Proposed Regulations Issued That Would Allow Use of Truncated Social Security Numbers on W-2s Issued to Employees

The IRS has issued proposed regulations that would allow employers to truncate social security numbers (SSNs) on the employee copies of Forms W-2 in REG-105004-16.  However, the IRS has announced that the option won’t be available for W-2s issued before December 31, 2018.

Prior to a change in the law found in the PATH Act, IRC §6051(a)(2) required the employee’s social security to be printed in full on the employee’s copy of Form W-2.  Due to concerns regarding identity theft, Congress changed the law to remove that requirement.  However, the law did not mandate the use of truncated numbers and the regulations continue to require use of the employee’s entire social security number.

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South Dakota Supreme Court Rules on Challenge to Quill, Setting Up Possibility for U.S. Supreme Court to Reconsider Quill

The most public challenge to Quill is now ready to be presented to the U.S. Supreme Court, as the South Dakota Supreme Court in the case of State of South Dakota v. Wayfair, SD SC, Case No. 28160 rule South Dakota’s tests for when an out of state seller must collect and remit sales tax unconstitutional.  The next question is whether the Supreme Court, which does not often show interest in tax cases, will take the opportunity to hear this case when the State of South Dakota files its appeal to the Court.

The State of South Dakota is hoping the Supreme Court believes now is the time to get rid of the physical presence test that was left in place in the Quill case.  The Supreme Court’s opinion in Quill gave, at best, lukewarm support for keeping the test in place, doing so largely because that’s what had been decided before.  The opinion suggested that if there had not been prior case law the Court would not have imposed this test and, as well, left open the door to reconsidering the issue later.

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IRS Extends Employer Sponsored Leave Program Relief to Cover Hurricane Irma

The IRS has yet again extended the relief it provided for Hurricane Harvey to cover Hurricane Irma.  In Notice 2017-52 the IRS has provided the same relief for employees and employers when a leave donation program to benefit victims of Hurricane Irma as Notice 2017-48, the details of which were covered in an earlier blog post.

Generally, an employer can allow employees to donate leave time of any sort to a program where the employer then pays an amount equal to the value of that time to a §170(c) charity to be used for relief for victims of either hurricane.  The IRS will not treat the payment as taxable income for the employee, but will treat the amount as compensation expense, rather than a charitable contribution, for the employer.

The payment to the charitable organization must be made before January 1, 2019.

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Massachusetts Publishes Sales Tax Collection Regulation With Expansive View of Physical Presence

The Boston Tea Party is closely associated with the slogan “no taxation without representation” but the Commonwealth of Massachusetts appears to be just fine with requiring collection of taxes from the represented by those located outside the state who don’t get a vote.

The number of states taking aggressive positions to expand the number of out of state entities that must take some action with regard to the state’s sales or use taxes continue to expand.  Massachusetts has issued regulations with an effective date of September 22, 2017 that require internet vendors who have sales of more than $500,000 into Massachusetts and more than 100 transactions resulting in delivery into Massachusetts to collect and remit sales taxes. [Massachusetts Regulation 830 CMR 64H.1.7]

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IRS Extends Filing Date Relief Given to Harvey Victims to Victims of Irma

The IRS has announced forms of due date and other relief for individuals impacted by Hurricane and Tropical Storm Harvey in Houston and surrounding areas, with relief later provided for victims of Hurricane Irma in Florida and Puerto Rico.

The IRS has announced information related to relief provided under IRC §7508A for performing certain acts in News Release IR-2017-135.  IRC §7805A provides that the IRS may authorize a delay of up to one year to allow taxpayers to perform certain acts when the taxpayer is affected by a federally declared disaster or terroristic or military action. Similar relief was extended to taxpayers in Florida and Puerto Rico affected by Hurricane Irma in News Release 2017-150.

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IRS Expands Qualified Plan Hurricane Relief to Now Cover Those Affected by Hurricane Irma as Well as Harvey

In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.  Following Hurricane Irma, the IRS in Announcement 2017-13 expanded the relief to cover those impacted by Hurricane Irma.

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IRS Acted Properly in Adjusting DSUE From Prior Spouse Form 706

When new provisions are added to the IRC, it takes a few years for the first court cases to begin to appear on the issues raised by the new provision.  We are now beginning to see the first cases that look at the of the portability rules found in IRC §2010(c), beginning with case of the Estate of Minnie Lynn Sower v. Commissioner, 149 TC No. 11.

The portability rules, first added to the law in 2010 and made a permanent part of the law in 2012, are meant to allow a surviving spouse to have the use of any unused exclusion amount from the deceased spouse’s estate, so long as the deceased spouse’s estate files an election to make that amount available to the surviving spouse. [IRC §2010(c)(4)]

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IRS Memorandum Gives Examples of Applying Plan Loan Grace Period Rules

A qualified retirement plan can provide for loans to be made to participants under the terms of the plan if the plan provisions comply with the requirements under IRC §72(p)(2).  The loan must require repayment within five years, have payments made at least quarterly, and there must be a level amortization (that is, equal payments).  If a participant fails to comply with the terms of the loan, the balance is deemed distributed to the participant.

