Document summaries for the week of Nov. 29, 2021

EMPLOYEE BENEFITS

IRS issues 2021 required retirement plan amendments

The IRS issued the 2021 Required Amendments List (2021 RA List), which is an annual list of changes in retirement plan qualification requirements that may necessitate plan amendments. The 2021 RA List applies to both individually designed plans qualified under Sec. 401(a) and individually designed plans that satisfy the requirements of Sec. 403(b). Notice 2021-64 (11/30/21).

INDIVIDUALS

IRS provides safe harbor for REITs and RICs

The IRS issued temporary guidance regarding the treatment of certain stock distributions by publicly offered real estate investment trusts (REITs) and publicly offered regulated investment companies (RICs). Specifically, in recognition of the need for liquidity as a result of the impacts of the COVID-19 pandemic, this guidance, similar to Rev. Proc. 2020-19, modifies the safe harbor provided in Rev. Proc. 2017-45 by temporarily reducing the minimum required aggregate amount of cash that distributee shareholders may receive to not less than 10% of the total distribution for Sec. 301, by reason of Sec. 305(b), to apply to such a distribution. Rev. Proc. 2021-53 (11/30/21).

Corporation's payment of couple's personal expenses results in constructive dividends

The Tax Court held that (1) the statute-of-limitation periods had not expired before statutory notices of deficiency were mailed to the taxpayer for tax years 2010 through 2012 and to the taxpayer's wholly owned corporation for the tax years ending March 31, 2011, through 2014; (2) the IRS was not required to make a correlative adjustment to the corporation's income for disallowed deductions of a related entity that were included in the corporation's income; and (3) the taxpayer and his wife failed to show that they did not receive constructive dividends from the corporation, except to the extent of certain director's fees. The court noted that the constructive dividends stemmed from the IRS's recharacterization of the corporation's deductions for salary, legal, and professional fees; medical reimbursements; long-term-care insurance; employee benefits programs; director's fees; and taxes and licenses as dividends to the couple because they represented payments of the couple's personal expenses. FAB Holdings, LLC, T.C. Memo. 2021-135 (11/30/21).

Taxpayer liable for penalty for unsubstantiated deductions on return

The Tax Court held that a taxpayer was not entitled to deduct unreimbursed employee business expenses of $42,621 because he did not strictly substantiate the reported car and truck expenses, travel expenses, and meal and entertainment expenses as required by Sec. 274; nor could he deduct $2,355 of cash contributions that were similarly unsubstantiated. The court also concluded that the taxpayer was liable for an accuracy-related penalty under Sec. 6662(a). Swyers, T.C. Summ. 2021-40 (11/30/21).

Grandfather cannot take deductions for grandchildren where daughter also claimed children

The Tax Court held that a taxpayer was not entitled to (1) dependency exemption deductions for two of his grandchildren; (2) head-of-household filing status; (3) the additional child tax credit; or (4) the earned income tax credit for 2015 because his daughter and her husband, unbeknownst to him, filed a 2015 tax return claiming the children on their tax return. The court noted that, while the taxpayer was not aware that his daughter filed a joint tax return with her spouse for 2015, the test of eligibility was not contingent upon the taxpayer's knowledge of his daughter's marital or filing status but rather whether the taxpayer satisfied the applicable tax law provisions, which the court concluded he did not. Gopi, T.C. Summ. 2021-41 (12/2/21).

Court upholds penalty on couple for deducting large unsubstantiated loss

The Tax Court held that a married couple who claimed a $1.778 million loss in 2004, which was subsequently rejected by the IRS, (1) filed a valid joint return for 2004; (2) were liable for the addition to tax under Sec. 6651(a)(1); and (3) could not use outside accountants as a shield for their failure to keep proper records to document their 2004 loss. The court found that the statutes of limitation under Sec. 6501(a) and Sec. 6501(c)(4) did not expire before the IRS issued the couple a statutory notice of deficiency and, the court said, the couple's actions were not reasonable or in good faith and thus they were liable for the 20% accuracy-related penalty under Sec. 6662(a). Soni, T.C. Memo. 2021-137 (12/1/21).

