Document summaries for the week of Nov. 2, 2020
Tax document summaries for the week of Nov. 2-6, 2020, covering employee benefits, partnerships, and more.
'Compensation' amounts paid to board directors could be seen as distributions of profits
In a highly redacted memorandum, the Office of Chief Counsel discussed the taxability of an amount recorded by a taxpayer as "Other Income" and the deductibility of amounts labeled as "compensation" and paid to corporate directors. The Chief Counsel's Office advised that one of the amounts involved so greatly exceeded the amounts which, as a matter of common knowledge, are usually paid to directors for their attendance at board meetings and the discharge of their customary duties, and was much greater than the amounts that had been paid in prior years, that it raised a strong inference that the unusual and extraordinary amount paid to the directors was not in fact compensation for their services but merely a distribution of a fixed percentage of the net profits that had no relation to the services rendered. CCA 202045012 (11/6/20).
Discount factors for 2020 accident year issued
The IRS issued the discount factors for the 2020 accident year for use by insurance companies in computing discounted unpaid losses under Sec. 846 and discounted estimated salvage recoverable under Sec. 832. The IRS also issued discount factors for losses incurred in the 2019 accident year and earlier accident years for use in tax years beginning in 2020. Rev. Proc. 2020-48 (11/4/20).
Final regs. issued on health insurance cost-sharing information
Treasury, the Department of Health and Human Services, and the Department of Labor issued final regulations that set forth requirements for group health plans and health insurance issuers in the individual and group markets to disclose cost-sharing information upon request to a participant, beneficiary, or enrollee. T.D. 9929 (11/4/20).
IRS rules on distribution of individual custodial accounts in kind upon termination of a Sec. 403(b) plan
The IRS was asked whether a Sec. 403(b) retirement plan funded through the use of Sec. 403(b)(7) custodial accounts that takes actions described in two situations was terminated in accordance with the rules of Regs. Sec. 1.403(b)-10(a) and whether distributions made to participants or beneficiaries in connection with the termination of the plan were includible in gross income. The IRS ruled that (1) in both Situation 1 and Situation 2, the retirement plan was terminated in accordance with the rules of Regs. Sec. 1.403(b)-10(a); (2) the distribution of an individual custodial account (ICA) in kind to a participant or beneficiary is not includible in gross income until amounts are actually paid to the participant or beneficiary out of the ICA, so long as the ICA maintains its status as a Sec. 403(b)(7) custodial account; and (3) any other amount distributed from a custodial account to a participant or beneficiary to effectuate plan termination is includible in gross income, except to the extent the amount is rolled over to an individual retirement account or other eligible retirement plan by a direct rollover or by a transfer made within 60 days. Rev. Rul. 2020-23 (11/5/20).
Comments solicited on provisions protecting annuity and spousal rights under ERISA
The IRS is requesting comments on the application of the annuity and spousal rights provisions of Section 205 of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, in connection with a distribution of an individual custodial account (ICA) in kind from a terminating Sec. 403(b) plan. Although no Sec. 403(b) plans are subject to the annuity and spousal rights provisions of Sec. 401(a)(11) and Sec. 417, some Sec. 403(b) plans that are subject to ERISA (such as a plan of a nonchurch tax-exempt employer that provides for matching contributions) are subject to the parallel annuity and spousal rights provisions of Section 205 of ERISA. Notice 2020-80 (11/5/20).
PEO is entitled to credits for FICA tax on tip income
The Eleventh Circuit held that a professional employer organization (PEO) was entitled to claim tax credits based on its payment of FICA taxes on the tip income of its clients' employees. The court held that the PEO was the statutory employer entitled to claim the credit because it controlled payment of the wages subject to withholding. TriNet Group, Inc., No. 19-10997 (11th Cir. 11/5/20).
ESTATES, TRUSTS & GIFTS
Dissolution of foundation results in release of dominion and control of foundation assets
The Office of Chief Counsel advised that the dissolution of a foundation and subsequent transfer at the direction of the foundation's primary beneficiary of foundation assets to an account over which the beneficiary had no ownership or control is a release of dominion and control over the assets and thereby constitutes a completed gift for gift tax purposes. In addition, the Chief Counsel's Office said, the primary beneficiary's transfer of the foundation's assets to an account in which the beneficiary had no ownership interest under applicable local law is not a qualified disclaimer under Sec. 2518 because the beneficiary directed the transfer to the account. CCA 202045011 (11/6/20).
Taxpayer could not reduce income by unsubstantiated amounts refunded to customers
The Tax Court held that a couple (1) were not entitled to offset gross receipts from the husband's driving school business by unreported cash refunds, and (2) were liable for a Sec. 6662(a) accuracy-related penalty. The court noted that, while the husband issued cash refunds in connection with his driving school business, he provided the court with very little, if anything, in the way of credible evidence upon which to make a rational finding or estimate of the amounts of those refunds. Lakew, T.C. Summ. 2020-27 (11/4/20).
Ex-husband's abusive behavior hindered taxpayer's ability to participate in tax prep
The Tax Court held that a taxpayer was entitled to streamlined relief from joint and several liability pursuant to Sec. 6015(f) for the years at issue to the extent of the tax items attributable to her ex-husband. The Tax Court found that the ex-husband's controlling and abusive behavior hindered the taxpayer's ability to question the understatements and underpayment of tax and to participate meaningfully in the preparation of their joint returns and, thus, she satisfied the lack of knowledge requirement for the years at issue even if she had actual or constructive knowledge of the understatements and underpayment. Leith, T.C. Memo. 2020-149 (11/4/20).
Court upholds penalty for doctor's failure to disclose participation in a listed transaction
The Eleventh Circuit affirmed a district court opinion, holding that a doctor and his S corporation were liable for Sec. 6707A penalties because they failed to disclose their participation in a multiemployer welfare benefit plan that was substantially similar to a listed transaction in Notice 95-34. Turnham, No. 19-12875 (11th Cir. 11/6/20).
IRS announces Taxpayer Relief Initiative
IRS extends COVID-19 relief regarding tax-exempt qualified private activity bonds
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 continuing COVID-19 pandemic, the IRS is extending until Sept. 30, 2021, the time period described in Section 4.02 of Rev. Proc. 2020-21, during which certain telephonic hearings are permitted. Rev. Proc. 2020-49 (11/4/20).
No charitable deduction for easement contribution that failed perpetuity test
The Tax Court held that a partnership could deduct a $35,077 cash contribution that the IRS had denied but was not entitled to a charitable contribution deduction for a conservation easement donation because the deed of easement did not protect the conservation purposes in perpetuity as required by Sec. 170(h)(5). The court also sustained a 20% accuracy-related penalty for a substantial-valuation misstatement based on the IRS’s adjustment relating to the excess of the easement’s fair market value but rejected the assessment of a 20% penalty on the remainder of the adjustment. Glade Creek Partners, LLC, T.C. Memo. 2020-148 (11/2/20).
New guidance allows taxpayers choice of bonus depreciation rules
The IRS issued guidance addressing how taxpayers can choose to apply the bonus depreciation rules in T.D. 9916 in prior tax years or rely on the proposed regulations (REG-106808-19) issued in September 2019. The procedure provides detailed rules for applying the final or proposed regulations as well as revoking or making late bonus depreciation elections. Rev. Proc. 2020-50 (11/6/20) (see related news story).