Document summaries for the week of Feb. 15, 2021
Tax document summaries for the week of Feb. 15–19 2021, covering individuals and IRS procedure.
Cannabis dispensary trafficking in controlled substances not allowed depreciation deductions
The Tax Court held that a corporation, which operated a California medical cannabis dispensary, was foreclosed under Sec. 280E from taking depreciation deductions in connection with its operations. The court also held that (1) the company’s business deductions for charitable contributions were properly disallowed because the corporation made the contributions in carrying on its trade or business; (2) the corporation’s business consisted of trafficking in controlled substances; and (3) the imposition of an accuracy-related penalty was appropriate because the corporation did not show that it acted with reasonable cause and in good faith with respect to the underpayments for the years at issue. San Jose Wellness, 156 T.C. No. 4 (2/17/21).
IRS issues guidance on additional relief for COVID-19 under cafeteria plans
The IRS issued guidance under the Consolidated Appropriations Act, 2021, P.L. 116-260, which provides temporary special rules for health flexible spending arrangements (FSAs) and dependent care assistance programs under Sec. 125 cafeteria plans. The guidance provides that a Sec. 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to (1) make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (2) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (3) revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer. Notice 2021-15 (2/18/21) (see related news story).
ESTATES, TRUSTS & GIFTS
Discount may apply when valuing an estate’s donation split among charities
The Tax Court held that, because the IRS and an estate had shortcomings in their analyses of the value of limited liability company (LLC) interests held by the estate, it was appropriate for the court to instead value the LLC interests and related discounts for purposes of determining any gift and estate tax deficiency. The court also concluded that a discount applied to the estate’s donation of a property that was split among charities. Estate of Warne, T.C. Memo. 2021-17 (2/18/21).
Taxpayer’s fraud precludes statute of limitation claim
The Tax Court held that, as a result of stipulations made by the taxpayer that he failed to file foreign bank account reports for foreign accounts he owned, failed to file several years’ tax returns on time, and failed to report income from various sources, the IRS had established the existence of the taxpayer’s fraud for 2004 through 2008 by clear and convincing evidence and the taxpayer was liable for the deficiencies and penalties the IRS assessed Further, the court noted that its finding of fraud for the 2004 through 2008 tax years negated the taxpayer’s argument that the statute of limitation applied to the years at issue because the finding of fraud lifts the statute of limitation. Kramer, T.C. Memo. 2021-16 (2/16/21).
Amount received for legal malpractice is not excludible from income
The Tax Court held that a taxpayer, who received a $125,000 payment in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit, could not exclude the payment from income as damages received on account of personal physical injuries or physical sickness under Sec. 104(a)(2). The court noted that, in the settlement agreement, the parties made clear that the amount paid was not directly linked to personal injuries suffered by the taxpayer but was instead compensation for legal malpractice. Blum, T.C. Memo. 2021-18 (2/18/21).
Payments to U.S. Virgin Islands are not foreign taxes eligible for foreign tax credit
The Ninth Circuit affirmed a Tax Court decision that three sisters were not entitled to claim foreign tax credits under Sec. 901 after they incorrectly claimed U.S. Virgin Islands residency and filed tax returns with, and made tax payments to, the U.S. Virgin Islands instead of the IRS. Vento, No. 19-71601 (9th Cir. 2/18/21).
IRS issues applicable federal rates for March 2021
The IRS issued a ruling containing the applicable federal rates for March 2021 for purposes of Sec. 1274(d), Sec. 1288(b), and Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) and 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. 2021-5 (2/16/21).
IRS updates weighted average interest rates, yield curves, and segment rates
The IRS issued a notice providing 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 notice provides 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 2021-16 (2/16/21).
IRS announces tax relief for Louisiana hurricane victims
The IRS announced that, for certain parts of Louisiana, victims of Hurricane Zeta that began Oct. 26, 2020, now have until March 1, 2021, to file various individual and business tax returns and make tax payments. LA-2021-01 (2/17/21).
IRS announces tax relief for Mississippi hurricane victims
The IRS announced that, for certain parts of Mississippi, victims of Hurricane Zeta that began Oct. 28, 2020, now have until March 1, 2021, to file various individual and business tax returns and make tax payments. MS-2021-01 (2/17/21).
IRS waives dyed fuel penalty in Texas
The IRS announced that because of severe winter weather affecting Texas, it will not impose a penalty when dyed diesel fuel is sold for use or used on the highway in Texas in order to minimize or prevent disruptions to the supply of fuel for diesel-powered highway vehicles. TX-2021-01 (2/19/21).
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.