Merely Having an In-State Income Beneficiary Insufficient to Allow a State to Tax All Trust Income

The U.S. Supreme Court appears to be making June 21 its annual tax opinion day.  Or, at least, they’ve issued the major tax opinion of the term on June 21 for the past two years.  While last year’s issue related to sales taxes (Wayfair), this year the issue is whether a state can tax a trust solely based on the trust having a resident current income beneficiary, even if that beneficiary has no right to force a current distribution of such income, no such distribution is made, and there’ s no guarantee the beneficiary will ever receive such a distribution.

A unanimous Supreme Court decided that the answer is no, a state cannot impose its tax in that situation, in the case of North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust, United States Supreme Court, Case No. 18-457.[1]  Justice Sotomayor wrote the main opinion on behalf of the Court.

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IRS Finalizes ESBT Regulations for Nonresident Alien Potential Current Beneficiaries

Less than two months after the IRS released proposed regulations on nonresident alien potential current beneficiaries in electing small business trusts, the IRS has taken the identical regulations final after no comments have been received on those regulations (TD 9868).

The details of the unchanged proposed regulations can be found in our article on the regulations (Proposed Regulations Issued for ESBTs with NRA Potential Current Beneficiary Subject to Grantor Trust Rules).

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Regulations Issued Creating Individual Coverage HRA and Excepted Benefit HRAs

The IRS, Department of Labor and Department of Health and Human Services have issued final regulations providing for expanding the use of health reimbursement arrangements (HRAs) that will qualify under the rules established by the Affordable Care Act, in particular the revisions to Section 2711 of the Public Health Service Act (PHSA).[1]

Individual Coverage HRA

The regulation establishes a new category of HRAs that is to be called an individual coverage HRA that an employer may offer that integrates with individual health care policies held by the employee (and, if applicable, his/her dependents and spouse).[2]  An individual coverage HRA must require participants and any dependents covered by the employer’s HRA to be enrolled in individual health coverage and to substantiate compliance with this rule.  The regulations require this step to insure compliance with PHSA sections 2711 and 2713.[3]

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Transcripts Will No Longer Be Sent Via Fax, Nor Will They Be Mailed Other Than to Taxpayer's Address of Record, After June 28, 2019

The IRS has announced in a news release that on June 28 the agency will no longer fax or mail transcripts to third parties under steps announced to attempt to protect taxpayer data from unauthorized release.[1]  The IRS had warned in 2018 that they planned to take this step.

The news release explains the issues raised by the prior system of faxing or mailing transcripts to third parties:

Tax transcripts are summaries of tax return information. Transcripts have become increasingly vulnerable as criminals impersonate taxpayers or authorized third parties. Identity thieves use tax transcripts to file fraudulent returns for refunds that are difficult to detect because they mirror a legitimate tax return.

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IRS Finalizes Regulations Requiring Reduction of Charitable Contribution Deduction by Related State Income Tax Credits in Excess of 15% of the Contribution

The IRS has issued final regulations under §170 to deal with state tax credits that reduce state income taxes in exchange for certain charitable contributions (TD 9864). While the IRS received a number of comments on the regulations, the final regulations generally adopt without change the proposed regulations issued in the summer of 2018.

Under these regulations, a taxpayer who makes a contribution to a charity for which he/she receives a tax credit against state income taxes in excess of 15% of the amount contributed must reduce the amount of the charitable contribution claimed by the amount of the credit.  The amount of the reduction is the maximum amount of the credit allowable for the amount of the contribution made by the taxpayer.

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Revised Draft Publication for Computing Withholding by Employers Issued to Go Along with Draft 2020 W-4

The IRS has unveiled a draft of the employer publication to make use of the 2020 draft Form W-4 to compute payroll check withholdings in Publication 15-T, Federal Income Tax Withholding Methods.[1]  The publication is being issued to assist employers in getting systems ready for 2020 withholding.

The nine page publication has 2 pages devoted to instructions[2], a full page Employer’s Withholding Worksheet[3] outlining calculations for both the wage bracket and percentage method of withholdings, a page of withholding method tables[4], and ends with five pages containing the wage bracket method tables.[5]

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TIGTA Finds Fewer Penalties Imposed in LB&I Exams With Tax Due of Over $10,000 Than in SB/SE Exams

The Treasury Inspector General for Tax Administration (TIGTA) issued a report that found the IRS is imposing accuracy-related penalties on businesses covered by the IRS Large Business and International Division (LB&I) less often that it does on businesses examined by the Small Business/Self-Employed Division (SB/SE).  The report looked at accuracy related penalties imposed under IRC §§6662 and 6662A.

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Author Could Not Divide Payments From Her Publisher to Exclude Portion from Self-Employment Income

An author attempted to argue that income from her publisher should be divided between income from writing, which would be subject to self-employment tax, and income related to other items covered by her contract are not subject to self-employment.  However, in the case of Slaugther v. Commissioner, TC Memo 2019-65 the Tax Court did not agree with her view.

The taxpayer in question is a well-known and successful author.  During the years involved in this case, the taxpayer spent from 12 to 15 weeks engaged in writing.  In addition, during those years she spent additional time building as a brand author.  The opinion describes a brand author as “one who provides prestige or reliable profits to a publishing house.”  She spent significant additional time meeting with publishers, agents, media contacts and others to “protect and further her status as a brand author.”

