Document summaries for the week of June 3, 2019
Court rejects corporation’s unsubstantiated deductions
The Tax Court upheld an IRS notice of deficiency in which the IRS disallowed, for lack of substantiation, deductions that a C corporation took against its gross receipts. The court also upheld the IRS’s tax calculation using personal service corporation rates and its penalty assessments against the corporation after finding that the corporation woefully failed to demonstrate reasonable cause and good faith in taking the deductions at issue. Amnesty National, T.C. Memo. 2019-63 (6/3/19).
Regs. impose corporate-level tax on property transfers to REITs
The IRS issued final regulations that impose corporate-level tax on certain transactions in which property of a C corporation becomes property of a real estate investment trust (REIT). T.D. 9862 (6/3/19).
Ninth Circuit again reverses Tax Court in transfer-pricing case
The Ninth Circuit held that the promulgation of Regs. Sec. 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation for their qualified cost-sharing arrangements to be considered valid, did not exceed the IRS’s rulemaking authority, was not arbitrary or capricious under the Administrative Procedure Act, and is entitled to deference under the standard from Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). The decision reversed the Tax Court’s holding in Altera Corp., 145 T.C. 91 (2015). The Ninth Circuit had withdrawn its original opinion in this case (issued in July 2018), but, as had the original panel, a reconstituted panel of judges held, 2–1, that the regulation is valid. Altera Corp., No. 16-70496 (9th Cir. 6/7/19) (see related news story).
Taxpayer cannot deduct expenses paid for services performed by wholly owned corporation
The Tax Court held that a taxpayer could not deduct as business expenses on his personal tax returns amounts paid for services performed by his solely owned but defunct corporation because, the court said, those amounts represented an invalid assignment of income. In addition, the court concluded that the taxpayer was not entitled to deduct net operating or bad debt losses and was liable for the accuracy-related penalties and penalties for the late-filing addition to tax. Frey, T.C. Memo. 2019-62 (6/3/19).
Court rejects findings from horse appraiser hired by taxpayers
In a case involving the issue of whether a horse-related activity engaged in by a group of taxpayers was an activity not engaged in for profit under Sec. 183, the Tax Court granted the IRS’s motion to exclude from evidence an appraisal report by the taxpayers’ expert witness. The court found that, because the appraiser could not explain how he got certain values and could not explain the methodology, and the manner in which he applied that methodology, to reach his valuation outcomes, the court had no means of examining whether the report “rests on a reliable foundation and is relevant to the task at hand.” Skolnick, T.C. Memo. 2019-64 (6/3/19).
Author is subject to self-employment tax on amounts paid for her ‘brand’
The Tax Court held that an author was subject to self-employment tax on (1) amounts paid for her name and likeness (in other words, her “brand”), and (2) amounts received from a noncompete agreement where the agreement did not prevent the author from contracting with others. Further, the court found that, because the author reasonably relied on the advice of her tax return preparer, she was not liable for negligence penalties the IRS assessed. Slaughter, T.C. Memo. 2019-65 (6/4/19).
Failure to use certified mail to document the date a petition was filed precludes a Tax Court hearing
The Tax Court granted an IRS motion to dismiss a case for lack of jurisdiction on the ground that the taxpayer’s petition was not timely filed. The court noted that, had the taxpayer’s attorney used certified mail, the taxpayer would have a postmarked receipt; but, instead, the taxpayer had no persuasive evidence of timely mailing and therefore failed to meet his burden of proving the document was timely mailed. Williams, T.C. Memo. 2019-66 (6/5/19).
Sixth Circuit affirms convictions for tax identity theft
The Sixth Circuit affirmed a district court’s conviction of three siblings for mail fraud, conspiracy to commit mail fraud, aggravated identity theft, conspiracy to commit identity theft, and illegal monetary transactions. The defendants created 21 fictitious trusts and submitted fictitious tax returns to the IRS to claim refunds for nonexistent excess withholding. Gandy, No. 17-2020 (6th Cir. 6/7/19).
Prop. regs. on qualified foreign pension funds gain and loss from US real property
The IRS issued proposed regulations regarding the exception from taxation for gain or loss of a qualified foreign pension fund attributable to certain interests in U.S. real property. The regulations also include rules for certifying that a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in U.S. real property. REG-109826-17 (6/6/19).
TIGTA releases semiannual report to Congress
The Treasury Inspector General for Tax Administration (TIGTA) released its semiannual report to Congress, covering Oct. 1, 2018, through March 31, 2019. TIGTA Semiannual Report to Congress (6/3/19).
Tax relief for victims of Oklahoma severe weather
The IRS announced that victims of severe storms, tornadoes, straight-line winds, and flooding that took place May 7, 2019, in Muskogee, Tulsa, and Wagoner counties in Oklahoma may qualify for tax relief. OK-2019-01 (6/3/19).
Enhanced oil recovery credit phased out for 2019
The IRS announced the inflation-adjustment factor and phaseout amount for the Sec. 43 enhanced oil recovery credit for tax years beginning in 2019 and concluded that the credit is phased out completely for costs paid or incurred in 2019. Notice 2019-36 (6/3/19).
Natural gas wellhead price published
The IRS published Treasury’s estimate of the annual average wellhead price per 1000 cubic feet for all domestic natural gas. This estimate is the reference price for purposes of the Sec. 45I marginal well production credit. Notice 2019-37 (6/3/19).
2019 marginal production depletion percentage is 15%
The IRS announced that under Sec. 613A(c)(6)(C), the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2019 is 15%. Notice 2019-38 (6/3/19).
IRS releases third quarter interest rates for tax underpayments and overpayments
The rates for interest determined under Sec. 6621 for the calendar quarter beginning July 1, 2019, will be 5% for overpayments (4% in the case of a corporation), 5% for underpayments, and 7% for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5%. Rev. Rul. 2019-15 (6/5/19).
Taxpayer subject to tax and penalty on early retirement plan distribution
The Tax Court held that a distribution received by a taxpayer from a qualified retirement account was includible in the taxpayer’s gross income for the year at issue. In addition, the court concluded that (1) because the taxpayer was only 42 years old, she was liable for the 10% additional tax under Sec. 72(t) on the total distribution less the portion of the distribution allocated to higher education expenses; and (2) the IRS did not abuse its discretion by sustaining a proposed levy to collect the taxpayer’s unpaid income tax liability for the year at issue. McCree, T.C. Memo. 2019-67 (6/6/19).
IRS explains CP2000 notices
The IRS issued a fact sheet explaining IRS Notice CP2000, which it sends to taxpayers when information on a tax return does not match data reported to the IRS by employers, banks, and other third parties. FS-2019-10 (6/7/19).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.