Document summaries for the week of Aug. 16, 2021

C CORPORATIONS

Chief Counsel addresses corporate taxpayer’s change in return treatment of foreign tax

The IRS Office of Chief Counsel advised that, while a corporate taxpayer has the option of changing its election to deduct foreign taxes to instead claim credits for such taxes, the taxpayer cannot claim both a deduction and a credit for the same foreign tax and cannot both retain the foreign tax deduction on its originally filed returns and claim a credit for the same taxes on an amended return. Thus, the Chief Counsel’s Office concluded, a corporation should not be eligible to claim the foreign tax credits without also amending its earlier returns on which deductions for those taxes were claimed and paying any associated tax deficiency. CCA 202133013 (8/20/21).

EMPLOYEE BENEFITS

IRS updates weighted average interest rates, yield curves, and segment rates

The IRS provided guidance on the corporate bond monthly yield curve, the corresponding spot segment rates under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2) applicable to August 2021. In addition, the notice provides guidance on the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) for plan years beginning before 2008, and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2021-50 (8/16/21).

EMPLOYMENT TAXES

Employers subject to penalty for failure to deposit taxes deferred under CARES Act

The IRS Office of Chief Counsel advised that, if the payment and deposit due dates for an employer’s Sec. 3111(a) (i.e., employer portion of Social Security) taxes or so much of the taxes imposed under Sec. 3221(a) (i.e., railroad retirement taxes) as are attributable to the rate in effect under Sec. 3111(a) are deferred under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and any portion of those taxes is not deposited by the applicable installment due date, the deferral of the deposit due date is invalidated for all of the employer’s deferred Sec. 3111(a) or Sec. 3221(a) taxes with the result that the Sec. 6656 penalty for failure to deposit taxes is applicable to the entire deferred amount, assuming that no exception to the penalty applies. Thus, for example, if an employer defers the deposit of its portion of the Sec. 3111(a) tax in the amount of $50,000 and deposits and pays $25,000 on Dec. 31, 2021, but fails to make any additional deposits or payments by Dec. 31, 2022, the employer is liable for a Sec. 6656 penalty on the entire $50,000, assuming no exception to the penalty applies. PMTA-07 (8/20/21).

INDIVIDUALS

Whistleblower does not qualify for award where IRS action did not result from his information

The Tax Court held that where the IRS discovered an erroneous deduction during an examination resulting in a $60 million adjustment and the examination was the result of a whistleblower’s claim, but the erroneous refund was unrelated to the claim, the whistleblower was not entitled to an award under Sec. 7623. Lissack, 157 T.C. No. 5 (8/17/21).

Taxpayer qualifies for child-related tax benefits for niece and nephews

The Tax Court held that a taxpayer who cared for her disabled brother’s children, who had the same principal place of abode as the taxpayer for more than one-half of the tax year at issue, was entitled to (1) dependency exemption deductions for the children; (2) child tax credits (including the refundable portion thereof) for the children; and (3) the earned income tax credit. The court noted that the taxpayer credibly testified that (1) she took care of the children to help her disabled brother; (2) the children stayed overnight with her all summer and on weekends, during school closures, and on holidays during the school year; and (3) the children stayed with her when they had to leave school early or when the school could not reach their father. Griffin, T.C. Summ. 2021-26 (8/16/21).

Court nixes Sec. 1244 worthless stock deduction

The Tax Court held that a couple could not take a Sec. 1244 worthless stock deduction but could deduct $3,000 as a capital loss for each of the years at issue. According to the court, (1) the couple did not prove the company whose stock was purchased met the Sec. 1244 definition of a “small business corporation,” and (2) the company was not an operating company because more than 50% of its aggregate gross receipts were not from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities. Ushio, T.C. Summ. 2021-27 (8/16/21).

Lack of substantiation precludes business and medical expense deductions

The Tax Court denied deductions for a majority of a couple’s business expense deductions after finding that a handwritten check register submitted as evidence to substantiate the deductions did not identify any payments that pertained to the husband’s employment as a chaplain. The Tax Court also held that the couple were not entitled to deduct medical expenses for the wife’s reconstructive back surgery where the names and the addresses of the payees, or the amounts paid to them, were not identified. Detwiler, T.C. Summ. 2021-28 (8/17/21).

