Document summaries for the week of Aug. 9, 2021
Tax document summaries for the week of Aug. 9–13, 2021.
Court finds IRS justified in proposing levy on child care center
The Tax Court granted summary judgment to the IRS and held that the IRS Office of Appeals was justified in upholding a proposed levy on a corporation operating a child care center because the corporation was not in compliance with its employment tax return filings and federal tax deposit obligations. The court noted that an IRS settlement officer alerted the corporation to its noncompliance and gave it multiple chances to provide proof of the filing of employment tax returns and the sufficiency of its federal tax deposits but the corporation did not avail itself of these opportunities. Kidz University, Inc., T.C. Memo. 2021-101 (8/12/21).
Taxpayer cannot use check sent with 2001 extension request to offset 2004 liability
The Tax Court held that it lacked jurisdiction to decide whether a $43,000 check attached to a taxpayer’s Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, for 2001 was a tax payment or, as asserted by the taxpayer, a deposit which he could use to offset his 2004 tax liability and receive a refund for that year. The court found that, even if it had jurisdiction, the taxpayer would not be entitled to a refund because, under Ott, 141 F.3d 1306 (9th Cir. 1998), the $43,000 check was a payment of tax and not a deposit in the nature of a cash bond, and thus the statute of limitation would apply to preclude the taxpayer’s refund claim. Mohsen, T.C. Memo. 2021-99 (8/11/21).
Incentive payments to car salesman are reported on Form 1040 rather than Schedule C
The Tax Court held that a taxpayer who worked for an auto dealership and received commissions on cars he sold (reported to him on Form W-2, Wage and Tax Statement) as well as performance incentive payments from the parent company (reported to him on Forms 1099-MISC, Miscellaneous Income), was required to report his incentive payment income as “Other Income” on Form 1040, U.S. Individual Income Tax Return, and report the related deductible business expenses on Schedule A, Itemized Deductions, rather than Schedule C, Profit or Loss from Business, of his Form 1040. In addition, the court concluded that (1) many of the business deductions claimed by the taxpayer were not adequately substantiated and thus were not deductible; (2) the taxpayer and his wife failed to report certain income; and (3) the couple was liable for accuracy-related penalties. Monroe, T.C. Summ. 2021-24 (8/11/21).
Bankruptcy lawyer cannot use prior bankruptcy to avoid paying tax deficiencies
The Tax Court, citing its opinion in Breland, 152 T.C. 156 (2019), held that a bankruptcy lawyer’s prior bankruptcy proceeding did not preclude the IRS from pursuing deficiencies, additions to tax, and penalties for the lawyer’s 2010 and 2011 tax returns. The court also concluded that the lawyer, who did not keep a set of books and records (1) was liable for tax on unreported Schedule C gross receipts and unreported Schedule E, Supplemental Income and Loss, partnership income; (2) was not entitled to numerous unsubstantiated deductions; and (3) was liable for accuracy-related penalties for the years at issue. Wathen, T.C. Memo. 2021-100 (8/11/21).
IRS levy sustained where couple failed to execute installment plan paperwork
The Tax Court held that the IRS did not abuse its discretion in sustaining a proposed levy against a couple who owed taxes for several years. The court noted that the IRS settlement officer working with the couple on an installment plan had requested that the couple execute a Form 433-D, Installment Agreement, reflecting the monthly installment agreement but the couple never did so, and the settlement officer thus closed the case and the IRS issued a notice of determination sustaining the proposed levy. Bates, T.C. Summ. 2021-25 (8/12/21).
Taxpayer avoids frivolous-position penalty
The Tax Court held that a taxpayer had received wages and other payments during 2012 that he did not report on his income tax return and thus he was liable for taxes and penalties on the tax underpayment. While the IRS had asked the court to apply a Sec. 6673 penalty because the taxpayer took frivolous positions, the court noted that the taxpayer had not been forewarned that a frivolous penalty might be applied so instead just warned the taxpayer that if he continues to advance similar positions in the future, the penalty will likely be imposed. Silver, T.C. Memo. 2021-98 (8/9/21).
