A potential problem for S corporations that received PPP loan forgiveness who had accumulated earnings and profits involved the proper classification of the expenses paid with the PPP loan proceeds in the computation of the accumulated adjustments account (AAA). A post by Dan Chodan, CPA on Twitter on January 3, 2022 pointed out that the IRS had now given guidance on this issue.[1]

The issue arose after Congress, in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act signed into law on December 27, 2020, provided that expenses paid that led to the forgiveness of the PPP loan would be deductible for federal tax purposes, overriding IRS Notice 2020-32 that provided such expenses would not be deductible for federal tax purposes.

Determining the fair market value for a closely-held business for various tax purposes depends upon valuations assuming a willing buyer and willing seller aware of all relevant facts. In CCA 202152018[1] the IRS finds that the valuation used by a taxpayer in attempting to set up a grantor retained annuity trust (GRAT) did not consider the fact that there was a high likelihood the entity being valued would be likely involved in a lucrative merger in the near future.

The Eleventh Circuit Court of Appeals has ruled invalid a portion of regulations adopted in 1986 related to contributions of conservation easements in the case of Hewitt v. Commissioner.[1] The issue involved the Tax Court’s finding, which the appellate panel overruled, that the easement failed to satisfy the “protected-in-perpetuity” requirement found at IRC §170(h)(5), as it violated the judicial extinguishment formula found at Reg. §1.170A-14(g)(6)(ii). The panel found that Treasury had violated the Administrative Procedures Act by failing to address comments provided on this issue as part of issuing the regulations in final form.

The Tax Court ruled that a taxpayer’s attempt to make a deposit rather than a payment of taxes failed when the tax had been assessed prior to the date the attempted deposit was made in the case of Ahmed v. Commissioner, TC Memo 2021-142.[1]

The IRS in News Release IR-2021-256 reminded taxpayers who deferred paying employer FICA for a portion of 2020 or a portion of their 2020 self-employment tax that a deadline is approaching on January 3 to pay a portion of the deferred taxes.[1]

The release explains the option provided to qualified taxpayers in 2020:

As part of the COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer’s share of their eligible Social Security tax liability, normally 6.2% of wages. Half of that deferral is now due on January 3, 2022, and the other half on January 3, 2023.[2]

The IRS has announced an additional extension of time for certain tax relief for all or part of six qualifying states related to Hurricane Ida.[1] Before this news release, affected taxpayers had until January 3, 2022 to file various tax returns and make various tax payments. The news release has moved that date to February 15, 2022.

While the IRS did not provide a reason for granting this extension, it seems likely that complaints that January 3, 2022 was during the IRS’s annual shutdown of both the individual and business electronic filing systems had a role in this relief. Those filing on the original January 3, 2022 extended relief date would have been required to file the returns in paper form rather than electronically.

In Chief Counsel Advice 202151005[1] the IRS discusses the lack of linkage between what is a rental for passive activity purposes under IRC §469(c)(2) and the exclusion of real estate rentals from self-employment income under IRC §1402(a)(1). The memorandum also discusses the application of the self-employment tax rules to two specific situations.

In News Release IR-2021-255[1] the IRS gave information on the letters that will be sent to taxpayers documenting the amounts of the Advance Child Tax Credit and third round of Economic Impact Payments that will provide information necessary to complete the taxpayers’ 2021 individual income tax returns.

The letters that taxpayers will receive are:

• Letter 6419, 2021 Advance CTC

• Letter 6475, Your Third Economic Impact Payment[2]

The release states “[t]he IRS urged people receiving these letters to make sure they hold onto them to assist them in preparing their 2021 federal tax returns in 2022.”[3]

The United States and Malta have entered into a Competent Authority Agreement (CAA)[1] on the meaning of a “pension fund” under the Malta-US income tax treaty. While that might seem like a matter of little consequence, the agreement is meant to quash what the IRS had identified in July as a 2021 “Dirty Dozen” scam that was being used to escape tax on the sale of appreciated property.[2]

The July 2021 IRS news release summarized the promoted program as follows:

Potentially abusive use of the US-Malta tax treaty

Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.[3]

In August of 2021, the Wall Street Journal published an article describing the structure in more detail.[4]

American Rescue Plan Act Section 9675 revised IRC §108(f)(5) to provide a temporary rule for the exclusion from income of certain discharges of student loan debt. In Notice 2021-01[1] the IRS provides that lenders are not to issue Forms 1099-C, Cancellation of Debt, for discharges that qualify for this relief.

