The “Almost Top Ten” (Part 4) – Tax Developments

Overview

Today’s article is the fourth in a series discussing what I view of significant developments in 2021 that weren’t quite big enough to make my “Top Ten” list.  This time I discuss for tax four tax developments that occurred in 2021 that weren’t quite big enough to make the “Top Ten.”

More significant developments of 2021 in ag law and tax – it’s the topic of today’s post.

Estate Tax Closing Letter Doesn’t Preclude Later Exam of Form 706

C.C.A. 202142010 (Apr. 1, 2021)

IRS Letter 627, an estate tax return closing letter, is issued to an estate and specifies the amount of the net estate tax, the state death tax credit or deduction, and any generation transfer tax for which an estate is liable. The position of the IRS, however, is that the letter is not a formal closing agreement.  Thus, the issuance of the letter does not bar the IRS from reopening or reexamining the estate tax return to determine estate tax liability if:  (1) there is evidence of fraud, malfeasance, collusion, concealment or misrepresentation of a material fact; (2) there is a clearly defined, substantial error based on an established IRS position; or (3) another circumstance indicating that a failure to reopen the case would be a serious administrative omission. Thus, when the IRS issues Letter 627 after accepting the return as filed, the issuance does not constitute an examination and IRS may later examine Form 706 associated with the estate that received the letter. 

IRS Supervisor Review - “Immediate Supervisor” is Person Who Actually Supervised Exam

Sand Investment Co., LLC v. Comr., 157 T.C. No. 11 (2021)

Under the Internal Revenue Code (Code), an IRS examining agent must obtain written supervisory approval to the agent’s determination to assess a penalty on any asserted tax deficiency. Under I.R.C. §6751(b)(1), the approval must be from the agent’s “immediate supervisor” before the penalty determination if “officially communicated” to the taxpayer. In a partnership audit case under the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA), supervisory approval generally must be obtained before the Final Partnership Administrative Adjustment (FPAA) is issued to the partnership. See, e.g., Palmolive Building Investors, LLC v. Comr., 152 T.C. 75 (2019). If an examiner obtains written supervisory approval before the FPAA was issues, the partnership must establish that the approval was untimely. See, e.g., Frost v. Comr., 154 T.C. 23 (2020). 

In this case, the IRS opened a TEFRA examination of the petitioner’s 2015 return. The IRS auditor’s review was supervised by a team manager. While the audit was ongoing, the agent was promoted and transferred to a different team, but continued handling the audit still under the supervision of the former team manager. Ultimately, the agent asserted an accuracy-related penalty against the petitioner and the former team manager signed the approval form. The next day, the auditor sent the petitioner several documents indicating that a penalty might be imposed. Two days later the new team manager also signed the auditor’s penalty approval form. The petitioner challenged the imposition of penalties because the new team manager hadn’t approved the penalty assessment before the auditor sent the penalty determination to the petitioner. The Tax Court held that the supervisor who actually oversaw the agent’s audit of the petitioner was the “immediate supervisor” for purposes of the written supervisory approval requirement of I.R.C. §6751(b)(1). There was no evidence that the new team manager had any authority to supervise the agent’s audit of the petitioner. 

Meal Portion of Per Diem Allowance Eligible to be Treated As Attributed to a Restaurant. 

IRS Notice 2021-63, 2021-49 IRB 835

Under I.R.C. §274(n)(1) and Treas. Reg. §1.274-12, a deduction of any expense for food or beverages generally is limited to 50 percent of the amount otherwise deductible (i.e., as an ordinary and necessary business expense that is not lavish or extravagant under the circumstances). However, the Consolidated Appropriations Act, 2021, provides that that the full cost of such an expense is deductible if incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages "provided by a restaurant." Meals obtained from a grocery or convenience store do not qualify.  The IRS, with this notice, specified that a taxpayer may treat the meal portion of a per diem rate or allowance paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for meals purchased while traveling away from home as being attributable to food or beverages provided by a restaurant. 

