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Tax Updates - Archived (October 2020 - August 2020)
October 2020
C Corporations
IRS Issues Final Consolidated Return Regulations: In T.D. 9927, the IRS issued final regulations under Code Sec. 1502 and Code Sec. 1503. The regulations (1) provide guidance implementing recent statutory amendments to Code Sec. 172 relating to the absorption of consolidated net operating loss carryovers and carrybacks, and (2) update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.
CARES Act
IRS Cannot Withhold Recovery Rebate Payments from Incarcerated Individuals: In Scholl v. Mnuchin, 2020 PTC 308 (N.D. Cal. 2020), a district court held that the Department of Treasury and the IRS cannot withhold recovery rebate payments (also known as economic impact payments), which were authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), from individuals on the sole basis of those individuals being incarcerated. The court gave the Treasury Department 30 days to reconsider any claim filed through the "non-filer" online portal or otherwise that was previously denied solely on the basis of the claimant's incarcerated status and ordered the Treasury Department to, within 45 days, file a declaration confirming all steps ordered by the court have been implemented.
Lenders Should Not File Information Returns for Loans Forgiven under PPP: In Announcement 2020-12, the IRS notified lenders that they should not file information returns or furnish payee statements under Code Sec. 6050P to report the amount of qualifying forgiveness with respect to covered loans made under the Paycheck Protection Program (PPP), a program authorized by the CARES Act. According to the IRS, when all or a portion of the stated principal amount of a covered loan is forgiven because the eligible recipient satisfies the applicable forgiveness requirements, an applicable entity is not required to, for federal income tax purposes only, and should not, file a Form 1099-C, Cancellation of Debt, information return with the IRS or provide a payee statement to the eligible recipient under Code Sec. 6050P as a result of the qualifying forgiveness.
Deductions
Personal Bankruptcy Petition Can't Be Used to Substantiate Business Expenses: In Ronning v. Comm'r, 2020 PTC 322 (11th Cir. 2020), the Eleventh Circuit affirmed the Tax Court and held that a taxpayer, whose business records were destroyed after he failed to pay storage fees at the facility where he kept his records, could not use his personal bankruptcy petition to substantiate business expenses in the form of interest that he contended had accrued on 12 bank loans listed as unsecured debts in the petition. The court also agreed with the Tax Court that the taxpayer was a cash method taxpayer and thus could not deduct expenses for interest that accrued but were never paid.
No Theft Loss Deduction Allowed; Loss Wasn't Claimed in "Discovery" Year: In Giambrone v. Comm'r, T.C. Memo. 2020-145, the Tax Court held that two brothers, who went into business together and founded a bank, were not entitled to a theft loss deduction under Rev. Proc. 2009-20 on their 2012 tax returns as a result of actions by a bank officer who looted the bank and forced it into receivership. The court concluded that, because the indictment of that bank officer happened in 2010, that was the year the loss was discovered for purposes of Rev. Proc. 2009-20.
Employee Benefits
IRS Issues 2021 Inflation-Adjusted Maximum Dollar Amount for Excepted Benefit HRAs: In Rev. Proc. 2020-43, the IRS issued the inflation-adjusted maximum dollar amount that may be made newly available for excepted benefit health reimbursement arrangements or other account-based group health plans for plan years beginning after December 31, 2020, and before January 1, 2022. Due to indexing methodology requiring rounding down to the nearest $50 increment, the amount remains $1,800 for the 2021 plan year.
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-77, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
Excise Taxes
Final Regs Provide Guidance on Excise Tax on Certain Colleges and Universities: In T.D. 9917, the IRS issued final regulations for determining the excise tax under Code Sec. 4968, as enacted by the Tax Cuts and Jobs Act of 2017, on the net investment income of an applicable educational institution. The final regulations provide that an "applicable educational institution" is any eligible educational institution (as defined in Code Sec. 25A(f)(2) and Reg. Sec. 1.25A-2(b)(1) that had at least 500 tuition-paying students attending the institution during the preceding tax year; (2) more than 50 percent of whose tuition-paying students are located in the United States; (3) that is not described in the first sentence of Code Sec. 511(a)(2)(B) (relating to state colleges and universities); and (4) the aggregate fair market value of the assets of which at the end of such preceding tax year (other than those assets that are used directly in carrying out the institution's exempt purpose) is at least $500,000 per student attending the institution.
