recent developments in federal income taxation · recent developments in federal income taxation...

Recent Developments in Federal Income Taxation

State Bar of New Mexico Tax Section Annual Tax Symposium

September 20, 2019

Bruce A. McGovern Professor of Law and Director, Tax Clinic

South Texas College of Law Houston Houston, Texas

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2

Wasco Real Properties I, LLC v. Commissioner, 744 Fed. Appx. 534 (9th Cir. 12/13/18)

Outline: item B.1.a, page 8 Three tax partnerships purchased land, a portion of which they

used to grow almond trees. The partnerships paid interest on loans incurred to finance the

purchase, and paid property taxes on the land. Issue:

Are the interest and property taxes paid by the partnerships capital expenditures under the uniform capitalization rules of § 263A?

Held: Yes, as to the interest and property taxes corresponding to the portion of the land on which almond trees were grown. Growing the almond trees is a production of those trees within the reach of section 263A.

3

Patients Mut. Assist. Collective Corp. v. Commissioner, 151 T.C. No. 11 (11/29/18) Outline: item B.2, page 9

Section 280E disallows any deduction or credit otherwise allowable if: such amount is paid or incurred in connection with a trade or business

“if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances ….”

The taxpayer, a subchapter C corporation, was engaged in a medical marijuana business in California.

Issues: 1. Does § 280E disallow deductions only for businesses that exclusively

traffic in controlled substances? 2. Can a business subject to § 280E include indirect costs in CGS pursuant

to § 263A? Held: (1) No. Section 280E applies even if a business engages in other

activities. (2) No. A business subject to § 280E cannot use § 263A and must determine CGS under the rules of § 471.

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Costs of Entertainment 2017 TCJA § 13304

Outline: item D.2, page 10 TCJA § 13304 amends Code § 274(a) to disallow business deductions

for: 1. Costs “[w]ith respect to an activity which is of a type generally

considered to constitute entertainment, amusement, or recreation.”

2. Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes.

Applies to taxable years beginning after 2017. Notice 2018-76, 2018-42 I.R.B. 599 (10/3/18).

Treasury and IRS will issue proposed regulations. Meals are still deductible (subject to 50% limit) if, among other

requirements, taxpayer (or employee) is present and meal is provided to current or potential business customer, client, consultant, or similar business contact.

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Notice 2018-76 2018-42 I.R.B. 599 (10/3/18) Outline: item D.2.a, page 11

Taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:

1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances; 3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of

the food or beverages; 4. The food and beverages are provided to a current or potential business

customer, client, consultant, or similar business contact; and 5. In the case of food and beverages provided during or at an entertainment

activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

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Example 1. 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases

tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

2. The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

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Example 2. 1. Taxpayer C invites D, a business contact, to a basketball game. C purchases

tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

2. The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.

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Example 3. 1. Assume the same facts as in Example 2, except that the invoice for the

basketball game tickets separately states the cost of the food and beverages.

2. As in Example 2, the basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

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Qualified Transportation Fringes Disallowed 2017 TCJA § 13304

Outline: item D.3, page 12 No deduction for qualified transportation fringes (employee

parking, transit passes, transportation in commuter highway vehicle) Applies to amounts paid or incurred after 2017 Ability of employees to exclude transportation fringes not

affected Exception: qualified bicycle commuting reimbursements before

2026 are: Deductible by employer Included in income of the employee

Note: UBTI of tax-exempt organizations is increased if they provide nondeductible qualified transportation fringes. [Outline page 82, item A.4.b].

10

Notice 2018-99 2018-52 I.R.B. 1067 (12/10/18)

Outline: item D.3.a, page 13 Treasury and IRS will issue proposed regulations under § 274 that

will include guidance on: Determining nondeductible expenses for qualified transportation fringes Calculation of increased unrelated business taxable income (UBTI) of tax-

exempt organizations that provide qualified transportation fringes.

Provides: Section 274(a) does not disallow amounts an employer pays to third parties

for employee parking in excess of the § 132(f)(2) monthly limitation on exclusion ($260 for 2018 and $265 for 2019), and employer must treat excess amount as compensation and wages to the employee.

