Document summaries for the week of March 22, 2021
Tax document summaries for the week of March 22–26 2021, covering individuals, IRS procedure, and more.
IRS can proceed with collecting unpaid employment taxes by levy
The Tax Court held that the IRS could proceed with collecting a corporation’s unpaid employment taxes by levy after concluding that it was not an abuse of discretion for IRS Appeals to reject an installment agreement relating to those unpaid taxes where it appeared that the corporation could not fund the agreement. The court also held that it was not an abuse of discretion for Appeals to refuse to classify the corporation’s account as currently not collectible when, even though the corporation did not have sufficient funds to make installment payments, it had assets that could be liquidated to make payments on its past-due taxes. American Limousines, Inc., T.C. Memo. 2021-36 (3/25/21).
Failure to file FBAR was willful
The Federal Circuit affirmed a decision of the Court of Federal Claims that a taxpayer’s failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report amounts she held in a Swiss bank account was willful and upheld a penalty of 50% of the account balance. Kimble, No. 2019-1590 (Fed. Cir. 3/22/21)
FBAR penalty applies per form and not per account
The Ninth Circuit reversed a district court decision and held, in an issue of first impression, that the $10,000 penalty for failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), applies per form and not per account. Boyd, No. 19-55585 (9th Cir. 3/24/21).
Personal protective equipment purchased by taxpayers qualifies as a medical expense
The IRS announced that amounts paid for personal protective equipment (PPE), such as masks, hand sanitizer, and sanitizing wipes, for the primary purpose of preventing the spread of COVID-19 are treated as amounts paid for medical care under Sec. 213(d). Therefore, amounts paid by an individual taxpayer for COVID-19 PPE for use by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent(s) that are not compensated for by insurance or otherwise are deductible under Sec. 213(a), provided that the taxpayer’s total medical expenses exceed 7.5% of adjusted gross income. Announcement 2021-7 (3/26/21) (see related news story).
Race car driver and wife substantially underreported income but escape hefty underpayment penalty
The Tax Court held that a successful race car driver and his wife, both of whom were involved in operating a race car business, (1) substantially underreported their income for 2009 and 2010; (2) were not entitled to large unsubstantiated net operating loss carryovers from the 1990s that were taken on their tax returns; (3) were not entitled to expenses relating to lawsuits that arose from the transfer of property interests to a family member because such expenses were nondeductible capital expenditures under Sec. 263; and (4) were not entitled to take business expense deductions relating to a house where little or no business was conducted but were entitled to minor home office deductions relating to another home. Finally, while the court upheld the assessment of penalties under Sec. 6651(a) for the couple’s late filing of their 2009 tax return, it concluded that the couple did not owe the 20% penalty for substantial understatement of income tax for both 2009 and 2010 because the IRS failed to show that the penalty had been personally approved in writing by the supervisor of the IRS agent making the penalty determination. Martin, T.C. Memo. 2021-35 (3/24/21).
Chief Counsel addresses federal tax classification of certain foreign entities
The Office of Chief Counsel advised that a foreign eligible entity is classified pursuant to Regs. Sec. 301.7701-3(b)(2) (i.e., the default classification provision) during the period in which its classification is not relevant and, while this determination is made when the classification of the entity first becomes relevant, the classification also applies during the nonrelevant period. According to the Chief Counsel’s Office, Regs. Sec. 301.7701-3(c)(1)(iv), which prohibits an entity that makes an election to change its classification from making another election to change its classification during the 60 months following the effective date of the first election (i.e., the 60-month limitation rule), applies if a foreign eligible entity, the classification of which has not previously been relevant, elects to change its classification. AM 2021-002 (3/25/21).
IRS updates weighted average interest rates, yield curves, and segment rates
The IRS issued a notice providing guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Sec. 417(e)(3), and the 24-month average segment rates under Sec. 430(h)(2). In addition, the notice provides guidance on the interest rate on 30-year Treasury securities under Sec. 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Sec. 431(c)(6)(E)(ii)(I). Notice 2021-22 (3/22/21).
IRS issues median gross income figures
The IRS issued a revenue procedure that provides guidance with respect to the United States and area median gross income figures for use by issuers of qualified mortgage bonds, as defined in Sec. 143(a), and issuers of mortgage credit certificates, as defined in Sec. 25(c), in computing the income requirements described in Sec. 143(f). In the revenue procedure, the IRS stated that it has decided to publish this revenue procedure as permanent guidance and to cease publishing annual revenue procedures providing income figures for purposes of computing the income requirements of Sec. 143(f). Rev. Proc. 2021-19 (3/25/21).
IRS issues purchase price figures for residences for issuers of qualified mortgage bonds
The IRS issued a revenue procedure that provides issuers of qualified mortgage bonds, as defined in Sec. 143(a), and issuers of mortgage credit certificates, as defined in Sec. 25(c), with (1) the nationwide average purchase price for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam. Rev. Proc. 2021-17 (3/25/21).
Partnership was a sham and agreements to extend statute of limitation were valid
The D.C. Circuit affirmed a Tax Court decision holding that a purported partnership was a sham that should be disregarded for tax purposes and that agreements extending the statute of limitation period were valid, making the IRS’s adjustments timely. BCP Trading and Investments, LLC, No. 19-1068 (D.C. Cir. 3/23/21).
STATE & LOCAL
IRS grants empowerment zone extensions
The IRS is providing an automatic procedure for a state or local government in which an empowerment zone is located to extend the empowerment zone designation made under Sec. 1391(a). Specifically, the procedure (1) provides that a state or local government that nominated an empowerment zone is deemed to extend until Dec. 31, 2025, the termination date designated by that state or local government in its empowerment zone nomination (designated termination date), as described in Sec. 1391(d)(1)(B), and (2) provides the procedure for such state or local government to decline this deemed extension of its designated termination date. Rev. Proc. 2021-18 (3/26/21).
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.