Document summaries for the week of June 10, 2019

C CORPORATIONS

IRS did not abuse its discretion in declining to discharge company’s $4.7 million tax debt

The Tax Court held that an IRS settlement officer did not abuse his discretion in declining a company’s proposal to discharge its $4,757,745 federal tax liability by making installment payments of $5,500 per month. The company was an information technology consulting business solely owned by one person who employed many other people and had consistently failed to file and pay employment taxes. The owner pled guilty to federal tax crimes and served time in prison. The court granted the IRS’s motion for summary judgment and sustained a proposed collection action against the company, influenced partly by the owner’s history of noncompliance. Indus Group, Inc., T.C. Memo. 2019-68 (6/10/19).

Gain on redemption of U.S. partnership interest not taxable

The D.C. Circuit upheld a Tax Court decision that gain a foreign company realized when it redeemed its interest in a U.S. partnership is not taxable because the redemption is not attributable to the company’s U.S. office and therefore it is foreign-source income. Grecian Magnesite Mining, Indus. & Shipping Co., SA, No. 17-1268 (D.C. Cir. 6/11/19).

Final Sec. 956 regs. exempt corporate U.S. shareholders

The IRS issued final regulations that reduce the amount determined under Sec. 956, which requires an income inclusion by U.S. shareholders of controlled foreign corporations that invest in U.S. property,  with respect to certain domestic corporations. T.D. 9859 (6/10/19).

Final regs. modify insurance company discounting rules

The IRS issued final regulations on discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for federal income tax purposes. T.D. 9863 (6/13/19).

 

EMPLOYEE BENEFITS

IRS issues monthly corporate yield curve and segment rates

The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Sec. 430(h)(2)(C)(iv). Notice 2019-40 (6/13/19).

 

EXEMPT ORGANIZATIONS

TIGTA releases report on implementation planning for excise tax on exempt org. excess compensation

The Treasury Inspector General for Tax Administration (TIGTA) issued a report assessing the IRS’s implantation planning efforts for the Sec. 4960 21% excise tax on excess compensation paid by tax-exempt organizations, which was added to the Code by P.L. 115-97. TIGTA Rep’t No. 2019-14-032 (6/10/19).

 

INDIVIDUALS

Losses from thoroughbred horse activity denied; penalties upheld

The Tax Court held that a couple was not engaged in their thoroughbred horse activity for profit within the meaning of Sec. 183(a) and, thus, were not entitled to deduct losses from that activity. The court also upheld the assessment of accuracy-related penalties against the couple after noting that both taxpayers were college-educated, had prior business experience, and did not seek any advice regarding the deductibility of their horse activity losses for any of the years at issue. The court also rejected the taxpayers’ argument that reasonable cause could be established because a prior IRS audit had allowed the deductions. Donoghue, T.C. Memo. 2019-71 (6/11/19).

Couple that ran Christian ministry and restaurant businesses must report contributions from their congregation but can deduct restaurant losses

The Tax Court held that a couple who operated a successful Christian ministry, as well as two restaurant businesses, (1) underreported their Schedule C gross receipts by deducting amounts for parsonage allowances and not reporting taxable contributions received from their congregation; (2) were not subject to the passive-loss limitation rules for restaurant-related losses; and (3) were not entitled to deductions for unsubstantiated car expenses. The court also concluded that the couple did not reasonably rely on their tax return preparer and were, thus, liable for accuracy-related penalties for 2007. However, the court found that the couple had reasonably relied on their preparer for 2008 and 2009 and were not liable for penalties. Brown, T.C. Memo. 2019-69 (6/10/19).

Noncontemporaneous mileage log did not sufficiently corroborate vehicle deductions

The Tax Court held that a couple (1) was not entitled deductions for car, truck, and machinery and equipment rental expenses because their noncontemporaneous mileage log and testimony did not sufficiently corroborate the deductions taken, and (2) was not entitled to a deduction for repairs and maintenance of computer equipment in excess of the amount the IRS had already allowed, but was entitled to a first-year depreciation deduction for the property as well as depreciation deductions. In addition, the couple and the IRS agreed that an accuracy-related penalty would apply for the year at issue if the recalculated deficiency is a substantial understatement of income tax as defined by Sec. 6662(d)(1)(A). Cooney, T.C. Summ. 2019-10 (6/11/19).

Court lacks jurisdiction to decide a disputed refund claim for a year not before it

The Tax Court sustained an IRS collection action against a couple for their 2015 taxes, which the couple argued should have been offset by a 2011 credit that would exist in the couple’s 2011 account if the IRS had not denied their 2011 refund claim. The court concluded that it lacked jurisdiction to decide a disputed refund claim for a year not before it. Murphy, T.C. Memo. 2019-72 (6/11/19).

Regs. finalized on charitable contributions to avoid SALT deduction cap

The IRS issued final regulations governing the availability of charitable contribution deductions under Sec. 170 when a taxpayer makes a contribution to a state or local agency or charitable fund and receives or expects to receive a corresponding state or local tax credit or deduction in return for the contribution. T.D. 9864 (6/11/19) (see related news story).

