Document summaries for the week of Oct. 12, 2020
Tax document summaries for the week of Oct. 12–16, 2020, covering corporations, IRS procedure, and more.
Final regs. on consolidated groups’ NOLs
The IRS finalized guidance for consolidated groups on the treatment of net operating losses (NOLs) after recent statutory changes. T.D. 9927 (10/13/20) (see related news story).
2021 inflation-adjusted limit for HRAs
The IRS issued the inflation-adjusted maximum dollar amount that may be made newly available for excepted benefit health reimbursement arrangements (HRAs) or other account-based group health plans for plan years beginning after Dec. 31, 2020, and before Jan. 1, 2022. Due to indexing methodology requiring rounding down to the nearest $50 increment, the amount remains unchanged at $1,800 for the 2021 plan year. Rev. Proc. 2020-43 (10/16/20) (see related news story).
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 2020-77 (10/16/20).
Qualified plan’s payment to state unclaimed property fund
The IRS ruled that a payment to a state unclaimed property fund from an individual’s retirement plan account, which had an accrued benefit of $900 and for which no withholding election had been made, was subject to federal income tax withholding because none of the statutory exceptions from treatment as a designated distribution in Sec. 3405(e)(1)(B) applied. As a result, the IRS said, the payment is subject to federal income tax withholding under Sec. 3405(d) and subject to the information reporting rules under Sec. 6047. Rev. Rul. 2020-24 (10/16/20) (see related news story).
Unclaimed property distributions allowed as self-certified rollovers
The IRS issued a revenue procedure that modifies Rev. Proc. 2016-47 and updates the list of permissible reasons for self-certification of eligibility for a waiver of the 60-day rollover requirement to provide the following as a new reason: a distribution was made to a state unclaimed property fund. The revenue procedure also provides examples of situations in which a distribution would not be eligible to be rolled over, and the appendix sets forth model language that may be used for self-certification. Rev. Proc. 2020-46 (10/16/20) (see related news story).
Social Security wage base for 2021
The Social Security Administration announced that the maximum amount of earnings subject to Social Security tax will be $142,800 in 2021. Press Release (10/13/20) (see related news story).
Danielson rule applies to taxpayers’ sale of business
In a case on remand from the Eleventh Circuit, a couple argued that the form of the sale of their business, as documented and originally reported, failed to comport with the sale’s economic reality and that the economic reality could only be ascertained by looking through the sale. The Tax Court rejected their argument, stating that the rule in Danielson, 378 F.2d 771 (3d Cir. 1967), applies in cases such as this where parties to a transaction expressly agree to the characterization of a transaction in a particular form or intentionally structure a transaction in a particular form for tax purposes. The rule is intended to prevent any party from unduly enriching itself by claiming a unilateral alteration of the agreed-upon consequences after the consummation of the transaction. Watts, T.C. Memo. 2020-144 (10/15/20).
Numerous business deductions disallowed for taxpayer’s wholly owned corporation
The Tax Court upheld IRS adjustments made to the income and expenses of a taxpayer’s wholly owned corporation as well as to the taxpayer’s taxable income as a result of (1) disallowed depreciation deductions; (2) the failure of the corporation to withhold employment taxes or issue Forms W-2 relating to payments made to the taxpayer; (3) the failure by the taxpayer to include in her gross income cancellation of indebtedness; (4) the receipt by the taxpayer of constructive dividends from the corporation; (5) the failure of the corporation to report certain income; (6) the inclusion in the corporation’s cost of goods sold of amounts in excess of those allowed by the IRS; and (7) the disallowance of officers’ compensation deductions for lack of substantiation. The court also held that, because the taxpayer could not show reasonable cause as to why her tax returns were not timely filed, she was liable for penalties under Sec. 6651. Wienke, T.C. Memo. 2020-143 (10/14/20).
Fantasy sports player contest fees are amounts paid for wagering
The IRS Office of Chief Counsel advised that the amount paid by a daily fantasy sports (DFS) player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction under Sec. 165(d). According to the Chief Counsel’s Office, any argument a DFS transaction is not wagering because it is based on skill must fail because elements of chance beyond the participant’s control ultimately determine the outcome of the transaction. CCA 202042015 (10/16/20).
Prop. regs. on ownership attribution after repeal of Sec. 958(b)(4)
The IRS issued proposed regulations under Secs. 367 and 954 relating to ownership attribution through foreign entities as a result of the repeal of Sec. 958(b)(4). The proposed regulations generally limit the application of the lookthrough rule in Sec. 954(c)(6) to foreign corporations that are controlled foreign corporations without regard to downward attribution from foreign persons and modify certain ownership attribution rules under Sec. 367(a) that refer to Sec. 958(b)(4). REG-110059-20 (10/12/20).
FBAR deadline extended to Oct. 31
Treasury’s Financial Crimes Enforcement Network (FinCEN) has extended the deadline for submitting calendar year 2019 FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to Oct. 31. FinCEN Clarifies FBAR Extensions (10/16/20) (see related news story).
IRS cannot assess 40% penalty where it failed to get approval for 20% penalties
The Tax Court held that an IRS revenue agent (RA) did not satisfy the supervisory approval requirements of Sec. 6751(b)(1) when he assessed 20% penalties on a taxpayer under Sec. 6662(a) and Sec. 6662(b)(6), because written supervisory approval was not given for either of those penalties until after a Letter 5153 and a revenue agent report had been issued to the taxpayer. The court also held that, because the RA failed to secure timely supervisory approval for the 20% penalties, he could not then impose a 40% penalty under Sec. 6662(i) because Congress indicated that it considered the 20% and 40% penalties as a single penalty and thus, by extension, no timely supervisory approval had been obtained for the 40% penalty either. Oropeza, 155 T.C. No. 9 (10/13/20).
IRS issues November 2020 applicable federal rates
The IRS issued a ruling that prescribes the applicable federal rates for November 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. 2020-22 (10/16/20).
Partnerships cannot deduct accrued production costs
The Tax Court held that two partnerships, which provide bulk-packaged tomato products to food processors and customer-branded finished products to the food service and retail trades, could not increase their cost of goods sold for the amount of accrued production costs because (1) the partnerships had not shown that all events had occurred to establish the fact of the liabilities, and (2) economic performance had not occurred with respect to the liabilities. The court also rejected the partnerships’ assertion that multi-year production contracts with various customers established the fact of their liabilities for the accrued production costs because, the court found, the partnerships’ efforts to comply with their customers’ specifications were production-run specific and the accrued production costs in issue were for goods and services provided after the production runs. The Morning Star Packing Co., LP, T.C. Memo. 2020-142 (10/14/20).
Final regs. on computation of life insurance reserves
The IRS issued final regulations that provide guidance on the computation of life insurance reserves and the change in basis of computing certain reserves of insurance companies. T.D. 9911 (10/13/20).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
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.