IRS provides safe harbor for calculating gross receipts for employee retention credit
The IRS issued a revenue procedure providing a safe harbor that permits a taxpayer to exclude certain items from gross receipts under Sec. 448(c) and Sec. 6033 solely for purposes of determining eligibility to claim the employee retention credit. The items covered by the safe harbor are: (1) the amount of the forgiveness of a Paycheck Protection Program loan under Section 7(a)(37) or 7A of the Small Business Act; (2) a grant under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted as part of the Consolidated Appropriations Act, 2021, P.L. 116-260; and (3) a restaurant revitalization grant under Section 5003 of the American Rescue Plan Act, P.L. 117-2. Rev. Proc 2021-33 (8/10/21) (see related news story).
Transition relief provided for certain employers claiming the WOTC
The IRS is providing transition relief for certain employers claiming the work opportunity tax credit (WOTC) under Sec. 51 for certain employees beginning work after Dec. 31, 2020, in response to legislation permitting the designation of an empowerment zone, defined in Sec. 1393(b), to be extended from Dec. 31, 2020, through Dec. 31, 2025. Specifically, the IRS is extending until Nov. 8, 2021, the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after Jan. 1, 2021, and before Oct. 9, 2021, is a member of the designated community resident targeted group or the qualified summer youth employee targeted group. Notice 2021-43 (8/10/21) (see related news story).
Oil recovery and marginal production reference price published
The IRS published the inflation-adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in calendar year 2021. Notice 2021-47 (8/9/21).
Chief Counsel’s Office addresses reimbursement of Branded Prescription Drug fee
The Office of Chief Counsel advised that a taxpayer-member of a controlled group, within the meaning of Regs. Sec. 51.2(e), who remits payment of the branded prescription drug fee, which was enacted as part of the Patient Protection and Affordable Care Act, P.L. 111-148, is not per se entitled to exclude from gross income a reimbursement of all or a portion of the fee from other members of the controlled group who are jointly and severally liable for the fee. According to the Chief Counsel’s Office, whether reimbursement of all or a portion of the branded prescription drug fee by members of the controlled group to the remitting member constitutes gross income to the remitting member generally depends on whether the remitting member benefits from the fee payment, and that determination depends on several nondispositive factors. CCA 202132009 (8/13/21).
IRS modifies procedure to reflect changes in treatment of certain credit card fees
The IRS issued a revenue procedure that reflects changes made to the treatment of certain credit card fees by Sec. 451(b), as amended by the law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97, and Regs. Secs. 1.451-3 and 1.1275-2(l). The procedure modifies Rev. Proc. 2013-26, which allows a taxpayer to use a safe harbor method of accounting for original issue discount on a pool of credit card receivables for purposes of Sec. 1272(a)(6), and is effective on Aug. 12, 2021. Rev. Proc. 2021-35 (8/12/21) (see related news story).
IRS modifies procedure to obtain automatic IRS consent to change accounting methods
The IRS modified Rev. Proc. 2019-43 to provide procedures under Sec. 446 and Regs. Sec. 1.446-1(e) to obtain automatic IRS consent to change methods of accounting to comply with final regulations under Regs. Sec. 1.451-3, 1.451-8, and 1.1275-2(l) and to change methods of accounting for certain inventory costs to comply with Secs. 263A, 461, and 471 if such changes are made in connection with a change to comply with Regs. Sec. 1.451-3 and/or Regs. Sec. 1.451-8, as applicable. The revenue procedure also modifies Rev. Proc. 2015-13 to provide procedures for a taxpayer to obtain the IRS’s consent to change its method of accounting to comply with Regs. Sec. 1.451-3 and/or Regs. Sec. 1.451-8, as applicable, by providing rules related to cost offset method changes. Rev. Proc. 2021-34 (8/12/21) (see related news story).
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.