Proposed Regulations Issued for ESBTs with NRA Potential Current Beneficiary Subject to Grantor Trust Rules

The IRS has moved to plug a potential loophole created when Congress changed the law in the Tax Cuts and Jobs Act (TCJA) to allow an electing small business trust (ESBT) to have a nonresident alien (NRA) potential current beneficiary (PCB).  In proposed regulations REG-117062-18 the IRS provides that if such an NRA would be treated as the owner of trust corpus under the grantor trust rules for such a trust, the grantor will not be treated as the owner of the S corporation portion of the ESBT.

In the preamble to the proposed regulations, the IRS points out that the committee reports related to the TCJA had stated that allowing NRAs to be PCBs of ESBTs did not pose a risk that the S corporation income would not be subject to U.S. tax, since tax is imposed on the trust and not the beneficiary for S corporation income when shares are held by an ESBT.

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Ninth Circuit Panel Holds Taxpayers Cannot Rely on Common Law Mailbox Rule to Prove Timely Filing of Documents

The Ninth Circuit Court of Appeals rejected a taxpayer’s attempt to use the common law mailbox rule to prove that an amended return the taxpayer claimed to have mailed to the IRS four months before the deadline for filing the claim was timely filed.  In Baldwin, et. ux. v. United States, CA9, No. 17-55115; No. 17-55354 the Court found that the IRS’s 2011 regulations under IRC §7502 take precedence over the Ninth Circuit’s prior holding that taxpayer could make use of the common law mailbox rule to prove timely filing in Anderson v. United States, 966 F.2d 487, 490 (9th Cir. 1992).

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Self Employed Health Insurance Deduction Available to Family Members of S Corporation Shareholder

In Chief Counsel Advice 201912001 the IRS held that family members, who while not directly holding shares in an S corporation, are deemed to be 2% shareholders under the rules of §318 are allowed to claim the self-employed health insurance deduction under IRC §162(l) if they otherwise qualify.

Under IRC §1372, individuals holding 2% or more of the stock of an S corporation are treated as if they were partners for purposes of applying the employee fringe benefit income tax rules.  IRC §1372(b) expands that definition of shareholders to include those who would be deemed to hold such shares by attribution under IRC §318.

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PMTA Outlines Interaction Between $10,000 SALT Cap and Home Office Deduction

In a Program Manager Technical Advice that must be parsed carefully (PMTA 2019-001), the IRS discusses the interplay between the office in home deduction under IRC §280A and the $10,000 cap on state and local taxes under IRC §164(b) added by the Tax Cuts and Jobs Act (TCJA).  If the reader is not careful, he/she may jump to a very taxpayer unfriendly conclusion.

The PMTA comes to the following conclusion that may alarm readers at first:

If a taxpayer’s total individual state and local taxes meet or exceed the $10,000 limitation of §164(b)(6), or if the taxpayer chooses to take the standard deduction instead of itemizing deductions, none of the taxpayer’s state and local taxes relating to taxpayer’s business use of the home are included as expenses under §280A(b). If a taxpayer’s total individual state and local taxes do not meet or exceed the $10,000 limitation of §164(b)(6), and the taxpayer does not opt to take the standard deduction in lieu of itemized deductions, then the taxpayer can include as expenses under §280A(b) the business portion of the state and local taxes up to the difference between the limitation under §164(b)(6) and the amount of individual state and local taxes that the taxpayer actually deducted under §164.

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AICPA Suggests Changes Be Made to Definition of a Trade or Business Found in Instructions to Form 461

The AICPA Tax Executive Committee has sent a letter to the IRS suggesting changes be made to the instructions for Form 461, Limitation on Business Losses.  The form is used to compute the limitation on business losses that was added by IRC §461.

Generally, under IRC §461 a taxpayer is limited to net business losses in excess of business income of $250,000 in a single year ($500,000 for a married couple filing a joint return).  The AICPA comment addresses a concern that the definition of a trade or business in the instructions may be too limiting.  The current definition in the regulations reads as follows:

An activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.

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IRS Sends Proposed Regulations on §199A(g) to OIRA

Although we have been through proposed regulations and final regulations issued along with some additional proposed regulations under IRC §199A, the IRS had not yet issued regulations on one portion of the section—IRC §199(g), a provision added as part of the grain glitch fix by the 2018 Consolidated Appropriations Act.

The change provided agricultural cooperatives with a deduction very similar to the old law IRC §199 qualified domestic production activity deduction.  Now the IRS has now sent proposed regulations under IRC §199(g) to the Office of Information and Regulatory Affairs of the Office of Management and Budget (RIN 1545-BO90).

