Document summaries for the week of June 28, 2021

Tax document summaries for the week of June 28–July 2, 2021, covering individuals, IRS procedure, and more.

CORPORATIONS

Gasoline/butane mixture is not an alternative fuel mixture

The Seventh Circuit held that the Sec. 6426 alternative fuel mixture tax credit does not apply to a gasoline/butane mixture. U.S. Venture, Inc., No. 20-1861 (7th Cir. 6/29/21).

 

INDIVIDUALS

Court upholds Notice of Federal Tax Lien on taxpayer who failed to pay taxes

The Tax Court upheld an IRS Notice of Federal Tax Lien with respect to a taxpayer who failed to timely file his 2008 and 2009 tax returns or pay the tax due for those returns. The court concluded that the IRS settlement officer overseeing the case did not abuse her discretion under Sec. 6330(c)(3)(B) to consider any issues raised by the taxpayer during a Collection Due Process hearing and noted that the taxpayer did not raise any issues at his hearing beyond his underlying liabilities or pursue any collection alternatives. Benson, T.C. Memo. 2021-78 (6/29/21).

Court denies deductions for unsubstantiated business expenses

The Tax Court held that a self-employed taxpayer who produced commercials for radio and television and provided entertainment services as an audio technician and musician was not entitled to certain business expense deductions on his 2016 and 2017 tax returns because he did not adequately substantiate them. In addition, the court found the taxpayer liable for accuracy-related penalties because he did not offer a meaningful defense against them. Bridges, T.C. Summ. 2021-16 (6/29/21).

Transfers of funds between related corporations were taxable distributions to taxpayer

The Tax Court held that a taxpayer’s transfers of funds between corporations that he owned were not bona fide loans but were instead taxable distributions. The court also held that the taxpayer’s calculation of cancellation-of-indebtedness income from which he sought relief under Sec. 108(a)(1)(B) was overstated because it included purported loans to him from his closely held companies that should have been excluded. Kelly, T.C. Memo. 2021-76 (6/28/21).

Court rejects taxpayer’s argument that her wages are not taxable and assesses penalty

The Tax Court held that a taxpayer was taxable on wages of $48,535 received during 2016 after rejecting her argument that the wages were not subject to tax because she was not engaging in the “exercise of Federal privileges.” The court found her argument to be frivolous and not only sustained the tax deficiency assessed by the IRS but also imposed a penalty of $250 under Sec. 6673(a)(1)(B). Muhammad, T.C. Memo. 2021-77 (6/29/21).

Gambling losses are not casualty losses

The Ninth Circuit affirmed a Tax Court decision upholding the IRS’s determination of a tax deficiency. The court held that the taxpayer’s gambling losses did not qualify as deductible casualty losses under Sec. 165(c)(3). Mancini, No. 19-73302 (9th Cir. 6/29/21).

Google Maps printouts did not qualify as substantiation for business miles driven

The Tax Court allowed a partial deduction for certain lodging and other unreimbursed employee business expenses incurred by a licensed journeyman electrician who, the court concluded, had a tax home in Colorado but incurred expenses in traveling to other states to perform union jobs. However, the court disallowed most of the vehicle-related expense deductions after determining that the taxpayer’s use of Google Maps printouts that purportedly reflected the distances traveled for certain projects was inadequate to substantiate the majority of miles the taxpayer said he had driven. Geiman, T.C. Memo. 2021-80 (6/30/21).

Taxpayer owes taxes on amounts earned by others driving under his Uber account

The Tax Court held that a taxpayer who earned income by driving for Uber and by having others drive for Uber under his account had unreported income of more than $540,000 based on the amounts deposited by Uber into his Uber-connected bank account and reported to him on the Forms 1099-K and 1099-MISC. While the court allowed a deduction for amounts the taxpayer paid to the other drivers from his Uber-connected account, it determined there was no way to substantiate amounts the taxpayer paid out to the other drivers in cash and thus such amounts were not deductible. Nurumbi, T.C. Memo. 2021-79 (6/30/21).

