Colorado Publishes Rules for Sellers to Comply with Tattletale Use Tax Reporting

The Colorado Department of Revenue has published an emergency rule (Rule 39-21-112(3.5)) to implement Colorado’s “tattletale” use tax reporting requirement for sellers who have more than $100,000 of sales into Colorado and do not collect Colorado sales tax.  The law in question is the one that was upheld by the Tenth Circuit Court of Appeals in the case of Direct Marketing Association v. Brohl, CA10, Case No. 12-1175, 2/22/16, cert denied.

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Structure Used By Shareholder to Hold S Shares Terminated S Status Instantly Upon Shareholder's Death

In Private Letter Ruling 201730002 we find a situation where a taxpayer’s death instantly terminated the S corporation in which he owned a 100% interest.  The structure he created to hold the S corporation stock set up a situation in which the S election’s validity continued only so long as the shareholder remained alive.

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Congressional and Administration Officials Release Statement on Tax Reform

A Joint Statement on Tax Reform was released on July 27, 2017 by House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin Brady (R-TX).  The statement provides a very basic outline of the basic ideas that the “Big 6” (a reference to the above group that has cropped up in the tax press) have determined to attempt to include in the tax reform bill that Congress expects to begin work on shortly.

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IRS Outlines Steps to Be Taken to Battle Increase in Business Related Tax Identity Theft

The IRS has issued a news release (IR-2017-123) updating what is happening with both individual and business related identity theft, as well as a fact sheet (FS-2017-10) outlining steps to be taken to combat an increase the agency has noted in identity theft from businesses and estates.

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Deemed Distribution Took Place on Last Day of Prior Year, Not Date Plan Administrator Sent Letter of Distribution to Participant

There was no question that the taxpayer in the case of Gowen v. Commissioner, TC Summ. Op. 2017-57 had defaulted on the loan he received from his former employer’s 401(k) plan and, as well, that he did not correct the default prior to the cure period allowed under the plan.  But the taxpayer argued that the actual deemed distribution did not take place in 2012, the year the deemed distribution was reported by the plan custodian on a Form 1099R, but rather at some point in 2013.

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Taxpayer Failed to Establish Work Location Outside Metropolitan Area or That He Was Away from Home

Even though it may appear to taxpayers that mileage and meals are clearly related to their job, only in limited circumstances may deductions be claimed for such items.  In the case of Wooten v. Commissioner, TC Summ. Op. 2017-58, the taxpayers discovered that none of the expenses they had claimed met the requirements to be deductible.

In this case the taxpayer was employed as a plumber/pipefitter for a contractor.  In his job he had to work at various locations, some in Gulfport or Biloxi, Mississippi, which were 20-25 miles from his home and two in Hattiesburg, Mississippi which was about 56 miles from his home.  Mr. Wooten kept logs of his travel to/from his home to these locations.  He claimed a deduction for this mileage, along with a deduction for meals he consumed at these locations.

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Appeals to Begin Offering Web-Based Conferences in Pilot Program

The IRS Office of Appeals announced in News Release IR-2017-122 that will begin a pilot program using web-based conferencing software to offer a virtual conference option for taxpayers and representatives.  This option will be in addition to the current conferencing options.

Currently taxpayers and representatives can meet with an Appeals Officer:

  • In person;
  • By phone; or
  • Through a video conference system located at a limited number of local IRS offices.

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Taxpayer Could Not Prove He Had Informed Broker to Use Other Than FIFO Cost Basis for Shares Sold

When a taxpayer acquires multiple blocks of the same security, under Reg. §1.1012-1(c)(1) the taxpayer is deemed to first sell the first shares purchased—or, to put it simply, the taxpayer is put on the first-in, first-out (FIFO) basis.  However, a taxpayer with the stocks held by a broker can specifically identify the shares to be sold if the taxpayer adequately advises the broker prior to the sale of the shares he/she wishes to sell.  [Reg. §1.1012-1(c)(2) and (3)]

In the case of Turan v. Commissioner, TC Memo 2017-141 the question was whether Mr. Turan had made that adequate identification of shares sold.

