Document summaries for the week of July 8, 2019

INDIVIDUALS

IRA distribution rolled over 62 days later was a valid rollover

The Tax Court held that, although a taxpayer did not rollover a $525,000 individual retirement account (IRA) distribution within 60 days of receiving the distribution, the taxpayer was entitled to qualified rollover treatment on the distribution and was not subject to tax deficiencies and penalties the IRS assessed. The court agreed with the taxpayer that she qualified for relief on two separate grounds: (1) The rollover was not recorded as timely because of a bookkeeping error by the IRA custodian, and (2) she was entitled to a hardship waiver under Sec. 408(d)(3)(I) because the funds were deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period and, if the financial institution had deposited the funds as instructed, it would have been a valid rollover. Burack, T.C. Memo. 2019-83 (7/8/19).

Taxpayer failed threshold requirements and was not entitled to a whistleblower award

The Tax Court held that a whistleblower claim involving the proper reporting of interest income for certain financial products had no merit and the IRS was entitled to summary judgment on the issue. The court concluded that (1) the taxpayer did not meet the threshold requirements for a whistleblower award because the IRS took no action and collected no proceeds, and (2) the Whistleblower Office did not abuse its discretion in denying the taxpayer’s claim. Epstein, T.C. Memo. 2019-81 (7/8/19).

No statute of limitation applies on assessing penalties where underpayments of tax were attributable to fraud

The Tax Court held that the IRS established by clear and convincing evidence that a taxpayer’s underpayments of tax for 2008 and 2009 were attributable to fraud. Further, because the taxpayer’s underpayments of tax were due to fraud, the three-year statute of limitation under Sec. 6501(a) on assessing penalties relating to those underpayments did not apply and the fraud penalty applied to the underpayments. Kohan, T.C. Memo. 2019-85 (7/9/19).

Couple liable for tax deficiencies and penalties for failing to report income

The Tax Court held that a couple (1) had unreported income for 2005 through 2009; (2) owned trust assets for which they should have taken into account the income, deductions, and credits of the trust in computing their taxable income for 2005 through 2009; (3) realized gain on the sale of a limited liability company interest that should have been included in their income; (4) did not qualify for nonrecognition of gain treatment under Sec. 1035 for a purported exchange of a variable life insurance policy because the policy was never a valid life insurance policy; and (5) were liable for excise taxes and penalties on excess individual retirement account contributions for 2007 through 2009. The court also concluded that the couple were liable for the fraud penalty under Sec. 6663(a) for years 2005 through 2009, as well as penalties under Sec. 6651(a) for failing to file their returns on time and failing to timely pay the tax due but did find that the IRS failed its burden of production for years 2007 and 2009 and the Sec. 6651(a)(2) penalties for those years were not sustained. Wegbreit, T.C. Memo. 2019-82 (7/8/19).

Chief Counsel’s Office addresses corporation’s charitable contribution carryover adjustment

Where a corporation has both a charitable contribution and net operating loss (NOL) carryovers from multiple tax years available in a tax year, the Office of Chief Counsel advised that the corporation must use a year-by-year NOL absorption computation to determine the charitable contribution carryover adjustment under Sec. 170(d)(2)(B). In addition, where the taxpayer’s charitable contribution carryover is set to expire in the year at issue pursuant to the five-year carryover period provided in Sec. 170(d)(2), the taxpayer must reduce its current-year charitable contributions first by the adjustment under Sec. 170(d)(2)(B) before reducing its earliest year’s charitable contribution carryover. CCA 201928014 (7/12/19).

No deduction allowed for ‘away from home’ expenses of ‘itinerant’ taxpayer

The Tax Court held that a taxpayer who worked as a systems engineer at various locations in the United States during 2014 and 2015 was not entitled to deductions for parking fees, tolls, transportation and travel expenses, and lodging because he either failed to adequately substantiate his deductions or because he was an itinerant and was not “away from home” within the meaning of Sec. 162(a)(2). However, because the taxpayer was required to have cellphone and internet access for his employment, and because he provided a reasonable basis for the court to accept his estimated expenses for these items, the court allowed an unreimbursed employee business expense deduction of $1,140 for each of 2014 and 2015. Krishnan, T.C. Summ. 2019-14 (7/10/19).

