2018 Revision of Comprehensive List of Automatic Changes Released with a Promise TCJA Method Change Procedure to Come Later

The IRS has updated the long (now 333 pages) document listing all of the automatic accounting method changes in Revenue Procedure 2018-31. This is the document that outlines the changes that can be made by attaching a Form 3115, Application for Change in Accounting Method, to the taxpayer’s tax return for the year of change (along with a copy to the IRS processing center in Covington, KY) rather than going through the process of applying for approval of the change and awaiting the IRS’s decision.

If you were hoping to see automatic change procedures outlined for changes added by the Tax Cuts and Jobs Act (TCJA), those are not in this document.  There were a few changes made to prior automatic changes (such as those impacting IRC §263A) to get ready for the new small business changes, but none of the small business changes, nor the revenue conformity change required for some businesses by IRC §451(b) as revised by TCJA are found in this document.

Image copyright kritchanut / 123RF Stock Photo

Read More

Savings Account Held by Son as Nominee, Must Be Counted in Calculation of Solvency for Debt Discharge Exclusion

In the case of Hamilton v. Commissioner, TC Memo 2018-62, the taxpayer had excluded from income cancellation of indebtedness of $158,511.  The taxpayers claimed they qualified for the insolvency exclusion under IRC §108(a)(1)(B), with liabilities in excess of assets at the time of the discharge of $165,871.  But the IRS objected that they had omitted from their calculation of insolvency a significant asset—a savings account held by their son that had been funded by the taxpayers and which the taxpayers regularly used to pay personal expenses.

Under IRC §61(a)(12), a discharge of indebtedness is specifically called out as a type of gross income subject to tax.  However, IRC §108 provides that, in a number of specific circumstances, a taxpayer is able to exclude from income some or all of the discharge.

Image copyright flynt / 123RF Stock Photo

Read More

IRS Modifies Safe Harbor RBIG and RBIL Calculations for Section 382 Due to TCJA Changes to Bonus Depreciation

In Notice 2018-30 the IRS has modified certain safe harbor calculations for recognized built in gain (RBIG) and recognized built in loss (RBIL) as it relates to limitations under IRC §382.  The IRS has revised guidance found in Notice 2003-65 to modify the safe harbor rules found in the IRC §§338 and 1374 approaches described in that ruling.

IRC §382 serves to limit the ability to “buy losses” in an existing corporation, limiting the corporation’s ability to claim pre-ownership change losses against post-change taxable income.  That ability is limited by the §382(b) limitation for each taxable year.

Image copyright convisum / 123RF Stock Photo

Read More

Small Businesses Warned About Risk of Identity Theft

The IRS, state taxing agencies and members of the nation’s tax industry in IRS News Release IR-2018-111 described a rising problem with identity theft aimed at small businesses and steps that are being taken to combat it.

The release begins by noting that the problem has been increasing recently:

In the past two years, the Internal Revenue Service has noted a sharp increase in the number of fraudulent filings of Forms 1120, 1120S and 1041 as well as Schedule K-1. The fraudulent filings apply to partnerships as well as estate and trust forms.

Image copyright pixelbliss / 123RF Stock Photo

Read More

Taxpayers Fails to Show They Reasonably Relied Upon Tax Advice

In the case of Keenan v. Commissioner, TC Memo 2018-60, the taxpayers argued that they should not face penalties under IRC §6662.  They argued they had reasonably relied on the advice of their CPA and attorney/insurance agent in claiming a deduction of over $3,000,000 related to a Benistar 419 plan.

The taxpayers were back in court after the Ninth Circuit Court of Appeals had sent the case back down to the Tax Court to consider the taxpayer’s claims that their situation was different enough from that of the taxpayers in the Curcio case to justify a different result.  The taxpayers, who were one of many taxpayers facing proposed disallowance of deductions for Benistar 419 plans, had agreed to be bound by the result of a set of test cases involving similarly situated taxpayers that were all part of the Curcio decision.

