Document summaries for the week of Sept. 30, 2019

Tax document summaries for the week of Sept. 30–Oct. 4, 2019, covering corporations, individuals, IRS procedure, partnerships, and more.

C CORPORATIONS

IRS did not abuse discretion in rejecting corporation’s installment agreement

The Tax Court held that the IRS did not abuse its discretion in rejecting an installment agreement requested by a corporation that failed to file multiple Forms 941, Employer’s Quarterly Federal Tax Return, and Forms 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and had not made required deposits of the associated employment and trust fund taxes. The court noted that it is not an abuse of discretion for the IRS to reject a collection alternative where a taxpayer is not in compliance with its ongoing tax obligations, as was the situation here. Wind Surf and Sail Pools, Inc., T.C. Memo. 2019-130 (10/1/19).

 

EMPLOYEE BENEFITS

IRS issues revenue procedure regarding Sec. 403(b) plans

The IRS’s guidance sets forth a system of recurring remedial amendment periods for correcting form defects in a Sec. 403(b) plan first occurring after March 31, 2020 (the ending date for the initial remedial amendment period under Rev. Proc. 2013-22). The guidance also provides deadlines for the adoption of plan amendments for Sec. 403(b) individually designed plans and Sec. 403(b) pre-approved plans. In addition, the guidance grants a limited extension of the initial remedial amendment period for certain form defects and establishes a system of Sec. 403(b) pre-approved plan cycles under which a Sec. 403(b) pre-approved plan sponsor may submit a proposed Sec. 403(b) pre-approved plan for review and approval by the IRS that, once approved, may be made available for adoption by eligible employers. Rev. Proc. 2019-39 (9/30/19).

Prop. regs. on health reimbursement arrangements (HRAs)

The IRS issued proposed regulations that clarify the application of the Sec. 4980H employer shared-responsibility provisions and certain nondiscrimination rules under the Code to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare. REG-136401-18 (9/30/19).

 

INDIVIDUALS

Taxpayer cannot consider his ‘basis in labor’ in calculating tax liability

The Tax Court held that a taxpayer (1) had income, self-employment income, and deductions for 2005, 2007, 2008, 2009, and 2010 in the amounts determined by the IRS; (2) could not consider his “basis in labor” in computing the federal income tax liability for income from the performance of services; and (3) was liable for tax on self-employment income and entitled to the deduction for self-employment tax in the amounts determined by the IRS. The court also concluded that (1) authority to issue a deficiency notice to the taxpayer was appropriately delegated to an IRS Appeals team manager; (2) the taxpayer was liable for additions to tax for failing to timely file tax returns and failing to make estimated payments; (3) refunds of the taxpayer’s overpayments were barred by the statute of limitation; and (4) Sec. 6673 is not unconstitutional as alleged by the taxpayer. Worsham, T.C. Memo. 2019-132 (10/1/19).

Income earned in Afghanistan not eligible for Sec. 911 exclusion

The Tax Court held that a taxpayer who accepted a 12-month job with a company to provide security services in Camp Dwyer, Afghanistan, was not entitled to exclude that income from gross income under Sec. 911 because his tax home was the United States and not Afghanistan. The court also found the taxpayer liable for negligence penalties because he failed to make a reasonable attempt to comply with the provisions of the Code and offered insufficient evidence that he sought advice regarding the proper tax treatment of his income. Cambria, T.C. Summ. 2019-28 (9/30/19).

Couple taking care of another woman’s children are not entitled to child-related credits and deductions

The Tax Court held that, for the 2012 tax year, a husband and wife who were taking care of another woman’s three children because the woman could not do so herself were not entitled to child tax credits and dependency exemption deductions because the children were not “qualifying children” under Sec. 152(d)(1)(D). Nor were the couple eligible for a dependency exemption deduction for taking care of the wife’s disabled father because his income from Social Security exceeded the Sec. 151(d) exemption amount. However, the court found that the couple were not liable for a Sec. 6662(a) accuracy-related penalty because they relied reasonably and in good faith on their commercial return preparer, to whom they fully disclosed their relationship with the children. Saunders, T.C. Summ. 2019-29 (9/30/19).

Husband’s renovation activities were not a trade or business; IRS disallows losses

The Tax Court held that renovation activities conducted by a taxpayer in South Africa did not rise to the level of a trade or business and, thus, the taxpayer and his wife could not deduct on Schedules C, Profit or Loss From Business, the losses attributable to the business. The court also concluded that the husband was not an employee during the years at issue and thus could not deduct unreimbursed employee business expenses, but it rejected the IRS’s assessment of accuracy-related penalties on the couple because the IRS did not meet its burden of proving it had obtained supervisory approval for assessing those penalties. Sarkin, T.C. Memo. 2019-131 (10/1/19).

Couple fail to show entitlement to deductions but escape accuracy-related penalty

The Tax Court held that a couple (1) were not entitled to deduct $21,396 for the husband’s unreimbursed employee expenses reported on Schedule A, Itemized Deductions, because the couple did not show whether the expenses were reimbursable under the husband’s employer’s reimbursement policy; and (2) with respect to the husband’s business of officiating sports games, the income and expenses of which were reported on Schedule C, Profit or Loss From Business, the couple were not entitled to deduct $16,579 of car and truck expenses because the expenses were not properly substantiated. However, the couple were not liable for the Sec. 6662(a) accuracy-related penalty because the IRS failed to prove that the penalty had been appropriately approved by an IRS supervisor. Bagdan, T.C. Summ. 2019-30 (10/1/19).

