Document summaries for the week of Oct. 28, 2019

Tax document summaries for the week of Oct. 28–Nov. 1, 2019, covering individuals, international, IRS procedure, and more.

INDIVIDUALS

Taxpayer is entitled to innocent spouse relief for one of the years she applied for relief

The Tax Court held that a taxpayer was entitled to innocent spouse relief under Sec. 6015(c) for 2011, despite the opposition of her former spouse to the relief. However, the court also held that the taxpayer was not entitled to innocent spouse relief under Sec. 6015(b), (c), or (f) for 2012 because it found that the taxpayer could not have reasonably believed that her former spouse would or could pay the tax liability reported on their 2012 return and that knowledge factor weighed too heavily against her for the court to allow relief for 2012. Lassek, T.C. Memo. 2019-145 (10/28/19).

Taxpayer unsuccessfully makes tax protester arguments

The Tax Court held that a taxpayer who earned money from publishing a newspaper and running an internet-based radio station was liable for tax deficiencies for not filing tax returns or paying income taxes for 2005 through 2009. The court characterized the taxpayer's arguments as “variations on oft-rejected tax-defier themes.” The court upheld penalties assessed by the IRS under Secs. 6651(a)(1) and (2) and Sec. 6654. Hayes, T.C. Memo. 2019-147 (10/30/19).

Tax Court rejects tax protester arguments and threatens Sec. 6673 penalty in future

The Tax Court upheld tax deficiencies assessed against a taxpayer who failed to report on his tax return wages he received from a restaurant services business as well as distributions he received from a health savings account. Although the court labeled the taxpayer’s arguments for not reporting these amounts as “tax-defier” arguments, it declined to assess a penalty under Sec. 6673 because the taxpayer had no prior history of making frivolous arguments; but the court warned the taxpayer that such penalties could be assessed if he advances similarly groundless arguments in the future. Kleinman, T.C. Summ. 2019-33 (10/31/19).

Physician who failed to report income is liable for taxes and various penalties

The Tax Court held that a physician, who was previously found guilty of various tax crimes and sentenced to 66 months in prison, received $328,440 in unreported income in 2000 from a physicians’ group for which he provided radiology services. The court also found the taxpayer was liable for a civil fraud penalty under Sec. 6663 and for penalties under Sec. 6651(a)(1). Russell, T.C. Memo. 2019-146 (10/30/19).

Business owner had constructive dividends when his company paid his personal expenses

The Tax Court held that a taxpayer who operated an engineering and paving company through his wholly owned C corporation was liable for tax deficiencies as a result of not filing his 2010 tax return and using his company’s bank account to pay personal expenses. The court agreed with the IRS that the taxpayer had constructive dividend income of $156,469 in 2010 as a result of withdrawing funds from his corporation’s bank account for personal use. Santos, T.C. Memo. 2019-148 (10/31/19).

 

INTERNATIONAL

APAs remained in effect after court ruled the IRS’s cancellation of the APAs was an abuse of discretion

The Tax Court held that, because it had previously concluded that the IRS’s cancellation of advance pricing agreements (APAs) with the taxpayer was an abuse of discretion, the APAs remained in effect and there was no allocation of income and deductions by the IRS and no net increase in taxable income for the tax year at issue. As a result, the court said, there was no net Sec. 482 transfer price adjustment, and the taxpayer was not liable for any Sec. 6662(h) penalties relating to the years at issue. Eaton Corp., 153 T.C. No. 6 (10/28/19).

 

IRS PROCEDURE

IRS notice to taxpayer did not reflect a determination as to the taxpayer and was thus invalid

The Tax Court held that, under its opinion in Dees, 148 T.C. 1 (2017), a notice issued by the IRS to the taxpayer was ambiguous on its face because it identified two taxpayers as potentially liable for the deficiencies determined therein. The court further held that the IRS failed to prove that the notice reflected a determination as to the taxpayer and copies of the taxpayer’s return introduced by the IRS established that the notice did not reflect a determination as to the taxpayer and thus the notice was invalid and the court lacked jurisdiction to decide the case. U.S. Auto Sales, Inc., 153 T.C. No. 5 (10/28/19).

Low-income housing credit carryover allocations published

The IRS published the amounts of unused housing credit carryovers allocated to qualified states under Sec. 42(h)(3)(D) for calendar year 2019. Rev. Proc. 2019-41 (10/28/19).

Prop. regs. on ABLE account contributions

The IRS issued proposed regulations to reflect amendments to Sec. 529A(b)(2)(B) that allow an employed or self-employed designated beneficiary to contribute to his or her ABLE account the lesser of the designated beneficiary’s compensation for the tax year or an amount equal to the poverty line for a one-person household for the calendar year preceding the calendar year in which the designated beneficiary’s tax year begins. REG-128246-18 (10/28/19).

Taxpayer’s refund suit can continue

The Fifth Circuit vacated in part, dismissed in part, and remanded a lower court’s decision. The appeals court held that a company owner had standing to sue for refund of tax payments he had designated for the company’s trust fund taxes, but that the IRS had applied to other tax liabilities. The case was remanded to determine whether the funds had actually come from the owner. Laird, No. 18-60735 (5th Cir. 10/28/19).

Draft qualified opportunity zone form released

The IRS posted a draft form for qualified opportunity fund reporting under Secs. 1400Z-1 and 1400Z-2. Draft Form 8996 (10/30/19).

 

PARTNERSHIPS

IRS properly disallowed partnership’s entire easement contribution deduction

The Tax Court held that an easement donated by a partnership (i.e., the donor) to a qualified organization did not satisfy Regs. Sec. 1.170A-14(g)(6) because the portion of the proceeds to which the donee was entitled was improperly reduced by (1) amounts paid in satisfaction of prior claims against the donor, and (2) amounts inuring to the donor that were attributable to appreciation in the value of improvements existing when the easement was granted plus the fair market value of any improvements the donor subsequently made to the property. The Tax Court further held that an alternative calculation of proceeds specified in the deed, which applied only if the deed’s formula was determined to be different from that required by the regulation, constituted a “condition subsequent” saving clause that could not be judicially enforced and, as a result, the IRS properly disallowed the entire charitable contribution deduction because the conservation purpose of the easement was not protected in perpetuity as required by Sec. 170(h)(5)(A). Coal Property Holdings, LLC, 153 T.C. No. 7 (10/28/19).

Final regs. on allocation of partnership liabilities

The IRS issued final regulations on how partnership liabilities are allocated for disguised-sale purposes. The final regulations remove the Sec. 707 temporary regulations and reinstate the regulations under Regs. Sec. 1.707-5(a)(2) that were previously in effect, in response to Executive Order 13789. T.D. 9876 (10/28/19).

Final regs. address obligations to restore capital account deficit balances

The IRS issued final regulations that address when certain obligations to restore a deficit balance in a partner’s capital account are disregarded under Sec. 704, when partnership liabilities are treated as recourse liabilities under Sec. 752, and how bottom-dollar payment obligations are treated under Sec. 752. T.D. 9877 (10/28/19).

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.