The IRS issued emailed advice discussing Certified Professional Employer Organizations (CPEO) and self-employed individuals that has general information on the issue of a partner or proprietor being as an employee when such an organization is used.  ECC 201916004 restates the IRS’s view that such individuals generally cannot be treated as an employee of the unincorporated entity they hold an ownership interest in.

First, the ruling clarifies that IRC §3511, which generally provides protection for the taxes that end up not being deposited by a CPEO, does not apply to self-employed individuals:

The reporting of amounts paid to self-employed individuals is provided for in section 6041. CPEOs must report remuneration they pay to self-employed individuals (within the meaning of section 6041 and the regulations thereunder) in accordance with the rules under these and other applicable provisions. Section 3511(f) of the Code provides that a self-employed individual is not a work site employee with respect to remuneration paid by a CPEO to the self-employed individual. Section 3511(c) provides that a CPEO is not treated as an employer of a self-employed individual. Consistent with these two provisions, section 31.3511-1(f)(2) of the proposed regulations provides that section 3511 does not apply to any self-employed individual.

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.

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.

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.

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.

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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.