Document summaries for the week of July 19, 2021

Tax document summaries for the week of July 19–23, 2021, covering individuals, IRS procedure, and more.

ESTATES, TRUSTS & GIFTS

IRS properly considered potential collectibility of estate taxes from executor

The Tax Court held that a determination by the IRS to uphold the filing of a Notice of Federal Tax Lien and to sustain a proposed collection action with respect to an estate’s tax deficiency was proper as a matter of law. The court also concluded that the IRS settlement officer properly considered the potential collectibility from the estate’s executor in determining the estate’s reasonable collection potential because the executor was potentially liable by reason of distributing estate assets before settling the estate’s outstanding tax liability. Estate of Lee, T.C. Memo. 2021-92 (7/20/21).

 

INDIVIDUALS

Foreign tax credit is disallowed where no foreign-source income is reported

The Tax Court held that, on their 2016 tax return, a married couple (1) received and failed to report taxable retirement income of $479, (2) received and failed to report payments in lieu of dividends of $112, and (3) could not claim a foreign tax credit of $3,550. The court concluded that, because the couple did not report any foreign-source taxable income on their 2016 tax return, their ratio of foreign taxable income to their total taxable income for 2016 was zero, and due to the foreign tax credit limitation in Sec. 904(a), their foreign tax credit was also zero. Bassily, T.C. Summ. 2021-20 (7/19/21).

Couple fails to substantiate expenses passed through from S corporation

The Tax Court held that a married couple were not entitled to a nonpassive loss deduction claimed on Schedule E, Supplemental Income and Loss, of their 2015 tax return. The court found that the couple did not provide sufficient substantiation regarding expenses incurred by an S corporation, which was 50% owned by the husband, and thus were not entitled to deduct passthrough losses from the S corporation in excess of those already allowed. Fagenboym, T.C. Summ. 2021-19 (7/19/21).

Couple who received separate certification notices for same liability may file joint petition

Where the IRS separately certified that a husband and wife each had a seriously delinquent tax debt (potentially resulting in revocation or denial of a passport) under Sec. 7345(b), the Tax Court held that married taxpayers who receive separate but substantially identical notices of certification arising from the same tax liability may file a joint Tax Court petition in the same manner as in a deficiency case under Tax Court Rule 34(a)(1). The court also held that (1) it lacked authority under Sec. 7345(e) to address the merits of an offer in compromise the couple had submitted to the IRS, and (2) because the IRS reversed its certifications as erroneous and so notified the Secretary of State, the couple’s challenge in that respect was moot. Garcia, 157 T.C. No. 1 (7/19/21).

Court allows couple to partially deduct losses from Ponzi scheme

The Tax Court held that a couple were entitled to certain passthrough theft loss deductions under Rev. Proc. 2009-20 due to losses incurred in 2008 as a result of a Ponzi scheme. However, the court found that other passthrough losses deducted by the couple did not qualify as theft losses under Sec. 165 and the couple were not “qualified investors” as described in the revenue procedure with respect to them. Vennes, T.C. Memo. 2021-93 (7/20/21).

Passport revocation for tax debt is constitutional

In a case of first impression, the Tenth Circuit held that provisions under Sec. 7345 and 22 U.S.C. Section 2714a(e) that allow the government to revoke the passports of individuals with significant tax debts are constitutional. The taxpayer had argued that the Privileges and Immunities Clause of the Fourteenth Amendment limited the federal government’s ability to restrict international travel, but the court disagreed. Maehr v. State Department, No. 20-1124 (10th Cir. 7/20/21).

 

IRS PROCEDURE

Appeals court allows enforcement of IRS summonses

The Sixth Circuit affirmed a district court decision ordering enforcement of IRS summonses issued during an investigation of the taxpayers’ tax liabilities. The court held that investigatory summonses may seek records from dates outside the specific tax period under investigation. Gaetano, No. 20-2182 (6th Cir. 7/16/21).

Informal advice addresses pre-TCJA Sec. 162 and False Claims Act cases

The Office of Chief Counsel issued expedited informal advice concerning the application of the pre-Tax Cuts and Jobs Act (TCJA) version of Sec. 162(f) to False Claims Act cases for which the settlement agreement does not address the federal tax treatment of the settlement amount. The Chief Counsel’s Office noted the significance of the Financial Management Information Systems (FMIS) report prepared by the Department of Justice (DOJ), and the importance of obtaining the FMIS report from the DOJ when determining how much of a settlement is compensatory and how much is punitive, as it provides evidence of the allocation of the settlement proceeds between compensatory and punitive amounts. The amount deposited into the Treasury is punitive and nondeductible under Sec. 162(f). CCA 202129014 (7/23/21).

