Document summaries for the week of Jan. 6, 2020
S corporation’s ESOP and ESOT do not qualify
The Tax Court sustained an IRS determination that the taxpayer’s employee stock ownership plan and employee stock ownership trust did not qualify under Secs. 401(a) and 501(a), respectively, for the plan years at issue. Ed Thielking, Inc., T.C. Memo. 2020-5 (1/9/20).
Standard flash is not a bingo game
The IRS advised that the game of standard flash, in which players purchase cards and a caller calls numbers from randomly selected balls, but in which some cards are automatically winners or losers, does not qualify as a bingo game within the meaning of Sec. 513(f) (which exempts the trade or business of conducting bingo games from the term “unrelated trade or business”). The IRS also advised that there is no legal basis for bifurcating the game so that part of it can be classified as a bingo game. TAM 202002010 (1/10/20).
Constructive denial clause is not inconsistent with conservation easement rules
The Office of Chief Counsel advised that a constructive denial clause in a conservation easement deed, under which the easement holder is deemed to have denied approval for a requested use of the land if the easement holder does not respond within a specified time period, is not inconsistent with the perpetuity requirements of Sec. 170(h). CCA 202002011 (1/10/20).
Taxpayers failed to substantiate business expenses
The Tax Court held that married taxpayers were not entitled to deduct various expenses related to their medical-staffing business due to lack of substantiation. The court also imposed accuracy-related penalties for substantial understatements of tax and/or negligence. Stovall, T.C. Summ. 2020-1 (1/6/20).
IRS introduces Gig Economy Tax Center
The IRS posted on its website pages designed to help taxpayers who earn money in the gig economy understand their tax obligations. Gig Economy Tax Center (1/9/20).
Coin-shop owner understated income
The Tax Court held that the IRS could use a bank-deposits analysis to reconstruct the income of a coin-shop owner who failed to provide books and records for his businesses during the IRS examination, and it sustained the IRS’s finding that he underreported his gross receipts by $6,810,339. Hommel, T.C. Memo. 2020-4 (1/8/20).
Appraisal deficiencies doom charitable contribution deduction
The Tax Court denied a married couple’s charitable deduction for donating their house to a charity because they did not secure a qualified appraisal. Their appraisal summary failed to provide, among other things, the basis and acquisition date of the contributed property. Loube, T.C. Memo. 2020-3 (1/8/20).
Special casualty loss rules explained
The Office of Chief Counsel explained the special casualty loss rules under the Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63, the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and the Bipartisan Budget Act of 2018, P.L. 115-123. CCA 202002014 (1/10/20).
Outer continental shelf activities subject UK company to US tax
The Tax Court held that a U.K. private limited liability company was engaged in a trade or business within the United States when it performed work decommissioning oil and gas wells on the U.S. Outer Continental Shelf in the Gulf of Mexico. The company was also held to have a U.S. permanent establishment, and its income was not tax-exempt under the United States–United Kingdom tax treaty. Adams Challenge (UK) Ltd., 154 T.C. No. 3 (1/8/20).
IRS announces start of 2020 filing season
The IRS announced that it will begin accepting and processing 2019 tax returns on Jan. 27, 2020. IR-2020-02 (1/6/20).
IRS issues annual progress report
The IRS issued its annual report for fiscal year 2019, providing an update on its progress in meeting the goals in its 2018–2022 strategic plan. Publication 5382, Internal Revenue Service Progress Update, Fiscal Year 2019 (1/6/20).
National Taxpayer Advocate delivers annual report to Congress
The acting National Taxpayer Advocate delivered her annual report to Congress, discussing implementation of the Taxpayer First Act and challenges facing the IRS. Annual Report to Congress, 2019 (1/8/20).
National Taxpayer Advocate makes legislative recommendations
The acting National Taxpayer Advocate issued 58 legislative recommendations for strengthening taxpayer rights and improving tax administration. National Taxpayer Advocate 2020 Purple Book (1/8/20).
Supervisory approval not needed to issue proposed adjustments letter
The Tax Court held that prior supervisory approval was not needed before the IRS Examination Division could issue a Letter 1807 and summary report setting forth proposed adjustments and inviting the taxpayer to a conference to discuss them. Belair Woods, LLC, 154 T.C. No. 1 (1/6/20).
Supervisory approval properly obtained for penalties
The Tax Court held that Sec. 6751(b)(1) does not require prior supervisory approval of penalties until the first formal communication to the taxpayer that the IRS has determined a penalty. In this case, the IRS did secure supervisory approval before the first formal communication of the penalty determination, the court found. Tribune Media Co., T.C. Memo. 2020-2 (1/6/20).
Tax Court clarifies burden of proof for penalty approval
The Tax Court held that once the IRS has satisfied its initial burden of proof by producing evidence showing that it complied with the Sec. 6751(b)(1) requirements for written supervisory approval of an accuracy-related penalty, the burden of proof shifts to the taxpayer to produce contradictory evidence to show that the IRS did not comply with Sec. 6751(b)(1). Frost, 154 T.C. No. 2 (1/7/20).
Subsequent changes do not affect designation as tax matters partner
The Office of Chief Counsel advised that if an LLC member was a proper tax matters partner (TMP) for the year under audit, the fact that the member subsequently disposes of his or her LLC interest or goes from being a member-manager to a nonmember-manager does not affect the TMP designation for the year the person was a member-manager. CCA 202002015 (1/10/20).
Chief Counsel advises on adjusting partner’s outside basis in examination
The Office of Chief Counsel advised that a partner’s outside basis in his or her partnership interest is an affected item that can be adjusted without opening a partnership-level examination if the IRS accepts the partnership return as filed. CCA 202002016 (1/10/20).
Tax Cuts and Jobs Act does not affect constructive receipt rules for cash-basis taxpayer
The Office of Chief Counsel explained that no changes in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, would affect the basic rules of constructive receipt and prepaid income for cash-basis taxpayers. CCA 202002013 (1/10/20).
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.