Document summaries for the week of Feb. 25, 2019

INDIVIDUALS

Taxpayer entitled to equitable innocent spouse relief

The Tax Court held that a taxpayer was entitled to equitable innocent spouse relief under Sec. 6015(f) under a streamlined determination. The court concluded that (1) the taxpayer’s ex-husband’s abusive and controlling behavior prevented the taxpayer from questioning his ability to pay the tax liabilities and to participate meaningfully in filing the joint returns; (2) the ex-husband controlled the records and finances of his construction business, which was the only source of income during the years in issue; and (3) years of abuse and control prevented the taxpayer from adequately questioning the underpayments of taxes relating to joint returns the taxpayer filed with her husband. Contreras, T.C. Memo. 2019-12 (2/26/19).

Court upholds levy against taxpayer for deficiencies on unreported income

The Tax Court granted summary judgment to the IRS and upheld the IRS’s issuance of a notice of intent to levy against a taxpayer who had failed to pay taxes on certain Social Security income and income from the cancellation of credit card debt. The court noted that the taxpayer had not submitted any offer of a collection alternative and that, even if he had done so, he had not complied with his tax filing obligations for the years after the year at issue. Thus, the court stated, the IRS could properly have rejected any proposed collection alternative on that ground alone. Grumbkow, T.C. Memo. 2019-13 (2/28/19).

Taxpayer can deduct mortgage interest paid on properties allocable to his trade or business

The Tax Court held that, while certain properties were not actually used in a taxpayer’s trade or business during the years in issue, the properties were allocable to the taxpayer’s trade or business. Consequently, the interest paid in connection with debt on the properties was not personal interest, as the IRS had argued. Thus, it was deductible as mortgage interest allocable to the taxpayer’s trade or business. However, the court also held that the taxpayer was not entitled to deductions for legal fees in excess of those already allowed by the IRS because he failed to establish the nature of the legal services involved, how those services related to his trade or business, or the amounts actually paid or incurred for those services. Pugh, T.C. Summ. 2019-2 (2/28/19).

Appeals court affirms denial of marijuana business deductions

The Tenth Circuit affirmed a Tax Court decision disallowing under Sec. 280E the taxpayers’ deduction of expenses from a medical marijuana business. The appellate court also held that placing the burden of proof on the taxpayers did not constitute “compulsion” under the Fifth Amendment and therefore did not violate their Fifth Amendment privilege against self-incrimination. Feinberg, No. 18-9005 (10th Cir. 2/26/19).

 

INTERNATIONAL

Upper-tier partners of CFC must increase income as a result of partnership Subpart F income

The Tax Court held that the earnings and profits (E&P) of upper-tier controlled foreign corporation (CFC) partners of a domestic partnership must be increased as a result of the partnership’s Sec. 951(a) Subpart F income inclusions, resulting in the taxpayers’ having to include an additional $73 million and $114 million in income for 2007 and 2008, respectively. According to the court, CFCs compute E&P  the same r as a domestic corporation, except as otherwise provided in the Code or the regulations, and there are no special E&P rules in the Code or regulations concerning a CFC partner’s distributive share of partnership income. Eaton Corp., 152 T.C. No. 2 (2/25/19).

 

IRS PROCEDURE

Penalties determined by computer program are exempt from written supervisory approval requirement

The Tax Court held that penalties determined under Sec. 6662(a) and Sec. 6662(b)(2) by an IRS computer program without human review are automatically calculated through electronic means within the meaning of Sec. 6751(b)(2)(B) and, thus, are exempt from the written supervisory approval requirement of Sec. 6751(b)(1). Further, because the couple had repeatedly advanced frivolous positions, the court assessed a penalty of $12,500 under Sec. 6673(a)(1). Walquist, 152 T.C. No. 3 (2/25/19).

IRS issues quarterly interest rates for tax overpayments and underpayments

The IRS issued the rates for interest on tax overpayments and underpayments for the second calendar quarter of 2019. The rates for interest determined under Sec. 6621 for the calendar quarter beginning April 1, 2019, will be 6% for overpayments (5% in the case of a corporation), 6% for underpayments, 8% for large corporate underpayments, and 3.5% on the portion of a corporate overpayment exceeding $10,000. Rev. Rul. 2019-05 (2/25/19).

Proposed regs. on retirement of tax-exempt bonds

The IRS issued proposed regulations that address when tax-exempt bonds are treated as retired for purposes of Sec. 103. REG-141739-08 (2/25/19).

IRS failed to provide reasonable advance notice of subpoena

The Ninth Circuit affirmed a district court’s order, quashing an IRS subpoena that sought documents in connection with a federal audit of an elderly couple. The court held that the IRS had violated Sec. 7602(c)(1) by not providing reasonable advance notice to the taxpayers. J.B., No. 16-15999 (9th Cir. 2/26/19).

IRS waives underpayment penalty for qualifying farmers and fishermen for 2018

The IRS announced a waiver for farmers and fishermen of the addition to tax under Sec. 6654 for the underpayment of estimated income tax for the 2018 tax year. This waiver applies to any qualifying farmer or fisherman who, by the normal deadline for filing the 2018 federal income tax return (i.e., April 15, 2019, for most taxpayers), files a 2018 federal income tax return, attaches a specified waiver form, and pays in full any tax reported on the return as payable. Notice 2019-17 (2/28/19).

Tax Court rules in IRS’s favor regarding Sec. 6751(b) requirements

The Tax Court held that, where the IRS asserts multiple penalties, Sec. 6751(b)(1) does not require that the “initial determination” of all the penalties be made at the same time or by the same individual. In addition, the Tax Court concluded that Sec. 6751(b)(1) does not require supervisory approval to be made on a particular form, and the statute is satisfied by approval on Form 5701, Notice of Proposed Adjustment, or Form 5402-c, Appeals Transmittal and Case Memo, with the subordinate’s initial determinations of penalty attached. Palmolive Building Investors, LLC, 152 T.C. No. 4 (2/28/19).

Submetering rules extended to renewable energy sources

The IRS issued final regulations amending the existing utility allowance regulations under the Sec. 42 low income housing credit. The new regulations extend the principles of the current submetering rules to situations in which a building owner sells to tenants energy produced from a renewable source that was not purchased from a local utility company. T.D. 9850 (2/27/19).

Appeals court upholds PTIN fees

The D.C. Circuit upheld the IRS’s authority to charge a fee for preparer tax identification numbers (PTINs), which a lower court had struck down. Montrois, No. 17-5204 (D.C. Cir. 3/1/19) (see related news story).

Newsletter Articles

TECHNOLOGY

2018 tax software survey

Among CPA tax preparers, tax return preparation software generates often extensive and ardent discussion. To get through the rigors of tax season, they depend on their tax preparation software. Here’s how they rate the leading professional products.

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.