Partnerships Required to Add Tax Basis Capital Information to Partner K-1s Given Until March 15, 2020 to Provide the Information to the IRS

An earlier article on this site discussed the addition to the 2018 Form 1065 instructions that required partnerships to provide tax basis capital account information for partners whose tax basis capital would be negative and which are reporting partners’ capital on the K-1 on basis other than the tax basis (IRS Adds Requirement for Tax Basis Partner Capital Information Reporting to Form 1065 Instructions, February 15, 2019).

Certain partnerships complained to the IRS that they will not be able to provide that information with this year’s K-1s, at least not without delaying the issuance of K-1s to shareholders significantly.  In response to these complaints, the IRS in Notice 2019-20 has provided a temporary reprieve to such partnerships.

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IRS No Longer Has Immediate Plans to Issue Regulations on Defined Benefit Plan Post-Retirement Lump-Sum Distribution Windows

The IRS has announced it no longer intends to issue amended regulations under IRC §401(a)(9) in Notice 2019-18.  The IRS has previously announced in Notice 2015-49 that it had intended to revise the minimum distribution regulations to address the practice of offering a temporary lump sum payment option to beneficiaries of a defined benefit pension plan who were currently receiving annuity payments.

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Treasury Announces Revision to Use of Temporary Regulations and Notices

The Treasury Department released a policy statement (Policy Statement on the Tax Regulatory Process) that indicated the agency will rely less on temporary regulations and subregulatory guidance (such as Notices) than it has in the past.

The statement begins by noting the IRS will continue to use the notice-and-comment process for both interpretative and legislative regulations even though the Administrative Procedures Act (APA) exempts interpretive regulations from that requirement.  The policy explains:

This process allows the public to participate before any final rule becomes effective and ensures that all views are adequately considered. It also enables the public to apprise the government of relevant information that the government may not possess or to alert the government to consequences that it may not foresee.

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Gambling Losses Linked to Prescribed Drug Were Not a Casualty Loss

The Tax Court took a look at what it takes to create a casualty loss in the case of Mancini v. Commissioner, T.C. Memo. 2019-16.  In this case the taxpayer argues that his gambling losses were a casualty loss since a drug he had been prescribed caused him to compulsively gamble.  While the court agreed he had proven the causal link between the drug and his gambling, it also found that his loss did not meet the requirements under the IRC to be a treated as a casualty loss.

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Recipients of Sexual Harassment Settlements Will Be Allowed to Deduct Legal Fees Even if Confidentiality Clause is in the Agreement

The IRS has published on their website a frequently asked question page dealing with a deduction for legal fees under IRC §162(q) (Section 162(q) FAQ).

For those who may not have memorized the Internal Revenue Code, IRC §162(q) is a provision added by the Tax Cuts and Jobs Act.  This provision provides:

(q) Payments related to sexual harassment and sexual abuse No deduction shall be allowed under this chapter for—

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

(2) attorney’s fees related to such a settlement or payment.

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IRS Did Not Exceed Its Authority in Charging a Fee to Issue and Renew PTINs

The Court of Appeals for the District of Columbia reversed a prior lower court ruling that barred the IRS from charging a fee to issue or renew Preparer Tax Identification Numbers (PTINs) in the case of Montrois, et al v. United States, Case No. 17-5204, CA DC.

In June of 2017 the U.S. District Court for the District of Columbia ruled in this case that the IRS, following a ruling in the case of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), lacked the authority to impose a fee on tax preparers to obtain and renew PTINs.  The original case argued that the fee violated the provisions of the Independent Offices Appropriations Act that the IRS used to justify the fee.

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Fifth Amendment Does Not Allow Taxpayer to Avoid Burden of Proving Business Did Not Traffic in Controlled Substances

The Tenth Circuit denied a taxpayer’s attempt to force the IRS to bear the burden of proof that an LLC operating as an S corporation was trafficking in a controlled substance that would lead to a denial of most business deductions per IRC §280E in the case of Feinberg, et at v. Commissioner, Case No. 18-9005, CA10.  The taxpayer argued that, despite the fact that the burden of proof generally falls on the taxpayer to prove the right to a deduction, to do so in this case would involve a violation of the taxpayers’ Fifth Amendment privilege.

This was the second trip up to the Tenth Circuit for the taxpayers in this exam.  While their first trip was ultimately successful in the eventual result, if not 100% in the decision, this second trip was not fruitful for the clients.

