Tax Court Disagrees With US District Court Over Potential Tax Exemption for Sale of Gravel

The Tax Court and U.S. District Court were considering the same basic issue for different years for the same taxpayers.  The courts came to opposite conclusions in the issue.  The United States District Court for the Western District of New York ruled in 2017 that the taxpayers in Perkins v. United States, No. 1:16-cv-00495, plausibly stated a claim for exemption from taxation for the 2010 sale of gravel based on two treaties between the United States and the Seneca Nation.  But in a case looking at the same two cases, the Tax Court decided in the case of Perkins v. Commissioner, 150 T.C. No. 6 that no exemption was available to the taxpayers under those treaties for sales of gravel in other years.

Alice Perkins is an enrolled member of the Seneca Nation and had received permission from the Seneca Nation to remove and sell gravel from lands held by Nation.  She and her husband lived on Seneca property.  For the years in question they sold gravel which they had mined from Seneca lands.

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S Corporations Not Exempted from Applicable Partnership Interest Rule of IRC §1061

The IRS issued guidance promised by Treasury Secretary Steven Mnuchin in his testimony in February before the Senate Finance Committee regarding the carried interest rules added in IRC §1061 by the Tax Cuts and Jobs Act.  Notice 2018-18 provides guidance on regulations the IRS plans to issue in this area.

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IRS Releases Online W-4 Calculator and 2018 Form W-4

The IRS released the revised W-4 Withholding Calculator on their website on February 28 along with the revised 2018 version of Form W-4.  The revision arrived slightly later than promised by Treasury Secretary Steven Mnuchin who testified on February 15 that the calculator would be out within a week.

The revised calculator takes into account changes made by the Tax Cuts and Jobs Act.  The calculator works for most individuals, but the IRS warns that it is not meant for taxpayers with more complex situations.

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Taxpayer's Taking of Funds from IRA to Send to Soon to Be Former Spouse Was Not a Tax Free Transfer of the IRA

While it is possible to transfer some or all of an IRA account tax free to the soon to be ex-spouse pursuant to a divorce, certain rules need to be followed.  In the case of Kirkpatrick v. Commissioner, TC Memo 2018-20, the taxpayer discovered that a failure to follow these procedures can be a very costly mistake.

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Partnership Did Not Hold Land for Development, Nor Sell It in the Ordinary Course of Its Trade or Business, So Gain Was Capital

In the case of Sugar Land Ranch Development LLC et al. v. Commissioner, TC Memo 2018-21, the IRS challenged the taxpayer’s treatment of gain from the sale of land.  The taxpayer had treated the gain as capital gain from the sale of investment property.  But the IRS argued that the property was held for sale to customers in the ordinary course of business and that the gain should be treated as ordinary gain.

To qualify for capital gain treatment, the gain must arise from the sale of an asset that is a capital asset in the hands of the taxpayer.  What is a capital asset is defined, under the IRC, by what is not a capital asset.  All assets held by a taxpayer are capital assets unless one of the exclusions, found at IRC §1221(a), applies.

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IRS Is Able to Process Returns with Some, But Not All, Benefits Retroactively Restored for 2017

In News Release IR-2018-33 the IRS announced that it was now able to begin accepting returns claiming certain tax benefits retroactively restored for 2017 by the Bipartisan Budget Act of 2018.  The three benefits that the IRS is now ready to accept returns containing are the following:

  • Exclusion from gross income of discharge of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness),
  • Mortgage insurance premiums treated as qualified residence interest, and
  • Deduction for qualified tuition and related expenses.

These provisions had expired at the end of 2016 and Congress had not enacted legislation to extend them for an additional year until the passage of the Bipartisan Budget Act on February 9.

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AICPA Writes Treasury Regarding §199A Issues Requiring Immediate Guidance

The AICPA Tax Executive Committee has sent a letter to the Treasury Department and the IRS outlining areas the Institute believes require immediate guidance for IRC §199A added to the law by the Tax Cuts and Jobs Act.  The list is not a short one—the summary table at the end of the document shows 29 separate items which require guidance, with six requiring immediate guidance and 23 that will also require guidance, presumably before returns begin to be filed for years that IRC §199A applies to.

