Document summaries for the week of July 12, 2021

C CORPORATIONS

Corporation liable for taxes after failing to substantiate deductions and report income

The Tax Court held that a corporation that ran several day care centers was liable for tax deficiencies for 2004 through 2007 as a result of issues that included writing off gifts to employees as business expenses, failing to report capital gain income on transfers of real property, failing to report rental property income, failing to show entitlement to depreciation taken on vehicles, and failing to show the business purpose of expenses deducted on its corporate return. Additionally, while the court did not sustain fraud penalties assessed by the IRS, it did sustain accuracy-related penalties after finding that the frequency, nature, and pervasiveness of the adjustments giving rise to the tax deficiencies left little question that the taxpayer disregarded the rules and regulations and failed to make a reasonable attempt to comply with the tax laws. Blossom Day Care Centers, Inc., T.C. Memo. 2021-87 (7/13/21).

Corporation failed to classify officers as employees; penalties upheld

The Tax Court held that the same taxpayer as in T.C. Memo. 2021-87 (1) failed to classify its corporate officers as employees for calendar years 2005 through 2008, and (2) was not entitled to relief under Section 530 of the Revenue Act of 1978, P.L. 95-600. The court also agreed with the IRS that the corporation was liable for unpaid employment taxes relating to the corporate officers, penalties under Sec. 6656 for failing to deposit tax, and accuracy-related penalties under Sec. 6662(a) for negligence. Blossom Day Care Centers, Inc., T.C. Memo. 2021-86 (7/13/21).

EMPLOYEE BENEFITS

IRS updates weighted average interest rates, yield curves, and segment rates

The IRS issued a notice that provides 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 2021-44 (7/15/21).

IRS guidance addresses employee plans correction methods under EPCRS

The IRS updated the comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Secs. 401(a), 403(a), 403(b), 408(k), or 408(p), but that have not met these requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits plan sponsors to correct these failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. Rev. Proc. 2021-30 (7/16/21).

INDIVIDUALS

Incarcerated taxpayer does not have reasonable cause for late filing and payment

The Fifth Circuit affirmed a lower court’s dismissal of a taxpayer’s suit to recover penalties he paid for late filing and late tax payments. The court disagreed with the taxpayer’s argument that he was entitled to a reasonable-cause exception to the penalties because he was incarcerated and his attorney failed to file his returns or pay the taxes due. Lindsay, No. 20-50994 (5th Cir. 7/9/21).

Temporary regulations to protect consumers from surprise medical bills

The IRS issued temporary regulations designed to protect consumers from surprise medical bills for emergency services, air ambulance services furnished by nonparticipating providers, and nonemergency services furnished by nonparticipating providers at participating facilities in certain circumstances. T.D. 9951 (7/13/21).

Tax professional is liable for penalties for fraudulently failing to file tax returns

The Tax Court held that a taxpayer, who was both an accountant and a tax lawyer, and his wholly owned corporation were liable for tax deficiencies and penalties as a result of fraudulently failing to file tax returns. The Tax Court found that the taxpayer and his corporation were essentially one giant scheme to hide sources of income through the use of multiple tax products, the creation of thousands of different entities and bank accounts, and the transfer of funds between these accounts and other entities. Ernest S. Ryder and Assocs., Inc., T.C. Memo. 2021-88 (7/14/21).

Couple cannot deduct as alimony amounts paid to their daughter’s ex-husband

The Tax Court sustained IRS determinations disallowing a married couple’s alimony deductions for amounts paid to their daughter’s ex-husband after rejecting the couple’s argument that they were bound by their daughter’s divorce agreement as guarantors in the event their daughter could not satisfy certain obligations specified in the divorce agreement. The court also disallowed amounts the couple included on Schedule F relating to the husband’s cannabidiol oil extraction venture, which he started with the couple’s son but then discontinued after the son’s death. Berger, T.C. Memo. 2021-89 (7/15/21).

Taxpayer awarded litigation and administrative costs

The Tax Court held that a taxpayer was entitled to litigation and administrative costs under Sec. 7430 because the IRS’s positions with respect to the accounting methods used by the taxpayer’s businesses were not substantially justified. Specifically, the court noted that the IRS had argued that the taxpayer’s businesses should be reporting income and expenses using the cash method even though the businesses carried inventories and were required under Regs. Sec. 1.446-1(c)(2) to use the accrual method. Morreale, T.C. Memo. 2021-90 (7/15/21).

INTERNATIONAL

Court upholds more than $4 million FBAR penalty

The Second Circuit upheld a district court’s imposition of a more than $4 million penalty for a taxpayer’s willful failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), for 2009. The penalty amounted to 50% of the aggregate balances of the accounts that should have been reported. Kahn, No. 19-3920 (2d Cir. 7/13/21).

IRS PROCEDURE

IRS issues applicable federal rates for August 2021

The IRS issued a ruling providing tables of various prescribed rates for federal income tax purposes for August 2021. Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of Sec. 1274(d); Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of Sec. 1288(b); Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in Sec. 382(f); Table 4 contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) for buildings placed in service during the current month (although under Sec. 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, is not less than 9%); and Table 5 contains 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. 2021-14 (7/15/21).