Document summaries for the week of Jan. 18, 2021
Tax document summaries for the week of Jan. 18–22 2021, covering employee benefits, IRS procedure, and more.
Management fees paid to shareholders were disguised distributions
The Tax Court held that a C corporation was not entitled to deductions for management fees paid to its three shareholders for tax years 2012–2014 because the evidence showed that such fees were simply disguised distributions and were not reasonable in amount. The court noted that the corporation never paid dividends to its shareholders and it presented no evidence showing that an independent investor would have been satisfied with investment returns after shareholder compensation. Aspro, Inc., T.C. Memo. 2021-8 (1/21/21).
IRS issues monthly corporate yield curve and segment rates
The IRS issued 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 IRS provided 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 2021-9 (1/19/21).
Kennel owners subject to tax and penalties for unreported income and unsubstantiated deductions
The Tax Court held that a married couple, who ran a kennel facility offering boarding and grooming services for dogs and cats, was subject to additional tax on unreported income as determined by the IRS because they failed to provide a complete and reliable summary of their gross receipts for certain years. In addition, the court concluded that the couple failed to adequately substantiate certain depreciation and travel deductions and thus could not deduct such amounts. Because the court found no reasonable cause for the underpayment of taxes relating to the tax deficiencies, it upheld the IRS’s assessment of a penalty under Sec. 6662(a). Bruneau, T.C. Summ. 2021-1 (1/21/21).
Failure by U.K. corporation to file returns precludes deductions and credits
A U.K. corporation, which owned a vessel used in decommissioning oil and gas wells on portions of the U.S. Outer Continental Shelf and had its 2009 and 2010 tax returns prepared by the IRS, was not entitled, under Sec. 882(c)(2), to the benefit of deductions or credits for those years because it did not submit “returns” for 2009 and 2010 until after the IRS had prepared and subscribed returns for it. The court further held that Sec. 882(c)(2) does not violate either the business profits or the nondiscrimination article of the bilateral income tax treaty between the United States and the United Kingdom. Adams Challenge (UK) Ltd., 156 T.C. No. 2 (1/21/21).
IRS provides additional relief with respect to employment tax deadlines
The IRS has modified Notice 2020-65 and postponed the time period during which employers must withhold and pay certain employment taxes from April 30, 2021, to Dec. 31, 2021, while also providing that associated interest, penalties, and additions to tax for late payment for any unpaid taxes will begin to accrue on Jan. 1, 2022, rather than on May 1, 2021. In Notice 2020-65, the IRS had postponed the due date for the withholding and payment of the tax imposed by Sec. 3101(a), and so much of the tax imposed by Sec. 3201 as is attributable to the rate in effect under Sec. 3101(a), until the period beginning on Jan. 1, 2021, and ending on April 30, 2021, a date that was extended by year-end legislation. Notice 2021-11 (1/19/21) (see related news story).
Information reporting requirements waived with respect to amounts excluded from gross income
The IRS is waiving the requirement to file certain information returns or furnish certain payee statements otherwise required under Section 279 of the COVID-related Tax Relief Act of 2020 (COVID Relief Act), enacted as part of the Consolidated Appropriations Act, 2021, P.L. 116-260. Specifically, the IRS (1) is waiving the requirement to file certain information returns or furnish certain payee statements otherwise required by Chapter 61 of the Code for amounts excluded from gross income by reason of the Paycheck Protection Program in Section 7A(i) of the Small Business Act or Sections 276(b), 277, or 278 of the COVID Relief Act, and (2) has obsoleted Announcement 2020-12. Notice 2021-6 (1/19/21).
IRS issues applicable federal rates for February 2021
The IRS issued a ruling containing the applicable federal rates for February 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 Code Sec. 42(b)(1) for buildings placed in service during the current month, 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, and the deemed rate of return for transfers made during calendar year 2021 to pooled income funds described in Sec. 642(c)(5) that have been in existence for less than three tax years immediately preceding the tax year in which the transfer was made. Rev. Rul. 2021-4 (1/19/21).
IRS provides underpayment of estimated tax relief relating to provision in CARES Act
The IRS is waiving the addition to tax under Sec. 6654 for underpayment of estimated income tax by individual taxpayers, where the underpayment is attributable to the amendment to Sec. 461(l)(1)(B) by Section 2304(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, P.L. 116-136. The relief provided does not waive the addition to tax under Sec. 6654 that is attributable to other CARES Act provisions, including the CARES Act amendment to Sec. 172(b). Notice 2021-8 (1/19/21) (see related news story).
IRS extends relief under Sec. 7508A for qualified opportunity funds
The IRS issued a notice providing additional relief under Sec. 7508A for qualified opportunity funds (QOFs) and their investors in response to the ongoing COVID-19 pandemic. The notice also provides additional relief pursuant to Sec. 1400Z-2(f)(3) and the regulations under Sec. 1400Z-2. Specifically, the notice extends the relief for QOFs and their investors provided by Notice 2020-39. Notice 2021-10 (1/19/21).
IRS provides relief for partnerships from certain penalties relating to capital account reporting
The IRS is providing partnerships with relief from certain penalties due to the inclusion of incorrect information in reporting their partners' beginning capital account balances on the 2020 Schedules K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., and the 2020 Schedules K-1 (Form 8865), Partner's Share of Income, Deductions, Credits, etc., as outlined in the 2020 Instructions for Form 1065, U.S. Return of Partnership Income. The IRS is also providing relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information in a partner’s beginning capital account balance reported by a partnership for the 2020 tax year. Notice 2021-13 (1/19/21) (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.