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Second Circuit Reverses Tax Court, Removing "Black Hole" for Claiming Refunds

The Second Circuit Court of Appeals eliminated the six month “black hole” that the Tax Court believed existed for refunds of taxpayers who failed to timely file a return when it reversed that Court’s decision in the case of Borenstein v. Commissioner, Case No. 17-3900.

The details of the original case were discussed in our blog post in August 2017 when the original decision was issued (“Taxpayer’s Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice”).  The Tax Court found that IRC §6512(b)(3), added by Congress in the Taxpayer Relief Act of 1997, created a six month “black hole” during which, if no return had originally been filed and the IRS issues a notice of deficiency before such a return is filed, the taxpayer would be barred from claiming a refund by filing a return following the issuance of the notice.  The problem is triggered if the taxpayer, while not filing a return, had filed for an extension of time to file such return.  The six month extension created, in the view of the Tax Court, a six month black hole for such refunds.

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Fifth Circuit Remands Case for Determination if CPA Was Negligent in Not Determining Efiled Tax Return Had Not Been Accepted

Electronic filing of tax returns is a very different process from mailing in a tax return.  But in the case of Haynes v. United States, 119 A.F.T.R.2d 2017-2202 the Federal District Court for the Western District of Texas applied the Supreme Court ruling in United States v. Boyle, 469 U.S. 241, 245 (1985) to deny relief from late filing penalty to a taxpayer who had been told by his tax preparer that his electronically filed return had been accepted—but it hadn’t.

The Fifth Circuit Court of Appeals reversed that decision in this case, but did so based on a rationale that, at least for now, did not require the appellate panel to determine if Boyle should still be strictly applied (Haynes v. United States, Case No. 17-50816).  The panel decided that, based on the facts, it was not clear if the CPA had been negligent in not determining the return had truly been accepted—and if the CPA was not negligent, neither was the taxpayer, thus creating reasonable cause.  So the panel sent the case back to determine if there was such negligence.

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IRS Confirms Treatment of State Tax Refunds on 2019 Tax Returns

The IRS has issued Revenue Ruling 2019-11 which outlines how state and local tax refunds will be treated when they arise from years subject to the $10,000 cap on deducting personal state and local income and property taxes imposed by IRC §164(b)(6) added by the Tax Cuts and Jobs Act (TCJA).  The treatment agrees with the treatment outlined in our March 1, 2019 article on the matter (“Tax Benefit Rule of §111 Should Shield State Tax Refunds For Taxpayers Over the SALT Limit”, Current Federal Tax Developments website, March 1, 2019).

As was noted in the referenced article, the tax benefit rule of §111(a) requires determining the amount of such deduction that was later refunded could have been removed from the prior year’s return with no tax effect.  That could be true to the extent:

  • The tax deduction for the prior year was capped at $10,000 by IRC §164(b)(6).  In that case, any refund up to the amount of the disallowed tax deduction on the original return would not generate a tax benefit and, under IRC §111(a), would not be subject to inclusion in income in the received; or

  • Had the refunded amount not been deducted on the original return, the standard deduction would have exceeded the itemized deduction.  In that case, no tax benefit is generated by the refund that is in excess of the amount of the total allowed itemized deductions on the original return in excess of the standard deduction.

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EINs Will No Longer Be Allowed for Responsible Party in Applying for Identification Numbers Beginning May 13

The IRS has announced there will be changes to the process to issue employer identification numbers beginning on May 13 in New Release IR 2019-58.  The IRS indicated these change are meant to enhance security.

Entities will no longer be able to use their own EIN as the identification number for the responsible party and the change will apply to both EINs obtained online and via filing a paper Form SS-4.  The release describes the responsible person as follows:

Generally, the responsible party is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. In cases where more than one person meets that definition, the entity may decide which individual should be the responsible party.

Copyright : yukipon / 123rf.com

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Credit for GM Electric Vehicles Will Begin to Phase-Out

Another manufacturer has sold enough qualified electric vehicles[1] to begin phasing out the tax credit for purchasing the manufacturer’s vehicles.  In Notice 2019-22 the IRS announced that the credit for qualified plug-in electric vehicles sold by General Motors would be phased down beginning April 1, 2019. 

Before April 1, 2019, the credit for the affected vehicles was $7,500.  From April 1, 2019 through September 30, 2019, buyers of the qualifying General Motors vehicles will receive 50% of the otherwise allowable credit ($3,750).  For the period from October 1, 2019 through March 31, 2020, buyer will receive 25% of the otherwise allowable credit ($1,875).  No credit will be allowed for purchases of vehicles after April 1, 2020.

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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.

Image by By RuthAS - Own work, CC BY 3.0

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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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