Document summaries for the week of July 1, 2019

CORPORATIONS

Treasury can reduce basis of qualified property for investment grant

The Federal Circuit affirmed a decision of the Court of Federal Claims regarding the amount of an infrastructure cash grant under Section1603 of the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (which provides such grants in lieu of Sec. 48 tax credits). The court determined that Section 1603(b)(2)(A) of the act unambiguously allows Treasury to reduce the cost basis of qualified property in proportion to its use in a qualifying activity. WestRock Virginia Corp., No. 2018-1877 (Fed. Cir. 6/28/19).

 

INDIVIDUALS

Nurse’s failure to adequately substantiate expenses precludes their deduction

The Tax Court held that the taxpayer, a psychiatric mental health nurse who received a salary as an employee as well as income from a sole proprietorship nursing activity, was not entitled to deductions for home office expenses, car and truck expenses, and education expenses because her “meager” records failed to adequately substantiate them. In addition, because the taxpayer did not make a sufficient effort to assess her proper tax liability, the court upheld an accuracy-related penalty. Esteen, T.C. Summ. 2019-13 (7/2/19).

Exporting business was an active trade or business

The Tax Court held that, because the IRS failed to meet its burden of proving that a taxpayer’s exporting business was unable to export vegan products in 2014 or that the taxpayer’s activities amounted to mere research into a potential business, the taxpayer’s business expenditures for 2014 were not limited by Sec. 195. However, the court also held that, because the taxpayer failed to adequately substantiate many claimed business expenses, most were not deductible. Smith, T.C. Summ. 2019-12 (7/1/19).

Taxpayer not entitled to enhanced attorneys’ fees

The Eighth Circuit held that a taxpayer who prevailed in a deficiency proceeding in Tax Court was not entitled to an award of enhanced attorneys’ fees under Sec. 7430(c)(1)(B)(iii) because his attorney’s equine experience and trial litigation success rate did not amount to a “special factor” that would justify his $400 per hour billed, versus the statutory rate of $180 per hour. The Eighth Circuit also upheld the Tax Court’s reduction of the number of hours the attorney could reasonably claim. Tolin, No. 18-2343 (8th Cir. 7/3/19).

 

INTERNATIONAL

IRS may determine treatment in lieu of agent authorization

The Office of Chief Counsel advised that, where a foreign shareholder is a related party with respect to a foreign corporation that is engaged in the conduct of a trade or business within the United States, and the foreign shareholder does not agree to authorize the foreign corporation to act as its agent as described in Sec. 6038C(d)(1), then the rules of Sec. 6038C(d)(3) (which provides the IRS with discretion to determine the treatment of an applicable transaction or item from its own knowledge or information) apply with respect to certain transactions between the foreign corporation and its shareholder. The Chief Counsel’s Office noted that Regs. Sec. 1.6038A-1(a) provides rules for certain foreign-owned U.S. corporations and foreign corporations engaged in a trade or business within the United States (i.e., reporting corporations) relating to information that must be furnished, records that must be maintained, and the authorization of the reporting corporation to act as agent for related foreign persons for purposes of Secs. 7602, 7603, and 7604 that must be executed. CCA 201927017 (7/5/19).

 

IRS PROCEDURE

Regs. allow truncated TINs on Forms W-2

The IRS issued final regulations that permit employers to use truncated taxpayer identification numbers (TTINs) on Forms W-2, Wage and Tax Statement, issued to employees. T.D. 9861 (7/2/19) (see related news story).

TIGTA critiques IRS video review processes

The Treasury Inspector General for Tax Administration (TIGTA) reported on its audit of the IRS’s Service-Wide Video Editorial Board, which reviews and approves IRS video projects. TIGTA Rep’t No. 2019-10-037 (7/2/19).

Failure to timely file refund suit precludes a refund or credit of claimed overpayment

The Office of Chief Counsel advised that, assuming there is no waiver or extension of the statute of limitation for filing suit, Sec. 6532 provides that a taxpayer has two years from the issuance of a Notice of Disallowance to file suit to challenge the disallowance of a refund claim. If the taxpayer does not do so within that period, Sec. 6514 prohibits the refund or credit of a claimed overpayment. CCA 201927020 (7/5/19).

IRS can levy on funds in a 401(k); early withdrawal penalty does not apply

The Office of Chief Counsel advised that the Legal Reference Guide for Revenue Officers in the Internal Revenue Manual (IRM) sets out the IRS’s position on levying on retirement income and the corpus of retirement plans. The Chief Counsel’s Office noted that the procedures for levying on retirement income are in IRM 5.11.6.2 and on pension retirement plans — including 401(k)s — in IRM Section 5.11.6.3, and that the early withdrawal penalty would not apply. CCA 201927019 (7/5/19).

SS-8 unit should follow normal processing rules for Forms 1099-K

The Office of Chief Counsel advised that an IRS unit that processes Forms SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, should follow normal processing rules when it receives Forms 1099-K, Payment Card and Third Party Network Transactions, in the process of making employment status determinations. CCA 201927018 (7/5/19).

 

PARTNERSHIPS

Final regs. prohibit partners from being employees of partnership’s disregarded entity

The IRS finalized temporary regulations (T.D. 9766) clarifying that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. T.D. 9869 (7/1/19).

 

TAX ACCOUNTING

Temporary increase in startup expense deduction is only for 2010 tax years

The Office of Chief Counsel advised that the temporary increase to $10,000 (subject to a $60,000 phase-out threshold) in the amount of startup expenditures that may be deducted applies only for a tax year beginning in 2010. The Chief Counsel’s Office cited Sec. 195(b)(3) and the Senate Finance Committee’s Summary of the Small Business Jobs Act (of 2010, P.L. 111-240), as well as reports by the Joint Committee on Taxation and Congressional Research Service. CCA 201927021 (7/5/19).

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.