Document Summaries for the week of June 13, 2022
Tax document summaries for the week of June 13–17, 2022, covering individuals and IRS procedure.
Transaction terminations give rise to capital losses
The IRS Office of Chief Counsel advised that a taxpayer's termination of certain transactions resulted in dispositions under Sec. 1001 that give rise to losses under Sec. 165 rather than deductible business expenses under Sec. 162. The Chief Counsel's Office concluded that neither the Sec. 263 regulations nor case law requires the termination fees to be treated as Sec. 162 expenses. The IRS also concluded that Sec. 1234A applies to characterize the resulting Sec. 165 losses as capital losses to the extent the losses are attributable to the termination of rights or obligations with respect to capital assets. CCA 202224010 (6/17/22).
Taxpayer cannot claim deductions for mortgage servicing rights where income is included in closed years
The IRS Office of Chief Counsel advised that a taxpayer that acquired a failed bank as part of a Sec. 597 taxable transfer for which the taxpayer mistakenly included income in closed years due to erroneous computations under Regs. Sec. 1.597-5(d)(2)(iii) is not entitled to claimed deductions with respect to certain mortgage servicing rights under Sec. 166(a) or Sec. 197, because the taxpayer's misreporting of the time-barred Sec. 597 income does not increase adjusted basis in the mortgage servicing rights. CCA 202224011 (6/17/22).
Tax Court upholds deficiency notices and penalties against tax protesters
The Tax Court granted summary judgment to the IRS in a case involving taxpayers who did not report wage income on their federal tax returns and who argued that wage income of U.S. citizens earned in the United States is not taxable. The court characterized their arguments as "gibberish downloaded from tax-protester websites" and sustained the adjustments in the IRS notices of deficiency. The court also sustained accuracy-related and late-filing penalties against the taxpayers but refrained from imposing a Sec. 6673(a)(1) frivolous-position penalty, noting the taxpayers refrained from advancing frivolous arguments after the court had warned them they risked that penalty. Hatfield, T.C. Memo. 2022-59 (6/13/22).
Taxpayers not entitled to mortgage interest deduction where house is foreclosed on
The Tax Court held that a married couple were not entitled to a home mortgage interest deduction for a portion of the sale proceeds that were paid to the mortgage holder after it foreclosed on their house. The sale proceeds did not cover the principal amount of the loan, and the taxpayers could not establish that any portion of the proceeds was applied to interest. However, the court found that this was a complex issue and the taxpayers had made a reasonable attempt to comply with the law, so it declined to impose an accuracy-related penalty. Howland, T.C. Memo. 2022-60 (6/13/22).
Innocent spouse relief does not apply to tax fund recovery penalty
The Tax Court held that a taxpayer, who along with her husband was an officer of a corporation that failed to pay withheld payroll taxes over to the government, was not entitled to challenge her trust fund recovery penalty (TRFP) in court or at a collection due process hearing because she had had a prior opportunity to challenge the liability. The court also held that she was not eligible for innocent spouse relief because the TRFP did not arise from any liability shown on a joint federal income tax return. Chavis, 158 T.C. No. 8 (6/15/22).
Tax Court allows deduction of website development expenses
The Tax Court allowed a taxpayer to deduct almost $25,000 of business deductions that the IRS had disallowed. The court held that a portion was deductible immediately as business-related expenses the taxpayer incurred after his business information website became an active trade or business and the rest is deductible ratably over a 180-month period under Sec. 195 as startup expenditures. Kellett, T.C. Memo. 2022-62 (6/14/22).
Tax Court upholds frivolous-return penalty
The Tax Court upheld a Sec. 6702(a) frivolous-return penalty against a taxpayer who argued that his wages were not taxable income and filed a tax return seeking a refund of withheld federal taxes. However, the court declined to impose a frivolous-return penalty against a second "reference copy" of the return, which the taxpayer sent to the IRS's Frivolous Return Program unit. Walker, T.C. Memo. 2022-63 (6/15/22).
Nurse allowed to deduct costs of scrubs
The Tax Court allowed taxpayers, a married couple, to deduct the cost of clothing resembling scrubs that the wife, a nurse, purchased to wear at work, but denied other work-related deductions. The court also declined to impose the Sec. 6662(a) accuracy-related penalty. Romana, T.C. Summ. 2022-9 (6/16/22).
IRS issues applicable federal rates for July 2022
The IRS issued a ruling providing tables of prescribed rates for federal income tax purposes for July 2022. Table 1 contains the short-term, midterm, and long-term applicable federal rates (AFRs) for purposes of Sec. 1274(d); Table 2 contains the short-term, midterm, and long-term adjusted AFRs for purposes of Sec. 1288(b); and Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in Sec. 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in Sec. 42(b)(1) for buildings placed in service during July 2022 (although, under Sec. 42(b)(2), the applicable percentage for non–federally subsidized new buildings placed in service after July 30, 2008, is not less than 9%), and Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of Sec. 7520. Rev. Rul. 2022-12 (6/15/22).
IRS did not abuse discretion in refusing to withdraw Notice of Federal Tax Lien
The Tax Court granted the IRS summary judgment in a case involving a taxpayer who entered into an installment agreement with the IRS to pay his tax liabilities and, as part of that agreement, acknowledged that a Notice of Federal Tax Lien on the relevant tax periods would remain in place. The court held that, although a notice of determination in the case contained a minor error regarding a monthly installment amount, the IRS settlement officer did not abuse her discretion in upholding the Notice of Federal Tax Lien against the taxpayer. Phillips, T.C. Memo. 2022-58 (6/13/22).
IRS expands use of voice bots
The IRS announced that its voice bots can now manage taxpayers' requests to establish or change a tax payment plan. IR-2022-127 (6/17/22) (see related news story).
Court sides with IRS on penalty approval but not on perpetuity requirement for easement
In a syndicated conservation easement case, the Tax Court denied the IRS's motion for summary judgment on the issue of whether the taxpayer's claimed charitable contribution deduction should have been disallowed because the easement's conservation purpose was not protected in perpetuity, but agreed with the IRS that it had properly complied with the requirement for timely supervisory approval of penalties. Morgan Run Partners, LLC, T.C. Memo. 2022-61 (6/14/22).
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.