Document summaries for the week of June 1, 2020
Tax document summaries for the week of June 1–5, 2020, covering employee benefits, individuals, IRS procedure, and more.
IRS announces upcoming guidance on remedial amendment cycles for certain plans
The IRS announced that (1) it plans to issue opinion letters with regard to the third six-year remedial amendment cycle for pre-approved defined contribution plans by June 30, 2020, or soon thereafter; (2) it will accept from an employer eligible to submit a determination letter request an application for an individual determination letter under the third six-year remedial amendment cycle for pre-approved defined contribution plans from Aug. 1, 2020, to July 31, 2022; and (3) an employer adopting a newly approved plan will be required to adopt the plan document by July 31, 2022. The IRS noted that Rev. Proc. 2017-41 sets forth procedures for providers of pre-approved plans to obtain opinion letters, once every six years, for qualified pre-approved plans submitted with respect to the third (and subsequent) six-year remedial amendment cycles. Announcement 2020-7 (6/1/20).
IRS will temporarily allow remote signatures for retirement plan participant elections
The IRS issued guidance that provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement in Regs. Sec. 1.401(a)-21(d)(6) for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance, which also covers spousal consents, accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Notice 2020-42 (6/3/20) (see related news story).
ESTATES, TRUSTS & GIFTS
Decedent’s advances to son were partially loans and partially gifts
The Tax Court held that advances made by a taxpayer to her son prior to her death were loans through 1989, but, after that, they were gifts. The court noted that the decedent expected her son to repay the loans because she expected him to make a success of his architecture practice but realized by the end of 1989 that he was unlikely to be successful and repay her advances. Estate of Bolles, T.C. Memo. 2020-71 (6/1/20).
IRS grants relief to certain arrangements that hold real property as trusts
The IRS is granting temporary relief to arrangements that are treated as trusts under Regs. Sec. 301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgage loans and their lease agreements, and to accept additional cash contributions, without jeopardizing their tax status as grantor trusts. The IRS also advises that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets. Rev. Proc. 2020-34 (6/4/20).
Taxpayer cannot exclude ‘gifts’ from income, but IRS failed to meet its burden in assessing penalty
The Tax Court held that transfers of funds to a taxpayer over several years did not constitute gifts excludable from income under Sec. 102 where the record documenting the gifts consisted largely of the taxpayer’s unsubstantiated and self-serving testimony that the court did not find credible. However, the court found that the taxpayer was not liable for penalties under Sec. 6662 because the IRS did not satisfy its initial burden of production under Sec. 6751(b). Kroner, T.C. Memo. 2020-73 (6/1/20).
Court grants collection action against taxpayer; IRS did not abuse its discretion
The Tax Court granted summary judgment to the IRS and sustained collection actions against a taxpayer who owed the IRS more than $15,000. The court also found that the IRS settlement officer (SO) did not abuse her discretion in closing the case after noting that the SO waited two months after a deadline she had set for closing the case for the taxpayer to submit financial information that she never received. Nimmo, T.C. Memo. 2020-72 (6/1/20).
Taxpayer failed to establish entitlement to qualified residence interest
The Tax Court held that a taxpayer was not entitled to deductions for qualified residence interest with respect to real properties in New York City and Hermosa Beach, Calif., because he failed to establish there was any bona fide debt. However, the court also concluded that the IRS failed to meet its burden of production with respect to the accuracy-related penalty under Secs. 6662(a) and (b)(2) for a substantial understatement of income tax and thus the taxpayer was not liable for the penalty. McCarthy, T.C. Memo. 2020-74 (6/4/20).
Renewable electricity production and refined coal production credit amounts for 2020
The IRS republished the inflation-adjustment factors and reference prices for calendar year 2020 that are used to determine the availability of the renewable electricity production credit, the refined coal production credit, and the Indian coal production credit under Sec. 45. Notice 2020-38 (6/1/20).
IRS updates list of countries with information reporting agreements on bank deposit interest
The IRS provided an updated list of countries with which the United States has in force an information exchange agreement, such that bank deposit interest paid to residents of those countries must be reported by payers to the extent required under Regs. Secs. 1.6049-8(a) and 1.6049-4(b)(5). The revenue procedure adds Singapore to this list. Rev. Proc. 2020-15 (6/1/20).
Tax Court rejects taxpayer’s motion regarding supervisory approval of penalties
The Tax Court rejected a taxpayer’s argument that the IRS failed to satisfy the supervisory approval requirement with respect to penalties the Service asserted against him in its answer to his Tax Court petition. The taxpayer argued that, because Sec. 6751(b)(1) provides that the “initial determination” of a penalty assessment must receive supervisory approval, the IRS’s counsel may not make the initial determination of a penalty and that therefore the IRS cannot satisfy Sec. 6751(b)(1) with respect to penalties asserted in an answer to the taxpayer’s petition. The court found the argument without merit. Koh, T.C. Memo. 2020-77 (6/4/20).
