Charitable Contributions Generally Must Be Reduced by Any Amount Received as Credit Against State or Local Taxes

The much anticipated proposed regulations to deal with the various credits that could be used to work around the newly imposed limitation found at IRC §164(b)(6) on deductions for state and local taxes have been released by the IRS (REG-112176-18).  The resulting rules are going to affect both the new workaround credits passed by New York, Connecticut, New Jersey and other states following the passage of the Tax Cuts and Jobs Act, as well as already existing credits in other states.

The credits in question give taxpayers a credit for all or a very significant portion of the contribution made as a direct reduction in state income taxes or property taxes.  Credits of this type had existed for years, being especially popular as credits for making contributions to organizations that provided scholarships or financial support to students attending private primary and secondary schools.

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Revised Automatic Change of Accounting Procedure Provided for Corporations Revoking S Status and Changing from Overall Cash to Overall Accrual Method

Congress anticipated that, due to the reduction of the corporate tax rate found in the Tax Cuts and Jobs Act (TCJA), certain S corporations would wish to terminate their election to become a C corporation.  Because of this, Congress added certain special rules that would apply to S corporations that revoked their status within two years of the date of enactment of TCJA.

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Shareholders Deemed to Receive Constructive Dividend Based on Payments to Partnership of S Corporations

The taxpayers in the case of Pacific Management Group et al. v. Commissioner, TC Memo 2018-131, were upset that they were being taxed twice on the income of their C corporation, once at the corporate level and a second time if the earnings were distributed to the shareholders.  But the IRS and, eventually, the Tax Court found the solution they were sold was too good to be true.

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Idaho Reminds Retailers of Affiliate Based Sales Tax Collection Requirement with a $10,000 Annual Sales Trigger

While a lot of attention has been focused on the Wayfair decision and how it can require an out of state seller to collect sales taxes on behalf of a state under certain conditions, it is important to remember that prior laws that were written to work with the Quill decision are still on the books.  As the Supreme Court noted in the Wayfair decision, Quill seemed to stand for the proposition that any physical presence in a state enabled a state to impose a sales tax collection requirement.  Thus, such statutes were sometimes drafted with a very low de minimis exception for out of state sellers, well below the $100,000 level found in South Dakota’s statute.

The state of Idaho has announced plans to continue to move forward with enforcing the state’s affiliate agreement nexus law and that the Idaho State Tax Commission has contacted 500 out of state sellers to “remind” them of the requirement to begin collecting the tax (“Some out-of-state retailers required to collect Idaho sales tax”, Idaho State Tax Commission News Release).

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Physical Presence Not Necessary for Corporation to Be Liable for Oregon Corporate Income Tax

While the Wayfair decision involved sales tax issues, the fact that the Supreme Court found that there was no need for physical presence for a business to be required to collect sales taxes suggested it was unlikely that such a test would apply for other types of taxes.  Shortly after the Wayfair decision was announced, Wells Fargo announced it was picking up an additional $481 million in state income taxes on its financial statements.[1]

Now the Oregon Supreme Court has ruled that the state’s corporate income tax does not require the physical presence of the corporation in the case of Capital One Auto Finance, Inc. v. Department of Revenue, Docket No. SC S064803.

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AICPA Writes IRS Asking for Guidance on S Corporation and Excess Business Loss Issues

The AICPA has sent a letter dated August 13, 2018 asking for immediate guidance on issues arising from the Tax Cuts and Jobs Act related to S corporations and excess business losses under IRC §461(l).  This request was developed by the AICPA S Corporation Taxation and Trust, Estate, and Gift Taxation Technical Resource Panels and approved by the AICPA Tax Executive Committee.

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IRS Has the Right to Operate Credential Program for Unenrolled Preparers

The AICPA won and then lost in the case of American Institute of Certified Public Accountants v. IRS, Case No. 16-5256, DC CA.

The AICPA had instituted a challenge to the IRS’s Annual Filing Season Program, established in Revenue Procedure 2014-42.  The opinion describes the program as follows:

The Program grants an annual “Record of Completion” to any participant who has obtained a preparer tax identification number, taken the annual “federal tax filing season refresher course,” passed a comprehension test, completed a minimum of eighteen hours of continuing education, and “consent[ed] to be subject to the duties and restrictions relating to practice before the IRS in subpart B and section 10.51 of Circular 230 for the entire period covered by the Record of Completion.” Id. § 4.05(1)-(4).

The IRS offers two incentives to participate in the Program. First, the IRS lists unenrolled agents with a Record of Completion in its online directory of tax preparers alongside attorneys, CPAs, and enrolled agents. Second, the IRS gives them the “limited practice right” to represent a taxpayer in the initial stages of the audit of a return he or she prepared; for this the unenrolled agent must have a Record of Completion for both the year of the return and the year the IRS initiated the audit. Id. § 6. Before the Program was established, all unenrolled agents had this limited practice right.

