Document summaries for the week of Aug. 19, 2019

CORPORATIONS

Accrual-method corporation cannot exclude from income a promissory note received in a sale

The Tax Court held that a corporation that manufactures and sells solar equipment had to include in income sales proceeds that took the form of a promissory note. The court agreed with the IRS that, because the taxpayer had elected the accrual method of accounting and actually used that method, it was required to include the entire sale price in gross income consistent with the all-events test of Regs. Sec. 1.451-1(a). King Solarman, Inc., T.C. Memo. 2019-103 (8/19/19).

 

EMPLOYEE BENEFITS

IRS reissues monthly corporate yield curve and segment rates

The IRS reissued its monthly notice that provides an update for weighted average interest rates, yield curves, and segment rates. According to the IRS, there was a mistake in the earlier notice. Notice 2019-48 (8/20/19).

Prop. regs. issued on employer-provided vehicles

The IRS issued proposed regulations regarding the special valuation rules for employers and employees to use when determining the amount to include in an employee’s gross income for personal use of an employer-provided vehicle. REG-101378-19 (8/22/19) (see related news story).

IRS extends temporary nondiscrimination relief for closed defined benefit plans through 2020

The IRS issued guidance which extends the temporary nondiscrimination relief for closed defined benefit plans that is provided in Notice 2014-5, by making that relief available for plan years beginning before 2021 if the conditions of Notice 2014-5 are satisfied. This extension is provided in anticipation of the issuance of final amendments to the Sec. 401(a)(4) regulations. Notice 2019-49 (8/23/19).

 

INDIVIDUALS

Taxpayer must include alimony in taxable income but escapes liability for penalty

The Tax Court held that $27,000 the taxpayer received from her ex-husband in 2015 was alimony or separate maintenance under Sec. 71(b), as in effect in 2015, and therefore constituted taxable income to the taxpayer. However, the court cited the taxpayer’s limited English proficiency and history of abuse at the hands of her ex-husband in finding that she was not liable for an accuracy-related penalty because she acted with reasonable cause and in good faith in not including the alimony income on her tax return. Faust, T.C. Memo. 2019-105 (8/20/19).

Couple fail to meet 750-hours test to prove they are real estate professionals; rental real estate loss denied

The Tax Court held that a couple were not entitled to offset against their ordinary income for 2014 a rental real estate loss of $27,500 because neither taxpayer qualified as a real estate professional. The court found that the recorded hours attributed to the husband were inflated and thus neither of them devoted the requisite 750-plus hours to real estate activity during 2014. Hairston, T.C. Memo. 2019-104 (8/20/19).

Taxpayer liable for taxes on deemed retirement plan distribution

The Tax Court held that a taxpayer was liable for federal income tax on a deemed distribution of $22,000 from his employer-sponsored retirement account after he defaulted on a loan he had taken out of the retirement account. Even though he had resumed making loan payments when he returned to the employer after temporarily leaving, he did not make a lump-sum payment to cover the many payments (with accrued interest) that he had failed to remit earlier in the year. McEnroe, T.C. Summ. 2019-21 (8/20/19).

Taxpayer cannot deduct casualty loss after hurricane but avoids accuracy-related penalty

The Tax Court held that a taxpayer was not entitled to a casualty loss deduction with respect to hurricane damage to his residence in Houston. For one thing, if the value of the property value had declined, it was not clear that it was due to the hurricane. However, because the taxpayer gave his CPA all the necessary information for his return and he relied in good faith on the CPA’s judgment, he was not liable for an accuracy-related penalty under Sec. 6662. Taylor, T.C. Memo. 2019-102 (8/19/19).

Taxpayer entitled to deductions relating to girlfriend’s grandchildren

The Tax Court held that a taxpayer: (1) was entitled to dependency exemption deductions for his girlfriend’s two grandchildren of whom he shared custody with because, under the tie-breaker rule, his income was higher than his girlfriend’s income; (2) qualified for filing as a head of household; (3) was entitled to an earned income tax credit with respect to the two children; (4) was entitled to a child tax credit for the children; and (5) was not liable for the accuracy-related penalty. Gutierrez, T.C. Summ. 2019-23 (8/22/19).

Couple cannot deduct C corporation loss as a passthrough loss on their return

The Tax Court held that a couple’s wholly owned C corporation did not qualify as an S corporation and thus the couple were not entitled to deduct a $67,000 loss incurred by the C corporation as a passthrough loss on their 2012 tax return. Further, because the couple failed to show that the late filing of their 2013 return was due to reasonable cause, they were liable for the penalty under Sec. 6651(a)(1) and, the court said, considering the taxpayer’s experience, knowledge, and education as a lawyer who owned a tax preparation company, deducting the C corporation’s loss on the couple’s 2012 return was not reasonable and they were thus liable for the Sec. 6662(a) accuracy-related penalty. Nzedu, T.C. Summ. 2019-22 (8/21/19).

