The IRS issued guidance that may put at risk the ability of individuals in certain states to participate in health savings accounts (HSAs) beginning in 2020 in Notice 2018-12.

As Tax Analysts reported in covering this Notice, several states, including California, Illinois, Maryland, and Vermont, prohibit cost-sharing for insurance coverage of male sterilization and contraception services.  But only Vermont has a “carve-out” for HSA-qualified high deductible health plans (HDHPs).

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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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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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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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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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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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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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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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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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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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