IRS Issues Proposed Regulations on Which Taxpayers May Rely on Section 199A

The much anticipated proposed regulations on the IRC §199A deduction related to qualified business income have been released by the IRS ([REG-107892-18]).  The proposed regulations give the first official insight into how the IRS is planning to administer the new provisions found under IRC §199A.

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Legal Fees Paid by S Corporation Were Not Trade or Business Expenses

The taxpayers in the case of Garcia v. Commissioner, TC Summary Op. 2018-38, recognized that expenses related to litigation that arose from an investment in stock in Randgold & Exploration Co., Ltd. (R&E) they had made would only be deductible as IRC §212 expenses.  They also recognized that a deduction under that provision would be a miscellaneous itemized deduction subject to the 2% floor imposed on all such deductions in the year in question and not deductible at all in computing their alternative minimum tax liability.

The taxpayers also were aware that if such expenses were an ordinary and necessary trade or business under IRC §162 that was incurred in the trade or business other than that of being an employee, the entire amount of the expense would be deductible in computing their adjusted gross income.  As well, the entire amount would also reduce their alternative minimum taxable income.

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IRS Releases Final Regulations Governing Partnership Representatives Under CPAR

The IRS in TD 9839 issued the final regulations outlining the rules applicable to the partnership representative under the Centralized Partnership Audit Regime (CPAR).  These regulations, found at Reg. §§301.6223-1 and 301.6223-2, outline the qualifications for a representative, how the representative resigns or is removed and the powers of the representative.

The IRS also finalized the regulations on the election to apply the CPAR rules to examinations of years beginning after the enactment of the Bipartisan Budget Act of 2015 but before January 1, 2018.  Those regulations, found at Reg. §301.9100-22, were adopted in final form without change and the temporary regulations were removed.

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IRS Releases Proposed Regulations Upon Which Taxpayers May Rely on TCJA Bonus Depreciation

Proposed regulations to implement the changes to bonus depreciation made by the Tax Cuts and Jobs Act have been released by the IRS in REG-104397-18

The preamble provides that taxpayers may rely upon the proposed regulations until final regulations are issued:

Pending the issuance of the final regulations, a taxpayer may choose to apply these proposed regulations to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017.

Some of the key features of the proposed regulations are discussed below.

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IRS Releases Guidance on Law Changes Related to 529 Plans

In Notice 2018-58 the IRS clarified various issues related to changes Congress made in the PATH Act and the Tax Cut and Jobs Act to §529 Education Savings Plan (a “qualified tuition program” or QTP).

Taking the oldest change first, the IRS clarified some issues related to the ability of a taxpayer to return funds to a §529 plan if the taxpayer receives a refund of qualified education expenses. As the IRS notes “This could occur, for example, if the beneficiary were to drop a class mid-semester.”

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Majority of States With a Sales Tax Plan to Start Requiring Out of State Sellers to Collect Taxes Shortly

Reports today from various sources have noted that a majority of states that impose a sales tax have now put in place requirements for out of state sellers to collect and pay over sales taxes.  The dates for beginning enforcement have ranged from July 1 (which means sellers may already be in violation) to January 1, with a number of states looking to begin collection requirements on October 1, 2018.

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Shareholders Constructively Aware Transaction Left IRS With No Way to Collect Tax, Transferee Liability Imposed

The Ninth Circuit Court of Appeals returned again to the case of Sloan v. Commissioner, CA 9, No. 16-73349, and again disagreed with the Tax Court’s finding in favor of the taxpayer.

This case began with the Tax Court’s opinion in the case of Slone v. Commissioner, TC Memo 2012-57, vacated and remanded,  CA9, 2015 TNT 110-18, No. 12-72464, 12-72495, 12-72496, and 12-72497 where the Tax Court rejected the IRS’s argument of substance over form in attempting to recast a sale of a corporation’s stock, following the sale of its assets, as a liquidating distribution to which transferee liability could attach under IRC §6901.  But, on appeal, the Ninth Circuit found that Tax Court had not properly considered the issue and sent the matter back to the Tax Court. 

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Another District Court Agrees Maximum FBAR Penalty Limited to $100,000

Yet another U.S. District Court has decided that the IRS must follow the terms of its own regulations and limit the maximum penalty for a willful violation of the FBAR rules to $100,000.  In the case of Wadhan v. United States, US DC Colorado, Case No. 1:17-cv-01287, the IRS was limited in the amount of penalty that could be assessed for the same reasons cited by the U.S. District Court for the Western District of Texas in United States v. Colliot.

