Document summaries for the week of Jan. 13, 2020
Tax document summaries for the week of Jan. 13–17, 2020, covering corporations and individuals.
Former shareholders are liable for tax, interest, and penalties of corporation they sold
The Tax Court held that several taxpayers, who previously held substantial shares of a corporation whose assets were transferred to them, were liable as transferees under Sec. 6901 for the corporation’s federal income tax liability, additions to tax, penalties, and interest for a short tax year ending May 31, 2001. The court did, however, reject the IRS’s late attempt to assess an addition to tax under Sec. 6651(a)(3), since none of the earlier notices issued with respect to this case included any reference to this addition to tax. Alta V Limited Partnership, T.C. Memo. 2020-8 (1/13/20).
IRS settlement officer did not abuse discretion in sustaining levy on corporate taxpayer
The Tax Court held that an IRS settlement officer (SO), who verified that all legal and procedural requirements had been met with respect to a levy on a corporate taxpayer, did not abuse his discretion in sustaining the proposed levy. The court concluded that the SO properly determined that the proposed levy appropriately balanced the need for the efficient collection of taxes with the taxpayer’s legitimate concern that the collection action be no more intrusive than necessary, and, the court noted, the taxpayer did not pursue any collection alternatives beyond its initial Collection Due Process hearing request. MEI Productions, T.C. Memo. 2020-11 (1/14/20).
Earlier supervisory approval needed for penalty
The Tax Court refused to sustain a proposed levy against a motorcycle distributor, holding that the written supervisory approval requirement of Sec. 6751(b)(1) applies to the assessable penalty imposed by Sec. 6707A for failure to disclose reportable transaction information. Here, the proposal of an assessable penalty in a 30-day letter to the distributor embodied an “initial determination” for purposes of Sec. 6751(b)(1), which required written supervisory approval. The court rejected the argument that the IRS is free to obtain written supervisory approval for assessable penalties at virtually any time before assessment. Laidlaw’s Harley Davidson Sales, Inc., 154 T.C. No. 4 (1/16/20).
Couple escape most penalties because they reasonably relied on return preparer
The Tax Court held that a travel agency operated as a partnership by a couple who immigrated from the Philippines (1) failed to report gross receipts on Forms 1065, U.S. Return of Partnership Income, and (2) was not entitled to certain claimed deductions, including for the couple’s daughter’s college tuition. However, the court found that the couple acted in good faith and had reasonable cause for avoiding penalties, noting that the couple had no formal training in accounting or taxation and reasonably relied on a tax return preparer who held himself out as a tax expert and former IRS revenue agent. Rivera, T.C. Memo. 2020-7 (1/13/20).
Lawyer cannot deduct travel and lodging expenses incurred to participate in a trial
The Tax Court held that a lawyer was not entitled to deduct travel and lodging expense incurred while traveling away from home as a result of a trial he had to attend. Although he was entitled to reimbursements from his employer for the expenses, he did not ask for reimbursement. Thus, the deductions did not qualify as ordinary and necessary business expenses under Sec. 162(a). Near, T.C. Memo. 2020-10 (1/14/20).
July 4 holiday could explain late filing of Tax Court petition
The Tax Court denied an IRS motion to dismiss for lack of jurisdiction a Tax Court petition that bore U.S. postage stamps but no discernable postmark or other markings by the U.S. Postal Service. The court noted that (1) the petition arrived at the Tax Court only one business day late; (2) the July 4 holiday fell between the date of the alleged mailing and the delivery date; and (3) in prior cases, holiday conditions at post offices (e.g., holiday closures, unusually large volumes of mail, or inefficiencies attributable to temporary staff) have been found to be a possible explanation for short delays in delivery. Seely, T.C. Memo. 2020-6 (1/13/20).
Taxpayer cannot claim unspecified additional deductions after CDP hearing
The Tax Court granted summary judgment to the IRS after finding that the IRS did not abuse its discretion in sustaining a notice of intent to levy issued with respect to a taxpayer’s unpaid tax liabilities. The court rejected the taxpayer’s assertion that he was entitled to claim unspecified additional deductions on his 2014 tax return, after noting that the taxpayer did not provide sufficient information regarding the amount of his underlying tax liability during his Collection Due Process (CDP) hearing. Anisetti, T.C. Summ. 2020-3 (1/14/20).
Couple cannot deduct losses on development of golf course and residential housing
The Tax Court held that a couple, who developed a golf course and surrounding residential housing through several wholly owned entities, were not entitled to deductions relating to losses on the alleged transfer of the golf course property, on the alleged abandonment of certain golf course improvements, and on the sale of promissory notes. Further, the court found that the couple were not entitled to defer gain from the transferred property to future tax years. In addition, the couple did not have reasonable cause for their underpayments of income tax and were therefore liable for Sec. 6662 accuracy-related penalties. Cuthbertson, T.C. Memo. 2020-9 (1/14/20).