Foreign
IRS Modifies Source-of-Income Rules: In T.D. 9921, the IRS issued final regulations modifying the rules for determining the source of income from sales of inventory produced within the United States and sold without the United States or vice versa. The final regulations also (1) contain new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the United States, and (2) modify certain rules for determining whether foreign source income is effectively connected with the conduct of a trade or business within the United States.
Final Regulations Address Multiple Foreign-Related Tax Issues: In T.D. 9922, the IRS issued final regulations addressing the following issues: (1) the allocation and apportionment of deductions under Code Sec. 861 through Code Sec. 865, including rules on the allocation and apportionment of expenditures for research and experimentation, stewardship, legal damages, and certain deductions of life insurance companies; (2) the allocation and apportionment of foreign income taxes; (3) the interaction of the branch loss and dual consolidated loss recapture rules with Code Sec. 904(f) and (g); (4) the effect of foreign tax redeterminations of foreign corporations, including for purposes of the application of the high-tax exception described in Code Sec. 954(b)(4) (and for purposes of determining tested income under Code Sec. 951A(c)(2)(A)(i)(III)), and required notifications under Code Sec. 905(c) to the IRS of foreign tax redeterminations and related penalty provisions; (5) the definition of foreign personal holding company income under Code Sec. 954; (6) the application of the foreign tax credit disallowance under Code Sec. 965(g); and (7) the application of the foreign tax credit limitation to consolidated groups. The final regulations also address (1) the reduction to a hybrid deduction account under Code Sec. 245A(e) by reason of an amount included in the gross income of a domestic corporation under Code Sec. 951(a) or Code Sec. 951A(a) with respect to a controlled foreign corporation (CFC); (2) the treatment of a hybrid instrument as a financing transaction for purposes of the conduit financing rules under Code Sec. 881; and (3) the treatment under Code Sec. 951A of certain prepayments made to a related CFC after December 31, 2017, and before the CFC's first tax year beginning after December 31, 2017.
IRS Proposes Foreign Tax Credit Regulations: In REG-101657-20, the IRS released proposed regulations relating to the foreign tax credit, including guidance on (1) the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; (2) the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; (3) the definition of a foreign income tax and a tax in lieu of an income tax; (4) transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by reason of the Coronavirus Aid, Relief, and Economic Security Act; (5) the definition of foreign branch category and financial services income; and (6) the time at which foreign taxes accrue and can be claimed as a credit.
Innocent Spouse
Innocent Spouse Relief Granted to Taxpayer Who Gave Up Spousal Support in Divorce: In Robinson v. Comm'r, T.C. Memo. 2020-134, the Tax Court granted innocent spouse relief to a taxpayer who, as part of her divorce agreement, agreed to waive spousal support and any rights to her husband's business assets in exchange for her husband's assumption of their 2010 tax liability. The court noted that the taxpayer did not receive a significant benefit from the nonpayment of the 2010 taxes while her husband did receive a benefit from the nonpayment, including the earning of social security credits.
Procedure
Second Circuit Rejects President's Appeal Relating to Accounting Firm's Documents: In Trump v. Vance, 2020 PTC 327 (2d Cir. 2020), the Second Circuit affirmed a district court and held that a grand jury subpoena issued by the District Attorney of the County of New York to President Trump's accounting firm was not overly broad nor was it issued in bad faith. According to the court (1) the President's bare assertion that the scope of the grand jury's investigation was limited only to certain payments made by Michael Cohen in 2016 amounted to nothing more than implausible speculation; (2) without the benefit of this linchpin assumption, all other allegations of overbreadth - based on the types of documents sought, the types of entities covered, and the time period covered by the subpoena, as well as the subpoena's near identity to a prior Congressional subpoena - fell short of meeting the plausibility standard; and (3) the President's allegations of bad faith failed to raise a plausible inference that the subpoena was issued out of malice or an intent to harass.
