Document summaries for the week of March 8, 2021

C CORPORATIONS

Corporation’s payments to microcaptive insurance company aren’t deductible

The Tax Court held that a construction company could not deduct payments to a microcaptive insurance company because the microcaptive failed to distribute risk and did not act as an insurer commonly would and, thus, failed to provide insurance. In addition, the Tax Court upheld the assessment of penalties on the resulting tax underpayments after concluding that the construction company’s hiring of a tax return preparer who simply copied information handed to him onto the taxpayer’s tax return did not equate to getting advice, or a professional’s judgment, upon which the construction company could reasonably rely to avoid penalties. Caylor Land and Development, Inc., T.C. Memo. 2021-30 (3/10/21).

INDIVIDUALS

Court disallows couple’s deductions for unreimbursed employee business expenses and their claimed education credit

The Tax Court held that a married couple were not entitled to deductions for the husband’s unreimbursed employee business expenses because they failed to substantiate them or to show that he requested reimbursement from his employer. The court also concluded that the couple were not entitled to claim an American opportunity tax credit because they failed to show that the husband was enrolled at least half time at an eligible educational institution or to substantiate that they personally paid the claimed tuition amounts. Pichardo, T.C. Summ. 2021-7 (3/8/21).

Taxpayer cannot deduct commuting expenses; IRS failed to obtain approval for penalty

The Tax Court held that a taxpayer employed by a trucking company was not entitled to deduct over $26,000 of car and truck expenses incurred in commuting to work, but the court rejected the IRS’s determination that the taxpayer was subject to self-employment tax for amounts reported on a Schedule C, Profit or Loss From Business, that the Tax Court found should not have been filed. The court also concluded that the taxpayer was not liable for an accuracy-related penalty the IRS assessed without the requisite supervisory approval. Mathews, T.C. Memo. 2021-28 (3/9/21).

IRS met its burden in proving frivolous return penalties were justified

The Tax Court held that the IRS met its burden of proving that four purported returns filed by a married couple that reported zero gross income, zero taxable income, and zero tax were frivolous tax returns. However, the court held that the IRS satisfied the written supervisory approval requirement with respect to only three of the four frivolous return penalties assessed and thus only sustained the IRS’s Notice of Federal Tax Lien with respect to those three purported returns. Smith, T.C. Memo. 2021-29 (3/10/21).

Deficiency notices to taxpayer who reported zero taxable income were valid

The Tax Court held that deficiency notices sent to a taxpayer, who reported taxable income of zero despite his Forms W-2 showing otherwise, were valid and properly approved. The court also held that the taxpayer was liable for the Sec. 72(t) tax on early retirement plan distributions. Harriss, T.C. Memo. 2021-31 (3/11/21).

LEGISLATION

American Rescue Plan Act signed

President Joe Biden signed legislation that makes several changes to the Internal Revenue Code. American Rescue Plan Act, P.L. 117-2 (3/11/20) (see related news story).

MISCELLANEOUS

Installation of accessibility ramp required by ADA does not violate Sec. 170 rules

The Office of Chief Counsel advised that, where a donor of an easement on a building in a registered historic district installs an accessibility ramp to comply with the Americans With Disabilities Act (ADA), such installation does not violate the requirements of Sec. 170(h)(4)(B)(i). According to the Chief Counsel’s Office, upkeep of a certified historic structure encumbered by a façade easement, though not specifically addressed in Sec. 170(h) or the regulations thereunder, is permitted because upkeep is essential for preservation of the structure. AM 2021-001 (3/12/21).