Document summaries for the week of May 18, 2020

INDIVIDUALS

Tax Court sustains action against couple who ignored IRS’s last chance letter

The Tax Court granted an IRS motion for summary judgment and sustained a collection action against a couple who had outstanding tax liabilities, interest, and penalties of almost $10,000 for their 2014 tax year. The court noted that the couple had acknowledged receipt of an IRS settlement officer’s “last chance” letter and still did not submit the information requested. Nesbitt, T.C. Memo. 2020-61 (5/18/20).

Court lacks jurisdiction in case involving overstated withholding credits

The Tax Court dismissed for lack of jurisdiction a case involving an adjustment to a taxpayer’s 2017 tax liability on account of overstated withholding credits the taxpayer claimed on his timely filed 2017 tax return. The court noted that it lacked jurisdiction under Sec. 6213 because the IRS had not determined a tax deficiency. Pope, T.C. Memo. 2020-62 (5/18/20).

Couple’s agreement can govern allocation of joint estimated payments in year they file separate returns

The Tax Court held that Forms 12257, Summary Notice of Determination, Waiver of Right to Judicial Review of a Collection Due Process Determination, and Waiver of Suspension of Levy Action, executed by the taxpayer and the IRS, stating that a lien would be released because the taxpayer was entitled to a credit for payments shown on her 2006 tax return, were not contracts that obligated the IRS to refrain from further collection action concerning the taxpayer's 2006 tax year. The court also concluded that an agreement between the taxpayer and her ex-husband can govern the allocation, under Regs. Sec. 1.6654-2(e)(5)(ii), of joint estimated tax payments made for a year for which the couple filed separate returns even if the agreement did not specifically address the allocation of estimated tax payments. Richlin, T.C. Memo. 2020-60 (5/18/20).

Court finds no abuse of discretion in IRS’s denial of couple’s whistleblower claim

The Tax Court held that the IRS Whistleblower Office (WBO) did not abuse its discretion when it denied an award to a husband and wife who claimed that the trustee of their Chapter 7 bankruptcy estate significantly understated the bankruptcy estate’s tax liability. According to the court, even assuming that the trustee improperly omitted income on the bankruptcy estate’s tax returns, there was no abuse of discretion in the denial of the couple’s claims because no administrative or judicial action was taken and no proceeds were collected on the basis of the information that the couple provided. Frantz, T.C. Memo. 2020-64 (5/19/20).

Tax Court modified agreement with the IRS to eliminate double-counting of taxpayer’s income

With respect to a taxpayer’s argument that his stipulation with the IRS regarding a capital gain should be modified or set aside because of the IRS’s disallowance of depreciation that reduced the basis of the property whose sale gave rise to the gain, the Tax Court held that justice required a modification of the parties’ capital gain stipulation to eliminate a manifest double-counting of income; however, it did not require any adjustment of the stipulated capital gain to reflect the IRS’s disallowance of deductions for depreciation. In addition, the Tax Court concluded that (1) if the taxpayer’s bank statements and general ledger establish a plausible, though not fully substantiated, connection between an expense reported by one of the taxpayer’s business entities and that entity’s business, a portion of the expense is deductible under Cohan, 39 F.2d 540 (2d Cir. 1930), and (2) the taxpayer was subject to self-employment tax on his income from one of his partnerships because he did not establish that the entity was a limited partnership of which he was a limited partner and thus did not demonstrate his entitlement to the exclusion in Sec. 1402(a)(13). Joseph, T.C. Memo. 2020-65 (5/19/20).

Taxpayer substantiated certain farming business deductions

The Tax Court held that a taxpayer sufficiently substantiated certain business expense deductions, but not others, relating to his farm in Mexico. He had incurred the expenses while working 16 hours a day at nonfarm jobs in order to buy and begin operating the farm. Serrano, T.C. Summ. 2020-15 (5/20/20).

Health savings account (HSA) contribution limits increase for 2021

The IRS announced that, for calendar year 2021, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan is $3,600, and the annual limitation on deductions for an individual with family coverage under a high-deductible health plan is $7,200. The IRS also stated that, for calendar year 2021, a “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage. The upper limit for out-of-pocket expenses is $7,000 for self-only coverage and $14,000 for family coverage. Rev. Proc. 2020-32 (5/20/20) (see related news story).

IRS PROCEDURE

IRS addresses income tax treaty references to NAFTA in light of impending replacement

The IRS issued an announcement that provides Treasury and the IRS’s view on how to interpret references in U.S. income tax treaties to the North American Free Trade Agreement (NAFTA) once it is replaced by the Agreement between the United States, Mexico, and Canada (the USMCA). The announcement provides that once the USMCA goes into force, the IRS and Treasury will interpret any references to NAFTA in a U.S. income tax treaty as a reference to the USMCA. Announcement 2020-6 (5/19/20).

Notice of deficiency is valid where deficiency was never extinguished by a payment

The Tax Court held that, with respect to a tax payment the taxpayer made, an IRS notice of deficiency was valid and the court had jurisdiction because (1) the taxpayer properly designated the payment as a deposit; (2) the IRS treated it as such; and (3) the deficiency at issue was never extinguished by a payment. Accordingly, the court concluded that the notice of deficiency was valid and the court  had jurisdiction. Peacock, T.C. Memo. 2020-63 (5/19/20).

Applicable reference price for Sec. 45I marginal well production credit

The IRS announced the applicable reference price ($2.55 per 1,000 cubic feet) for qualified natural gas production from qualified marginal wells during tax years beginning in calendar year 2019 for the purpose of determining the Sec. 45I marginal well production credit. Notice 2020-34 (5/18/20).

Prop. regs. on the rehabilitation credit

The IRS issued proposed regulations on the Sec. 47 rehabilitation credit, including rules to coordinate the new five-year period over which the credit may be claimed with other special rules for investment credit property. REG-124327-19 (5/21/20).