Document summaries for the week of Sept. 16, 2019

Tax document summaries for Sept. 16–20, 2019, covering employee benefits, individuals, IRS procedure, partnerships, and tax accounting.

EMPLOYEE BENEFITS

Final regs. issued on 401(k) hardship distributions

The IRS issued final regulations amending the requirements for hardship distributions from Sec. 401(k) plans. T.D. 9875 (9/20/19) (see related news story).

 

INDIVIDUALS

Failure to report income and substantiate expenses leads to fraud and accuracy-related penalties

The Tax Court held that a couple (1) failed to report gross receipts from their business, which marketed and sold marijuana cigarette containers; (2) were not entitled to deduct costs of goods sold respect to their business due to a failure to substantiate them; (3) were not entitled to car and truck expenses, as well as travel expenses, due to their failure to substantiate them under Sec. 274(d); (4) failed to report constructive dividends from a business in which the husband owned an interest; (5) failed to report passthrough income from their business for 2011, after it had made an S election; (6) failed to report rental income; (7) could not deduct depreciation greater than the amounts the IRS conceded for 2011 and 2012; and (8) could not take the net operating loss deduction claimed on their 2012 income tax return. The court also held that the husband was liable for a fraud penalty under Sec. 6663, as well as an accuracy-related penalty under Sec. 6662(a), for each of the years at issue but that his wife was not liable for the penalties. Chico, T.C. Memo. 2019-123 (9/16/19).

Couple fail to qualify for premium assistance tax credit

The Tax Court held that a couple could not deduct expenses incurred in helping the husband’s sister publish a book because the husband was not engaged in the publishing business with the predominant, primary, or principal objective of making a profit. As a result, the couple’s household income for 2015 exceeded 400% of the applicable federal poverty line for 2015, and the couple therefore did not qualify for the premium assistance tax credit under Sec. 36B. Fanaieyan, T.C. Memo. 2019-125 (9/19/19).

Taxable distribution results from transfer of retirement funds between ex-spouses

The Tax Court held that, where a taxpayer’s former spouse transferred funds from her retirement account to his retirement account and he then withdrew those funds, the withdrawal was a taxable distribution and, because he was under 59½ years old, he was liable for the penalty tax under Sec. 72(t). The court noted that, while the taxpayer credibly testified regarding the intent of the divorce property order, which dictated that his former spouse transfer a certain amount to him, his understanding that his former spouse would withdraw the funds from her retirement account and transfer them directly to him did not overcome the fact that the funds were transferred from her retirement account to his and he then withdrew those funds. Rosenberg, T.C. Memo. 2019-124 (9/19/19).

 

IRS PROCEDURE

Taxpayer’s OIC is not deemed accepted

The Tax Court sustained two Notice of Federal Tax Lien (NFTL) filings regarding a taxpayer’s unpaid tax liabilities for 2007 and 2014. The court rejected the taxpayer’s argument that his offer in compromise (OIC) was deemed accepted under Sec. 7122(f) because the IRS did not reject it within 24 months. The court also concluded that the IRS settlement officer did not abuse her discretion in returning the taxpayer’s OIC and not refunding the amounts paid when he submitted the OIC. Brown, T.C. Memo. 2019-121 (9/16/19).

Power of attorney prevents tolling of refund statute of limitation

The First Circuit held that the Sec. 6511 statute of limitation period for filing a refund claim was not tolled by a taxpayer’s financial disability because the taxpayer’s son held a durable power of attorney authorizing him to act on his father’s behalf in financial matters. Therefore, the taxpayer’s estate’s refund claim was held untimely. Stauffer, No. 18-2105 (1st Cir. 9/16/19).

IRS mails settlement offers to microcaptives under audit

The IRS announced that is mailing settlement offers to certain taxpayers under audit who participated in microcaptive insurance transactions. IR-2019-157 (9/16/19).

IRS issues October 2019 applicable federal rates

The IRS issued a ruling that prescribes the applicable federal rates for October 2019. The ruling provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. Rev. Rul. 2019-23 (9/22/19).

 

PARTNERSHIPS

Denial of partnership’s loss deduction was not time-barred

The Tax Court held that determinations in a final partnership administrative adjustment, which disallowed a partnership’s $35 million loss deduction, were not time-barred by the limitation period under Sec. 6229(a). The court concluded that the partnership did not intend to file a return when it faxed a copy of the return to the IRS agent in 2005 or mailed to the IRS’s counsel a document that purported to be a return in 2007. Seaview Trading, LLC, T.C. Memo. 2019-122 (9/16/19).

Partnership had profit motive in operating golf course; loss deductions allowed

The Tax Court held that a Texas limited partnership was engaged in the activity of operating a golf course with the objective of making a profit under Sec. 183 and was thus entitled to deductions for losses from a trade or business for 2011 through 2014. While the court agreed with the IRS that the major partner, who made capital contributions of over $100 million to the partnership, initially intended to create a charitable organization, the court was convinced that the partnership’s predominant, primary, or principal objective was to realize an economic profit independent of tax savings. WP Realty, LP, T.C. Memo. 2019-120 (9/16/19).

 

TAX ACCOUNTING

IRS expands relief relating to 2018 California wildfires

The IRS is expanding the emergency housing and compliance monitoring relief provided in Rev. Procs. 2014-49 and 2014-50 in response to the devastation caused by the 2018 California wildfires to include Butte, Los Angeles, and Ventura counties in California. The expanded relief is limited to the CA Wildfires Major Disaster as defined in the guidance. Notice 2019-52 (9/17/19).

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.