Document summaries for the week of Feb. 10, 2020
Tax document summaries for the week of Feb. 10–14, 2020, covering individuals, IRS procedure, and more.
Taxpayer entitled to head-of-household status
The Tax Court held that an unmarried taxpayer who lived with her three children and the father of the children was entitled to file as a head of household for 2015 and 2016 because she met all the requirements. However, the court concluded the taxpayer was not entitled to an education credit under Sec. 25A for 2014 because she did not establish that she paid tuition for that year. Magana, T.C. Summ. 2020-9 (2/10/20).
Surgeon liable for tax and penalties on unreported distributions from inherited IRA
The Tax Court held that a surgeon, who failed to include in income more than $500,000 in distributions he received from an inherited IRA, was liable for the underpayment of tax on that unreported income, rejecting the surgeon’s claim that the IRS had violated Sec. 7605(b) by failing to coordinate its examination of his return with an automated underreporter notice it had sent him. The court also upheld the IRS’s assessment of an accuracy-related penalty on the taxpayer after noting that the taxpayer failed to inform his tax return preparer of the distribution and, given the large amount of the distribution, that failure was not reasonable. Essner, T.C. Memo. 2020-23 (2/12/20).
Seventh Circuit affirms Tax Court innocent spouse decision
The Seventh Circuit affirmed a Tax Court decision that a taxpayer was entitled to innocent spouse relief for 2010, when he filed a joint return with his wife and was unaware of her embezzlement from her employer, but not for 2011, when they a filed a joint return and he had become aware of the embezzlement. Jacobsen, No. 18-3371 (7th Cir. 2/13/20).
Indian coal production credit inflation adjustment issued for 2018 and 2019
The IRS published the inflation adjustment factor for the Indian coal production credit under Sec. 45 for calendar years 2018 and 2019. Notice 2020-9 (2/10/20).
Prop. regs. update withholding rules
The IRS issued proposed regulations that update the rules for withholding on individuals’ wages to reflect the statutory changes in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, including the elimination of the personal exemption. REG-132741-17 (2/11/20) (see related news story).
IRS training materials gave incorrect answer on prepayment of state taxes scenario
In response to a question involving IRS training materials dealing with the deductibility of prepaid 2018 state income taxes, the Chief Counsel’s Office advised that the answer in the training materials was incorrect. According to the Chief Counsel’s Office, the question of whether a taxpayer may deduct the prepayment of 2018 state or local real property taxes in 2017 depends on the date that real property taxes are assessed and, the Chief Counsel’s Office stated, the pre-payment of anticipated real property taxes in 2017 that will not be assessed until 2018 is not deductible in 2017. CCA 202007016 (2/14/20).
Video game currency is not reportable
The IRS issued a statement that virtual currency used in a video game is not reportable as virtual currency if the currency does not leave the game environment. IRS Statement on Changes to Virtual Currency Webpage (2/14/20) (see related news story).
Chief Counsel’s Office cites occasion where multiple FPAAs might be issued
The Office of Chief Counsel advised that, to make adjustments in a partnership examination, the IRS may only issue one final partnership administrative adjustment (FPAA) for a particular tax year, absent fraud, malfeasance, or misrepresentation of material fact. However, the Chief Counsel’s Office cited Sec. 6230(a)(2)(C) and the decision in American Milling, LP, T.C. Memo. 2015-192 in concluding that, if a TEFRA partnership (TP2) is a partner in another TEFRA partnership (TP1) and partner-level factual determinations are needed at the TP2 level in order to apply the results of the final determination in the TP1 TEFRA proceeding, an FPAA may be issued to TP2 to make those partner-level factual determinations. CCA 202007017 (2/14/20).
Court rejects conservation easement donation, but reasonable cause may exist for failure to supply completed appraisal
The Tax Court held that a partnership was not entitled to a charitable contribution deduction for the donation of a conservation easement because the partnership although it attached to its Form 1065, U.S. Return of Partnership Income, for the year of the donation an “appraisal summary” on Form 8283, Noncash Charitable Contributions, its failure to disclose the cost or adjusted basis of the property that was the subject of the contribution invalidated the form. While the court also concluded that the regulation imposing these requirements, Reg. Sec. 1.170A-13(c), is valid, the court found that disputes of material fact existed as to whether the partnership had reasonable cause for its failure to supply a fully completed appraisal summary. Oakhill Woods, LLC, T.C. Memo. 2020-24 (2/13/20).
Income recognized upon the sale of life insurance contracts
In a revenue ruling, the IRS updated the answers to questions about how much income an individual must recognize upon the sale of the life insurance contracts described in Situation 2 and Situation 3 of Rev. Rul. 2009-13 and Situation 2 of Rev. Rul. 2009-14. The modification was needed because of changes that the law known as the Tax Cuts and Jobs Act, P.L. 115-97, made to Sec. 1016(a)(1)(B), relating to basis adjustments for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract. The IRS concluded that (1) in Situation 2 of Rev. Rul. 2009-13, the individual recognizes $16,000 of income upon the sale of the life insurance contract, of which $14,000 is ordinary income and $2,000 is long-term capital gain; (2) in Situation 3 of Rev. Rul. 2009-13, the individual recognizes a long-term capital loss of $25,000 upon the sale of the life insurance contract; and (3) in Situation 2 of Rev. Rul. 2009-14, B recognizes $1,000 of long-term capital gain upon the sale of the life insurance contract. Rev. Rul. 2020-5 (2/10/20).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.