Document Summaries for the week of Sept. 26, 2022

C CORPORATIONS

Tax Court finds a mutual mistake of law regarding debt cancellation

The Tax Court held that when a subsidiary member of a consolidated group (S) disposes of all its assets, a member that owns S stock must include in income for the year of disposition any excess loss account in the member's stock in S regardless of whether S may be entitled to deductions for one or more subsequent years. The court further held that, because the time when debt will be discharged for federal income tax purposes cannot be predicted, the IRS's professed reliance on the consolidated parent's representations that certain debt would be canceled six years after its due date demonstrated that the failure of the consolidated group to take into account the full cancellation of such debt before 2012 reflected a mutual mistake of law. Belmont Interests, Inc., T.C. Memo. 2022-98 (9/26/22).

EMPLOYEE BENEFITS

Deadlines for amending certain retirement plans extended

The IRS issued a notice extending the deadline for amending an eligible retirement plan (including an individual retirement arrangement (IRA) or annuity contract) to reflect the provisions of Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and Section 302 of Title III of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, P.L. 116-260. Under this notice, the extended amendment deadline is Dec. 31, 2025, for (1) a qualified retirement plan or Sec. 403(b) plan that is not a governmental plan or (2) an IRA. Later deadlines apply with respect to governmental retirement plans (including governmental plans under Sec. 457(b)). Notice 2022-45 (9/26/22).

INDIVIDUALS

Couple ineligible for premium tax credit as household income exceeded 400% of poverty line

The Tax Court held that a couple (1) were not entitled to a refund based on their claim of a $123,822 capital loss, which was limited to $3,000 for 2017; (2) were ineligible for the Sec. 36B premium tax credit (PTC) for 2017 because their household income exceeded 400% of the federal poverty line; and (3) were required to repay the advance PTC received in 2017. The Tax Court noted that to the extent the couple claimed that paying the deficiency would be a hardship, they were free to explore collection alternatives with the IRS, such as an installment agreement or an offer in compromise. Powell, T.C. Summ. 2022-19 (9/26/22).

Couple liable for penalties for failing to properly substantiate business expenses

The Tax Court held that a husband and wife who deducted business expenses on their Schedules A, Itemized Deductions, and  C, Profit or Loss from Business (Sole Proprietorship), were entitled to deduct unreimbursed vehicle expenses they incurred on behalf of their employers on Schedule A that they appropriately substantiated with vehicle logs that recorded their contemporaneous use of the vehicles. However, they could not deduct other business expenses that they failed to properly substantiate. The court further concluded that the couple failed to establish reasonable cause for the failures to substantiate their other business expenses and were thus liable for accuracy-related penalties under Sec. 6662(a) to the extent there were underpayments and substantial understatements of income tax for 2015 and 2016. Patitz, T.C. Memo. 2022-99 (9/27/22).

Farming couple's transfers of crops to CRATs are not deductible as charitable contributions

The Tax Court held that a couple engaged in a farming business were not entitled to deduct as noncash charitable contributions transfers of agricultural crops to two charitable remainder annuity trusts (CRATs) that sold the crops and used the proceeds to purchase annuity plans. The court further held that annuity distributions from those plans were taxable to the couple as ordinary income and not, as the couple had argued, nontaxable returns of corpus under Sec. 664(b)(4). Furrer, T.C. Memo. 2022-100 (9/28/22).

Court refrains from imposing frivolous argument penalty this time

The Tax Court held that a taxpayer who failed to file a tax return for 2013 and 2014 was (1) liable for the unreported income as set forth in an IRS notice of deficiency; (2) was liable for the Sec. 72(t) additional tax relating to a distribution he received in 2013; (3) was liable for additions to tax under Secs. 6651(a)(1), 6651(a)(2), and 6654(a); and (4) was liable for a frivolous position penalty under Sec. 6673(a)(1). However, since this was the taxpayer's first time before the Tax Court, the court refused an IRS request to assess a $25,000 Sec. 6673(a)(1) penalty against the taxpayer for frivolous arguments he made before the court but cautioned the taxpayer that he could be liable for such penalties if he pressed similar arguments in the future. Ashford, T.C. Memo. 2022-101 (9/29/22).