If a taxpayer owns or leases parking facilities where employees park: Nondeductible portion of the cost of providing parking can be

calculated using any reasonable method. The notice provides a four-step methodology that is deemed to be a

reasonable method.

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20% Deduction for Qualified Business Income 2017 TCJA § 11011

Outline: item D.4, page 13 TCJA § 11011 adds Code § 199A, which generally allows a 20%

deduction for “qualified business income.” Available to individuals, estates, and trusts for taxable years

beginning after 2017 and before 2026 Proposed regulations: 83 Fed. Reg. 40884 (8/16/18). Final regulations: issued January 18, 2019 Proposed regulations: issued January 18, 2019

Provide guidance on treatment of previously suspended losses that constitute qualified business income.

Notice 2019-7 (1/18/2019) Safe harbor under which rental real estate enterprises are

treated as a trade or business for purposes of § 199A

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Limit on Deducting Business Interest 2017 TCJA § 13301

Outline: item D.5, page 19 Amendments to Code § 163(j) limit the deduction of business

interest expense – a/k/a “thin cap rules.” Limit is business interest income plus 30% of “adjusted taxable

income” plus floor plan financing ATI generally is earnings before interest, tax, depreciation and

amortization (EBITDA) for 2018-2022, then earnings before interest and taxes (EBIT).

Businesses with average annual gross receipts of $25 million or less (over 3 years) are exempted

Real estate businesses can elect out, but become subject to alternative depreciation system.

Interim guidance: Notice 2018-28 (April 2, 2018). Proposed regulations: 83 Fed. Reg. 67490 (12/28/18).

13

Alternative Health Care Advocates v. Commissioner, 151 T.C. No. 13 (12/20/18) Outline: item D.6, page 21

Section 280E disallows any deduction or credit otherwise allowable if: such amount is paid or incurred in connection with a trade or business

“if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances ….”

A subchapter C corporation operated a medical marijuana dispensary and took title to the marijuana. An S corporation handled daily operations, including paying employees wages and salaries. California.

Issue: Is the S corporation, which did not take title to the marijuana, engaged in trafficking in controlled substances and therefore subject to § 280E?

Held: Yes. The S corporation’s employees were involved in providing medical marijuana to the dispensary’s patients and were engaged in the purchase and sale of marijuana on the C corporation’s behalf.

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Rev. Proc. 2019-13 2019-9 I.R.B. 744 (2/13/19) Outline: item E.2, page 25

Addresses the interaction of 100% bonus depreciation under section 168(k) and the section 280F limitation on depreciation of passenger automobiles.

Absent this Rev. Proc., a taxpayer claiming bonus depreciation on a passenger automobile place in service in 2018 would deduct $18,000 in 2018, and nothing further until the recovery period as expired. At that point, $5,760 per year would be deductible each year.

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Rev. Proc. 2019-13 2019-9 I.R.B. 744 (2/13/19) Outline: item E.2, page 25

Taxable Year Depreciation Limits Under Table 2 of Rev. Proc. 2018-25

Depreciation Deduction Under the Safe Harbor

2018 $18,000 $18,000

2019 $16,000 $13,440 ($42,000 x .32)

2020 $9,600 $8,064 ($42,000 x .1920) 2021 $5,760 $4,838 ($42,000 x .1152)

2022 $5,760 $4,838 ($42,000 x .1152)

2023 $5,760 $2,419 ($42,000 x .0576)

TOTAL $51,599

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Mihelick v. United States 123 A.F.T.R.2d 2019-2251 (11th Cir. 6/18/19)

Outline: item H.2, page 29 Holds that a taxpayer, while married, had received $600,000 of

income (her husband’s earnings) under a claim of right, and therefore, when she repaid $300,000 in 2009 to settle a suit brought against her husband for breach of fiduciary duty, she could determine her tax liability for the year of repayment under § 1341.

