Joint Committee Publishes Document Detailing Differences Between Versions of Tax Cuts and Jobs Act

The Joint Committee on Taxation has released a report (JCX-64-17) that details the differences between the versions of the Tax Cuts and Jobs Act that passed the House and Senate. 

The document breaks the bills down by broad topics, and within each broad topic lists those provisions that are identical in both bills, those that exists in both bills but have some differences in the details and then provisions that exist only in one or the other bill.

While this document will likely be relevant for only a short period of time, right now it’s a very useful document to help practitioners understand what items are in both bills in identical form (and thus seem most likely to adopted without change), those that exist with differences (where it’s likely the provision will be in the final bill, though details remain in doubt), and those that exist only in one bill (and are most at risk to not appear in the final bill at all).

That said, there is no guarantee that only these provisions will be in the final bill, or that a provision will end up with terms that are unlike those in either the current House or Senate bills.

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List of 2017 Required Amendments Issued by IRS

The IRS has issued the 2017 required amendment (RA) list for individually designed qualified retirement plans (Notice 2017-72).  Despite the name of the document, the required amendments listed in this document are not required to be made by the end of 2017, but rather must be made generally by December 31, 2019 (the end of the remedial amendment period), although some governmental plans may qualify for a later date (see Rev. Proc. 2016-37).

The IRS changed the required amendment period, effective January 1, 2017, with the issuance of Rev. Proc. 2016-37.  As the current notice describes the new system contained in Rev. Proc. 2016-37:

Sections 5.05(3) and 5.06(3) of Rev. Proc. 2016-37 extend the remedial amendment period for individually designed plans to correct disqualifying provisions that arise as a result of a change in qualification requirements. Under section 5.05(3), the remedial amendment period for a plan that is not a governmental plan (as defined in § 414(d)) is extended to the end of the second calendar year that begins after the issuance of the RA List on which the change in qualification requirements appears. Section 5.06(3) provides a special rule for governmental plans that could further extend the remedial amendment period in some cases.

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IRS Within Its Rights to Increase Tax Due for Audit When Taxpayer Filed an Amended Return After Audit Report Was Accepted

In the case of Planty v. Commissioner, TC Memo 2017-240, the Tax Court found the IRS did not conduct an impermissible second examination barred by IRC §7605(b) when the taxpayers filed an amended tax return after accepting the original examination report. 

In effect, the taxpayer took a slightly bad situation (owing tax on an exam) and made it far worse (IRS determined they owed far more tax for the year in question) by attempting to amend the return for the year in question.

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Sale of Property to Former Spouse Found Related to Cessation of Marriage, No Loss Allowed on Sale

The IRS in the case of Stapleton v. Commissioner¸ TC Summary Opinion 2017-87, was challenging the taxpayer’s claimed capital loss carryover from 2012 to 2013 and 2014.  The IRS specifically was taking the position that a sale of property by the taxpayer to his ex-spouse in 2012 related to the cessation of the prior marriage and thus a loss deduction was barred by IRC §1041(a)(2).

IRC §1041(a)(2) provides:

(a) General rule

No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)— …

 (2) a former spouse, but only if the transfer is incident to the divorce.

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Disgorgement Ordered for Violation of Federal Securities Law Not Deductible in View of IRS Memo

The IRS, reacting to the Supreme Court’s decision in Kokesh v. S.E.C., 137 S. Ct. (2017), has issued a memorandum (CCA 201748008) taking the position that amount paid as a disgorgement for violating a federal securities falls under IRC Section 162(f)’s prohibition of a deduction for a fine or similar penalty.

Specifically, IRC §162(f) provides:

(f) Fines and penalties

No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.

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IRS Grants Additional Relief for Partnerships Affected by Change in Due Date

In Notice 2017-71 the IRS has granted additional relief to taxpayers impacted by the change in the due date for partnership and related returns changed by the Surface Transportation and Veterans Health Care Act.  Calendar year partnership returns for 2016 were due on March 15, 2017, while in prior years that return would have been due by April 15. 

In Notice 2017-47 the IRS granted relief from late filing penalties for partnerships that filed their return or extension by the original due date.  This notice extends that relief to other items, except interest on tax due, affected by the change in the due date made by Congress.  That would include, for instance, the funding of a contribution to an employee benefit plan by the due date of the return for which a deduction is claimed on the prior year return.

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Read More Date Printed Used as a Postmark Applied by Other than the USPS for Timely Filing Rule

The Tax Court, having been reversed on appeal by the Seventh Circuit Court of Appeals in a case with virtually identical facts, officially changed its position on how to determine if a document mailed with a mailing label meets the timely filing rules of IRC §7502.  In Pearson v. Commissioner, 149 TC No. 20, the Court rejected its prior position that entries in the U.S. Postal Service database amounted to the equivalent of U.S Postal Service applied postmark which took precedence over the mailing date.  Instead, a document mailed with a label (or any other sort of postage meter equivalent label) is tested under the regulations for a document with a postmark applied by other than the U.S. Postal Service.