Court denies refund to taxpayer whose ex-wife was the source of the tax overpayment

The Tax Court denied a taxpayer's request for a refund of taxes overpaid on a joint tax return filed with his former wife after noting that the taxes at issue were paid by his ex-wife and the taxpayer had been ordered by a state court to reimburse his ex-wife for a portion of the tax liability in the form of increased spousal support payments. Further, the court noted, the taxpayer did not make any payments directly to the IRS, and most of his increased spousal support payments were not made until after the liability was satisfied; thus, he could not be said to have made or been the source of an overpayment. Collins, T.C. Summ. 2022-20 (9/29/22).

IRS PROCEDURE

Proposed regulations on resolution of federal tax controversies without litigation

The IRS issued proposed regulations relating to the IRS Independent Office of Appeals' resolution of federal tax controversies without litigation and relating to requests for referral to that office following the Service's issuance of a notice of deficiency. REG-125693-19 (9/26/22).

Tax relief for Alaska severe storms, flooding, and landslides

The IRS announced that victims of Alaska severe storms, flooding, and landslides occurring between Sept. 15 and Sept. 20, 2022, who reside or have a business in the Regional Education Attendance Areas of Bering Strait, Kashunamiut, Lower Kuskokwim, and Lower Yukon now have until Feb. 15, 2023, to file various individual and business tax returns and make tax payments. AK-2022-04 (9/27/22).

IRS extends replacement period for livestock sold on account of drought

The IRS issued a notice that explains the circumstances under which the four-year replacement period under Sec. 1033(e)(2) is extended for livestock sold on account of drought. The appendix to the notice contains a list of counties that experienced exceptional, extreme, or severe drought conditions during the 12-month period ending Aug. 31, 2022, and taxpayers may use this list to determine if an extension is available. Notice 2022-43 (9/28/22).

IRS raises per diem rates for business travel

The IRS issued the special per diem rates by which taxpayers may substantiate ordinary and necessary business expenses of travel away from home for travel after Oct. 1, 2022. Notice 2022-44 (9/26/22) (see related news story).

IRS extends R&D credit transition period

The IRS announced that it is extending for another year, until Jan. 10, 2024, the transition period during which it will allow taxpayers 45 days to perfect a refund claim involving a Sec. 41 research and development (R&D) credit to comply with new information requirements. IRS Sets Forth Required Information for Valid Research Credit Claim for Refund (9/30/22) (see related news story).

Tax relief for victims of Hurricane Ian in Florida

The IRS announced that victims of Hurricane Ian, which began Sept. 23, 2022, in Florida now have until Feb. 15, 2023, to file various individual and business tax returns and make tax payments. FL-2022-19 (9/29/22).

IRS grants dyed diesel penalty relief in Florida

In response to disruptions resulting from Hurricane Ian, the IRS announced that it will not impose a penalty when dyed diesel fuel with a sulfur content that does not exceed 15 parts per million is sold for use or used by emergency vehicles on the highway in the state of Florida. The relief began Sept. 28 and runs through Oct. 19, 2022. IR-2022-169 (9/30/22).

TAX ACCOUNTING

Inflation adjustment factor provided for Sec. 45Q for 2022

The IRS issued a notice providing the inflation adjustment factor for the carbon oxide sequestration credit under Sec. 45Q for calendar year 2022. The notice also informs taxpayers that pursuant to Sec. 45Q(g), as amended by the Inflation Reduction Act of 2022, P.L. 117-169, 2022 will be the final calendar year for which a taxpayer may claim a Sec. 45Q credit under Secs. 45Q(a)(1) and (2) for qualified carbon oxide that is captured by carbon capture equipment originally placed in service at a qualified facility before the date of enactment of the Bipartisan Budget Act of 2018, P.L. 115-223 (i.e., Feb. 9, 2018). Notice 2022-38 (9/26/22).