Wind Farm's Indemnification Agreement Doesn't Affect Suit Against the Government: In Pacific Wind, LLC v. U.S., 2020 PTC 328 (Fed. Cl. 2020), the Court of Federal Claims denied a government motion to dismiss a complaint by the owner of a wind farm who alleged that the government underpaid it by more than $8.4 million when it made a grant to the taxpayer pursuant to Section 1603 of the American Recovery and Reinvestment Act of 2009. The court rejected the government's argument that an indemnification agreement under which the seller of the wind farm agreed to indemnify the wind farm for any Section 1603 grant shortfall meant that the taxpayer lacked standing to bring the case and instead held that the government's obligation to the wind farm was not affected by the fact that it had an indemnification agreement in place.
New Procedure Aims to Facilitate Market's Transition Away from LIBOR: In Rev. Proc. 2020-44, the IRS issued guidance aimed at facilitating the market's transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates by mitigating certain potential tax consequences of adopting fallback language recommended by the Alternative Reference Rates Committee (ARRC) and the International Swaps and Derivatives Association (ISDA). The guidance generally provides that modifying certain contracts to incorporate the ARRC's and ISDA's recommended fallback language will not result in a realization event and, generally, such modifications will not result in legging out of an integrated transaction or in the disposition or termination of either leg of a hedging transaction.
IRS Abused Its Discretion in Denying Whistleblower Claim: In Doyle v. Comm'r, T.C. Memo. 2020-139, the Tax Court held that the rejection by the IRS Whistleblower Office (WBO) of a whistleblower claim was not supported by the administrative record and thus constituted an abuse of discretion. The court also found that because the WBO's determination was not based on the non-collection of proceeds, the IRS could not rely on that supposed ground to defend its rejection of the claim.
Form 1040-NR Removed from List of Returns Exempt from Electronic Filing: In Notice 2020-70, the IRS modified Notice 2011-26 to generally remove Form 1040-NR, U.S. Nonresident Alien Income Tax Return, from the list of returns that are administratively exempt from the electronic filing requirement imposed on specified tax return preparers by Code Sec. 6011(e)(3) and Reg. Sec. 301.6011-7, and to provide the circumstances under which the Form 1040-NR remains subject to the exemption. In addition, the notice provides that future updates to the list of returns in Notice 2011-26 that are administratively exempt from the electronic filing requirement due to IRS e-file limitations will be provided for in IRS Publication 4164, Modernized e-File (MeF) Guide for Software Developers and Transmitters.
IRS Issues Transition Relief for Certain Employer Health Coverage Reporting: In Notice 2020-76, the IRS extended the due dates for certain health insurance reporting under Code Sec. 6055 and Code Sec. 6056 from January 31, 2021, to March 2, 2021, for insurers, self-insuring employers, applicable large employers, and certain other providers of minimum essential coverage to furnish to individuals the 2020 Form 1095-B, Health Coverage, and the 2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. The IRS also said that it will not impose a penalty under Code Sec. 6722 for failures to furnish a Form 1095-B to responsible individuals and is providing a final extension of transitional good-faith relief from Code Sec. 6721 and Code Sec. 6722 penalties to the 2020 information reporting requirements under Code Sec. 6055 and Code Sec. 6056.
IRS Special Agent Guilty of Filing False Returns, Stealing, and Obstructing Justice: In U.S. v. Aleykina, 2020 PTC 306 (9th Cir. 2020), the Ninth Circuit affirmed a district court's judgment which found a former IRS Special Agent, who investigated criminal tax fraud, guilty of filing false tax returns, stealing government money, and obstructing justice. The court rejected her argument that she did not destroy evidence and thus did not obstruct justice after finding that, while she failed in her attempt to destroy files on her computer, in her attempt to do so she still altered evidence and thus obstructed justice.
