Document summaries for the week of Aug. 5, 2019

CORPORATIONS

IRS gives insurance companies automatic consent for certain accounting method changes

The IRS issued simplified procedures for insurance companies to obtain automatic consent to change their methods of accounting for life insurance reserves, amounts under Sec. 807(c)(3), and specified policy acquisition expenses under Sec. 848, as applicable, to comply with Sec. 807 and Sec. 848, as amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, for the first tax year beginning after Dec. 31, 2017. The IRS emphasized that this procedure is only available for one tax year. As a result, the timing of the issuance of the procedure may pose challenges to an insurance company that has already prepared its tax return for the first tax year beginning after Dec. 31, 2017; and the procedure provides accommodations for that situation. Rev. Proc. 2019-34 (8/6/19).

 

INDIVIDUALS

Taxpayer treated personal living expenses as business deductions; penalties imposed

The Tax Court held that a taxpayer who is an author, performer, and motivational speaker purposefully participated in a scheme to reduce his income tax by improperly treating personal living expenses as business deductions. Specifically, he (1) received constructive dividends from a wholly owned company that received fees he earned during 2010, 2011, and 2012 and that were not reported as income; (2) was liable for the Sec. 6651(a)(1) addition to tax for failure to timely file for 2011; (3) was liable for Sec. 6662(a) accuracy-related penalties; and (4) was liable for a penalty pursuant to Sec. 6673(a) for promoting frivolous and groundless positions. Combs, T.C. Memo. 2019-96 (8/5/19).

Court sustains collection action against taxpayer

The Tax Court sustained a proposed levy to collect a taxpayer’s unpaid taxes for 2012 and 2015 after finding that challenges advanced at trial by the taxpayer were frivolous. Further, the court said, the IRS settlement officer did not abuse his discretion in denying collection alternatives, because the taxpayer was delinquent with respect to her current tax obligations. Gilmore, T.C. Memo. 2019-97 (8/6/19).

Couple operating foster care business entitled to some deductions but not others

The Tax Court held that a couple operating a foster care business (1) were not entitled to charitable contribution deductions claimed on Schedule A, Itemized Deductions, for donations made in cash and/or property due to lack of substantiation; (2) were entitled to depreciation deductions attributable to the use of their home for their foster care business; (3) were entitled to deductions for the business use of their home; (4) were not entitled to dependency exemption deductions relating to their foster care clients; and (5) were not entitled to education credits under Sec. 25A because they provided no substantiation for the qualified tuition and related expenses for which the credits were taken. The court concluded that, with respect to a portion of the tax underpayments, the couple did not demonstrate that they acted with reasonable cause and in good faith and thus were liable for penalties with respect to those portions of the underpayments. Kho, T.C. Summ. 2019-18 (8/5/19).

Taxpayer was not regularly and actively involved in activities for which deductions were taken

The Tax Court held that a taxpayer who filed a Schedule C, Profit or Loss From Business, for 2011, 2012, and 2013, and reported that his principal business activity was acting as an agricultural merchant wholesaler, but then deducted amounts attributable to two separate, unrelated activities — cocoa farming in West Africa and aiding certain African refugees to immigrate to the United States — was not regularly and actively involved in his cocoa farming or rescue services activity and thus could not deduct related expenses as trade or business expenses. The court also rejected the taxpayer’s alternative position that such expenses were deductible under Sec. 212 as expenses for the production or collection of income. Wegener, T.C. Memo. 2019-98 (8/6/19).

Early distribution from 401(k) plan does not qualify for first home purchase exception to 10% penalty tax

The Tax Court held that a taxpayer, who received an early distribution from her 401(k) retirement plan to help purchase her first home, did not qualify for the Sec. 72(t)(2)(F) first-home purchase exception to the 10% penalty tax on early retirement plan distributions. The court concluded that, regardless of the advice the taxpayer received, the exception applies only to distributions from individual retirement account plans. Soltani-Amadi, T.C. Summ. 2019-19 (8/8/19).

 

INTERNATIONAL

Cloud transaction regulations proposed

The IRS issued proposed regulations on the treatment of cloud transactions for purposes of the international provisions of the Code. REG-130700-14 (8/9/19) (see related news story).

 

IRS PROCEDURE

Disciplinary sanctions announced

The IRS Office of Professional Responsibility announced the imposition of disciplinary sanctions against CPAs, attorneys, and an enrolled agent. Announcement 2019-8 (8/5/19).

TIGTA reports on IRS procedures to reduce erroneous and fraudulent returns

The Treasury Inspector General for Tax Administration (TIGTA) reported on its audit of the IRS’s efforts to detect and prevent erroneous or fraudulent claims on amended returns. TIGTA made seven recommendations. TIGTA Rep’t No. 2019-40-042 (8/5/19).

IRS will start enforcing cost-sharing regulations

The IRS Large Business and International Division instructed its employees to apply the cost-sharing rules in Regs. Sec. 1.482-7A(d) following the Ninth Circuit’s decision upholding the regulations in Altera Corp., No. 16-70496 (9th Cir. 6/7/19). The IRS also withdrew its memorandum LB&I-04-0118-005, which it had issued in January 2018 to provide instructions to its examiners on transfer-pricing issues related to stock-based compensation in cost-sharing arrangements. LB&I-04-0719-008 (8/5/19).

IRS updates specifications for private printing of substitute 2019 Forms W-2 and W-3

The IRS issued specifications for private printing of red-ink substitutes for 2019 Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements. The new revenue procedure will be produced as the next version of IRS Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3, and supersedes Rev. Proc. 2018-37. Rev. Proc. 2019-28 (8/5/19).

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.