IRS Announces Relief on Certain 965 Transition Tax Issues

The IRS continues to revise its guidance with regard to the Section 965 transition tax adopted as part of the Tax Cuts and Jobs Act.  In News Release IR-2018-131 the IRS announced waivers of certain penalties impacted by that tax and revisions to its frequently asked questions regarding the tax maintained on the IRS web site.

The IRS has added three new questions and answers to the 965 tax frequently asked questions (FAQs) page on its website (Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns).

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Email Explains Difference Between Filing a Claim and an Adjusted Return on Payroll Withholding Issues

The problems of attempting to develop summary explanations for training purposes (like this article) of tax material was discussed in Chief Counsel Email 201822028.  A person inside the IRS was raising questions about IRS training materials related to the question of when an employer may “claim” an “adjustment” for income tax withholding and additional Medicare tax.

Specifically, the email begins by noting the matter that had led to the request for clarification:

Your initial inquiry was whether certain training materials were correct in stating that “[a]n employer CANNOT claim an adjustment for [Income Tax Withholding] and additional Medicare taxes after the close of the calendar year for the employee.” The training materials cite to § 31.6413(a)-2(c)(2).

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Taxpayer Was a Statutory Employee, Expenses Deductible on Schedule C

One of the issues in the case of Fiedziuszko v. Commissioner, TC Memo 2018-75, was whether the taxpayer, who received a Form W-2 for his work for 2012, was a “statutory employee.”

The statutory employee definition is found at IRC §3121(d)(3).  The first requirement to be a statutory employee is that the individual not be a common-law employee of the service recipient.  Next, the taxpayer must perform services for pay in one of the following four categories:

  • As an agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services, for his principal;

  • As a full-time life insurance salesman;

  • As a home worker performing work, according to specifications furnished by the person for whom the services are performed, on materials or goods furnished by such person which are required to be returned to such person or a person designated by him; or

  • As a traveling or city salesman, other than as an agent-driver or commission-driver, engaged upon a full-time basis in the solicitation on behalf of, and the transmission to, his principal (except for side-line sales activities on behalf of some other person) of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their business operations.

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Fact Sheet Outlines Steps IRS Takes to Contact Taxpayers

Clients who get scam phone calls from parties claiming to be the IRS demanding immediate payment are often calling advisers in a panic after such a call.  While we will assure them that the IRS doesn’t handle these issues the way the caller they talked to is suggesting, we can now also point them to an IRS document regarding what the IRS will and will not with regard to a tax issue.

In Fact Sheet FS-2018-12 the IRS describes how the agency does and does not contact taxpayers.

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IRS Issues Ruling Providing for Withholding on Transfer of IRA Funds to State Unclaimed Property Funds and Filing of Forms 1099R

The various states have laws on their books that require an entity holding “unclaimed property” to turn that property over to the state.  Generally, this transfer takes place when the account owner fails to take any action with regard to the property and the holder of the property is unable to locate that owner.

Such property can include individual retirement accounts.  In Revenue Ruling 2018-77 the IRS rules on circumstances when the payor will or will not be required to withhold taxes from the transfer to the state as well as the reporting requirements on a Form 1099R when such a distribution takes place.

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No Deductions Allowed to Taxpayer Since Business Had Not Yet Commenced

While the tax law allows deductions for expenses incurred in a trade or business, it does not allow a taxpayer to claim a current deduction while the taxpayer is merely investigating the possibility of entering into a trade or business.  In the case of Samadi v. Commissioner, TC Summary Opinion 2018-27 the Tax Court determined the taxpayer was in just such an investigatory stage and not actually conducting a trade or business.

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IRS to Issue Guidance on SALT Workarounds, Raises Issue of Substance over Form

The IRS has now fired its first salvo in the SALT workaround controversy.  Notice 2018-54 announces the IRS’s intention to propose regulations to deal with some types of SALT workarounds.

In one sense this notice gives us little information about exactly what can and cannot pass muster when taxpayers make charitable contributions that reduce their state income taxes in an effort to shift from a nondeductible expense (state and local taxes in excess of $10,000) to fully deductible items (charitable contributions). But it does indicate that the IRS does not plan to sit by quietly and not issue guidance in this area.

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Agreeing with the Ninth Circuit, DC Circuit Upholds IRS Position that SMLLC Partner Renders a Partnership Subject to TEFRA Procedures

In a TEFRA case that may have continuing implications under the new Centralized Partnership Audit Regime (CPAR) taking effect for partnership tax years beginning in 2018, the DC Circuit, following suit with a similar opinion last year from the Ninth Circuit, found that having a disregarded entity as a partner meant a partnership could not avoid being examined under the TEFRA partnership examination provisions.

The case, Mellow Partners v. Commissioner, Case No. 16-1454, CA DC appealed the Tax Court’s holding that the TEFRA audit provisions applied to a partnership where each partner held his interest in a single member LLC.

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Penalty Limited to Maximum Amount Stated in Regulation Not Updated for Later Increase in Maximum Penalty

A U.S. District Court in the case of United States v. Colliot, Case No. 1:16-cv-01281, Western District of Texas, found that Treasury failure to update a regulation served the limit the amount of penalty the IRS could assess against an individual who willfully failed to report accounts on FBAR reports.

