Final and Additional Proposed Regulations for Bonus Depreciation Under TCJA Released by IRS

Just before the extended filing deadline for 2019 partnerships and S corporations the IRS has finalized the proposed regulations issued in August of 2018 for bonus depreciation (TD 9874)[1].  Proposed regulations to implement the changes to bonus depreciation made by the Tax Cuts and Jobs Act have were originally released by the IRS in REG-104397-18

At the same time the IRS issued more proposed regulations related to bonus depreciation (REG-106808-19)[2] that propose rules for property not eligible for bonus depreciation, a de minimis use  rule for previously used property and rules related to components of larger property.

One provision found in the proposed regulations will be of special interest to organizations with floor plan interest and revenue of more than $25 million without an excess amount of interest (including floor plan interest). In that case, taxpayers may have claims for refund if they failed to claim bonus depreciation in certain cases.

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Proposed Regulations Issued on Advance Payment Rules Added at §451(c) by TCJA

In the Tax Cuts and Jobs Act, Congress added IRC §451(c) in order to put into the Code an accounting method the IRS had defined in Revenue Procedure 2004-34 to optionally account for advance payments. On September 5, 2019, the IRS released proposed regulations to implement this provision.[1]  Specifically, the IRS has proposed to add Proposed Reg. §1.451-8, Advance payments for goods, services and other items to the existing regulations under IRC §451.

The IRS makes clear in the preamble that, for the most part, the proposed regulations will follow the previously existing guidance:

Because new section 451(c)(1)(B) was intended to generally codify the Revenue Procedure deferral method, the Treasury Department and the IRS believe that rules similar to the Revenue Procedure deferral method are necessary and appropriate for the proper application of section 451(c). See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.).[2]

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Car Awarded to Stand-Out High School Senior in Drawing is Taxable Income

A Tennessee high school student got a lesson on tax law in the case of Conyers v. Commissioner, Designated Order, Case No. 13969-18.[1]  The former stand-out student discovered that the value of the Jeep Renegade she received as an award that given as a prize in a drawing was taxable income to her, despite being given to her in recognition of outstanding performance her senior year. 

To qualify to be part of that drawing, Alejandra had to have perfect attendance her senior year, good grades and be submitted for the drawing by her high school.  Alejandra was just such a model student.  The program was run by a local car dealership as a “Strive to Drive” competition.[2]

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Proposed Regulations Released on AFS Revenue Conformity Rule of §451(b)

The IRS has released proposed regulations on revenue conformity added by the Tax Cuts and Jobs Act at IRC §451(b). These regulations are available on the Federal Register’s website:

Taxable Year of Income Inclusion under an Accrual Method of Accounting

Some of the key issues found in these proposed regulations:

  • A discussion of the impact of ASC 606 revised revenue recognition standard for GAAP (referred to as “New Standards” in the proposed regulations) and the use of terminology similar to that found in ASC 606 in the regulations

  • The IRS declined to offer a deduction matching rule when revenue is accelerated

  • The IRS provides details on tax accounting methods to which these rules do not apply

A more detailed 16 page discussion of these regulations can be downloaded below:

Kaplan Financial Education: GAAP Meets Tax: Proposed Regulations for Revenue Conformity Under IRC §451(b)

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Use of Management Company Did Not Allow Real Estate Professional to Include Vacation Properties in Rental Grouping under §469(c)(7)

In what may initially seem like an odd argument for both parties to make, the IRS successfully argued that vacation homes were not rentals in the case of Eger v. United States, USDC Northern District California, Case No. 18-cv-00199-DMR.[1]

Greg Eger was a real estate professional, meeting the requirements under IRC §469(c)(7). The Eger owned three properties that were offered for rent at points during the year, located in Mexico, Colorado, and Hawaii. [2]  In each case they entered into contracts with management companies that would seek to offer these properties up for rent, although in each case the Egers had the right to remove days from the rental pool for their own personal use.[3]

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Memorandum Outlines What the IRS Sees as Being Required to Have a Deductible Payment to a Qualified Retirement Plan

In Chief Counsel Advice 201935011,[1] the IRS discusses when a contribution other than cash to a qualified retirement plan has been paid to determine if the contribution is deductible under IRC §404(a).

