Despite Issues With Records, Taxpayer Found to Be a Real Estate Professional

The key factor to sustaining a taxpayer’s claim to be a real estate professional in cases before the Tax Court generally comes down to whether the taxpayer has sufficient and reliable records to back up their activity.  In the case of Birdsong v. Commissioner, TC Memo 2018-148 the taxpayer’s records were found to be sufficient to sustain her contention that she was a real estate professional.

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Math Error Procedures Can Be Used After Return Processed and Refund Issued

In a Project Manager Technical Advice addressed to the IRS Taxpayer Advocate and the Commissioner of the Wage and Investment Division, the Chief Counsel’s office concluded that the IRS can use the math authority to correct errors in the earned income tax credit, child tax credit, additional child tax credit and the American opportunity tax credit even if the return has already been processed and a refund issued (PMTA 2018-017).

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§1291(a) Gains Allocated to Prior Years Are Not Included in Determining Applicability of Six-Year Statute

In the case of Toso, et al v. Commissioner, 115 TC No. 4, the Tax Court considered issues related to passive foreign investment company (PFIC) gains.  Specifically, the Court looked at how gains taxed under the rules of IRC §1291(a) will be counted for purposes of determining if there is a substantial omission from gross income under IRC §6501(e)(1)(A)(i) that would allow for a six-year statute of limitations.

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South Dakota Governor Proposes Bills to Begin Requirement of Collection of Tax by Out of State Sellers and Marketplaces on November 1

As states scramble to begin collecting sales taxes after the Supreme Court’s decision in the case of South Dakota v. Wayfair, one state that has not yet been able to begin collecting the tax is, of all things, the state of South Dakota itself.  Those who have read the Supreme Court’s decision will remember that the decision did not actually formally approve South Dakota’s law and order the defendants to pay the taxes.  Rather, the case was sent back down to South Dakota state courts to consider other potential objections.

In order to get around this problem, the Governor of the State of South Dakota has called a special session of the state legislature for September 12 and issued two draft pieces of legislation to allow the state to begin collecting taxes from remote sellers beginning on November 1, 2018.

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Withdrawal Under Threat of Levy Is Subject to Early Distribution Tax

Close only counts in horseshoes and hand grenades as the saying goes--and tax relief provisions are in neither category as the taxpayer in the case of Thompson v. United States, Case No. 3:18-cv-01675, US DC ND CA discovered.  The problem arose over an exception to the 10% premature distribution tax of IRC §72(t) for distributions made on account of a levy under IRC §6331.[1]

The exception, found at IRC §72(t)(2)(A)(vii) provides the early distribution tax does not apply “made on account of a levy under section 6331 on the qualified retirement plan.”

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DOL and IRS Ordered to Consider Modifications to Retirement Plan Rules

On August 31, 2018 the President signed an executive order entitled “Executive Order on Strengthening Retirement Security in America” that was aimed at increasing the number of employees being offered retirement programs via their employer and to slow the required distributions from such plans.  The order contains instructions for the Department of Labor and Treasury Department to consider various revisions to requirements related to qualified retirement plans.

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Seismic Survey Costs Are Costs to Be Amortized, Not Intangible Drilling Costs, per IRS Memorandum

In CCA 201835004 the question was posed regarding whether seismic surveys information obtained to determine the placement of offshore gas and oil development wells should be treated as geological and geophysical costs, amortizable under §167(h), or as intangible drilling costs, deductible under IRC §263(c).

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Late Rollover Allowed For Taxpayer Who Had Previously Relied on Spouse for Financial and Tax Matters

In PLR 201835017 the IRS granted a taxpayer a waiver of the 60-day deadline to roll over a distribution she received from a qualified retirement plan.  She received this relief because she claimed she had previously relied on her spouse to handle all tax and financial matters, but the couple had separated during the 60-day period.

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IRS Warns Professionals About Requirement for Data Security Plan

In News Release IR-2018-175 warned tax professionals that a failure to prepare a written data security represents a violation of the FTC’s Safeguards Rules and the that the IRS may treat a violation of the FTC Safeguards Rule as a violation of the standards for authorized IRS e-file providers under Revenue Procedure 2007-40.

The IRS Electronic Tax Administration Advisory Committee (ETAAC) members noted in June that they believe fewer than half of all tax professionals are aware of the FTC rule and have written plans in compliance with the rule.

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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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