Document summaries for the week of Feb. 8, 2021
Tax document summaries for the week of Feb. 8–12 2021, covering individuals and IRS procedure.
Taxpayer entitled to amortization deductions upon acquiring business in Sec. 351 transaction
The Tax Court held that the step-transaction doctrine applied to a transaction in which a corporation acquired the assets of a partnership in exchange for the issuance of its common stock, which was partially redeemed for $2.7 million in cash immediately thereafter along with the promise of an additional cash payment of $300,000 to the partnership. After accepting the parties’ agreement that Sec. 351 applied to the partnership’s transfer of assets to the corporation, the court found that (1) the partnership recognized gain in the transaction, as recharacterized, to the extent of the $2.7 million cash it received and the fair market value of its right to the additional $300,000 payment; (2) the partnership’s recognized gain increased the corporation’s bases in the transferred assets; and (3) the corporation was entitled to amortization deductions in respect of the assets acquired. Complex Media, Inc., T.C. Memo. 2021-14 (2/10/21).
Court denies research tax credit for expenses incurred by a company’s shipbuilding subsidiary
With respect to the Sec. 41 tax credit for increasing research activities, the Tax Court held that the requirement in Sec. 41(d)(1)(C) and Reg. Sec. 1.41-4(a)(6) that at least 80% of a taxpayer's research must constitute elements of a process of experimentation applies to activities and not to physical components of the product being developed or improved. Consequently, the requirement is not satisfied simply because at least 80% of the product's elements differ from those of products the taxpayer previously developed. Little Sandy Coal Co., Inc., T.C. Memo. 2021-15 (2/11/21).
New form available for self-employed to claim sick and family leave credits
The IRS announced the availability of a Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, for self-employed individuals to use to claim qualified sick and family leave equivalent tax credits on their 2020 Form 1040, U.S. Individual Tax Return, for leave taken between April 1, 2020, and Dec. 31, 2020, and on their 2021 Form 1040 for leave taken between Jan. 1, 2021, and March 31, 2021. IR-2021-31 (2/8/21).
Notice mailed to sole proprietorship, rather than individual owner, is valid
The Tax Court held that the IRS timely mailed a notice of intent to levy to collect a taxpayer’s liability for backup withholding, additions to tax, and associated interest. The Tax Court also held that, while it has not previously addressed the question of whether an IRS notice mailed to a sole proprietorship, rather than to the individual owner, is valid, the same rule applies as would apply to a single-member limited liability company and its owner; thus, a notice mailed to a sole proprietorship, rather than to the individual owner, is valid. BM Construction, T.C. Memo. 2021-13 (2/8/21).
Chief Counsel changes instructions for addressing correspondence to Tax Court
The Office of Chief Counsel issued a notice that provides a change in instructions for addressing correspondence to the Tax Division of the Department of Justice. According to the notice, effective immediately, all correspondence to the Tax Division should be addressed to: Mr. David A. Hubbert, Acting Assistant Attorney General, Tax Division, United States Department of Justice. CC-2021-005 (2/11/21).
IRS’s receipt and auditing of taxpayer’s Virgin Islands returns does not start limitation period
The Eighth Circuit reversed a Tax Court decision and held that, even though the IRS received the taxpayer’s tax returns from the U.S. Virgin Islands Bureau of Internal Revenue, audited the returns, and issued notices of deficiency, those facts were irrelevant for statute of limitation purposes. The taxpayer had not filed a return with the IRS, and the IRS’s actual knowledge of the returns did not create a filing. The Eighth Circuit’s opinion, issued on rehearing, supersedes a previous opinion it issued in the case on Dec. 15, 2020. Coffey, No. 18-3256 (8th Cir. 2/12/21).
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.