The term “payment” or “paid” is referenced multiple times in IRC §404(a) regarding what would constitute a deductible contribution to a qualified retirement plan.  The memo notes that the U.S. Supreme Court had addressed this matter in the 1977 case of Don E. Williams v. Commissioner, 429 US 569.[2]  In that case, the plan sponsor had delivered to the plan an interest-bearing promissory note before the due date for a contribution to be made but did not pay off that note until after that date.

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Sale of S Corporation Appears to Have Been Put in Hold Until IRS Rules Ineffective S Election Was Inadvertant, S Status Recognized

I’ve often run into CPAs when discussing S corporations and the various ways they can lose their S status who remark that, while that may be true, they’ve never seen the IRS actually revoke the corporation’s status on an exam, or even question the issue.  While that may be true, the author notes that a lot of private letter ruling requests are paid for to correct issues that would have terminated the S status, but which the IRS had not become aware.

A major reason for this is noted explicitly in PLR 201935010.[1]  The problem often arises when a buyer is interested in acquiring the business and during the review of the organization, the potential liability for taxes for prior years comes to light due to an issue that rendered the organization ineligible to have received or to have continued with S corporation status.

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IRS Grants Relief to Allow Late Filing of Copy of Form 3115 for Accounting Method Change-But At a Cost

Filing a Form 3115 to request an automatic change of accounting methods is something almost every CPA eventually has to do, but it’s also an rather unusual process that isn’t like a normal tax return filing.  Not surprisingly, this is just the sort of thing where steps get missed by accident—resulting in the taxpayer failing to obtain the required permission to change its accounting method, a failure that can be both costly to the client and embarrassing to the CPA firm.

PLR 201935002[1] reminds us that the problem can be corrected—but also that the way to do so requires the formal process of requesting a private letter ruling and the user fee related to the application (currently set at $11,800 per Appendix A(3)(ii) of Revenue Procedure 2019-01).

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IRS Sent Notice of Deficiency to Last Address Clearly Communicated to the Agency

The taxpayers in the case of Chapman v. Commissioner, TC Memo 2019-110[1] argued that the IRS had failed to send the notice of deficiency to their last known address.  They stated they had failed to receive the document and, as such, were not aware of the deadline by which they had to file a Tax Court petition.

The case involved Duane Chapman and his recently deceased wife, Alice Smith.  The couple had been featured on a pair of TV series, eight seasons of Dog the Bounty Hunter on A&E and three seasons of Dog and Beth: On the Hunt on CMT.  The series chronicled their experiences as a bounty hunter in both Hawaii and Colorado.

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Recipient of Gifted Partnership Interest Treats Pre-Existing Debt-Related Interest as Interest Related to Acquisition of Passthrough Interest

Published Tax Court decisions look at new and novel issues that have not previously been decided by the Court—and, in the case of Lipnick v. Commissioner, 153 TC No. 1,[1] the Court was looking at just such case. 

The issue was fairly simple.  A partner received a debt-financed distribution from a partnership.  He used those funds to buy investment assets and, under Reg. §1.163-8T and Notice 89-35, he treated the debt-financed distribution interest expense reported to him by the partnership as investment interest.  However, later he gifted a portion of his interest in the partnership to his son who, of course, was now seeing such debt-financed distribution interest show up on his K-1. 

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Coffeehouse Could Not Qualify as a §501(c)(3) Organization

In 2016 we noted an unsuccessful attempt by a religious order to get a coffeehouse the organization planned to operate treated as a §501(c)(3) exempt organization.[1]  Now, in PLR 201934008,[2] we have another attempt, this time for a coffeehouse that “will act as both a fundraising organization for nonprofits that serve your community and act as a community launch point and gathering venue featuring local art and music.”[3]

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Taxpayer's Lack of a Horse, Along with Other Issues, Found to Bar a Deduction for a Horse Business

In the case of McMillan v. Commissioner, TC Memo 2019-108,[1] the taxpayer was arguing that her loss from her horse business.  The IRS had challenged Ms. McMillan regarding this business in five prior Tax Court cases, but this time, she faced a unique challenge—her last horse had died two years previously.[2]  So she was arguing for the unique proposition that a horse breeding/showing business did not require a horse.

Unfortunately, the Tax Court did not accept this view.

