The IRS released a News Release[1] and 22-page Chief Counsel Memorandum[2] that set forth information a claim for refund related to the research credit under IRC §41 will be required to contain to be considered a valid claim. The News Release states:

The IRS has set forth the information that taxpayers will be required to include for a research credit claim for refund to be considered valid. Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise IRS of the basis of the claim. The Chief Counsel memorandum will be used to improve tax administration with clearer instructions for eligible taxpayers to claim the credit while reducing the number of disputes over such claims.[3]

One of the tools the IRS has used with increasing frequency to provide guidance has been the use of Frequently Asked Questions (FAQs) posted on the IRS website. The IRS began using the tool heavily to provide guidance for various Tax Cut and Jobs Act provisions, and that use continued with guidance for various items found in the COVID relief bills.

However, tax professionals have expressed major concerns with the IRS reliance on such guidance. First, it’s not clear what happens if the IRS discovers that an FAQ no longer agrees with what the agency and courts find to be the proper interpretation of the law. Can the IRS assert a position contrary to a published FAQ against a taxpayer and if they succeed in doing so, do taxpayers face potential penalties for taking positions on a tax return relying upon the FAQ?

In Notice 2021-58[1] the IRS returned to the subject of various emergency extensions for certain COBRA actions issued jointly by the IRS and Department of Labor beginning in May of 2020.

The IRS describes that original notice as follows:

On May 4, 2020, in response to the National Emergency concerning the Novel Coronavirus Disease (COVID-19) Outbreak (National Emergency), the Agencies published the Joint Notice, which extended certain timeframes otherwise applicable to group health plans, disability and other welfare plans, pension plans, and their participants and beneficiaries under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). The Joint Notice extended these timeframes by requiring that plans subject to ERISA or the Code disregard the period for certain action from March 1, 2020, until 60 days after the announced end of the National Emergency or such other date announced by the Agencies in a future notification (the Outbreak Period), subject to a maximum disregarded period of one year.[2]

The IRS argued that Charles Leyh should not be allowed a deduction for alimony for amounts he paid for health insurance for his soon to be ex-wife via his employer’s cafeteria plan pursuant to a separation agreement, arguing Charles got an impermissible double benefit since the amount paid for her insurance was not included in his income.[1] But in a published opinion, the Tax Court disagreed, finding that no impermissible double benefit existed, as his spouse reported that amount as income on her separate return for the year.

The IRS has adopted final regulations setting a $67 dollar fee[1] for a closing letter for a decedent’s estate.[2]

The person liable for the fee is the “the estate of the decedent or other person requesting, in accordance with applicable procedures and policies, an estate tax closing letter to be issued with respect to the estate.”[3]

In the case of Gregory v. Commissioner, TC Memo 2021-115,[1] the taxpayer asked the Tax Court to rule that expenses incurred for a “hobby” under Section 183 are not miscellaneous itemized deductions facing the limitations of IRC §67(a), the 2% floor on miscellaneous itemized deductions that was in place before all such deductions were eliminated in the Tax Cuts and Jobs Act. The Tax Court found just the opposite—that, aside from taxes allowed as a deduction under IRC §183(b)(1), the expenses are treated as miscellaneous itemized deductions.

IRC §183 is often referred to as the hobby loss rule, and most court cases dealing with this section spend time trying to determine if the activity is or is not an “activity not engaged in for profit” under IRC §183(a). But this case looks at a different issue—assuming the activity is found as not being engaged in for a profit, are the expenses allowed under IRC §183(b) subject to the limitations imposed on miscellaneous itemized deductions found at IRC §67.

In the case of Parker v. Commissioner, TC Memo 2021-111[1] the taxpayers faced a number of issues related to their tax return for 2015. We will look at a few of the issues, primarily to discuss where the taxpayers failed to obtain the benefits they claimed on their returns.

In the Estate of Connelly v. United States,[1] the US District Court for the Eastern District of Missouri determined that a buy-sell agreement did not set the value of the decedent’s interest in a closely held corporation he owned a majority interest in and the proceeds of the life insurance policy held by the company that was used to redeem his shares from his estate had to be included in the calculation of the value of the company for estate tax purposes.

While the Fifth Circuit Court of Appeals upheld the Tax Court’s decision regarding the amount of tax owed by the taxpayer in the case of Ray v. Commissioner, Docket No. 20-60004, CA5,[1] the panel overruled the Tax Court on the issue of penalties and found that the taxpayer had a reasonable basis for a portion of his substantial understatement of tax on the return in question.

A penalty under IRC §6662, such as the substantial understatement penalty for income taxes, is waived if the taxpayer can demonstrate:

• Reasonable cause for the underpayment and

• The taxpayer acted with good faith with regard to the underpayment.[2]

The taxation of lawsuit settlement proceeds brings taxpayers before the Tax Court regularly, as it did in the case of Tressler v. Commissioner, TC Summary Opinion 2021-33.[1]

Taxpayers often feel that much of any lawsuit award should not be taxable—they feel they have been wronged and it just doesn’t “feel right” to pay tax on the amounts awarded to them to right that wrong by the court. But the IRC only treats certain types of award amounts as being nontaxable, with the rest being subject to tax because of the default rule of IRC §61—all items of gross income are subject to tax unless we can find an exception to that general rule.

