Document summaries for the week of June 29, 2020

CORPORATIONS

Temporary and proposed regs. on consolidated NOLs

The IRS issued temporary regulations that respond to the provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, that retroactively extended the net operating loss (NOL) carryback period under Sec. 172 for tax years beginning after 2017 and before 2021. The regulations allow consolidated groups that acquire new members that were members of another consolidated group to elect, in a year subsequent to the year of acquisition, to waive all or part of the preacquisition portion of an extended carryback period under Sec. 172 for certain losses attributable to the acquired members where there is a retroactive statutory extension of the NOL carryback period under Sec. 172. T.D. 9900 and REG-125716-18 (7/3/20) (see related news story).

EMPLOYEE BENEFITS

Guidance on midyear amendment to safe harbor Sec. 401(k) or 401(m) plans

The IRS issued a notice clarifying the requirements that apply to a midyear amendment to a safe-harbor Sec. 401(k) or 401(m) plan that reduces only contributions made on behalf of highly compensated employees. In the notice, the IRS also provided temporary relief in connection with the ongoing COVID-19 pandemic from certain requirements that would otherwise apply to a midyear amendment to a safe-harbor Sec. 401(k) or 401(m) plan adopted between March 13, 2020, and Aug. 31, 2020, that reduces or suspends safe-harbor contributions. Notice 2020-52 (6/29/20).

EMPLOYMENT TAXES

IRS revises rules and specifications for substitute Form 941

The IRS issued the latest revision of IRS Publication 4436, General Rules and Specifications for Substitute Form 941, Schedule B (Form 941), Schedule D (Form 941), Schedule R (Form 941), and Form 8974, superseding Rev. Proc. 2018-24. Rev. Proc. 2020-31 (6/29/20).

EXEMPT ORGANIZATIONS

IRS cannot use Sec. 265 to disallow a charitable contribution allowed in computing UBTI

The Office of Chief Counsel advised that Sec. 265(a)(1) cannot be applied to disallow a Sec. 170 charitable contribution deduction allowed by Sec. 512(b)(10) in calculating unelated business taxable income (UBTI) under Sec. 512(a)(1). In reaching its conclusion, the Chief Counsel’s Office found that a charitable contribution is not allocable to tax-exempt income but instead arises from a donor’s charitable intent to voluntarily transfer money or property without receiving any benefit in return. CCA 202027003 (7/2/20).

INDIVIDUALS

Child-related deductions negated by failure to attach Form 8332 to return

The Tax Court held that, because the noncustodial parent of two children did not attach to her 2014 tax return a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, she was not entitled to claim a dependency exemption or child tax credit with respect to those two children; nor was she entitled to head-of-household filing status. The court noted that, while the children’s father subsequently gave the noncustodial parent a signed Form 8332, he did not file an amended return disclaiming his previous claim of the children as dependents. Bethune, T.C. Memo. 2020-96 (6/30/20).

Taxpayer failed to rebut IRS’s deficiency determinations

The Tax Court held that a taxpayer was liable for tax deficiencies assessed by the IRS because she offered no evidence rebutting disallowed deductions or her receipt of income third-party sources reported to the IRS. The court upheld accuracy-related penalties for the years at issue. Francois, T.C. Summ. 2020-18 (6/30/20).

IRS did not abuse its discretion in sustaining federal tax lien

The Tax Court held that a taxpayer was not entitled to challenge his underlying tax liabilities where his Tax Court petition was not timely filed. The court further held that the IRS did not abuse its discretion by sustaining a Notice of Federal Tax Lien where the taxpayer did not timely submit documents and additional amended returns that the IRS had requested. Nguyen, T.C. Memo. 2020-97 (6/30/20).

One-third of taxpayer’s settlement payment from employer is excludable from income

The Tax Court held that one-third of a $19,000 settlement payment received by a taxpayer from an employer was excludable from her income under Sec. 104(a)(2). The court noted that the payment was the result of adversarial, arm’s-length, and good-faith negotiations and that the settlement agreement identified three bases for the $19,000 payment, one of which was physical distress and damages.  Beckett, T.C. Summ. 2020-19 (7/1/20).

Taxpayer guilty of income tax evasion is not liable for fraud penalty

The Tax Court held that a taxpayer who had pleaded guilty to income tax evasion after filing a false and fraudulent income tax return was not liable for a Sec. 6663(a) fraud penalty. The court said that, because Form 4549, Income Tax Examination Changes, was not offered into evidence by the IRS, it could not determine whether that form clearly reflected the revenue agent’s conclusion that the taxpayer should be subject to a fraud penalty, and, if it was the initial determination of the fraud penalty, there was no evidence of its timely written approval. Minemyer, T.C. Memo. 2020-99 (7/1/20).

IRS PROCEDURE

Tax deadline to remain July 15

The IRS announced that tax filing and payment deadlines will not be further postponed past July 15, 2020. IR-2020-134 (6/29/20) (see related news story).

IRS announces tax relief for South Carolina storm victims

The IRS announced that victims of the severe storms, tornadoes, and straight-line winds that began on April 12, 2020, in South Carolina may qualify for tax relief. SC-2020-01 (6/30/20).

Married couple who prevailed in CDP hearing not entitled to recoup reasonable costs

The Tax Court held that, after the IRS did not sustain tax lien filings against a husband and wife following a Collection Due Process (CDC) hearing, the couple were not entitled to reasonable litigation or administrative costs pursuant to Sec. 7430 because CDP hearings are generally considered collection actions and not administrative proceedings. The court also concluded that the couple were barred by the plain text Sec. 7430 from recovering compensation for personal time spent in litigating their own case. Dennis, T.C. Memo. 2020-98 (7/1/20).

Prop. regs. on compliance monitoring for low-income housing credit

The IRS issued proposed regulations on the compliance-monitoring duties of state and local housing credit agencies for purposes of the low-income housing credit. REG-123027-19 (7/1/20).

IRS issues COVID-19–related relief from certain Sec. 142(d) and Sec. 147(d) requirements

In response to the ongoing COVID-19 pandemic, the IRS issued temporary relief pursuant to Sec. 7508A(a) and Regs. Sec. 1.43-13(a) from certain requirements under Sec. 42 for qualified low-income housing projects and under Sec. 142(d) and Sec. 147(d) for qualified residential rental projects. The notice, which is effective July 1, 2020, amplifies Notice 2020-23, Rev. Proc. 2004-39, Rev. Proc. 2014-49, and Rev. Proc. 2014-50. Notice 2020-53 (7/1/20).

STATE & LOCAL TAXES

State tax credit program is unconstitutional

The U.S. Supreme Court held that a state program that grants tax credits to those who donate to organizations that award scholarships for private school tuition violated the Free Exercise Clause of the First Amendment of the U.S. Constitution because the program prohibited families from using the scholarships at religious schools. Espinoza v. Montana Dep’t of Rev., No. 18-1195 (U.S. 6/30/20).