In November of 2019, we wrote[1] about the case of Wilson, et. al. v. United States, Case No. 2:19-cv-05037, US District Court, Eastern District of New York where a taxpayer prevailed in a case where he was the sole owner and beneficiary of a foreign trust. The owner/beneficiary was found to be liable for only the smaller 5% penalty under §6677(b) as the owner of a foreign trust that fails to file a report under IRC §6048. He was able to escape the 35% penalty imposed on a beneficiary for failing to report the receipt of a distribution from that trust as required by the same section.

However, the Second Circuit Court of Appeals has now reversed the District Court after the IRS appealed the decision,[2] finding that the 35% penalty the IRS had originally imposed was due in this case, noting:

We vacate the court’s judgment and hold that when an individual is both the sole owner and beneficiary of a foreign trust and fails to timely report distributions she received from the trust, the government has the authority under the IRC to impose a 35% penalty.[3]

IRS emailed advice is always tricky to interpret, since we are seeing only one side of a conversation in these cases—only the IRS attorney’s response is provided. And, unlike more formal advice from the Chief Counsel’s office, these emails do not follow a formal structure where the facts under consideration are outlined in the attorney’s response.

But Chief Counsel Email 202129012[1] contains one side of a discussion that outlines an issue that arises with partnership examinations under the BBA centralized partnership audit regime, discussing if it matters that the partnership can show that if an item of adjustment had been properly reported by the partners no additional income tax would have resulted. The partnership would want to have this amount excluded from the imputed adjustment (IU) under the regime, which is generally subjected to tax at the highest marginal tax rate when paid by the partnership.

When dealing with a decedent’s estate, an executor of the estate may face personal liability for taxes found to be due from the estate if the executor made a distribution that rendered the estate insolvent, assuming the executor had knowledge or notice of that liability or potential liability.[1]

In the case of Fagenboym v. Commissioner [1] we see a taxpayer unsuccessfully attempt to make use of the most-cited case in federal income tax cases—the case of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

For those who aren’t familiar with the Cohan case, the case involved vaudeville producer and entertainer George M. Cohan and produced what is often referred to as the Cohan doctrine or rule. The opinion summarizes this rule as follows:

Under the Cohan rule, when a taxpayer establishes that he or she has incurred a deductible expense, but is unable to substantiate the exact amount, the Court is permitted to estimate the deductible amount. Id. at 543-544. But we can do so only to estimate the amount of the deductible expense when the taxpayer provides evidence sufficient to establish a rational basis upon which the estimate can be made. See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). In estimating the amount allowable the Court bears heavily upon the taxpayer who failed to maintain required records and to substantiate expenses as the Code requires. See Cohan v. Commissioner, 39 F.2d at 544; Keenan v. Commissioner, T.C. Memo. 2006-45, aff’d, 233 F. App’x 719 (9th Cir. 2007).[2]

The IRS published a notice in the Federal Register on July 19, 2021 asking for comments on a new Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations and related instructions.[1]

The notice describes the proposed form in an abstract section as follows:

Internal Revenue Code (IRC) Section 1366 determines the shareholder’s tax liability from an S corporation. IRC Section 1367 details the adjustments to basis including the increase and decrease in basis, income items included in basis, the basis of indebtedness, and the basis of inherited stock. Shareholders will use Form 7203 to calculate their stock and debt basis, ensuring the losses and deductions are accurately claimed.[2]

The form and instructions have not been made available for download at this time. Rather, interested parties are directed to request the form and instructions from an IRS contact listed in the notice.

