Document summaries for the week of Oct. 21, 2019

Tax document summaries for the week of Oct. 21–25, 2019, covering corporations, individuals, IRS procedure and more.

CORPORATIONS

California medical marijuana dispensary barred from taking deductions

The Tax Court rejected a medical marijuana dispensary’s constitutional challenge to Sec. 280E, which disallows deductions for a business that consists of trafficking in a controlled substance within the meaning of the Controlled Substances Act. The dispensary, legally operating under California law, contended that Sec. 280E imposes a gross receipts tax as a penalty in violation of the prohibition on excessive fines in the U.S. Constitution, but the court disagreed. The court also held that (1) Sec. 280E is not limited to deductions under Sec. 162 but applies to bar all deductions claimed by the dispensary, and (2) the dispensary had provided no compelling argument to overrule the court’s precedent holding that Sec. 280E applies to businesses operating legally under state law, notwithstanding its use of the word “trafficking.” Northern California Small Business Assistants Inc., 153 T.C. No. 4 (10/23/19).

 

ESTATES, TRUSTS & GIFTS

IRS’s valuation of stock in disguised gift case was arbitrary and excessive

The Tax Court held that an error by an IRS valuation expert, in a case involving a disguised gift of stock by a couple to their sons, caused the expert to overvalue the disguised gifts by $6.9 million and rendered the IRS’s valuation of the stock arbitrary and excessive. After correcting for that error, the court determined the proper valuation of the gifts. Cavallaro, T.C. Memo. 2019-144 (10/24/19).

 

INDIVIDUALS

Tax Court cannot order IRS to reexamine the subject of a whistleblower complaint

The Tax Court held that the IRS Whistleblower Office did not abuse its discretion when it refused to award a whistleblower any more than the $43,424 it determined the whistleblower was entitled to. With respect to the whistleblower’s allegation that the amount the IRS collected was “woefully inadequate” and the whistleblower’s insistence that the court order the IRS to conduct another audit, the court stated that it did not have the authority to order the IRS to reexamine the target of the investigation at issue. Apruzzese, T.C. Memo. 2019-141 (10/21/19).

Couple who failed to report income from wife’s medical practice are liable for civil fraud penalties

The Tax Court held that a couple (1) failed to report income received by the wife’s medical practice; (2) overstated the wife’s medical practice’s deductions; and (3) failed to report as income proceeds received by the husband from a lawsuit settlement. The court also held that the couple were liable for Sec. 6663 civil fraud penalties after concluding that the IRS had proved by clear and convincing evidence that for each of the three years at issue, the couple had an underpayment of tax due to fraudulent intent. Ghadiri-Asli, T.C. Memo. 2019-142 (10/23/19).

Businessman’s wife not eligible for innocent spouse relief relating to taxes on his unreported income

The Tax Court held that a taxpayer was not entitled to innocent spouse relief with respect to taxes owed as a result of unreported income relating to her husband’s Chinese business dealings. In addition to concluding that the taxpayer had reason to know of the understatements of tax, the other factors considered by the court in determining if relief was warranted were either neutral or weighed against relief. Nishi, T.C. Memo. 2019-143 (10/23/19).

 

IRS PROCEDURE

IRS procedures for transmitting emails with return information

The IRS announced procedures for its Chief Counsel employees to use when transmitting emails containing return information or personally identifiable information to taxpayers or their representatives in Tax Court litigation and in conjunction with requests for letter rulings and closing agreements. The employees can use the Large Business & International Secure E-mail System or the SecureZIP encrypted email system, but taxpayers must execute and return a memorandum of understanding agreeing to the use of the email encryption method and acknowledging the risks.  CC-2020-002 (10/21/19)

Chief Counsel issues procedures for coordination of cases involving virtual currency

The Chief Counsel’s Office issued a notice alerting Chief Counsel attorneys to procedures for working and coordinating cases with issues involving virtual currency, including digital assets, digital currency, crypto-assets, and cryptocurrency. These cases may involve information received from various third-party sources, such as information returns, and information received from a summons of a virtual currency exchange, and they may involve a request for advice from the IRS on Title 26 or Title 31 (Bank Secrecy Act) audits or cases in litigation. CC-2020-003 (10/22/19).

Final regs. issued on reportable life insurance contract transactions

The IRS issued final regulations governing the reporting of life insurance contract transactions and payments of reportable death benefits under Sec. 6050Y. The regulations also provide guidance on the exclusion of death benefits from gross income under Sec. 101 after a reportable policy sale. T.D. 9879 (10/25/19).

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.