While, as noted, this position had been adopted on appeal, reversing the prior Tax Court decision, the reversal only would have had effect for taxpayers in the Seventh Circuit had the Tax Court not reversed its prior position.

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Court Grants Some of IRS's Request to Obtain Customer Information from Bitcoin Exchange

The IRS was granted the right to receive some, but not all, of the information it wished to see related to customers of a bitcoin exchange (United States v. Coinbase Inc. USDC ND California, Case No. 3:17-cv-01431), though not on all customers of the exchange.

The IRS had been originally seeking information on all U.S. customers of the exchange, but the agency had already revised their request to exclude any account with less than $20,000 in one transaction type (buy, sell or receive) during any one year between 2013-2015 and also excluding any customer that had only purchased bitcoin or customers for which Coinbase had issued a Form 1099K.  The IRS also had requested detailed information on each customer, including know your customer due diligence, agreements granting a third party access to the account and correspondence between Coinbase and any party relating to a specific account.

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Additional CPAR Proposed Regulations Issued to Deal with International Tax Issues

The IRS has released additional proposed regulations (REG-119337-17) on the Centralized Partnership Audit Regime (CPAR) that was created by the Bipartisan Budget Act of 2015.  These regulations, which add to the proposed regulations issued in June, address the impact of various international tax provisions on CPAR exams.

Specifically, these regulations look at the relationship of CPAR to the existing withholding obligations for certain foreign partners.  The proposed regulations make it clear that, generally, such withholding obligations are not covered by CPAR, but remind the reader that the IRS has taken the position in the June proposed regulations that he agency retains the right to separately examine the partnership and/or partners for any tax not covered by CPAR.

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No Deduction for Legal Fees Paid in Attempt to Recover Overpaid Alimony

Taxpayers often come to advisers seeking a way to claim a deduction for legal fees.  As we are aware, the IRC doesn’t provide a provision that broadly allows a deduction for legal fees.  Rather, taxpayers must find a provision in the IRC that allows a deduction for expenses of a type in which the current legal fees can be categorized.

The search for a provision under which to claim a deduction for legal fees was undertaken recently by the taxpayer in the case of Barry v. Commissioner, TC Memo 2017-237.  In this case the taxpayer had incurred over $25,000 of legal fees in an unsuccessful attempt to recover what he claimed was alimony which he had paid to his wife in excess of what was allowed under their agreement.

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English Law Used to Determine if Payments Would Cease on Death of Payee

The basic question the Court had to decide in the case of Wolens v. Commissioner, TC Memo 2017-236 seemed to be one often encountered in alimony court cases.  Did the payment stream in question stop upon the death of the recipient spouse?  Answering that question in the affirmative would satisfy one of four initial requirements for a payment stream to be treated as alimony for tax purposes.

As has often been true in previous cases, the divorce document did not specifically address whether these payments would continue after the death of the recipient.  And, as happens in those cases, the Court next looks to the relevant governing law (referred to in the cases as “state’ law) to determine if the underlying law would cause the payment stream to stop.

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Moline Requirement to Recognize Existence of Entity Applies to S Corporations per IRS Memo

The IRS issued a memorandum (CCA 201747006) that takes the position that the Court of Claim’s 2011 opinion in the case of Morton v. United States, 98 Fed. Cl. 596 (2011), is in error when it takes the position that, for an S corporation, an entity doesn’t have to be strictly recognized as unique form its owners. Rather, the memorandum argues that the opinion should not have distinguished the treatment of S corporations from that given by the U.S. Supreme Court in the case of Moline Properties v. Commissioner, 319 U.S. 436 (1943).

Moline generally holds that a taxpayer is not able to ignore the existence of separate entities that he/she has set up when analyzing a tax issue.  Rather, each entity is treated as a unique entity from the taxpayer’s perspective and the taxpayer must live with the consequences of that fact.  Unlike the IRS, the taxpayer was involved in creating the structure in question.

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IRS Provides Safe Harbor for Claiming Casualty Loss Arising from Deterioration of Residence Foundation Due to Pyrrhotite

In Revenue Procedure 2017-60 the IRS has provided a safe harbor for use by individuals who have suffered damage to their personal residences due to deteriorating concrete foundations caused by the presence of pyrrhotite. Under the safe harbor, amounts paid to repair such damage will count as a casualty loss in the year of payment.

The issue affects residents of the Northeastern United States due to the presence of pyrrhotite in the concrete mixture used to pour the affected foundations.  The IRS notes that this is a mineral that naturally occurs in stone aggregate which is used to produce concrete.  The mineral oxidizes in the presence of water and oxygen, leading to the formation of expansive mineral products and causing the concrete to deteriorate prematurely.

