The IRS finally addressed the options for the timing of PPP forgiveness for tax purposes in Revenue Procedure 2021-48[1] as well as issuing two related procedures at the same time dealing with related issues. This includes a very limited time period when an affected BBB partnership can file an amended income tax return in lieu of filing the otherwise required Administrative Adjustment Request.

In Notice 2021-63[1] the IRS provides guidance on the interaction of the per diem rules found in Revenue Procedure 2019-48[2] and the temporary allowance of a 100% deduction for business meals provided by a restaurant found at IRC §274(n)(2)(D) for amounts paid or incurred in 2021 and 2022.

Having already released the annual inflation adjusted retirement numbers in Notice 2021-61, discussed in an earlier article,[1] the IRS has now released Revenue Procedure 2021-45[2] that contains most of the other inflation adjusted numbers for 2022 taxes.

As the numbers relate to the law as it existed at the date of publication of the procedure, something that could change based on pending Congressional action, the procedure contains the following warning:

This revenue procedure sets forth inflation-adjusted items for 2022 for various provisions of the Internal Revenue Code of 1986 (Code), as amended, as of November 10, 2021. To the extent amendments to the Code are enacted for 2022 after November 10, 2021, taxpayers should consult additional guidance to determine whether these adjustments remain applicable for 2022.

A trader generally executes an extremely large number of trades during the year attempting to take advantage of very short-term variations in the prices of securities. While some find this pursuit profitable, many find that their ability to harvest those short-term gains doesn’t exist, and while discovering this fact they encounter significant losses. Unfortunately, by default these losses are capital losses, resulting in only being able to deduct $3,000 per year of such losses against other income—and all too often such traders have losses that are well in excess of such limits, running to five or six figure losses.

The IRS Taxpayer Advocate Service (TAS) has announced that, for now, TAS will no longer assist taxpayers who are experiencing processing delays for amended income tax returns.[1]

The TAS blog explains:

Under our current procedures, TAS does not accept cases in which we cannot meaningfully expedite or improve case resolution for taxpayers. Amended returns fall into this category. Due to the broad impact of COVID-19, the IRS has faced significant challenges in all its return processing operations. Unfortunately, until the IRS processes a tax return, TAS cannot assist the taxpayer. For that reason, TAS will not accept new cases solely involving the processing of an individual or business amended return. TAS will continue to monitor IRS developments in amended return processing and will reevaluate this determination as the situation changes.

The House of Representatives on November 5, 2021 passed the Infrastructure Investment and Jobs Act, accepting the amendments the Senate had made to the bill. The Act is being sent to the President who is expected to sign the bill.

Although not primarily a tax bill, the Infrastructure Investment and Jobs Act (IIJA) does contain some provisions that have a tax impact.

For each provision the effective date of the provision is noted. For those items whose effective date is tied to the date of enactment, that date will be the date that the President signs the bill, assuming that he does so.

The IRS issued inflation adjusted retirement plan and fringe benefit numbers for 2022 in Notice 2021-61.

The IRS has released the official draft of the proposed Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, [1] to be used to report S corporation stock basis, debt basis, and allowed/disallowed losses on Forms 1040. The form is virtually identical to the one we discussed in July of 2021 when the IRS published information about the form in the Federal Register.[2]

The IRS has updated its FAQ entitled “Coronavirus-related relief for retirement plans and IRAs questions and answers,”[1] adding two questions to assist employers who, facing staffing issues, rehire employees who had previously retired.

The two questions are added at the beginning of the FAQ in a new section titled “Rehires Following Bona Fide Retirement; In-Service Distributions.” The first question looks at the impact of a rehire for a plan that does not allow for in-service distributions. The concern is that by rehiring the employee, the original retirement may now be challenged by the IRS as not a bona-fide retirement. The question indicates how this problem may be avoided.

A taxpayer was unsuccessful in attempting to recover taxes via a claim of right deduction under IRC §1341 in the case of Heiting v. United States, US DC WD Wisconsin, Case No. 3:19-cv-00224, a holding upheld on appeal.[1]

The IRS released a News Release[1] and 22-page Chief Counsel Memorandum[2] that set forth information a claim for refund related to the research credit under IRC §41 will be required to contain to be considered a valid claim. The News Release states:

The IRS has set forth the information that taxpayers will be required to include for a research credit claim for refund to be considered valid. Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise IRS of the basis of the claim. The Chief Counsel memorandum will be used to improve tax administration with clearer instructions for eligible taxpayers to claim the credit while reducing the number of disputes over such claims.[3]

One of the tools the IRS has used with increasing frequency to provide guidance has been the use of Frequently Asked Questions (FAQs) posted on the IRS website. The IRS began using the tool heavily to provide guidance for various Tax Cut and Jobs Act provisions, and that use continued with guidance for various items found in the COVID relief bills.