In Notice 2021-53[1] the IRS has issued guidance to employers for reporting qualified leave wages for 2021. The Notice serves to update the guidance provided for reporting such items on 2020 W-2s to take into account changes made in the qualified leave wage provisions for 2021.

The special per-diem rates for the fiscal year running from October 1, 2021 to September 30, 2022 has been released in Notice 2021-52.[1] The special rates governed by this Notice are:

• The special transportation industry meal and incidental expenses (M&IE) rates,

• The rate for the incidental expenses only deduction, and

• The rates and list of high-cost localities for purposes of the high-low substantiation method.[2]

The special meals and incidental expense rates for the transportation industry for the period from October 1, 2021 to September 30, 2022 are $69 for any locality of travel in the continental United States (CONUS) and $74 for any locality outside the continental United States (OCONUS).[3]

I’ve been asked a few times since Notice 2021-49 was published by the IRS what should be done about already filed Forms 941 or 941-X where an employee retention credit was claimed on the return in question for wages the Notice indicates are ineligible to be used to claim that credit.

For those who aren’t up to speed on this issue, that Notice provided that controlling interest holders based on direct ownership of an interest of an employer who had any living relative in the following list would not be paid qualifying wages for the ERC by the controlled employer:

• Brother or sister;

• Ancestors (such as parents, grandparents, etc.); or

• Lineal descendant (such as a child, grandchild, etc.).[1]

In recent discussions over whether Notice 2021-49,[1] which provides the “no living relatives” rule for controlling interest holders for purposes of the various iterations of the employee retention credit,[2] is valid, some commentators have argued that the Notice must be invalid on this point as it is at odds with what they believe Congress intended. At that point, the commentators dive into various arguments regarding how to divine that “true intent” of the relatives rule with the enactment of the employee retention credit itself, the reference to IRC §51(i)(1) and even the “true intent” of the text in IRC §51(i)(1) that gives rise to the issue. And, based on these sources outside the IRC, they argue that either position can be claimed with disclosure or can even be claimed without disclosing the position on the return.

But talking about such indirect sources of “intent” puts the cart before the horse in dealing with the statute. The courts do not generally consider such issues of intent except in cases where it is established that the text of the statute itself does not clearly lead to a single result.

After initially beginning a temporary acceptance of certain e-signatures during 2020 as a response to the COVID-19 pandemic, then extending that program twice, dropping the “temporary” designation in the most recent extension, the IRS now appears to have made the program permanent in IRS Fact Sheet 2021-12.[1]

The IRS justifies allowing e-signatures on certain forms as follows:

To help reduce burden for the tax community, the IRS allows taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The agency is balancing the e-signature option with critical security and protection needed against identity theft and fraud. Understanding the importance of electronic signatures to the tax community, the IRS offers an overview about using them on certain forms.[2]

The IRS issued PMTA 2021-07[1] that addresses a problem taxpayers who deferred employer FICA under the CARES Act may run into this year or next—with a consequence far more negative than they would believe would happen for what to them appears to be a minor error.

The Tax Court found that the taxpayer was neither continuing operating a prior trade or business nor had begun the conduct of a new trade or business in the case of Estate of Morgan v. Commissioner, TC Memo 2021-104.[1]

IRC §1244 was meant to encourage investing in small operating corporations by allowing for a limited ordinary income deduction for a loss on disposing of such stock. IRC §1244(a) provides:

(a) General rule

In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.

The cap on the maximum §1244 loss for a single tax year is found at IRC §1244(b):

(b) Maximum amount for any taxable year

For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—

(1) $50,000, or

(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.

The IRS has published the revised depreciation limits for vehicles under IRC §280F(d)(7) in Revenue Procedure 2021-31.[1] The limits on depreciation for such assets are adjusted for inflation each year.

For passenger automobiles acquired after September 27, 2017 and placed in service during 2021, the limitation on depreciation if §168(k)’s bonus depreciation applies is:

• 1st tax year - $18,200

• 2nd tax year - $16,400

• 3rd tax year - $9,800

• Each succeeding year - $5,860.[2]

In holding that the taxpayers in the case of McCaffery v. United States[1] had failed to prove their claim for refund was filed timely, the US Court of Federal Claims decision took the position that the US Tax Court had developed a method of showing timely filing for an envelope lacking a postmark that is at odds with the Internal Revenue Code.

The Court described the facts of this case as follows:

Plaintiffs filed their federal income tax return for the 2013 tax year on April 15, 2014 with a total tax liability of $70,977. Compl. ¶¶ 6-7; Def.’s App. B at B-1-B-2 (ECF 11-1). In 2017, Plaintiffs filed an amended tax return claiming an overpayment of $69,080 for the 2013 tax year and requesting a refund in that amount. Compl. ¶ 8; Def.’s Mot. to Dismiss at 3; Def.’s App. B at B-15, B-17. The parties agree (and it appears to the Court) that the deadline for claiming an overpayment was April 18, 2017. Def.’s Mot. to Dismiss at 5; Pls.’ Opp. at 1, 3.4 But the IRS noted the receipt date of Plaintiffs’ amended return as April 24, 2017 — six days later.[2]