An issue that has not yet been addressed directly by the IRS is the treatment of certain expenses paid after a taxpayer received a Paycheck Protection Program (PPP) loan when the taxpayer’s tax year end concludes prior to either the filing of an application for or a grant of forgiveness.

The PPP loan program, established by the CARES Act signed into law in March of 2020[1], provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law[2] and such forgiveness would not be treated as taxable income to the borrower.[3]

In a news release (IR-2020-248)[1] the IRS announced relief for taxpayers in various collection activities to help taxpayers struggling due to COVID-19.

The IRS has released guidance for preparing Forms W-2 for employers who have deferred employee old age, survivors and disability taxes pursuant to the President’s August 8 memorandum, as provided for in Notice 2020-65.[1]

A number of sources are reporting that the SBA has begun circulating two forms to be completed by borrowers with PPP loans in excess of $2 million, to provide information for determining the necessity of their borrowings.[1] The SBA had published a notice in the Federal Register on October 26, 2020 indicating that there would be two such forms (Forms 3509, Loan Necessity Questionnaire (For-Profit Borrowers) and 3510 Loan Necessity Questionnaire (Non-Profit Borrowers))[2] the agency had not posted such forms on any website as of October 30.

However, copies of such forms did show up on various websites, all of which reported that the SBA had not return requests for comments on whether the forms published were authentic. One such copy of the Form 3509 can be found on Politico’s website,[3] and other sites have identical copies of the form.

In an information letter,[1] the IRS has informally addressed an issue that has existed since the passage of the Tax Cuts and Jobs Act—does the $10,000 state and local tax deduction cap apply to the special deduction under IRC §216 to a shareholder’s portion of taxes paid by a housing cooperative?

In February 2019[2] we published an article looking at the interaction of the limitation on personal state and local taxes found at IRC §164(b)(6) and the deduction allowed for owners of shares in a real estate cooperative under IRC §216. A real estate cooperative is an alternative to the use of a condominium structure to have an individual purchase a segment (or unit) in a particular building. The cooperative is a corporation that owns the building, with each shareholder normally having the right to occupy a particular unit.

The IRS has released a draft of the Form 1065 instructions for 2020 returns that contains the IRS’s proposed requirement for reporting partners’ capital on the K-1 on the tax basis.[1] The IRS issued a news release on the matter at the same time.[2]

News Release Summary

The news release indicates that the IRS has decided to require partnerships to use the transactional approach in computing partners’ capital on the tax basis, and require tax basis capital reporting on the 2020 Schedules K-1, Form 1065. The release states:

The revised instructions indicate that partnerships filing Form 1065 for tax year 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method. Under the tax basis method outlined in the instructions, partnerships report partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles as opposed to reporting using other methods such as GAAP.

In the case of Giambrone et al v. Commissioner, TC Memo 2020-145[1] the Tax Court ruled that a taxpayer must strictly follow an IRS revenue procedure granting a more favorable tax treatment than normally would be available if the taxpayer wishes to take advantage of the procedure.

The case involved what is often referred to as the “Madoff ruling” found at Revenue Procedure 2009-20. The revenue procedure grants taxpayers relief from the normal provisions for claiming a theft loss from criminally fraudulent investment arrangements, such as Ponzi schemes. The ruling was issued following the confession of Bernie Madoff to having run one of the largest Ponzi schemes ever.

In the case of Goei, et al v. CBIZ, Inc. et al[1] a U.S. District Court ruled that a CPA firm could not rely on alleged poor representation by the client’s attorneys to reduce damages the firm might owe due to the taxpayers being subjected to failure to file penalties. While the ruling is based on specific Rhode Island law issues, it outlines the risks CPA firms face when dealing with filing issues.

The taxpayer in question lived in Switzerland but had U.S. filing responsibilities. He had engaged an individual CPA in 2007 to advise him on U.S. tax issues and handle tax filings. The CPA joined the CPA firm in 2008, bringing Mr. Goei along with him.

Individuals who woke up the morning of October 16 realizing that, although they should have filed a Report of Foreign Bank and Financial Accounts (FBAR) by October 15, they had forgotten to do so, will be happy to learn they have been granted a short reprieve to get the report filed by the Financial Crimes Enforcement Network (FinCEN).[1]

The relief is granted due to a mistake made by FinCEN on October 14 when the agency posted a statement on the Bank Secrecy Act (BSA) e-filing website that was meant to remind filers of relief granted to victims of recent natural disasters who were given until December 31, 2020 to file the FinCEN form via a Notice issued on October 6.[2] However, the posting on the BSA site failed to include the information that the relief was limited to those impacted by the disasters, implying that all filers were to be given until the end of the year to file the form.

