LLCs were created by the state of Wyoming years ago to be an entity that the IRC had no way to classify.  That status has continued to today—an LLC is not an entity type for federal income tax purposes, even though it is an entity type for most other purposes under state law. Eventually the IRS decided to deal with the entity type issue by using what we refer to as a “check the box” election.

The check the box regulations, found at IRC §301.7703-3, allow the taxpayer to choose between certain entity types based on the number of equity holders of the LLC.  In essence, we pretend, for federal tax purposes, that the LLC is really some other entity.

After the IRS’s first attempt at revising Form W-4 to take into account the changes in Tax Cuts and Jobs Act was withdrawn after facing criticism the resulting form was too complex, the IRS has returned with another draft Form W-4. The new draft form will try again to take into account the substantial changes found in the Tax Cuts and Jobs Act in a concise form to help employees arrive at a proper amount of withholding. (“IRS, Treasury unveil proposed W-4 design for 2020,” IR-2019-98, IRS website, May 31, 2019)[1]

The new W-4 does away with the concept of withholding allowances entirely, since personal exemptions no longer a “central feature of the tax code” in the words of the news release.  Rather the form will attempt to provide information that the employer will use to arrive at a withholding number.

In the case of Breland v. Commissioner, TC Memo 2019-59[1] (May 29, 2019) two different issues were decided by the Tax Court:

• Did the taxpayers properly substantiate the basis of property sold by producing only a Form 8824 from a prior return when the property was obtained as part of a like-kind exchange?

• What was the actual sales price and cancellation of debt resulting from the foreclosure sale of the taxpayer’s properties?

A taxpayer who dedicated his life to evangelization, using normal interactions in life to open discussions regarding his religious beliefs to all around him, found that the Tax Court did not agree with his view that this made his various expenses incurred for meals, travel and other items were automatically deductible. (Oliveri v. Commissioner, TC Memo 2019-57, May 28, 2019)[1]

Courts prefer to decide issues on narrow grounds if they can, and a failure in completing Form 8283, which Forbes online contributor called an error that “would be a review comment that a senior accountant with three years experience would have given an associate,”[1] was the issue the Tax Court had focused on to deny a $33 million deduction to a partnership in the 2017 case of RERI Holdings I LLC v. Commissioner, 149 TC No. 1.

The Sixth Circuit did not come to the rescue of the taxpayer in this case, agreeing with the Tax Court that the failure to include basis information on the tax return was sufficient to allow a denial of the entire deduction. (Jeff Blau, et al v. Commissioner, USCA DC, Case No. 17-1266)[2]

Update: Shortly after this article was posted, the House voted 417-3 to pass the SECURE Act with the Kiddie Tax fix described in this article. The Wall Street Journal indicates that a GOP aide informed them that the Senate plans to vote on this just passed House version of the Bill, rather than vote on the similar bill that chamber was considering.[1]

It’s always risky to put much stock in a bill in Congress that hasn’t yet passed a single chamber, but it’s beginning to look like the SECURE Act (“Setting Every Community Up for Retirement Enhancement” - Congress is back to full word acronyms...) might actually move forward at this point, with something similar to it being enacted into law. 

When the §529 provisions were pulled it looked like that might cause Republican support to go away (and thus kill any chance in the Senate), but the addition of a full Kiddie Tax fix (roll back the provision to the pre-TCJA version now that unintended consequences are coming out of the woodwork outside of just the Gold Star families problem) and the apparent endorsement of ranking minority member and previous Ways & Means Chair Kevin Brady seem to have gotten both sides on board.

An article in Tax Notes Today outlining comments made by an assistant U.S. attorney based in New Haven, Connecticut highlighted that tax preparers may get entangled in criminal tax prosecutions when they fail to insure clients are properly documenting loans from a business.[1]

Christopher W. Schmeisser was speaking at a criminal tax conference held at Quinnipiac University School of Law in North Haven, Connecticut.  Mr. Schmeisser indicated that loans are often used as part of a scheme for a taxpayer to avoid paying taxes.

The IRS announced the agency has discovered an error that existed in the worksheets for calculating tax due that were in the Schedule D instructions for 2018 returns (Error in Tax Calculation in Schedule D Tax Worksheet (Form 1040)[1]).  Most tax software followed the erroneous worksheet for returns prepared during the filing season.

The IRS noted the impacted returns as follows:

The tax calculation did not work correctly with the new TCJA regular tax rates and brackets for certain Schedule D filers who had 28% rate gain (taxed at a maximum rate of 28%) reported on line 18 of Schedule D or unrecaptured section 1250 gain (taxed at a maximum rate of 25%) reported on line 19 of Schedule D.

The IRS argued that the taxpayer in Barbara v. Commissioner, TC Memo 2019-50 did not materially participate in the trade or business of lending money, leading to a proposed assessment of tax of over $536,000 along with a 20% substantial underpayment penalty under §6662(a).  But the Tax Court did not agree with the IRS’s view in this case.

After selling his trucking business, Fred Barbara used the money to start a money lending business.  The office of the money lending business was in Chicago, IL.  The business employed two full time employees:  an accountant and a secretary.

If a former S corporation makes a distribution to redeem shares that is treated as equivalent to a dividend and, therefore, taxed under IRC §301 during its post-transition termination period, how is that taxed?  In Revenue Ruling 2019-13 the IRS answers that question which likely has not been keeping most of America awake at night awaiting an answer.

The relatively short ruling looks at whether that distribution first reduces the accumulated adjustment account (AAA) and the taxpayer’s basis in the stock or, rather, is treated as first coming out of earnings and profits. 

The IRS addressed a special issue impacting the estate tax deduction under IRC §2058 for amounts paid for state estate, inheritance, legacy or succession taxes under Connecticut’s estate tax.  In Program Manager Technical Advice 2019-03 the IRS looks at the issue of whether the estate tax paid to the state of Connecticut has to be reduced proportionately to account for Connecticut gift taxes paid within three years of death that are included in the Connecticut taxable estate.

The IRS has released the maximum value for employer provided vehicles for purposes of the special valuation rule found at Reg. §1.62-21(d) and (e) for 2019 in Notice 2019-34.

In Notice 2019-08 the IRS had announced that the agency planned to issue regulations that were going to greatly increase the limits for the cost of such vehicles to take into account changes made in the Tax Cuts and Jobs Act, setting the base value at $50,000 adjusted annually for inflation after 2018.

The Eleventh Circuit Court of Appeals rejected a unique twist on the “my boss ordered me not to pay the trust fund taxes” defense in the case of Myers v. United States, CA 11, Case No. 18-11403.  In this case the party Mr. Myers claimed ordered him not to pay was an agent of the Small Business Administration (SBA) that had been appointed as a receiver of his employer.