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Surviving Spouse Who Was Designed Beneficiary of IRA by State Court Allowed to Treat IRA as Her Own

In PLR 201934006[1] the IRS granted the taxpayer’s request to allow her to roll the amounts from her deceased husband’s IRA to an IRA in her own name.

The IRA had listed the couple’s children as the beneficiaries of the decedent’s IRA.  Later a state court named the spouse as the sole beneficiary of her husband’s IRA.

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OIRA Completes Review of Proposed Regulations for TCJA Changes to §451

We are getting close to our first look at the IRS’s proposed regulations to implement the revenue recognition conformity and advance payment provisions added to IRC §451 by the Tax Cuts and Jobs Act. Tax NotesToday Federal reported on August 22, 2019, that the IRS’s proposed regulations related to both issues have now completed their review at the Office of Information and Regulatory Affairs of the Office of Management and Budget.[1]

The revenue conformity rules of IRC §451(b) apply to any taxpayer who reports on the accrual method of accounting for tax purposes[2] that has an applicable financial statement (AFR) as defined in IRC §451(b)(3).  Under these rules, the taxpayer must generally recognize revenue for tax purposes no later than the date on which the revenue is recognized in the AFR.

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Court Find Taxpayer's Log of Participation Time for Rentals Inflated by 150 Hours, Did Not Meet Tests for Real Estate Professional

In what has happened quite often over the past few years, the Tax Court found in the case of Hairston v. Commissioner, TC Memo 2019-104[1] that the taxpayers had failed to show that either was a real estate professional.  Thus, losses of just under $55,000 over three years were treated as passive activity losses.

IRC §469(c)(2) provides a blanket rule that a rental activity is automatically treated as a passive activity.  However, IRC §469(c)(7) was added to the law to grant relief from this automatic treatment to individuals who are real estate professionals.

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Memorandum Issued Confirming Two French Taxes Eligible for Foreign Tax Credit

Formalizing a change of view by the agency noted on its website in July,[1] the IRS has issued an LB&I, SB/SE directive on the ability of taxpayers who pay two French taxes to claim a foreign tax credit.[2]

The taxes imposed by France that the IRS now agrees are eligible for foreign tax credit treatment are:

  • Contribution sociale généralisée (CSG) and

  • Contribution pour le remboursement de la dette sociale (CRDS).

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Taxpayer Both Required to Use Accrual Method and Had Been Using the Method for Tax Purposes

In the case of King Solarman, Inc. v. Commissioner, TC Memo 2019-103[1] the key issue was whether the taxpayer was reporting on the cash or accrual overall method of accounting and, even if the business was on the cash method of accounting, it was nevertheless required to use the overall accrual method of accounting for tax purposes.

Taxpayers are generally eligible to use the overall cash or accrual method of accounting or another method permitted under the Code or regulations.[2]  However, once a taxpayer has chosen an overall method of accounting, the taxpayer must obtain the IRS’s permission to change that method.[3]

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Willful Failure to File FBAR Found by Magistrate Where Taxpayer Signed Return Returns With Schedule B Indicating No Foreign Accounts

A U.S. magistrate judge has recommended that the government be granted summary judgment in a suit to collect a willful failure to file FBAR reports penalty in the case of United States v. Said, USDC Middle District Florida, Case No. 8:17-cv-00826.[1]

The Court outlined the standard to be used to determine if there was willfulness in the context of failure to file the FBAR reports:

In the FBAR context, willfulness “may be proven ‘through inference from conduct meant to conceal or mislead sources of income or other financial information,’ and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.’” Williams, 489 Fed. App’x at 658 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991))...[2]

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IRS Publishes Redacted Version of DNA Testing Private Letter Ruling

In a story posted on August 1, 2019 we noted that DNA testing firm 23andMe had reported receiving a private letter ruling from the IRS that allows for a portion of a DNA test kit fee paid for ancestry and health testing qualified as a deductible medical expense under IRC §213. The ruling (PLR 201933005) has been posted by IRS.

While most taxpayers do not itemize, and even those that do often have not incurred the necessary amount of medical expenses to begin to deduct them on Schedule A, the ruling clears the way to use HSA funds to reimburse the taxpayer for the medical portion of the fee. As well, flexible spending accounts also should be able to reimburse such amounts as well.

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