Taxpayer stationed in Afghanistan had US home and thus was not entitled to foreign earned income exclusion

The Tax Court held that a taxpayer who was stationed in Afghanistan while in the U.S. Army was not entitled to the foreign earned income exclusion under Sec. 911(a) for 2011 and 2012 because her tax home was in the United States during those years and she thus did not have a foreign tax home. The court also disallowed additional business expenses taken by the taxpayer and her husband. Noting that the couple did not consult a tax professional regarding the foreign earned income exclusion and finding that their reliance on a tax software website did not demonstrate a reasonable attempt to comply with Sec. 911, the court also upheld the assessment of accuracy-related penalties. Haskins, T.C. Memo. 2019-87 (7/11/19).

Taxpayer’s case is moot since IRS abated restitution-based assessments and withdrew NFTL

In a collection-due-process (CDP) case involving an incarcerated taxpayer’s request for a review of IRS determination to uphold a notice of federal tax lien (NFTL) against him, the Tax Court held that, because the IRS had abated all restitution-based assessments and withdrawn the NFTL, there remained no adjudicable case or controversy, and hence the case was moot. However, the court noted that if the IRS later reassesses the restitution at issue, the taxpayer is free to challenge that collection effort. Catlett, T.C. Memo. 2019-86 (7/11/19).

 

INTERNATIONAL

Proposed regulations on PFICs

The IRS issued proposed regulations regarding the determination of ownership in a passive foreign investment company (PFIC) within the meaning of Sec. 1297(a) and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation for purposes of Sec. 1297. REG-105474-18 (7/11/19).

 

IRS PROCEDURE

Renewable electricity production and refined coal production credit amounts for 2019

The IRS reported the 2019 inflation-adjustment factor and reference prices used to determine the availability of the Sec. 45 credit for electricity produced from qualified energy resources and refined coal and included the credit amounts for renewable electricity production and refined coal production. The notice also corrected the credit amount for refined coal production for 2018. Notice 2019-41 (7/8/19).

National taxpayer advocate reports on earned income credit

Nina Olson, the national taxpayer advocate, published volume 3 of her annual report to Congress, examining the earned income tax credit. Special Report to Congress, vol. 3 (7/10/19).

IRS removes regs. regarding advance payments for goods and long-term contracts

The IRS issued final regulations that remove existing regulations (Regs. Sec. 1.451-5) regarding advance payments for goods and long-term contracts. T.D. 9870 (7/11/19).

 

PRACTICE & STANDARDS

CPA liable for penalties for preparing mariner returns taking deduction for meals provided by employers

The Tax Court held that (1) the IRS satisfied its burden of proving that a CPA, who specialized in preparing tax returns for mariners, prepared 5,167 returns for the years in issue with knowledge that the returns and/or schedules prepared would result in understatements of tax, and (2) the CPA was thus liable for the penalties assessed under Sec. 6701 for aiding and abetting an understatement of tax liability from those returns. The court noted that, despite advice to the contrary, the CPA continued to assert that mariners were entitled to deductions for the cost of meals furnished by their employers and for which they incurred no expense. Kapp, T.C. Memo. 2019-84 (7/9/19).

 

TAX ACCOUNTING

IRS tolls and extends continuity safe harbor to mitigate national security concerns

The IRS has updated and clarified previous guidance involving the beginning of construction for purposes of Sec. 45 (i.e., the production tax credit) and Sec. 48 (i.e., the investment tax credit). According to the IRS, the continuity safe harbor may be tolled and extended in certain limited circumstances involving significant national security concerns. Notice 2019-43 (7/12/19).

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.