IRS officer did not abuse her discretion in sustaining a notice of federal tax lien

The Tax Court granted summary judgment to the IRS and sustained a collection action against a taxpayer who had tax deficiencies relating to her 2015 and 2016 tax returns. In finding that the IRS settlement officer (SO) who worked with the taxpayer did not abuse her discretion in sustaining a notice of federal tax lien, the court noted that the taxpayer had never completed forms the SO had asked for and did not supply any financial information that would allow the SO to evaluate the taxpayer’s ability to pay or make any determination as to the taxpayer’s eligibility for a collection alternative. Long, T.C. Memo. 2021-81 (6/30/21).

Six-year statute of limitation applies to partners who failed to adequately disclose gain

The Tax Court held that, because a married couple did not adequately disclose the source of a capital gain reported on their Form 1040 Schedule E, Supplemental Income and Loss, and because a partnership in which they were partners failed to file a return with the requisite Schedules K-1, the six-year statute of limitations period applied with respect to deficiencies assessed by the IRS. The court noted that the couple’s return provided no clue to the IRS that their distributive share of the partnership’s capital gain income was about $3.4 million greater than reported on the face of their return. Pragias, T.C. Memo. 2021-82 (6/30/21).

Bank information can be updated on Child Tax Credit Portal

The IRS announced that individuals can now update their bank account information with the IRS online in order to receive monthly advance child tax credit payments. IR-2021-143 (7/1/21) (see related news story).

 

IRS PROCEDURE

IRS issues start of ‘Dirty Dozen’ tax scams list

The IRS issued the first two parts of its annual list of top tax scams, detailing pandemic-related scams and personal information cons. IR-2021-135 (6/28/21); IR-2021-137 (6/29/21) (see related news stories here and here).

National taxpayer advocate issues midyear report to Congress

National Taxpayer Advocate Erin Collins issued her midyear report to Congress, assessing the 2021 tax filing season and identifying areas for improvement. FY 2022 Objectives Report to Congress (6/30/21).

IRS provides specifications for private printing of information returns

The IRS issued a procedure providing specifications for the private printing of red-ink substitutes for the 2021 revisions of certain information returns. This procedure will be reproduced as the next revision of IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns, and supersedes Rev. Proc. 2020-35. Rev. Proc 2021-27 (6/28/21).

IRS issues procedure for certain paper and computer-generated forms

The IRS issued a procedure that provides general rules and specifications from the IRS for paper and computer-generated substitutes for Form 941, Employer’s Quarterly Federal Tax Return, and its Schedules B, D, and R, and Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This procedure supersedes Rev. Proc. 2020-31. Rev. Proc. 2021-22 (6/28/21).

2020 Data Book released

The IRS issued its fiscal year 2020 Data Book detailing the Service’s activities during the period Oct. 1, 2019, through Sept. 30, 2021. 2020 Data Book (6/28/21).

IRS procedure specifies how and when to make NOL elections

The IRS issued a revenue procedure which provides guidance regarding elections and revocations relating to net operating losses (NOLs), including farming loss NOLs. The procedure (1) addresses provisions in Section 2303(e) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136,  which provides special rules for taxpayers with an NOL for any tax year beginning in 2018, 2019, or 2020, all or a portion of which consists of a “farming loss,” and (2) specifies when and how to make an election with regard to all NOLs of the taxpayer, regardless of whether the NOL is a farming loss NOL. Rev. Proc. 2021-14 (6/30/21) (see related news story).

IRS extends COVID-related charity rules

The IRS announced that it is extending through 2021 the guidance previously issued in Notice 2020-46, which provides that cash payments employers make to charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation, or personal leave which their employees forgo will not be treated as compensation. Additionally, the employees will not be treated as receiving the value of the leave as income and cannot claim a deduction for the leave that they donated to their employer; however, employers may deduct the cash payments as a business expense or as a charitable contribution deduction if the employer otherwise meets the applicable requirements. Notice 2021-42 (6/30/21).

