Document Summaries for the week of Aug. 29, 2022

ESTATES, TRUSTS & GIFTS

IRS issues annual interest rates for valuing farm property under Sec. 2032A(e)(7)

The IRS issued a revenue ruling listing the average annual effective interest rates on new loans under the Farm Credit System that are used for purposes of Sec. 2032A(e)(7) when valuing real property used for farming purposes. The revenue ruling also lists the states within each Farm Credit System Bank Territory. Rev. Rul. 2022-16 (8/29/22).

INDIVIDUALS

Taxpayer cannot deduct unsubstantiated qualified residence interest

The Tax Court held that a taxpayer could not deduct qualified residence interest on his qualified residence because the payments were made through the taxpayer's wholly owned corporation and could not be properly substantiated. The court also upheld an accuracy-related penalty because the taxpayer failed to keep adequate books and records or to properly substantiate the reported expenses. Pressman, T.C. Summ. 2022-15 (8/29/22).

Former serviceman's tax home was not outside the US

The Tax Court held that a former Navy serviceman who worked and lived in Iraq following his military service did not establish that his home for tax purposes was not within the United States for either of the years at issue and, thus, he was not entitled to exclude from income under Sec. 911 the wages he earned in Iraq for those years. However, the court found he was not liable for the penalties assessed by the IRS because his tax returns were prepared by a paid income tax return preparer who was provided with the taxpayer's Forms W-2, Wage and Tax Statement, and the circumstances surrounding his employment in Iraq. The taxpayer, thus, reasonably relied on the advice of his return preparer with respect to the application of Sec. 911(a) and its technical provisions. Domdom, T.C. Summ. 2022-17 (8/30/22).

Settlement was not due to physical injury or illness and thus is taxable to former employee

The Tax Court held that a legal settlement of more than $300,000 received by a taxpayer from his former employer as a result of a lawsuit was not excludable from income under Sec. 104(a)(2) as being received for a physical injury or illness. The court noted that the lawsuit alleged only violations of California's labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress and that the taxpayer had not asserted any claims premised upon physical injury or illness; thus, the court could not conclude that the taxpayer's employer intended to compensate him for any such injury or illness. Dern, T.C. Memo. 2022-90 (8/30/22).

Couple liable for penalties for failing to file 2013 tax return and pay resulting taxes

The Tax Court upheld penalties on a couple who failed to prove that their failures to timely file their 2013 income tax return and pay the resulting taxes were due to reasonable cause and not willful neglect. The court also found that, because the couple sought no other collection alternative other than one presented by an IRS settlement officer (SO), the SO did not abuse her discretion in closing the case and sustaining the collection actions against the couple. Remisovsky, T.C. Memo. 2022-89 (8/30/22).

Couple ineligible for health coverage tax credit, qualify for premium tax credit for partial year

The Tax Court upheld the IRS's disallowance of a couple's claimed health coverage tax credit (HCTC) after the couple stipulated that they had not received certain types of Trade Adjustment Assistance benefits or Pension Benefit Guaranty Corp. benefits or that either of them was a family member of a recipient of such benefits who had died or with whom either taxpayer had finalized a divorce. Thus, they did not qualify for the HCTC. However, the Tax Court did conclude that the couple were eligible for a partial premium tax credit under Sec. 36B but were ineligible for that credit for the portion of the year in  which they had COBRA coverage. Sek, T.C. Memo. 2022-87 (8/29/22).

Construction superintendent allowed partial deductions for expenses incurred

The Tax Court held that a taxpayer who was employed as a construction superintendent and was required to travel to various locations as part of his job properly substantiated, and therefore could deduct, a portion of claimed unreimbursed employee expenses for meals and lodging totaling approximately $11,000. However, the court held that because the taxpayer did not provide sufficient evidence that the purchase of uniforms and protective clothing, safety equipment, a phone, or tools was a condition of his employment, he could not deduct those expenses. Butterfield, T.C. Summ. 2022-16 (8/30/22).

Swiss couple living in US understated their foreign-source income

The Tax Court held that a married couple who were citizens of Switzerland that lawfully lived in the United States were liable for tax deficiencies and accuracy-related penalties as a result of understating income received from foreign sources. The court further held that amended returns filed by the couple were not qualified amended returns under Reg. Sec. 1.6664-2(c)(3)(i)(D) because they were filed after the IRS served a John Doe summons on a Swiss bank in an attempt to discover the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns. Lamprecht, T.C. Memo. 2022-91 (8/31/22).

