Supreme Court to Review Case Regarding When a State May Impose Its Income Tax on a Trust

The US Supreme Court has agreed to look at under what circumstances a state can impose its income tax on a trust by granting certiorari in the case of North Carolina Dept. of Revenue v. Kaestner Family Trust, Case No. 18-457.

Last July the North Carolina Supreme Court decided that the state had no right to impose its income tax on a trust that, while it had a North Carolina beneficiary, was established in New York, did not have a North Carolina trustee and had no property in North Carolina.  (See the prior article on Current Federal Tax Developments that discussed the original case along with another case on state taxation of trusts at Two States Find Their State’s Statutes for Taxing Trusts Violate Due Process Clause.)

Image copyright Moal Olivier

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Income Verification and Certain Other User-Fee Programs Reopened by IRS

The IRS announced that the agency will reopen the Income Verification Express Program and some user-fee based program (IRS Statement - IRS Reopens IVES, Some Fee-based Programs,  These programs had been suspended during the government shutdown.

The IRS statement notes the reasons why the agency is reopening these programs:

While the IRS remains closed during the partial government shutdown, the agency recognizes the immediate hardship incurred if information is not available through the Income Verification Express Service (IVES) program as well as by taxpayers who have been unable to certify their residency in the United States for certain tax treaty benefits or by those who have been unable to obtain photocopies of tax returns.

Photo by Finn Hackshaw on Unsplash

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Syndicate Rules May Create Problems for Small Businesses and §163(j) Interest Limits

An exception to the general rule that small businesses are exempt from the §163(j) limits on the deduction for business interest applies to any entity that is a “tax shelter.”  The most likely problem to arise that many may not initially notice is that the organization might meet the definition of a syndicate.

On January 11, 2019, Tax Notes Today published a story that featured comments from Tony Nitti, CPA that discussed the potential issues that may arise with the interest deduction limitation under §163(j) and the syndicate rules.

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Second Draft Version of Publication 535 Removes Real Estate and Insurance Agents/Brokers from SSTB Category

In the full draft revision (January 7, 2019) of Publication 535, the IRS removed the language that had previously included real estate agents and insurance agents as specified service trades or businesses from the full publication.

In a previous version of the document the IRS, issued on December 19, 2018, the IRS had provided the following definition of a brokerage business:

Brokerage services, including arranging transactions between a buyer and a seller for a commission or fee such as stock brokers, real estate agents and brokers, insurance agents and brokers, (emphasis added) and intellectual property brokers;

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Filing Season Set to Begin on January 28, Refunds to Be Issued Even if Partial Government Shutdown Continues

In News Release IR-2019-01 the IRS announced that it will begin processing tax returns this year on January 28, 2019 and, despite the partial government shutdown, will issue refunds that may be due on returns filed this year.

The release notes:

As in past years, the IRS will begin accepting and processing individual tax returns once the filing season begins. For taxpayers who usually file early in the year and have all of the needed documentation, there is no need to wait to file. They should file when they are ready to submit a complete and accurate tax return.

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Discussion Draft for Technical Corrections for TCJA Posted by Representative Brady

The day before moving from Chairman of the House Ways and Means Committee to the ranking member of the committee, Rep. Kevin Brady released a discussion draft of the technical corrections to the Tax Cuts and Jobs Act.

Normally I’d not not worry much about a document issued by the ranking minority member of the committee, but in this case it does outline what a principal author of TCJA now believes needs to be fixed. Time will tell how many of these changes make it into law.

Discussion Draft of Technical Corrections for TCJA

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IRS Significantly Raises Limits On Value of Vehicles for Cents Per Mile and Fleet-Average Valuation Rule

In Notice 2019-8 the IRS has set the maximum values for 2018 for employer provided vehicles under which the cents per mile method (Reg. §1.61-21(e)) or fleet-average valuation rule (Reg. §1.61-21(d)) may apply.

The IRS is making a significant increase in this number.  The agency explains its reasoning as follows:

Consistent with the substantial increase in the dollar limitations on depreciation deductions under section 280F(a), as modified by section 13202(a)(1) of the Act, the IRS and the Treasury Department intend to amend Treas. Reg. § 1.61-21(d) and (e) to incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules effective for the 2018 calendar year. Further, the IRS and the Treasury Department intend that the regulations will be modified to provide that this $50,000 base value will be adjusted annually using section 280F(d)(7) for 2019 and subsequent years.

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IRS Issues Safe Harbor Procedure on Charitable Contribution Credits That Apply to Payments Made for a Trade or Business

(Modified to add commentary on applicability date of the safe harbor)

In Revenue Procedure 2019-12 the IRS released a set of safe harbor rules that apply to C corporations and certain passthrough entities that receive a state tax credit for amounts paid to organizations qualified under §170(c).

The procedure was issued in response to proposed regulations issued in 2018 that will apply to charitable contributions made by individuals after August 27, 2018. In such cases, an individual must reduce any charitable contribution claimed by any state tax credit received for making the contribution exceeds 15% of the contribution amount.

