Document summaries for the week of Aug. 26, 2019

EMPLOYEE BENEFITS

Deduction for contribution to qualified retirement plan requires actual payment

The Office of Chief Counsel advised that an employer’s contribution to the trust of its qualified retirement plan must be paid in cash (or its equivalent) or property to be deductible under Sec. 404(a). According to the Chief Counsel’s Office, whether a contribution is paid for purposes of Sec. 404(a) is determined under the objective outlay-of-assets test in Don E. Williams Co., 429 U.S. 569 (1977). CCA 201935011 (8/30/19).

 

ESTATES, TRUSTS & GIFTS

Effective interest rates on Farm Credit System loans

The IRS issued the 2019 interest rates on new Farm Credit System loans, to be used in computing the special-use value of farm real property for which an election is made under Sec. 2032A. Rev. Rul. 2019-18 (8/26/19).

 

INDIVIDUALS

Horseless taxpayer cannot take deductions for alleged horse business, but is not liable for penalties

The Tax Court disallowed deductions that a taxpayer claimed on her 2010 tax return for her horse business after noting that she had not owned a horse since 2008, had not made a profit on her horse activity in over 20 years, and had not reported any horse-related income since 2004. The court also held that the taxpayer was taxable on a $70,000 litigation settlement she received after suing her homeowners association. However, because the IRS did not show that substantial-understatement and negligence penalties had been personally approved (in writing) by the immediate supervisor of the individual assessing them, the taxpayer was not liable for the penalties. McMillan, T.C. Memo. 2019-108 (8/26/19).

Parents denied American opportunity tax credit for daughter’s 5th year of postsecondary education

The Tax Court held that a couple were not entitled to the American opportunity tax credit (AOTC) they claimed on their 2015 tax return for one of their daughters because, by 2015, the couple had previously claimed and received the AOTC for four tax years (2011 through 2014) with respect to that daughter’s postsecondary education. The court noted that the AOTC is only allowed for four tax years of postsecondary education with respect to any eligible student. Thomas, T.C. Summ. 2019-24 (8/26/19).

Tax Court dismisses couple’s petition as untimely

The Tax Court held that the IRS sent valid deficiency notices to a couple’s last-known address and that the couple’s petition to the court with respect to those deficiency notices was not timely. As a result, the Tax Court granted the IRS’s motion to dismiss for lack of jurisdiction. Chapman, T.C. Memo. 2019-110 (8/29/19).

Taxpayer not liable for frivolous return penalty on photocopies of original Form 1040X

The Tax Court held that a taxpayer was liable for the $5,000 penalty under Sec. 6702(a)(1) for filing a frivolous amended return, but her attachments of copies of her original Form 1040X, Amended U.S. Individual Income Tax Return, to letters to the IRS did not constitute filing a return for purposes of the penalty. The court also concluded that: (1) an IRS letter inviting the taxpayer to correct her frivolous filing was not an “initial determination” of penalty for purposes of Sec. 6751(b)(1); and (2) an omission from the Notice of Federal Tax Lien of the assessment date for two of the penalties did not invalidate the notice. Kestin, 153 T.C. No. 2 (8/29/19).

Taxpayer fails to substantiate business car and truck expenses

The Tax Court held that a taxpayer who worked as a taxicab driver and real estate appraiser was not entitled to deduct car and truck expenses reported on his Schedule C, Profit or Loss From Business, for his real estate appraisal business because he did not appropriately substantiate them. The court noted that the taxpayer did not keep contemporaneous mileage logs or similar records and there was no evidence of where he started each trip or which of his three vehicles he used. Hatte, T.C. Memo. 2019-109 (8/28/19).

 

INTERNATIONAL

IRS issues procedure relating to deposit interest paid to nonresident alien individuals

The IRS issued a revenue procedure in which it added one country — Georgia — to the list of countries with which the United States has in force an information exchange agreement such that interest paid to residents of those jurisdictions must be reported by payers to the extent required under Regs. Secs. 1.6049-8(a) and 1.6049-4(b)(5). The revenue procedure also adds two jurisdictions — Curaçao and Cyprus — to the list of jurisdictions with which Treasury and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under those regulatory provisions. Rev. Proc. 2019-23 (8/23/19).

IRS provides benchmarks for foreign insurers

The IRS issued the domestic asset/liability percentages and domestic investment yields by which foreign life and property and liability insurance companies compute their minimum effectively connected net investment income under Sec. 842(b) for tax years beginning after Dec. 31, 2017. Instructions are also provided for computing foreign insurance companies' liabilities for estimated tax and installment payments of estimated tax for tax years beginning after Dec. 31, 2017. Rev. Proc. 2019-36 (8/29/19).

 

IRS PROCEDURE

Third quarter over- and underpayment rates are unchanged

The IRS announced that the interest rates on tax overpayments and underpayments for the third calendar quarter of 2019, beginning Oct. 1, 2019, will be the same as in the prior quarter: 5% for overpayments (4% for corporations), 5% for underpayments, 2½% for the portion of a corporate overpayment exceeding $10,000, and 7% for large corporate underpayments. Rev. Rul. 2019-21 (8/28/19).

Assessment statute expiration date does not run until filing

The Office of Chief Counsel advised that, with respect to a supplement due in 2025 but filed in 2026, the failure to file would occur in 2025. According to the Chief Counsel’s Office, calculating the assessment statute expiration date (ASED) is not directly tied to the time of a failure because, under Sec. 6501(c)(3), the ASED does not begin to run until a return is filed. CCA 201935012 (8/30/19).

IRS waives dyed fuel penalty in advance of hurricane

In anticipation of Hurricane Dorian, the IRS announced that it will not impose a penalty on dyed diesel fuel sold for use or used on the highways in Florida. The relief remains in effect through Sept. 15, 2019. IR-2019-148 (8/30/19).

 

PARTNERSHIPS

Taxpayer is deemed to have made debt-financed acquisition of partnership interests

The Tax Court held that a taxpayer who received certain partnership interests from his father as gifts and bequests did not receive the proceeds of any debt-financed distributions and did not use partnership distributions to acquire property held for investment. Rather, the court found, the taxpayer was deemed to have made a debt-financed acquisition of the partnership interests, and the associated interest expense must be allocated among the partnerships’ assets. Lipnick, 153 T.C. No. 1 (8/28/19).

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.