Document summaries for the week of April 26, 2021
Tax document summaries for the week of April 26–30, 2021, covering individuals, IRS procedure, and more.
Drug manufacturer must capitalize expenses incurred to obtain FDA approval
The Tax Court held that legal expenses a generic drug manufacturer incurred in preparing notice letters to patentees must be capitalized because they were necessary to obtain Food and Drug Administration (FDA) approval. However, the court also held that the legal expenses the manufacturer incurred to defend patent infringement suits were deductible as ordinary and necessary business expenses because that litigation was distinct from the FDA approval process. Mylan, Inc., 156 T.C. No. 10 (4/27/21).
Self-serving testimony does not prove couple had deductible theft loss
The Tax Court held that a couple were not entitled to a theft loss for money lost on an investment in a technology that they said was misrepresented to them. The court found that the couple did not present evidence that representations to them were made with the intent to defraud and that the only evidence of fraud presented at trial was the husband's testimony. Baum, T.C. Memo. 2021-46 (4/27/21).
Music business owner cannot deduct unsubstantiated net operating loss
The Eleventh Circuit affirmed a Tax Court decision holding that the owner of a music business taxed as a partnership could not deduct a large net operating loss that he could not substantiate. Barker, No. 19-11994 (11th Cir. 4/27/21).
Primary purpose test can be used by aircraft owner to determine deductibility of expenses
The Office of Chief Counsel advised that a sole proprietor that owns an aircraft (either directly or indirectly through a disregarded entity) may use the primary purpose test in Regs. Sec. 1.162-2(b)(1) to determine whether expenses for use of the aircraft by the sole proprietor are deductible. The Chief Counsel’s Office also noted that, while Sec. 274(e)(2) and Sec. 274(e)(9) and Regs. Sec. 1.274-10 do not apply to expenses for use of by a sole proprietor of an aircraft owned by the sole proprietor, limitations under other sections (and subsections) of the Code, including Sec. 274(a)(1) (relating to entertainment expenses) and Sec. 274(m)(3) (relating to travel expenses of a spouse, dependent, or others) may apply. CCA 202117012 (4/30/21).
Couple substantially underreported taxable income from real estate business
The Tax Court held that a married couple had unreported taxable income of approximately $4.9 million and $1.9 million for 2011 and 2012 as a result of the husband’s real estate business. The court concluded that, because the couple did not produce books or records reflecting the full amount of deposits made to their bank accounts in the years at issue and did not maintain books and records sufficient to establish their income, the IRS permissibly performed a bank deposit analysis to determine their unreported income. Haghnazarzadeh, T.C. Memo. 2021-47 (4/29/21).
IRS waives Sec. 911(d) minimum time requirements for Iraq
Because of adverse conditions in Iraq, the IRS waived the minimum time requirements under Sec. 911(d) for individuals who left that country on or after March 25, 2020. Rev. Proc. 2021-21 (4/26/21).
IRS posts draft Schedules K-2 and K-3
The IRS released updated early drafts of new Schedules K-2, Partners’ Distributive Share Items — International, and K-3, Partners’ Share of Income, Deductions, Credits, etc. — International, for Forms 1065, U.S. Return of Partnership Income; 1120-S, U.S. Income Tax Return for an S Corporation; and 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, for tax year 2021 (filing season 2022). IR-2021-98 (4/30/21).
Individual tax credits updated to reflect American Rescue Plan Act changes
The IRS modified and superseded portions of the 2021 inflation revenue procedure, Rev. Proc. 2020-45, and Rev. Proc. 2020-36 to reflect statutory amendments made by the American Rescue Plan Act, P.L. 117-2. Specifically, in a new procedure, the IRS modified the inflation-adjusted amounts for the child tax credit, the earned income tax credit, and the applicable percentage table for the Sec. 36B premium tax credit. Rev. Proc. 2021-23 (4/26/21) (see related news story).
Slight overpayment of rent to S shareholders does not result in penalties
The Tax Court held that an S corporation renting space in a building owned by its four shareholders paid slightly more rent than fair market rental in two of the three years at issue, resulting in a nondeductible dividend. The court rejected the IRS's assessment of accuracy-related penalties, however, because the S corporation showed that the underpayments were due to reasonable cause and that the corporation acted in good faith. Plentywood Drug, Inc., T.C. Memo. 2021-45 (4/26/21).