Document summaries for the week of April 1, 2019

INDIVIDUALS

Couple cannot deduct expenses relating to yacht charter activity

The Tax Court held that a couple’s yacht charter operation was an activity not engaged in for profit within the meaning of Sec. 183 and thus the couple could not take losses related to that activity on their 2011 and 2012 tax returns. After examining the various factors used to determine if a taxpayer operated an activity with a profit objective and finding that only one favored the taxpayers, the court concluded that the couple’s primary objective was to partially offset the significant fixed costs of maintaining their yacht so that it could be sold after they stopped using it for personal purposes, as well as offsetting their significant income with these fixed costs. Steiner, T.C. Memo. 2019-25 (4/2/19).

Couple not liable for accuracy-related penalty where they made an honest and reasonable attempt to determine their tax liability

The Tax Court held that a couple (1) were not entitled to deduct $5,829 of unreimbursed employee expenses from the husband’s job; (2) were not entitled to deduct $2,934 of other expenses; (3) were not entitled to deduct $16,598 of car expenses for miles driven by the wife for either a website development business or a consulting and property management business; (4) were not entitled to deduct $1,896 for expenses related to the use of the couple’s home by the wife with respect to either a website development business or a consulting and property management business reported on a Schedule C, Profit or Loss From Business, or by the husband with respect to his employment; and (5) were entitled to deduct $8,292 for auto and travel expenses for the wife’s management of the couple’s investment properties. Further, the court concluded that, because the couple made honest and reasonable efforts to determine their 2013 federal income tax liability and because the understatement of income tax resulted from an honest misunderstanding of law that was reasonable in the light of the couple’s limited English language proficiency, they were not liable for the accuracy-related penalty for 2013. Zhu, T.C. Summ. 2019-6 (4/2/19).

Taxpayer liable for deficiencies dating back more than 27 years

The Tax Court partially sustained an IRS determination with respect to a proposed levy to collect a taxpayer’s income tax liabilities on previous assessments dating as far back as 1991. However, the Tax Court did not sustain the Service’s determination with respect to certain amounts of self-reported tax (and related additions to tax and interest) and for $6,000 of alleged unreported tax for 1995. Plotkin, T.C. Memo. 2019-27 (4/4/19).

Decedent’s wife cannot deduct estate tax paid on father-in-law’s IRD

The Tax Court held that a taxpayer who received individual retirement account (IRA) and annuity distributions in 2014 as the beneficiary of her late husband’s estate was not entitled to a miscellaneous deduction for federal estate tax of $157,000, which was paid on income in respect of a decedent (IRD) attributable to her husband’s father, which transferred to her upon her husband’s death. The court concluded that the taxpayer did not meet her burden of showing that she was entitled to the deduction. Schermer, T.C. Memo. 2019-28 (4/4/19).

Office of Chief Counsel advises on cap on SALT deductions and home office deduction

The IRS Office of Chief Counsel issued advice on the interplay between the $10,000 cap on deductions for state and local tax (SALT) and the home office deduction, concluding that state and local taxes that exceed the $10,000 limit are generally not deductible as otherwise allowable expenses under Sec. 280A(b), although it might still be deductible under a different exception to Sec. 280A(a), such as Sec. 280A(c). PMTA 2019-01 (4/4/19).

 

IRS PROCEDURE

Second Circuit reverses Tax Court’s 2-year lookback period

The Second Circuit reversed the Tax Court’s holding that it did not have jurisdiction under Sec. 6512(b)(3) to order a refund or credit of a taxpayer’s overpayment because it could look back only two years in her case. The appeals court remanded the case to the Tax Court for entry of judgment for the taxpayer. Borenstein, No. 17-3900 (2d Cir. 4/2/19).

Regs. prescribe returns for filing certain excise taxes

The IRS issued final regulations specifying which return to use to pay various excise taxes under Secs. 4960, 4966, 4967, and 4968 and the time for filing the return. The Service also implemented the addition of excise taxes under Secs. 4966 and 4967 to the first-tier taxes subject to abatement under Sec. 4962. T.D. 9855 (4/5/19).

Regs. authorize disclosure of return information to Census Bureau

The IRS issued final regulations that authorize disclosure by the Service of specified items of return information to the Census Bureau under Sec. 6103(j)(1)(A). T.D. 9856 (4/5/19).

IRS provides rules on public-use requirements for qualified residential rental projects

The IRS issued guidance regarding the general public-use requirements for qualified residential rental projects financed with tax-exempt bonds under Sec. 142(d). Specifically, it coordinates these requirements with Sec. 42(g)(9), under which a project does not violate the general public-use requirement under Sec. 42 as a result of specified occupancy restrictions or preferences (for example, certain housing preferences for military veterans). Rev. Proc. 2019-17 (4/3/19).

 

PARTNERSHIPS

Indirect partner missed opportunity to challenge tax liability based on computational adjustments in TEFRA proceeding

The Tax Court held that the IRS was not required to provide notices of final partnership administrative adjustment (FPAAs) to a taxpayer who indirectly held interests in the partnerships to which the FPAAs related. The court found that (1) the failure of the tax matters partner to provide the notices did not affect the applicability of any proceeding or adjustment, (2) the taxpayer had a prior opportunity to challenge the income tax attributable to the FPAAs’ computational adjustments and was thus precluded from challenging the liability in the instant case, and (3) the IRS did not abuse its discretion in assessing an accuracy-related penalty against the taxpayer. Consequently, the court sustained the IRS’s levy to collect the outstanding liability. Davison, T.C. Memo. 2019-26 (4/3/19).

Partnership liable for late-filing penalty

The Tax Court upheld an IRS notice of federal tax lien with respect to a penalty imposed on a limited liability company for the late filing of its Form 1065, U.S. Return of Partnership Income. The court found that the IRS settlement officer in the case did not abuse her discretion when considering issues raised by the taxpayer at a collection due process hearing. Vica Technologies, LLC, T.C. Summ. 2019-7 (4/4/19).

Newsletter Articles

TECHNOLOGY

2018 tax software survey

Among CPA tax preparers, tax return preparation software generates often extensive and ardent discussion. To get through the rigors of tax season, they depend on their tax preparation software. Here’s how they rate the leading professional products.

DEDUCTIONS

Qualified business income deduction regs. and other guidance issued

The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.