Additional Examples of Disclosure of Third-Party Tax Information Released: In CC-2020-008, the Office of Chief Counsel supplemented CC-2006-003 and CC-2006-006 to provide five additional examples, in Q&A format, relating to disclosures of third-party tax information in syndicated conservation easement matters. In Q&A-3, the Chief Counsel's Office stated that, pursuant to Code Sec. 6103(l)(4)(B), third party returns or return information can be disclosed to the IRS Office of Professional Responsibility as part of a referral or investigation of a tax return preparer or an appraiser.
September 2020
Accounting
IRS issues September 2020 Applicable Federal Rates: In Rev. Rul. 2020-16, the IRS issued a ruling which prescribes the applicable federal rates for September 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.
Bankruptcy
Debtor Can't Invoke CARES Act Provision to Extend Term of Bankruptcy Plan: In In re Roebuck, 2020 PTC 287 (Bankr. W.D. Pa.), a bankruptcy court rejected confirmation of a debtor's proposed amended bankruptcy plan, which had the support of the bankruptcy trustee and which relied on Section 1329(d) of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and which sought to extend the term of the plan beyond five years. The court held that the debtor could not invoke Section 1329(d) of the CARES Act because that provision applies only to plans confirmed under Bankruptcy Code Section 1325(a) before March 27, 2020, and the debtor's interim confirmation plan did not qualify as a confirmed plan under Section 1325.
Provision in Bankruptcy Plan Dealing with Tax Refunds Is Invalid: In In re Diaz, 2020 PTC 270 (5th Cir. 2020), the Fifth Circuit held that a provision in a local chapter 13 bankruptcy plan, which requires that debtors in the Western District of Texas turn over to the bankruptcy trustee any tax refund received in excess of $2,000 is invalid because it abridges debtors' substantive rights and conflicts with the Supreme Court's guidance on 11 U.S.C. Section 1325(b)(2) in Hamilton v. Lanning, 560 U.S. 505 (2010). As a result, the court vacated the bankruptcy court's confirmation of a debtor's bankruptcy plan and remanded to allow the debtor to file a new plan.
Credits
Final Regs Clarify Effect of Personal Exemption on Premium Tax Credit: In T.D. 9912, the IRS issued final regulations under Code Sec. 36B and Code Sec. 6011 that clarify that the reduction of the personal exemption deduction to zero for tax years beginning after December 31, 2017, and before January 1, 2026, does not affect an individual taxpayer's ability to claim the premium tax credit. The final regulations affect individuals who claim the premium tax credit.
Rehabilitation Credit Regs Finalized Without Any Modifications: In T.D. 9915, the IRS finalized proposed regulations, without any modifications, which provide that the rehabilitation credit is properly determined in the year a qualified rehabilitated building (QRB) is placed in service but allocated ratably over the five-year period beginning in such year as required by the Tax Cuts and Jobs Act of 2017 (TCJA), rather than being allocated entirely to the tax year the QRB is placed in service as under Code Sec. 47 before the TCJA. The final regulations, which add Reg. Sec. 1.47-7(a) through (f), include: (1) a general rule for calculating the rehabilitation credit; (2) definitions of ratable share and rehabilitation credit determined; (3) a rule coordinating the changes to Code Sec. 47 with the special rules in Code Sec. 50; and (4) examples illustrating the interaction of Code Sec. 47 with rules in Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property), and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).
Deductions
Taxpayer Can't Deduct Expenses for Meals with Current and Former Spouse: In Franklin v. Comm'r, T.C. Memo. 2020-127, the Tax Court held that a taxpayer who deducted numerous expenses for meals, entertainment, and travel failed to adequately substantiate and document such expenses. The court noted that the taxpayer's meal log included several charges for meals with his former spouse and his current spouse and had asserted unconvincingly that the purpose of these meetings was to discuss real estate opportunities.