Failure to substantiate basis in rental property precludes depreciation deductions

The Tax Court held that a married couple who owned rental property could not take depreciation deductions relating to the property because they failed to produce any records that showed their basis in the property. However, the court (1) allowed deductions for mortgage interest, a partial deduction for repairs, and a partial deduction for cost of goods sold for a prior business enterprise, and (2) found the couple was not liable for an accuracy-related penalty because they relied on a tax return preparer to prepare their tax return. Minarich, T.C. Summ. 2021-17 (7/1/21).

Accrual of interest on bank’s delinquent taxes is not affected by Sec. 7507

In a situation where Sec. 7507(a), which exempts insolvent banks from tax, applied to bar the assessment, collection, and payment into the U.S. Treasury of a bank’s federal income tax for a certain period but then ceased to apply, the Office of Chief Counsel advised that (1) Sec. 6601 interest accrued from the date fixed for filing the return reporting the tax until the date the tax was paid, (2) Sec. 6601 interest on unpaid Sec. 6601 interest continues to accrue until the amount of Sec. 6601 interest owed is paid, and (3) the accrual of such interest is unaffected by Sec. 7507(a). As to tax that becomes due during a period of immunity under Sec. 7507(a), the Chief Counsel’s Office stated that failing to pay tax during such period is due to reasonable cause under Sec. 6651(a)(2) and not due to willful neglect because Sec. 7507(a) effectively precludes paying such tax on the payment due date. CCA 202126022 (7/2/21).

IRS announces transition relief from penalties relating to new Schedules K-2 and K-3

The IRS issued a notice announcing that it is providing transition relief for tax years that begin in 2021 with respect to new Schedules K-2, Partners’ Distributive Share Items — International, and K-3, Partner’s Share of Income, Deductions, Credits, etc. —– International, required for Forms 1065, U.S. Return of Partnership Income, 1120-S, U.S. Income Tax Return for an S Corporation, and 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. The notice provides background on these new schedules and the penalties that may apply for failure to furnish complete and correct information with respect to such schedules and provides transition relief from these penalties for any incorrect or incomplete reporting on the Schedules K-2 and K-3 if the filer establishes to the satisfaction of the IRS that it made a good-faith effort to comply with the new reporting requirements. Notice 2021-39 (6/30/21). 

 

TAX ACCOUNTING

IRS amends beginning-of-construction requirement under Secs. 45 and 48

The IRS issued a notice that clarifies and modifies prior IRS notices addressing the beginning-of-construction requirement for both the production tax credit for qualified facilities under Sec. 45 and the investment tax credit for energy property under Sec. 48. In response to the COVID-19 pandemic, the notice provides that the safe harbor originally provided in Notice 2013-60 and Notice 2018-59 and extended in prior IRS notices (continuity safe harbor) is further extended for property the construction of which began in 2016 through 2020. The latest notice also clarifies the methods that taxpayers may use to satisfy certain continuity requirements of the beginning-of-construction requirements under Secs. 45 and 48. Notice 2021-41 (6/29/21).

IRS rules that an acid gas removal unit qualifies as carbon capture equipment

The IRS ruled that, for purposes of the carbon oxide sequestration credit in Sec. 45Q, the acid gas removal unit at a methanol plant that produces methanol from petroleum coke in a multistep industrial process is carbon capture equipment within the meaning of Regs. Sec. 1.45Q-2. The IRS also stated that an investor in the facility is not required to own every component of carbon capture equipment within a single process train at the facility in order to be the person to whom the Sec. 45Q credit is attributable under Regs. Sec. 1.45Q-1(h). Rev. Rul. 2021-13 (7/1/21).

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TECHNOLOGY

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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.