The Second Circuit Court of Appeals eliminated the six month “black hole” that the Tax Court believed existed for refunds of taxpayers who failed to timely file a return when it reversed that Court’s decision in the case of Borenstein v. Commissioner, Case No. 17-3900.

The details of the original case were discussed in our blog post in August 2017 when the original decision was issued (“Taxpayer’s Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice”).  The Tax Court found that IRC §6512(b)(3), added by Congress in the Taxpayer Relief Act of 1997, created a six month “black hole” during which, if no return had originally been filed and the IRS issues a notice of deficiency before such a return is filed, the taxpayer would be barred from claiming a refund by filing a return following the issuance of the notice.  The problem is triggered if the taxpayer, while not filing a return, had filed for an extension of time to file such return.  The six month extension created, in the view of the Tax Court, a six month black hole for such refunds.

The IRS has issued Revenue Ruling 2019-11 which outlines how state and local tax refunds will be treated when they arise from years subject to the $10,000 cap on deducting personal state and local income and property taxes imposed by IRC §164(b)(6) added by the Tax Cuts and Jobs Act (TCJA).  The treatment agrees with the treatment outlined in our March 1, 2019 article on the matter (“Tax Benefit Rule of §111 Should Shield State Tax Refunds For Taxpayers Over the SALT Limit”, Current Federal Tax Developments website, March 1, 2019).

As was noted in the referenced article, the tax benefit rule of §111(a) requires determining the amount of such deduction that was later refunded could have been removed from the prior year’s return with no tax effect.  That could be true to the extent:

• The tax deduction for the prior year was capped at $10,000 by IRC §164(b)(6).  In that case, any refund up to the amount of the disallowed tax deduction on the original return would not generate a tax benefit and, under IRC §111(a), would not be subject to inclusion in income in the received; or

• Had the refunded amount not been deducted on the original return, the standard deduction would have exceeded the itemized deduction.  In that case, no tax benefit is generated by the refund that is in excess of the amount of the total allowed itemized deductions on the original return in excess of the standard deduction.

The IRS has announced there will be changes to the process to issue employer identification numbers beginning on May 13 in New Release IR 2019-58.  The IRS indicated these change are meant to enhance security.

Entities will no longer be able to use their own EIN as the identification number for the responsible party and the change will apply to both EINs obtained online and via filing a paper Form SS-4.  The release describes the responsible person as follows:

Generally, the responsible party is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party.

Copyright : yukipon / 123rf.com

The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB) announced that they are in the process of reviewing final regulations for the state and local tax workarounds and a separate notice related to §§170(c) and 164. 

OIRA has been reviewing all IRS regulations, both proposed and final, since last year.  However, this is the first time that OIRA has announced a review of a notice.  This is also interesting since the IRS also recently issued a policy statement indicating a reduced use of subregulatory guidance, which has some questioning what this particular review might mean, if anything, about the new IRS policy.

The IRS has revised the relief from the underpayment of estimated tax penalty for 2018 returns it first provided in Notice 2019-11, now granting relief to taxpayer that paid in at least 80% of the total tax actually due for 2018, up from 85%.  Notice 2019-25 also provides information on how taxpayers who may have already filed and paid the penalty may obtain relief.

A taxpayer was denied current deductions and a net operating loss arising from his claimed business related to a restored vintage World War II fighter plane in the case of Kurdziel v. Commissioner, TC Memo 2019-20.  The Tax Court agreed with the IRS that the losses were barred by what is referred to as the hobby loss rule under IRC §183.

Image by By RuthAS - Own work, CC BY 3.0

The IRS announced that it is taking the relatively rare step of suspending two prior revenue rulings in Revenue Ruling 2019-09.  The ruling being suspended are Revenue Rulings 57-464 and 57-492 which relate to the active trade or business requirement of IRC §355.

Internal Revenue Manual Section 32.2.2.8 (08-11-2004) defines what suspended status is for a Revenue Ruling:

9. Suspended is used only in rare situations to show that previously published guidance will not be applied pending some future action, such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

Thus, suspension is not a revocation of the rulings.  Presumably this leaves the door open for the IRS to determine that one or both rulings will be put back in force unchanged at the end of the study.  But, more likely, the agency doesn’t want to imply that both of the situations describe cases where it will be held there clearly is an active trade or business once the study is complete.

The IRS is under obligation only to mail notices to the taxpayer’s last known address in order to start the clock running on the time period to take specific actions.  In the case of Gregory v. Commissioner, 152 TC No. 7, the Tax Court ruled that neither Form 2848, Power of Attorney and Declaration of Representative, nor Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, served to change a taxpayer’s last known address.

The taxpayer in the case of ATL & Sons Holding Inc. v. Commissioner, 152 TC No. 8, sought to have the Tax Court order the IRS to stop pursuing a failure to file penalty imposed on the taxpayer’s S corporation.  The taxpayer argued that there had been no harm to the government since the shareholders had timely filed their personal returns and reported the income.  While they may not have applied for an extension of time to file the S corporation return, they had filed for such an extension on their personal return and filed within the time period for such filing.