Document summaries for the week of March 2, 2020
Tax document summaries for the week of March 2–6, 2020, covering estates, trusts, international, and more.
IRS issues 2020 cumulative list of plan changes
The IRS issued the “2020 Cumulative List of Changes in Plan Qualification Requirements for Pre-Approved Defined Benefit Plans.” This document identifies changes in the qualification requirements of the Internal Revenue Code that are required to be taken into account in a pre-approved plan document submitted under the pre-approved plan program administered by the IRS and that will be considered by the IRS for purposes of issuing opinion letters. Notice 2020-14 (3/6/20).
ESTATES, TRUSTS & GIFTS
Valuation of LLC interest should consider only reasonably probable events
In determining fair market value for gift tax purposes, the Tax Court concluded that elements affecting the value of a limited liability company (LLC) interest that depend upon events within the realm of possibility should not be considered if the events are not shown to be reasonably probable. The court thus rejected an IRS expert’s reliance on an additional action being taken with respect to some of the units in one of the LLCs. The taxpayer had a member interest in (1) an LLC that was transferred to a grantor retained annuity trust, and (2) an LLC transferred to a family irrevocable trust. Grieve, T.C. Memo. 2020-28 (3/2/20).
IRS provides tax relief for certain foreign trusts
The IRS issued a revenue procedure which exempts from foreign trust information reporting requirements certain U.S. individuals’ transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. In addition, the procedure provides procedural guidance for certain eligible individuals on how to request abatement of penalties that have been assessed, or refunds of penalties that have been paid, for a failure to comply with the information reporting requirements regarding these foreign trusts. Rev. Proc. 2020-17 (3/2/20).
US beneficiary of foreign trust can claim withholding credits subject to certain conditions
The Office of Chief Counsel advised that, under Sec. 1462, a U.S. beneficiary of a foreign complex trust may claim a credit for taxes withheld under Sec. 1441 on payments of U.S.-source income to the foreign trust that are included in the trust’s income for the year of payment, if certain conditions are met. Specifically, the foreign trust: (1) must distribute all or a portion of the income to the U.S. beneficiary during the tax year; (2) must properly allocate the withholding associated with the distribution to the U.S. beneficiary; and (3) must not itself claim a credit or refund with respect to the Sec. 1441 withholding allocated to the beneficiary. Additionally, the U.S. beneficiary must include on its federal income tax return the amount of income required to be reported under Sec. 1462 that is associated with the distribution and the amount of credit properly allocable to the income reportable from the distribution, and, in addition, must substantiate entitlement to the credit for the withholding. PMTA 2020-06 (3/6/20).
Whistleblower did not meet criteria for an award
The Tax Court held that the IRS did not abuse its discretion in denying an award to a whistleblower who had forwarded information to the IRS Whistleblower Office about a corporate taxpayer that failed to file certain tax returns and that had deducted $4 million in expenses that should have been capitalized on a tax return it did file. The court noted that the IRS conducted an examination of the corporation based on the whistleblower’s information and found that the expenses at issue were properly substantiated and deducted and, because no proceeds were collected, the whistleblower did not meet the requirements of Sec. 7623 for an award. Pulcine, T.C. Memo. 2020-29 (3/2/20).
IRS posts state-by-state population figures
The IRS posted resident population figures for the 50 states, the District of Columbia, Puerto Rico, and the U.S. insular areas for purposes of determining the 2020 calendar-year state housing credit ceiling under Sec. 42(h), private activity bond volume cap under Sec. 146, and private activity bond volume limit under Sec. 142(k). Notice 2020-10 (3/2/20).
IRS creates Fraud Enforcement Office
The IRS announced the creation of a new Fraud Enforcement Office and said its director would begin serving in mid-March. The office will reside within the IRS Small Business/Self Employed Division and work on agencywide compliance issues. IR-2020-49 (3/5/20).
IRS did not abuse its discretion in relying on computer-generated transcripts to verify penalty assessments
The Tax Court held that an IRS settlement officer (SO) did not abuse his discretion when he sustained a proposed levy and filed a Notice of Federal Tax Lien against a taxpayer who had unpaid Sec. 6702 penalties relating to the filing of frivolous returns. The court found that the taxpayer had not demonstrated that there was any irregularity in the SO’s assessment procedure and that the SO did not abuse his discretion in relying on computer-generated transcripts to verify the assessments of the Sec. 6702 penalties. Sun River Financial Trust, T.C. Memo. 2020-30 (3/5/20).
Court sustains collection action against taxpayer who failed to pay 2013 taxes
The Tax Court sustained the IRS’s collection action against a taxpayer who failed to pay taxes due for 2013, finding no abuse of discretion on the Service’s part. The court noted that the taxpayer remains free to submit to the IRS, for its consideration, a collection alternative in the form of an offer in compromise or an installment agreement, supported by the necessary financial information. Wong, T.C. Memo. 2020-32 (3/5/20).
Disaster relief for Tennessee tornado victims
The IRS announced that victims in Tennessee of the severe storms, tornadoes, and flooding that began on March 3, 2020, may qualify for tax relief. TN-2020-01 (3/6/20).
Debt asset/debt scheme was a sham, Seventh Circuit holds
The Seventh Circuit affirmed a Tax Court decision holding that a partnership used in a distressed asset/debt scheme to generate artificial losses for high-income taxpayers was a sham and its income should be allocated to its tax matters partner. Sugarloaf Fund, LLC, No. 19-2468 (7th Cir. 3/6/20).
Dividends received from S corporation were ordinary income, not qualified dividends
The Tax Court held that dividends received by a couple from their wholly owned S corporation, which operates a Montessori school, were properly classified as ordinary income and not as qualified dividends as they had reported. The court noted that the S corporation reported ordinary income for the years at issue and the shareholders thus also had ordinary income. Liu, T.C. Memo. 2020-31 (3/5/20).