The letter breaks the requested guidance into six broad areas for which information is needed.  These areas are:

  • Definition of section 199A Qualified Business Income
  • Aggregation method for calculation of QBI of pass-through businesses
  • Deductible amount of QBI for a pass-through entity with business in net loss
  • Qualification of wages paid by an employee leasing company
  • Application of section 199A to an owner of a fiscal year pass-through entity ending in 2018
  • Availability of deduction for Electing Small Business Trusts (ESBTs)

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IRS Issues News Release to Clarify That Loans a Bank Calls a Home Equity Loan May Still Be Deductible as Mortgage Interest After TCJA

In News Release IR-2018-32 the IRS sought to deal with what appears to be a widespread misunderstanding of how the home mortgage interest deduction works under the revisions passed as part of the Tax Cuts and Jobs Act.  The IRS points out that merely because a lender refers to a loan as a “home equity” loan, that does not mean the interest will not be deductible in 2018, so long as proceeds of the loan are used to acquire or substantially improve the residence.

Under IRC §163(h)(3)(F), only “acquisition indebtedness” (as defined by IRC §163(h)(3)(B)) will be deductible, and “home equity” indebtedness (as defined by IRC §163(h)(3)(C)) will not be.  Too many taxpayers, reporters and, in this author’s experience, even tax advisers are ignoring the “as defined by” clauses above and instead go directly to using loan labels to determine deductibility.

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Oddity Is Not Absurdity, So Eleventh Circuit Upholds Ordinary Income Treatment

In September of 2016 we wrote about the case of CRI-Leslie LLC et al. v. Commissioner, 147 T.C. No. 8 where the Tax Court found that, since a §1231 asset is effectively, per §1221(a)(a), not a capital asset, a $9.7 million gain was not a capital gain, but rather was ordinary income.  You can read about the details of this case in the original post.

The taxpayer, not happy with the Tax Court's decision, appealed the case to the Eleventh Circuit. And many advisers, seeing this result as odd and not something Congress could have meant to result, may agree.  But it turns out the law allows for odd results.

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Despite Having No Adjustment in Prior Two Exams, Taxpayer's Use of Gross Profit Method Found to Significantly Misstate Income

A taxpayer’s appeal of a Tax Court decision upholding an IRS assessment regarding a method that had survived two prior IRS audit failed to win relief from the First Circuit Court of Appeals in the case of Transupport, Inc. v. Commissioner, CA1, No 17-1265.

The taxpayer in this case is a wholesaler of engine and engine parts used in military vehicles.  The issue in this case involved a portion of the business where the taxpayer bought parts in bulk from the U.S. Government and resold them.

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Bipartisan Budget Act of 2018 Signed Into Law with Tax Provisions, Including Extenders

The Bipartisan Budget Act of 2018, H.R. 1892, signed into law by President Trump on February 9, 2018, is best known for ending the very short government shutdown that took place for a few hours on February 9, 2018.  But that bill also contained many tax related provisions in its 652 pages.

One key item to note is that the bill gave a one-year reprieve to 34 provisions that expired at the end of 2016.  They still have expired (past tense), but the expiration date is now at the end of 2017.  That means these benefits can be claimed on 2017 income tax returns. 

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IRS Updates Priority Guidance Report for TCJA Implementation Issues

The IRS has released the second quarter update to the agency’s 2017-2018 Priority Guidance Report which shows 18 projects added related to guidance implementing the Tax Cuts and Jobs Act.

Per the statement accompanying the report, it contains “guidance projects that we hope to complete during the twelve-month period from July 1, 2017, through June 30, 2018 (the plan year).”

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Pyrrhotite Damage Revenue Procedure Modified to Extend Time to Pay for Repairs

The IRS has revised the relief granted in Revenue Procedure 2017-60 by issuing Revenue Procedure 2018-14.  The procedures apply to individuals who have damage to the concrete foundations of their personal residences caused by the presence of the mineral pyrrhotite.

As was described in the article that discussed the original relief provision posted on Current Federal Tax Developments:

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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2018 Plan and IRA Numbers Are Not Changed by TCJA Provisions

The IRS has begun the process of indicating which inflation adjusted numbers will or will not change due to revisions made in the Tax Cuts and Jobs Act.  In News Release IR-2018-19 the IRS has clarified that the qualified retirement plan and IRA amounts for 2018 originally announced in News Release IR-2017-177 and Notice 2017-64 will not require changes in amounts due to the Tax Cuts and Jobs Act.

Most of the numbers in that release were not at risk, since the inflation adjustment for the various numbers related to qualified plans are computed using procedures similar to those used to calculate cost of living adjustments under the Social Security Act.  The TCJA made no changes to that computation.

