I’ve been asked a few times since Notice 2021-49 was published by the IRS what should be done about already filed Forms 941 or 941-X where an employee retention credit was claimed on the return in question for wages the Notice indicates are ineligible to be used to claim that credit.

For those who aren’t up to speed on this issue, that Notice provided that controlling interest holders based on direct ownership of an interest of an employer who had any living relative in the following list would not be paid qualifying wages for the ERC by the controlled employer:

• Brother or sister;

• Ancestors (such as parents, grandparents, etc.); or

• Lineal descendant (such as a child, grandchild, etc.).[1]

In recent discussions over whether Notice 2021-49,[1] which provides the “no living relatives” rule for controlling interest holders for purposes of the various iterations of the employee retention credit,[2] is valid, some commentators have argued that the Notice must be invalid on this point as it is at odds with what they believe Congress intended. At that point, the commentators dive into various arguments regarding how to divine that “true intent” of the relatives rule with the enactment of the employee retention credit itself, the reference to IRC §51(i)(1) and even the “true intent” of the text in IRC §51(i)(1) that gives rise to the issue. And, based on these sources outside the IRC, they argue that either position can be claimed with disclosure or can even be claimed without disclosing the position on the return.

But talking about such indirect sources of “intent” puts the cart before the horse in dealing with the statute. The courts do not generally consider such issues of intent except in cases where it is established that the text of the statute itself does not clearly lead to a single result.

After initially beginning a temporary acceptance of certain e-signatures during 2020 as a response to the COVID-19 pandemic, then extending that program twice, dropping the “temporary” designation in the most recent extension, the IRS now appears to have made the program permanent in IRS Fact Sheet 2021-12.[1]

The IRS justifies allowing e-signatures on certain forms as follows:

To help reduce burden for the tax community, the IRS allows taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The agency is balancing the e-signature option with critical security and protection needed against identity theft and fraud. Understanding the importance of electronic signatures to the tax community, the IRS offers an overview about using them on certain forms.[2]

The IRS issued PMTA 2021-07[1] that addresses a problem taxpayers who deferred employer FICA under the CARES Act may run into this year or next—with a consequence far more negative than they would believe would happen for what to them appears to be a minor error.

The Tax Court found that the taxpayer was neither continuing operating a prior trade or business nor had begun the conduct of a new trade or business in the case of Estate of Morgan v. Commissioner, TC Memo 2021-104.[1]

IRC §1244 was meant to encourage investing in small operating corporations by allowing for a limited ordinary income deduction for a loss on disposing of such stock. IRC §1244(a) provides:

(a) General rule

In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.

The cap on the maximum §1244 loss for a single tax year is found at IRC §1244(b):

(b) Maximum amount for any taxable year

For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—

(1) $50,000, or

(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.

The IRS has published the revised depreciation limits for vehicles under IRC §280F(d)(7) in Revenue Procedure 2021-31.[1] The limits on depreciation for such assets are adjusted for inflation each year.

For passenger automobiles acquired after September 27, 2017 and placed in service during 2021, the limitation on depreciation if §168(k)’s bonus depreciation applies is:

• 1st tax year - $18,200

• 2nd tax year - $16,400

• 3rd tax year - $9,800

• Each succeeding year - $5,860.[2]

In holding that the taxpayers in the case of McCaffery v. United States[1] had failed to prove their claim for refund was filed timely, the US Court of Federal Claims decision took the position that the US Tax Court had developed a method of showing timely filing for an envelope lacking a postmark that is at odds with the Internal Revenue Code.

The Court described the facts of this case as follows:

Plaintiffs filed their federal income tax return for the 2013 tax year on April 15, 2014 with a total tax liability of $70,977. Compl. ¶¶ 6-7; Def.’s App. B at B-1-B-2 (ECF 11-1). In 2017, Plaintiffs filed an amended tax return claiming an overpayment of $69,080 for the 2013 tax year and requesting a refund in that amount. Compl. ¶ 8; Def.’s Mot. to Dismiss at 3; Def.’s App. B at B-15, B-17. The parties agree (and it appears to the Court) that the deadline for claiming an overpayment was April 18, 2017. Def.’s Mot. to Dismiss at 5; Pls.’ Opp. at 1, 3.4 But the IRS noted the receipt date of Plaintiffs’ amended return as April 24, 2017 — six days later.[2]

A question that had bothered many employers that had borrowed money under the Paycheck Protection Program (PPP) was whether forgiveness of that loan, although excluded from taxable income, was nevertheless part of receipts under §448(c) that would impact the calculation of whether there had been a reduction in revenue that could qualify a taxpayer to claim the employee retention credit (ERC).

The IRS’s answer, in Revenue Procedure 2021-33,[1] is that, yes, it is included in gross receipts under IRC §448(c)—but if you want to exclude it consistently in your calculations of gross receipts under IRC §448(c) for ERC purposes only, the agency will accept that as well.

Since many advisers seem to have difficulty understanding the rules under which certain individuals are barred from having wages qualify for the employee retention credit outlined in IRS Notice 2021-49, I’ve summarized key portions of those rules in the following two sections. See our main article[1] for the authorities behind each step-by-step process detailed below.

