OIRA In the Process of Reviewing Final SALT Workaround Regulations and Related Notice

The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB) announced that they are in the process of reviewing final regulations for the state and local tax workarounds and a separate notice related to §§170(c) and 164. 

OIRA has been reviewing all IRS regulations, both proposed and final, since last year.  However, this is the first time that OIRA has announced a review of a notice.  This is also interesting since the IRS also recently issued a policy statement indicating a reduced use of subregulatory guidance, which has some questioning what this particular review might mean, if anything, about the new IRS policy.

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Final Regulations Implementing 2010 Changes in Reportable Transaction Disclosure Rules Issued

Final regulations have been issued by the IRS on the penalty found at IRC §6707A for failure to disclose a reportable transaction (TD 9853).  These regulations clarify the application of these rules due to changes made in the Small Business Jobs Act of 2010.  That Act modified the calculation of the penalty, making it somewhat less draconian than the fixed dollar penalties found in the original provision.

IRC §6707A imposes penalties for failing to report certain transactions that are either treated as reportable transactions as defined by Reg. §1.6011-4 or are treated as listed transactions due to being identified by IRS as a tax avoidance transaction for purposes of IRC §6011

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Proposed Regulations Issued Regarding Transfer for Value and Reportable Life Insurance Transactions

The IRS released proposed regulations on the rules added for reporting certain transatctions related to life insurance policies under IRC §6050Y and changes made to the transfer for value rules found at IRC §101(a)(3) in REG-103083-18.  The provisions were added to the law by the Tax Cuts and Jobs Act (TCJA) in late 2017.

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Special 2018 Underpayment Penalty Relief Expanded to Apply to Those That Paid in At Least 80% of Total Tax Due

The IRS has revised the relief from the underpayment of estimated tax penalty for 2018 returns it first provided in Notice 2019-11, now granting relief to taxpayer that paid in at least 80% of the total tax actually due for 2018, up from 85%.  Notice 2019-25 also provides information on how taxpayers who may have already filed and paid the penalty may obtain relief.

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Tax Court Finds Pilot Did Not Have a Profit Motive in Aircraft Business

A taxpayer was denied current deductions and a net operating loss arising from his claimed business related to a restored vintage World War II fighter plane in the case of Kurdziel v. Commissioner, TC Memo 2019-20.  The Tax Court agreed with the IRS that the losses were barred by what is referred to as the hobby loss rule under IRC §183.

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IRS Suspends Two Active Trade or Business Rulings Under §355 Pending the Results of a Study

The IRS announced that it is taking the relatively rare step of suspending two prior revenue rulings in Revenue Ruling 2019-09.  The ruling being suspended are Revenue Rulings 57-464 and 57-492 which relate to the active trade or business requirement of IRC §355.

Internal Revenue Manual Section 32.2.2.8 (08-11-2004) defines what suspended status is for a Revenue Ruling:

9. Suspended is used only in rare situations to show that previously published guidance will not be applied pending some future action, such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

Thus, suspension is not a revocation of the rulings.  Presumably this leaves the door open for the IRS to determine that one or both rulings will be put back in force unchanged at the end of the study.  But, more likely, the agency doesn’t want to imply that both of the situations describe cases where it will be held there clearly is an active trade or business once the study is complete.

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Filing Forms 2848 and 4868 Did Not Serve as Proper Notice of Taxpayers' New Address

The IRS is under obligation only to mail notices to the taxpayer’s last known address in order to start the clock running on the time period to take specific actions.  In the case of Gregory v. Commissioner, 152 TC No. 7, the Tax Court ruled that neither Form 2848, Power of Attorney and Declaration of Representative, nor Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, served to change a taxpayer’s last known address.

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No Harm, No Foul Does Not Create Reasonable Cause for Late Filing of S Corporation Return

The taxpayer in the case of ATL & Sons Holding Inc. v. Commissioner, 152 TC No. 8, sought to have the Tax Court order the IRS to stop pursuing a failure to file penalty imposed on the taxpayer’s S corporation.  The taxpayer argued that there had been no harm to the government since the shareholders had timely filed their personal returns and reported the income.  While they may not have applied for an extension of time to file the S corporation return, they had filed for such an extension on their personal return and filed within the time period for such filing.

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MAGI for Purpose of the Premium Tax Credit Includes Social Security Benefits Excluded from Income Under a §86(e) Election

The Tax Court determined that a taxpayer who elects to exclude a lump sum payment of social security from gross income under IRC §86(e) nevertheless must include that amount in the taxpayer’s modified adjusted gross income (MAGI) for computing repayment of the advance premium tax credit under IRC §36B.  The case of Johnson v. Commissioner, 152 TC No. 6, involved a taxpayer who had received just such a lump sum payment of social security in a year in which he had also received advanced premium tax credits to reduce his health insurance premiums.

IRC §36B provides for advanced payment of premium tax credits that are available to qualified individual purchasing insurance on health insurance exchanges.  The advance credit is to be reconciled at the end of the year to the amount of credit the taxpayer qualifies for based on the taxpayer’s §36B MAGI.  That reconciliation takes place on Form 8962, Premium Tax Credit, which is filed with the taxpayer’s individual income tax return.

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§199A Signed Safe Harbor Statement Must be Attached as a PDF to an E-Filed Return

If a taxpayer is electing making the safe harbor election for a real estate enterprise under Notice 2019-07 and electronically filing his/her return, a signed copy of the election must be submitted as a PDF attachment to e-filed return reports Tax Notes Today.  In an article in the March 11, 2019 edition of Tax Notes Today, Eric Yauch reports that IRS Office of Chief Counsel Attorney Robert Alinsky confirmed that requirement while speaking at the Federal Bar Association Conference in Washington.[1]

Notice 2019-07, issued concurrently with the final regulations under IRC §199A, provided a draft revenue procedure that allowed a safe harbor election to treat a real estate enterprise as a trade or business which would qualify for the deduction of a qualified business income amount under IRC §199A.  The Notice provided that taxpayers may rely on the proposed revenue procedure until the final revenue procedure is issued by the IRS.

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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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