Payments made to state unclaimed property funds of a participant’s benefit from a retirement plan are subject to federal income tax withholding and information reporting, the IRS has ruled in Revenue Ruling 2020-24.[1]

The ruling is based on the following facts:

Employer M is the plan administrator of Plan X, a qualified retirement plan under § 401(a) that does not include designated Roth accounts under § 402A, hold employer securities, or provide benefits described in § 104 (compensation for injuries or sickness) or § 105 (amounts received under accident and health plans). Individual C, a U.S. person under § 7701(a)(30)(A) with a calendar year taxable year, has an accrued benefit in Plan X with a value of $900, has not made a withholding election under § 3405 with respect to her benefit, and has no investment in the contract within the meaning of § 72 with respect to her benefit. In 2020, Individual C’s accrued benefit (net of any applicable withholding) is paid to the State J unclaimed property fund, a fund under which a claim for property may be made by an owner.[2]

In 2016 the IRS released Revenue Procedure 2016-47,[1] providing the ability for an individual to self-certify specific reasons why they had not been able to roll over an IRA or qualified plan distribution within 60-days, qualifying for late rollover relief so long as the holder was able to document the self-certified reason if later required to by the IRS.

The IRS has now reissued the relief[2] to add a new self-certification reason:

In response to requests from stakeholders, this revenue procedure modifies that list by adding a new reason: a distribution was made to a state unclaimed property fund.[3]

In CCA 202042015[1] the IRS decided that the amount a daily fantasy sports player pays to participate in a contest is a wagering expense subject to IRC §165(d)’s limitation on the deduction of gambling losses.

IRC §165(d) provides:

(d) Wagering losses

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.

The IRS has been issuing a large number of frequently asked questions pages (referred to as FAQs) to deal with tax law in recent years, particularly with regard to issues under the Tax Cuts and Jobs Act and later legislation. The agency, in the case of Scholl, et al v. Mnuchin, et al, USDC ND CA, Case No. No. 4:20-cv-05309[1] had argued, among other things, that these FAQs are not “final agency actions” and thus not subject to review by the courts under the Administrative Procedures Act (APA) even in cases where the IRS is taking action directly related to the FAQ holdings.

The case involved the IRS FAQ, published on May 6, 2020, that in Q&A 15 took the position that incarcerated individuals were not eligible to receive an economic impact payment (EIP) under the CARES Act. The agency eventually took action to retrieve payments that had already been made to such individuals, asked any who had received them and not had them retrieved to send the money back and refused to issue any additional payments to such individuals.

The IRS has updated its FAQ on “Temporary procedures to fax certain Forms 1139 and 1045 due to COVID-19,”[1] to provide that the ability to fax claims for refund using Forms 1139 and 1045 will continue through December 31, 2020. After that date, the fax numbers can no longer be used for that purpose.

The FAQ, which we’ve discussed previously, allows those filing tentative refund claims under sections 2303 and 2305 of the CARES Act to fax the claims to the IRS rather than mailing the claims to the IRS.

The Tax Court sided with the IRS in the case of The Morning Star Packing Company, L.P. et al v. Commissioner, TC Memo 2020-142.[1] The Court found the taxpayers could not claim a tax deduction for certain accrued expenses, finding that not all events had taken place to establish the fact of the liabilities in question.

A taxpayer reporting on the overall accrual method of accounting must generally demonstrate two items in order to be able to claim a deduction on the current year’s return.

• Economic performance with regard to the item in question[2] and

• All events have occurred that determine the fact of a liability and the amount of that liability can be determined with reasonable accuracy.[3]

The IRS has issued a draft of the instructions[1] for Form 8995, Qualified Business Income Deduction Simplified Computation, for 2020, something that may not initially seem noteworthy. But it turns out that what is no longer found in the instructions may indicate an IRS change of view on the impact of charitable contributions on the calculation of qualified business income under IRC §199A.

Eric Yauch noted in an article published in Tax Notes Today Federal on October 14, 2020[2] that the revised instructions no longer contain a reference to, in at least some cases, reducing qualified business income (QBI) by charitable contributions.

Some concerns had been raised regarding the expiration date found on the various Forms 3508 to be used to apply for forgiveness under the PPP loan program. Ever since the first Form 3508 was released, the forms have shown an expiration date in the upper right corner of October 31, 2020.

The issue came into sharper focus when the SBA released the Form 3508S in October with that very same expiration date. Some expressed the concern that this might be the date by which borrowers would have to apply for forgiveness—and that date was rapidly approaching. But others noted nothing in the statute or other SBA guidance suggested that such a short deadline applied to the request for forgiveness.