Document Summaries for the week of Sept. 12, 2022

C CORPORATIONS

Sole shareholder received constructive distributions in sale-leaseback transaction

The Tax Court held that the sole shareholder of a C corporation that purported to engage in sale-and-leaseback transactions with a third party received constructive distributions of payments made by the C corporation. Further, the court concluded that because the taxpayer failed to show that the C corporation lacked sufficient earnings and profits, the constructive distributions constituted dividends within the meaning of Sec. 316(a). Fabian, T.C. Memo. 2022-94 (9/13/22).

Domestic asset and liability percentages and domestic investment yields issued for 2022

The IRS issued the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Sec. 842(b) for tax years beginning after Dec. 31, 2020. The IRS noted that Rev. Proc. 2021-41 contains the information for the domestic asset/liability percentages and domestic investment yields for tax years beginning after Dec. 31, 2019. Rev. Proc. 2022-36 (9/14/22).

INDIVIDUALS

Tax return preparer hit with fraud penalties

The Tax Court held that because the IRS had shown that several badges of fraud were evident in a case involving a tax return preparer who reported only a fraction of her income, the preparer was liable for fraud penalties under Sec. 6663 on her tax underpayment. Further, the court found that the taxpayer, who earned more than $400,000 than she reported on her tax return, was not eligible for the earned income tax credit. Degourville, T.C. Memo. 2022-93 (9/12/22).

Taxpayer liable for deficiencies and penalties relating to unreported income in Swiss accounts

The Tax Court held that the IRS established by clear and convincing evidence that a taxpayer who opened numbered Swiss bank accounts through which he funneled income that he did not report on his Forms 1040, U.S. Individual Income Tax Return, as well as investment income earned in those accounts, was liable for various penalties and tax deficiencies. Further, because he destroyed or caused the destruction of his records, the taxpayer could not assert that he was entitled to various deductions. Estate of Clemmons, T.C. Memo. 2022-95 (9/14/22).

INTERNATIONAL

IRS intends to issue regulations under Sec. 901 to address recent Puerto Rican legislation

The IRS announced its intention to issue regulations under Sec. 901 to provide that amending an existing tax decree with Puerto Rico pursuant to Puerto Rico's Act 52-2022, on or before Dec. 31, 2022, does not cause any amount of foreign income tax paid or accrued to Puerto Rico pursuant to the amended tax decree to be treated as a noncompulsory amount under Regs. Sec. 1.901-2(e)(5). According to the IRS, under the forthcoming proposed regulations, amending an existing tax decree pursuant to Act 52-2022 (as enacted on June 30, 2022) will not, solely by reason of any difference in the amount of income tax liability to Puerto Rico under the existing tax decree as compared with the amended tax decree, be considered to increase the taxpayer's liability for Puerto Rico income tax over time for purposes of Regs. Sec. 1.901-2(e)(5) if the existing tax decree is amended pursuant to Act 52-2022 on or before Dec. 31, 2022, and the taxpayer's Puerto Rico income tax liability under the amended tax decree in each tax year is less than the amount of income tax the taxpayer would have owed to Puerto Rico under Puerto Rico's generally applicable income tax laws in the absence of any tax decree in the taxable year. Notice 2022-42 (9/16/22).

IRS PROCEDURE

Guidance issued on one-time claim for alternative fuels credit and payments

The IRS issued a notice providing rules that claimants must follow to make a one-time claim for the credit and payment allowable under Secs. 6426(d) and 6427(e) for alternative fuels sold or used during the first, second, and third calendar quarters of 2022. The notice also provides instructions for how a taxpayer's liability for the excise tax imposed by Sec. 4081 may be reduced by claiming the alternative fuel mixture credit allowable under Sec. 6426(e) for the first and second calendar quarters of 2022. Notice 2022-39 (9/13/22).

Final regs. issued on protections against 'balance billing'

The IRS jointly issued regulations with the Department of Health and Human Services and the Department of Labor regarding certain protections against "balance billing," by which out-of-network medical providers bill patients for the difference between billed charges and the amount collected from a plan or issuer, plus patient-paid copayments, coinsurance, or deductibles. The protections are provided under the No Surprises Act, which was enacted as part of the Consolidated Appropriations Act, 2021, P.L. 116-260. T.D. 9965 (9/12/22).

IRS issues October 2022 applicable federal rates

The IRS issued a ruling providing tables of prescribed rates for federal income tax purposes for October 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. 2022-18 (9/16/22).

Chief Counsel's addresses situations where PPP loans may not qualify for forgiveness

The IRS Office of Chief Counsel advised that, if a taxpayer makes one or more representations that he or she satisfies the conditions for forgiveness of a Paycheck Protection Program (PPP) loan under 15 U.S.C. Sections 636m and 636(a)(37)(J) (i.e., qualifying forgiveness), but does not factually satisfy the conditions for a qualifying forgiveness, and, as a result, has the PPP loan forgiven improperly, the taxpayer may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. Section 636m(i) or Section 276(b)(1) of the COVID-related Tax Relief Act of 2020. The Chief Counsel's Office noted that a variety of fact patterns may establish that the taxpayer was not eligible for forgiveness under the statute and related regulatory guidance, citing as an example a situation where a taxpayer may have used PPP funds for personal expenditures. CCA 202237010 (9/16/22).