Document summaries for the week of May 6, 2019

CORPORATIONS

IRS requests comments on reduced corporate tax rate and normalization issues in ratemaking proceedings

The IRS is requesting comments about normalization issues that have arisen, or are anticipated, in ratemaking proceedings due to the decrease in the corporate tax rate as a result of the law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97. Based on comments received from stakeholders, the IRS expects to issue future guidance under Sec. 168(f)(2) and Sec. 168(i)(9) addressing excess deferred income taxes and public utility companies. Notice 2019-33 (5/7/19).

IRS issues guidance on stock redemptions during former S corp.’s transition period

The IRS issued a notice on the treatment of cash distributions made in redemption of the stock of a C corporation formerly classified as an S corporation during the post-termination transition period, as defined under Sec. 1377(b).The notice held that such a cash distribution that is subject to Sec. 301 by reason of Sec. 302(d) reduces the corporation’s accumulated adjustments account (within the meaning of Sec. 1368(e)), with any remainder characterized as a taxable dividend. Rev. Rul. 2019-13 (5/9/19) (see related news story).

 

EMPLOYEE BENEFITS

IRS issues 2019 maximum values of vehicles for employees’ personal use

The IRS issued a notice of (1) the inflation-adjusted maximum value of a vehicle for 2019 for use with the fleet-average and vehicle cents-per-mile valuation rules ($50,400), (2) information about where this maximum value will be published in the future, and (3) flexibility for 2018 and 2019 in the consistency requirements in the existing regulations relating to the valuation rules. The IRS noted that, while Regs. Secs. 1.61-21(d) and (e) provide special valuation rules determining the amount to include in employee income for personal use of employer-provided vehicles, employers can use these rules for vehicles only with fair market values that do not exceed a maximum value that is adjusted for inflation each year under Sec. 280F. Notice 2019-34 (5/8/19) (see related news story).

 

INDIVIDUALS

Child’s father is not entitled to child-related deductions and credits

The Tax Court held that a taxpayer was not entitled to claim his minor child as a dependent on his 2012 tax return and thus was also not entitled to head-of-household filing status, the child tax credit, or the earned income tax credit for that child. The court noted that the child did not live with the taxpayer during any part of 2012 and did not qualify as either the taxpayer’s qualifying child or  qualifying relative. Cook, T.C. Memo. 2019-48 (5/7/19)

Taxpayer must carry back NOL after failing to timely elect to forgo it

The Office of Chief Counsel advised that, because the deadline for making the election under Sec. 172(b)(3) to forgo a net operating loss (NOL) carryback is prescribed by statute, the IRS cannot provide any relief for late elections beyond that provided in Regs. Sec. 1.9100-2. CCA 201919012 (5/10/19).

Cayman yacht business operating as a Florida LLC cannot escape US employment tax liability

The Tax Court held that a Cayman Island charter yacht business that was the sole member of a Florida limited liability company (LLC) was treated as a corporation for U.S. employment tax purposes and an American employer under Sec. 3121(h). Thus, it was not entitled to the employment tax exemption of Sec. 3121(b)(4) with respect to its crew.  As a result, the Tax Court concluded, the LLC was liable for employment taxes on wages paid to the crew during the period ending Dec. 31, 2012, for which the IRS could proceed with its proposed collection action. DAF Charters, LLC, 152 T.C. No. 14 (5/9/19).

IRS did not abuse its discretion in rejecting $100 monthly installment proposal

The Tax Court granted summary judgment to the IRS after holding that a settlement officer (SO) from the IRS Appeals office did not abuse her discretion in rejecting a taxpayer’s proposed agreement offering installment payments of $100 per month. The court found that, even if the taxpayer were allowed the additional expenses that he claimed, his ability to pay would still far exceed his offer. The court also noted that the SO made a counterproposal to which the taxpayer never replied. Goosby, T.C. Memo. 2019-49 (5/9/19).

 

INTERNATIONAL

CFC shareholders that guaranteed loans must recognize ordinary income

The Third Circuit affirmed a Tax Court decision that held that under the Subpart F rules of Sec. 951(a)(1)(B) and Sec. 956(d), two U.S. shareholders of two controlled foreign corporations (CFCs) that guaranteed loans made to a U.S. entity must include in gross income, as ordinary income, the CFCs’ applicable earnings. Among the issues the Tax Court addressed and the Third Circuit affirmed was that the IRS’s adoption of the Subpart F regulations at issue was not arbitrary and capricious. SIH Partners, LLLP, No. 18-1862 (3d Cir. 5/7/19).

 

IRS PROCEDURE

IRS modernizes rules for private schools to publicize their racially nondiscriminatory policies

The IRS modified Rev. Proc. 75-50, which sets forth guidelines and recordkeeping requirements for determining whether private schools applying for tax-exempt status, or that currently have tax-exempt status under Sec. 501(c)(3), have racially nondiscriminatory policies as to students. The IRS updated Rev. Proc. 75-50 to reflect technological advances and to provide a third method for a private school to satisfy the requirement contained in Section 4.03,  to make its racially nondiscriminatory policy known to all segments of the general community served by the school, by using its website to publicize the school’s racially nondiscriminatory policy as to students. Rev. Proc. 2019-22 (5/7/19).

IRS does not have to disclose DIF scores

The Office of Chief Counsel advised that the IRS does not need to assert any common law privileges to withhold information protected by statute, including the Discriminant Index Function (DIF) scores it uses to rank and assess tax returns for increased review, which could be withheld under Sec. 6103(b)(2)(A). CCA 201919011 (5/10/19).

 

PARTNERSHIPS

Partnership’s 2015 TMP must sign even if no longer a partner

The Office of Chief Counsel advised that a partnership’s tax matters partner (TMP) for 2015 should sign a return-related document, even though the TMP was no longer a partner. CCA 201919013 (5/10/19).

Prop. regs. on withholding on transfers of partnership interests

The IRS issued proposed regulations on the operation of new Sec. 1446(f), which requires withholding on the transfer of a partnership interest described in Sec. 864(c)(8) (gain or loss of foreign persons from the sale or exchange of certain partnership interests). REG-105476-18 (5/8/19) (see related news story).

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.