Document summaries for the week of July 15, 2019

EXEMPT ORGANIZATIONS

Final regs. on Sec. 501(c)(4) organizations’ notice requirement

The IRS issued final regulations on the requirement that a Sec. 501(c)(4) “social welfare” organization must notify the IRS, no later than 60 days after its establishment, of its intent to operate under Sec. 501(c)(4). T.D. 9873 (7/19/19).

 

INDIVIDUALS

Taxpayer failed to show she is entitled to innocent spouse relief

The Tax Court held that, because a taxpayer did not establish that she requested innocent spouse relief from joint and several liability within two years from the IRS’s commencing collection activities, she failed to show that she qualified for innocent spouse relief under Sec. 6015(b) or Sec. 6015(c). The court also held that the taxpayer was not entitled to equitable relief under Sec. 6015(f) because the liability from which the taxpayer sought relief was attributable to her income and she failed to show that prior abuse and fear of her ex-husband’s retaliation prevented her from challenging the exclusion of income on one of the returns and the nonpayment of the balance due reported on another return. Ogden, T.C. Memo. 2019-88 (7/15/19).

Gambler lacked requisite profit objective to deduct losses on Schedule C

The Tax Court held that, while a taxpayer was entitled to deduct almost $17,000 in gambling losses for the year at issue, he had to deduct them on Schedule A, Itemized Deductions, as an itemized deduction, rather than Schedule C, Profit or Loss From Business, because he was not a professional gambler. According to the court, the taxpayer did not have the requisite profit objective to qualify his gambling activity as a trade or business for the year at issue. Zalesiak, T.C. Summ. 2019-16 (7/15/19).

Loss on disposition of properties is limited to amount the IRS calculated

The Tax Court held that, while a taxpayer suffered a loss upon the disposition of certain real estate, he failed to show that the tax basis used to calculate the loss was more than that calculated by the IRS. The loss on the properties was thus limited to the loss the IRS calculated. The court also concluded that, because the taxpayer did not have reasonable cause for failing to timely file his 2013 tax return or timely pay the tax shown on that return, he was liable for the Sec. 6651(a) penalties the IRS assessed. Perry, T.C. Summ. 2019-15 (7/15/19).

IRS expands preventive care under a high-deductible health plan

The IRS expanded upon previous guidance dealing with preventive care benefits that a high-deductible health plan may cover before a deductible is met (e.g., Notices 2004-23, 2004-50, and 2013-57) by providing a list of additional services and items that may be treated as preventive care for purposes of Sec. 223(c)(2)(C). These services and items are treated as preventive only when prescribed to treat an individual diagnosed with a specified chronic condition, to prevent its exacerbation or the development of a secondary condition. Notice 2019-45  (7/17/19) (see related news story).

Court calls attempted deduction of legal expenses a gross abuse of the Code

The Tax Court upheld accuracy-related penalties assessed against a couple after disallowing numerous tax deductions they took on their joint return because they either failed to substantiate the amounts deducted or failed to substantiate their business purpose. The court was particularly troubled by a $90,000 deduction taken for legal fees paid by one entity the couple controlled to another entity they controlled, calling it a “gross abuse of the Code.” Rogers, T.C. Memo. 2019-90 (7/17/19).

Tax Court sustains NFTL, rejects argument that it would hurt taxpayers’ credit rating

The Tax Court held that an IRS settlement officer (SO) did not abuse her discretion in rejecting a couple’s request that the IRS withdraw a notice of federal tax lien (NFTL) that they said was affecting their credit rating and jeopardizing their ability to get a car loan. It was apparent to the court that the SO duly considered the totality of the couple’s circumstances and properly performed a balancing analysis. Finding no abuse of discretion, the court sustained the filing of the NFTL. Richards, T.C. Memo. 2019-89 (7/17/19).

Failure to attach Form 8332 to return precludes dependency exemption, even though the form was subsequently obtained

The Tax Court held that, because a taxpayer did not attach Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar written declaration to his original 2015 federal income tax return, he could not claim his son as a dependent for 2015. Although the taxpayer received a Form 8332 from his ex-wife in 2017 for the 2015 tax year, the court noted that the regulations do not explicitly allow Form 8332 or declaration to be submitted during an audit or with an amended return if, as in this case, the custodial parent claimed a dependency exemption for the child and does not file his or her own amended return removing the claim. The court concluded that the taxpayer was thus not entitled to the dependency exemption deduction, child tax credit, earned income tax credit, and head of household filing status for 2015. DeMar, T.C. Memo. 2019-91 (7/18/19).

 

INTERNATIONAL

Court affirms US treaty authority to collect unpaid taxes for Canada

The Fourth Circuit dismissed a Canadian citizen’s refund suit, holding that a treaty authorizing the United States to collect unpaid income taxes on behalf of Canada is constitutional. Retfalvi, No. 18-2158 (7/16/19).

 

IRS PROCEDURE

General rules for printing substitute forms updated

The IRS published the specifications for the private printing of red-ink substitutes for the 2019 revisions of certain information returns. This procedure will be reproduced as the next revision of IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. Rev. Proc. 2018-46 is superseded. Rev. Proc. 2019-24 (7/15/19).

IRS issues August 2019 applicable federal rates

The IRS issued a ruling that provides various prescribed rates for August 2019 for federal income tax purposes under Sec. 1274, including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. Rev. Rul. 2019-17 (7/17/19).

Final regs. on income inclusion rules for lessees of investment credit property

The IRS issued final regulations providing guidance on the income inclusion rules under Sec. 50(d)(5) that are applicable to a lessee of investment credit property when a lessor of such property elects to treat the lessee as having acquired the property. T.D. 9872 (7/17/19)

 

PARTNERSHIPS

Sec. 761(e) applies to a deemed distribution in a partnership assets-over merger

The IRS National Office advised that a deemed distribution of a partnership interest in an assets-over merger of two partnerships under Regs. Sec. 1.708-1(c)(3)(i) is treated pursuant to Sec. 761(e) as an “exchange” that requires a mandatory downward inside-basis adjustment under Sec. 743(b) when the resulting partnership has a substantial built-in loss. Additionally, the National Office said that cancellation of indebtedness income that is deferred under Sec. 108(i) is not included in calculating a transferee partner’s share of adjusted basis to the partnership of partnership property for purposes of Regs. Sec. 1.743-1(d)(1). TAM 201929019 (7/19/19).

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.