Document summaries for the week of Jan. 11, 2021
Tax document summaries for the week of Jan. 11–15 2021, covering individuals, IRS procedure, and more.
2021 covered compensation tables released
The IRS issued a ruling that provides tables of covered compensation under Sec. 401(l)(5)(E) for the 2021 plan year. Sec. 401(l)(5)(E)(i) defines “covered compensation” with respect to an employee as the average of the contribution and benefit bases in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains Social Security retirement age. Rev. Rul. 2021-3 (1/15/21).
Final regulations provide safe harbor for covered health reimbursement arrangements and Sec. 105 requirements
[Editor's note: These regulations were not published in the Federal Register before the Biden Administration instituted a regulatory freeze on Jan. 20, 2021. As a result they must be reviewed and approved before they are published.] The IRS posted final regulations that clarify the application of the Sec. 4980H employer shared-responsibility provisions and certain nondiscrimination rules under the Code to health reimbursement arrangements (HRAs) and other account-based group health plans integrated with individual health insurance coverage or Medicare. They also provide certain safe harbors with respect to the application of those provisions to individual coverage HRAs. T.D. 9949 (1/13/21).
Final regs. issued on exempt organization excess remuneration
The IRS issued the final regulations on the Sec. 4960 excise tax on compensation in excess of $1 million and certain parachute payments. T.D. 9938 (1/12/21) (see related news story).
IP PINs now available to all taxpayers
The IRS announced the expansion of its Identity Protection PIN Opt-In Program to all taxpayers who can verify their identities. IR-2021-09 (1/12/21).
Inventor not entitled to Sec. 1235 treatment on income relating to transfer of patent rights
The Tax Court held that a taxpayer, an inventor with several advanced degrees including one in law, was not entitled to Sec. 1235 treatment on his receipt of $100,000 of income that related to the transfer of his rights in a patent, nor was he entitled to long-term capital gain treatment because he did not satisfy the holding period requirement and failed to prove that he had a “sale or exchange.” In addition, the court found that he was (1) liable for self-employment tax on the $100,000; (2) failed to establish entitlement to a deduction for a loss originating in 2012, and thus was not entitled to a net operating loss carryover deduction claimed for tax year 2014; and (3) was liable for a penalty under Sec. 6662(a) for substantial understatement of income tax. Filler, T.C. Memo. 2021-6 (1/13/21).
Inclusion of Social Security benefits in income does not violate Constitution
The Tax Court held that the provisions of Sec. 86(c), which resulted in the inclusion of the taxpayer’s Social Security benefits in his income, did not violate his rights to due process and equal protection even though filing separately meant the exclusion amount for taxing his benefits was zero. Kelley, T.C. Memo 2021-2 (1/11/21)
Proposed regulations on federally declared disasters
The IRS issued proposed regulations relating to the new mandatory 60-day postponement of certain time-sensitive tax-related deadlines by reason of a federally declared disaster. The proposed regulations also clarify the definition of “federally declared disaster.” REG-115057-20 (1/13/21).
Final regs. issued on deductibility of fines and penalties
The IRS issued final regulations on when fines and penalties paid to a government are not deductible by a taxpayer, including defining when a payment counts as restitution, which may be deductible. T.D. 9946 (1/12/21) (see related news story).
IRS sends Taxpayer First Act Report to Congress
As mandated by the Taxpayer First Act, P.L. 116-25, the IRS sent to Congress a set of plans for changing tax administration in the areas of “Taxpayer Experience,” “Training,” and “Organizational Redesign.” Taxpayer First Act Report to Congress (1/11/21).
Tax season to start Feb. 12
The IRS announced that it will start accepting and processing tax returns on Feb. 12, 2021. IR-2021-16 (1/15/21) (see related news story).
National Taxpayer Advocate reports to Congress
The National Taxpayer Advocate, Erin Collins, delivered her first annual report to Congress. 2020 National Taxpayer Advocate Annual Report to Congress (1/13/20).
Failure to file valid joint return precludes innocent spouse relief
The Tax Court rejected a taxpayer’s claim that she was entitled to innocent spouse relief under Sec. 6015(e)(1) for a deficiency assessed on a joint tax return that she and her then-husband filed in 2010 because, the court said, the couple had divorced in 2006 and thus had not filed a valid joint return in 2010. As a result, the taxpayer could not recover an overpayment on her 2014 tax return that had been applied to the 2010 deficiency. James, T.C. Memo. 2021-7 (1/13/21).
