Document summaries for the week of March 4, 2019
IRS cannot collect corporate division’s employment taxes from parent company established under Indian Reorganization Act
In an issue of first impression, the Tax Court held that the charter of a corporation of a federally recognized Indian tribe, which had been issued by the Department of Interior under Section 17 of the Indian Reorganization Act of 1934 (25 U.S.C. §5124), properly allowed the corporation to create corporate divisions, the assets and liabilities of which were distinct from those of the corporation for federal tax purposes. Further, the Tax Court said, a division of the corporation acted as a legally distinct division, and, therefore, the IRS was precluded from collecting that division’s employment tax liabilities from the parent corporation. Blue Lake Rancheria Econ. Dev. Corp., 152 T.C. No. 5 (3/6/19).
Not-for-profit corporation gets lower, corporate interest rate on refunds
The Tenth Circuit held that a nonstock, not-for-profit entity was a corporation for purposes of Sec. 6621(a)(1) and therefore subject to the lower corporate interest rate on a refund it received from the IRS. Wichita Center for Grad. Med. Educ., Inc., No. 18-3016 (10th Cir. 3/7/19).
Lost wages are compensation under RRTA
The U.S. Supreme Court held that the portion of a jury award that constituted lost wages for the time a taxpayer was unable to work due to an on-the-job injury is taxable compensation under the Railroad Retirement Tax Act of 1937. BNSF Railway Co. v. Loos, No. 17-1042 (U.S. 3/4/19).
Tax Court rejects as untimely petition filed by taxpayer using a private postage label
The Tax Court granted an IRS motion to dismiss, for lack of jurisdiction, a Tax Court petition filed by a taxpayer using a private postage label printed from Endicia.com, a website for buying postage. The Tax Court deemed the petition untimely after noting that the envelope containing the petition also bore two U.S. Postal Service postmarks that were after the 90-day filing deadline and that the envelope did not arrive at the Tax Court until 20 days after the date shown on the postage label. Jordan, T.C. Memo. 2019-15 (3/4/19).
Couple with $97,000 of income must repay the advance premium tax credit payments received
The Tax Court held that a couple’s tax liability was increased by their receipt of excess advance premium tax credit (APTC) payments under Sec. 36B. The court agreed with the IRS that the couple were not eligible for any credit because their household income of $97,000 exceeded the maximum allowable for receiving the APTC and any claim of getting inadequate health coverage for the premiums they paid should be pursued separately in state court. Kerns, T.C. Memo. 2019-14 (3/4/19).
Compulsive gambling losses resulting from use of Parkinson’s drug are not deductible as casualty losses
The Tax Court held that, even though a taxpayer’s compulsive-gambling losses were caused by a Parkinson’s-related drug, the losses were not deductible casualty losses. While the court found that the taxpayer’s brain was damaged by the drug Pramipexole, it noted that physical damage to property remains one of the prerequisites of a casualty-loss deduction, and the taxpayer’s depleted bank accounts, and the money he left on the table when he made bad real estate deals, did not suffer any physical damage. Mancini, T.C. Memo. 2019-16 (3/4/19).
Court disallows numerous deductions for lack of substantiation, business purpose, and nexus to taxpayer’s business
The Tax Court disallowed numerous expenses deducted by a taxpayer including (1) $5,700 in medical expenses that were improperly characterized as business expenses and were not otherwise deductible; (2) $4,000 of expenses for meetings for which there was no clear nexus between the meetings and a business purpose; (3) $10,000 in subscription fees for which the taxpayer could not provide substantiation or establish that the fees were ordinary and necessary to her business operations; and (4) $5,000 in travel expenses for which the taxpayer could not satisfy the substantiation requirements of Sec. 274(d). Finally, the court rejected the taxpayer’s deduction of $50,000 in expenses for a “license” that appeared to the court to be more akin to a franchise agreement and for which the court allowed the taxpayer an amortization deduction. McDowell, T.C. Summ. 2019-3 (3/4/19).
Couple escape penalty where IRS fails to comply with Sec. 6751
The Tax Court held that a couple were liable for cancellation-of-indebtedness income for credit card debt that was forgiven by Citibank and were not entitled to (1) unsubstantiated business expenses; (2) a child tax credit for their daughter who was over 17 years old in the year the credit was taken; (3) moving expense deductions because they did not meet the requirements for deducting them; and (4) unreimbursed employee business expenses because no reimbursement from the employer had been requested. However, because there was no evidence in the record that showed the IRS’s compliance with Sec. 6751, the couple were not liable for the Sec. 6662(a) accuracy-related penalty. Rodriguez, T.C. Summ. 2019-4 (3/5/19).
