Document summaries for the week of Jan. 25, 2021
Tax document summaries for the week of Jan. 25–29 2021, covering individuals, IRS procedure, and more.
IRS posts instructions on claiming ERC for employers with PPP loans that were not forgiven
The IRS posted instructions on its website explaining how taxpayers who did not get their Paycheck Protection Program (PPP) loan forgiven can claim the employee retention credit (ERC) when they file their employment tax return. Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941 (1/22/21) (see related news story).
Taxpayer’s gross income is not reduced by repayment of Social Security disability benefits
The Tax Court held that, under Sec. 86, a taxpayer was treated as having received $35,999 in Social Security disability benefits in 2014 as a result of his receipt of $28,276 in Social Security disability payments and $7,723 in workers’ compensation offset attributable to workers’ compensation he received in 2013. The court also concluded that the taxpayer’s gross income for 2014 was not reduced when, beginning in 2017, he was required to repay $49,170 in Social Security disability benefits. Hairston, T.C. Summ. 2021-2 (1/25/21).
Taxpayer’s failure to substantiate real estate expenses and losses precludes deduction
The Tax Court upheld an IRS deficiency assessment and accuracy-related penalties against a taxpayer who worked as a full-time employee in 2012 and 2013 and also invested in real estate, after finding that the taxpayer failed to substantiate many of the real estate and other expenses and losses reported on his Schedules A, Itemized Deductions, C, Profit or Loss From Business, and E, Supplemental Income or Loss, of Form 1040. The court also held that the taxpayer received additional income from a retirement plan distribution that he failed to report. Brown, T.C. Summ. 2021-4 (1/26/21).
Lawyer cannot deduct Maryland lodging expenses because presence in D.C. was not temporary
The Tax Court held that an immigration lawyer’s statements and supporting evidence did not reflect that his presence in the Washington, D.C., area was temporary, as he was not in the area for a set or limited period but was instead indefinitely working there in furtherance of his Washington, D.C., immigration practice. As a result, the court held that the lawyer could not deduct $8,400 of Maryland lodging expenses because he was not “away from home” under Sec. 162(a)(2) during the time at issue. Soboyede, T.C. Summ. 2021-3 (1/26/21).
Losses from failed farming activity were startup expenses
The Tax Court held that a couple’s losses from a farming activity, in which they unsuccessfully attempted to raise chickens, grow vegetables, and raise cattle, were not deductible because the losses were startup expenses for which Sec. 195(a) prohibits a current deduction. The court also agreed with the IRS that the couple could not take an operating loss deduction for a rental property that had been flooded and was in no condition to rent, but found that the IRS erred in determining passive losses on other rental properties because the gains from passive activities exceeded the losses. Costello, T.C. Memo. 2021-9 (1/25/21).
Cattle farm with little or no cattle was not an activity engaged in for profit
The Tax Court held that a man who worked as a banker about 70 hours a week, and his wife, could not deduct losses incurred on their “cattle farm,” which had no cattle at all except for part of one of the years at issue, because it was not an activity engaged in for profit. The court also held that the couple were not entitled to deduct interest paid on their main residence because they could not substantiate that the interest was acquisition indebtedness. Whatley, T.C. Memo. 2021-11 (1/28/21).
IRS warns of identity theft scam involving unemployment benefits
The IRS warned taxpayers of an identity theft scam involving fraudulent claims for state unemployment benefits. IR-2021-24 (1/28/21) (see related news story).
Competent Authority Arrangement on remuneration to US consular employees in Italy
The IRS announced that the United States and Italy have entered into a Competent Authority Arrangement clarifying the application of subparagraph 1(b) of Article 19, Government Services, of the United States–Italy income tax treaty for remuneration the United States pays to U.S. citizens or dual nationals who are residents of Italy and who are rendering services to the United States in U.S. embassies and consulates in Italy. Announcement 2021-1 (1/25/21).
Amount assessed under Sec. 72(t) is a tax and thus not subject to supervisory approval
The Tax Court held that a taxpayer who received early distributions from a retirement plan was subject to tax on the distributions and was also liable for the 10% exaction on these distributions under Sec. 72(t). The court also held that the Sec. 72(t) exaction is a “tax” rather than a penalty, addition to tax, or additional amount and is thus not subject to the Sec. 6751(b) written supervisory approval requirement. Grajales, 156 T.C. No. 3 (1/25/21).
IRS can collect restitution-based assessments arising from court order
The Tax Court held that a taxpayer, who developed strategies to use corporations to conceal assets and evade income tax, was liable for restitution-based assessments (RBAs) arising from a federal district court order requiring him to pay criminal restitution. Citing the Tax Court’s decision in Carpenter, 152 T.C. 12 (2019), the court rejected the taxpayer’s argument that the IRS lacked the legal authority to take administrative collection action to collect RBAs. Reynolds, T.C. Memo. 2021-10 (1/26/21).
IRS creates chief taxpayer experience officer position
The IRS announced the creation of a new position, chief taxpayer experience officer, to help unify and expand efforts across the agency to serve taxpayers and which was created in response to the Taxpayer First Act, P.L. 116-25. IR-2021-22 (1/26/21).
IRS explains new employee retention credit provisions
The IRS explained the new provisions of the employee retention credit, as amended by the Consolidated Appropriations Act, 2021, P.L. 116-260. IR-2021-21 (1/26/21) (see related news story).
IRS updates FAQs on sick leave credit and family leave credit
The IRS posted updated FAQs about recent legislation that extended and amended tax relief to certain small and midsize employers under the Families First Coronavirus Response Act (FFCRA), P.L. 116-127. The FAQs cover how the Consolidated Appropriations Act, 2021, P.L. 116-260, extended the availability of the tax credits created by the FFCRA to eligible employers for paid sick and family leave provided through March 31, 2021, as well as other amendments to the credits. COVID-19–Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs (1/28/21).
Court denies overstated conservation easement deduction but negates most penalties
The Tax Court held that a partnership was not entitled to any charitable contribution deduction for an easement donated to a tax-exempt organization because the extinguishment-proceeds clause in the deed violated Regs. Sec. 1.170A-14(g)(6)(ii). However, the court also concluded that (1) most of the partners were not liable for penalties because it was more likely than not that the penalties assessed by the IRS on those partners did not have written supervisory approval; (2) no penalty under Sec. 6662(b)(2) applied to the easement donation because the clause in the deed was similar to one that an IRS private letter ruling suggested would satisfy Regs. Sec. 1.170A-14(g)(6)(ii) and the partnership’s tax position was thus reasonable; (3) while the partnership overstated the value of the conservation easement, it was not so overstated that the gross-valuation-misstatement penalty applied; and (4) one partner was liable for a penalty for which written supervisory approval was obtained. Sells, T.C. Memo. 2021-12 (1/28/21).
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.