INTERNATIONAL

Appeals court holds FBAR reporting penalty is applied on per account basis

Reversing a district court, the Fifth Circuit held that the penalty for nonwillful failure to report interests in foreign accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), applies on a per account and not a per form basis, i.e., that each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty. Bittner, No. 20-40597 (5th Cir. 11/30/21).

IRS PROCEDURE

Collection sustained for taxpayer owing $2 million

The Tax Court granted summary judgment for the IRS and sustained an IRS collection action for more than $430,000 against a taxpayer who failed to file numerous income tax returns and owed deficiencies, additions to tax, and interest totaling more than $2 million. The court sustained the collection action for all years except 2012, as to which it found it lacked jurisdiction. O'Donnell, T.C. Memo. 2021-134 (11/30/21).

IRS extends e-signature procedures

The IRS has extended until Oct. 31, 2023, procedures that allow taxpayers and their representatives to sign digitally or by an image of their signatures an array of forms and returns as well as certain compliance-interaction-related forms and documents. NHQ-10-1121-0005 and NHQ-01-1121-0004 (see related news story).

IRS ruling addresses correct percent floor to use under Sec. 42(b)(3)

The IRS issued a ruling in which it addresses three scenarios relating to the application of the low-income housing credit rate in Sec. 42(b)(3), which provides a 4% minimum credit rate for buildings to which the 9% floor in Sec. 42(b)(2) does not apply and which are placed in service by the taxpayer after Dec. 31, 2020. The situations involved building constructions with (1) a draw-down loan with an issue date in 2020; (2) a post-2020 issuance of a de minimis amount of exempt facility bonds; and (3) an additional allocation of a de minimis housing credit dollar amount after 2020. Rev. Rul. 2021-20 (12/1/21).

IRS provides safe harbors for certain determinations relating to Rev. Rul. 2021-20

The IRS issued a revenue procedure that provides safe harbors for determining whether an exempt facility bond issue that is issued after Dec. 31, 2020, or an allocation of a housing credit dollar amount that is made after Dec. 31, 2020, is more than de minimis for purposes of Holdings 2 and 3 of Rev. Rul. 2021-20, which is summarized immediately above. Rev. Rul. 2021-20 addresses whether the minimum 4% applicable percentage (4% floor) under Sec. 42(b)(3) applies to a building. Rev. Proc. 2021-43 (12/1/21).

PARTNERSHIPS

Court lets partnership off the hook for portion of 20% accuracy-related penalty

The Tax Court held that a partnership had reasonable cause and acted in good faith with respect to the portion of a charitable deduction of a conservation easement donation totaling more than $25 million that the court disallowed because the easement deeds failed to protect a conservation purpose in perpetuity. Thus, the partnership was not liable for the 20% accuracy-related penalty on that portion of the partnership's tax underpayment. Plateau Holdings, LLC, T.C. Memo. 2021-133 (11/30/21).

Change to partnership's 'money number' is included in imputed underpayment

In a discussion regarding IRS adjustments to a partnership return, the IRS Office of Chief Counsel advised that an adjustment to any partnership-related item that is a "money number" on the Form 1065 or in the partnership's books and records, goes into the calculation of the imputed underpayment (IU). According to the Chief Counsel's Office, under the Bipartisan Budget Act of 2015, P.L. 114-74, whether an adjustment is included in the IU calculation does not at all depend on whether/how/if the item would be taxed at the partner level; it only matters if a change is made to a "money number," as adjustments to "non-money numbers" like gallons for the fuel credit are always adjustments that do not result in an IU. CCA 202148006 (12/3/21).

S CORPORATIONS

Court rejects IRS summary judgment against restaurateurs operating as an S corporation

The Tax Court denied an IRS motion for summary judgment in a case involving a married couple who started a restaurant and elected Subchapter S status for the restaurant but never filed tax returns or paid taxes with respect to the restaurant's income or losses. The court noted that the IRS allowed no deductions for cost of goods sold or expenses incurred in operating the restaurant and allocated 100% of the restaurant's gross income to the husband, even though the Form 2553, Election by a Small Business Corporation, showed him as owning only 40% of the shares of the S corporation. Because disputes of material fact existed, the court denied the IRS's summary judgment motion in relevant part. Chan, T.C. Memo. 2021-136 (12/1/21).