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Taxpayer's Loss Generated Using a Family Limited Partnership Formed With Assets Contributed to S Corporation Lacked Economic Substance

An attempt to combine the concepts of valuation discounts for family limited partnership often used in estate planning with a short-lived S corporation to create an income tax benefit was not looked upon positively by the Tax Court in the case of Smith v. Commissioner, TC Memo 2017-218.

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IRS Issues QSEHRA Guidance in FAQ Format

Late in 2016, as part of the 21st Century Cures Act, Congress had created a program under which certain qualifying small employers could pay directly for medical costs of certain employees (generally private health care insurance) without running afoul of the provisions of the Affordable Care Act that could subject the employer to a $100 per employee per day penalty for offering a health plan that did not comply with the standards imposed under that law.

These programs are referred to as “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs) authorized by IRC §9831(d).  In Notice 2017-67 the IRS issued a 59-page set of frequently asked questions (FAQs) regarding the operation of such plans to maintain compliance with the requirements of the law.

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Waiver of Repayment of Excess Pension Payment Not Taxable as Cancellation of Indebtedness

In Private Letter Ruling 201743011 a taxpayer sought clarification that he would not end up having to effectively report the same income twice despite receiving information returns in different years that reported what was the same income.

The taxpayer had received payments from a pension plan to which the taxpayer had made after-tax contributions for several years.  The taxpayer reported his payments using the simplified safe harbor method of reporting his income pursuant to Notice 88-118, determining the taxable portion of each payment and the amount that represented a nontaxable return of capital.

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Senate Finance Committee Chairman's Revisions to Tax Cuts and Jobs Act

Changes to the Tax Cuts and Jobs Act were released late on November 14 by Senator Orrin Hatch.  These changes are being made to the original Senate Finance Committee Chairman's mark of the bill.

Some of the changes bring the Senate bill into conformity with similar provisions in the House Bill, while others (such as the removal of the shared responsibility payment beginning in 2019 that has gotten much press coverage) are brand new provisions not seen in the House bill.  The revisions also serve to bring the Senate Bill into compliance with the Byrd rule.

The Joint Committee on taxation has released an explanation of these changes..

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JCT Description of Initial Senate Versions of Tax Cuts and Jobs Act Released

The U.S. Senate Finance Committee is set to unveil the Chairman's Mark of the Tax Cuts and Jobs Act November 10.  The mark has some significant differences from the bill currently moving through the Senate Finance Committee.

Some highlights of key differences include:

  • Seven tax brackets (10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%)
  • Expand child credit to $1,650
  • Double the estate tax exemption (no repeal)
  • Home mortgage deduction remains at $1,000,000
  • Back to original framework standard deduction numbers
  • No change to carried interest
  • Medical expenses remain deductible
  • No state and local tax deductions (including real estate taxes)
  • Lower corporate rate to 20% but with one year delay
  • Changes passthrough income relief to a 17.4% deduction for such income

The Joint Committee on Taxation has released their summary of the Senate Finance Committee's Chairman's Mark.

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Ways and Means Chairman Offers More Amendments to Tax Cuts and Jobs Act

Chairman Brady added more proposed amendments to the Tax Cuts and Jobs Act that were released on Thursday.

Chairman’s Second Amendment Summary

  • Removed self-employment tax revisions (which includes S corporations)
  • Restores adoption credit
  • Require SSN for child in order to claim entire amount of the enhanced child credit
  • Can rollover from 529 to ABLE account
  • Floor plan financing interest fully deductible but no full expensing for such businesses
  • S corporation gets special 6 year rule if terminates status due to Act for
    • Accounting method changes
    • Also gets special rule for distributions to be pro-rata from E&P and AAA
  • Requirement to capitalize research and development are required to be capitalized and amortized over 5 years (15 years for foreign)
  • Immediate deduction for expenses of attorney in contingent fee litigation
  • Remove changes to deferred compensation
  • 83(b) election cannot be made on restricted stock units (RSU)
  • Raised rate on repatriated assets to
  • 7% on earnings held in illiquid investments
  • 14% on other earnings and profits

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Ways and Means Chairman Brady's Amendments to the Tax Cuts and Jobs Act

The process continues in D.C. as the Tax Cuts and Jobs Act faces hearings before the House Ways and Means Committee.

On Monday Chairman Brady released a set of amendments, adopted by the Committee, that made the following revisions to the bill.

  • Rules mandating proper net earnings from self-employment for earned income tax credit
  • Employers must give employees’ name and address on payroll tax returns
  • Three year holding period for carried interests to get long term capital gain treatment
  • 1.4% excise tax only applies to universities with endowments of more than $250,000 per student
  • Deferral up to five years for income from stock options or restricted stock units if corporation’s stock is not publicly traded
  • Restores ability to treat self-created musical works as capital assets
  • Continue employer exclusion of dependent care assistance of up to $5,000 through 2022

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