Trust Deduction for Donation of Appreciated Property Limited to Basis

One of the longstanding “rules of thumb” of tax research is to be careful not to rely upon a single court decision that seems to be an “outlier,” especially when it comes from a U.S. District Court which is a court that does not specialize in tax law cases.  This turned out to be true in the case of Green v. United States where a decision from an Oklahoma District Court was reversed on appeal by the Tenth Circuit Court of Appeals (Case No. 16-6371).

We had covered the District Court decision on the Current Federal Tax Developments website when the opinion was published in November of 2015.[1]  The IRS had several objections, including whether any deduction should be allowed.  But on appeal the IRS limited its objection to the amount of the contribution, not whether a contribution deduction should be allowed to the taxpayer.

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US Supreme Court Agrees to Hear South Dakota's Challenge to Quill

The United States Supreme Court has agreed to hear South Dakota's appeal in the case of State of South Dakota v. Wayfair, SD SC, Case No. 28160. (Order Granting Certiorari, January 12, 2018)

South Dakota enacted a law that required out of state sellers who sell over $100,000 in a year and have 200 or more distinct transactions to collect and remit sale tax for the state of South Dakota regardless of whether or not the seller has nexus with the state of South Dakota.

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IRS Issues Early Withholding Tables to Take Into Account TCJA Changes

The IRS has issued Notice 1036, Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding.  These new tables take into account the changes made in P.L.115-97, better known as the Tax Cuts and Jobs Act (TCJA), which reduced individual income tax rates and made other changes.

As the IRS had indicated, the new tables continue to use withholding allowances in the computation of tax to be withheld, something often referred to as “exemptions” or “dependents” by many employees.  The amount has not actually just related to exemptions for years, so the fact that TCJA removed personal exemptions doesn’t mean that these allowances can no longer be used.

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List of Expired and Expiring Federal Tax Provisions from 2016-2027 Released by Joint Committee on Taxation

The Joint Committee on Taxation has issued its annual report on expiring tax provisions (List of Expiring Federal Tax Provisions 2017-2027, JCX-1-18). 

This document provides a detailed list by year of expiring and expired provisions.  The list of most immediate interest contains the provisions that expired in 2016.  

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FASB Considers TCJA Deferred Tax Guidance

Previously we had discussed action by the Securities and Exchange Commission to deal with the changes to deferred taxes required by the law known as the Tax Cuts and Jobs Act (see SEC Issues Interpretative Bulletin on Applying ASC 740 in Light of TCJA).  The SEC issued Staff Accounting Bulletin No. 118 that provided guidance to public companies on how to deal with issues arising from the difficulties in computing the proper deferred tax adjustments in time to report for December 31, 2017 financial statements.

The Financial Accounting Standards Board met on January 10, 2018 to discuss other implications of TCJA on reporting and measurement for deferred taxes under ASC 740.  Ken Tysiac of the Journal of Accountancy posted a report of that meeting on the Journal’s website (“FASB Addresses Financial Reporting Impacts of New Tax Law”, January 10, 2018 [1]).

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Current Deduction Allowed Where Fuel Rewards Program Entitled Customer to an Amount of Fuel at No Additional Cust

The IRS again looked at fuel rewards in Field Attorney Advice FAA 20180101F.  The topic had come up before with a slightly different program that ended up in the court (Giant Eagle Inc. v. Commissioner, Case No. 14-3961, CA3, reversing TC Memo 2014-146, 5/6/16) with the IRS losing and formally issuing a non-acquiescence on the decision (AOD 2016-03, 10/2/16).

But in this case the IRS decided that, unlike their view with regard to Giant Eagle, that this particular fuel rewards program did allow the taxpayer to claim a current deduction for issued but not yet redeemed rewards at the end of the taxpayer’s tax year.

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Despite Finding Taxpayer Had Constructive Knowledge of Income, Innocent Spouse Relief Under Section 6015(c) Granted

A taxpayer was granted innocent spouse relief in the case of Bishop v. Commissioner, TC Summary Opinion 2018-1, despite the fact that the Tax Court found that he should have been aware of the distribution that gave rise to the liability. 

The taxpayer’s spouse had inherited an IRA account from her father in 2009.  From 2009 to 2013 various distributions had been taken from the account, ranging from $4,000 to $48,000, and reported on the couple’s joint income tax return.