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Disregarded Entity Holding S Corporation Stock Terminated Election When Entity Obtained a Second Sharholder

LLCs were created by the state of Wyoming years ago to be an entity that the IRC had no way to classify.  That status has continued to today—an LLC is not an entity type for federal income tax purposes, even though it is an entity type for most other purposes under state law. Eventually the IRS decided to deal with the entity type issue by using what we refer to as a “check the box” election.

The check the box regulations, found at IRC §301.7703-3, allow the taxpayer to choose between certain entity types based on the number of equity holders of the LLC.  In essence, we pretend, for federal tax purposes, that the LLC is really some other entity.

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IRS Releases New Draft W-4 for 2020, After Failing to Develop Form That Took TCJA Into Account for 2019

After the IRS’s first attempt at revising Form W-4 to take into account the changes in Tax Cuts and Jobs Act was withdrawn after facing criticism the resulting form was too complex, the IRS has returned with another draft Form W-4. The new draft form will try again to take into account the substantial changes found in the Tax Cuts and Jobs Act in a concise form to help employees arrive at a proper amount of withholding. (“IRS, Treasury unveil proposed W-4 design for 2020,” IR-2019-98, IRS website, May 31, 2019)[1]

The new W-4 does away with the concept of withholding allowances entirely, since personal exemptions no longer a “central feature of the tax code” in the words of the news release.  Rather the form will attempt to provide information that the employer will use to arrive at a withholding number.

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Win Some, Lose Some: Basis of Property Sold Reduced Due to Lack of Documentation, But Sales Price was Lender's Bid in Foreclosure Sale

In the case of Breland v. Commissioner, TC Memo 2019-59[1] (May 29, 2019) two different issues were decided by the Tax Court:

  • Did the taxpayers properly substantiate the basis of property sold by producing only a Form 8824 from a prior return when the property was obtained as part of a like-kind exchange?

  • What was the actual sales price and cancellation of debt resulting from the foreclosure sale of the taxpayer’s properties?

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Evangelizing Did Not Enable Taxpayer to Deduct Personal Expenses as Charitable Contributions

A taxpayer who dedicated his life to evangelization, using normal interactions in life to open discussions regarding his religious beliefs to all around him, found that the Tax Court did not agree with his view that this made his various expenses incurred for meals, travel and other items were automatically deductible. (Oliveri v. Commissioner, TC Memo 2019-57, May 28, 2019)[1]

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DC Circuit Agrees With Tax Court That Failure to Disclose Basis of Contributed Property Results in Denial of a $33 Million Contribution Deduction

Courts prefer to decide issues on narrow grounds if they can, and a failure in completing Form 8283, which Forbes online contributor called an error that “would be a review comment that a senior accountant with three years experience would have given an associate,”[1] was the issue the Tax Court had focused on to deny a $33 million deduction to a partnership in the 2017 case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.

The Sixth Circuit did not come to the rescue of the taxpayer in this case, agreeing with the Tax Court that the failure to include basis information on the tax return was sufficient to allow a denial of the entire deduction. (Jeff Blau, et al v. Commissioner, USCA DC, Case No. 17-1266)[2]

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Congress Appears to Be Seriously Considering Bill That Would Greatly Impact Inherited Retirement Account Payout Terms

Update: Shortly after this article was posted, the House voted 417-3 to pass the SECURE Act with the Kiddie Tax fix described in this article. The Wall Street Journal indicates that a GOP aide informed them that the Senate plans to vote on this just passed House version of the Bill, rather than vote on the similar bill that chamber was considering.[1]

It’s always risky to put much stock in a bill in Congress that hasn’t yet passed a single chamber, but it’s beginning to look like the SECURE Act (“Setting Every Community Up for Retirement Enhancement” - Congress is back to full word acronyms...) might actually move forward at this point, with something similar to it being enacted into law. 

When the §529 provisions were pulled it looked like that might cause Republican support to go away (and thus kill any chance in the Senate), but the addition of a full Kiddie Tax fix (roll back the provision to the pre-TCJA version now that unintended consequences are coming out of the woodwork outside of just the Gold Star families problem) and the apparent endorsement of ranking minority member and previous Ways & Means Chair Kevin Brady seem to have gotten both sides on board.

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IRS Commissioner Indicates IRS to Issue New Virtual Currency Guidance Soon

In letter to Rep. Tom Emmer, R-Minn., IRS Commissioner Charles Rettig indicated that the agency plans to release additional guidance on issues related to virtual currencies soon in three areas raised by a letter the Congressman had sent to the agency on April 11, 2019.

The IRS has previously issued guidance on the taxation of virtual currencies in Notice 2014-21, a notice discussed on this website when the IRS issued News Release IR-2018-71 to remind taxpayers of the agency’s stated position on the taxation of virtual currencies such as Bitcoin (BTC).

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Assistant US Attorney Comments on Issues Related to Preparer's Criminal Exposure Under §7602(2)

An article in Tax Notes Today outlining comments made by an assistant U.S. attorney based in New Haven, Connecticut highlighted that tax preparers may get entangled in criminal tax prosecutions when they fail to insure clients are properly documenting loans from a business.[1]

Christopher W. Schmeisser was speaking at a criminal tax conference held at Quinnipiac University School of Law in North Haven, Connecticut.  Mr. Schmeisser indicated that loans are often used as part of a scheme for a taxpayer to avoid paying taxes.

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