Document summaries for the week of July 26, 2021
Tax document summaries for the week of July 26–30, 2021, covering employee benefits, individuals, and more.
Step-transaction doctrine invoked to disallow a loss deduction
The Court of Federal Claims held that the IRS properly invoked the step-transaction doctrine to characterize events that resulted in a company’s claimed loss deduction as a single sale transaction, disallowing a deduction the company had claimed. GSS Holdings (Liberty) Inc., No. 19-728T (Fed. Cl. 7/26/21).
IRS provides additional guidance on COBRA continuation coverage
The IRS issued a notice providing additional guidance relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage that was enacted in Section 9501 of the American Rescue Plan Act of 2021, P.L. 117-2. The notice supplements Notice 2021-31 and addresses additional issues such as the extended COBRA coverage periods, dental and vision coverage, and comparable state continuation coverage. It also provides additional clarification on which entity is the common law employer entitled to claim the COBRA premium assistance credit. Notice 2021-46 (7/26/21) (see related news story).
IRS guidance addresses ARPA pension plan funding changes
The IRS issued guidance on the changes to the funding rules for single-employer defined benefit pension plans under Sec. 430 that were made by Sec. 9705 and Sec. 9706 of the American Rescue Plan Act of 2021 (ARPA), P.L. 117-2. Some of the issues addressed include the ARPA changes to the adjusted 24-month average segment rates, the applicability of the ARPA segment rates, changes to the adjusted 24-month average segment rates, and the extension of the amortization period for shortfall amortization bases. Notice 2021-48 (7/30/21).
Taxpayer liable for almost $300,000 in fines and penalties for excess benefit transactions
The Tax Court held that a taxpayer was a disqualified person with respect to a tax-exempt organization and that she engaged in excess benefit transactions with that organization during 2014 that she failed to report. As a result, the court found the taxpayer liable for a first-tier tax of $32,500 under Sec. 4958(a) and, because the taxpayer failed to correct the improper transactions during the applicable period, a second-tier tax of $260,000 under Sec. 4958(b), and additions to tax under Secs. 6651(a)(1) and (2). Ononuju, T.C. Memo. 2021-94 (7/26/21).
Statute of limitation does not apply to taxpayer’s failure to report investment income
The Tax Court held that a taxpayer failed to report $791,661 in offshore investment income and rejected his contention that the tax assessment on the unreported income was barred by the three-year statute-of-limitation period in Sec. 6501(a). The court agreed with the IRS that there was no statute-of-limitation period because the underpayments were due to fraud. Harrington, T.C. Memo. 2021-95 (7/26/21).
Traveling nurse cannot deduct expenses incurred while not away from home
The Tax Court held that a taxpayer who worked as a traveling nurse was not entitled to deductions for travel expenses incurred between her home in Georgia and her work in Kentucky, as well as other expenses incurred in Kentucky, because her tax home was Kentucky, and thus the expenses were not incurred “away from home.” According to the court, the taxpayer had no business reason for traveling to Georgia; her travel to Georgia was based on her personal desire to maintain a residence there. West, T.C. Summ. 2021-21 (7/26/21).
Tax Court reduces square footage used to calculate taxpayer’s office expense
The Tax Court held that a taxpayer, who teleworked from her 1,288-square-foot, two-bedroom apartment and used one of those bedrooms as an office, was not entitled to deduct 33% of the rent, utilities, and rental insurance as a business expense but instead was limited to a deduction of 23% of such costs. The court said it was unclear how the taxpayer arrived at her percentage of the deductible amount since she was unsure of the dimensions of the bedroom used as an office but roughly estimated it to be 300 square feet. Saedian, T.C. Summ. 2021-23 (7/29/21).
Court rejects penalty assessments on taxpayers after disallowing certain deductions
The Tax Court upheld the IRS’s disallowance of expenses passed through to a taxpayer from the taxpayer’s wholly owned S corporation because she did not conduct the S corporation’s activities with continuity and regularity as a means of earning a living. The court also disallowed a portion of gambling losses incurred by the taxpayer’s husband for lack of substantiation but rejected the IRS’s assessment of penalties because the taxpayers routinely used the same tax return preparer and had acted in good faith and thus had reasonable cause for their underpayment of tax. Gamble, T.C. Summ. 2021-22 (7/28/21).
Chief Counsel addresses Sec. 170(h) and conservation easement deed extinguishment clauses
The Office of Chief Counsel advised that a conservation easement fails to satisfy the requirements of Sec. 170(h) if the deed contains language subtracting from the donee’s extinguishment proceeds the value of post-donation improvements or the post-donation increase in value of the property attributable to improvements. The Chief Counsel’s Office noted that language in a conservation easement deed that closely adheres to the language of Regs. Sec. 1.170A-14(g)(6)(ii) generally will not cause a deed to violate the enforceability in perpetuity requirements and the Chief Counsel provided and example of such language. CCA 202130014 (7/30/21).