Document summaries for the week of June 15, 2020
Tax document summaries for the week of June 15–19, 2020, covering employee benefits, individuals, and IRS procedure.
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). Notice 2020-45 (6/15/20).
Business’s workers were independent contractors, not employees
The Tax Court held that individuals working for a taxpayer in the taxpayer’s cleaning business were not employees and, thus, the taxpayer was not responsible for federal employment taxes assessed by the IRS. According to the court, it was evident that the taxpayer created an independent contractor relationship with the workers she hired. Santos, T.C. Memo. 2020-88 (6/17/20).
IRS issues guidance on CARES Act retirement plan provisions
The IRS issued a notice relating to provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, P.L. 116-136, that allow favorable tax treatment for coronavirus-related distributions from eligible retirement plans. The notice is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying the provisions and includes guidance on how plans may report coronavirus-related distributions and how individuals may report these distributions on their individual federal income tax returns. Notice 2020-50 (6/19/20) (see related news story).
Prop. regs. issued on qualified transportation fringe benefits
The IRS issued proposed regulations implementing changes to Sec. 274 that disallow a deduction for qualified transportation fringe benefits. REG-119307-19 (6/19/20) (see related news story).
Couple’s tax increased by excess advance payments of the premium assistance tax credit
The Tax Court held that a married couple received excess advance payments of the premium assistance tax credit, which in turn increased their tax due by the amount of the excess, subject to the limitations set forth in Sec. 36B(f)(2)(B). The court also held that the couple was entitled to a deduction for self-employed health insurance costs, which lowered their household income, so they were entitled to some of the premium tax credit for the year, contrary to the IRS’s position. They were also liable for an addition to tax under Sec. 6651 for filing their 2015 tax return late despite their claim that they expected a refund, not a tax due. Abrego, T.C. Memo. 2020-87 (6/16/20).
Passthrough losses denied where taxpayer failed establish material participation
The Tax Court held that losses deducted by a taxpayer with respect to two passthrough entities were passive losses because the taxpayer failed to establish that he materially participated in the activities that generated the losses. In addition, the court found that the taxpayer failed to substantiate his wholly owned corporation’s bases in the passthrough entities and failed to provide any proof to substantiate his deductions for self-employed health insurance. The taxpayer was also liable for accuracy-related penalties under Sec. 6662(a). Sellers, T.C. Memo. 2020-84 (6/15/20).
Taxpayer fails to meet criteria for child-related deductions and credits
The Tax Court held that a taxpayer was not entitled to various child-related deductions, credits, and head of household filing status where he was not the child’s custodial parent and the child was not his qualifying child or relative because he did not obtain Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, from his ex-wife. The court also concluded that the taxpayer was not entitled to an education credit or an American opportunity tax credit for 2015 because all his qualifying tuition and related expenses were paid with a federal Pell grant, but the taxpayer was entitled to an education credit for 2016 because he paid a portion of his qualifying tuition and related expenses in 2016. Bidzimou, T.C. Memo. 2020-85 (6/15/20).
Couple entitled to partial deductions for unsubstantiated business expenses
The Tax Court, using the rule in Cohan, 39 F.2d 540 (2d Cir. 1930), allowed partial deductions for expenses incurred by a couple in their management consulting business but not appropriately substantiated. However, the court denied a deduction for consulting fees allegedly paid to a website developer because the couple failed to produce any records substantiating the expense. Bowers, T.C. Summ. 2020-17 (6/16/20).
Court lacks jurisdiction where taxpayers failed to file Tax Court petition on time
The Tax Court held that the IRS sent a deficiency notice to the taxpayers’ last known address despite an addition of extra digits at the end of the taxpayers’ ZIP code. The court then concluded that it lacked jurisdiction over the taxpayers’ Tax Court petition because it was not filed within the 90-day period following the date that appeared on the IRS notice of deficiency, but was instead filed 616 days after the deadline stated in the notice. Moukhitdinov, T.C. Memo. 2020-86 (6/16/20).