Processed Marine Seismic Data Is Not Qualifying Property under Former Sec. 199: In TGS-NOPEC Geophysical Company and Subsidiaries v. Comm'r, 155 T.C. No. 3 (2020), the Tax Court held that a company's processed marine seismic data is not qualifying production property within the meaning of former Code Sec. 199(c)(5) because it is neither tangible personal property nor a sound recording and, as a result, the company was not entitled to a deduction under former Code Sec. 199 on its 2008 tax return with respect to such property. The court also concluded that (1) the company's processing of marine seismic data constitutes engineering services performed in the United States with respect to the construction of real property under former Code Sec. 199(c)(4), but its gross receipts from such services are domestic production gross receipts (DPGR) only to the extent that such construction activities are within the United States; and (2) to the extent that the company received gross receipts from its parent company for processing services of its parent's data for the parent's clients, such revenue does not constitute DPGR for purposes of former Code Sec. 199.
Final Regs Address Deductions for Contributions to Nuclear Decommissioning Trusts: In T.D. 9906, the IRS issued final regulations under Code Sec. 468A relating to deductions for contributions to trusts maintained for decommissioning nuclear power plants and the use of the amounts in those trusts to decommission nuclear plants. The regulations revise and clarify certain provisions in existing regulations to address issues that have arisen as more nuclear plants have begun the decommissioning process.
Employee Benefits
IRS Expands Situations Where Certain Plan Amendment Deadlines Can Be Expanded: In Rev. Proc. 2020-40, the IRS modified Section 15.05 of Rev. Proc. 2016-37, and Section 12.02 of Rev. Proc. 2019-39, to expand the situations in which the plan amendment deadline for discretionary amendments made to qualified pre-approved plans and Code Sec. 403(b) pre-approved plans may be extended. These modifications are consistent with the extensions of the plan amendment deadlines for discretionary amendments set forth in Section 8.02 of Rev. Proc. 2016-37 with respect to qualified individually designed plans and Section 6.02 of Rev. Proc. 2019-39 with respect to Code Sec. 403(b) individually designed plans.
Excise Taxes
Powered Glider Kit Refurbished Tractors Did Not Qualify for Excise Tax Safe Harbor: In Schneider National Leasing, Inc. v. U.S., 2020 PTC 292 (E.D. Wisc. 2020), a district court held that 912 of a trucking company's purchase of 976 tractors were not repaired or modified and thus did not fall within the safe harbor provisions of Code Sec. 4052(f) and were subject to the 12 percent excise tax under Code Sec. 4051(a)(1)(E). The court agreed with the IRS that, with respect to the taxpayer's 912 powered glider kit refurbished tractors, the taxpayer's manufacture and subsequent use or lease of the refurbished tractors did not meet the safe harbor because the taxpayer had not "repaired or modified" articles for purposes of that provision.
Gross Income
Convertible Virtual Currency Received for Performing Microtasks Is Ordinary Income: In CCA 202035011, the Office of Chief Counsel advised that an individual who receives convertible virtual currency for performing a microtask through a crowdsourcing or similar platform has received consideration in exchange for performing a service, and the receipt of such currency is taxable as ordinary income. In addition, the Chief Counsel's Office stated that such compensation may also be subject to self-employment tax. CCA 202035011 (8/28/20).
Insurance Companies
Final Insurance Regulations Implement Legislative Changes: In T.D. 9911, the IRS issued final regulations that provide guidance on the computation of life insurance reserves and the change in basis of computing certain reserves of insurance companies. The final regulations implement recent legislative changes and affect entities taxable as insurance companies.
International
Soldier's Ties to U.S. Preclude Eligibility for Foreign Earned Income Exclusion: In Haskins v. Comm'r, 2020 PTC 289 (11th Cir. 2020), the Eleventh Circuit affirmed a Tax Court holding that an Army intelligence officer who lived and worked on a base in Afghanistan was not eligible for the foreign earned income exclusion under Code Sec. 911(a) given her strong ties to the United States and her weak ties abroad. The court noted that the taxpayer maintained strong connections to the United States in the form of her driver's license, home in Arizona, and bank account and that she continued to be involved in her family's finances, as reflected by her supporting her son's schooling, paying household bills, and buying gift cards for her husband.
