The IRS has issued proposed regulations to implement the various small business optional accounting rules added to IRC §§263A, 448, 460 and 471 by the Tax Cuts and Jobs Act (TCJA).[1] These rules are generally available to small businesses that are not tax shelters and have average annual gross receipts in the preceding three years not in excess of an amount annually adjusted for inflation. For 2020 the revenue limit is $26 million.[2]

Qualifying entities are:

• Allowed to use the cash basis of accounting (any change of method is treated as a change initiated by the taxpayer and made with the consent of the IRS). [IRC §448(b)(3), (d)(7)]

• Allowed to be exempt from the application of the uniform capitalization rules of IRC §263A [IRC §263A(i)]

• Allowed to be exempt from the requirement to keep inventories under the rules of §471(a) (though such items must either be tracked as if they were non-incidental supplies or treated in conformity with the entity’s applicable financial statement/books and records if no AFS exists). [IRC §471(c)]

• Treated as meeting the gross receipts requirement to be treated as a small contractor exempt from the percentage of completion method (this does not impact the second requirement that the expected length of contracts must also be less than 2 years to be exempt from percentage of completion). [IRC §460(e)(1)(B)]

Any change of method required for the above is treated as a change initiated by the taxpayer and made with the consent of the IRS for purposes of IRC §481.

The IRS announced[1] that the agency is going to be accepting the duplicate copy of Form 3115, Application for Change in Accounting Method, a taxpayer is required to file as part of a request for an automatic method change via fax beginning on July 31, 2020.

The website provides the following general information:

Until further notice, the IRS is implementing the temporary procedure described below for fax transmission of the duplicate copy of Form 3115, Application for Change in Accounting Method.

Starting on July 31, 2020, the IRS will accept the duplicate copy of Form 3115, Application for Change in Accounting Method, via fax to 844-249-8134. Important note: This change applies only to taxpayers requesting consent to make a change in accounting method under the automatic change procedure. This temporary procedure is in effect until further notice.

Taxpayers will still need to submit two copies of the Form 3115 to the IRS. Taxpayers must continue to file Form 3115 with their tax return (including extensions). However, instead of mailing the duplicate paper copy of Form 3115 to the IRS in Ogden, Utah, taxpayers can now fax it to 844-249-8134.

It’s been a rough summer for taxpayers attempting to dispute IRS disallowances of charitable contribution deductions for conservation easements under IRC §170(h). In the most recent case, the plaintiff was coming before the Court for the third time and, as with the last two, the IRS prevailed on the issue in front of the Tax Court.

In this case, the taxpayer in Belair Woods, LLC v. Commissioner, TC Memo 2020-112[1] was disputing the IRS’s position that the easement in question failed the “protected in perpetuity” requirement under IRC §170(h)(5)(A). That provision and regulations[2] implementing the provision, require that the grant of the easement must, in the event the easement is extinguished, provide the charity with a proportionate share of the proceeds upon a later sale of the property.

The question of whether real estate was or was not a capital asset in the hands of the taxpayer was the key issue in the case of Keefe v. Commissioner,[1] CA2, Case Nos. 18-2357, 18-2594, affirming TC Memo 2018-28. This issue comes up often with real estate, with taxpayers having a particular interest when they are unable to recover what they had invested in the property upon disposing of it.

Following a loss in the Tax Court, a case we had previously written about when originally decided in March of 2018 (Mansion Property Was Never Actually Used in a Rental Activity, Loss Was Capital), the taxpayers appealed the decision to the Second Circuit Court of Appeals

The IRS has released drafts of two new partnership tax forms for 2020 partnership returns, adding new Schedules K-2[1] (20 pages) and K-3[2] (22 pages) along with draft instructions for Schedules K-2[3] (25 pages) and K-3[4] (11 pages). The IRS announced these new forms on their website on July 14, 2020.[5]

The IRS in the announcement provides the following reason for issuing these new forms:

The Treasury Department and the IRS are proposing updates to the partnership form for tax year 2021 (filing season 2022). The updates will provide greater clarity for partners on how to compute their U.S. income tax liability with respect to international tax matters, including how to compute deductions and credits. The redesigned form and instructions also give useful guidance to partnerships on how to provide international tax information to their partners. This proposed form would apply to a partnership required to file Form 1065, but only if the partnership has items of international tax relevance (generally foreign activities or foreign partners). The proposed changes would not affect domestic partnerships with no items of international tax relevance.

