Document summaries for the week of May 11, 2020
Tax document summaries for the week of May 11–15, 2020, covering corporations, employee benefits, IRS procedure, and more.
Final debt/equity regs. issued
The IRS issued final regulations regarding the treatment of certain interests in corporations as stock or indebtedness. T.D. 9897 (5/13/20) (see related news story).
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 2020-37 (5/12/20).
IRS issues COVID-19 guidance for cafeteria plans and high-deductible health plans
The IRS in a notice provided increased flexibility for midyear elections made under a Sec. 125 cafeteria plan during calendar year 2020 with respect to employer-sponsored health coverage, health flexible spending arrangements (FSAs), and dependent care assistance programs. The notice also provides increased flexibility for grace periods to apply unused amounts in health FSAs to medical care expenses and unused amounts in dependent care assistance programs to dependent care expenses incurred in either case through Dec. 31, 2020. In addition, the notice provides that the relief in Notice 2020-15 regarding high-deductible health plans and expenses related to COVID-19, and in Section 3701 of the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, regarding a temporary exemption for telehealth services, may be applied retroactively to Jan. 1, 2020. Notice 2020-29 (5/12/20) (see related news story).
IRS increases carryover of unused amounts in health FSAs to $550
The IRS issued guidance that increases the $500 limit for unused amounts remaining in a health flexible spending arrangement (FSA) that may be carried over into the following year to $550. Regarding individual coverage health reimbursement arrangements, the guidance also provides clarification on the reimbursement for premium expenses occurring prior to the beginning of the plan year (generally, addressing the need to pay the premium for January health insurance coverage in December of the previous year). Notice 2020-33 (5/12/20) (see related news story).
Donated easement failed perpetuity requirement, but taxpayer’s position was reasonable
The Tax Court held that an easement deed violated the “protected in perpetuity” requirement of Sec. 170(h)(5), as interpreted in Regs. Sec. 1.170A-14(g)(6), because the donee’s share of the extinguishment proceeds (1) was based on a fixed historical value rather than a proportionate share, and (2) was reduced by the value of any improvements made by the donor. However, because the court found that the taxpayer’s position was reasonable, the court rejected the IRS’s assessment of a penalty under Sec. 6662. Oakbrook Land Holding, LLC, T.C. Memo. 2020-54 (5/12/20).
Perpetuity requirement for donated easements is valid
The Tax Court held that Regs. Sec. 1.170A-14(g)(6), which provides that a donated easement must be protected in perpetuity for the donation to be tax-deductible, was properly promulgated and is valid under the Administrative Procedure Act, 5 U.S.C. Section 553. The court further held that the construction of Sec. 170(h)(5) set forth in Regs. Sec. 1.170A-14(g)(6) is valid under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Oakbrook Land Holding, LLC, 154 T.C. No. 10 (5/12/20).
Chief Counsel’s Office summarizes easement contribution cases from 2012 to present
The Office of Chief Counsel issued a memorandum summarizing 121 select charitable contribution tax cases on qualified conservation contributions. The summary begins with Carpenter, T.C. Memo. 2012-1, and ends with Hoffman Properties II, LP, 956 F.3d 832 (6th Cir. 2020), which was decided on April 14, 2020. CCA 202020002 (5/15/20).
CPA hit with penalties for promoting abusive tax shelter
The Tax Court held that a CPA, in a case involving a tool reimbursement program, was liable for $36,000 of penalties under Sec. 6700 for promoting an abusive tax shelter. The court concluded that the IRS demonstrated that the CPA, who was also an attorney, was a primary and indispensable figurehead in the marketing and sale of a multistep benefit plan through which employers and employees could avoid paying tax. Davison, T.C. Memo. 2020-58 (5/14/20).
Promoter of tool reimbursement tax shelter liable for $181,000 in penalties
The Tax Court held that a corporate executive who helped promote an abusive tax shelter involving a tool reimbursement plan was liable for Sec. 6700 penalties of approximately $181,000. The court agreed with the IRS that the executive made a number of false or fraudulent statements concerning the tool reimbursement plan and knew or had reason to know that these statements were false or fraudulent and that these statements had a substantial impact on the decision-making process of clients and caused them to avoid the payment of employment taxes. Lemay, T.C. Memo. 2020-59 (5/14/20).
Prop. regs. on deductibility of fines and penalties
The IRS issued proposed regulations providing guidance on Sec. 162(f), as amended by legislation enacted in 2017, concerning the deduction of certain fines, penalties, and other amounts. REG-104591-18 (5/13/20) (see related news story).
Chief Counsel clarifies procedures for electronically transmitting large files to DOJ
The IRS Office of Chief Counsel clarified procedures in Chief Counsel Notice CC-2019-005 for Chief Counsel attorneys to transmit large files electronically to the Department of Justice, Tax Division, using email and Justice Enterprise File Sharing. CC-2020-006 (5/11/20).
IRS issues June 2020 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for June 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. 2020-12 (5/15/20).
IRS abused its discretion in rejecting proposed installment agreement because couple had not sold property
The Tax Court held that the IRS abused its discretion in sustaining a proposed levy notice and rejecting a couple’s proposed installment agreement because the couple had not first sold almost all of their property, including their residence. The IRS erroneously assumed that the Internal Revenue Manual provides no discretion to IRS agents to accept an installment agreement unless the taxpayer first sells all of his or her property. Kirkley, T.C. Memo. 2020-57 (5/13/20).
Renewable electricity production and refined coal production credit amounts for 2020
The IRS published the 2020 inflation adjustment factors and reference prices used in determining the availability of the credit for renewable electricity production, refined coal production, and Indian coal production under Sec. 45. 85 Fed. Reg. 28698 (5/13/20).
Litigation settlement payment is capital gain, not ordinary income
The Tax Court held that a settlement payment obtained by a partnership as a result of litigation with a former business partner was received in exchange for its joint venture interest and thus was capital gain income. The court rejected the IRS’s characterization of the settlement payment as ordinary income after noting that the settlement was the result of adversarial parties’ negotiating at arm’s length and the settlement payment was within the reasonable range of value of the joint venture interest. NCA Argyle LP, T.C. Memo. 2020-56 (5/13/20).
Court denies charitable deduction for conservation easement that was not protected in perpetuity
The Tax Court held that the conservation purpose underlying an easement for which a partnership had taken a charitable contribution deduction was not protected in perpetuity as required by Sec. 170(h)(5)(A) and, thus, was not deductible. The court noted that the question presented in the case was similar to other recent cases in which the court had issued decisions adverse to taxpayers. Woodland Property Holdings, LLC, T.C. Memo. 2020-55 (5/13/20).
Appeals court addresses conservation easement deduction
The Eleventh Circuit reversed a Tax Court decision denying a deduction for a conservation easement that included a golf course but also preserved 348 acres of undeveloped land consisting of forests and wetlands. Champions Retreat Golf Founders, LLC, No. 18-14817 (11th Cir. 5/13/20).
Partner’s outside basis is an affected item that may be adjusted at the partner level
The Office of Chief Counsel advised that a partner’s outside basis in his or her partnership interest is an affected item that may be adjusted at the partner level without opening a partnership-level examination, if the partnership return is accepted as filed. In adjusting outside basis at the partner level in this manner, the Chief Counsel’s Office stated, none of the partnership-item components of outside basis can be changed without opening a TEFRA proceeding. CCA 202020001 (5/15/20).
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.