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Loan Financial Adviser Found Not Liable to Repay in FINRA Action Treated as Ordinary Income

In the case of Connell v. Commissioner, TC Memo 2018-213, the taxpayer (who was employed by Merrill Lynch) attempted to classify the amount of a loan that was forgiven as part of a Financial Industry Regulatory Authority’s (FINRA) decision in a dispute he had with Merrill Lynch as a capital gain.

The taxpayer had been a financial adviser since 1974.  In 2009 when he discovered that Smith Barney, with whom he was then associated, was going to be acquired by Morgan Stanley, he decided to look for other employment opportunities.  The best offer he received was from Merrill Lynch which he accepted.

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IRS Draft Publication Includes Real Estate and Insurance Agents and Brokers as SSTBs

On January 7, 2019 the IRS issued a revised draft version of the publication that returns to the position taken in the proposed regulations. Click here to go to that story.

The draft copy of the §199A  section of Publication 535 released by the IRS on December 19, 2018, in describing what is a specified service trade or business has language in it that does not track what was found in the proposed regulations released in August.  The issue involves whether “services performed in the field of brokerage services” includes services performed by real estate agents, real estate brokers, insurance agents, etc. or is limited to the brokerage of financial products.

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Final Regulations for CPAR Audit Regime Released by the IRS

The IRS has issued the final version of regulations for the new centralized partnership audit regime (CPAR) that will apply to tax returns for partnership tax years beginning after December 31, 2017. This set of final regulations completes the regulations on CPAR. Separate sets of final regulations that deal with the election out of the CPAR regime and the partnership representative had previously been released.

The proposed regulations can be downloaded from the IRS website via the following link:

TD 9844 - Final CPAR Regulations

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Revenue Procedure Released to Deal with ADS Depreciation Issues for Electing Farm and Real Property Businesses and Section 179 Changes Found in TCJA

In Revenue Procedure 2019-08 the IRS gives information on the following items following the enactment of the Tax Cuts and Jobs Act:

  • Qualified real property under IRC §179;

  • Alternative depreciation system (ADS) depreciation of real property with the new 30 and 40 year lives; and

  • Handling the transition to ADS depreciation for certain property of electing farming and electing real property businesses.

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Rental Trade or Business Example in Blue Book: Does It Really Tell Us Anything?

The Blue Book released by the Joint Committee on Taxation contains an example on page 24 that is meant to illustrate what constitutes a trade or business for purposes of §199A using a rental as the basis for the example.  Given that one of the major concerns expressed about the application of §199A is when a rental qualifies for the deduction, the insertion of this example initially appears to be welcome news.

However, at least for now, it is not clear if the example found in the Blue Book clarifies matters or simply creates additional questions.

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IRS Announces Plans to Issue Regulations for Two Special Enforcement Matters Under CPAR

In Notice 2019-6 the IRS announced its intention to issue proposed regulations to deal with “special enforcement matters” under the centralized partnership audit regime (CPAR).  Special enforcement matters are defined at IRC §6241(11), a provision added by the Consolidated Appropriations Act of 2018 as part of the technical corrections to the CPAR partnership audit regime that was created by the Bipartisan Budget Act of 2015 and which will first be effective for partnership tax years beginning in 2018.

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S Corporation Providing Management Services to Marijuana Dispensary Found to Be Trafficking in Controlled Substances for §280E Purposes

A business does not have to have title to marijuana to be engaged in trafficking in controlled substances, triggering the denial of deductions under IRC §280E, the Tax Court ruled in Alternative Health Care Advocates et al. v. Commissioner, 151 TC No. 13.

IRC §280E bars deductions, other than those for the cost of sales, to businesses that traffic in items considered controlled substances by federal law.  The fact that certain states have legalized the sale of marijuana in some situations does not change that federal tax result.

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Rules Proposed to Implement Requirement to Treat Sale of Partnership Interests as Effectively Connected with US Trade or Business by Foreign Partners

Proposed regulations dealing with the sale of a partnership have been issued by the IRS (REG-113604-18) to implement changes made by Congress in the Tax Cuts and Jobs Act. Specifically, TCJA made the following changes to deal with foreign holders of partnership interests:

  • Requiring foreign partners to treat the sale of a partnership interest as “effectively connected” with a U.S. trade or business if a sale of the partnership’s assets would have created such effectively connected income (overturning the result in Grecian Mining v. Commissioner, 149 TC No. 3); and

  • Requiring the buyer of a partnership interest to withhold 10% of the purchase price unless the buyer certifies the buyer is not a foreign person.

  • These proposed regulations deal only with the first category of transactions--rules on withholding are not in this of regulations, though the preamble notes that Treasury and the IRS “intend to issue guidance under section 1446(f) expeditiously.”

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Joint Committee on Taxation Staff Releases Their Explanation of the Tax Cuts and Jobs Act (The Blue Book)

The Joint Committee on Taxation has released the General Explanation Of Public Law 115-97, better known as the Blue Book on TCJA (JCS-1-18).

The 457 page document contains the staff’s explanation of the provisions in last year’s Tax Cuts and Jobs Act.  Blue Books for prior laws have often been referenced and consulted by the IRS in developing guidance, as well as being referred to by advisers when dealing with matters not yet covered by IRS guidance.

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