Document summaries for the week of May 25, 2020

BANKRUPTCY

Under state law, bank that generated losses is entitled to tax refund

On remand from the Supreme Court, the Tenth Circuit applied Colorado state law (rather than the Bob Richards rule, as earlier) to hold that the Federal Deposit Insurance Corp., as receiver for a bankrupt bank, and not the bank’s holding company, was the owner of a federal tax refund that arose from the bank’s losses. Rodriguez v. Federal Deposit Ins. Corp., No. 17-1281 (10th Cir. 5/26/20).

ESTATES, TRUSTS & GIFTS

Trust can challenge tax liabilities

The Tax Court, citing Sec. 6330(c)(2)(B), held that a trust could challenge its underlying tax liabilities for 2014 and 2015 because it had had no prior opportunity to do so. The trust had properly raised the challenge during a Collection Due Process hearing by contending that the IRS had improperly disallowed net operating loss carryforward deductions for the two years, the court held, and denied the IRS’s motion for summary judgment. Amanda Iris Gluck Irrevocable Trust, 154 T.C. No. 11 (5/26/20).

EXEMPT ORGANIZATIONS

Final regs. address reporting by tax-exempt organizations

The IRS issued final regulations under which certain tax-exempt organizations will not have to supply the names and addresses of substantial donors on Schedule B, Schedule of Contributors, of Form 990, Return of Organization Exempt From Tax. T.D. 9898 (5/27/20) (see related news story).

INDIVIDUALS

Tax Court lacks jurisdiction to redetermine deficiency but can redetermine penalty

The Tax Court held that it lacked jurisdiction to redetermine a deficiency resulting from the IRS’s denial of a married couple’s like-kind exchange of a condominium for a 25% interest in an apartment building owned by a partnership. However, the court denied the taxpayers’ motion for summary judgment with respect to an accuracy-related penalty over which it held it had jurisdiction. The IRS’s denial of like-kind exchange treatment was a “computational adjustment” because it represented a change in the tax liability of a partner that properly reflected the treatment of a partnership item under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the court held. Gluck, T.C. Memo. 2020-66 (5/26/20).

Taxpayer gets deductions regardless of return preparer’s fiction

The Tax Court agreed with a brief submitted by the IRS after a taxpayer’s trial that stated that $40,345 of income and expenses reported on the taxpayer’s Schedule C was a fiction; however, the court rejected the IRS’s argument that the taxpayer could not deduct $12,060 of expenses the IRS had previously allowed, holding it allowable as an unreimbursed employee deduction on Schedule A. The court noted that the taxpayer’s tax return preparer had created a fiction by setting up the appearance of a Schedule C business to create a business loss deduction to reduce the taxpayer’s salary income. Aguilar, T.C. Summ. 2020-16 (5/26/20).

Elimination of personal exemption does not affect premium tax credit

The IRS issued proposed regulations clarifying that the reduction of the personal exemption deduction to zero for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, does not affect an individual taxpayer’s ability to claim the Sec. 36B premium tax credit. REG-124810-19 (5/26/20) (see related news story).

IRS to allow e-filing of amended returns

The IRS announced that taxpayers will be able to electronically file Forms 1040-X, Amended U.S. Individual Income Tax Return, later this summer. IR-2020-107 (5/28/20) (see related news story).

Tax Court sustains tax lien based on restitution-based assessments

The Tax Court sustained an IRS Notice of Federal Tax Lien filing with respect to a delinquent taxpayer for balances of restitution-based assessments, which related to an order of criminal restitution for tax losses. The court noted that the federal district court’s May 2011 restitution order was imposed after the effective date of Sec. 6201(a)(4). Thus, the IRS settlement officer’s conclusion that the restitution-based assessments were not in error was not an abuse of discretion. Engle, T.C. Memo. 2020-69 (5/28/20).