Deficiency notice left with unauthorized person at taxpayer’s address starts 30-day period for hearing request
The Tax Court held that the IRS’s mailing of a notice of intent to levy to a taxpayer’s actual (and last known) address by certified mail, return receipt requested, started the running of the 30-day period to request a collection due process hearing under Secs. 6330(a)(2) and (3) even though the taxpayer’s address was shared by multiple businesses and the U.S. Postal Service left the notice at that address with a person who was neither the taxpayer’s employee nor authorized to receive mail on the taxpayer’s behalf. As a result, the court found that the taxpayer’s request for a hearing under Sec. 6330 was untimely and IRS Appeals properly did not issue a notice of determination concerning the IRS’s collection action and, absent a determination by IRS Appeals, the Tax Court lacked jurisdiction to consider a petition filed by the taxpayer. Ramey, 156 T.C. No. 1 (1/14/21).
Collection due process case remanded due to insufficient record
In a collection due process case, the Tax Court held that the record before it was insufficient to decide whether the settlement officer failed to properly consider the installment agreement the taxpayers requested. After noting that there were multiple unanswered questions about the settlement officer’s analysis, the court remanded the case for a supplemental hearing. Boettcher, T.C. Memo. 2021-4 (1/12/21).
Air transportation excise tax final regulations
The IRS issued final regulations relating to the Sec. 4261 and 4271 air transportation excise taxes and the Sec. 4261(e)(5)(A) exemption for amounts paid for certain air management services. T.D. 9948 (1/14/21).
Final regulations issued on Sec. 199A deduction for co-op patrons
The IRS issued final regulations providing guidance to cooperatives and their patrons regarding the Sec. 199A qualified business income deduction, as well as guidance to specified agricultural or horticultural cooperatives and their patrons regarding the Sec. 199A(g) deduction for eligible domestic production activities undertaken by specified cooperatives. T.D. 9947 (1/14/21).
Partners fail to convince court that cancelled debt was really a partner contribution
The Tax Court held that a partnership, and thus its partners, received cancellation of indebtedness income from the discharge of loans made to the partnership which the partners tried, but failed, to recharacterize as partner contributions. The court also rejected an argument from one of the partners that he was insolvent and thus the cancellation of indebtedness was not includible in his income. Hohl, T.C. Memo. 2021-5 (1/13/21).
IRS issues procedures for calculating wage limitation under Sec. 199A(g)
The IRS issued a revenue procedure that (1) provides methods for calculating W-2 wages for purposes of the W-2 wage limitation provided in Sec. 199A(g)(1)(B)(i) for specified agricultural or horticultural cooperatives (specified cooperatives), and (2) modifies Rev. Proc. 2019-11 to amend the method for determining W-2 wages for taxpayers with short tax years. Specified cooperatives can take a deduction under Sec. 199A(g)(1)(A) equal to the lesser of 9% of qualified production activities income or taxable income of a specified cooperative, but not to exceed the W-2 wage limitation. Rev. Proc. 2021-11 (1/14/21).
IRS extends safe harbor for certain mortgage instruments
In light of the continuing COVID-19 pandemic, the IRS is extending the expiration dates relevant to the application of the safe harbors in Rev. Proc. 2020-26, which protect the federal income tax status of real estate mortgage investment conduits and investment trusts that provide certain forbearances of mortgage loans they hold or that acquire mortgage loans that have received certain forbearances. Additionally, the IRS is extending the expiration dates relevant to the application of the safe harbors in Rev. Proc. 2020-34, which protect the federal income tax status of certain investment trusts whose trustees request or agree to certain forbearances of mortgage loans, make certain modifications of real property leases, or accept certain cash contributions. Rev. Proc. 2021-12 (1/14/21).
Temporary relief for certain low-income housing projects extended
In response to the continuing COVID-19 pandemic, the IRS announced that it is extending the temporary relief from certain requirements under Sec. 42 for qualified low-income housing projects and under Sec. 142(d) and Sec. 147(d) for qualified residential rental projects that was provided in Notice 2020-53. In addition, the IRS is also providing relief for additional Sec. 42 requirements not previously addressed in Notice 2020-53. Notice 2021-12 (1/15/21).
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.