Court rejects IRS determination and finds taxpayer eligible for innocent spouse relief

The Tax Court rejected an IRS determination that a taxpayer was not entitled to relief from liability for underpayments of joint federal income tax for the five years at issue. Factors the court found weighing in favor of relief included that the taxpayer had been emotionally abused and neglected by her husband and that she did not gain any significant benefit from the nonpayment of the joint income tax liabilities. Grady, T.C. Summ. 2021-29 (8/17/21).

Court grants motion to dismiss case against deceased taxpayer

The Tax Court held that the IRS satisfied most applicable burdens of production and proof against a taxpayer who died in January 2020, granted the Service’s motion to dismiss the taxpayer’s petition for lack of prosecution, and entered judgment against him. The taxpayer had been convicted in 2011 on federal criminal charges, including tax crimes and conspiracy to defraud the United States, and was in prison when he died. Catlett, T.C. Memo. 2021-102 (8/16/21).

Appeals court denies innocent spouse relief to tax shelter promoter’s wife

The Seventh Circuit affirmed a Tax Court decision holding that the wife of a tax shelter promoter was not entitled to innocent spouse relief because she “was aware of too many facts and too many warning signs to escape financial responsibility” for the couple’s underpaid taxes. Rogers, No. 20-2789 (7th Cir. 8/17/21).

Taxpayer cannot offset net investment income tax with foreign tax credit

The Tax Court held that a taxpayer was not entitled to use a foreign tax credit to offset the Sec. 1411 net investment income tax (NIIT) under either the U.S. income tax treaty with France or the U.S. income tax treaty with Italy. The court noted that the treaties’ terms are subject to the provisions and limitations of the Internal Revenue Code, which does not allow for any credits against the NIIT. Toulouse, 157 T.C. No. 4 (8/16/21).

Afghanistan defense contractor qualifies for foreign earned income exclusion

The Tax Court held that a U.S. citizen working as a defense contractor in Afghanistan was not a “transient or sojourner” abroad and was thus entitled to take the foreign earned income exclusion under Sec. 911 for all but one of the years at issue. In reaching its conclusion, the court noted that (1) the taxpayer fully assimilated into the only community she had available to her in Afghanistan, (2) she met the physical presence test in Sec. 911(d)(1), and (3) the taxpayer’s trips back to Texas were not to visit family but to check on her house. Wood, T.C. Memo. 2021-103 (8/18/21).

Determination of overpayment interest for individuals qualifying for Sec. 7508A relief

The IRS Office of Chief Counsel advised that Secs. 7508A(c) and 7508(b)(2) provide an exception to Sec. 6611(g), which limits the accrual of overpayment interest when a return is not filed in processible form, when an individual taxpayer files a tax return that is timely due to relief granted under Sec. 7508A because of a federally declared disaster or terroristic or military actions. However, the Chief Counsel’s Office concluded, if an individual taxpayer who qualifies for relief under Sec. 7508A with respect to a return timely obtains an extension pursuant to Sec. 6081 and files the return after the postponed due date but before the extended due date, the Sec. 7508(b)(2) overpayment interest provisions do not apply. PMTA-06 (8/20/21).

Appeals court upholds IRS adjustments in son-of-boss tax shelter case

The Eleventh Circuit affirmed a Tax Court decision and upheld adjustments in IRS notices of deficiency against the taxpayer, who invested in son-of-boss tax shelters. Greenberg, No. 20-13001 (11th Cir. 8/20/21).

IRS PROCEDURE

IRS issues applicable federal rates for September 2021

The IRS issued a ruling providing tables of various prescribed rates for federal income tax purposes for September 2021. Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of Sec. 1274(d). Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for purposes of Sec. 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in Sec. 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) for buildings placed in service during the month. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Sec. 7520. Rev. Rul. 2021-16 (8/16/21).

IRS examines confidentiality issues of internet-based portal for FOIA requests

The IRS Office of Chief Counsel issued a memo supplementing earlier tentative guidance relating to the Office of Management and Budget’s mandate to allow the public to submit Freedom of Information Act (FOIA) requests through an internet portal pursuant to the FOIA Improvement Act, P.L. 114-185. The Chief Counsel’s Office advised that, because information submitted directly to the IRS as part of a FOIA request could be deemed “return information,” the confidentiality of which is assured by Sec. 6103, any internet-based portal for the submission of FOIA requests should provide the same protections against unauthorized disclosure as the IRS’s other internet-based applications. PMTA-08 (8/20/21).