Document Summaries for the Week of Nov. 28, 2022
Tax document summaries for the week of Nov. 28–Dec. 2, 2022, covering individuals, IRS procedure, and tax accounting
Couple cannot deduct rental real estate losses and depreciation on vehicle
The Tax Court held that a married couple were not entitled to deduct flowthrough losses from a partnership they formed to manage their rental real estate activities because they did not qualify as real estate professionals and did not show that they materially participated in the activities. Also, the couple were not entitled to depreciation deductions for the wife's vehicle because they failed to substantiate its cost, when it was placed in service, its business use percentage, and its previously allowed depreciation. In addition, the court concluded that the couple were liable for Sec. 6662(a) penalties because they presented no evidence that their underpayments were due to reasonable cause. Dunn, T.C. Memo. 2022-112 (11/29/22).
Couple cannot deduct Malaysian entity's losses against their individual incomes
The Tax Court held that a married couple did not have an ownership interest in a Malaysian private limited liability company. Even if they did have an ownership interest, the court held, they were not entitled to offset their individual income with the entity's losses because it did not elect to be treated as a disregarded entity and therefore by default was a foreign corporation, the losses of which do not flow through to its owners. The court also concluded that the couple were not entitled to various business expense deductions because they failed to provide sufficient evidence substantiating them. Ismail, T.C. Memo. 2022-113 (11/29/22).
Payments made under Suffolk County's Septic Improvement Program are not taxable
The IRS announced that payments made by Suffolk County, New York, to residential property owners in Suffolk County under Suffolk County's Septic Improvement Program (SIP Program) are not included in the gross income of those property owners for federal income tax purposes. In addition, because the SIP Program payments to Suffolk County residents are not includible in the gross income of the recipients, Suffolk County does not have an information-reporting obligation for the payments made to residential property owners in Suffolk County under the SIP Program. Announcement 2022-26 (12/1/22).
Pending criminal case and legal expenses did not create economic hardship on couple
The Tax Court held that a husband's pending criminal case and the associated unquantified legal expenses did not create an economic hardship within the meaning of Regs. Sec. 301.6343-1(b)(4) on a couple who owed $466,000 in taxes. Further, the court stated, the IRS did not abuse its discretion in denying the couple's requested collection alternatives and determining to sustain a proposed levy. Lipka, T.C. Memo. 2022-116 (12/1/22).
IRS application of bank deposits method was reasonable in calculating taxpayer's income
The Tax Court held that the IRS carried its burden of proving that its implementation of the bank deposits method in calculating the income of the sole owner of a real estate consulting firm was reasonable in light of all surrounding facts and circumstances. The court therefore sustained the IRS's determination that the taxpayer had $102,885 of additional unreported income for 2013. Showalter, T.C. Memo. 2022-114 (11/30/22).
Court upholds IRS rejection of innocent spouse relief
The Tax Court held that the IRS correctly denied a taxpayer's request for innocent spouse relief. In rejecting the taxpayer's argument that she was entitled to relief because she and her husband were not members of the same household during his time in prison, the court noted that under Regs. Sec. 1.6015-3(b)(3)(i), the husband's period in federal prison is considered a temporary absence and the couple therefore remained members of the same household during that time. Reynolds, T.C. Memo. 2022-115 (11/30/22).
Congress intended that the deadline to file a deficiency case cannot be equitably tolled
The Tax Court held that, despite the Supreme Court's holding in Boechler, 142 S. Ct. 1493 (2022), the text, context, and relevant historical treatment of Sec. 6213(a) confirms Congress's intention that the deadline to file a deficiency case is jurisdictional and thus cannot be equitably tolled. As a result, the court concluded that its previous dismissal of the case at issue for lack of jurisdiction was proper. Hallmark Research Collective, 159 T.C. No. 6 (11/29/22).
IRS issues quarterly interest rates for tax overpayments and underpayments
The IRS issued the interest rates on tax overpayments and underpayments for the first calendar quarter of 2023: 7% for overpayments (6% in the case of a corporation), 7% for underpayments, 9% for large corporate underpayments, and 4.5% on the portion of corporate overpayments exceeding $10,000. Rev. Rul. 2022-23 (11/29/22).
IRS announces 2022 credit amounts for renewable electricity production credit
The IRS announced the credit amounts for calendar year 2022 for the renewable electricity production credit under Sec. 45, in the case of any qualified facility placed in service after Dec. 31, 2021. Because the Inflation Reduction Act, P.L. 117-169, changed the manner in which Sec. 45 credit amounts are calculated in the case of any qualified facility placed in service after Dec. 31, 2021, this announcement supplements the Sec. 45 credit amounts originally published in Notice 2022-20. For any qualified facility placed in service before Jan. 1, 2022, the Sec. 45 credit amounts in Notice 2022-20 remain unchanged. Announcement 2022-23 (11/28/22).
Clean energy project prevailing wage rate and apprenticeship requirements issued
The IRS issued guidance on how to satisfy the prevailing wage rate and apprenticeship requirements added by the Inflation Reduction Act, P.L. 117-169, to qualify for increased clean energy credit and deduction amounts under Secs. 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. Notice 2022-61 (11/30/22) (see related news story).
Chief Counsel advises that a $1 simplified return is a 'return'
The IRS Office of Chief Counsel advised that its best interpretation of the language in Rev. Proc. 2020-28 is that simplified returns are federal income tax returns and a $1 simplified return filed through the nonfiler portal is a return, including for purposes of Sec. 6501. Additionally, the Chief Counsel's Office stated, the analogous revenue procedure for the 2020 tax year, Rev. Proc. 2021-24, states in Section 4.03 that "A simplified return is a Federal income tax return for all purposes." CCA 202248010 (12/2/22).
IRS reminds states to use certain housing credit allocations before year end
The IRS issued a reminder to state and local housing credit agencies of the impending deadline applicable to certain allocations of housing credit dollar amounts under Sec. 42. For 2021 and 2022, Section 305 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Act), P.L. 116-260, conditionally increases a state's housing credit ceiling under Sec. 42(h)(3) and, because a state cannot carry over to years after 2022 any housing credit allocation authority under Section 305 of the Act that was not used to make qualifying allocations in 2021 and 2022, any unused allocations will be lost after 2022. Announcement 2022-27 (12/1/22).
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.