The Notice describes the income exclusion as follows:

Under this special rule, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of loans provided for postsecondary educational expenses, whether the loan was provided through the educational institution or directly to the borrower. Such loans must have been made, insured, or guaranteed by the United States, or an instrumentality or agency thereof, a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof, or an eligible educational institution. Additionally, certain private education loans and loans made by certain educational organizations qualify for this special rule.[2]

The IRS has released the mileage rates for 2022 in Notice 2022-3.[1] A taxpayer using the standard mileage rates must comply with the requirements of Revenue Procedure 2019-46.[2]

The standard mileage rate for 2022 will be 58.5 cents per mile for business use.[3] The portion of this business mileage that is treated as depreciation is:

• 25 cents per mile for 2018,

• 26 cents per mile for 2019,

• 27 cents per mile for 2020,

• 26 cents per mile for 2021, and

• 26 cents per mile for 2022.[4]

The IRS is requiring partnerships that have international tax information to prepare and attach Schedules K-2 and K-3 to partnerships whose tax year begins in 2021. However, the final versions of these forms are not available currently, which could present a problem for a fiscal year partnership that began operations in 2021, but whose year-end for its first income tax return is before the end of 2021. As well, partnerships that are not in existence at year end may face a similar problem complying with the reporting requirements.

In the case of Wheeler v. Commissioner,[1] the Tax Court did not find persuasive a taxpayer’s argument that she should be granted innocent spouse relief for taxes related to income from an S corporation she held an interest in during the year before the Court, which also was the year her divorce was finalized late in the year.

Notice 2021-65[1] has been released by the IRS, providing guidance on the repeal of the employee retention credit (ERC), effective as of September 30, 2021, for all employers except those that are recovery startup businesses. This retroactive change was part of the Infrastructure Investment and Jobs Act (IIJA)that was signed into law on November 15. Prior to the enactment of the IIJA, employers who faced certain reductions in gross receipts or were subject to certain full or partial suspensions of their business due to COVID-19 governmental orders could qualify for the credit.

In the case of Soni v. Commissioner,[1] the Tax Court found that Anjali Soni, despite never signing the joint income tax return with her husband for the year in question, had tacitly consented to the filings and thus faced joint liability for any tax due on that return.

In emailed chief counsel advice,[1] counsel explained how and when “money numbers” impact the calculation of the imputed adjustment (IU) for a partnership being examined under the BBA centralized partnership audit regime. The issue involved adjustments of items that would not directly impact the amounts reported on that year’s Form 1065, but do involve a partnership item stated in terms of dollars.

The email begins by noting “[i]f we adjust any partnership-related item (PRI) that is a ‘money number’ on the Form 1065 or in the partnership’s books and records, it goes into the calculation of the IU.”[2] The advice continues on to note that “[a]n adjustment to an item that is not an item of income, gain, loss, deduction, or credit (i.e. ‘non-income item’) is always a positive adjustment. See 301.6225-1(d)(2) (definition of positive and negative adjustments).”[3]

The IRS clarified, in emailed counsel advice,[1] that it does not matter if a partner is a for profit or exempt organization to determine if that partner will bar the partnership from electing out of the regime under IRC §6221(b).

The email is written in response to a question that is not disclosed in the document. However, it’s fairly certain the question that was asked was whether a partnership that had a tax exempt partner could opt out of the BBA partnership audit regime when filing its return using the procedures found at IRC §6221(b)(1).

The 2021 draft instructions for Form 1065 have added additional information related to a determination of whether a taxpayer has self-employment income from the partnership.[1]

The new revision to the instructions provides:

However, whether a partner (including a member of an LLC treated as a partnership for federal income tax purposes) qualifies as a limited partner for purposes of self-employment tax depends upon whether the partner meets the definition of a limited partner under section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative. Relevant to this determination is whether the partner merely invested in the partnership and is not actively participating in the partnership’s business operations; a partner who is performing services for a partnership in their capacity as a partner and that is, based on the facts and circumstances, acting in the manner of a self-employed person is not a limited partner for self-employment tax purposes. See Renkemeyer, Campbell & Weaver, LLP v. Commissioner, 136 T.C. 137, 150 (2011).[2]

The IRS has issued guidance on a web page on the agency’s site related to the early termination of the employee retention credit for employers other than a recovery startup business.[1] The IRS posting explains:

The Infrastructure Investment and Jobs Act amends section 3134 of the Internal Revenue Code to limit the availability of the employee retention credit in the fourth quarter of 2021 to taxpayers that are recovery startup businesses, as defined in section 3134(c)(5). Therefore, taxpayers that are not recovery startup businesses are not eligible for the employee retention credit for wages paid after September 30, 2021.[2]

In September of 2020 we discussed issues that arose in the case of Fowler v. Commissioner, 155 TC No. 7, when the IRS rejected an electronically filed return due to the lack of inclusion of an identity protection PIN on the return and its effect on the date a return was treated as filed for statute of limitations purposes.[1] In that case the Court ruled that the IRS had attempted to assess tax more than 3 years after the date the taxpayer initially attempted to file the return, and thus the IRS had failed to act in time.

In this case,[2] the IRS is now asserting the taxpayer had failed to file a return within the three-year period that began on the original filing date including extensions for filing, thus the taxpayers could not obtain the refund shown on the return that they filed within that time period, but which the IRS had rejected due to a suspicion that the return may have been the result of identity theft.