Document summaries for the week of March 29, 2021
Tax document summaries for the week of March 29–April 2, 2021, covering individuals, IRS procedure, and more.
Cannabis dispensary cannot offset gross receipts with business expenses
The Tax Court held that a corporation who operated a medical cannabis retail dispensary under California law underreported its gross income, was not entitled to offset its gross receipts with any cost of goods sold (COGS) because it failed to substantiate its COGS expenses, and was liable for the accuracy-related penalty under Sec. 6662(a). The court noted that the individual who organized the dispensary had destroyed the dispensary’s business records and thus the court was unable to estimate the dispensary’s COGS. Purple Heart Patient Center, Inc., T.C. Memo. 2021-38 (3/29/21).
Tax Court revises Complex Media decision issued in February
Due to an error in the original decision in Complex Media, Inc., T.C. Memo. 2021-14 (2/10/21), a decision addressing the step-transaction doctrine, the Tax Court issued a revised decision in that case. The updated decision reflects a revision on the last line of page 74, where the word “limit” is revised to “limn.” Complex Media Inc., T.C. Memo. 2021-14 (3/31/21).
IRS updates guidance on employee retention credit
The IRS issued a notice amplifying Notice 2021-20, which provides guidance on the employee retention credit enacted under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136. The notice provides guidance with respect to the amendments made to the employee retention credit by the Consolidated Appropriations Act, 2021, P.L. 116-260, which are effective beginning Jan. 1, 2021. Notice 2021-23 (4/2/21) (see related news story).
Appeals court upholds IRS levy
Affirming the Tax Court’s grant of summary judgment, the Seventh Circuit found that a taxpayer had a prior opportunity to contest his tax liability after he received a notice of a tax lien on his property and therefore upheld an IRS levy on the property. Jeffers, No. 20-2056 (7th Cir. 3/30/21).
Taxpayer who failed to review her return is liable for accuracy-related penalty
The Tax Court held that an independent contractor who failed to include almost $170,000 of nonemployee compensation in her 2015 federal income tax return did not qualify for the reasonable cause exception to the accuracy-related penalty the IRS assessed. The court concluded that, because the taxpayer did not review her tax return before its filing, she failed to do the bare minimum or expend reasonable effort in ensuring that all income was included on her return. Walton, T.C. Memo. 2021-40 (3/30/21).
Expenses for designing garments do not qualify for research activities credit
The Tax Court held that a successful garment designer was not entitled to claim credits under Sec. 41 in 2011 and 2012 for increasing research activities. The court concluded that the activities in the taxpayer’s design process did not constitute qualified research and thus no credit was allowed for the related expenses. Max, T.C. Memo. 2021-37 (3/29/21).
Couple’s closing agreement with IRS precludes subsequent tax and penalty assessment
The Tax Court held that a tax deficiency and accuracy-related penalty assessed by the IRS on a married couple was precluded by a closing agreement that had previously been signed by the parties. While the court acknowledged that there was uncertainty in the closing agreement concerning the amount of foreign tax credit to which the parties agreed the couple were entitled to, it did not agree with the IRS that there was a tax deficiency and thus found there could be no penalty on the deficiency. Crandall, T.C. Memo. 2021-39 (3/29/21).
US and Japan reach arrangement regarding treaty arbitration clause
The IRS announced that the United States and Japan have entered into an arrangement regarding the implementation of the arbitration process provided for in paragraphs 5, 6, and 7 of Article 25 of the U.S.–Japan income tax treaty. Announcement 2021-5 (3/29/21).
IRS postpones various tax filing deadlines
The IRS has postponed the deadlines for (1) filing tax forms in the Form 1040 series, including related schedules, from April 15 to May 17, 2021, and (2) filing and furnishing forms in the Forms 5498 series from June 1 to June 30, 2021. As a result of the postponement of the due dates for tax forms in the Form 1040 series, the period beginning on April 15, 2021, and ending on May 17, 2021, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the federal income tax returns or to pay the federal income taxes postponed. Notice 2021-21 (3/29/21) (see related news story).
IRS correct to certify taxpayer’s debt as a seriously delinquent tax debt under Sec. 7345(b)
The Tax Court held that the IRS did not err in certifying that a taxpayer who failed to pay almost $500,000 in assessed tax liabilities has a “seriously delinquent tax debt” within the meaning of Sec. 7345(b). The court also held that Sec. 7345(b) does not violate the taxpayer’s human rights as expressed in the Universal Declaration of Human Rights and is not unconstitutional. Rowen, 156 T.C. No. 8 (3/30/21).
IRS issues advance pricing report under 1999 law
The IRS issued a report, under Section 521(b) of the Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170, concerning advance pricing agreements. The report describes the experience, structure, and activities of the Advance Pricing and Mutual Agreement Program during calendar year 2020. Announcement 2021-6 (3/30/21).
IRS to automatically issue refunds on tax-free 2020 unemployment benefits
The IRS announced that, beginning in May and continuing into the summer, it will automatically issue to eligible taxpayers refunds of income tax paid on 2020 unemployment benefits. IR-2021-71 (3/31/21) (see related news story).