IRS did not abuse its discretion in dismissing taxpayer’s arguments as frivolous
The Tax Court granted summary judgment to the IRS after concluding that the Service did not abuse it discretion in dismissing a taxpayer’s arguments as frivolous and sustaining a proposed levy action against the taxpayer. The court rejected the taxpayer’s argument that the tax liabilities at issue were improperly assessed because, among other reasons, he was not subject to federal income tax. Schwager, T.C. Memo. 2020-83 (6/15/20).
Taxpayer’s collection due process case moves forward
The Tax Court denied an IRS motion for summary judgment in a case involving a taxpayer whom the IRS said owed taxes for 2015 after (1) reviewing the taxpayer’s claim that he did not receive proper notice of a Collection Due Process hearing, and (2) finding that there was a material dispute of fact as to whether the taxpayer received a reasonable opportunity to present evidence pertaining to his tax liability for 2015. The court opined that the IRS settlement officer might have abused her discretion by not giving the taxpayer a reasonable opportunity to present his evidence with respect to his 2015 tax year. Cosio, T.C. Memo. 2020-90 (6/18/20).
Couple cannot deduct carryover of easement donation allowed in earlier year
The Tax Court held that a couple who had taken a charitable contribution deduction of approximately $2.8 million on their 2012 tax return for a conservation easement donation, which the IRS did not challenge, could not subsequently deduct the carried over portion of the contribution on their 2013 and 2014 tax returns. The problem was that the deed for the conservation easement property did not properly allocate the extinguishment proceeds in accordance with Regs. Sec. 1.170A-14(g)(6)(ii). However, the taxpayers were not liable for accuracy-related penalties. Hewitt, T.C. Memo. 2020-89 (6/17/20).
Taxpayer’s blind confidence in husband was not lack of knowledge for innocent spouse purposes
The Tax Court held that a taxpayer was not entitled to innocent spouse relief for tax years 2010 through 2012. The court concluded that, while the taxpayer’s blind confidence in her husband evidenced her love and devotion, her emotional decision to ignore the facts and circumstances she well knew on an intellectual level was not a lack of knowledge for purposes of Secs. 6015(b) and (f). Rogers, T.C. Memo. 2020-91 (6/18/20).
Tax evasion conviction upheld
The D.C. Circuit affirmed the tax evasion conviction of the chief executive of a recycling company who spent investor money on personal expenses and failed to report the diverted corporate funds as income. Han, No. 18-3081 (D.C. Cir. 6/19/20).
IRS issues July 2020 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for July 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. 2020-14 (6/15/20).
IRS issues inflation adjustment factor for carbon oxide sequestration credit
The IRS issued the inflation adjustment factor for the credit for Sec. 45Q carbon oxide sequestration for calendar year 2020. The inflation adjustment factor for calendar year 2020 is 1.1908 and the Sec. 45Q credit for calendar year 2020 is $23.82 per metric ton of qualified carbon oxide under Sec. 45Q(a)(1) and $11.91 per metric ton of qualified carbon oxide under Sec. 45Q(a)(2). Notice 2020-40 (6/15/20).
IRS adds two encryption options for Chief Counsel employees
The IRS added two encryption options for Chief Counsel employees to transmit emails containing return information or personally identifiable information to taxpayers or their representatives in Tax Court litigation or in conjunction with requests for letter rulings or closing agreements, supplementing the options set out in CC-2020-002. CC-2020-007 (6/15/20).
Use of wrong FedEx service makes petitions not subject to mailbox rule
The Ninth Circuit affirmed the Tax Court’s dismissal of two businesses’ petitions for redetermination of federal income tax deficiencies because the petitions were not timely filed. The petitions were delivered one day after the 90-day deadline set in Sec. 6213(a), and the taxpayers sent the petitions using a FedEx service that was not on the IRS’s formal list of designated delivery services to which the Sec. 7502 mailbox rule applies. Organic Cannabis Foundation, LLC, No. 17-72874 (9th Cir. 6/18/20).
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.