The IRS has opened up a website by which Circular 230 practitioners (CPAs, EAs and attorneys) can submit a Power of Attorney request.[1] The page contains information on using the service as well as the link to access the system. The IRS has also published an addition to the Internal Revenue Manual at 21.2.1.63[2] that describes the program and noted it would become available on July 18, 2021. The program is described as follows:

Tax Pro Account is an online system, available to the public on July 18, 2021, that allows individual tax professionals to securely request third party authorizations for an individual taxpayer as power of attorney (POA) or tax information authorization (TIA), in lieu of filing a paper Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization.[3]

However, the IRM notes that “[t]he Tax Pro Account application does not have the [specific capabilities] that the forms allow, as detailed below.”[4] That is, only a very limited set of authorizations can be handled via this system. In fact, advisers will note that the system, at least at the beginning, is very limited in the situations in which it can be used, and it will require the adviser’s client to access the system as well as this system has both the professional and the client electronically sign the form.

In the case of Morreale v. Commissioner[1] the Tax Court found that the IRS position in his case was not substantially justified, awarding the taxpayer attorney’s fees for the costs incurred on this matter—but this matter alone, and only at the statutory rate.

The taxpayer is a hotelier and restaurateur who operated in Denver. He failed to file income tax returns for 2011 and 2012 and in 2013 filed for bankruptcy. The IRS bankruptcy specialists referred the case to the Examination Division to assist in the preparation of substitutes for returns for 2011 and 2012.[2]

The taxpayer agreed to prepare the delinquent income tax returns. After the returns were submitted to the Revenue Agent, the RA proposed adjustments based on two primary issues:

• The taxpayer had not substantiated basis in Sketch, LLC which operated two restaurants[3] and

• The taxpayer had improperly reported income on the accrual basis of accounting, so that accrued but unpaid expenses were disallowed.[4]

During the COVID-19 pandemic, many people turned to digital signatures to avoid meeting face to face. And, as we’ve noted in prior posts, the IRS also authorized the use of electronic signatures for many purposes.[1] If you search Google for “digital signatures legally binding” you are likely to get links to articles from many digital signature providers with headlines stating that such signatures are legally binding.

But if you read behind the headlines you will find caveats and exceptions. In the case of Mills v. United States,[2] the taxpayer discovered that signatures on tax documents are subject to specific requirements and his use of a digital signature did not count, costing him the chance to pursue his claim for refund

The Fifth Circuit Court of Appeals upheld a lower court ruling that a taxpayer did not have reasonable cause for late filing of his tax returns when the attorney he had hired to handle such affairs while the taxpayer was incarcerated had embezzled the funds meant to be used to pay the taxes and had not filed the returns in question.[1] The case illustrates just how difficult it is for a taxpayer to escape such penalties by claiming reliance on a tax professional, even when that professional has intentionally misled the taxpayer about having filed the returns in question.

The Journal of Accountancy reported that the SBA informed lenders in a July 9 letter that it will no longer request the completion of a loan necessity questionnaire for borrowers with PPP loans of more than $2 million and will not perform an additional necessity review.[1]

The justification for the way that IRA custodians are asked to report qualified charitable distributions (QCDs) under IRC §408(d) is explained by the IRS in Information Letter 2021-0007[1] addressed to Rep. Chip Roy of Texas.

The letter begins by explaining generally how the QCD rules work:

Under Section 408(d)(8) of the Internal Revenue Code (Code), a taxpayer can exclude from gross income up to $100,000 of QCDs each year. Section 408(d)(8)(B) of the Code defines a QCD as a distribution from an IRA, whose owner is at least age 70½, made directly to one or more specified charitable organizations, provided the distribution would be includible in the IRA owner's gross income if it were made to the owner instead. Any deductions a taxpayer took for IRA contributions made during years they were 70½ or older, also reduce the amount available for QCDs.[2]

In Information Letter 2021-0012[1] the IRS, while declining to provide the specific ruling the taxpayer requested, does provide specific examples of legal expenses that would not be deductible for income tax purposes.

In an information letter issued in December of 2020 to the office of then-Senator Kelly Loeffler,[1] the IRS explained why the Senator’s constituent was required to provide additional documentation to support that amounts paid with a debit card linked to her employer-sponsored health flexible spending account and that the employer had properly deactivated her card.