17

Breland v. Commissioner T.C. Memo. 2019-59 (5/29/19)

Outline: item A.3, page 33 The taxpayers, a married couple, purchased real property on Dauphin

Island, Alabama. The property was subject to a recourse mortgage loan from Whitney Bank

in the amount of $11.2 million. Whitney Bank foreclosed and was the high bidder at the foreclosure sale

with a bid of $7.2 million. The taxpayers later filed for chapter 11 bankruptcy protection in federal

court. Whitney Bank filed a proof of claim for $6.3 million. Issue: what is the taxpayers’ amount realized in the foreclosure sale? Is it

the $11.2 million loan balance, or the $7.2 million sale price? Held: The $7.2 million sale price. The taxpayers realized a $4.3 million loss.

Reg. § 1.1001-2(a)(1): a taxpayer’s AR includes the amount of any liabilities from which the taxpayer is discharged as a result of transferring property.

But this rule applies to nonrecourse debt. In the case of recourse debt, the portion of the loan included in AR is limited to the property’s FMV.

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Gaylor v. Mnuchin, 919 F.3d 420 (7th Cir. 3/15/19)

Outline: item A.1.a, page 35

Holds the parsonage allowance exclusion of section 107(2) to be constitutional.

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CCA 201912001 (3/22/19) Outline: item A.3, page 37

Concludes that an individual who was treated as a 2-percent S corporation shareholder because the stock of a family member was attributed to the individual under the constructive ownership rules of § 318 could deduct the amounts paid by the S corporation under a group health plan and included in the individual’s gross income.

20

Felton v. Commissioner, T.C. Memo. 2018-168 (10/10/18)

Outline: item B.4, page 43 The taxpayer was the pastor of a sizeable church in Minnesota. The church had an envelope system for collecting offerings. White, gold, and

blue envelopes where used. White: congregant could indicate the portion of any contribution which the congregant

desired to be paid by the church to the taxpayer-pastor. Gold: tax-deductible contributions to special programs and retreats conducted by the

church. Blue: nondeductible “gifts” to pastor.

Issue: is the blue envelope money an excludable gift under section 102(a), or instead included in the pastor’s gross income.

Held: gross income. Four factors: Average congregant made blue-envelope donations to keep the taxpayer-pastor; Lack of emphasis in church services that blue-envelope monies were “gifts” to pastor; Routinized structure of the blue-envelope system for the taxpayer’s benefit; and Ratio of the taxpayer’s salary to the purported blue-envelope “gifts.”

21

Doyle v. Commissioner T.C. Memo. 2019-8 (2/6/19) Outline: item B.5, page 44

Holds that $250,000 received by the taxpayer, a terminated employee, “for his alleged emotional distress damages,” which his employer reported on Form 1099-MISC, was includible in the taxpayer’s gross income pursuant to the language of § 104(a), which provides that “emotional distress shall not be treated as a physical injury or physical sickness.”

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The 2017 Tax Cuts and Jobs Act added § 151(d)(5), which reduces the exemption amount to zero for TY beginning after 2017 and before 2026. Eliminates the deduction for personal exemptions authorized by § 151(a).

However, it is still necessary to determine for various purposes whether an individual is a “dependent” within the meaning of § 152. Qualifying child Qualifying relative:

To be a qualifying relative, § 152(d)(1)(B) requires the individual’s gross income for the calendar year be less than the exemption amount as defined in § 151(d).

Notice 2018-70: “because it would be highly unusual for an individual to have gross income less than zero, virtually no individuals would be eligible as qualifying relatives.”

Notice 2018-70: Proposed regulations will be issued. In determining eligibility in 2018 for head-of-household filing status and for the new

$500 credit (§ 24(h)(4)) for dependents other than a qualifying child, an individual must have gross income not exceeding $4,150 (to be adjusted for inflation).

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Deduction of State and Local Taxes Outline: item D.2, page 50

TCJA: An individual’s itemized deductions on Schedule A for state taxes cannot exceed $10,000. Applies to aggregate of property taxes, and sales or income taxes. Limit applies both to single individuals and married individuals filing

jointly Applies 2018 through 2025

Some states have adopted workarounds, e.g., New Jersey gives a credit against property taxes for contributions to certain charitable funds designated by the state.

Notice 2018-54 (5/23/18): proposed regulations will “make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers.”

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Deduction of State and Local Taxes Outline: item D.2.d, page 52

Final regulations: 84 Fed. Reg. 27,513 (6/13/19). Apply to contributions after 8/27/18.