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Taxpayer Had to Report Unemployment Benefit Income Even Though He Later Repaid the Benefits

The concept of a “claim-of-right” can be confusing for both taxpayers and tax professionals.  In the case of Yoklic v. Commissioner, TC Memo. 2017-143, a taxpayer did not include unemployment benefits received in 2012 in income because the state agency administering the benefits (Arizona’s Department of Economic Security (DES)) had determined he was not entitled to the benefits, and Mr. Yoklic repaid those benefits in 2013.

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Executive Order Does Not Relieve Taxpayers of Shared Responsibility Penalties for 2016

On January 20, 2017, newly inaugurated President Donald Trump signed Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, directing agencies to exercise the authority and discretion permitted to them by law to reduce burdens imposed by the Affordable Care Act.  As well, shortly thereafter the IRS announced that it would accept tax returns where taxpayers did not indicate whether they had qualifying health insurance. 

Many clients took this to mean that the penalties for failure to maintain health insurance that provided minimum essential coverage by individuals and the shared responsibility payments that are imposed on applicable large employers (ALEs) who fail to provide affordable minimum essential coverage to their employees would not apply for 2016.  However, in information letters INFO 2017-10, INFO 2017-0013, and INFO 2017-0017 the IRS noted that the order did not actually change the law, and that the penalties will still apply to those taxpayers unless they meet another exception.

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IRS for the Third Time Extends Safe Harbor Method for Recipients of Hardest Hit Fund Relief Through 2021

The IRS in Notice 2017-40 again extended the time period, this time through 2021, that taxpayers may use the safe harbor method of reporting HFA mortgage relief originally granted in Notice 2011-14.  Notice 2015-77 had extended until the 2017 tax year the safe harbor method originally provided for in Notice 2013-7 of reporting payments made on a home mortgage that had received relief from a state housing agency from the Hardest Hit Fund (HFA Hardest Hit Fund). 

The new notice also extends relief from penalties related to information returns for mortgage services and state housing agencies due to payments made under the program.

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IRS Email Explains Limits to Use of Form 941-X for Prior Year Errors in Federal Income Tax Withholding

In emailed advice (Chief Counsel Email 201727008), the IRS Chief Counsel’s office discussed the limitation on the use of Form 941-X, specifically looking at what qualifies as “administrative error” for which the Form 941-X can be used to address issues on prior year’s payroll tax reports related to federal income tax withheld.

People do make mistakes, and at time those errors involve payroll tax issues, including tax withholding.  Form 941-X was created to allow employers to deal with some errors—but the form has very specific limitations on its use.  As a practical matter, once a year has ended and the employee has been given a W-2, the consequences of, say, overwithholding or underwitholding federal income taxes gets “passed on” to the employee since that number is claimed as a credit on the employee’s own income tax return.

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Legal Fees Related to Employment, Not Taxpayer's New Business Venture

Whether a taxpayer can claim a deduction for legal expenses generally depends on the origin of the claim giving rise to the legal expense.  This means that even if the legal expense might arguably have an impact on one activity (say, a new trade or business the taxpayer is establishing) it will not be deductible as part of that activity if the claim originated elsewhere.  The case of Dulik v. Commissioner, TC Summ. Op. 2017-51 deals with this issue.

In this case the taxpayer was negotiating a separation agreement from his former employer.  In doing so he paid $26,781 in legal fees related to various issues in negotiating that agreement, specifically looking to get removed from the agreement a reference to a secrecy agreement he had signed with a predecessor of his current employer which contained a non-compete agreement.

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Employer's Failure to Deduct 401(k) Loan Payments from Employee's Pay While on Leave Resulted in Taxable Distribution

A participant in a qualified employer retirement plan may, if the plan allows it, borrow funds from the plan.  However, such borrowing is subject to a number of specific provisions in federal law and regulations.  Violation of the provisions regarding repaying the loan results in its treatment as a distribution from the plan, taxable to the participant.  That’s true even though the participant remains liable to repay and does actually repay the loan to the plan.