Reg. §1.72(p)-1, Q&A 10 allows a plan to include a “grace period” to allow participants to correct missed payments.  Under these provisions a missed payment must be corrected by the end of the calendar quarter after the calendar quarter in which the missed payment took place.  While a plan does not have to allow for a grace period, most plans will provide for this since otherwise any sort of problem would trigger a deemed distribution to the beneficiary.

In Chief Counsel Memorandum 201736022 the IRS looks at two situations to determine if the grace period rules have been complied with.

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Loss Does Not Qualify for Special Relief Revenue Procedure from Madoff Era

In the case of Hamilton v. United States, USDC Northern District of Indiana, Case No. 1:15-cv-00303 a couple was attempting to invoke Revenue Procedure 2009-20 to claim a theft loss related to a failed investment scheme.

The Hamiltons had invested in a program where their credit would be used, along with the credit of others, to finance a development.  As the Court described the arrangement:

In 2006, plaintiffs Robert and Joan Hamilton were approached with an investment opportunity in a real estate development project in North Carolina known as the Grandfather Vista Development. The investment was portrayed as the means by which the developers were financing the development. For $500,000, investors could purchase a 10-acre lot within the development site from the developers. They would also simultaneously execute a buy-back agreement effective one year after the date of purchase, by which the developers would repurchase the lot at a price of $625,000. The developers personally guaranteed the buy-back agreements, and apparently represented to buyers that they had over $100 million in net worth, meaning they portrayed the investment as nearly risk-free. In addition, the buyers would not need to put substantial amounts of cash into the investment; instead, they would finance the investment through bank loans secured by the lots they were purchasing. The developers also agreed to pay the interest on those loans over the one-year period they would be outstanding. Thus, for a small down payment, the investors believed they would receive large, guaranteed returns after one year. As the Hamiltons explain it, they “understood that in exchange for using [their] credit to procure loans from pre-arranged banks, [they] would be repaid within a year with a significant return.”

The Hamiltons took the bait, although some might have worried that this deal sounded too good to be true.  For instance, it might raise some questions why the developers, if they were truly as financially sound as they asserted, would be forced to use such a high cost program to provide only short-term financing.  The Court pointed this out in a footnote, stating “[i]t is unclear how the developers explained their willingness to pay a twenty-five percent interest rate if they had such substantial assets to offer as security.”

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IRS Provides Guidance for Employer Sponsored Leave Donation Programs for Hurricane Harvey Relief

The IRS in Notice 2017-48 provided guidance on the use of leave-based charitable donation programs that employers can use to provide Hurricane Harvey relief.  Under such programs, employees give up certain amounts of vacation, sick or personal leave in exchange for which the employer makes a cash donation to a qualified charitable organization for Hurricane Harvey relief.

Normally such an arrangement would arguably be taxable to the employee, followed by a charitable contribution deduction for the employee or, in the alternative, that the payments are charitable contributions of the employer which would be subject to the appropriate limits on charitable contribution deductions.  This notice provides that the IRS will not assert that position for programs that meet the requirements of this notice.

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Assessment for Disguised Compensation to S Corporation Shareholders Not a Worker Classification Issue Just Because PEO Was Used

The Tax Court is a court of limited jurisdiction, which means it can only hear cases that the Internal Revenue Code provides that it can hear.  In Chief Counsel Advice 201735021 the issue was whether a payroll tax examination was a worker classification exam, as the Tax Court has the right to hear cases regarding employee classification under IRC §7436(a), but does not have jurisdiction to hear a case where the issue is whether certain payments represented disguised compensation to employees.

In this case, the IRS was examining an S corporation which, for some years in question, had used a professional employer organization (PEO) for its payroll.  Under the agreement with the PEO, all individuals working for the taxpayer, including the officers of the corporation, were treated as employees of the PEO and received paychecks from that organization. 

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IRS Grants Relief to Certain Partnerships That Failed to Notice Change in Return Due Dates

Due dates for tax returns don’t change very often—so rarely that most taxpayers likely assume they simply won’t. But Congress in 2015 proved that such dates can be changed and that Congress is willing to do so, changing several dates. Matters are tougher when Congress moves the due date forward, as they did for partnerships.

Many partnerships, unaware of that requirement, either filed their Form 1065 or their request for an extension on Form 7004 after March 15, but on or before April 15, this year.  Notice 2017-47 provides relief from late filing penalties for partnerships in that situation who meet the requirements provided for in the notice.