Note:   The Notice is effective for expenses incurred by an employer, self-employed individual or employees described in I.R.C. §62(a)(2)(B) through (E) after December 31, 2020, and before January 1, 2023.

Credit Card Reward Dollars May Be Taxable

Anikeev, et ux. v. Comr., T.C. Memo. 2021-23

The petitioners, husband and wife, spent over $6 million on their “Blue Cash” American Express credit cards (“Blue Card”) from 2013 to 2014.  They used their Blue Cards to accumulate as many reward points as possible, which they did by using the cards to buy Visa gift cards, money orders or prepaid debit card reloads that they later used to pay the credit card bill. The credit card earned then five percent cash back on certain purchases after spending in $6,500 in a single calendar year. Before purchases were sufficient for them to reach the five percent level, the card earned one percent cash back on certain purchases. Rewards were issued in the form of “rewards dollars” that could be redeemed for gift cards and statement credits.

In 2013, the petitioners charged over $1.2 million for the purchase of Visa gift cards, reloadable debit cards and money orders.  In 2014 they charged over $5.2 million primarily for the purchase of Visa gift cards.  They then used the Visa gift cards to buy money orders which they used to pay the American Express bills. 

They redeemed $36,200 in rewards dollars from the card as statement credits in 2013 and $277,275 in 2014. The petitioners did not report these amounts as income for either year. The IRS audited and took the position that the earnings should have been reported as “other income.” The petitioners claimed that when a payment is made by a seller to a customer, it’s generally seen as a “price adjustment to the basis of the property” – the “rebate rule.” Rev. Rul. 79-96, 1976-1 C.B. 23.  Under this rule, a purchase incentive is not treated as income. Instead, the incentive is treated as a reduction of the purchase price (and associated reduction of basis) of what is purchased with the rewards or points. Thus, points and cashback earned on spending are viewed as a price adjustment. The petitioners, citing this rule, pointed out that the “manner of purchase of something…does not constitute an accession of wealth. The IRS, conversely, asserted that the rewards were taxable upon receipt because the petitioners did not purchase goods or services for which a rebate or purchase price adjustment could be applied.  Instead, the IRS claimed that the petitioners purchased cash equivalents – Visa gift cards; reloadable debit cards; and money orders.  See, e.g., Tech. Adv. Memo. 200437030 (Apr. 30, 2004).  As cash equivalents, the rewards paid to the petitioners as statement credits were an accession to wealth and, thus, gross income under I.R.C. §61. 

The Tax Court agreed that gift cards were a “product” – they couldn’t be redeemed for cash and were not eligible for deposit into a bank account.  Likewise, the Tax Court determined that that Visa gift cards provided a service to the petitioners via a product stating that, “[p]roviding a substitute for a credit card is a service via a product which is commonly sold via displays at drug stores and grocery stores.”  Thus, the portion of their reward dollars associated with gift card purchases weren't taxable under the “rebate rule.”  However, the Tax Court held that the petitioners’ direct purchases of money orders and reloads of cash into the debit cards using their credit card was different in that the petitioners were buying “cash equivalents” rather than a rebate on a purchase. They were not a product subject to a price adjustment and were not used to obtain a product or service. Because there was no product or service obtained in connection with direct money order purchases and cash reloads, the reward dollars associated with those purchases were for cash infusions.

The Tax Court also noted that the petitioners’ practice would most often have been ignored if it had not been for the petitioners’ “manipulation” of the rewards program using cash equivalents. Thus, the longstanding IRS rule of not taxing credit card points didn’t apply. Thus, the Tax Court held that reward points become taxable when massive amounts of cash equivalents are purchased to generate wealth – buying money orders and funding prepaid debit cards with a credit card for cash back, and then immediately paying the credit card bill.

Note:   The Tax Court also stated that it would like to see some reform in this area providing guidance on the issue of credit card rewards and the profiting from buying cash equivalents with a credit card.