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Weekly IRS Roundup June 15 – June 20, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 15 – June 20, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here. June 19, 2020: The US Tax Court announced that the Court will resume receiving mail effective July 10, 2020. Any items currently being held by the United States Postal Service or any private delivery service will be delivered to the Court on that day. June 19, 2020: The IRS issued proposed regulations that provide guidance for the deduction of qualified transportation fringe (QTF) and commuting expenses. As part of the Tax Cuts and Jobs Act (TCJA), taxpayers are not allowed deductions for QTF expenses or for certain commuting expenses. These proposed regulations address the elimination of the QTF deduction. The proposed regulations also provide guidance to determine the amount of QTF parking expense that is...

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Tax Court Holds That Form 870-AD Is Not a Binding Settlement Agreement

A recent US Tax Court Memorandum Opinion held that a settlement agreement embodied in Internal Revenue Service (IRS) Form 870-AD does not preclude the IRS from reopening an audit and issuing a notice of deficiency. In Howe v. Commissioner, T.C. Memo 2020-78, the Tax Court held that equitable estoppel did not bind the Commissioner to an agreement in Form 870-AD. Only settlements that comply with Internal Revenue Code (IRC) sections 7121 and 7122 are binding on both the taxpayer and government, and an IRS Form 870-AD does not comply with those provisions. Further, the Court held that equitable estoppel did not bar the IRS from asserting a larger deficiency against the taxpayer because, even if true, the alleged failures to follow internal IRS procedures would not rise to the level of affirmative misconduct. An IRS revenue agent initially began an audit of the 2008 tax return for the taxpayer, who was CEO and majority shareholder of a healthcare company, in...

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Tax Court Zooms into Remote Proceedings

On May 29, 2020, the US Tax Court (Tax Court) announced that to accommodate continuing uncertainties relating to the COVID-19 pandemic, and until further notice, all court proceedings would be conducted remotely. The Tax Court also issued Administrative Order 2020-02 regarding the conduct of remote proceedings and Administrative Order 2020-03 regarding limited entries of appearance. The Orders are effective until terminated by the Tax Court. Administrative Order 2020-02 contains sample forms, which are also available under the “Forms” tab on the Tax Court’s website, providing more information on how Tax Court proceedings will be conducted during the pandemic. The updated forms include: Notice Setting Case for Trial Standing Pretrial Order for Regular Cases Standing Pretrial Order for Small Tax Cases Pretrial Memorandum Petitioner’s (Taxpayer’s) Getting Ready for Trial Checklist The forms make clear certain requirements that are contained in the Tax Court...

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Eighth Circuit Applies Subjective Standard to Reasonable Basis Penalty Defense

On April 24, 2020, the US Court of Appeals for the Eighth Circuit published its opinion in Wells Fargo & Co. v. United States, No. 17-3578, affirming a district court’s holdings that the taxpayer was not entitled to certain foreign tax credits and was liable for the negligence penalty for claiming the credits. Much has been written about the substantive issue, which we will not discuss here. Instead, we focus on the Eighth Circuit’s divided analysis relating to the reasonable basis defense to the negligence penalty. In Wells Fargo, the taxpayer relied solely on the reasonable basis defense to the government’s assertion of penalties. Under Internal Revenue Code (IRC) section 6662(b)(1), a taxpayer is liable for penalty of 20% of an underpayment of its taxes attributable to its “negligence.” Various defenses are potentially applicable to the negligence penalty, which we recently discussed in detail here. One such defense is if the taxpayer can show it had a...

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Fifth Circuit Rules that Law Firm Clients’ Identities Are Not Privileged

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (Firm) could not invoke the attorney-client privilege against an Internal Revenue Service (IRS) summons seeking the identity of its clients. According to an IRS revenue agent’s declaration submitted in support of the summons, the Firm became a target for IRS investigation following an audit of one of its clients, an individual who had used the Firm’s services to establish and operate various foreign accounts and entities, through which the individual had funneled millions of dollars of unreported income. The IRS issued a John Doe summons to the Firm seeking, amongst other things, the identities of other clients for whom it had established foreign accounts or entities. The Firm filed a petition to quash the summons in the US District Court for the Western District of Texas,...