Taxpayer denied deductions and credit because child was not a ‘qualifying’ child

The Tax Court held that a taxpayer was not entitled to a dependency exemption deduction for his minor child because the child was not the taxpayer’s qualifying child or relative and his ex-wife did not execute Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent and she claimed the child on her return that year. As a result, the taxpayer also (1) did not qualify for head-of-household filing status; (2) was not entitled to a child tax credit and an additional child tax credit, and (3) was not entitled to an earned income tax credit. Skitzki, T.C. Memo. 2019-106 (8/21/19)

 

INTERNATIONAL

Guidance addresses domestic partnerships and S corporations filing under proposed GILTI regulations

The IRS issued a notice announcing its intention to issue regulations that will permit a domestic partnership or S corporation that is a U.S. shareholder of a controlled foreign corporation to apply Prop. Regs. Sec. 1.951A-5, related to the treatment of domestic partnerships and S corporations, for determining the amount of the global intangible low-taxed income (GILTI) inclusion, for tax years ending before June 22, 2019. The notice also addresses the applicability of penalties for a domestic partnership or S corporation that acted consistently with Prop. Regs. 1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under Regs. Sec. 1.951A-1(e).  Notice 2019-46 (8/22/19).

 

IRS PROCEDURE

Same EIN must be used for Forms 945 and related information returns

The Office of Chief Counsel was asked whether the IRS has the authority to require taxpayers that file Forms 945, Annual Return of Withheld Federal Income Tax, to use the same employer identification number (EIN) when filing related information returns. According to the Chief Counsel’s Office, the IRS has ample authority under the Internal Revenue Code and regulations to impose the requirement that the same EIN be used on both the Form 945 and the information returns furnished to payees that report the federal income tax withholding reported on the Form 945 and that no legislative change is necessary to effectuate this requirement. PMTA 2019-10 (8/23/19).

Guidance addresses inclusion of phone numbers in systemically generated correspondence

In addressing a question of whether the IRS is legally required to include a telephone number in systemically generated correspondence, the Office of Chief Counsel looked to the rules in Sec. 3705 that apply to two categories of taxpayer correspondence: (1) manually generated correspondence; and (2) any other correspondence or notice. According to the Chief Counsel’s Office, given the broad scope of the language set forth in Sec. 3705(a) regarding manually generated and any other correspondence, it could not interpret Sec. 3705(a)(2) to legally exclude certain categories of taxpayer correspondence, including soft or educational correspondence, from its reach and, further, the Chief Counsel’s Office noted, there are good business reasons to include a telephone number. PMTA 2019-09 (8/23/19).

Court questions settlement officer’s handling of CDP case

The Tax Court denied an IRS motion for summary judgment in a Collection Due Process (CDP) case and directed the IRS to show cause as to why the case should not be remanded to the IRS Appeals Office for a supplemental CDP hearing, preferably before a different IRS settlement officer (SO) instead of the SO who had heard the case twice before. The court noted that, rather than give the taxpayer a reasonable extension of time to supply requested information, the SO closed the case the next day and, as a result, the court questioned whether the SO abused her discretion in the handling of the case. Dodd, T.C. Memo. 2019-107 (8/22/19).

 

PARTNERSHIPS

IRS issues draft partnership audit liability form

The IRS posted a draft  Form 8978, Partner’s Audit Liability Under Section 6226, for a partnership making a push-out election under Sec. 6226(a)(1) to use to provide a statement of audit adjustments to its partners. Draft Form 8978 (8/22/19).

 

S CORPORATIONS

Court agrees with estate’s expert as to valuation of a closely held S corporation

With respect to the valuation of a lumber business whose majority owner had died, the Tax Court rejected the IRS’s expert’s net-asset-value method for valuing the closely held S corporation because there was no likelihood of a sale of the company’s timberlands and, thus, an asset-based approach was not appropriate for valuing the company. The court (1) accepted the valuation by the estate’s expert after finding the tax-affecting in his valuations was more accurate than the IRS’s blunt zero-rate approach, (2) concluded that the estate’s expert properly treated certain intercompany loans as operating assets, and (3) found that the estate’s discount for lack of marketability was reasonable. Estate of Jones, T.C. Memo. 2019-101 (8/19/19).

 

TAX ACCOUNTING

Amounts received for premium economy seating are subject to air transportation excise tax

The Office of Chief Counsel advised that the additional fee paid by an airline passenger for premium economy seating is an “amount paid” for taxable transportation. Therefore, the additional fee paid by the passenger is subject to the air transportation excise tax, regardless of whether the premium economy seating is located in the economy cabin or in a separate cabin. PMTA 2019-11 (8/23/19).

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.