Document summaries for the week of April 15, 2019

C CORPORATIONS

Company cannot take research credits but escapes related penalties for underpayment of tax

The Tax Court held that a company engaged in the wheat milling business did not show that expenses for which it claimed research credits for the tax years ending May 31, 2011, and 2012, were qualified research expenses and, consequently, the company was not entitled to the research credits it claimed under Sec. 41. However, the court concluded that, in claiming the credits, the taxpayer acted with reasonable cause and in good faith when it relied on a company that prepared its tax returns, as well as research credit studies, and thus was not liable for Sec. 6662 penalties. Siemer Milling Co., T.C. Memo. 2019-37 (4/15/19).

 

EMPLOYEE BENEFITS

IRS issues monthly corporate 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), as reflected by the application of Sec. 430(h)(2)(C)(iv). Notice 2019-29 (4/16/19).

IRS expands use of the Self-Correction Program in the Employee Plans Compliance Resolution System

The IRS issued a revenue procedure that modifies and supersedes Rev. Proc. 2018-52, which sets forth the Employee Plans Compliance Resolution System (EPCRS), a comprehensive system of correction programs for retirement plans that have failed to satisfy certain requirements under Sec. 401(a), 403(a), 403(b), 408(k), or 408(p). The new revenue procedure expands the use of the Self-Correction Program (SCP) to permit correction of failures of certain plan documents and loans, including defaulted loans, failure to obtain spousal consent on a loan, and loans that exceed the number permitted under the terms of the plan. The revenue procedure also provides an additional method of correcting operational failures by plan amendment under the SCP. Rev. Proc. 2019-19 (4/19/19).

 

INDIVIDUALS

Taxpayer entitled to deduct a portion of legal fees incurred in suing his ex-wife

The Tax Court held that a taxpayer was entitled to deduct a portion of legal expenses incurred in suing his former wife over fund management losses because the cause of action related to the production of income under Sec. 212(1). However, the court also upheld the accuracy-related penalty assessed against the taxpayer after concluding that he failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment of tax for the year at issue, provided that the Rule 155 computation established the taxpayer had a substantial understatement of tax.  Ray, T.C. Memo. 2019-36 (4/15/19).

LLC failed to report income and was not entitled to NOL carrybacks and carryforwards

The Tax Court held that the cost of goods sold for a couple’s limited liability company (LLC), which was a disregarded entity for federal tax purposes, was no more than the amount allowed by the IRS and, as a result, there was no net operating loss carryback or carryforward as had been claimed. The court also concluded that the LLC failed to report more than $300,000 of gross income and that a penalty under Sec. 6662(a) equal to 20% of the underpayment for 2007 applied, but there was no liability for the penalty under Sec. 6662(a) for 2008. Estate of Ronning, T.C. Memo. 2019-38 (4/15/19).

SIFL cents-per-mile rates issued

The IRS issued the standard industry fare level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2019 for purposes of Regs. Sec. 1.61-21(g), relating to the rule for valuing noncommercial flights provided as an employee fringe benefit on employer-provided aircraft. Rev. Rul. 2019-10 (4/15/19).

No theft deduction allowed where prospect of recovery was unknowable

The Tax Court held that a couple could not deduct more than $400,000 in theft losses they alleged their wholly owned S corporation incurred in 2011 as a result of real estate fraud. According to the court, the S corporation did not have a subjective belief that there was no reasonable prospect of recovery as late as 2015. After reviewing both objective and subjective factors, the Tax Court found that the taxpayers had not investigated or acted upon any prospect of recovery by the S corporation at the end of 2011, beyond speculation and conjecture. McNely, T.C. Memo. 2019-39 (4/18/19).

Taxpayer fails to assign error to IRS deficiencies

The Tax Court held that, where a taxpayer assigned no error to IRS adjustments underlying the determinations of income tax deficiencies, a taxpayer was deemed to concede the deficiencies and sustained them. The court further held that the taxpayer did not persuade the court to look behind the notice of deficiency. Moya, 152 T.C. No. 11 (4/17/19).

 

IRS PROCEDURE

IRS issues May 2019 applicable federal rates

The IRS issued a ruling that prescribes the applicable federal rates for May 2019. This guidance provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate and are determined as prescribed by Sec. 1274. Rev. Rul. 2019-12 (4/16/19).

IRS mailbox rule supersedes common law mailbox rule

The Ninth Circuit reversed a lower court’s decision and held that Regs. Sec. 301.7502-1(e)(2), providing exclusive means to prove delivery of documents to the IRS, is valid and supersedes the common law mailbox rule. Under the regulation, the taxpayers had not filed a timely refund claim. Baldwin, No. 17-55115 (9th Cir. 4/16/19).

IRS announces IT modernization plan

The IRS announced a six-year plan to modernize its information technology systems. FS-2019-9 (4/18/19).

Additional prop. regs. issued on QOFs

The IRS issued supplemental proposed regulations under Sec. 1400Z-2, which establishes qualified opportunity funds (QOFs) to encourage investments in low-income communities. These proposed regulations clarify certain requirements not addressed in prior proposed regulations (REG-115420-18). REG-120186-18 (4/17/19) (see related news story).