In the case of Frias v. Commissioner, TC Memo 2017-139 there was little question the written terms of the loan had not been followed—but the failure had been due to a failure by the employer to fulfill its obligation to withhold the payment from Ms. Frias’s checks she received while was on maternity leave.

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Election to Currently Deduct Future Landfill Cleanup Costs Under §468 Not Limited to Accrual Basis Taxpayers

IRC §468 allows electing taxpayers who, among other things, operate landfills to claim a current deduction for costs that will be incurred once the landfill is closed to clean up the site.  But the IRS argued in the case of Gregory v. Commissioner, 149 TC No. 2 that this election was restricted to taxpayers who used the overall accrual method of accounting for tax purposes.

IRC §448’s language allows a deduction to a taxpayer who elects the application of the provision. The taxpayers argued that nowhere in the statute did Congress restrict the taxpayers who could make this election to those using the overall accrual basis of accounting and that, based on the plain language of the statute, they should be allowed to take a deduction for such future clean-up costs regardless of the fact they reported their income and deductions generally on the cash basis of accounting.

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Washington State Enacts Use Tax Tattletale Bill with Very Low Threshold

The state of Washington has upped the ante regarding the risk to businesses who don’t pay attention to individual state laws requiring reporting on sales to residents of a state by a business with no connection with the state.  Washington’s governor signed into law Washington H.B. 2163, a “tattletale” use tax bill that is triggered whenever a remote seller in a year has more than $10,000 in gross sales to Washington state residents.

A “tattletale” bill does not attempt to require remote sellers to collect sales tax for the state on their remote sales.  Rather the bill requires that such sellers take various steps to “turn in” such buyers to the state and “motivate” the buyers to comply with their use tax obligations.  The law will often require some form of notice to potential buyers of their use tax obligations, along with later reports given at the end of the year to both the buyers (listing items they bought for which use tax would be due) and the state in question.

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IRS Will Not Follow Case That Allowed Taxpayer Filing Married Filing Separate to Claim Earned Income Tax Credit

In the case of Tsehay v. Commissioner, TC Memo 2016-200, the Tax Court held that a taxpayer with a filing status of married filing separately nevertheless was eligible to claim an earned income tax credit under IRC §32.  However, the IRS in Action on Decision 2017-05 (AOD 2017-05) announced that the agency will not acquiesce in this decision.

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Failure to Report Basis of Property Donated Fatal to Charitable Contribution

Details matter when claiming a charitable deduction under IRC §170—and failing to follow all of the requirements will most often trigger a complete disallowance of the deduction.  That’s true even of a claimed $33 million deduction in the case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.

In this case the LLC, being taxed as a partnership, purchased a remainder interest in property for $2.95 million in March 2002.  In August 2003, the LLC assigned its interest to a university, a §501(c)(3) organization.  The Form 1065 reported a noncash charitable contribution of $33,019,000 from this donation.

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IRS Issues Final Regulations on Streamlined Applications for §501(c)(3) Exempt Organization Status

The IRS has adopted as final regulations the proposed regulations issued in June of 2014 that allowed for a streamlined application for tax-exempt status under IRC §501(c)(3) in T.D. 9819.  These same regulations were issued in 2014 as temporary regulations which, with the issuance of the same regulations in final form, are now withdrawn.

The streamlined application process takes place entirely online, with the organization filling in Form 1023-EZ online at http://www.pay.gov.

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No Taxable IRA Distribution Where Taxpayer Had Funds Wired to Buy Stock That Custodian Later Refused to Accept

In the case of McGaugh v. Commissioner, Case No. 13665-14, CA7 the taxpayer had wired funds from his IRA account to purchase stock which we expected to be held in his IRA account.  However, the taxpayer’s IRA custodian refused to accept the share certificate that was received.  The IRS took the position that this resulted in a taxable distribution to the taxpayer from the IRA account.

The Tax Court decided that the taxpayer had not actually or constructively received a distribution from his IRA. (TC Memo 2016-28)  The IRS, not happy with this result, appealed the case to the Seventh Circuit Court of Appeals.

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