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Taxpayer Who Rolled After-Tax Contributions to Traditional IRA Has Basis in the IRA

He who hesitates is lost the saying goes, and in taxes that is often very true when facing statute of limitations to fix a problem.  But in Information Letter INFO 2017-0028 the IRS “solved” the taxpayer’s problem from 2006, largely by pointing it there really wasn’t the problem the taxpayer thought existed.

While we don’t know for sure why the taxpayer decided to look back at his actions in 2006 at this late date, he did so and contacted his Congressman who contacted the IRS.  The taxpayer in 2006 had rolled 401(k) funds from his employer’s plan to a traditional IRA.  However, the 401(k) included after-tax contributions and the taxpayer indicated he had “inadvertently” rolled those funds into a traditional IRA rather than a Roth IRA.  The taxpayer was asking how he could get credit for the taxes he had paid on those funds.

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Employer Retirement Account Being Paid to Spouse of Employee Cannot be Transferred to Inherited IRA of Spouse's Beneficiary at Spouse's Death

A surviving spouse was being paid out of an employer sponsored retirement plan based on an account held by the now deceased spouse.  In Information Letter INFO 2017-0030 the IRS addressed the question of whether, now that the surviving spouse had passed away, the balance of the account could be transferred to an inherited IRA for the benefit of a beneficiary of the surviving spouse.

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Six Year Statute on Failure to Report Income from Foreign Assets Does Not Apply to Years Before Asset Information Reporting Required

The first published Tax Court decision of 2018 deals with an issue that likely won’t impact a whole lot of taxpayers, but does give a look at how the court interpret a statute.  The case of Rafizadeh v. Commissioner, 150 TC No. 1 looks at how the expansion of the statute of limitations for cases involving a failure to report income from foreign financial assets applies to years before the information reporting for those assets applied.

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Qualified Business Income: A Summary of the Provision in the Tax Cuts and Jobs Act

As part of the Tax Cuts and Jobs Act signed into law on December 22, 2017 a new deduction is made available to taxpayers other than corporations that is based on passthrough income.  In this case, passthrough includes not only income from a partnership or S corporation, but also income from any unincorporated trade or business operated by the taxpayer.

The deduction is the total of:

  • The “combined qualified business income amount” of the taxpayer (subject to an adjusted taxable income limit) plus
  • 20% of the aggregate amount of qualified cooperate dividends (subject to a separate adjusted taxable income limit)

The qualified business income deduction is not adjusted for preferences and adjustments in the computation of alternative minimum taxable income. [IRC §199(f)(2)]

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CPAR Opt-Out Final Regulations Issued by IRS

Some partnerships will be authorized under the Centralized Partnership Audit Regime (CPAR) to elect to opt out of the centralized exams if they meet certain requirements.  Reg. 301.6221(b)-1 (TD 9829) provides the details for which partnerships can opt out and how they will go about doing so.

CPAR, which takes effect for returns filed for years beginning on or after January 1, 2018, represents a major change in how partnership returns will be examined.  By default, a tax will be determined and assessed at the partnership level (IRC §6221(a)).  In the alternative, a partnership subject to CPAR can elect to push out the adjustments to the partners in the year under review (IRC §6226).

Congress provided an option for some partnerships to elect out of CPAR and instead be taxed under traditional partnership exam rules (what were the small partnership examinations under the now repealed TEFRA rules).  Note that the election is an annual election, so electing to opt out of CPAR for 2018 does not require the partnership to opt out for 2019, nor will the partnership be opted out for 2019 unless the partnership both qualifies to make the election and files a timely election.

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IRS Issues News Release on Prepayment of 2018 Real Estate Taxes Due to TCJA

With the upcoming limitation to $10,000 annually for any deduction for state and local taxes on Schedule A, questions arose about being able to prepay taxes before the end of 2017 to obtain the unlimited deduction rather than face the $10,000 cap beginning in 2018.  Congress shut down any thought of prepaying 2018 income taxes, treating any payment of 2018 taxes made in 2017 as being paid in 2018 (IRC §164(b)(6) after revision by the Tax Cuts and Jobs Act).

With prepaying income tax shut down, taxpayers began to think about prepaying property taxes, with a number of localities providing methods to advance pay taxes for 2018.  But if a tax has not yet been assessed or billed, can that tax be deemed “paid” under IRC §164(a)?

In response to these developments, the IRS issued News Release IR-2017-210, IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017.  The news release provides information on the types of payments made before the end of 2017 that can be deducted on the 2017 return.