Taxpayer lacked reasonable cause to rely on practitioner who claimed to be an enrolled agent
The Tax Court held that a taxpayer, who had built a successful pool-design company and subsequently stopped paying taxes on the advice of a tax practitioner who claimed to be an enrolled agent, was liable for tax deficiencies and penalties. According to the court, the taxpayer should not have relied on the practitioner, and his reliance on the practitioner did not constitute reasonable cause because a cursory review of the returns at issue should have revealed the multiple errors on the returns. Burbach, T.C. Memo. 2019-17 (3/7/19).
IRS updates FATCA FAQs
The IRS posted two new FAQs (Q23 and Q24) to its webpage of frequently asked questions concerning the Foreign Account Tax Compliance Act. The new FAQs concern the waiver of interest, penalties, and additions to tax for certain withholding agents and the withholding of a foreign partner’s or beneficiary’s share of undistributed income for the 2018 year. FATCA ― FAQs General, Q23 and Q24 (3/5/19).
Prop. regs. issued on FDII and GILTI deductions
The IRS issued proposed regulations on determining the amount of the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) under Sec. 250. REG-104464-18 (3/5/19) (see related news story).
Treasury announces new tax regulatory policy
The Treasury Department and the IRS announced changes to their policy on issuing temporary regulations, notices of proposed regulations, and other guidance. Policy Statement on the Tax Regulatory Process (3/5/19) (see related news story).
IRS can use circumstantial evidence to prove existence of Form 900
The Office of Chief Counsel advised that the fact that the IRS’s lack of a physical copy of a Form 900, Tax Collection Waiver, is not fatal if the IRS has reliable secondary evidence that proves the document existed. According to the Chief Counsel’s Office, the IRS may use circumstantial evidence to prove the existence of a waiver, even when the original is lost or destroyed. CCA 201906008 (3/8/19).
Sec. 6229 limitation period can be closed even though Sec. 6501 limitation period is open
The Office of Chief Counsel advised that, because the period of limitation for making assessments under Sec. 6229 is a minimum period under which no partner’s Sec. 6501 statute of limitation period expires, the Sec. 6229 period can be closed even though the Sec. 6501 period is open. According to the Chief Counsel’s Office, an administrative adjustment request (AAR) cannot be filed if the Sec. 6229 period has closed, even if the partner has an open Sec. 6501 period. CCA 201906007 (3/8/19).
Protective refund claims can be made with respect to gift taxes
In response to a question, the Office of Chief Counsel advised that protective refund claims can be made with respect to gift taxes, and that it did not see a basis for IRS Exam’s reported denial of a gift tax refund claim for the sole reason that that it related to gift taxes. CCA 201906006 (3/8/19).
Adviser does not need to provide information pursuant to Sec. 6112
The Office of Chief Counsel corrected an unidentified, earlier email to say that, based on the information that an adviser provided, the adviser did not meet the fee threshold to be considered a material adviser under Sec. 6111. Therefore, the Chief Counsel’s Office stated, the adviser did not need to provide information pursuant to Sec. 6112 regarding the transaction at issue. CCA 201906005 (3/8/19).
IRS provides penalty relief for missing negative tax basis capital account information
The IRS is providing a waiver of penalties under Sec. 6722 and Sec. 6698 to certain partnerships that file Schedules K-1 that fail to report information about partners’ negative tax basis capital accounts for the partnerships’ 2018 tax year. The relief is conditioned on the partnerships’ providing the missing information in a separate schedule by March 15, 2020. Notice 2019-20 (3/7/19).
IRS no longer plans to amend RMD regulations relating to lump-sum payments in lieu of future annuity payments
The IRS said that it no longer intends to amend the required minimum distribution (RMD) regulations under Sec. 401(a)(9) to address the practice of offering retirees and beneficiaries who are currently receiving annuity payments under a defined benefit plan a temporary option to elect a lump-sum payment in lieu of future annuity payments. The IRS had previously, in Notice 2015-49, informed taxpayers that it intended to propose amendments to the RMD regulations to address the use of lump-sum payments to replace ongoing annuity payments under a qualified defined benefit plan. Notice 2019-18 (3/6/19).
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.