Document summaries for the week of Jan. 20, 2020

Tax document summaries for the week of Jan. 20–24, 2020, covering employee benefits, individuals, IRS procedure, and more.

C CORPORATION

Fees paid in acquisition did not create or enhance an intangible asset

The IRS National Office advised that certain professional and administrative fees paid by a target corporation in connection with a taxpayer’s acquisition of the target’s stock did not create or enhance a separate and distinct intangible asset under Regs. Secs. 1.263(a)-4(b)(1)(iii) and (b)(3)(i). The National Office also concluded that the taxpayer could not claim a loss deduction under Sec. 165 on behalf of the target corporation for the professional and administrative fees in the tax year in which the taxpayer sold all of the target’s stock. TAM 202004010 (1/24/20).

Court upholds collection actions on employment taxes

The Tax Court upheld collection actions against a family-run trash removal and recycling business with respect to unpaid employment taxes for three calendar quarters during 2015 and 2016. The court also concluded that, given the taxpayer’s unresponsiveness after initially working with the IRS on the issues, an IRS settlement officer was justified in closing the case. Northside Carting, Inc., T.C. Memo. 2020-18 (1/23/20).

 

EMPLOYEE BENEFITS

IRS issues monthly corporate yield curve and segment rates

The IRS issued guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the IRS provided guidance as to the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I), as reflected by the application of Sec. 430(h)(2)(C)(iv). Notice 2020-7 (1/21/20).

IRS provides reporting relief for 2020 RMDs

Because of the short time since the amendment of Sec. 401(a)(9) by the Further Consolidated Appropriations Act, 2020, P.L. 116-94, which changed the required minimum distribution (RMD) age from 70½ to 72, the IRS issued guidance providing that the RMD statement required under Notice 2002-27 should not be sent to IRA owners who have turned or will turn 70½ in 2020. However, if a financial institution does provide an RMD statement to an owner who turns 70½ in 2020, the IRS will not consider the statement to have been provided incorrectly, but only if the financial institution also notifies the owner by April 15, 2020, that the RMD is not in fact required for 2020. Notice 2020-6 (1/24/20).

 

INDIVIDUALS

Unreported constructive dividends increase couple’s income, but reliance on preparer negates penalties

The Tax Court held that (1) a couple’s income was increased by unreported constructive dividends they received from a corporation wholly owned by the husband; (2) the corporation failed to substantiate certain deductions and to establish that other deductions were ordinary and necessary trade or business expenses; (3) the corporation failed to introduce evidence contradicting the IRS’s calculation of inventories; and (4) a net long-term capital gain the couple reported on their return should instead have been reported on the corporation’s return. However, the court also concluded that the couple relied in good faith on a tax preparer not only for advice in preparing their returns but also during examinations and trial preparations, and the couple thus were not liable for assessed accuracy-related penalties. Reliable Computer Services, Inc., T.C. Summ. 2020-7 (1/22/20).

Disbarred attorney liable for $1.9 million fraud penalty after failing to report contingency fee income

The Tax Court held that the IRS proved that a former attorney, who received millions of dollars in contingency fees after successfully representing four clients in a Catholic clergy sex-abuse lawsuit, underpaid his income tax liability with respect to the fee income. The court further held that the subsequently disbarred attorney underpaid the tax liability with fraudulent intent and was thus liable for a $1.9 million civil fraud penalty under Sec. 6663. Isaacson, T.C. Memo. 2020-17 (1/23/20).

Court cannot grant penalty relief to couple in son-of-boss transaction

The Tax Court held that it had no jurisdiction in a pre-payment forum to consider penalties against a couple who participated in a son-of-boss tax shelter transaction that were determined at the partnership level. Accordingly, with respect to the penalties, the court denied the couple’s motion and granted the IRS’s motion to dismiss. Manroe, T.C. Memo. 2020-16 (1/22/20).

Ninth Circuit affirms couple are not entitled to deductions

The Ninth Circuit affirmed a Tax Court decision that a married couple were not entitled to deduct expenses related to the husband’s law practice because there was no evidence that he actually practiced law. Also, the wife did not qualify as a real estate professional, so their rental real estate losses were disallowed beyond the amounts allowed by the IRS. Simonelli, No. 18-70664 (9th Cir. 1/23/20.