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SEC Issues Interpretative Bulletin on Applying ASC 740 in Light of TCJA

It’s not often we talk about financial reporting issues in this venue, but the enactment of the Tax Cuts and Jobs Act creates issues for financial reporting involving accounting for income taxes under Accounting Standards Codification (ASC) 740.  Under ASC 740-10-35-4 an entity must take into account the impact of a change in tax law on the entity’s deferred tax liabilities, assets and valuation allowances.  ASC 740-10-55-62 makes clear this takes place in the period that includes the date of enactment of the revised law.

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, which makes that the date of enactment of the law.  Given the complex changes that are part of this law, it may not be possible to complete an evaluation of the impact of this law on an entity’s deferred tax liabilities, assets and valuation allowances in time for reporting activity for the period ended December 31, 2017.

In recognition of this issue, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118.  The bulletin allows registrants to make a reasonable estimate of the effects of TCJA and report that as a provisional amount during the “measurement period.”

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IRS Announces New Withholding Guidance for TCJA Will Make Use of Existing Form W-4

The IRS announced that the changes in guidance for withholding of income taxes required due to the passage of the Tax Cuts and Jobs Act (TCJA) will not require a new Form W-4 to be issued (IRS Website, IRS Statement – Withholding for 2018).  Thus, the form will continue to reference “exemptions” that will serve to adjust the amount of an employee’s withholding even though the law itself eliminates the actual deduction for personal and dependent exemptions.

The W-4 has always used exemptions to cover any reduction in taxes expected due to deductions, credits and other adjustments, not just the amount of adjustment in expected taxes that was created by the actual exemptions.  By continuing to use exemptions on the form, the IRS has greatly simplified the work of revising payroll systems to deal with the new tax law.

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Group of Films Licensed Together Can Qualify as an Item for Section 199

A package of films licensed by a taxpayer in the normal course of business can qualify as an item under Reg. §1.199-3(d)(1)(i) for purposes of the domestic production activity deduction under §199 per Revenue Ruling 2018-3.

The ruling looks at the following facts:

X Corporation (X) licenses a package of films (for example, a television channel) to customers for a fee in the normal course of its business. X's package contains films licensed to X by unrelated third parties and films produced by X. X pays license fees for distribution rights of the licensed films.

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IRS Provides Safe Harbor Casualty Loss Procedures for Damage to Personal Residences and Contents

The IRS has provided two general purpose safe harbors for claiming a casualty loss related to a personal residence and its contents (in Revenue Procedure 2018-8), as well as one tailored for the hurricanes that took place in 2017(Revenue Procedure 2018-9).

The general purpose ruling provided for safe harbor methods for claiming an amount of casualty loss using a simpler method than getting “before event” and “after event” appraisals.  One set of the general purpose relief provisions apply to any losses, while the second set only apply if the loss arises from a federally declared disaster.

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IRS Extends to March 2 Date for Providing Insurance Forms 1095 to Individuals

The IRS announced in Notice 2018-6 an extension of the due date for furnishing Form 1095-B, Health Coverage, and Form 1095-C, Employer Provided Health Insurance Offer and Coverage to individuals for 2017 from January 31, 2018 to March 2, 2018.

However, the date for filing copies of the forms with the IRS has not been extended this year, thus they will continue to be due on February 28, 2018 if not electronically with the IRS, and April 2, 2018 for those filing electronically.

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Only Accounts Established Using Detailed Secure Access Methods Will Now Have Access to e-Services Accounts

The IRS announced on their website page “e-Services - Online Tools for Tax Professionals”[1] that all access to e-Services beginning on December 10, 2017 requires the use of an account that was established using the IRS’s Secure Access authentication.  If a professional has not established an e-Services account by going through the more detailed process, the professional will be required to sign up again using the more detailed (and difficult to complete) process.

Secure Access is meant to make it more difficult for an individual to impersonate a taxpayer or professional.  As the IRS describes the program in their announcement made on December 8[2]:

Secure Access helps protect online tools in two ways: it has a more rigorous identity-proofing process which helps ensure the users are who they say they are, and it requires returning users to use a two-factor access process by entering their credentials (username and password) plus a security code sent as a text message to their mobile phone or a security code generated by the new IRS2Go app feature. This two-factor authentication process meets required federal standards for protecting information.

The IRS is technically correct that both methods are currently allowed under the National Institute of Science and Technology (NIST) standards, the use of SMS as the two-factor vehicle is less secure and the NIST has stated it is being deprecated and may no longer be acceptable at some point in the future.[3]  The NIST issued this statement over a year ago.

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