IRS to provide safe harbor for payments to tax-exempt organizations in exchange for state or local tax credit

The IRS announced that it intends to publish a proposed regulation providing a safe harbor under Sec. 164 for certain individuals who make a payment to, or for the use of, an entity described in Sec. 170(c) in return for a state or local tax credit. Under the safe harbor, an individual may treat as a payment of state or local tax for purposes of Sec. 164 the portion of a payment for which a charitable contribution deduction under Sec. 170 is, or will be, disallowed under Regs. Sec. 1.170A-1(h)(3). Notice 2019-12 (6/11/19) (see related news story).

Final regs. issued on health reimbursement accounts

The Department of Labor, the Department of Health and Human Services, and the IRS jointly issued final regulations to allow the integration of health reimbursement accounts (HRAs) and other account-based group health plans with individual health insurance coverage or Medicare, if certain conditions are satisfied. T.D. 9867 (6/13/19) (see related news story).

Court denies taxpayer’s motions where merits of arguments were previously decided

The Tax Court denied a taxpayer’s motion to have his case, which involves a proposed collection action, remanded on the grounds that the Appeals settlement officer in charge of the case is an “Officer of the United States” who was not appointed in a manner consistent with the Appointments Clause after the court noted that the merits of the taxpayer’s arguments in his motion were addressed and decided adverse to the taxpayer’s position in Tucker, 135 T.C. 114 (2010), aff’d, 676 F.3d 1129 (D.C. Cir. 2012). The court also denied a second motion by the taxpayer, in which the taxpayer sought to have the court hold that the IRS Office of Appeals is “unconstitutional” because of an alleged violation of the separation of powers doctrine, after noting that the taxpayer’s arguments in the second motion addressed essentially the same underlying facts, concepts, and legal principles that were considered by the Tax Court, and were the basis for the Tax Court’s holding, in Tucker. Fonticiella, T.C. Memo. 2019-74 (6/13/19).

Failure to keep contemporaneous log of time spent on rental activities precludes loss deductions

The Tax Court held that, because a couple spent less than 14 days in each of the years at issue at their Idaho rental property, Sec. 280A(e) did not limit the extent to which they could deduct rental real estate losses for that property. However, the court also concluded that, because the logs that recorded the time the couple spent on Idaho-rental-property activities were not created contemporaneously with those activities, the wife did not qualify as a real estate professional and the rental real estate losses from the property were suspended until the couple disposed of the property. Rose, T.C. Memo. 2019-73 (6/13/19).

Court imposes $1,000 penalty on taxpayer for frivolous arguments

The Tax Court held that, because a taxpayer failed to file a federal income tax return for 2012 and failed to introduce any credible evidence showing that he had reasonable cause for failing to timely file that return, he was liable for the related tax deficiency and was liable for the addition to tax under Sec. 6651(a)(1). The court also imposed a penalty of $1,000 after finding that the taxpayer continued to advance frivolous arguments as to why he was not subject to tax and the court warned the taxpayer that additional penalties would be imposed if he continued to advance those frivolous arguments. Staples, T.C. Memo. 2019-75 (6/13/19).

 

INTERNATIONAL

Final regs. on GILTI and foreign tax credits

The IRS issued final regulations providing guidance on how to determine the amount of global intangible low-taxed income (GILTI) that is included in the gross income of U.S. shareholders of foreign corporations. T.D. 9866 (6/14/19) (see related news story).

Prop. regs. on determining amounts included in their partners’ gross income

The IRS issued proposed regulations on the treatment of domestic partnerships for purposes of determining amounts included in their partners’ gross income with respect to foreign corporations. The proposed regulations also cover the global intangible low-taxed income (GILTI) rules for gross income that is subject to a high rate of foreign tax. REG-101828-19 (6/14/19) (see related news story).

Regulations issued on dividends-received deduction

The IRS issued temporary and proposed regulations on the limitation on the Sec. 245A deduction for dividends received from certain foreign corporations and amounts eligible for the Sec. 954 lookthrough exception. T.D. 9865; REG-106282-18 (6/14/19).

 

IRS PROCEDURE

IRS did not abuse its discretion in proceeding with a collection action

The Tax Court granted summary judgment to the IRS after finding that there were no disputed issues of material fact and that the IRS’s determination to sustain a proposed collection action against a taxpayer, who owed the IRS more than $100,000, was proper as a matter of law. The court also held that there was no abuse of discretion by the IRS where the taxpayer had not questioned the IRS’s determination that he could pay the IRS $1,879 per month. Fakurnejad, T.C. Memo. 2019-70 (6/10/19).

Fraud by return preparer keeps limitation period open

The Eleventh Circuit held that the limitation period for assessment remains open under the Sec. 6501 fraud exception where the taxpayers’ return preparer, without their knowledge, included fraudulent entries on their tax returns. Finnegan, No. 17-10676 (11th Cir. 6/11/19).

Tax relief for victims of South Dakota severe weather

The IRS announced that victims of the severe storms, tornadoes, straight-line winds, and flooding that began on March 13, 2019, in South Dakota may qualify for tax relief. SD-2019-01 (6/11/19).

Tax relief for victims of Arkansas severe weather

The IRS announced that victims of the severe storms and flooding that began on May 21, 2019, in Arkansas may qualify for tax relief. AR-2019-01 (6/11/19).

 

S CORPORATIONS

Final regs. on expansion of ESBT beneficiaries

The IRS issued final regulations regarding the statutory expansion of the class of permissible potential current beneficiaries of an electing small business trust (ESBT) to include nonresident aliens. T.D. 9868 (6/13/19).

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.