The regulations: Generally require taxpayers to reduce the amount of any federal

income tax charitable contribution deduction by the amount of any corresponding state or local tax credit. Provide an exception: a taxpayer’s federal charitable contribution

deduction is not reduced if the corresponding state or local credit does not exceed 15 percent of the taxpayer’s federal deduction.

Example: T contributes $1,000 to state charity and gets 10% state tax credit.

Provide that a state or local tax deduction normally will not reduce a taxpayer’s federal deduction (provided the state and local deduction does not exceed the taxpayer’s federal deduction).

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Deduction of State and Local Taxes IRS News Release IR-2018-178 (9/5/18)

Rev. Proc. 2019-12, 2019-04 I.R.B. 401 (12/29/18) Outline: item D.2.b-c, page 50

This News Release provides: If a payment to a government agency or charity qualifies as an

ordinary and necessary business expense under § 162(a), it is not subject to disallowance in the manner in which deductions under § 170 are subject to disallowance.

This is true regardless of whether the taxpayer is doing business as a sole proprietor, partnership or corporation.

Rev. Proc. 2019-12: Sets forth safe harbors for C corporations and “specified passthrough

entities.” General principle: the taxpayer’s federal charitable contribution

deduction is reduced by any state tax credit, but the balance of the payment can be a business expense deduction under § 162 if the payment is made with a business purpose.

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Notice 2019-12 2019-27 I.R.B. 57 (6/11/19) Outline: item D.2.e, page 53

Announces that the Treasury Department and the IRS intend to publish a proposed regulation that will amend Reg. § 164-3 to provide a safe harbor for individuals who itemize deductions and make a payment to or for the use of an entity described in § 170(c) in return for a state or local tax credit.

Under this safe harbor, an individual who itemizes deductions and who makes a payment to a section 170(c) entity in return for a state or local tax credit may treat as a payment of state or local tax for purposes of section 164 the portion of such payment for which a charitable contribution deduction under section 170 is or will be disallowed under final regulations.

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Deduction of State and Local Taxes Rev. Rul. 2019-11, 2019-17 I.R.B. 1041 (3/29/19)

Outline: item B.6, page 46

Addresses the inclusion of state tax refunds in gross income when the taxpayer is affected by the $10,000 limit on deducting state and local taxes.

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Situation 1 (State income tax refund fully includable). Facts: Taxpayer A paid local real property taxes of $4,000 and state income

taxes of $5,000 in 2018. A’s state and local tax deduction was not limited by section 164(b)(6) because it was below $10,000. Including other allowable itemized deductions, A claimed a total of $14,000 in itemized deductions on A’s 2018 federal income tax return. In 2019, A received a $1,500 state income tax refund due to A’s overpayment of state income taxes in 2018.

Held: In 2019, A received a $1,500 refund of state income taxes paid in 2018. Had A paid only the proper amount of state income tax in 2018, A’s state and local tax deduction would have been reduced from $9,000 to $7,500 and as a result, A’s itemized deductions would have been reduced from $14,000 to $12,500, a difference of $1,500. A received a tax benefit from the overpayment of $1,500 in state income tax in 2018. Thus, A is required to include the entire $1,500 state income tax refund in A’s gross income in 2019.

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Situation 2 (State income tax refund not includable) Facts: Taxpayer B paid local real property taxes of $5,000 and state income taxes

of $7,000 in 2018. Section 164(b)(6) limited B’s state and local tax deduction on B’s 2018 federal income tax return to $10,000, so B could not deduct $2,000 of the $12,000 state and local taxes paid. Including other allowable itemized deductions, B claimed a total of $15,000 in itemized deductions on B’s 2018 federal income tax return. In 2019, B received a $750 state income tax refund due to B’s overpayment of state income taxes in 2018.

Held: In 2019, B received a $750 refund of state income taxes paid in 2018. Had B paid only the proper amount of state income tax in 2018, B’s state and local tax deduction would have remained the same ($10,000) and B’s itemized deductions would have remained the same ($15,000). B received no tax benefit from the overpayment of $750 in state income tax in 2018. Thus, B is not required to include the $750 state income tax refund in B’s gross income in 2019.

