Document summaries for the week of Feb. 4, 2019

INDIVIDUALS

Taxpayers cannot raise new issues in Rule 155 proceeding

The Tax Court held that several taxpayers, who the court had previously determined were not entitled to foreign tax credits under Sec. 901 for certain amounts paid to the U.S. Virgin Islands, could not raise new issues in a Rule 155 proceeding, and it denied the taxpayers’ motion to reopen the record in the case. In their computations, the taxpayers took the position that the amounts at issue were deductible as state or local taxes under Sec. 164(a)(3), an argument they had not advanced at any prior point in the litigation. Vento, 152 T.C. No. 1 (2/4/19).

IRS abused its discretion in finding taxpayer wasted his wealth to avoid paying his tax liability

The Tax Court held that a taxpayer did not waste his wealth by investing in Gulf Opportunity Zone property to avoid paying the IRS and, thus, the IRS’s determination to sustain a proposed levy action regarding the taxpayer’s unpaid 2001 tax liability was an abuse of discretion. The court also held that an IRS determination that the taxpayer had a property right in a trust, of which he was a beneficiary, was arbitrary, capricious, and without sound basis in fact or law. Campbell, T.C. Memo. 2019-4 (2/4/19).

Taxpayer cannot zero out payments from former employer

The Tax Court held that a taxpayer, who had been fired by his employer that subsequently paid him for “alleged unpaid wages” and “alleged emotional distress,” could not zero out income from the emotional-distress payments by deducting amounts for pain and suffering and, for one year at issue, legal fees. The court did note that the tax treatment on the taxpayer’s return was consistent with advice the taxpayer had received from his CPA. The taxpayer thus had reasonable cause and acted in good faith and was not liable for an accuracy-related penalty, the court held. Doyle, T.C. Memo. 2019-8 (2/6/19).

 

INTERNATIONAL

Chief Counsel’s Office opines on correct functional currency in foreign stock transaction

Where a foreign corporation agreed to sell the stock of its corporate group and that stock was subsequently contributed to an entity treated as a partnership for U.S. tax purposes, the Office of Chief Counsel advised that, in calculating any Sec. 988 foreign currency gain or loss with respect to payments of principal and interest on related loans, the functional currency was that of the country in which the foreign corporation was located, rather than that of the partnership. The Chief Counsel’s Office stated that the versions of Regs. Secs. 1.989(a)-1 and 1.988-4(b) in effect before their modification in T.D. 9794 applied to the years at issue. TAM 201902030 (2/8/19).

 

IRS PROCEDURE

Appeals Office can decline cases with no tax issues

The Office of Chief Counsel responded to a request for advice on whether cases raising solely constitutional and nontax issues are eligible for Appeals consideration. The Chief Counsel’s Office concluded that, while it is ultimately up to Appeals to interpret its own criteria for case consideration, Appeals’ published procedures appear to allow it to decline cases with no tax issues. CCA 201902031 (2/8/19).

No abuse of discretion in collecting tanning excise taxes from business’s president

The Tax Court held that an IRS settlement officer did not abuse his discretion in sustaining a levy to collect trust fund recovery penalties from the president and majority shareholder of a tanning bed business who had not paid certain tanning excise taxes. The court also noted that the penalties were asserted by a revenue agent and approved by his immediate supervisor using Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, which satisfied the supervisory-approval requirement of Sec. 6751(b). Humiston, T.C. Memo. 2019-9 (2/7/19).

Collection alternatives rejected for taxpayer behind on tax payment and filing obligations

The Tax Court held that an IRS determination to uphold a notice of intent to levy on a taxpayer, who was delinquent on his 2012 and 2013 tax liabilities, was proper as a matter of law. The court noted that the taxpayer did not provide the IRS settlement officer in the case with any financial or other information that would justify granting the taxpayer’s request for an installment agreement. Moreover, the taxpayer was not current in his tax filing obligations, and this fact alone was grounds to reject any collection alternative, the court stated. Samaniego, T.C. Memo. 2019-7 (2/6/19).

 

PARTNERSHIPS

Tax Court has jurisdiction only over couple’s tax deficiencies but not the related penalties

The Tax Court held that IRS adjustments in notices of deficiency that were attributable to a decision in prior TEFRA proceedings required partner-level determinations of a couple’s tax deficiencies, but not of the related penalties. The court concluded that it has jurisdiction only over the tax deficiencies at issue but not over the penalties and granted the IRS’s motion to dismiss as to the penalties. The couple should instead file a refund claim for the penalty. Gunther, T.C. Memo. 2019-6 (2/5/19).

Appeals court awards litigation costs to partnership

The Federal Circuit affirmed a lower court decision awarding reasonable litigation costs incurred in connection with a TEFRA proceeding and an untimely notice of final partnership administrative adjustment. The court held that the partnership, and not the partners, was the “prevailing party” under Sec. 7430. BASR Partnership, No. 2017-1925 (Fed. Cir. 2/8/19).

 

TAX ACCOUNTING

Sale of patented application resulted in capital gain, not ordinary income

The Tax Court held that a taxpayer’s transfer of a patented application of a method he designed, which allows a business to allocate leads and marketing efforts to sales pipelines on the basis of each pipeline’s capacity to develop leads effectively, met the requirements for long-term capital gains treatment under Sec. 1235. In addition, the court rejected the IRS’s argument that the taxpayer received additional commission income in 2007 that he did not report and instead accepted the taxpayer’s explanation that he miscalculated the amount of those commissions. Meggs, T.C. Memo. 2019-5 (2/4/19).

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.