Document summaries for the week of June 7, 2021
Tax document summaries for the week of June 7–11, 2021, covering individuals, IRS procedure, and more.
Proposed levy sustained on lawyer liable for 1998 employment taxes
The Tax Court sustained a proposed levy on a lawyer, who underwent multiple Chapter 7 bankruptcy proceedings between 2000 and 2011, with respect to employment taxes reportable on Form 941, Employer’s Quarterly Federal Tax Return, for two quarters in 1998 after finding that the taxpayer was liable for the Form 941 liabilities at issue. The court further found that there was no abuse of discretion on the part of the IRS, its agents, or the IRS settlement officer assigned to the taxpayer’s case with respect to the decision to proceed with collection on the proposed levy. Lufkin, T.C. Memo. 2021-71 (6/8/21).
Taxpayer must include entire malpractice award in income, including fees paid to attorney
The Tax Court held that a taxpayer had to include in income $175,000 she received when she won a malpractice lawsuit against her divorce attorney, and that amount included the portion of the settlement retained by her attorney as a fee for representing her in the lawsuit. The court noted that, even if the taxpayer had convinced the court that some of the settlement proceeds were meant to replace her purported loss of marital property and that the loss was a nontaxable recovery of capital, she failed to provide a basis upon which the court could allocate the settlement proceeds between that hypothetically nontaxable recovery and other taxable amounts. Holliday, T.C. Memo. 2021-69 (6/7/21)
United States and Switzerland update treaty for certain retirement arrangements
The competent authorities of the United States and Switzerland entered into an arrangement regarding certain U.S. and Swiss pension or other retirement arrangements, including individual retirement savings plans, that may be eligible for benefits under paragraph 3 of Article 10 of the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income signed on Oct. 2, 1996, as amended. The arrangement was entered into under paragraph 3 of Article 25 of the treaty and supersedes the competent authority arrangement entered into on Dec. 10, 2004. Announcement 2021-11 (6/7/21).
Wife’s Social Security income is not foreign-sourced
The Tax Court held that an IRS settlement officer correctly calculated a married couple’s foreign tax credit for 2014 and rejected the couple’s argument that the wife’s taxable Social Security benefits should be treated as sourced in Puerto Rico (or be ignored altogether) for purposes of the foreign tax credit limitation factor calculated under Sec. 904. The court noted that Sec. 861(a)(8) explicitly provides that U.S. Social Security benefits are U.S.-source income. Garcia, T.C. Memo. 2021-72 (6/8/21).
Sec. 6404(b) precludes abatement of interest on taxes due on fraudulent contribution deductions
The Tax Court held that Sec. 6404(b) precludes a married couple’s claim under Sec. 6404(a) for abatement of almost 13 years of interest on income taxes due on charitable contribution deductions that had been passed through to them from a partnership but turned out to be fraudulent. The court further held that, with the exception of one period of approximately five months, the administrative record showed that IRS Appeals did not abuse its discretion when it determined that there was no ministerial or managerial act by the IRS sufficient to constitute unreasonable delay that would justify abatement of interest under Sec. 6404(e). Verghese, T.C. Memo. 2021-70 (6/7/21).
Taxpayers are not entitled to new CDP hearing
The Eighth Circuit affirmed a Tax Court decision that the taxpayers, a married couple, were not entitled to a new Collection Due Process (CDP) hearing. A revenue officer included notes and correspondence about a meeting with their attorney in the official file that the settlement officer reviewed; however, the court found that these were not improper ex parte communications but were contemporaneously made statements that were pertinent to the case. Stewart, No. 19-3786 (8th Cir. 6/8/21).
2020 reference price for natural gas production from marginal wells
The IRS provided the applicable reference price for qualified natural gas production from qualified marginal wells during tax years beginning in calendar year 2020 for the purpose of determining the marginal well production credit under Sec. 45I. Notice 2021-34 (6/7/21).
Regulations explain tax deadline postponements due to federally declared disasters
The IRS issued final regulations relating to the new mandatory 60-day postponement of certain time-sensitive tax-related deadlines by reason of a federally declared disaster. T.D. 9950 (6/10/21) (see related news story).
IRS did not abuse its discretion in denying whistleblower claim
The Tax Court granted the IRS summary judgment after reviewing the denial by the IRS Whistleblower Office (WBO) of a taxpayer’s claim. The court concluded that the WBO did not abuse its discretion in denying the claim. Whistleblower 10084-16W, T.C. Memo. 2021-73 (6/9/21).
Court did not impose restitution under plea agreement so final judgement binds parties
In response to a question involving restitution with respect to a particular defendant who had pled guilty to an unidentified criminal charge, the Office of Chief Counsel advised that the defendant’s case was a Westbrooks case, referring to the decision in Westbrooks, 858 F.3d 317 (5th Cir. 2017), involving restitution imposed for a tax offense. The Chief Counsel’s Office noted that the defendant was convicted under a plea agreement and, while the court might have had the power to impose restitution as an independent part of the sentence, it did not do so, and the judgment, having become final, binds the parties. CCA 202123008 (6/11/21).
FAQs explain ARPA credit changes
The IRS posted two sets of FAQs to its website, explaining changes to various credits made by the American Rescue Plan Act (ARPA), P.L. 117-2. IR-2021-128 (6/11/21) (see related news story).
IRS to amend qualified derivative payments reporting requirements
The IRS announced that it intends to amend regulations under Sec. 59A and Sec. 6038A to defer the applicability date of certain provisions of the regulations relating to the reporting of qualified derivative payments until tax years beginning on or after Jan. 1, 2023. Specifically, the IRS said it will amend Regs. Sec. 1.6038A-2(g) to provide that Regs. Sec. 1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after Jan. 1, 2023, and until Regs. Sec. 1.6038A-2(b)(7)(ix) applies, the rules described in Regs. Sec. 1.59A-6(b)(2)(iv) that apply during the transition period will continue to apply. Notice 2021-36 (6/10/21).
Calculation of business interest limitation includes Sec. 481 adjustments
The Office of Chief Counsel advised that, to determine the amount of interest allowed as a deduction for the 2020 tax year under the business interest limitation rules in Sec. 163(j), a taxpayer’s adjusted taxable income (ATI) under Sec. 163(j)(8) for such tax year includes those adjustments that are required under Sec. 481(a) for a change in method of accounting for depreciation. The Chief Counsel’s Office also noted that, for purposes of determining ATI, the addback of the depreciation amount, including any Sec. 481(a) adjustment for the year of change, is allowed only for tax years beginning before Jan. 1, 2022. CCA 202123007 (6/11/21).
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.
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.