However, tax professionals have expressed major concerns with the IRS reliance on such guidance. First, it’s not clear what happens if the IRS discovers that an FAQ no longer agrees with what the agency and courts find to be the proper interpretation of the law. Can the IRS assert a position contrary to a published FAQ against a taxpayer and if they succeed in doing so, do taxpayers face potential penalties for taking positions on a tax return relying upon the FAQ?

In Notice 2021-58[1] the IRS returned to the subject of various emergency extensions for certain COBRA actions issued jointly by the IRS and Department of Labor beginning in May of 2020.

The IRS describes that original notice as follows:

On May 4, 2020, in response to the National Emergency concerning the Novel Coronavirus Disease (COVID-19) Outbreak (National Emergency), the Agencies published the Joint Notice, which extended certain timeframes otherwise applicable to group health plans, disability and other welfare plans, pension plans, and their participants and beneficiaries under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). The Joint Notice extended these timeframes by requiring that plans subject to ERISA or the Code disregard the period for certain action from March 1, 2020, until 60 days after the announced end of the National Emergency or such other date announced by the Agencies in a future notification (the Outbreak Period), subject to a maximum disregarded period of one year.[2]

The IRS argued that Charles Leyh should not be allowed a deduction for alimony for amounts he paid for health insurance for his soon to be ex-wife via his employer’s cafeteria plan pursuant to a separation agreement, arguing Charles got an impermissible double benefit since the amount paid for her insurance was not included in his income.[1] But in a published opinion, the Tax Court disagreed, finding that no impermissible double benefit existed, as his spouse reported that amount as income on her separate return for the year.

The IRS has adopted final regulations setting a $67 dollar fee[1] for a closing letter for a decedent’s estate.[2]

The person liable for the fee is the “the estate of the decedent or other person requesting, in accordance with applicable procedures and policies, an estate tax closing letter to be issued with respect to the estate.”[3]

In the case of Gregory v. Commissioner, TC Memo 2021-115,[1] the taxpayer asked the Tax Court to rule that expenses incurred for a “hobby” under Section 183 are not miscellaneous itemized deductions facing the limitations of IRC §67(a), the 2% floor on miscellaneous itemized deductions that was in place before all such deductions were eliminated in the Tax Cuts and Jobs Act. The Tax Court found just the opposite—that, aside from taxes allowed as a deduction under IRC §183(b)(1), the expenses are treated as miscellaneous itemized deductions.

IRC §183 is often referred to as the hobby loss rule, and most court cases dealing with this section spend time trying to determine if the activity is or is not an “activity not engaged in for profit” under IRC §183(a). But this case looks at a different issue—assuming the activity is found as not being engaged in for a profit, are the expenses allowed under IRC §183(b) subject to the limitations imposed on miscellaneous itemized deductions found at IRC §67.

In the case of Parker v. Commissioner, TC Memo 2021-111[1] the taxpayers faced a number of issues related to their tax return for 2015. We will look at a few of the issues, primarily to discuss where the taxpayers failed to obtain the benefits they claimed on their returns.

In the Estate of Connelly v. United States,[1] the US District Court for the Eastern District of Missouri determined that a buy-sell agreement did not set the value of the decedent’s interest in a closely held corporation he owned a majority interest in and the proceeds of the life insurance policy held by the company that was used to redeem his shares from his estate had to be included in the calculation of the value of the company for estate tax purposes.

While the Fifth Circuit Court of Appeals upheld the Tax Court’s decision regarding the amount of tax owed by the taxpayer in the case of Ray v. Commissioner, Docket No. 20-60004, CA5,[1] the panel overruled the Tax Court on the issue of penalties and found that the taxpayer had a reasonable basis for a portion of his substantial understatement of tax on the return in question.

A penalty under IRC §6662, such as the substantial understatement penalty for income taxes, is waived if the taxpayer can demonstrate:

• Reasonable cause for the underpayment and

• The taxpayer acted with good faith with regard to the underpayment.[2]

The taxation of lawsuit settlement proceeds brings taxpayers before the Tax Court regularly, as it did in the case of Tressler v. Commissioner, TC Summary Opinion 2021-33.[1]

Taxpayers often feel that much of any lawsuit award should not be taxable—they feel they have been wronged and it just doesn’t “feel right” to pay tax on the amounts awarded to them to right that wrong by the court. But the IRC only treats certain types of award amounts as being nontaxable, with the rest being subject to tax because of the default rule of IRC §61—all items of gross income are subject to tax unless we can find an exception to that general rule.