Document summaries for the week of May 4, 2020

C CORPORATIONS

Court rejects numerous tax deductions taken by California medical marijuana dispensary

The Tax Court held that a California not-for-profit mutual benefit corporation that operated a medical marijuana dispensary (1) was precluded by Sec. 280E from deducting additional costs of goods sold (COGS) and other business expenses other than those the IRS had already allowed; (2) was a reseller of marijuana under Sec. 471 and thus could not deduct additional indirect costs included in COGS; (3) provided no evidence in support of business changes that necessitated a change in its method of accounting and thus was not allowed to change its accounting method under Sec. 446 for tax year 2015; and (4) was liable for Sec. 6662(a) accuracy-related penalties. The court noted that, while the corporation hired an accountant to prepare its tax returns, it provided no evidence that it relied on its accountant for advice on the positions it took on its tax returns. Richmond Patients Group, T.C. Memo. 2020-52 (5/4/20).

Corporation’s VP/Secretary liable for trust fund recovery penalties

The Tax Court granted an IRS motion for summary judgment and sustained the IRS’s filing of a notice of federal tax lien in an action to collect Sec. 6672 trust fund recovery penalties assessed against a vice president/secretary of a C corporation for his failure to collect and pay over employment taxes. The court noted that the vice president/secretary had the power to direct the acts of collection, accounting for, and paying over trust fund monies of the corporation but that the required funds were not withheld or paid over to the IRS for the periods at issue. Lambert, T.C. Memo. 2020-53 (5/6/20).

EMPLOYEE BENEFITS

Leased employees’ service before employment is credited for plan eligibility and vesting purposes

The Office of Chief Counsel was asked whether the calculation of years of service for certain individuals under a company’s qualified retirement plan, for purposes of plan eligibility and vesting, included the service period where those individuals worked as leased employees before they were hired as common law employees. The Chief Counsel’s Office rejected the employer’s argument and concluded that Sec. 414(n)(4)(B) applies to all individuals who worked under a leasing arrangement, and the four-month leasing period of work under the leasing arrangement at issue counted for purposes of minimum participation and vesting. CCA 202019018 (5/8/20).

ESTATES, TRUSTS & GIFTS

Prop. regs. clarify deductions available to trusts and estates

The IRS issued proposed regulations that clarify that certain deductions are allowed to an estate or nongrantor trust because they are not miscellaneous itemized deductions. REG-113295-18 (5/7/20) (see related news story).

INDIVIDUALS

Second Circuit dismisses appeal involving psychotherapist-patient privilege

The Second Circuit dismissed a taxpayer’s appeal from a federal district court order finding that he waived his psychotherapist-patient privilege by putting his mental health at issue in the litigation. The appeals court concluded that it lacked jurisdiction over his interlocutory appeal, in this refund case involving whether the three-year lookback period was suspended because the taxpayer was unable to manage his financial affairs due to disability. Rosner, No. 19-687 (2d Cir. 5/8/20).

INTERNATIONAL

US parent corporation’s income was foreign base company sales income

The Tax Court held that income earned by a U.S. parent corporation’s controlled foreign corporation (CFC) in Luxembourg from sales of appliances by that CFC to the U.S. parent and to the U.S. parent’s Mexican CFC constituted foreign base company sales income (FBCSI) under Sec. 954(d) and, as such, was taxable to the U.S. parent corporation as Subpart F income under Sec. 951(a). According to the court, regardless of whether the appliances sold by the Luxembourg CFC were actually manufactured by it, the sales income was FBCSI under Sec. 954(d)(2) because the Mexican branch is treated as a subsidiary of the Luxembourg CFC, and the sales income earned by the Luxembourg CFC constitutes FBCSI. Whirlpool Financial Corp., 154 T.C. No. 9 (5/5/20).

IRS addresses impact of travel restrictions resulting from global pandemic

The IRS issued a revenue procedure which addresses the impact of travel restrictions and disruptions resulting from the COVID-19 pandemic that may cause individuals to temporarily conduct activities in a country other than the United States or in a territory of the United States that would not otherwise have been conducted there. The revenue procedure provides that certain activities are not taken into account as activities giving rise to a foreign branch separate unit for purposes of the dual consolidated loss rules under Sec.1503(d) or an obligation to file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches. Rev. Proc. 2020-30 (5/7/20).

