Document Summaries for the week of Jan. 31, 2022
Tax document summaries for the week of Jan. 31–Feb. 4, 2022, covering international, IRS procedure, and more.
ESTATES, TRUSTS & GIFTS
Tax Court sides with IRS in estate's collection due process case
The Tax Court granted summary judgment to the IRS in a collection due process case involving the estate of a taxpayer who owed significant tax liabilities upon death. The estate argued that the decedent's ex-wife and son should be permitted to retain certain amounts from the estate. The court said it could not see how effective tax administration could possibly support a result (1) that the decedent's son be permitted to retain $100,000 in life insurance proceeds paid to him under a policy maintained by the decedent's employer; (2) that the decedent's ex-wife (who, under a marriage separation agreement, was supposed to have received the life insurance proceeds) be permitted to recover instead $100,000 from a retirement account to which she had disclaimed all rights; and (3) that the government be required to compromise its claim for tax due on the substantial income that the decedent earned during the relevant tax years. Estate of Washington, T.C. Memo. 2022-4 (2/2/22).
IRS updates FAQs on advance child tax credit
The IRS updated its frequently asked questions on the 2021 child tax credit and advance child tax credit. The Service updated question H4 on repayment protection and added a new question H10 on what to do to trace a payment that was not received. FS-2022-07 (2/1/22).
IRS updates FAQs on recovery rebate credit
The IRS updated its frequently asked questions on the 2020 recovery rebate credit to include information on tracing payments. FS-2022-08 (2/2/22).
Tax Court rules on constructive distribution by domestic LLC of foreign subsidiary stock
The Tax Court held that, for the operative nonrecognition rules of Secs. 354, 356, and 361 to apply to a reorganization described in Sec. 368(a)(1)(F), the transaction, however actually effected, should be treated as involving (1) a transfer of the old corporation's assets to the new corporation in exchange for stock of the new corporation and the new corporation's assumption of any liabilities of the old corporation, and (2) the old corporation's distribution to its shareholders of the stock of the new corporation in cancellation of their stock in the old corporation. Further, the court concluded that (1) a constructive distribution by a domestic limited liability company (LLC) to a foreign corporation of stock of the foreign corporation's subsidiary that occurred as part of a reorganization by which the foreign corporation's subsidiary acquired the domestic LLC was a disposition within the meaning of Sec. 367(d)(2)(A)(ii)(II); and (2) the domestic LLC's constructive distribution to the foreign corporation of stock of that corporation's subsidiary that occurred as part of the reorganization by which the subsidiary acquired the domestic LLC was a disposition within the meaning of Sec. 367(d)(2)(A)(ii)(II). TBL Licensing LLC, 158 T.C. No. 1 (1/31/22).
IRS updates tax relief for Washington storm victims
The IRS expanded relief available to more victims of severe storms, straight-line winds, flooding, landslides, and mudslides in additional parts of Washington state beginning Nov. 5, 2021. These taxpayers have until March 15, 2022, to file various individual and business tax returns and make tax payments. WA-2022-01 (updated 1/31/22).
Offer in compromise: Taxpayer loses argument that IRS allowances do not support his particular lifestyle
The Tax Court sided with the IRS in a collection due process case after determining that the IRS did not abuse its discretion in rejecting an offer-in-compromise proposed by a taxpayer who failed to file his 2012 tax return and who filed his 2013 and 2014 tax returns late. The court rejected the taxpayer's assertions that living expenses allowed by the IRS were insufficient because they did not support his particular lifestyle. Flynn, T.C. Memo. 2022-5 (2/3/22).
IRS can provide limited employee background check information to a state
The IRS Office of Chief Counsel was asked whether (1) the IRS may provide any background check information on an employee to the state of Wisconsin; and (2) what restrictions apply to the IRS providing an employee's background check information in this context. The Chief Counsel's Office advised that, while disclosure to Wisconsin of employee background investigation files is permissible under the Privacy Act, the Privacy Act does not supersede the confidentiality provisions set forth in Sec. 6103, and more specifically, Sec. 6103(a) makes tax returns and return information confidential unless otherwise authorized by the Code; thus any returns or return information contained in a background check file must not be disclosed unless an exception applies. CCA 202205025 (2/4/22).
Work opportunity credit is not available for wages paid in marijuana business
The IRS Office of Chief Counsel advised that Sec. 280E prohibits a taxpayer from entitlement to the Sec. 51 work opportunity tax credit (WOTC) for wages paid or incurred in carrying on a business of trafficking in marijuana. The Chief Counsel's Office noted, under Sec. 280E, no deduction or credit is allowed for any amount paid or incurred during the tax year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) that is prohibited by federal law or the law of any state in which such trade or business is conducted. CCA 202205024 (2/4/22).
IRS cannot mandate barcodes on returns and forms developed outside of IRS
The IRS Office of Chief Counsel advised that the IRS does not have authority to require that tax software developers include barcodes on returns, forms, and schedules created through their software, but does have broad authority to design its own tax returns, forms, and schedules to incorporate a scannable bar code on those documents. Embedding bar codes, the Chief Counsel's Office said, would impose no additional burden on taxpayers or other filers because there would be no mandate that filers use only returns, forms, and schedules with scannable barcodes. PMTA 2022-02 (2/4/22).
Shareholder's S stock was not subject to substantial risk of forfeiture
The Tax Court held that an S corporation shareholder's stock in the S corporation was not subject to a substantial risk of forfeiture pursuant to Sec. 83 for the years at issue and the shareholder was thus not entitled to defer taxes, interest, and penalties on his allocable share of the S corporation's income. The court also concluded that certain expenses incurred and paid by the S corporation were not ordinary and necessary business expenses deductible under Sec. 162 and thus the shareholder could not deduct his allocable share of those deductions. Larson, T.C. Memo. 2022-3 (2/2/22).
IRS updates list of automatic tax accounting method changes
The IRS issued a revenue procedure updating the list of automatic tax accounting changes to which the procedures in Rev. Proc. 2015-13, as clarified and modified by several other revenue procedures, apply. The new procedure amplifies, modifies, and supersedes, in part, numerous revenue procedures and revenue rulings. Rev. Proc. 2022-14 (1/31/22) (see related news story).
Chief Counsel addresses basis of assets of former charities for Sec. 4940 purposes
The IRS Office of Chief Counsel advised that, for purposes of determining capital gain net income under Sec. 4940, the basis of property of a tax-exempt organization described in Sec. 501(c)(3) that ceases to qualify as a public charity under Sec. 509(a)(1), (2), or (3), and becomes a private foundation is determined under the rules of Secs. 1011 through 1022, subject to the provisions of Sec. 4940(c)(3)(B) and without regard to Sec. 362(c) (relating to a special rule for certain contributions to capital). Sec. 4940(c)(3)(B), the Chief Counsel's Office noted, provides special rules for depreciation and depletion deductions. PMTA 2022-01 (2/4/22).
Business meal deductions after the TCJA
This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.
Quirks spurred by COVID-19 tax relief
This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.