IRS issues quarterly interest rates for tax overpayments and underpayments
The IRS issued the rates for interest on tax overpayments and underpayments for the calendar quarter beginning July 1, 2020. The interest rates will be 3% for overpayments (2% in the case of a corporation), 3% for underpayments, 0.5% for the portion of a corporate overpayment exceeding $10,000, and 5% for large corporate underpayments. Rev. Rul. 2020-13 (6/4/20).
IRS did not abuse its discretion in rejecting whistleblower claim
The Tax Court granted summary judgment to the IRS after holding that the IRS Whistleblower Office did not abuse its discretion in rejecting two whistleblower claims made by the taxpayer. The court noted that, after reviewing the taxpayer’s information, the IRS concluded that the information was not specific or credible and/or was speculative, and the Service did not proceed with an administrative action and did not collect any proceeds. Waszczuk, T.C. Memo. 2020-75 (6/4/20).
LLCs and LLPs
Tenth Circuit affirms decision in solar-energy tax credit scheme
The Tenth Circuit affirmed a district court decision enjoining the defendants from promoting an unlawful solar-energy tax credit scheme and ordering them to disgorge their gross receipts from the scheme. RaPower-3, LLC, No. 18-4119 (10th Cir. 6/2/20).
Gravel company cannot deduct alleged donation of water storage rights
The Tax Court held that a partnership, the business of which consists of extracting rock, sand, and gravel from the ground and processing those materials into asphalt, was not entitled to a charitable contribution deduction for an alleged donation of certain water storage rights because the partnership did not substantiate the donation, as required under Regs. Sec. 1.170A-13(c). The court rejected the taxpayer’s argument that it had substantially complied with the regulation at issue and also rejected the taxpayer’s assertion that the deduction should be allowed as part of a bargain sale because, the court said, no reliable evidence was presented of the actual fair market value of the water storage easement transferred. Brannan Sand & Gravel Co., LLC, T.C. Memo. 2020-76 (6/4/20).
IRS requests comments on partnership tax capital reporting
The IRS announced that it is seeking public comment on a proposed requirement for partnerships to use only one of two alternative methods to report partner capital accounts with respect to partnership tax years that end on or after Dec. 31, 2020. According to the IRS, comments received in response to this request will help inform the development of the instructions to be included in Form 1065, U.S. Return of Partnership Income (to which the instructions for Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, refer), and Partner’s Instructions for Schedule K-1 (Form 1065), for tax year 2020. Notice 2020-43 (6/5/20).
Court rejects loss deductions of real estate developer with underwater properties
The Tax Court held that a real estate developer, who undertook a series of transactions to transfer parcels of real estate encumbered by liabilities in excess of their fair market value into liquidating trusts established for the benefit of his lenders, could not claim ordinary losses from those transactions and thus could not subsequently deduct net operating losses generated from those transactions. The court concluded that the losses reported by the taxpayer’s S corporation, which owned the properties, were not bona fide dispositions and were not evidenced by closed and completed transactions, fixed by identifiable events, that were actually sustained during the year at issue. Sage, 154 T.C. No. 12 (6/2/20).
Timeliness of refund claim ‘attributable to’ NOL carryback
The Office of Chief Counsel advised that a claim for refund is “attributable to” a net operating loss (NOL) for purposes of the special period of limitations under Sec. 6511(d)(2) where the overpayment at issue arises from an NOL carryback that triggers payment of alternative minimum tax, which in turn generates a minimum tax credit, which is carried forward to create the overpayment. According to the Chief Counsel’s Office, limited caselaw supports an interpretation of the phrase “attributable to” an NOL carryback to include any overpayment that results from a chain of causation beginning with an NOL carryback. CCA 202023006 (6/5/20).
IRS provides relief for qualified opportunity funds and their investors due to pandemic
In response to the ongoing COVID-19 pandemic, the IRS issued a notice that answers questions regarding relief from certain requirements under Sec. 1400Z-2 and the implementing regulations, such as timeframes for taxpayers to invest eligible gains in qualified opportunity funds (QOFs). The notice, among other things, (1) provides relief for certain failures by a QOF to meet the 90% investment standard, (2) postpones the time periods for satisfying certain other requirements, and (3) confirms that (i) the 24-month extension for the working capital safe harbor, and (ii) the 12-month extension for QOFs to reinvest certain proceeds, both as provided under the Sec. 1400Z-2 regulations, are available to otherwise qualifying QOFs and qualified opportunity zone businesses. Notice 2020-39 (6/4/20) (see related news story).