Misspelling does not invalidate notice of federal tax lien

The Seventh Circuit affirmed a district court decision and held that the taxpayers had adequate notice of an IRS tax lien against their property, and the IRS could enforce the tax lien, despite the fact that the notice of federal tax lien misspelled the debtor’s first name by omitting an “l” from “Carroll.” Z Investment Properties, LLC, No. 18-1915 (7th Cir. 4/18/19).

Chief Counsel’s Office addresses question relating to IRS lien filings on additional assessments

With respect to a question about the filing of a notice of federal tax lien on additional assessments, the Office of Chief Counsel advised that Internal Revenue Manual (IRM) Section 5.12.2.3.2(2), Section 5.12.2.6, and elsewhere in IRM Section 5.12.2 should be consulted. CCA 201916010 (4/19/19).

Taxpayers cannot designate voluntary payments for a lien discharge the IRS is not required to give

In determining whether a taxpayer can designate payments with respect to the discharge of a tax lien, the Office of Chief Counsel advised that, while IRM Section 5.1.2.8 states that voluntary payment designations are “normally” honored, all discharges (for those under Sec. 6325(b)(4)) are at the IRS’s discretion. Thus, the Chief Counsel’s Office said, while taxpayers may generally designate voluntary payments, they cannot do so for a discharge that the IRS is not required to give. CCA 201916009 (4/19/19).

Field counsel should coordinate and oversee disclosures to DOJ for litigation purposes

The Office of Chief Counsel advised that the Department of Justice (DOJ) should rarely be working directly with a Taxpayer Assistance Order. According to the Chief Counsel’s Office, field counsel should coordinate and oversee all disclosures to DOJ for litigation purposes, to ensure compliance with Sec. 6103(h)(2) and to identify any privileged information. CCA 201916007 (4/19/19).

Sec. 6707A penalty must be assessed within three years of filing the underlying return

The Office of Chief Counsel advised that a Sec. 6707A penalty for failure to timely or properly disclose a reportable transaction must be assessed within three years of the date of the filing of the underlying return. Additionally, the Chief Counsel’s Office noted that, under Sec. 6501(a), a tax assessment must be made “within 3 years after the return was filed” and, for purposes of Sec. 6501, the term “return” means the return required to be filed by the taxpayer. CCA 201916006 (4/19/19).

CPEO payments to partners are payments to self-employed individuals

The Office of Chief Counsel said that it has received requests for clarifications of the preamble to the proposed regulations for certified professional employer organizations (CPEOs) (Prop. Regs. Sec. 301.7705-1) addressing how payments from CPEOs to self-employed individuals should be treated for employment tax purposes. Addressing payments to partners, the Chief Counsel’s Office stated that, regardless of whether an individual partner in a partnership is receiving payments from the CPEO for services performed in the conduct of the trade or business of the partnership or as an independent contractor of the partnership, the payments are to a self-employed individual and should be treated as such for reporting purposes under Sec. 6041. CCA 201916004 (4/19/19).

Information from foreign financial institutions is taxpayers’ return information

In a one-sentence Chief Counsel Advice, the Office of Chief Counsel advised that, information the IRS gathers from foreign financial institutions as part of a determination of liability or possible liability of a taxpayer is the taxpayer’s return information under Sec. 6103. CCA 201916003 (4/19/19).

Chief Counsel’s Office states effective dates for new Tax Court rules

The Office of Chief Counsel advised that the Tax Court rules in new Title XXXIV, which involves passport cases under Sec. 7345, are effective for cases filed after Dec. 4, 2015. The Chief Counsel’s Office also noted that changes in Tax Court Rule 23(a)(3), involving email addresses in signature blocks, are effective Nov. 30, 2018. CCA 201916001 (4/19/19).

IRS has independent authority to collect criminal restitution

The Tax Court sustained a collection action against a taxpayer who had filed false tax returns and held that Sec. 6201(a)(4) grants the IRS independent authority to administratively collect amounts of criminal restitution assessed under that provision. The court also concluded that a payment schedule included in an order for criminal restitution that is due immediately does not limit the IRS’s authority to collect administratively unpaid amounts of the restitution and, in the instant case, IRS Appeals did not abuse its discretion in sustaining the collection actions at issue. Carpenter, 152 T.C. 12 (4/18/19).

 

S CORPORATIONS

Guidance issued on ESBTs with NRAs as potential current beneficiaries

The IRS issued proposed regulations regarding the recent expansion of permissible potential current beneficiaries of an electing small business trust (ESBT) to include nonresident aliens (NRAs). The proposed regulations are designed to ensure that the income of an S corporation will continue to be subject to U.S. federal income tax when an NRA is a deemed owner of a grantor trust that elects to be an ESBT. REG-117062-18 (4/17/19).

Newsletter Articles

TAX REFORM

Traps for the unwary: Tax Cuts and Jobs Act changes

By now many of us are familiar with the various provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Here is a list of changes together with (perhaps) unexpected nuances.

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.