Document summaries for the week of Nov. 16, 2020

Tax document summaries for the week of Nov. 16–20, 2020, covering employee benefits, individuals, and more.

EMPLOYEE BENEFITS

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 2020-81 (11/16/20).

IRS implements CARES Act extended due date for contributions to defined benefit plans

The IRS announced that it will treat a contribution to a single-employer defined benefit pension plan with an extended due date of Jan. 1, 2021, pursuant to Section 3608(a)(1) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 136-116, as timely if it is made no later than Jan. 4, 2021 (which is the first business day after Jan. 1, 2021). The extension of the due date for contributions covered by Section 3608(a)(1) of the CARES Act to Jan. 1, 2021 (and now Jan. 4, 2021) is intended to allow employers sponsoring these plans to defer these payment obligations until calendar year 2021. Deferring these payment obligations until then helps employers to alleviate an additional adverse impact on their businesses that were already harmed by the COVID-19 pandemic. Notice 2020-82 (11/16/20).

2020 Required Amendments List is issued

The IRS issued the 2020 Required Amendments List (2020 RA List), under which it lists both the individually designed plans qualified under Sec. 401(a) (qualified individually designed plans) and the individually designed plans that satisfy the requirements of Sec. 403(b) (Sec. 403(b) individually designed plans). Among the changes in requirements that may require an amendment are (1) the difficulty-of-care payments treated as compensation for retirement contribution limitations, and (2) the application of cooperative and small employer charity pension plan rules to certain charitable employers. Notice 2020-83 (11/20/20).

 

EXEMPT ORGANIZATIONS

Final UBTI silo regs. issued

The IRS issued final regulations that provide guidance on how an exempt organization subject to the unrelated business income tax (UBIT) determines if it has more than one unrelated trade or business. The regulations also discuss how an exempt organization calculates unrelated business taxable income (UBTI) if it has more than one unrelated trade or business. T.D. 9933 (11/20/20) (see related news story).

 

INDIVIDUALS

Taxpayer failed to timely appeal the denial of his whistleblower claim

The Tax Court held that a taxpayer did not file his petition appealing the denial of his whistleblower claim by the IRS Whistleblower Office within the 30-day limitation period under Sec. 7623(b)(4) and he neither pleaded nor suggested that he met any exception to the court’s application of that period on the basis of 30 calendar days. Thus, the court concluded that the IRS was entitled to summary judgment on the grounds that the petition was untimely. Aghadjanian, T.C. Memo. 2020-155 (11/16/20).

Taxpayer cannot take theft loss for ex-husband’s refusal to transfer marital property

The Tax Court held that a taxpayer did not sustain a deductible theft loss of approximately $2.5 million in 2015 as a result of her ex-husband’s refusal to transfer marital property awarded to her in 2008 by order of a Connecticut divorce court. According to the court, the fact that the taxpayer did not know in December 2015 exactly where her ex-husband had hidden his assets did not negate the fact that she had, at that time, a reasonable prospect of recovery from a variety of sources. Bruno, T.C. Memo. 2020-156 (11/16/20).

Doctor met material participation requirement for his restaurant and brewery businesses

The Tax Court held that because a doctor met the material-participation requirements of Sec. 469 with respect to the activities of five restaurants and a brewery that he owned, the restaurants and the brewery were not passive activities and the taxpayer was entitled to deduct losses sustained from those activities. However, the court also held that the taxpayer received a constructive dividend from his wholly owned medical corporation when the corporation paid over $81,000 of his personal expenses and, as a result, he was liable for penalties on the underpayment of taxes resulting from the exclusion of the constructive dividend from income. Padda, T.C. Memo. 2020-154 (11/16/20).

Taxpayer with home in California and no foreign residence is not eligible for foreign earned income exclusion

The Tax Court held that a taxpayer, who worked as a pilot for a domestic company and who flew mostly international routes, could not exclude any of his income from tax under the Sec. 911(d)(1) foreign earned income exclusion because his tax home was in California and he did not show that he was a bona fide resident of a foreign country. The court also determined that the taxpayer had to include in income a California state income tax refund because he had previously claimed a deduction on his federal income tax return for the taxes. Cutting, T.C. Memo. 2020-158 (11/19/20).

Where transfer is an incomplete gift, the property’s value is zero for penalty purposes

The Tax Court supplemented its prior opinion in Fakiris, T.C. Memo. 2017-126, and held that the terms governing the donation of a theater contained restrictions so substantial that dominion and control over the theater had not been relinquished; therefore no charitable contribution deduction was allowed because no gift had occurred. The court also found that, since the transfer of the theater was not a completed gift, and thus no property had been transferred, the correct value of the property was zero for determining the  Sec. 6662(h) accuracy-related penalty, triggering the gross valuation misstatement penalty. Fakiris, T.C. Memo. 2020-157 (11/19/20).