More taxpayers qualify for student loan cancellation-of-debt relief
The IRS issued a revenue procedure that provides relief to certain taxpayers who took out federal or private student loans that were discharged either because the schools closed down or there was some type of fraud or deception. The IRS said it will not assert that taxpayers within the scope of the revenue procedure must recognize gross income as a result of the discharge of their student loans, and it will not assert that a creditor must file information returns and furnish payee statements for the discharge of any indebtedness within the scope of the revenue procedure. Rev. Proc. 2020-11 (1/15/20) (see related news story).
Payments to shell corporation were nondeductible capital contributions
The Tax Court held that a part-time college professor could not deduct as employee business expenses payments he made to CYBER Learning Corp., a corporation the taxpayer and others formed to create software and other products to help potential clients perform training and education. The court noted that CYBER was an empty shell with no customers or source of income for the years prior to the year at issue and, the court concluded, the payments made to CYBER were, in effect, capital contributions. Christensen, T.C. Memo. 2020-14 (1/15/20).
Hospital doctor must report business-related expenses on Schedule A, not Schedule C
The Tax Court held that a doctor who worked for a hospital was not entitled to report expenses relating to her job on Schedule C, Profit or Loss From Business, and instead had to report such expenses as employee-related deductions on Schedule A, Itemized Deductions, subject to the 2%-of-adjusted-gross-income limitation. The court found that the taxpayer did not establish that she practiced medicine under circumstances other than as an employee or in a manner that required the income and deductions attributable to her medical practice to be shown on a Schedule C. Her 2012 Form W-2, Wage and Tax Statement, did not identify her as a statutory employee. Gambhir, T.C. Summ. 2020-4 (1/15/20).
Couple are liable for taxes on Social Security income and early IRA distribution
The Tax Court held that a couple were liable for taxes on certain Social Security benefits paid to the wife that were not reported on the couple’s 2015 tax return. The court also found that the couple were liable for the tax penalty in Sec. 72(t) as a result of a premature distribution to the husband from an individual retirement account. Merrell, T.C. Summ. 2020-5 (1/16/20).
IRS erred in calculating taxpayer’s unreported income
The Tax Court held that, in performing a bank deposits analysis with respect to a taxpayer whom the IRS suspected of having unreported income, the IRS should have reduced the taxpayer’s income by a $400,000 payment he had returned. The Tax Court also held that the taxpayer was not liable for an accuracy-related penalty where the amount of tax shown on his 2015 return exceeded his 2015 tax liability. Onyeani, T.C. Memo. 2020-15 (1/16/20).
Couple who ran Ponzi scheme are liable for fraud penalties
The Tax Court held that a couple were liable for civil fraud penalties as a result of tax underpayments due to their operation of a Ponzi scheme for which the husband was subsequently convicted and sentenced to five years in prison and ordered to pay $3.8 million in restitution. The court found the IRS had proved by clear and convincing evidence that the tax underpayments at issue were attributable to fraud. Purvis, T.C. Memo. 2020-13 (1/15/20).
No theft loss deduction for stock sold years earlier
The Court of Federal Claims held that taxpayers could not claim tax refunds in 2009 based on alleged theft losses. The taxpayers claimed they were fraud victims in a stock loan program. However, although the taxpayers discovered the fraud in 2009, the stock involved was sold in 2002 and 2003. Rochlis, No. 16-200T (Fed. Cl. 1/14/20).
IRS properly denied taxpayer’s request for currently-not-collectible status
The Tax Court held that a self-employed attorney who failed to pay his taxes for years 2012–2016 could not challenge his underlying tax liabilities in Tax Court. In addition, the IRS settlement officer assigned to his case did not abuse her discretion in denying the taxpayer’s request for currently-not-collectible (CNC) status or, in the alternative, an installment agreement (IA). The taxpayer did not qualify for CNC status, and he made no concrete IA proposal during his collection due process hearing and the settlement officer was not obligated to propose one for him. Aviles, T.C. Memo. 2020-12 (1/15/20).
IRS issues guidance on claims relating to biodiesel mixtures and alternative fuels sold or used during 2018 and 2019
The IRS has issued rules that claimants must follow to make a one-time claim for the credits and payments for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar years 2018 and 2019. The IRS also provides instructions for how a claimant may offset its taxable fuel liability with the alternative fuel mixture credit for 2018 and 2019, and provides instructions for how a claimant may make certain income tax claims for biodiesel, second-generation biofuel, and alternative fuel. Notice 2020-8 (1/15/20).
IRS issues February 2020 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for February 2020. The ruling provides various prescribed rates under Sec. 1274 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. 2020-3 (1/15/20).
Burden of proof relating to kickbacks
The Office of Chief Counsel advised that, where an income tax deficiency arises from disallowed expenses that are determined to constitute kickbacks described in Sec. 162(c)(1) and (c)(2), the IRS is not required to prove by clear and convincing evidence that each payment is a kickback. Instead, clear and convincing evidence that only some of the kickbacks are described in Sec. 162(c)(1) and (c)(2) is sufficient, and the IRS may then make determinations as to the related deficiencies, which are presumed to be correct unless the taxpayer proves otherwise. CCA 202003004 (1/17/20).
Regs. on transfers of certain property to related foreign partners
The IRS issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. T.D. 9891 (1/17/20).
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.