Image copyright racorn / 123RF Stock Photo

Read More

Organization Operated for Commercial, Not Exempt, Purpose

In the case of Abovo Foundation, Inc. v. Commissioner, TC Memo 2018-57, the taxpayer was asking the Tax Court to rule that the organization qualified as a §501(c)(3) tax-exempt organization. The Tax Court, siding with the government, found that the entity failed to qualify.

The organization’s stated purpose was summarized as follows in the opinion:

Abovo's primary purpose would be to deliver quality management consulting services to medical providers and advance Government programs through patient safety initiatives. Its quality management services would include “defining, identifying, analyzing, measuring and controlling systems and processes to ensure desirable outcomes”. In addition, Abovo would provide “uplifting services for the elderly and veterans”, housing for low-income individuals, and internal auditing services.

Image copyright everythingpossible / 123RF Stock Photo

Read More

Oklahoma Governor Decides to Veto Most Recent Tattletale Bill

Oklahoma Governor Mary Fallin has vetoed the expansion of Oklahoma’s out of state tattletale provision to require reporting to the state and creating penalties that had been found in SB 337 discussed here previously.  Note that she had previously signed legislation imposing more stringent tattletale responsibilities on marketplace and certain other remote sellers (HB 1019 passed as part of the Second Special Session and signed into law on April 10, 2018).

The Oklahoma legislature remains in session and, at least in theory, could override this veto.  We will keep an eye on this legislation to see if there is any further activity in this area.

Image copyright happystock / 123RF Stock Photo

Read More

IRS Delays Third Party Purchase of Life Insurance from Insured Reporting Rules Added by TCJA

The IRS has issued Notice 2018-41 which delays the requirement to file reports on certain sales of life insurance policies mandated by TCJA until the IRS issues final regulations on the provision.

An information return will need to be filed by each person who acquires a life insurance policy in a reportable policy sale under IRC §6050Y for sales completed after December 31, 2017.  A “reportable policy sale” is defined at IRC §101(a)(3)(B) as:

…[T]he acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in such life insurance contract. For purposes of the preceding sentence, the term “indirectly” applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract.

Image copyright rawpixel / 123RF Stock Photo

Read More

Taxpayer Failed to Read TurboTax Notice of Rejected Return, No Relief Granted for Failure to File Penalty

A taxpayer was denied relief from late filing penalties when his return, filed via TurboTax, was rejected for an erroneous identification number for a dependent in the case of Spottiswood v. United States, US District Court, ND California, Case No. 3:17-cv-00209. The taxpayer failed to notice an email from TurboTax reporting to him that the return had been rejected, as well as the fact that the $395,619 payment due had not been withdrawn from his bank account. It was not until 18 months later he discovered the rejected return.

Image copyright srcnnr / 123RF Stock Photo

Read More

IRS Restores Maximum HSA Contribution to $6,900 for 2018, Provides Special Relief

When Congress changed the method of computing most inflation adjustments by moving to the chained CPI calculation as part of the Tax Cuts and Jobs Act signed into law in December of 2017, virtually all of the inflation adjusted numbers for 2018 had already been published and some actions had been taken in reliance on those numbers.  When those numbers changed, that put some taxpayers in a tough position.

Specifically, the IRS announced in Revenue Procedure 2018-18 that the maximum contribution to a health savings account for an individual with family coverage would be reduced by $50, to $6,850 rather than the $6,900 limit originally provided for in Revenue Procedure 2017-37 that was issued in May of 2017.  In response to numerous complaints about this change announced after 2018 had already begun, the IRS in Revenue Procedure 2018-27 announced that the agency would continue to treat $6,900 as the maximum contribution for an individual with family coverage.

Image copyright melpomen / 123RF Stock Photo

Read More

Initial Number of Reports "Disappointing" Under Colorado's Tattletale Use Tax Law

The state of Colorado’s number of reports received from out of state sellers under its tattletale use tax law were “disappointing” in the words of Phil Horwitz, director of tax policy analysis for the Colorado Department of Revenue. Mr. Horwitz’s comments to the Multistate Tax Commission’s Uniformity Committee on April 25 were reported on by Tax Notes Today in an April 26 story.

The law took effect on July 1, 2017, with the first reports due by March 1, 2018.