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Tax Benefit Rule of §111 Should Shield State Tax Refunds For Taxpayers Over the SALT Limit

This week a number of questions arose in different online tax discussion forums regarding the potential taxability of a state income tax refund for taxpayers where the taxpayers had their state tax deductions limited by the $10,000 limit on such deductions under IRC §164(b)(6).  The question was whether a portion of the refund equal to the refund amounts times the ratio of income taxes to total state and local taxes subject to the $10,000 limit will be considered taxable in 2019.

Some tax software have been providing reports of potentially taxable refunds based on the ratio calculation. The rumors suggest that at least some sources at the IRS have indicated that this prorated refund calculation is what should be reported in 2019. But is such a calculation correct?

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At the Last Minute the IRS Grants Extension of Time For Farmers and Fisherman to File and Pay Tax Under Special Estimated Tax Penalty Rule

Individual farmers and fishermen are subject to special rules under IRC §6654(i)(1)(A) & (B) that exempt them from an underpayment penalty under §6654 if they make a single estimated tax payment in the amount due by January 15 of the year following the year the taxes are due.  However, under IRC §6654(i)(1)(D) these individuals get a second chance if they miss that January 15 date for their one estimate.  They are still not subject to an underpayment penalty if they file their return by March 1 of the year following the year in question and pay the resulting tax.

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Supervisory Review Not Required for Substantial Underpayment Penalty Generated When Taxpayer Failed to Respond to Unreported Income Notice

The case of Walquist v. Commissioner, 152 TC No. 3, looks at first glance to be just a run of the mill tax protestor case, as the Court noted the taxpayer, in response to an automated IRS notice regarding unreported income, filed a Tax Court petition that contained the following:

On November 27, 2017, petitioners submitted to this Court a purported petition that consisted of a copy of the notice of deficiency, on each page of which they had written “REFUSAL FOR CAUSE.” Petitioners appended various documents containing assertions commonly advanced by tax protesters, including assertions that U.S. currency is not “lawful money” and that they “have no obligations or liability to even file a return” because they “intend to only handle legal money.” Petitioners also advanced the more novel (but equally frivolous) argument that this Court should garnish the wages of the Secretary of the Treasury for an amount equal to petitioners' outstanding tax liability.

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Can an LLC Operating a Shopping Center with Triple Net Leases for All Tenants Give Rise to Qualified Business Income?

This article  is based on my response to a question raised on an online forum.  The person asking the question recognized the issue, but because I’ve encountered some advisers who have come to believe the safe harbor is “the” test for rentals I wanted to clarify matters a bit.  Hopefully this helps.

Facts: An LLC operates a shopping center with many tenants.  While the leases are all triple net leases, the manager spends over 250 hours a year dealing with items related to the center, including collecting rents, paying the bills, finding new tenants, dealing with vendors and keeping the records of the operation.  The operation doesn’t qualify for the safe harbor of Notice 2017-07 due to being a set of triple net leases.  Does that mean it cannot be a trade or business for Section 199A purposes?

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State Law Providing Exempton from State Taxation of State But Not Federal Law Enforcement Pensions Held to Illegally Discriminate Against Federal Employees

The U.S. Supreme Court found to be illegal a West Virginia state tax break that provided an exemption from state tax for retired state law enforcement employees but did not offer the same benefit to retired federal law enforcement employees.  The Court unanimously ruled in the case of Dawson v. Steager, Case No. 17-419 that the West Virginia court was in error finding that the law was acceptable since it applied only to a narrow class of retirees and did not intend to discriminate against federal marshals.

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Owners of Shares in Housing Cooperatives May Escape $10,000 Limit on Tax Deduction Due to Drafting Error in TCJA

In Politico’s Morning Tax on February 21, 2019 a potential loophole regarding property taxes paid by owners of units in housing cooperatives is discussed.  As the article notes:

So why might living in a co-op give taxpayers a way around the SALT cap? In short, co-op owners don’t pay a property tax, or actually buy a property as it’s usually understood, as Pro Tax’s Brian Faler reported. That matters because lawmakers bypassed the section of the tax code that does allow co-op owners to deduct their version of property taxes — essentially a fee paid to the corporation that owns the property, which then pays the taxes — when drafting the TCJA.

