Document summaries for the week of May 24, 2021

CORPORATIONS & SHAREHOLDERS

IRS announces nonacquiescence in split-dollar life insurance decision

The IRS announced that it does not acquiesce to the Sixth Circuit’s decision in Machacek, 906 F.3d 429 (6th Cir. 2018), rev’g T.C. Memo. 2016-55. The nonacquiescence pertains to the holding that the economic benefits of a compensatory split-dollar life insurance arrangement may be treated as a distribution with respect to stock under Sec. 301. AOD 2021-2 (5/24/21).

ESTATES, TRUSTS & GIFTS

Decedent’s third wife, not his first wife, was his surviving spouse

The Tax Court held that a decedent’s third wife, rather than his first wife as the IRS had argued, was the decedent’s surviving spouse and, as a result, the marital deduction under Sec. 2056(a) taken on the decedent’s estate tax return was proper. The court concluded that (1) New York law applied to determine the third wife’s marital status at the time of the decedent’s death, and (2) the Israeli marriage between the third wife and the decedent was valid under the place of celebration test that the N.Y. Court of Appeals has applied consistently for 140 years. Estate of Grossman, T.C. Memo. 2021-65 (5/27/21).

INDIVIDUALS

Taxpayer penalized for failing to account for sales reported on Form 1099-K

The Tax Court held that a taxpayer, who bought and sold items online using a drop-shipping model in which he purchased an item from a third party and then sold the item on Amazon and received the sales proceeds through Amazon, was taxable on the Amazon payments reported to him on Form 1099-K, Payment Card and Third Party Network Transactions. The court also concluded that, because the taxpayer failed to investigate the proper tax treatment of his drop-shipping activities or maintain any documentation of his activities, he was liable for the accuracy-related penalty assessed by the IRS. Legoski, T.C. Summ. 2021-15 (5/26/21).

IRS PROCEDURE

IRS announces tax relief for victims of severe storms and flooding in West Virginia

The IRS announced that victims of severe storms and flooding that began February 27, 2021 now have until June 30, 2021, to file various individual and business tax returns and make tax payments. WV-2021-01 (5/27/21).

Chief Counsel addresses overpayment interest start date when filing status changes

The IRS Office of Chief Counsel was asked what is the filing date for subsequent returns, for purposes of starting overpayment interest pursuant to Secs. 6611(b)(3), 6611(e)(1), and 6611(g), where a joint return is permitted after a separate return has been filed, or separate returns are permitted after a joint return has been filed. The Chief Counsel’s Office provided two examples and noted that its responses are intended to be used to change programming interest computation routines, training materials, and Internal Revenue manuals. PMTA 2021-03 (5/25/21).

Renewable electricity production and refined coal production credit amounts for 2021

The IRS published the inflation adjustment factors and reference prices for calendar year 2021 for the renewable electricity production credit, the refined coal production credit, and the Indian coal production credit under Sec. 45. Notice 2021-32 (5/24/21).

Interest rates remain the same for the third quarter of 2021

The IRS issued the rates for interest on tax overpayments and underpayments for the third calendar quarter of 2021, beginning July 1, 2021. The interest rates, which are the same as they were for the second quarter of 2021, will be 3% for overpayments (2% in the case of a corporation), 3% for underpayments, and 5% for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5%. Rev. Rul. 2021-10 (5/27/21).

Sec. 6707A penalty not assessed under TEFRA

In a very succinct Chief Counsel Advice that provides no background information but deals with a Form 872, Consent to Extend the Time to Assess Tax, for a Sec. 6707A penalty, the Chief Counsel’s Office advised that a tax matters partner only signs Tax Equity and Fiscal Responsibility Act (TEFRA) statute extensions. Further, the Chief Counsel’s Office noted, a Sec. 6707A penalty would not be assessed under TEFRA. CCA 202121011 (5/28/21).

TAX ACCOUNTING

Liability to pay sales incentive is not accelerated by guaranteed minimum sales incentive

The National Office advised that a manufacturer’s liability to pay sales incentives to third party distributors is incurred under the all events test of Sec. 461 in the tax year the distributors earn the sales incentive, and is not accelerated by the manufacturer’s promise to pay a guaranteed minimum sales incentive, where its liability to pay the guaranteed minimum is contingent on distributors selling at least one unit in Year 2, and also on not selling sufficient units to earn incentives that exceeded the guaranteed minimum. According to the Chief Counsel’s Office, since the last event necessary to establish the manufacturer’s liability occurs in Year 2, the taxpayer cannot establish the fact of its liability in Year 1. TAM 202121010 (5/28/21).

Payments to finance company relating to promotional program must be capitalized

The National Office advised that a taxpayer’s payments to a company that finances purchases of the taxpayer’s products, in order to shift the cost of a below-market interest rate promotional program from the finance company to the taxpayer, are not deductible under Sec. 162 as sales and marketing expenses. According to the National Office, the payments are made to acquire an intangible debt instrument and therefore must be capitalized under Regs. Sec. 1.263(a)-4(b)(1)(i) and Regs. Sec. 1.263(a)-4(c)(1). TAM 202121009 (5/28/21).

Gas distributor not eligible for 10-year NOL carryback

The Office of Chief Counsel advised that deductible costs incurred by a distributor of natural gas, in order to comply with federal pipeline safety regulations, did not satisfy certain laws requiring the remediation of environmental contamination within the definition of a specified liability loss in Sec. 172(f)(1), as in effect prior to the law known as the Tax Cuts and Jobs Act of 2017 (TCJA), P.L. 115-97. As a result, the Chief Counsel’s Office concluded that the distributor did not satisfy the three-year rule under pre-TCJA Sec. 172(f)(1)(B)(ii) for deductions for maintaining and repairing natural gas pipelines and was thus not eligible for the 10-year net operating loss (NOL) carryback allowed under pre-TCJA Sec. 172(b)(1)(C). CCA 202121008 (5/28/21).