 

INTERNATIONAL

Countries form group to fight global international tax evasion

The IRS announced that Australia, Canada, the Netherlands, the United Kingdom, and the United States are undertaking coordinated action to stop offshore tax evasion. The heads of tax enforcement for those countries have formed a group called the Joint Chiefs of Global Tax Enforcement, or J5, to combat international tax crime and money laundering. IR-2020-18 (1/23/20).

 

IRS PROCEDURE

Trust fund recovery penalty is subject to the written supervisory approval requirement

The Tax Court held that a trust fund recovery penalty (TFRP) is a “penalty” within the meaning of Sec. 6751(b)(1) and is, thus, subject to the requirement that written supervisory approval be secured for the initial determination of the assessment. The court also concluded that, with respect to a taxpayer who failed to pay employment taxes and was determined to be a responsible person, (1) the initial determination of penalty assessments against the taxpayer was embodied in a Letter 1153, Trust Fund Recovery Penalty Letter, sent to the taxpayer formally communicating the IRS’s definite decision to assert TFRPs against the taxpayer; (2) the IRS satisfied the requirements of Sec. 6751(b)(1) because written supervisory approval of the TFRPs was secured on Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, on the same date the respective Letter 1153 was mailed to the taxpayer; and (3) the IRS settlement officer did not abuse his discretion in declining to place the taxpayer’s account into currently not collectible status. Chadwick, 154 T.C. No. 5 (1/21/20).

Court upholds assessment and accuracy-related penalty where taxpayer fails to respond

The Tax Court sustained an IRS determination to include unreported income from retirement plan distributions, impose the Sec. 72(t) addition to tax for early distributions from those plans, and impose the Sec. 6662(a) accuracy-related penalty on a taxpayer. The court noted that the taxpayer failed to respond to a Tax Court order to respond to the IRS and made no argument about any of those issues. Purdie, T.C. Summ. 2020-6 (1/21/20).

IRS extends temporary dyed fuel relief

The IRS provided an additional extension, through 2020, of the temporary dyed fuel relief provided originally in Notice 2017-30 and then extended by Notice 2018-39 and Notice 2019-04. Notice 2020-4 (1/21/20).

Misaddressed CDP hearing requests should be based on when they are mailed

The Office of Chief Counsel explained its recommended revisions to the Internal Revenue Manual (IRM) procedures regarding the treatment of Collection Due Process (CDP) hearing requests mailed to an incorrect IRS address. Currently, the IRS determines the timeliness of incorrectly addressed hearing requests based on when they are received at the correct CDP processing site. However, in light of confusion caused by multiple addresses on the CDP Notice, the Chief Counsel’s Office recommended that the IRS base misdirected requests’ timeliness on the date they are mailed. PMTA 2020-02 (1/24/20).

 

PARTNERSHIPS

Rev. Proc. 84-35 continues to apply to partnerships after 2017

The Office of Chief Counsel was asked whether relief granted to small partnerships by Rev. Proc. 84-35, relating to the penalty under Sec. 6698(a) for failure to file a partnership return, is obsolete in light of the repeal of Sec. 6231(a)(1)(B) in the Bipartisan Budget Act of 2015, effective for years beginning after 2017, and, if not, whether Rev. Proc. 84-35 allows the IRS to implement procedures to ensure that partnerships claiming relief under Rev. Proc. 84-35 are in fact entitled to that relief. The Chief Counsel’s Office advised that (1) Rev. Proc. 84-35 is not obsolete and continues to apply; (2) Rev. Proc. 84-35’s reference to Sec. 6231(a)(1)(b) defines small partnerships for the purpose of the relief provided by the revenue procedure; (3) the repeal of the small partnership exception in Sec. 6231(a)(1)(B) does not affect the scope of the penalty under Sec. 6698 for failure to file a partnership return; and (4) Rev. Proc. 84-35 allows the IRS to implement procedures requiring partnerships claiming relief under Rev. Proc. 84-35 to demonstrate that they are entitled to this relief. PMTA 2020-01 (1/24/20).

Newsletter Articles

50th ANNIVERSARY

50 years of The Tax Adviser

The January 2020 issue marks the 50th anniversary of The Tax Adviser, which was first published in January 1970. Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits.

PRACTICE MANAGEMENT

2019 tax software survey

This annual survey shows how CPAs rate the tax preparation software they used during last tax season and how it handled the recent tax law changes.