In the case of Weiderman v. Commissioner, T.C. Memo. 2020-109,[1] the taxpayer found that simply using a loan to purchase a residence isn’t sufficient to make it into qualified principal residence indebtedness. The taxpayer was looking to claim an exclusion from cancellation of indebtedness income under IRC §108(a)(1)(E).

The IRS has finalized regulations to set the PTIN fee at $21 plus a $14.95 third-party contractor fee as the agency begins to resume collection of this annual fee from paid tax preparers.[1] The final regulations retain the same fees as were found in the proposed regulations originally announced on April 15, 2020.

The IRS had ceased collection of the PTIN user fee following an initial loss in the US District Court for the District of Columbia in the case of Steele v. United States, 260 F. Supp. 3d 52 (D.D.C. 2017)[2] that found the IRS did not have the authority to charge such a fee. However, the Court of Appeals for District of Columbia found that the IRS did have the authority to charge such a fee, reversing that earlier decision of the lower court in Montrois v. United States, 916 F.3d 1056 (D.C. Cir. 2019).[3]

In the case of Duffy v. Commissioner, TC Memo 2020-108,[1] the Tax Court gave its view of what impact a state’s law had on whether a debt in question was recourse or nonrecourse.

Short Sales: Recourse vs. Nonrecourse Debts

In this case the issue was key because the taxpayers had entered into a short sale of a residence that had total outstanding debt secured by the property in excess of its fair market value.

Petitioners sold the Gearhart property in March 2011 for $800,000. JPMorgan Chase agreed to accept $750,841 of the proceeds in full satisfaction of the mortgage loan that encumbered the property. The documents which the parties stipulated regarding petitioners’ sale of the Gearhart property do not include any judicial filings by JPMorgan Chase and make no reference to judicial proceedings to enforce petitioners’ obligation to the bank.[2]

The $750,841 that JPMorgan Chase accepted in full payment was $626,046 less than the unpaid principal balance of that mortgage at the time.[3]

The IRS has issued a flowchart outlining the processes in a Bipartisan Budget Act of 2015 partnership examination in Publication 5388, Bipartisan Budget Act (BBA) Roadmap for Taxpayers.[1]

The Bipartisan Budget Act of 2015 repealed the prior TEFRA partnership audit regime and added a new fully centralized partnership regime. The flowchart outlines the process once an examination gets underway, including elections available to the taxpayer once the IRS has issued the Notice of Proposed Partnership Adjustment.

The IRS released a very short FAQ to provide two answers related to the taxation of provider relief payments from the Provider Relief Fund created by the CARES Act.[1]

The web page describes the program as follows:

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, appropriated $100 billion for the Public Health and Social Services Emergency Fund (Provider Relief Fund). The Paycheck Protection Program and Health Care Enhancement Act, enacted on April 24, 2020, appropriated an additional $75 billion to the Provider Relief Fund. This funding will be used to reimburse eligible health care providers for health care-related expenses or lost revenues that are attributable to the COVID-19 pandemic. See https://www.hhs.gov/provider-relief/index.html for more information about the Provider Relief Fund.

Taxpayers who receive these funds may wonder about their tax status—are these payments taxable income or not?

In Memorandum AM 2020-006[1] the IRS looked at a marketed charitable remainder annuity trust structure which claimed to allow a taxpayer to completely avoid paying tax on large capital gains. The IRS was not impressed with the marketing materials they reviewed, finding the program failed to accomplish the goal implied by the materials.