30

Kerns v. Commissioner T.C. Memo. 2019-14 (3/4/19)

Outline: item D.4, page 54 Holds that the Tax Court does not have equitable power to change

the statutory treatment of excess advance premium tax credits as an increase in tax.

See also McGuire v. Commissioner, 149 T.C. 254 (8/28/17).

31

Feigh v. Commissioner, 152 T.C. No. 15 (5/15/19) Outline: item D.7, page 56

Holds that “Medicaid waiver payments” that individuals received and excluded from gross income under Notice 2014-7 are “earned income” for purposes of the earned income credit and the additional child tax credit.

32

Petersen v. Commissioner, 924 F.3d 1111 (10th Cir. 5/15/19)

Outline: item D.3, page 59 The taxpayers were shareholders of an S corporation that had

established an Employee Stock Ownership Plan (ESOP). The ESOP owned shares for the benefit of employees.

The S corporation used the accrual method of accounting and accrued deductions for > $1 million in wages and vacation pay.

Issue: were the S corporation’s deductions disallowed by the forced matching rule of § 267(a)(2)? This rule defers deductions of an accrual method taxpayer for

items payable to a related cash-method taxpayer until the cash-method taxpayer includes the item in gross income.

Held: Yes. The shares held by the ESOP trust are attributed to the employees who, as shareholders, are related to the S corp. pursuant to § 267(e).

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Brokertec Holdings, Inc. v. Commissioner, T.C. Memo. 2019-32 (4/9/19)

Outline: item H.3, page 65 Holds that a cash grant received by a corporation was a

nontaxable, nonshareholder contribution to capital.

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2017 Tax Cuts and Jobs Act § 13312 Outline: item G.1, page 73

Section 13312 of the 2017 TCJA amended Code § 118. New § 118(b)(2) provides:

Non-shareholder contributions to the capital of a corporation made after 12/22/17 by any governmental entity or civic group are not excluded from the corporation’s gross income.

The legislative history of this amendment states: “The conferees intend that section 118, as modified, continue

to apply only to corporations.”

35

Ginsburg v. United States, 922 F.3d 1320 (Fed. Cir. 4/25/19)

Outline: item G.1.c, page 75 The taxpayer held 90% of the membership interests in an LLC classified

as a partnership for federal tax purposes. The LLC participated in New York State’s Brownfield Development Tax

Credit program. In return for acquiring an abandoned shoe factory and restoring it as

residential property, the LLC received state tax credits. Any credit in excess of state tax liability is paid in cash. The LLC received $1.8 million from New York State as an “excess” credit

payment. Issue: is $1.8 million payment included in the LLC’s (and therefore its

partners’) gross income? Held: Yes. The payment was an accession to wealth (Glenshaw Glass

(U.S. 1955). The court rejected arguments that the payment was a nontaxable (1) contribution to capital, (2) recovery of investment, or (3) general welfare grant.

36

Uniquest Delaware, LLC v. United States, 294 F. Supp. 3d 107 (W.D.N.Y. 3/27/18)

Outline: item G.1.b, page 74

Held: An $11 million grant from New York State received by an LLC classified as a partnership for federal tax purposes was included in the LLC’s (and therefore the partners’) gross income. The grant was for restoration of a building in Buffalo. The court rejected the argument that the grant was a

nontaxable contribution to capital because § 118 applies only to corporations.

Planning idea: The LLC had two members, each of which was a disregarded LLC held by

a subchapter S corporation. Had the grant been paid to the S corporations and then contributed to

the LLC, the S corporations could have excluded the grant from gross income (at least under the pre-TCJA version of § 118).

37

Notice 2019-20 and IRS FAQ 2019-14 I.R.B. 927 (3/7/19) Outline: item G.2, page 75

The updated 2018 Instructions for Form 1065 and accompanying Schedule K-1 now require a partnership that does not report tax basis capital accounts to its partners to report, on line 20 of Schedule K-1 (Form 1065) using code AH, the amount of a partner’s tax basis capital both at the beginning of the year and at the end of the year if either amount is negative.

