The IRS has released final regulations updating guidance on cases when a payment to a charity will be treated as a payment of an ordinary and necessary business expense under IRC §162 in TD 9907.[1] The regulations also contain provisions that clarify situations when a donation to a charity that results in a credit against state and local taxes can be deducted as an additional payment of those taxes.

The IRS has issued two new safe harbor explanations to be given to participants receiving a distribution by qualified plans to satisfy the requirements of IRC §402(f). The new documents have been updated to take into account changes to the law made by the SECURE Act and the CARES Act related to qualified retirement plans in Notice 2020-40.[1] The new documents update the notices found in Notice 2018-74.

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.