The article does caution it’s “not apparent whether co-op owners can assume they’re in the clear, at least for now, on property taxes.”  But what exactly is the issue?

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Does Having UberEats in the Area Put Employer Provided Meals Into the Employee's Wages? The IRS Thinks It Does in Many Cases.

The IRS indicated that the existence of expanded delivery options for meals in an area may eliminate the ability of an employer to claim that meals are provided to employees for the convenience of the employer in TAM 201903017.  While the TAM deals with a number of issues in its 50 pages, the consideration of the impact of delivery services such as UberEats is something new in this area.

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IRS Acquiesces in Result Only in Hockey Team Meals Case

Although the case arguably has been rendered effectively moot by the Tax Cuts and Jobs Act, the IRS did announce in Action on Decision AOD 2019-01 that it acquiesced in result only in the case of Jacobs v. Commissioner, 148 T.C. No. 24 (2017).

The Jacobs case, which we detailed when the case was originally released (Full Deduction Allowed to Hockey Team for Meals Provided to Players at Away Games, 6/20/17), held that a profession hockey team that provided meals for its players in areas leased from local hotels for away games qualified as meals provided at an employer’s eating facility under §132(e).  Based on the law in effect that time, such employer meals provided at an employer’s eating facility qualified for a 100% deduction for the employer and no inclusion in income for the employee.

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IRS Expands Cases Where S Shareholder Must Attach Basis Computation and Adds Check Box to Schedule E

Glen Birnbaum, CPA pointed out on Twitter on February 15, 2019 an item referenced in RIA’s Federal Tax Update the same day regarding a new check box has appeared on Schedule E of Form 1040 that applies to S corporation shareholders.  The IRS posted information about this change on its website in an article titled “Clarification on line 28, column (e), of Schedule E (Form 1040)” on February 6, 2019.

The page provides:

As stated in Part II of the Schedule E (Form 1040), a taxpayer who owns an interest in an S corporation and reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from the S corporation must check a corresponding box under line 28, column (e), and attach a computation detailing their S corporation basis. The discussion about basis rules for S corporations in the Instructions for Schedule E (Form 1040) for Parts II and III does not limit or modify this requirement.

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IRS Adds Requirement for Tax Basis Partner Capital Information Reporting to Form 1065 Instructions

Note: On March 7 , 2019 the IRS provided temporary relief for partnerships unable to timely provide this information. See our article at this link.

An article published in Tax Notes Today on February 15[1] highlighted a change in the 2018 Form 1065 instructions that will impact partnerships reporting partners’ capital accounts on Schedule K-1 using other than tax basis capital account reporting.

The new instructions, found in the instructions for Schedule K-1, Item L in the Form 1065 instructions at page 30 reads as follows:

If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1 in Item L (that is, GAAP, 704(b) book, or other), and tax basis capital, if reported on any partner's Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, such partner's beginning and ending shares of tax basis capital. This is in addition to the required reporting in Item L of Schedule K-1.

For these purposes, the term “tax basis capital” means (i) the amount of cash plus the tax basis of property contributed to a partnership by a partner minus the amount of cash plus the tax basis of property distributed to a partner by the partnership net of any liabilities assumed or taken subject to in connection with such contribution or distribution, plus (ii) the partner's cumulative share of partnership taxable income and tax-exempt income, minus (iii) the partner's cumulative share of taxable loss and nondeductible, noncapital expenditures.

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Safe Harbor for Luxury Autos and Bonus Depreciation Provided by IRS

The IRS addressed a quirky interaction of bonus depreciation under IRC §168(k) and the luxury auto rules under IRC §280F in Revenue Procedure 2019-13. Absent this safe harbor method, taxpayers who opted not to elect out of §168(k) bonus depreciation for an automobile limited by §280F would find any basis in the automobile in excess of $18,000 would not be deductible until the end of the standard recovery period, which would begin in the seventh year after acquiring the vehicle.

Under the Tax Cuts and Jobs Act, a taxpayer is allowed to deduct 100% of the cost of qualifying assets in the year the asset is placed in service for assets placed in service between September 27, 2017, and January 1, 2023.[1] However, under the provisions most often referred to as the "luxury auto rules" a taxpayer's depreciation and/or §179 deduction for covered vehicles is capped at $10,000 for the first year.[2] This amount is adjusted annually for inflation.

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