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IRS Updates Procedure for Obtaining Information on Deductible Contribution Status for Organizations

Revenue Procedure 2018-32 has been issued by the IRS to provide consolidated guidance for taxpayers to gain assurance that an organization they are making a charitable contribution to qualifies to receive tax deductible contributions.  This ruling consolidates and updates prior guidance found in several prior procedures.

The prior procedures that have been modified and superseded are:

  • Rev. Proc. 81-6, 1981-1 C.B. 620;

  • Rev. Proc. 81-7, 1981-1 C.B. 621;

  • Rev. Proc. 89-23, 1989-1 C.B. 844; and

  • Rev. Proc. 2011-25 I.R.B. 887

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Taxpayer Did Not Act in Good Faith in Relying on Advice of Shelter Promoter, and Obtained No Advice from Accounting Firm

The question of whether a taxpayer had reasonably relied upon the advice of tax professionals when taking a tax position was the sole issue before the court in the case of RB-1 Investment Partners v. Commissioner, TC Memo 2018-64.

The taxpayers in the case had gotten into a Son-of-BOSS tax shelter in an attempt to shelter from tax the gain from the sale of their very successful concrete business.  While the taxpayers initially disputed the IRS’s disallowance of the benefits from the strategy, at this point the taxpayers had conceded that issue and now were only disputing the penalties in this case.

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Tuition Waiver Taxable to Former Employee When Used by Daughter 22 Years After It Was Granted

John Voigt worked for Tulane University in 1991, at which time he was laid off as part of a staff reduction.  As part of his severance package, John was entitled to a tuition waiver for himself or his dependents in the future if certain conditions were met.

In 2013, John’s daughter enrolled at Tulane and received the benefit of the tuition waiver for the spring and fall semesters.  In the case of Voight v. Commissioner, TC Summary Opinion 2018-25, the Tax Court had to decide if the value of that tuition waiver represented taxable income to John.

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Officials Give Little New Information on Coming TCJA Guidance

Looking at the coverage we have from the American Bar Association Section of Taxation’s meeting in Washington on May 11 nothing earthshattering about the upcoming guidance on the Tax Cuts and Jobs Act seems to have emerged from that meeting.  However, Tax Analyst’s coverage did highlight some items.

The proposed regulations on new §199A are scheduled to be released by June 30 per the IRS Priority Guidance plan, most recently updated on May 9.  But in a Real Estate session at the ABA’s Conference, Bryan Rimmke, attorney-adviser, Treasury Office of Tax Legislative Counsel did not commit to indicating that taxpayers will be able to rely on that initial guidance. In the Tax Analysts coverage, Mr. Rimmke noted “the agency is grappling with the same complex issues under section 199A as practitioners.”[1]  Advisers will need to pay attention when the proposed regulations are issued whether or not they are accompanied by “taxpayers can rely” language.

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Connecticut Enacts Two Separate SALT Workaround Provisions, Including Mandatory Passthrough Tax With Offsetting State Tax Credit

The workarounds for the TCJA enacted limits on state and local taxes (SALT) have now expanded into another state, with Connecticut adding its workaround to those already passed by New York and New Jersey.  Connecticut Substitute Bill SB 11contains two different SALT workarounds.

The first workaround is a property tax credit based one, very similar to the one enacted by New Jersey earlier in May.  The bill authorizes municipalities to provide a property tax credit to those donating to a “designated community supporting organization.”  The credit could not exceed the lesser of:

  • The amount of property tax owed or

  • 85% of the donation to the designated community supporting organization.

The funds received by the organization will be made available to the municipality as a grant equal to the funds received under the program.

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Automatic Change Revenue Procedure Released for Accounting Method Changes Related to Adoption of ASC 606

The same week as the IRS released the annual revised general purpose automatic method change list revenue procedure the agency decided to release the revenue procedure outlining how taxpayers may request a change of accounting method related to the GAAP changes taking place under ASC 606, Revenue from Contracts with Customers.  The change procedures are contained in Revenue Procedure 2018-29.

While this procedure is generally good news, it most clearly does not mean that the IRS is going allow the use of methods provided under ASC 606 without regard to whether the method is otherwise allowable under the IRC.  The taxpayer will have to make its own determination regarding whether or not conforming tax and book methods in their situation is actually allowed under the IRC.

In the second paragraph of the procedure the IRS notes that this procedure does not deal with the other major GAAP/tax accounting method issue for 2018 found in the new revenue conformity provision at IRC §451(b) and (c) added by the Tax Cuts and Jobs Act, noting the agency is working on additional guidance to deal with that issue.

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Taxpayer Had No Asset to Sell, Income Was Ordinary

In the case of Pexa v. United States, Case No. 2:16-cv-00994, U.S. District Court, Eastern District of California the taxpayer was attempting to defend his treatment of termination payments for his termination payments received from Farmers Insurance as long term capital gain income.  The District Court had this matter before it on appeal from the Bankruptcy Court, which had ruled against the taxpayer.

Mr. Pexa had been involved first as an insurance agent and, eventually, a district manager for Farmers Insurance.  When he was promoted to district manager he was no longer allowed to sell insurance, rather now being in charge of recruiting, training, and supervising agents.  As such, he sold his agency to his sister in 1998, with a note payable over 20 years. 

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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.

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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.

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