Diesel technology specialist was an employee and not an independent contractor

The Tax Court held that, for tax years 2014 and 2015, a taxpayer who worked in the oil business as a diesel technology specialist and claimed he was an independent contractor was really a common law employee. Accordingly, he could only deduct his unreimbursed employee expenses on Schedule A, Itemized Deductions, subject to the 2%-of-adjusted-gross-income limitation. The court did allow the taxpayer to deduct on Schedule A costs incurred in seeking legal advice about avoiding trade secret infringement after an oil company representative advised him to seek such advice. McGuigan, T.C. Summ. 2019-27 (9/30/19).

SIFL cents-per-mile rates issued

The IRS issued the standard industry fare level (SIFL) cents-per-mile rates and terminal charge in effect for the second half of 2019 for purposes of Regs. Sec. 1.61-21(g), relating to the rule for valuing noncommercial flights provided as an employee fringe benefit on employer-provided aircraft. Rev. Rul. 2019-22 (9/30/19).

Couple’s untimely filing of Form 2555 precludes deduction under Sec. 911

The Tax Court held that a couple could not exclude, under Sec. 911, wages they earned in Iraq and Germany because they did not timely file the required election to exclude the income. The court noted that the Form 2555, Foreign Earned Income, the couple filed with their tax return included errors, omissions, and inconsistencies, including the reporting of the couple’s tax home as being in Texas for one of the years at issue. Weschenfelder, T.C. Memo. 2019-133 (10/3/19)

 

INTERNATIONAL

CFC downward attributions get safe harbors

The IRS issued a revenue procedure that generally provides guidance related to the repeal of Sec. 958(b)(4). The guidance affects certain U.S. persons (within the meaning of Sec. 7701(a)(30)) that own stock in certain foreign corporations. The procedure also provides a safe harbor for determining whether a foreign corporation is a controlled foreign corporation (CFC) within the meaning of Sec. 957; a safe harbor for determining certain items, including taxable income and earnings and profits, of a CFC based on alternative information; and a safe harbor for determining certain items of a specified foreign corporation within the meaning of Sec. 965(e) and Regs. Sec. 1.965-1(f)(45) based on alternative information. Rev. Proc. 2019-40 (10/1/19) (see related news story).

Prop. regs. on ownership attribution under Sec. 958

The IRS issued proposed regulations concerning ownership attribution for determining the status of corporations as controlled foreign corporations and their U.S. shareholders. REG-104223-18 (10/1/19) (see related news story).

 

IRS PROCEDURE

IRS settlement officer should have verified termination of offer in compromise

The Tax Court held that an IRS settlement officer (SO) abused his discretion when the IRS attempted to collect, by levy, unpaid trust fund recovery penalties from a taxpayer who is a responsible officer of a corporation that failed to pay over employment taxes. The court concluded that (1) the SO did not properly verify that an IRS office had followed the administrative procedures for terminating an offer in compromise the taxpayer had in effect; (2) the determination to sustain the proposed levy without verifying that proper procedures were followed was an abuse of discretion; and (3) a new settlement officer should be assigned to the case. Moore, T.C. Memo. 2019-129 (9/30/19).

IRS extends replacement period for livestock sold on account of drought

The IRS issued a notice extending the replacement period under Sec. 1033(e) for livestock sold on account of drought in specified counties. For a taxpayer who qualified for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2019 (or, in the case of a fiscal-year taxpayer, at the end of the tax year that includes Aug. 31, 2019), the replacement period is extended under Sec. 1033(e)(2) and Notice 2006-82 if the applicable region includes any county on the list in the Appendix of the notice, and the extension will continue until the end of the taxpayer’s first tax year ending after a drought-free year for the applicable region. Notice 2019-54 (9/30/19).

 

MISCELLANEOUS

Tax Court issues procedures for taxpayer representatives to file a limited entry of appearance

Through Tax Court Administrative Order No. 2019-01, issued in May, the Tax Court prescribed procedures for taxpayer representatives to file a limited entry of appearance. The Office of Chief Counsel issued a notice to inform Chief Counsel attorneys of the new procedure, effective Sept. 9, 2019, and the notice reminds Chief Counsel attorneys of their ethical responsibilities  to representatives who file a limited entry of appearance. CC-2020-001 (10/4/19).

 

PARTNERSHIPS

IRS issues draft Form 1065 and Schedule K-1

The IRS issued a draft Form 1065, U.S. Return of Partnership Income, and its Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for tax year 2019. Form 1065; Schedule K-1 (9/30/19).

 

S CORPORATIONS

IRS issues draft Form 1120-S and Schedule K-1

The IRS issued a draft Form 1120-S, U.S. Income Tax Return for an S Corporation, and its Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., for tax year 2019. Form 1120-S; Schedule K-1 (9/30/19).

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.