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Loss from Competing in Pageants Reportable on Return of Minor Daughter, Not Parents

The daughter of the taxpayers in the case of Lopez v. Commissioner, TC Memo 2017-171 competed in several beauty pageants beginning at the age of nine.  She won several events and received cash prizes, totaling $1,325 and $1,850 in the two years at issue in the case and her parents deposited her winnings in a savings account for her future college education expenses.

Competing in such contests require incurring many expenses, as the parents discovered.  The taxpayers paid $21,732 and $15,445 of such expenses in the two years under examination.  The parents did not take reimbursement for any of the expenses from their daughter’s savings accounts.

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Taxpayer's Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice

Taxpayers who fail to timely their tax returns will sometimes tell advisers that it doesn’t matter because they are sure they are overpaid.  That’s fine—except that any overpayment can be lost if the taxpayer waits too long to timely file the return.

In the case of Borenstein v. Commissioner, 149 TC No. 10, the taxpayer discovered a way to lose a refund that probably will be new to most readers.

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IRS Allows Retirement Plans to Allow Those Affected by Hurricane Harvey to Receive Loans and/or Hardship Distributions Under Simplified Procedures

In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.

The general relief is described in the notice as follows:

…[A] qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey, to an employee or former employee whose principal residence on August 23, 2017, was located in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (“FEMA”) because of the devastation caused by Hurricane Harvey or whose place of employment was located in one of these counties on that applicable date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date.

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Taxpayer Unable to Establish Extension Request Timely Filed

One of the traditions of tax season for advisers is filing extensions for taxpayers on April 15.  The case of Laidlaw, et ux. et al v. Commissioner, TC Memo 2017-167 deals with a problem when the IRS claimed not to have received an extension that the taxpayer’s adviser claimed to have filed.

The taxpayers filed their tax returns for 2005 at the extended due date of October 16, 2006.  The taxpayers had filed Forms 4868 for each of the prior three years—but the IRS did not have a record of receiving one for 2005.  The forms were not sent by certified or registered mail, but rather the taxpayer’s adviser testified that he sent them in by regular mail.

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Taxpayer Had to Repay Excess Premium Credit Despite Exchange Not Reacting to Notice of Change in Income

The taxpayers in the case of McGuire v. Commissioner, 149 TC No. 9, were asking the Tax Court to find that they did not owe $7,805 in excess advance premium credit they had received under the Affordable Care Act (ACA). However, the Court found that it lacked the ability to grant the relief the taxpayers were requesting.

The taxpayer originally had obtained insurance from Covered California, an ACA health care exchange, for 2014.  Based on the household income reported, Covered California computed that the taxpayers were eligible for an advance premium credit of $591 per month, for a total credit of $7,092.  The taxpayers enrolled in a plan with a gross monthly premium of $1,181.97 per month.  Due to the credit, the net premium they paid each month was $590.97.

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Federal and Texas Tax Related Relief for Taxpayers Affected by Hurricane Harvey

The IRS and the Texas Comptroller have announced forms of due date and other relief for individuals impacted by Hurricane and Tropical Storm Harvey in Houston and surrounding areas.

The IRS has announced information related to relief provided under IRC §7508A for performing certain acts in News Release IR-2017-135.  IRC §7805A provides that the IRS may authorize a delay of up to one year to allow taxpayers to perform certain acts when the taxpayer is affected by a federally declared disaster or terroristic or military action.

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IRS Recognized Common Law Marriage Based on State Ruling

Federal tax law doesn’t itself contain a definition of what constitutes a marriage, rather deferring to state law.  As Reg. §301.7701-18(b)(1) provides:

(b) Persons who are lawfully married for federal tax purposes.

(1) In general.

Except as provided in paragraph (b)(2) of this section regarding marriages entered into under the laws of a foreign jurisdiction, a marriage of two individuals is recognized for federal tax purposes if the marriage is recognized by the state, possession, or territory of the United States in which the marriage is entered into, regardless of domicile.

(2) Foreign marriages.

Two individuals who enter into a relationship denominated as marriage under the laws of a foreign jurisdiction are recognized as married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States, regardless of domicile.

Technical Advice Memorandum 201734007 answers a question regarding whether the IRS had to recognize a “common law” marriage.

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Social Club Did Not Show Profit Motive for Sales to Nonmembers

In the arena of tax law, often minor differences in a situation may create major differences in how a situation is evaluated for tax purposes.  What a taxpayer must show to demonstrate an activity was entered into with an intention to make a profit is one of those areas where there are different tests depending on the situation.

Specifically, a not for profit organization seeking to offset unrelated business taxable income from one activity with losses from another unrelated business activity faces a very different hurdle to show that the second activity was entered into with the intent to make a profit.  This issue was discussed recently in the case of Losantiville Country Club v. Commissioner, TC Memo 2017-158.

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