Document summaries for the week of March 15, 2021
Tax document summaries for the week of March 15–19 2021, covering individuals, IRS procedure, and more.
Separation from service exception does not apply to taxpayer’s IRA distribution
The Tax Court held that the Sec. 72(t)(2)(A)(v) separation from service exception to the 10% additional tax on early retirement plan distributions did not apply to the taxpayer. The court noted that, although the taxpayer had a Sec. 401(k) plan with his previous employer and was 55 years old when he separated from service with that employer, he transferred the funds from his 401(k) account to a traditional IRA and, because he withdrew the distribution from a tradition IRA at age 57, Sec. 72(t)(2)(A)(v) did not apply. Catania, T.C. Memo. 2021-33 (3/15/21).
Court does not buy lawyer’s testimony that she was insolvent before debt discharge
The Tax Court held that a lawyer, who was the sole shareholder of an S corporation in which she operated her legal business, was taxable on 100% of the firm’s income and losses and she should have reported the amounts from the corporation’s Form 1120S on Schedule E, Supplemental Income and Loss, rather than Schedule C, Profit or Loss From Business, of her Form 1040. She also owed employment taxes on all of her compensation, including officer compensation. In addition, the court held that the taxpayer had income from the cancellation of debts and, because her only proof that she was insolvent before her debts were discharged was her own testimony, she was not entitled to use the insolvency exception in Sec. 108(a)(1)(B) to exclude the discharge of indebtedness from income. Ward, T.C. Memo. 2021-32 (3/15/21).
Casino profits paid to tribal members are taxable income
The Eleventh Circuit held that payments from the Miccosukee Tribe to tribal members from the profits of a casino operated by the tribe are taxable income to the tribal members and not exempt from tax under statute or as nontaxable lease payments. Clay, No. 19-14441 (11th Cir. 3/16/21).
IRS postpones April 15 tax deadline
The IRS announced that it is postponing the deadline for all individual tax returns. Returns otherwise due April 15 will not have to be filed until May 17 this year. IR-2021-59 (3/17/21) (see related news story).
TCJA provision addressing gambling losses applies only to individuals
The Office of Chief Counsel advised that the amendment to Sec. 165(d) made by the law known as the Tax Cuts and Jobs Act of 2017 (TCJA), P.L. 115-97, which limits wagering losses to wagering gains and reverses the result reached by the Tax Court in Mayo, 136 T.C. 81 (2011), applies only to individuals, as detailed in the legislative history of the amendment and the Mayo case. According to the Chief Counsel’s office, nothing in the committee report states an intention to apply the amendment to losses incurred by businesses in the trade or business of gambling. CCA 202111012 (3/19/21).
Appeals court affirms denial of innocent spouse relief
The Eleventh Circuit affirmed a Tax Court decision denying a taxpayer innocent spouse relief, finding the Tax Court had not abused its discretion when weighing the factors of economic hardship and the taxpayer’s knowledge. Sleeth, No. 20-10221 (11th Cir. 3/19/21).
IRS did not abuse its discretion in denying OIC of couple living large
The Tax Court held that an IRS settlement officer did not abuse her discretion in sustaining a proposed collection action against a married couple after rejecting the couple’s offer in compromise and proposed installment agreement as not being in the government’s best interest. The court noted that IRS Appeals determined that the husband and wife were high-income earners who enjoyed a commensurate lifestyle during the period in which their tax was not paid, yet they neglected to pay tax even when they possessed the means to do so. Siebert, T.C. Memo. 2021-34 (3/15/21).
IRS issues applicable federal rates for April 2021
The IRS issued a ruling containing the applicable federal rates for April 2021 for purposes of Sec. 1274(d), Sec. 1288(b), and Sec. 382(f). The ruling also contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) for buildings placed in service during the current month, the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for Sec. 7520 purposes. Rev. Rul. 2021-7 (3/15/21).
Calendar year 2021 state population figures published
The IRS issued population figures for state and local housing credit agencies to use in calculating: (1) the 2021 calendar-year population-based component of the state housing credit ceiling under Sec. 42(h)(3)(C)(ii); (2) the 2021 calendar-year volume cap under Sec. 146; and (3) the 2021 volume limit under Sec. 142(k)(5). Notice 2021-19 (3/15/21).
IRS clarifies Notice 2021-12
The IRS issued a notice clarifying Notice 2021-12, which provides temporary relief from certain requirements under Sec. 42 for qualified low-income housing projects and under Sec. 142(d) and Sec. 147(d) for qualified residential rental projects, by providing a more precise citation in Section IV.E of that notice. That clarification provides that, for purposes of Sec. 42(f)(3)(A)(ii), if the close of the first year of the credit period with respect to a building is on or after April 1, 2020, and on or before June 30, 2021, then the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the six-month period following the close of that first year. Notice 2021-17 (3/16/21).
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.