Tax Court finds ‘sophisticated’ business couple liable for multiple penalties

The Tax Court held that a married couple, who the court described as “sophisticated business people” (1) failed to substantiate their Form 1040, Schedule A, deductions beyond the amounts that the IRS had already allowed; (2) did not qualify as real estate professionals and thus could not deduct their Schedule E rental real estate losses after the passive activity loss limitation; (3) were not entitled to the additional self-employed health insurance deductions beyond the amounts allowed by the IRS; and (4) were not entitled to a foreign tax credit carryover to 2009. Additionally, because there was no evidence that the couple sought advice in the preparation of their tax returns and the couple did not have reasonable cause and did not act in good faith with regard to the positions maintained on their tax returns, the court found them liable for accuracy-related penalties under Sec. 6662(a) and the addition to tax under Sec. 6651(a)(1) for multiple tax years. Larkin, T.C. Memo. 2020-70 (5/28/20).

Upfront payments to class-action lawyer are income in the year received

The Tax Court held that a lawyer, who focused on class action litigation and who received upfront payments from clients to support the cost of litigation, had to include the upfront payments in income in the year received and could not, instead, treat them as loans. The court concluded that the taxpayer was also liable for accuracy-related penalties after noting that the taxpayer had considerable experience with contingent fee litigation and fee-sharing agreements and the proper tax treatment of such payments was not a novel issue for him. Novoselsky, T.C. Memo. 2020-68 (5/28/20).

Biweekly payments to CPA were wages and not self-employment income

The Tax Court held that biweekly payments received by a CPA, who had sold his interest and goodwill in a firm to his business partner while continuing to provide accounting services to the firm, were appropriately characterized as wages and not self-employment income. Additionally, the court concluded that, because the taxpayer was an employee, his business-related expenses were only deductible as employee business expenses subject to the 2%-of-adjusted-gross-income limitation. Furthermore, he was not entitled to other deductions such as for self-employed health insurance expense. Thoma, T.C. Memo. 2020-67 (5/27/20).

Federal Circuit revives taxpayers’ theft loss claim

The Federal Circuit revived a couple’s income tax refund claim in a case stemming from financial losses they sustained as victims of a fraudulent investment scheme. One issue in the case was whether they lacked a reasonable prospect of recovering money they lost. Reversing the Court of Federal Claims, the Federal Circuit remanded the case for a calculation of their refunds. Adkins, No. 2019-1356 (Fed. Cir. 5/29/20).

IRS PROCEDURE

IRS issues income amounts for qualified mortgage bonds

The IRS issued guidance with respect to the U.S. and area median gross income amounts used by issuers of qualified mortgage bonds, as defined in Sec. 143(a), and issuers of mortgage credit certificates, as defined in Sec. 25(c), in computing the income requirements described in Sec. 143(f). Rev. Proc. 2020-33 (5/26/20).

Change proposed for withholding rules for retirement and annuity payments

The IRS issued proposed regulations for income tax withholding on retirement and annuity payments to implement an amendment made by the law known as Tax Cuts and Jobs Act, P.L. 115-97. REG-100320-20 (5/26/20).

TAX ACCOUNTING

IRS extends continuity safe harbor for certain energy tax credits

The IRS modified prior IRS notices addressing the beginning-of-construction requirement for both the production tax credit for renewable energy facilities under Sec. 45 and the investment tax credit for energy property under Sec. 48. In response to the COVID-19 pandemic, the notice (1) provides that the continuity safe harbor extended by prior IRS notices is further extended for projects that began construction in either calendar year 2016 or 2017; and (2) provides a 3½ month safe harbor for services or property paid for by the taxpayer on or after Sept. 16, 2019, and received by Oct. 15, 2020. Notice 2020-41 (5/27/20).

IRS postpones more deadlines as a result of COVID-19 pandemic

As a result of the ongoing COVID-19 pandemic, the IRS is postponing deadlines for some specified time-sensitive actions with respect to certain employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs). The IRS is also providing a temporary waiver of the requirement that certified professional employer organizations file certain employment tax returns and their accompanying schedules on magnetic media. Notice 2020-35 (5/28/20).

Proposed regs. issued on carbon oxide sequestration credits

The IRS issued proposed regulations providing guidance on the Sec. 45Q tax credits for carbon oxide captured using equipment originally placed in service on or after Feb. 9, 2018. REG-112339-19 (5/28/20).