IRS PROCEDURE

Oil recovery and marginal production reference price published

The IRS published the reference price under Sec. 45K(d)(2)(C) for calendar year 2019. The reference price applies in determining the amount of the Sec. 43 enhanced oil recovery credit, the Sec. 45I marginal well production credit, and the Sec. 613A percentage depletion in case of oil and natural gas produced from marginal properties. Notice 2020-28 (5/4/20).

2020 marginal production depletion percentage is 15%

The IRS announced that the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2020 is 15%. Notice 2020-30 (5/4/20).

Adjustment factor and phaseout amount for the 2020 enhanced oil recovery credit

The IRS announced the inflation adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in calendar year 2020. Because the reference price for the 2019 calendar year ($55.55) exceeds $28 multiplied by the inflation adjustment factor for the 2019 calendar year ($28 multiplied by 1.7640 = $49.392) by $6.16, the enhanced oil recovery credit for qualified costs paid or incurred in 2020 is phased out completely. Notice 2020-31 (5/4/20).

IRS addresses approval requirement for certain tax-exempt bonds during pandemic

The IRS issued temporary guidance regarding the public approval requirement under Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the COVID-19 pandemic, the guidance provides that hearings held by teleconference as described in Section 4.01 of the guidance will be treated as held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit for the purpose of Regs. Sec. 1.147-1(d)(2). Rev. Proc. 2020-21 (5/4/20).

IRS employees can use outside notary services for activity connected to official duties

The Office of Chief Counsel advised that, where an IRS employee presents a document containing return information to an outside notary, for purposes of having the document notarized in connection with the IRS employee’s official duties (e.g., the sale of real property), Sec. 6103(k)(6) and the accompanying regulations authorize such a disclosure of return information. The Chief Counsel’s Office noted that, while the established practice in these situations is to use IRS employees who are licensed notaries to notarize such documents wherever possible, there may be times when the need for a notary arises and an IRS employee notary is not available. CCA 202019004 (5/8/20).

Chief Counsel’s Office discusses approval process for requests for returns to be made by agent

The Office of Chief Counsel was asked to provide guidance on who approves a request for a return to be made by an agent when there are no longer district directors. The Chief Counsel’s Office noted that, because Reg. Sec. 1.6012-1(a)(5) delegates authority to district directors to approve requests to allow a return to be made by an agent, the answer to the question is covered by Delegation Order 1-23, which provides that an Assistant Deputy Commissioner, Division Commissioner; Chief; or Director, Submission Processing Field, Compliance Services Field, and Accounts Management Field (or any person who this authority has been re-delegated to per Delegation Order 1-23 paragraph (9)) may now approve such requests. CCA 202019005 (5/8/20).

TAX ACCOUNTING

Expanded temporary rule allows governmental issuers to purchase own tax-exempt bonds

The IRS is temporarily expanding the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Sec. 103 and Sec. 141 through Sec. 150. The IRS said that, in recognition of the need for liquidity and stability in the markets, including the short-term tax-exempt bond market, during the current period of economic disruption, it is expanding the time periods during which governmental issuers may purchase and hold their own tax-exempt qualified tender bonds and tax-exempt commercial paper. Notice 2020-25 (5/4/20).

Safe harbors are provided for distributions declared by certain REITs or RICs

The IRS issued temporary guidance regarding the treatment of certain stock distributions by publicly offered real estate investment trusts (REITs) and publicly offered regulated investment companies (RICs) under the Internal Revenue Code. Specifically, in recognition of the need for enhanced liquidity during the current period of economic disruption, the temporary guidance modifies the safe harbor provided in Rev. Proc. 2017-45 by temporarily (from April 1 to Dec. 31, 2020) reducing the minimum required aggregate amount of cash that distributee shareholders may receive to not less than 10% of the total distribution in order for Sec. 301, by reason of Sec. 305(b), to apply to that distribution. Rev. Proc. 2020-19 (5/4/20).