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IRS Flexes Its Administrative Summons Power in Recent Tax Case

The United States Court of Appeals for the Tenth Circuit’s recent opinion in Standing Akimbo, LLC v. United States, No. 19-1049 (10th Cir. April 7, 2020), reminds us of the Internal Revenue Service’s (IRS) ability to obtain the information it needs to examine taxpayers’ returns using its powerful summons tool. In May 2017, the IRS began auditing Standing Akimbo, LLC (Standing Akimbo), a Colorado limited liability company operating as a medical-marijuana dispensary. The audit focused on whether Standing Akimbo improperly claimed business deductions that were prohibited under Internal Revenue Code (IRC) section 280E. Generally, IRC section 280E provides that no deduction or credit is allowed for any amount paid or incurred in the carrying of a business if such business trafficks in controlled substances that are prohibited by Federal law. While legal under Colorado law, marijuana is still classified as a controlled substance under Federal law, and specifically...

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IRS Failed to Prove Supervisory Approval For Penalty Based Upon Redacted Document

In a recent order in the The Cannon Corp. v. Commissioner, No. 12466-16, the US Tax Court (Tax Court) held that a redacted email from a revenue agent’s supervisor to the agent regarding a notice of deficiency was not sufficient to satisfy the approval requirement under Internal Revenue Code (IRC) section 6751(b) for the assertion of accuracy-related penalties. Under IRC section 6751(b), as interpreted by case law, the Internal Revenue Service (IRS) is permitted to assert penalties only if the initial determination to assert the penalty is approved in writing by the supervisor of the individual making such a determination. That provision has been litigated recently in several notable cases, for example, Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), and Graev v. Commissioner, 149 T.C. 485 (2017). Since Graev, the Tax Court has issued a series of decisions on the requirements of IRC section 6751(b). Our recent article discussing these decisions can be found...

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Taxpayer Victory in an IRC Section 199 Contract Manufacturing Case

Recently, the US Federal District Court for the Southern District of Iowa in Meredith Corp. v. United States, No. 4:17-cv-00385 (S.D. Iowa Mar. 20, 2020), held that a magazine publisher was entitled to refund of federal income tax based for the Internal Revenue Code (IRC) section 199 domestic production deduction based upon the printing services performed by a contract manufacturer. At issue in the case was whether the publisher qualified as a printer of magazines for purposes of IRC section 199 despite hiring third-party printers to print its magazines. The Internal Revenue Service (IRS) argued that the third-party printers, not the magazine publisher, had the “benefits and burdens of ownership,” and thus only the third-party printers were eligible for the IRC section 199 deduction. The case involved tax years 2006 through 2012. The Tax Cuts and Jobs Act repealed IRC section 199 domestic production deduction for tax years after 2018. This was a fact...

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US Tax Court Cancels Remainder of Spring Trial Sessions

After cancelling several trial sessions for March 2020 and April 2020, and closing its building until further notice, the US Tax Court (Tax Court) has announced that the remainder of its trial sessions through the end of June 2020 have been cancelled as a result of the coronavirus (COVID-19). The cancelled trial sessions will be rescheduled at a later date. Although the Tax Court’s building is closed, the court remains operational: Tax Court personnel are working remotely. The eAccess and eFiling systems remain operational and the Court will continue to process items received electronically, serve orders and opinions, enter and serve decisions, work with litigants, and receive telephone calls. Practice Point: Much like prior government shutdowns, the cancellation of a large number of trial sessions stemming from COVID-19 is a major disruption for the Tax Court, taxpayers and the Internal Revenue Service (IRS). Those taxpayers whose cases have been delayed...

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Tax Court Closes Building and Cancels More Trial Sessions

As the fallout from the coronavirus (COVID-19) continues, the US Tax Court (Tax Court) has cancelled additional trial sessions. As we previously discussed, the Tax Court last week cancelled all trial sessions for March 2020. Now, the Tax Court has announced that all trial sessions for April 2020 are also cancelled. Additionally, although the Tax Court will remain open to receive mail and accept hand-delivered petitions, the Tax Court building will be closed to visitors.

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