The IRS appealed District Court opinion that ruled the AICPA had no standing to bring this suit on behalf of its members.  The AICPA appealed that ruling to the DC Circuit Court of Appeals which reversed the District Court and held that the AICPA had standing to bring the suit.

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IRS Issues Proposed Regulations on Which Taxpayers May Rely on Section 199A

The much anticipated proposed regulations on the IRC §199A deduction related to qualified business income have been released by the IRS ([REG-107892-18]).  The proposed regulations give the first official insight into how the IRS is planning to administer the new provisions found under IRC §199A.

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Legal Fees Paid by S Corporation Were Not Trade or Business Expenses

The taxpayers in the case of Garcia v. Commissioner, TC Summary Op. 2018-38, recognized that expenses related to litigation that arose from an investment in stock in Randgold & Exploration Co., Ltd. (R&E) they had made would only be deductible as IRC §212 expenses.  They also recognized that a deduction under that provision would be a miscellaneous itemized deduction subject to the 2% floor imposed on all such deductions in the year in question and not deductible at all in computing their alternative minimum tax liability.

The taxpayers also were aware that if such expenses were an ordinary and necessary trade or business under IRC §162 that was incurred in the trade or business other than that of being an employee, the entire amount of the expense would be deductible in computing their adjusted gross income.  As well, the entire amount would also reduce their alternative minimum taxable income.

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IRS Releases Final Regulations Governing Partnership Representatives Under CPAR

The IRS in TD 9839 issued the final regulations outlining the rules applicable to the partnership representative under the Centralized Partnership Audit Regime (CPAR).  These regulations, found at Reg. §§301.6223-1 and 301.6223-2, outline the qualifications for a representative, how the representative resigns or is removed and the powers of the representative.

The IRS also finalized the regulations on the election to apply the CPAR rules to examinations of years beginning after the enactment of the Bipartisan Budget Act of 2015 but before January 1, 2018.  Those regulations, found at Reg. §301.9100-22, were adopted in final form without change and the temporary regulations were removed.

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IRS Releases Proposed Regulations Upon Which Taxpayers May Rely on TCJA Bonus Depreciation

Proposed regulations to implement the changes to bonus depreciation made by the Tax Cuts and Jobs Act have been released by the IRS in REG-104397-18. 

The preamble provides that taxpayers may rely upon the proposed regulations until final regulations are issued:

Pending the issuance of the final regulations, a taxpayer may choose to apply these proposed regulations to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, by the taxpayer during taxable years ending on or after September 28, 2017.

Some of the key features of the proposed regulations are discussed below.

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IRS Releases Guidance on Law Changes Related to 529 Plans

In Notice 2018-58 the IRS clarified various issues related to changes Congress made in the PATH Act and the Tax Cut and Jobs Act to §529 Education Savings Plan (a “qualified tuition program” or QTP).

Taking the oldest change first, the IRS clarified some issues related to the ability of a taxpayer to return funds to a §529 plan if the taxpayer receives a refund of qualified education expenses. As the IRS notes “This could occur, for example, if the beneficiary were to drop a class mid-semester.”

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Majority of States With a Sales Tax Plan to Start Requiring Out of State Sellers to Collect Taxes Shortly

Reports today from various sources have noted that a majority of states that impose a sales tax have now put in place requirements for out of state sellers to collect and pay over sales taxes.  The dates for beginning enforcement have ranged from July 1 (which means sellers may already be in violation) to January 1, with a number of states looking to begin collection requirements on October 1, 2018.

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Shareholders Constructively Aware Transaction Left IRS With No Way to Collect Tax, Transferee Liability Imposed

The Ninth Circuit Court of Appeals returned again to the case of Sloan v. Commissioner, CA 9, No. 16-73349, and again disagreed with the Tax Court’s finding in favor of the taxpayer.

This case began with the Tax Court’s opinion in the case of Slone v. Commissioner, TC Memo 2012-57, vacated and remanded,  CA9, 2015 TNT 110-18, No. 12-72464, 12-72495, 12-72496, and 12-72497 where the Tax Court rejected the IRS’s argument of substance over form in attempting to recast a sale of a corporation’s stock, following the sale of its assets, as a liquidating distribution to which transferee liability could attach under IRC §6901.  But, on appeal, the Ninth Circuit found that Tax Court had not properly considered the issue and sent the matter back to the Tax Court. 

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Another District Court Agrees Maximum FBAR Penalty Limited to $100,000

Yet another U.S. District Court has decided that the IRS must follow the terms of its own regulations and limit the maximum penalty for a willful violation of the FBAR rules to $100,000.  In the case of Wadhan v. United States, US DC Colorado, Case No. 1:17-cv-01287, the IRS was limited in the amount of penalty that could be assessed for the same reasons cited by the U.S. District Court for the Western District of Texas in United States v. Colliot.

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