Taxpayer failed to show connection between his business and travel expenses

The Tax Court held that a taxpayer was not entitled to a deduction for travel expenses on his 2015 tax return because he failed to provide sufficient evidence (1) showing the connection between the trips he took and the trade or business of the organization for which he was working, or (2) demonstrating how the trips were helpful to his position as executive director of the organization. Further, the court held that the taxpayer could not deduct his tax return preparation fees because the amount paid did not exceed 2-percent of the taxpayer's adjusted gross income as was required in 2015 under Sec. 67(a). Luna, T.C. Summ. 2022-18 (9/1/22).

INTERNATIONAL

Chief Counsel advises that entity's qualified derivatives dealer application should be rejected

The Office of Chief Counsel advised that an entity that is not eligible for qualified derivatives dealer (QDD) status under Regs. Sec. 1.1441-1(e)(6)(ii)(A)-(C) and is not subject to comparable regulatory supervision is not an eligible entity under Regs. Sec. 1.1441-1(e)(6)(ii)(D), and its QDD application should thus be rejected. The Chief Counsel's Office noted that QDD eligible entity categories described in Regs. Sec. 1.1441-1(e)(6)(ii)(A)-(C) are limited to entities subject to the dealer, bank, or bank holding company regulatory regimes (directly or indirectly), and an entity that does not establish that it is subject to comparable regulatory supervision is not intended to be covered by Regs. Sec. 1.1441-1(e)(6)(ii)(D) and therefore, the IRS should reject the entity's QDD application as not "otherwise acceptable to the IRS" pursuant to Regs. Sec. 1.1441-1(e)(6)(ii)(D). CCA 202235010 (9/2/22).

Chief Counsel addresses tax impact of corporation's challenge of Sec. 965 regulation

The Office of Chief Counsel was asked how Sec. 965(h)(4) applies to the portion of a domestic corporation's tax liability that the corporation did not report because it is challenging a regulation that would increase the amount of the corporation's Sec. 965(h) net tax liability as defined in Regs. Sec. 1.965-7(g)(4). According to the Chief Counsel's Office, the portion of the unreported tax liability is a deficiency due to negligence or intentional disregard of Regs. Sec.  1.78-1 and the corporation is thus not entitled to prorate the deficiency under Sec. 965(h)(4), and the deficiency is due on notice and demand. CCA 202235009 (9/2/22).

IRS PROCEDURE

IRS announces recent disciplinary sanctions

The Office of Professional Responsibility announced recent disciplinary sanctions involving attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the IRS, which are published in pamphlet form as Treasury Department Circular No. 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Announcement 2022-17 (8/29/22).

Fifth Circuit reverses decision in refund claim suit

The Fifth Circuit reversed a district court decision, holding that the district court lacked jurisdiction over the taxpayers' refund claims, which were premised on Sec. 6501's statute of limitation, because Sec. 7422(h) prohibits courts hearing refund actions from deciding partnership items or reevaluating the Tax Court's determination of those items. Baxter, No. 21-20258 (5th Cir. 8/31/22).

IRS announces tax relief for Mississippi water crisis victims

The IRS announced that victims of the water crisis beginning Aug. 30, 2022, affected by the water crisis and that reside or have a business in Hinds County, Mississippi, qualify for tax relief now have until Feb. 15, 2023, to file various individual and business tax returns and make tax payments. MS-2022-01 (9/2/22).

PARTNERSHIPS

Court rejects IRS's protected-in-perpetuity argument in easement donation case

The Tax Court denied an IRS motion for summary judgment in a case involving a donation of a conservation easement that the IRS said did not meet the protected-in-perpetuity requirement because, the court noted, the Eleventh Circuit (to which this case could be appealed) in Hewitt, 21 F.4th 1336 (11th Cir. 2021), had rejected the IRS's interpretation of that requirement as being arbitrary and capricious and therefore invalid. However, the Tax Court did hold that the IRS's assessment of penalties received the requisite supervisory approval under Sec. 6751(b)(1). Sparta Pink Property, LLC, T.C. Memo. 2022-88 (8/29/22).

TAX-EXEMPT ORGANIZATIONS

Regs. issued on states' access to return information of exempt organizations

The IRS issued final regulations that provide guidance to state officials regarding the process by which they may obtain or inspect certain returns and return information (including information about final and proposed denials and revocations of tax-exempt status) for the purpose of administering state laws governing certain tax-exempt organizations and their activities. T.D. 9964 (8/29/22).