The IRS has published 34 pages of additional guidance[1] on the Employee Retention Credit (ERC), including the first guidance on the changes made for the 3rd and 4th quarter credits and the official IRS word on the related party issues raised by the references to IRC §§51(i)(1) and 267(c) we wrote about in April of 2021.[2]

In the case of the issues for §§51(i)(1) and 267(c), the IRS arrived at an identical conclusion to that expressed in our April article—wages paid to those with a controlling interest in the employer will not be eligible for the credit unless the controlling interest holder has no living relatives (or just very remote ones).

There are two major sections to the Notice, the first providing guidance on the changes made to the ERC for the 3rd and 4th quarter of 2021 and the second providing guidance on additional issues applicable to all versions of the ERC.

The Eleventh Circuit Court of Appeals upheld the Tax Court’s decision regarding self-employment income in the case of Slaughter v. Commissioner.[1] In this case, an author argued that most of the income she received from her publishing contract was for activities other than the time she spent writing books. She argued that payments for anything other than time spent writing a book was not income from a trade or business for self-employment tax purposes.

In CCA 202130014[1] the IRS Chief Counsel’s office discussed the issues related to conservation easement extinguishment, stating that the requirements prevent an easement with an extinguishment clause that removes post-donation increases in property values due to post-donation improvements from the calculation of the charity’s share of such proceeds from qualifying for a charitable deduction under IRC §170(h).

The CCA states the issue to be addressed as follows:

Does a conservation easement fail to satisfy the requirements of section 170(h) of the Code if the deed contains language subtracting from the donee’s extinguishment proceeds the value of post-donation improvements or the post-donation increase in value of the property attributable to improvements?[2]

The IRS updated its FAQ on “Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021,” adding Question 27a that creates a “substantially similar condition” under the Families First Coronavirus Relief Act (FFCRA) Section 5102(a)(6) that allows a credit for leave time paid to employees who take leave to:

• Accompany an individual with a qualifying relationship to the employee or self-employed person who is obtaining a vaccination or

• Care for an individual with a qualifying relationship to the employee or self-employed person who is recovering from a vaccination.[1]

The Small Business Administration (SBA) has issued a new Interim Final Rule (IFR) that provides an option for lenders to allow certain borrowers to apply for forgiveness directly through the SBA, creates an optional simplified method to document the required drop in revenue for Second Draw Paycheck Protection Program (PPP) loans for certain borrowers and provides a deferment of payments for those who timely file an appeal with the SBA.[1]

In November of 2019, we wrote[1] about the case of Wilson, et. al. v. United States, Case No. 2:19-cv-05037, US District Court, Eastern District of New York where a taxpayer prevailed in a case where he was the sole owner and beneficiary of a foreign trust. The owner/beneficiary was found to be liable for only the smaller 5% penalty under §6677(b) as the owner of a foreign trust that fails to file a report under IRC §6048. He was able to escape the 35% penalty imposed on a beneficiary for failing to report the receipt of a distribution from that trust as required by the same section.

However, the Second Circuit Court of Appeals has now reversed the District Court after the IRS appealed the decision,[2] finding that the 35% penalty the IRS had originally imposed was due in this case, noting:

We vacate the court’s judgment and hold that when an individual is both the sole owner and beneficiary of a foreign trust and fails to timely report distributions she received from the trust, the government has the authority under the IRC to impose a 35% penalty.[3]

IRS emailed advice is always tricky to interpret, since we are seeing only one side of a conversation in these cases—only the IRS attorney’s response is provided. And, unlike more formal advice from the Chief Counsel’s office, these emails do not follow a formal structure where the facts under consideration are outlined in the attorney’s response.

But Chief Counsel Email 202129012[1] contains one side of a discussion that outlines an issue that arises with partnership examinations under the BBA centralized partnership audit regime, discussing if it matters that the partnership can show that if an item of adjustment had been properly reported by the partners no additional income tax would have resulted. The partnership would want to have this amount excluded from the imputed adjustment (IU) under the regime, which is generally subjected to tax at the highest marginal tax rate when paid by the partnership.

When dealing with a decedent’s estate, an executor of the estate may face personal liability for taxes found to be due from the estate if the executor made a distribution that rendered the estate insolvent, assuming the executor had knowledge or notice of that liability or potential liability.[1]

In the case of Fagenboym v. Commissioner [1] we see a taxpayer unsuccessfully attempt to make use of the most-cited case in federal income tax cases—the case of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

For those who aren’t familiar with the Cohan case, the case involved vaudeville producer and entertainer George M. Cohan and produced what is often referred to as the Cohan doctrine or rule. The opinion summarizes this rule as follows:

Under the Cohan rule, when a taxpayer establishes that he or she has incurred a deductible expense, but is unable to substantiate the exact amount, the Court is permitted to estimate the deductible amount. Id. at 543-544. But we can do so only to estimate the amount of the deductible expense when the taxpayer provides evidence sufficient to establish a rational basis upon which the estimate can be made. See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). In estimating the amount allowable the Court bears heavily upon the taxpayer who failed to maintain required records and to substantiate expenses as the Code requires. See Cohan v. Commissioner, 39 F.2d at 544; Keenan v. Commissioner, T.C. Memo. 2006-45, aff’d, 233 F. App’x 719 (9th Cir. 2007).[2]