This Notice and the FAQ on the IRS website provide guidance on tax capital accounts.

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Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4 (2/28/19)

Outline: item A.9, page 98

Holds section 6751(b) supervisory approval requirement does not require that all penalties be determined at the same time.

39

Gregory v. Commissioner, 152 T.C. No. 7 (3/13/19)

Outline: item D.1, page 101

Holds that filing a power of attorney on Form 2848 does not provide the IRS with clear and concise notification of the taxpayer’s new address.

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Baldwin v. Commissioner, 921 F.3d 836 (9th Cir. 4/16/19)

Outline: item E.3, page 104

Held: regulations issued under § 7502 displace the common-law mailbox rule. Thus, taxpayer could not prove timely mailing of amended

return through testimony of employees who mailed it at the Post Office.

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Melasky v. Commissioner, 151 T.C. No. 8 (10/10/18) and 151 T.C. No. 9 (10/10/18)

Outline: item F.2, page 106 The taxpayers hand-delivered to the Service at the Service’s office in

Houston a check for $18,000 and requested that the check be applied against their 2009 federal income tax liability.

A few days later, the Service levied against the bank account on which the check had been drawn and applied the proceeds of the levy to an earlier tax year. Therefore, the check bounced.

The taxpayers had a CDP hearing. The IRS settlement officer determined that the levy proceeds were an involuntary payment that the IRS was free to apply as it wished.

Held: 1. The standard of review in Tax Court is for abuse of discretion, not (as the

parties had agreed) de novo. The underlying tax liability was not at issue. 2. The levy proceeds were an involuntary payment that the IRS could apply to

earlier years. 3. The IRS did not abuse its discretion in rejecting the taxpayers’ proposed partial-

pay installment agreement.

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Contreras v. Commissioner, T.C. Memo. 2019-12 (2/26/19)

Outline: item G.1, page 109

Held: taxpayer was entitled to innocent spouse relief under § 6015(f) for four years.

Case involves several interesting issues, including the effect of husband’s prior, common-law marriage to another woman.

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Moya v. Commissioner 152 T.C. No. 11 (4/17/19)

Outline: item H.10, page 118 The taxpayer moved from Nevada to Santa Cruz, California. An IRS audit of her returns was conducted by the IRS office In Las Vegas.

Through written correspondence, the taxpayer requested that the examination of her returns be transferred to an IRS office near Santa Cruz and that a hearing scheduled in Las Vegas take place instead in Santa Cruz.

Her phone calls to the IRS went unreturned; she received contradictory information as to where the examination of her returns would take place; and she received inconsistent requests for information.

The taxpayer asserted that, in examining her returns, the IRS had violated the Taxpayer Bill of Rights (TBOR), including her rights to be informed, to challenge the IRS position and be heard, and to a fair and just tax system.

Issue: do alleged violations of the TBOR provide a basis for invalidating a notice of deficiency?

Held: No. The Tax Court generally does not look behind a notice of deficiency. Taxpayer had a full opportunity to challenge in the Tax Court.

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Slaughter v. Commissioner T.C. Memo. 2019-65 (6/4/19) Outline: item B.2, page 122

The taxpayer, an author of crime fiction, had publishing contracts that: Gave the publishers not only the right to print, publish, distribute, sell, and

license the works written by the taxpayer, but also the right to use her name and likeness in advertising, promotion, and publicity for the contracted works and the right to advertise other works in her books.

Required the taxpayer to provide photographs and appear at promotional events and contained various forms of noncompete clauses.

Did not allocate the taxpayer’s compensation in any way. On her tax returns, prepared by CPAs, the taxpayer allocated:

Some of the royalties and advances to her trade or business of writing (Schedule C, subject to self-employment tax), and

Most to payment for an intangible asset (Schedule E, not subject to SE tax). Issue: were the royalties and advances received by the taxpayer subject to

self-employment tax? Held: Yes. Her trade or business included writing and developing her brand.

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Partner SE Tax: T.D. 9869 84 Fed. Reg. 3178 (7/2/19) Outline: item B.3, page 123

Final regulations clarify that a partner in a partnership is considered self-employed even if the partner is an employee of a disregarded entity owned by the partnership.

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