Document summaries for the week of June 21, 2021

EMPLOYEE BENEFITS

IRS extends temporary relief from physical presence requirement in Regs. Sec. 1.401(a)-21

The IRS issued a notice that provides a 12-month extension, through June 30, 2022, of the temporary relief provided in Notice 2021-3 from the physical presence requirement in Regs. Sec. 1.401(a)-21(d)(6) for participant elections required to be witnessed by a plan representative or a notary public (the physical presence requirement). According to the IRS, this extension of relief is provided to respond to the continuing COVID-19 pandemic and to permit consideration of stakeholder comments. Notice 2021-40 (6/24/21).

INDIVIDUALS

IRS opens portal for opting out of advance child tax credit

The IRS has opened an online site to enable taxpayers to unenroll from receiving advance payments of the 2021 child tax credit. It also allows taxpayers to view their eligibility and their expected advance payments. Child Tax Credit Update Portal (6/22/21) (see related news story).

Taxpayer is liable for penalties that accrued before restitution was ordered or paid

The Tax Court held that a taxpayer, who was sentenced to prison for 2004–2006 tax crimes and ordered to pay restitution of $1.4 million, was liable for additions to tax under Sec. 6651 and Sec. 6654 that accrued before the restitution was ordered or paid. The court noted that the taxpayer failed to show that the failures to file returns or pay estimated taxes was due to reasonable cause and not due to willful neglect. Ervin, T.C. Memo. 2021-75 (6/23/21).

Basis of properties must be reduced to determine debt discharge excluded from income

The Tax Court held that, where a taxpayer sold 16 investment properties in 2012 and received a discharge of qualified real property business indebtedness (QRPBI) for 15 of those properties in 2012, and subsequently sold seven investment properties in 2013 for which no discharge of debt was received, the taxpayer is required to reduce the bases of depreciable real properties sold in 2012 to calculate the basis adjustment necessary for determining the amount of the QRPBI discharge that may be excluded from income. The court also concluded that the taxpayer was not liable for accuracy-related penalties because he relied in good faith on professional tax advice in preparing his returns for 2012 and 2013, and thus the court rejected IRS arguments that errors on the taxpayer’s returns showed he was not acting in good faith. Hussey, 156 T.C. No. 12 (6/24/21).

IRS PROCEDURE

Sec. 6700 penalty calculation includes gross income derived after formation of tax shelter

The IRS Office of Chief Counsel advised that the Sec. 6700 penalty calculation includes a promoter’s gross income derived from the organization or sale of a tax shelter after the formation of the tax shelter. The Chief Counsel’s Office cited Davison, T.C. Memo. 2020-58, in noting that courts have found that Sec. 6700 allows the government to assess a penalty on all gross income derived from the organization or sale of a tax shelter, including gross income derived after the formation of the tax shelter. CCA 202125008 (6/25/21).

Promotion of microcaptive insurance transactions can lead to Sec. 6700 penalties

The IRS Office of Chief Counsel advised that, with respect to the promotion of microcaptive insurance transactions, the following two types of false or fraudulent statements fall within the purview of Sec. 6700: (1) statements directly addressing the availability of tax benefits, and (2) statements concerning factual matters that are relevant to the availability of tax benefits. Additionally, the Chief Counsel’s Office stated that, to the extent that an individual organizer or seller of a microcaptive program made, or caused to be made, false or fraudulent statements that the individual knew or had reason to know were false or fraudulent as to the availability of tax benefits, the IRS may penalize each such individual under Sec. 6700. CCA 202125009 (6/25/21).

Chief Counsel believes that cases under discussion are Westbrooks cases

With respect to discussions involving three unidentified cases, the IRS Office of Chief Counsel advised that, in its view, the cases were Westbrooks cases, referring to the decision in Westbrooks, 858 F.3d 317 (5th Cir. 2017), involving restitution imposed for a tax offense. CCA 202125010; CCA 202125014; CCA 202125019 (6/25/21).

Chief Counsel: Cases at issue are not Westbrooks cases

With respect to discussions involving several unidentified cases, the IRS Office of Chief Counsel advised that, in its view, the cases are not Westbrooks cases, referring to the decision in Westbrooks, 858 F.3d 317 (5th Cir. 2017), involving restitution imposed for a tax offense. CCA 202125011; CCA 202125012; CCA 202125013; CCA 202125018 (6/25/21).

Two-year period for filing refund suit has expired

In response to a question involving guidance from the IRS Small Business and Self-Employed (SBSE) division regarding a taxpayer’s refund, the Office of Chief Counsel advised that it agreed with the guidance and noted that (1) a Letter 105C, which is used for fully disallowed claims, was issued on April 12, 2017, which means that the two-year period for filing suit expired on April 12, 2019, and while the two-year period can be extended by using Form 907, Agreement to Extend the Time to Bring Suit, the time for executing such extension had expired; and (2) once the IRS issues a notice of claim disallowance, the IRS is prohibited from issuing a refund after the two-year period for filing suit has expired unless the taxpayer has protected herself by filing a timely refund suit. As a result, the Chief Counsel’s Office stated that it saw no relief that could be given for the taxpayer’s refund. CCA 202125015 (6/25/21).

No restitution was ordered in connection with tax loss

The Office of Chief Counsel advised that, with respect to the question of whether there was an assessable restitution determined by the court with respect to a defendant’s plea agreement, the amount of restitution payable to the nongovernment victim was a set amount and the court imposed no restitution for the Title 26 count. The Chief Counsel’s Office noted that while the plea agreement suggested that there would be a separate restitution order, none was made and, because no restitution was ordered in connection with the tax loss at issue, there is no amount of restitution for which an assessment can be made under Sec. 6201(a)(4). CCA 202125016 (6/25/21).

IRS was wrong in denying claim, but taxpayer appears out of luck

The Office of Chief Counsel advised that a taxpayer was out of luck even though it appeared that the IRS was wrong in denying the taxpayer’s refund claim because the facts suggested that the claim was timely because of the impact of Sec. 7503. The only way that the Chief Counsel’s Office could see issuing a refund after the period for filing suit had expired was if somehow the two-year period for filing suit was not actually triggered (e.g., the Letter 105C was invalid because it was not sent by certified or registered mail as required by Sec. 6532). CCA 202125017 (6/25/21).