any county on the list in the Appendix to the notice, and the extension will continue until the end of the taxpayer’s first tax year ending after a drought-free year for the applicable region. Notice 2018-79 (9/28/18).
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.