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Utah Latest State to Adopt South Dakota Style Remote Seller Law

The latest state to act to force out of state sellers to collect sales tax is Utah.  In a special session, the Utah Legislature passed SB 2001 which conforms the state’s rules requiring out of state sellers to file with Utah with the provisions found in South Dakota’s law.

Utah’s triggers for filing by an out of state seller will conform to South Dakota’s, effective on January 1, 2019.  As well, the previous rule that allowed sellers who voluntarily collected Utah tax to retain 18% of the tax collected will be repealed effective on the same date.

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Regulations Modified to Allow Use of Forfeitures to Fund QMACs and QNECs

The IRS has published final regulations (TD 9835) that modify the requirements for qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) for employer retirement plans.  These regulations are adopted essentially unchanged from the proposed versions issued in January 2017.

These payments are used to deal with issues that arise when an employer initially runs the ADP and/or ACP tests for a retirement plan and discovers the plan does not comply with one or both tests for the plan year.

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Two States Find Their States' Statutes for Taxing Trusts Violate Due Process Clause

While most conversations since the Wayfair decision regarding state and local taxes have revolved around an expansion of a state’s ability to impose taxes, the high courts in two states have moved to reduce the state’s ability to impose taxes on income from trusts, finding that the state’s attempts to tax trust income are in violation of the U.S. Constitution.

The North Carolina Supreme Court in the case of Kimberley Rice Kaestner 1992 Family Trust v. Dep’t of Revenue, No. 307PA15-2 and the Minnesota Supreme Court in the case of Fielding v. Comm’r of Revenue, A17-1177 each ruled the respective states had inappropriately attempted to tax the income of the trusts in question.

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Willful Failure to Comply With FBAR Includes Mere Recklessness in IRS's View

An IRS Program Manager Technical Advice (PMTA 2018-013) the Chief Counsel’s office outlined its position on what constitutes willfulness for purposes of imposing the maximum penalty for FBAR reporting violations, as well as the standard of proof that must be established for the IRS to carry the issue of applying the penalty.

Under 31 USC §5321(a)(5)(B) the maximum penalty for an FBAR violation is $10,000 unless the violation is willful.  In that case, 31 USC §5321(a)(5)(C) increases the maximum penalty to the greater of $100,000 or 50% of the balance in the account.

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PMTA Explains Effect on Employee Wages of Payroll Tax Exam Treating Fringe Benefit as Taxable

In Program Manager Technical Advice 2018-015 the IRS analyzes how to handle the implications to the employee of an examination of an employer where it is determined the employer failed to properly classify fringe benefits received by an individual as taxable wages.  Specifically, the guidance looks at whether the employer’s payment of the federal income taxes and FICA not withheld creates income for the employee.

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Proposed Regulations Issued for Preparer's Head of Household Due Diligence Following TCJA

The IRS has issued proposed regulations (REG-103474-18) to implement the Tax Cuts and Jobs Act changes made to IRC §6695(g), expanding the preparer due diligence rules and penalty to cover qualification for head of household filing status.

Congress in recently years has decided that having preparers be required to do more work inquiring about taxpayer’s qualifications for various tax benefits has proven useful, so they have expanded the due diligence from being limited to the earned income tax credit, to cover additional items.

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Contributor Information Will Not Be Required from Non-§501(c)(3) Organizations on Form 990 Schedule B Beginning on 2018 Returns

In Revenue Procedure 2018-38 the IRS announced that tax exempt organizations, other than §501(c)(3) organizations, will no longer be required be required to report the names and addresses of certain donors on Schedule B of Form 990, but will be required to have such information available should the IRS request it.  The new rules will take effect for taxable years ending on or after December 31, 2018.

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Unlike Some Feared, TCJA Did Not Block a Trust's Ability to Deduct Expenses Incurred Due to Property Being Held in Trust

In the Tax Cuts and Jobs Act (TCJA), Congress eliminated the ability of individuals to claim miscellaneous itemized deductions beginning with their 2018 income tax returns.  In Notice 2018-61 the IRS explains how this rule will impact trusts and estates whose returns are computed in a manner similar to that of individuals, but with some modifications found at IRC §67(e).

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