Document summaries for the week of April 8, 2019

C CORPORATIONS

Cash grants resulting from participation in N.J. economic program were nontaxable contributions to capital

The Tax Court held that cash grants to members of a taxpayer’s consolidated group as part of their participation in New Jersey’s Business Employment Incentive Program were not taxable income to the affiliates but, instead, were contributions to the capital of the affiliates under Sec. 118(a). The court found that the circumstances surrounding the payments were substantially similar to those in Brown Shoe Co., 175 F.2d 305 (8th Cir. 1949), and McKay Products Corp., 178 F.2d 639 (3d Cir. 1949), and manifested the definite purpose of enlarging the working capital of the taxpayer’s affiliates. Brokertec Holdings, Inc., T.C. Memo. 2019-32 (4/9/19).

Company’s noncompliance with employment tax obligations precludes collection alternative

The Tax Court held that an IRS settlement officer did not abuse her discretion in rejecting a collection alternative from a corporation with unpaid employment tax liabilities, based on the taxpayer’s noncompliance with its quarterly employment tax obligations. The court noted that the taxpayer conceded in its petition that it was not in compliance with its estimated quarterly employment tax obligations for the first and second quarters of 2017 and that, typically, current compliance with the revenue laws is a prerequisite to being eligible for a collection alternative. Gardinier Assocs., Inc., T.C. Memo. 2019-29 (4/8/19).

Companies that had their state privileges suspended lacked the legal capacity to litigate in Tax Court

The Tax Court granted an IRS motion to dismiss for lack of jurisdiction a petition filed by two related corporations, which had their powers, rights, and privileges suspended by California because of their failure to pay state taxes. According to the court, the corporations did not have the legal capacity to litigate in the Tax Court. Timbron International Corp., T.C. Memo. 2019-31 (4/8/19).

 

INDIVIDUALS

Taxpayer failed to prove N.J. office was not his regular place of business; travel deductions denied

The Tax Court held that a taxpayer, who worked four days a week for a company in Pennsauken, N.J., and returned to his home in Atlanta for the rest of the week, failed to prove that Pennsauken was not his regular or principal place of business and that the weekly trips from Pennsauken to Atlanta were in the pursuit of a trade or business. As a result, the court concluded that the taxpayer could not deduct his traveling expenses between Atlanta and Pennsauken for the years at issue and found no authority to support the taxpayer’s argument that the court had to look at the taxpayer’s business history as a whole to determine whether he had a regular or principal place of business. Brown, T.C. Memo. 2019-30 (4/8/19).

IRS did not abuse its discretion where taxpayer failed to pursue installment agreement or provide collection alternatives

The Tax Court held that, where a taxpayer requested an offer in compromise (OIC) and an installment agreement, but did not pursue the installment agreement beyond his initial Collection Due Process hearing request and did not provide any collection alternatives, it was appropriate for the IRS settlement officer (SO) to find that the taxpayer was not eligible for either collection alternative. Thus, the court concluded that the SO did not abuse her discretion in rejecting the taxpayer’s OIC and sustaining a proposed levy for the years at issue. Ragsdale, T.C. Memo. 2019-33 (4/9/19).

 

IRS PROCEDURE

Regs. define ‘investment-type property’ for tax-exempt bonds

The IRS issued final regulations on the Sec. 148 arbitrage investment restrictions applicable to tax-exempt bonds issued by state and local governments. The regulations clarify the definition of “investment-type property” by providing an exception for investment in capital projects used in furtherance of the public purposes of the bonds. T.D. 9854 (4/8/19).

Case remanded to Whistleblower Office

The Tax Court granted an IRS motion to remand a whistleblower case to the Whistleblower Office for further consideration. The court rejected the whistleblower’s objection, finding that remand was appropriate because (1) the IRS identified substantial and legitimate concerns; (2) remand would conserve the Tax Court’s and the parties’ time and resources; and (3) the whistleblower would not be unduly prejudiced. Whistleblower 769-16W, 152 T.C. No. 10 (4/11/19).

IRS provides safe harbor for trading pro sports team contracts or draft picks

The IRS issued a procedure that provides a safe harbor for professional sports teams to treat certain player and staff-member contracts and draft picks as having a zero value for determining gain or loss when they trade the contracts or draft picks. All parties to the trade must use the safe harbor, and no team may transfer property other than a personnel contract, draft pick, or cash. Rev. Proc. 2019-18 (4/11/19) (see related news story).

Court lacks jurisdiction over suit against IRS

The Court of Federal Claims held that it did not have jurisdiction to hear a taxpayer’s suit, which alleged that the taxpayer was owed compensation from the IRS for its “fraud, arrogance, hubris, deceit, and greed.” The taxpayer requested “gambler relief” and $750 million in damages, but his claims were based in tort, the court held, and therefore outside its jurisdiction. Kupersmit, No. 18-1839T (Fed. Cl. 4/11/19).

Levy notices did not levy royalties after date of notice

The Sixth Circuit reversed a lower court decision and held that the statute of limitation did not bar a wrongful levy action because notices of levy issued in 2012 did not constitute levies on royalties generated after the notices were served. Gold Forever Music, Inc., No. 18-1789 (6th Cir. 4/10/19).

 

S CORPORATIONS

S corporation shareholder-employee deduct health insurance premiums

The Office of Chief Counsel advised that an S corporation’s employee who was a 2% shareholder pursuant to the attribution-of-ownership rules under Sec. 318 was entitled to the self-employed accident and health insurance deduction under Sec. 162(l) for amounts the S corporation paid under a group health plan for all employees and included in the individual’s gross income, if the individual otherwise met the requirements of Sec. 162(l). The Chief Counsel’s Office noted that, for the shareholder-employee to deduct the premiums, the S corporation must report them as wages on the shareholder-employee’s Form W-2, Wage and Tax Statement, in that same year, and the shareholder must report them as gross income on his or her individual tax return. CCA 201912001 (4/12/19).

Plastic surgeon cannot avoid tax deficiencies resulting from wife’s misappropriation of his S corporation’s income

The Tax Court held that the chief of plastic surgery at Mercy Hospital in St. Louis was not entitled to innocent spouse relief under Sec. 6015(f) for tax liabilities for years 2003 through 2006 related to unreported cash fees received by his medical practice, even though the fees were misappropriated from the medical practice by his wife and his office manager. The court noted that the doctor was the sole shareholder of the medical practice, an S corporation, and thus the unreported cash fees, which should have been included in the S corporation’s income and in the doctor’s income as a shareholder, were allocable to him, as were the resulting tax deficiencies. Francel, T.C. Memo. 2019-35 (4/10/19).

IRS prevails in microcaptive insurance case

The Tax Court held that individual taxpayers who were owners of S corporations that paid purported insurance premiums to a microcaptive insurance company could not deduct the payments or any related fees because they were not in fact for insurance. The microcaptive had made a Sec. 831(b) election and reported no taxable income for any of the years at issue. According to the court, the arrangement among the related taxpayers and corporations lacked risk distribution and was not insurance in the commonly accepted sense. However, the court found that the taxpayers were not liable for accuracy-related penalties because they reasonably relied on professional advice in forming the arrangement. Syzygy Insurance Co., T.C. Memo. 2019-34 (4/10/19).

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.