Amounts paid by defaulting bidder on seized property is forfeited

The Office of Chief Counsel was asked for advice on a situation involving a deferred payment sale of seized property that is subsequently declared null and void as the result of a default in payment by a purchaser, and the property is then resold. The Chief Counsel’s Office noted that, under Sec. 6335(e)(3) and Regs. Sec. 301.6335-1(c)(9), any amount paid by a defaulting bidder is forfeited and the Internal Revenue Manual has special accounting procedures for how the IRS is to handle forfeited bid-in amounts. CCA 202129013 (7/23/21).

Summons should not be issued to taxpayer’s former employee without notice to taxpayer

The Office of Chief Counsel advised that, while the IRS can avoid giving Sec. 7602(c) notice to a taxpayer regarding a third-party contact, the IRS must establish reasonable cause that notifying the taxpayer of a third-party summons may lead the taxpayer to attempt to prevent the communication of information from that third-party contact through intimidation, bribery, or collusion. In the situation at issue, the Chief Counsel’s Office concluded that, unless the IRS can allege sufficient facts and circumstances to persuade a court, a summons should not be issued to a taxpayer’s former employee without providing notice to the taxpayer. CCA 202129011 (7/23/21).

IRS not required to assert a Sec. 6038 penalty against spouses

The Office of Chief Counsel advised that the IRS is not required to assert a Sec. 6038 penalty against spouses of those who have a filing requirement under that provision. The Chief Counsel’s Office cited the Supreme Court’s decision in Heckler v. Chaney, 470 U.S. 821 (1985), in concluding that the Treasury Secretary and his delegates have discretion under Sec. 7803(a)(2)(A) to decide whether to assert penalties. CCA 202129010 (7/23/21).

Chief Counsel discusses procedures for assessing a Sec. 6695A penalty

The Office of Chief Counsel advised that, while there is no case law or guidance on the issue, the Chief Counsel’s position is that, to assess the Sec. 6695A penalty for substantial and gross valuation misstatements attributable to incorrect appraisals, the IRS is not legally required to send the L4477 or an information document request, or to conduct an interview with the appraiser, although it nonetheless may be a good policy decision to do so. The Chief Counsel’s Office said that its reading of Sec. 6695A is that the exception in Sec. 6695A(c) is a defense to the penalty, not a prerequisite to assessing it. CCA 202129009 (7/23/21).

Nothing in COVID notices would extend the 24-month window for IRS to accept an offer-in-compromise

The Office of Chief Counsel advised that nothing in the current COVID notices (including Notice 2020-23 and its predecessors), nor in Sec. 7508A itself, would extend the 24-month period for the IRS to accept an offer-in-compromise if the original deadline does not fall between April 6, 2020, and July 15, 2020. CCA 202129008 (7/23/21).

Taxpayers can designate payment allocation when making quarterly federal tax deposits

The Office of Chief Counsel advised that, when a taxpayer makes a quarterly federal tax deposit, the taxpayer can designate the payment allocation attributable to a specific payroll. However, the Chief Counsel’s Office said, the request or designation for the application of the payment must be specific, in writing, and made at the time of the payment, and the taxpayer has no right of designation of payments resulting from enforced collection measures. CCA 202129007 (7/23/21).

Levies on Social Security income continue after collection statute expiration date

The Chief Counsel’s Office advised that, if the IRS has issued a continuous wage levy, the levy is released at the end of the collection statute expiration date (CSED) and this also holds true for federal payment levy program levies under Sec. 6331(h), with an exclusion due to imminently ending CSEDs. However, the Chief Counsel’s Office noted, in the case of a levy specifically on Social Security income under Sec. 6331(a), the levy continues after the CSED due to the fact that the taxpayer had a fixed and determinable right to future payments of Social Security income at the time the levy arose. CCA 202129006 (7/23/21).

 

PARTNERSHIPS

All adjustments to partnership-related items go into computing imputed underpayment

The Office of Chief Counsel advised that all adjustments to partnership-related items (PRIs) go into the computation of an imputed underpayment (IU) regardless of whether they would result in additional income tax if properly reported by the partners. The issue of whether there is an income tax impact does not go into consideration of whether an adjustment goes into the IU computation but rather goes into the analysis of whether the item is a PRI or not. CCA 202129012 (7/23/21).

 

TAX-EXEMPT ORGANIZATIONS

Entity owned and controlled by couple did not qualify as a 501(c)(3) organization

The Tax Court held that an entity owned and controlled exclusively by a married couple did not qualify for exempt status under Sec. 501(a) and thus did not qualify as an exempt organization for purposes of Sec. 501(c)(3). The court noted that, because the entity was owned and controlled exclusively by the couple, the benefits relating to the entity would inure to the couple, and the entity would not be operated for the benefit of the public. New World Infrastructure Organization, T.C. Memo. 2021-91 (7/20/21).

Tax Insider Articles

DEDUCTIONS

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.

TAX RELIEF

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.