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Change in 2014 S Corporation Loan Regulations Did Not Change Result When Loans Came from Related Corporations

In the case of Meruelo v. Commissioner, TC Memo 2018-16 a taxpayer argued that an IRS change in regulations related to S corporations loans made in 2014 meant that he did not need to show he was actually economically worse off following a purported loan to obtain basis for deducting losses.  Unfortunately for the taxpayer, the Tax Court ruled that the new regulations did not remove the requirement that the taxpayer show he/she is economically worse off to obtain basis in what the taxpayer claims is a loan from him/her to the S corporation.

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Engineer is Potentially Subject to Penalty for Overly Aggressive Cost Segregation Study

In a Chief Counsel Memorandum (CCA 201805001), the IRS found that a “tax-consultant engineer” could be held liable for a penalty under IRC §6701 for aiding and abetting another person in the understatement of that person’s tax liability.  In the matter at hand, the engineer had advised the taxpayer to, at least in the IRS’s view, overly aggressively attempt to reclassify portions of a building to have their costs recovered under much shorter lives.

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Revision of Attributes for CPAR Audits Proposed Regulations Issued

More proposed guidance has emerged on the comprehensive partnership audit regime (CPAR) that was enacted as part of the 2015 Bipartisan Budget Agreement.  CPAR is effective for tax years beginning after December 31, 2018, replacing the prior TEFRA consolidated audit regime with an even more centralized system.  The new guidance, found at REG-118067-17, provide information on the attribute adjustments to be made following a CPAR examination of the partnership.

Under CPAR by default at the conclusion of a partnership exam, the IRS issues a bill for tax due, referred to as an “imputed underpayment,” to the partnership which pays the amount.  The imputed underpayment is initially calculated by applying the maximum individual tax rate (37% for 2018) to the net adjustment of the partnership, though the partnership has various options to adjust the payment amount down to lower rates and/or remove portions of the adjustment from the imputed adjustment entirely.

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IRS Provides Interim Guidance on Forms W-4 Related to TCJA

Due to changes in the law made by the Tax Cuts and Jobs Act (TCJA), the IRS in Notice 2018-14 provided an extended effective period for 2017 Forms W-4 that claimed exemption from income tax withholding for 2017 and allows employees to use the 2017 Form W-4 to claim exemption from withholding in 2018.  The notice also makes other changes to rules applicable to the use of Form W-4 to give the IRS time to release an updated Form W-4.

Specifically, the notice provides:

  • Extends the effective period of Forms W-4, Employee's Withholding Allowance Certificate, furnished to claim exemption from income tax withholding until February 28, 2018, and permits employees to claim exemption from withholding for 2018 by temporarily using the 2017 Form W-4;
  • Temporarily suspends the requirement that employees must furnish their employers new Forms W-4 within 10 days of changes in status that reduce the withholding allowances they are entitled to claim;
  • Provides that the optional withholding rate on supplemental wage payments is 22 percent for 2018 through 2025; and
  • Provides that, for 2018, withholding on periodic payments when no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances.

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AICPA Writes Treasury Listing Items Needing Immediate Guidance

The AICPA Tax Executive Committee has sent Treasury a letter and memorandum outlining guidance that the organization is requesting regarding the Tax Cuts and Jobs Act.

While the memorandum provides a long list of guidance the AICPA deems necessary, the cover letter, signed by Tax Executive Committee Chair Annette Nellen, CPA, CGMA, Esq., points out three areas the AICPA believes require immediate guidance:

In particular, there are three areas of main concern. First, under section 199A, guidance is needed on the definition of specified service trade or business, the interaction of this section with other Code sections and the calculation of the section 199A deduction for complex business structures. Second, for section 481 accounting method changes, general procedural guidance is needed for making accounting method changes in order to comply with the new rules. Finally, penalty relief for underpayment of taxes is needed. Taxpayers and preparers need sufficient time to determine the appropriate withholding and estimated tax payments for businesses, individuals, trusts, estates, and other entities that may have a dramatically different tax liability in 2018 or that are affected by provisions effective for 2017.

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IRS Updates Adequate Disclosure Revenue Procedure, No Significant Changes Made

The IRS has revised the adequate disclosure Revenue Procedure (Revenue Procedure 2018-11).  The procedure that contains the provisions that would provide for adequate disclosure for purposes of avoiding certain penalties under §6662 (accuracy related penalty imposed on taxpayers) and §6694 (paid preparer penalties).

The procedure is meant to provide guidance as to what constitutes adequate disclosure of positions that do not have substantial authority but do have a reasonable basis.  Adequate disclosure of such positions in most cases serves to eliminate the accuracy related penalty due on substantial understatements of tax or the paid preparer penalty for a tax deficiency related to an unreasonable position.

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