31 Years Later, Treasury Notices Typo Fix Did Not Make It Into Code of Federal Regulations

Although it took 30 years, the IRS has issued a correction to a regulation dealing with attribution rules for purposes of determining a “brother-sister group” under IRC §52.  In TD 8179 the IRS changes a reference from “Reg. §1.414(c)-4(b)(1)” to “Reg. §1.414-4.”  And it’s the sort of quirky flaw that only tax geeks can love—and potentially exploit for the (temporary) benefit of eligible clients.

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IRS Releases FAQ Dealing with TCJA Limitations Imposed on Tax Benefits from Charitable Contributions and Foreign Taxes for a Partner with Insufficient Basis

The IRS has issued a frequently asked questions document related to changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) in the computation of a partner’s outside basis limitations due to the payment of foreign taxes and certain charitable contributions.[1]

The IRS outlines the changes in a set of three examples discussing how a partner computes his/her limitations on claiming a tax benefit from charitable contributions and payment of foreign taxes dependent on basis in the partnership under IRC §704(d).

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Recklessness Does Not Amount to Willfully Understating Tax By a Preparer

In the case of Rodgers v. United States, 123 AFTR 2d 2019-2294[1], the Ninth Circuit Court of Appeals agreed that the District Court had applied the wrong standard in determining if a preparer penalty applied.  But, as will become clear, that doesn’t mean the preparer will fare any better when the case goes back to the District Court to have the proper standard applied.

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Bookkeeping Error by Financial Institution Meant that Taxpayer's IRA Rollover Qualified for Late Rollover Relief

The taxpayer in the case of Burack v. Commissioner, TC Memo 2019-83[1], had withdrawn over $500,000 from her IRA.  She used the funds to pay for her new home in Philadelphia as she was awaiting the funds from the sale of her former residence.  She planned to return the funds to an IRA with 60 days of the original receipt, completing a tax free rollover.[2]

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Proposed Regulations Issued to Allow Multiple Employer Plans to Avoid Consequences of Action of Uncooperative Employer

The IRS has issued proposed regulations that would apply to defined contribution multiple employer plans (MEPs) in REG-121508-18[1] in response to an executive order[2] issued by the President in August 2018.  The EO directed the IRS and related agencies to take actions to encourage the use of MEPs, specifically to limit the consequences should one of the employers participating in the MEP fail to take actions required to allow the plan to remain qualified.

Concerns had been expressed that the above rule (often referred to as the “one bad apple rule” and officially referred to as part of the overall unified plan rule) discouraged employers from joining an MEP plan, since the actions of an unrelated employer over which they would have no control could jeopardize the qualified status of the plan, putting the innocent employer and its employees at risk for the tax consequences of plan disqualification.[3]

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Final Regulations Will Permit Employers to Truncate SSNs on W-2s Provided to Employees Beginning with Forms for 2020

Beginning with the 2020 Forms W-2, employers will be allowed to issue Forms W-2 to employees with truncated social security numbers, though the copies sent to the social security administration will continue to have the employee’s complete social security number on them.  The IRS has issued final regulations on the issue, adopting with little change the proposed regulations previously issued on this topic.[1]

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Updated FAQ Provides Relief for Taxpayers Who Reinvested 2018 §1231 Gains Prior to December 31, 2018

The IRS is back at modifying frequently asked questions (FAQ) on its website for TCJA related changes, this time related to the Qualified Opportunity Zone investments under IRC §1400Z-2.  But unlike the significant additions made to the §199A FAQ just before the filing deadline for 2018 returns, this time the IRS added a single question and answer to its Opportunity Zones Frequently Asked Questions page.

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Supreme Court Declines to Hear Appeal of Minnesota Trust Case

After having decided that North Carolina could not tax a trust based solely on residence of a beneficiary in the Kaestner Trust case, the Court had to decide what to do with another case.  Shortly after the North Carolina Supreme Court ruled against the North Carolina Department of Revenue in the Kaestner case the Minnesota Supreme Court ruled against the state of Minnesota’s ability to impose its tax on a trust on different grounds.

On June 28, 2019, the Court decided not to hear the Minnesota Department of Revenue’s appeal of the Minnesota Supreme Court’s ruling in the Fielding case.[1]  The Minnesota Supreme Court ruled that the state could not impose an income tax on a trust when the only connection with Minnesota was the fact that the settlor had been a Minnesota resident when the trust became irrevocable.[2]

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IRS Finalizes Regulations That Bar Partnerships from Using Disregarded Entities to Treat Partners as Employees

The IRS has issued final regulations that bar partnerships from treating partners working for a disregarded entity owned by the partnership as employees.[1]  The final regulations replace identical temporary regulations that were issued in May of 2016.[2]

Some partnerships had argued that since single member LLCs are treated as separate entities, and therefore “like” C corporations, for payroll tax purposes, partners of a partnership holding 100% of the interests in the LLC could be employees of the disregarded entity.  By doing so, the partners could qualify for various tax benefits, such as tax favored benefits available to employees but not self-employed persons.

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IRS Official Confirms Mixed-Use Rental Properties Can Be a Single Trade or Business

An issue that has confused taxpayers since the IRS has issued guidance on IRC §199A is whether a taxpayer has to treat commercial and residential rentals as different trades for businesses, especially in the context of mixed-use property.  Tax Notes Today Federal reported on comments from Holly Porter, IRS associate chief counsel (passthroughs and special industries) where she said that such combinations were not prohibited under the general rules for determining the trades or businesses of a taxpayer.[1]

The IRS had included a prohibition on combining commercial and residential rentals into a single enterprise under the proposed safe harbor test regarding whether a rental is a trade or business under Notice 2019-07.  Since it is only a safe harbor, not being able to come under its conditions did not necessarily mean that the undertaking could be a trade or business—just that the taxpayer could not use the safe harbor to establish it was a §162 trade or business eligible for the 20% §199A deduction.

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Transaction Substantially Similar to Listed Transaction, Taxpayer Subject to Penalties for Failing to Disclose

The cry that the program being promoted to the client is “different” from those that have either lost in court or been identified as a listed transaction is one that most advisers have heard.  But in the case of Interior Glass System, Inc. v. United States[1], CA9, No. 17-15713, IRC §6707A’s disclosure rule is one thing that is like horseshoes and hand grenades—close counts and transactions that are close to listed ones must be disclosed.

IRC §6707A provides for penalties to be imposed on a taxpayer who fails to disclose a reportable transaction, with additional penalties imposed if the transaction is a listed transaction. 

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IRS Sends Email to Preparers Outlining Steps to Take When a Data Breach Occurs

The IRS has sent an email to tax professionals discussing what to do if the professional becomes aware of a data breach.[1]

The email begins by reminding tax professionals that the IRS had sent out an email in March (which I suspect many overlooked due to coming in the middle of a generally very trying filing season) about the need to develop a data security plan.  But the email continues that even with such a plan in place, a data breach can still occur.

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Tax Court Did Not Believe Taxpayer's Logs That Showed He Drove from Florida to South Africa

Taxpayers who try to reconstruct records when faced with an IRS exam often make obvious mistakes.  But in the case of Burden, et al v. Commissioner, TC Summary Opinion 2019-11[1] the taxpayers may have set a new standard for creating records that clearly did not reflect reality.

The key issues in this case revolved around the taxpayers’ attempt to deduct $41,950 for unreimbursed employee business expenses for both spouses.  Of those expenses $20,334 represented vehicle expenses computed at the standard mileage rate, $10,897 represented travel expenses and $2,904 represented meals and entertainment expenses.

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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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