Although employee business expenses generally were rendered nondeductible (at least temporarily) by the Tax Cuts and Jobs Act, a recent case on the concept of a “tax home” for an employee’s away from home expenses is still relevant to those who work with employee benefits. In the case of Warque v. Commissioner,[1] an IRS agent unsuccessfully attempted to argue his tax home became Las Vegas when the agency agreed to place him on a list for potential hardship relocation to the Nevada City.

The IRS Taxpayer Advocate Service (TAS) has issued a memorandum (TAS-13-0721-0009)[1] which states that TAS will not accept most advance child tax credit (Adv. CTC) cases. The memorandum explains the advance child tax credit provision, found in the American Rescue Plan Act of 2021, as follows:

Section 9611(a) of the American Rescue Plan Act, Public Law 117-2 (2021), signed into law on March 11, 2021, amended Internal Revenue Code (IRC) section 24 to create special rules for the Child Tax Credit (CTC) applicable to only calendar year 2021 and added new IRC section 7527A to provide for periodic advance payments of the CTC to eligible individuals in calendar year 2021. The Adv CTC payments will commence July 15, 2021 and end by December 31, 2021. During this time IRS programming will use tax year 2020 return data (or 2019, if 2020 is not available) to generate monthly payments totaling up to 50 percent of the taxpayer's projected 2021 CTC amount. Taxpayers who have not filed a 2020 or 2019 federal income tax return and do not have a filing requirement can use the “Child Tax Credit Non-filer Sign up Tool” on irs.gov to file a 2020 tax return. Eligible taxpayers who do not want to receive Adv CTC can elect to unenroll to decline the advanced payments using the CTC UP. The CTC UP also allows eligible taxpayers to check enrollment, and future updates will allow taxpayers to change other items such as address, bank information, and life event changes.[2]

A little more than one year ago the IRS released Notice 2020-46 allowing employers to establish COVID-19 related leave donation programs for employees to participate in for their leave time to be converted to a cash donation to a charitable organization offering COVID-19 relief. The program was described in an article posted to this site at the time.[1] The guidance expired on December 31, 2020.

In Notice 2021-39,[1] issued at the same time as draft versions of the 2021 instructions for new Forms K-2 and K-3 for partnerships and S corporations, the IRS provided limited relief from penalties related to issues properly preparing those forms on 2021 tax returns.

Guidance has been issued to farmers for elections related to net operating losses added by the COVID-related Tax Relief Act of 2020 (CTRA) in Revenue Procedure 2021-14.[1] The Procedure broadly described its guidance as follows:

Specifically, this revenue procedure prescribes when and how to make an election with regard to all NOLs of the taxpayer, regardless of whether the NOL is a Farming Loss NOL. This revenue procedure also provides that a taxpayer is treated as having made a deemed election under § 2303(e)(1) of the CARES Act if the taxpayer, before December 27, 2020, filed one or more original or amended Federal income tax returns, or applications for tentative refund, that disregard the CARES Act Amendments with regard to a Farming Loss NOL. This revenue procedure further prescribes when and how to revoke an election made under § 172(b)(1)(B)(iv) or § 172(b)(3) of the Code to waive the two-year carryback period for the farming loss portion of a Farming Loss NOL incurred in a taxable year beginning in 2018 or 2019.[2]

The U.S. Supreme decided not to hear the challenge by the state of New Hampshire to Massachusetts’ taxation of workers who worked remotely in other states.[1]

The state of Massachusetts issued emergency regulations on nonresident income sourcing due to the closing of offices in the state during the COVID-19 epidemic.[2] The key provision the state of New Hampshire objected to reads as follows:

Under M.G.L. c. 62, § 5A(a), income of a nonresident derived from a trade or business, including any employment, carried on in the Commonwealth is sourced to Massachusetts. Pursuant to this rule, all compensation received for services performed by a nonresident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing such services in Massachusetts, and who is performing services from a location outside Massachusetts due to a Pandemic-related Circumstance will continue to be treated as Massachusetts source income subject to personal income tax under M.G.L. c. 62, § 5A and personal income tax withholding pursuant to M.G.L. c. 62B, § 2.[3]