Image copyright studiograndouest / 123RF Stock Photo

Read More

Oklahoma Legislature Passes Colorado Style Tattletale Use Tax Bill

The Oklahoma legislature, fresh from passing a bill that requires marketplace vendors (such as Amazon, eBay, etc.) to either collect and remit sales taxes or send notices, has sent a new bill (Oklahoma SB 337) to the Governor’s desk that expands a “tattletale” disclosure rule that would apply to all out of state sellers who do not collect Oklahoma use tax.

“Tattletale” laws have sprung up in a number of states following Colorado’s victory in federal court for its statute (see Colorado Law Requiring Out of State Sellers to Report on Colorado Customers Who May Owe Use Tax Upheld by Tenth Circuit describing a Tenth Circuit ruling which the US Supreme Court refused to review).  In the oral arguments presented to the Supreme Court in South Dakota v. Wayfair (see Supreme Court Hears Oral Argument in Sales Tax Collection Case for more details) it was clear that the Colorado statute was the “alternative” if the Court decides to continue to require physical presence for a state to be able to force a vendor to collect sales tax.

Image copyright sabphoto / 123RF Stock Photo

Read More

AICPA Recommends Changes to IRS's No Refund Policy for Taxpayers with 965 Liability

The AICPA in a letter issued on April 19, 2018 has asked the IRS to reconsider its view, expressed in a change added to the questions and answers on the §965 transition tax, that any overpayments for taxpayers who elect to pay the tax in installments will not be refunded unless the entire balance of the tax is paid.

Image copyright abluecup / 123RF Stock Photo

Read More

Supreme Court Hears Oral Argument in Sales Tax Collection Case

Oral arguments took place on April 18 before the United States Supreme Court in the case of South Dakota v. Wayfair.  The case is a challenge to a South Dakota statute the requires the collection of South Dakota’s sales tax by any seller that sells more than $100,000 of product into South Dakota during a calendar year or who has 200 or more separate transactions within the state during that year. 

For those who wish to listen to the hour long session, you can find the audio here.

This statute pushes for pure economic nexus—no other sort of presence inside South Dakota (even “cookie nexus” like that being pursued by states like Massachusetts) is required to trigger collection. Such a position is directly contrary to the physical presence requirement outlined by the U.S. Supreme Court in the case of Quill Corp. v. United States, 504 U.S. 298 (1992) and, based on this fact, the statute had been struck down by South Dakota courts, including the South Dakota Supreme Court

Image copyright hafakot / 123RF Stock Photo

Read More

Just What We Need - One More Day of Tax Season

You probably finished off your final returns, went home, relaxed and breathed a sigh of relief that one more tax season is over.

Except, it turns out, it isn't.  Due to the IRS's major computer system meltdown during most of deadline day, the IRS has announced we now have one more day to file returns and pay taxes, per News Release IR-2018-100, released about 7:00 pm EDT on April 17.

Image copyright takkemei / 123RF Stock Photo

Read More

Fiscal Year Corporations to Pay Blended Rate for First Year of TCJA

Sometimes the tax law seems to say something clearly—only we find elsewhere in the Internal Revenue Code that clarity is overridden.  In News Release IR-2018-99 the IRS explains how a rate that, per the Tax Cuts and Jobs Act, took effect for tax years beginning in 2018 actually affects most years beginning any time after January 1, 2017.

The New Release outlines the rate that will be paid by fiscal year corporations for the corporation’s year that includes January 1, 2018.  Act Section 13001(a) of Pub. L 115-97 (the law generally referred to as the Tax Cuts and Jobs Act) provides that the 21% flat rate version of IRC §11 takes effect “for tax years beginning after December 31, 2017.”

Image copyright ivonnewierink / 123RF Stock Photo

Read More

Two Additional States Poised with Tattletale Sales Tax Bills

Two more states have passed "tattletale" statutes for out of state sellers, both of which have been sent on for signatures by each state's governor. Both are based roughly on the Colorado law that the Tenth Circuit panel which included Neil Gorsuch found acceptable under federal law and which SCOTUS refused to hear an appeal related to.

Image copyright sabphoto / 123RF Stock Photo

Read More