Document summaries for the week of Feb. 24, 2020
Tax document summaries for the week of Feb. 24–28, 2020, covering corporations, individuals, and more.
Supreme Court strikes down Bob Richards rule on tax refund allocations
The Supreme Court invalidated the federal common law rule created in In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262 (9th Cir. 1973). The Bob Richards rule provided that, in the absence of an agreement, a refund belongs to the member of a consolidated group that generated the losses that led to it. The high court unanimously vacated a Tenth Circuit decision that had applied the rule and remanded the case. Rodriguez v. Federal Deposit Insurance Corp., No. 18-1269 (U.S. 2/25/20) (see related news story).
Restoration of back pay to exonerated military service members is not taxable
The Office of Chief Counsel advised that payments in the form of back pay made to U.S. military service members following the reversal of a court martial conviction are considered a civil damage, restitution, or other monetary award related to the service member’s wrongful incarceration under Sec. 139F and may be excluded from gross income if all other requirements of Sec. 139F are satisfied. PMTA 2020-05 (2/25/20).
Court enters judgment against tax return preparer
The Tax Court granted an IRS motion for entry of default judgment against a tax return preparer who prepared returns with erroneous claims for the first-time homebuyer credit and deductions on Schedules A and Schedules C of Form 1040. Noting that there was no appearance by, or on behalf of, the preparer when the case was called for trial, the court entered a decision sustaining the IRS’s collection action against him. James, T.C. Summ. 2020-11 (2/27/20).
Nail salon owners underreported income; husband hit with civil fraud penalties
The Tax Court held that a couple who ran two nail salons underreported their business income and the related tax for 2004–2006. Further, because the husband also altered numerous checks and bank records that he submitted to the IRS in an attempt to conceal the couple’s correct taxable income, the court held him liable for civil fraud penalties under Sec. 6663 for the years at issue. Le, T.C. Memo. 2020-27 (2/26/20).
Chief Counsel addresses limitation of overpayment interest when taxpayer qualifies for Sec. 7508A relief
The Office of Chief Counsel advised that Sec. 7508A(c) provides an exception from the late-return rule of Sec. 6611(b)(3) and the 45-day rule of Sec. 6611(e), which limit the payment of interest on any overpayment, when a taxpayer qualifies for relief under Sec. 7508A because of a federally declared disaster or terroristic or military actions. The Chief Counsel’s Office found that, because Sec. 7508A(c) incorporates the special rule for overpayments in Sec. 7508(b), neither the late-return rule of Sec. 6611(b)(3) nor the 45-day rule of Sec. 6611(e) applies when a taxpayer qualifies for relief under Sec. 7508A. PMTA 2020-04 (2/25/20).
Educational letters sent to taxpayers require a telephone number where taxpayers can ask questions
The Office of Chief Counsel was asked whether educational letters sent to taxpayers by the IRS’s Research, Applied Analytics, and Statistics section require a contact telephone number pursuant to the IRS Restructuring and Reform Act of 1998, P.L. 105-26, Section 3705. The Chief Counsel’s Office advised that yes, because such letters are “any other correspondence” within the meaning of Sec. 3705(a)(2), the educational letters require a telephone number where taxpayers can ask questions about the letter. PMTA 2020-03 (2/25/20).
IRS issues interest rates for second quarter of 2020
The rates for interest determined under Sec. 6621 for the calendar quarter beginning April 1, 2020, will be 5% for overpayments (4% in the case of a corporation), 5% for underpayments, and 7% for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5%. Rev. Rul. 2020-7 (2/28/20).
Chief Counsel addresses application of loss limitation rules to partner’s self-employment tax
The Office of Chief Counsel advised that, unless a specific exclusion applies, the basis loss limitation under Sec. 704(d) and the at-risk loss limitation under Sec. 465 apply when determining a general partner’s net earnings from self-employment under Sec. 1402 for Self-Employment Contributions Act (SECA) tax purposes. Thus, if an individual share of loss from a partnership is disallowed to a partner under Sec. 704(d) or Sec. 465 for the tax year, the loss is also not taken into account in computing the partner’s net earnings from self-employment for that tax year for SECA tax purposes, assuming no SECA provision or regulation provides otherwise. CCA 202009024 (2/28/20).