Taxpayers are entitled to easement contribution deductions in full

The Tax Court held that two couples, who were partners in a partnership that reported a noncash charitable contribution deduction of almost $5 million for the donation of conservation easements to a qualified charitable organization, were entitled to the contribution deductions as reported because the easement deeds did not violate the Sec. 170(h)(2)(C) perpetuity requirement and the easements were not valued so high as to create deficiencies. In determining the value of the easements donated, the court acknowledged that the facts of the case were odd compared to most conservation-easement cases because, unlike other cases where past sales of property are of limited usefulness, this case involved recent and reliable transactions The court thus concluded that the tax deductions were reasonable. Rajagopalan, T.C. Memo. 2020-159 (11/19/20).

 

INTERNATIONAL

IRS did not abuse its discretion in reallocating income to US corporation

The Tax Court held that the IRS did not abuse its discretion under Sec. 482 by reallocating income to a U.S. corporation, which is the legal owner of intellectual property necessary to manufacture, distribute, and sell some of the best-known beverage brands in the world, by employing a comparable profits method (CPM) that used licensed foreign manufacturing affiliates (referred to as “supply points”) as the tested parties and the bottlers as the uncontrolled comparables. The court also concluded that (1) the IRS did not err by recomputing the taxpayer’s Sec. 987 losses after the CPM changed the income allocable to the taxpayer’s Mexican supply point, a branch of the taxpayer, and (2) the taxpayer made a timely election to employ dividend offset treatment for dividends paid by the supply points during 2007–2009 in satisfaction of royalty obligations. As a result, the court said, the IRS’s reallocations to the taxpayer must accordingly be reduced by the amounts of those dividends. The Coca-Cola Co., 155 T.C. No. 10 (11/18/20).

 

IRS PROCEDURE

IRS issues December 2020 applicable federal rates

The IRS issued a ruling that prescribes the applicable federal rates for December 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. 2020-26 (11/16/20).

OPR announces disciplinary sanctions against practitioners

The IRS Office of Professional Responsibility (OPR) announced recent disciplinary sanctions involving CPAs and an enrolled agent. Announcement 2020-19 (11/16/20).

Safe harbor allows deduction of expenses paid with PPP loan that is not forgiven

The IRS issued a revenue procedure that provides a safe harbor under which a taxpayer can claim a deduction in the taxpayer’s tax year beginning or ending in 2020 (2020 tax year) for certain otherwise deductible eligible expenses if (1) the eligible expenses are paid or incurred during the taxpayer’s 2020 tax year; (2) the taxpayer receives a loan (covered loan) guaranteed under the Paycheck Protection Program (PPP) authorized under Section 7(a)(36) of the Small Business Act, which at the end of the taxpayer’s 2020 tax year the taxpayer expects to be forgiven in a tax year after the 2020 tax year (subsequent tax year); and (3) in a subsequent tax year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan. A taxpayer described in the revenue procedure may be able to deduct some or all of the eligible expenses on (1) the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the 2020 tax year; (2) an amended return or an administrative adjustment request under Sec. 6227 for the 2020 tax year, as applicable; or (3) the taxpayer’s timely filed, including extensions, original income tax return or information return, as applicable, for the subsequent tax year. Rev. Proc. 2020-51 (11/18/20) (see related news story).

 

PARTNERSHIPS

IRS proposed changes to centralized partnership audit regime

The IRS issued proposed regulations on when the new centralized partnership audit regime does not apply to certain partnership-related items. REG-123652-18 (11/20/20) (see related news story).

 

TAX ACCOUNTING

Taxpayers cannot deduct expenses paid with PPP loans that will be forgiven

The IRS ruled that a taxpayer that receives a loan (covered loan) guaranteed under the Paycheck Protection Program (PPP) and pays or incurs certain otherwise deductible expenses listed in Section 1106(b) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, may not deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of such tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses paid or accrued during the covered period. According to the IRS, this rule applies even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such tax year but has a reasonable expectation of having the loan forgiven. Rev. Rul. 2020-27 (11/18/20) (see related news story).

Newsletter Articles

50th ANNIVERSARY

50 years of The Tax Adviser

The January 2020 issue marks the 50th anniversary of The Tax Adviser, which was first published in January 1970. Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits.

TAX RELIEF

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.