Welcome to the Federal Tax Update Podcast, hosted by Lynn Nichols. This is presented as a member benefit by the South Carolina Association of CPAs. It is produced to provide current information about developments in U.S. tax law, such as cases, ruling, IRS pronouncements and expert comments on hot topics.

Nichols notes: The most interesting technical item this week (and most interesting from a human experience standpoint) is item No. 2 about Plentywood Pharmacy. The IRS spent a fortune to get a ruling that $20,000 per year was a dividend. Collecting thereby the difference between an individual rate of +/- 30% and a corporate rate of 21% – after recalculation of depreciation, tax credits, etc. etc. A TOTAL waste of time except to terrorize ordinary citizens!

Item No. 4 on auto dealer inventories is interesting because the tax law in this case will not apply until the Treasury Secretary publishes a notice in the Federal Register allowing for it to be applied – clearly, a requirement that can be subject to political pressure.

The final item concerning bank deposits should remind us all of the need to keep records of where money came from – and where it went!

Trending in this edition:

  1. IRS Amends Prior Guidance to Reflect Rescue Plan Act

The IRS has amended (Rev. Proc. 2021-23) provisions in previous guidance (Rev. Proc. 2020-36, Rev. Proc. 2020-45) regarding the child tax credit, the earned income credit, and the premium tax credit to reflect changes made by the American Rescue Plan Act of 2021. [Rev. Proc. 2021-23; 2021-19 IRB 1. 4/25/2021]

  1. Tax Court Determines Fair Market Rent for Pharmacy

The Tax Court determined the fair market rent a pharmacy should have paid its owners who also owned the building where the pharmacy was located after the IRS determined that the rent the pharmacy paid was too high and constituted constructive dividends. The court held that accuracy-related penalties don’t apply. [Plentywood Drug Inc.; T.C. Memo. 2021-45, 4/26/2021]

  1. Pharma Company’s Patent Litigation Fees Are Deductible

The Tax Court held in Mylan Inc. v. Commissioner that legal fees incurred by a generic drug manufacturer to defend patent infringement suits are a deductible business expense, rejecting the IRS’s position that they must be capitalized. [Tax Notes Today; 4/28/2021, article by Kristen Parillo]

Mylan Can Deduct Patent Litigation Expenses for Generic Drugs

The Tax Court held that legal expenses that Mylan Inc. incurred to prepare notice letters to obtain Food and Drug Administration approval to manufacture generic drugs must be capitalized, but the legal expenses incurred in defending against patent infringement suits are deductible as ordinary and necessary business expenses because they were not part of the FDA approval process. [Mylan Inc. et al.; 156 T.C. No. 10, 4/27/2021]

  1. AICPA Joins Auto Dealers’ Request for Inventory Relief

The IRS should exercise its discretion to provide relief to taxpayers with potential surprise income arising out of inventory replacement difficulties induced by foreign trade disruption, according to the American Institute of CPAs. [Tax Notes Today 4/30/2021, article by Nathan Richman]

  1. IRS Provides Info for Gig Workers, Unemployment Comp Recipients

The IRS has reminded (IR-2021-97) workers in the gig economy and those who claimed unemployment compensation in 2020 of their filing and payment options and where to find information on meeting their tax obligations.

  1. Couple Fails to Show Bank Deposits Were Not Taxable Income

The Tax Court sustained the IRS’s deficiency determinations against a couple based on the IRS’s bank deposits analysis, finding that the couple failed to show that millions of dollars deposited into their nine bank accounts should be treated as nontaxable deposits. [Josef Haghnazarzadeh et ux. v. Commissioner; No. 27031-17; T.C. Memo. 2021-47]

Missed last week’s Tax topic? Catch up with Lynn on his Tax Updates video playlist.

All commentary is brief, and you should not take a position on the items discussed until you thoroughly examine it with authoritative sources. The topics can be found discussed in further length at Tax Notes Today.

“I have relied on Tax Analysts® to provide reliable and timely analysis of Federal tax developments for over 30 years. The ‘headnotes’ you see here are from ‘Tax Notes Today,’ the preeminent source of accurate information and analysis of important developments and trends in Federal taxation,” Nichols says.

You can contact Lynn Nichols at lynnnicholscpa@outlook.com or 714.321.3387 and connect on LinkedIn.

A federal tax specialist for 50 years, Lynn Nichols provides tax consulting services to CPA firms on complex federal income tax issues, professional standards in tax practice and effective tax practice management.

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