IRS Defers Applicability Date One Year for Foreign-Related Regs: In Notice 2020-73, the IRS announced its intention to amend the applicability dates in Reg. Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and 1.989(a)-1 of the 2016 final regulations and Reg. Sec. 1.987-2 and Reg. Sec. 1.987-4 of the related 2019 final regulations to provide that the 2016 final regulations and the related 2019 final regulations apply to tax years beginning after December 7, 2021 (the amended applicability date). Previously, the regulations were set to apply to tax years beginning after December 7, 2020.
IRS Finalizes Base-Erosion and Anti-Abuse Tax Regulations: In T.D. 9910, the IRS issued final regulations that provide guidance on the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties.
IRS Issues Final Regs under Secs. 245A and 954: In T.D. 9909, the IRS issued final regulations under Code Sec. 245A and Code Sec. 954 that limit the deduction for certain dividends received by United States persons from foreign corporations under Code Sec. 245A and the exception to subpart F income under Code Sec. 954(c)(6) for certain dividends received by controlled foreign corporations. The IRS also issued final regulations under Code Sec. 6038 regarding information reporting to facilitate administration of the final regulations.
Prop. Regs Address Extraordinary Dispositions and Disqualified Basis Rules: In REG-124737-19, the IRS issued proposed regulations under Code Sec. 245A and Code Sec. 951A that coordinate the extraordinary disposition rule under Code Sec. 245A with the disqualified basis rule under Code Sec. 951A. The IRS also issued proposed regulations under Code Sec. 6038 regarding information reporting to facilitate administration of the proposed regulations.
Procedure
Interest Rates for the Fourth Quarter of 2020 Remain Unchanged: In Rev. Rul. 2020-18, the IRS announced that the interest rates for the fourth quarter of 2020 will be the same as they were for the third quarter of 2020. Thus, the rates for interest determined under Code Sec. 6621 for the calendar quarter beginning October 1, 2020, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for underpayments, 5 percent for large corporate underpayments, and the rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent.
Whistleblower's Claim Rejected, Even After Court Allows Additional Evidence: In Bemmelen v. Comm'r, 154 T.C. No. 4 (2020), the Tax Court granted a whistleblower's motion to supplement the administrative record on his case with a 2012 submission that had been made to the IRS, but rejected the whistleblower's motion to supplement the record with respect to a 2019 document. The court also concluded that because the Director of the IRS Whistle Blower Office (WBO) did not improperly redelegate his authority to analyze the whistleblower's information, and because the WBO's rejection of the whistleblower's claim was supported by the administrative record, as completed, and was not arbitrary, capricious, or an abuse of discretion, or otherwise not in accordance with law, the IRS's motion for summary judgment should be granted.
Tax Court Has Jurisdiction under Supreme Court Precedent to Enforce Prior Decisions: In Whistleblower 21276-13W v. Comm'r, 155 T.C. No. 2 (2020), the Tax Court held that, with respect to two prior decisions (the "Decisions") entered by the court that set forth the dollar amounts of two whistleblowers' awards, the Tax Court had jurisdiction to enter the Decisions because a remand to the IRS Whistleblower Office for further proceedings would have been futile as only one disposition was possible as a matter of law on the issue before the Tax Court. The court further held that, as a court of record, it has jurisdiction to enforce the Decisions under longstanding Supreme Court precedent and the court rejected the whistleblowers' motions for relief because they ignored the terms of the partial settlement and misinterpreted the Decisions.
S Corporations
IRS Plans to Issue Regs Dealing with S Corporations and Foreign-Related Income: In Notice 2020-69, the IRS announced that it intends to issue regulations addressing the application of Code Sec. 951 and Code Sec. 951A to certain S corporations with accumulated earnings and profits and stated that, for those S corporations electing the treatment provided in the regulations, global intangible low-taxed income (GILTI) inclusions would create an accumulated adjustments account. The IRS also announced that it will issue rules (1) which address the treatment of qualified improvement property under the alternative depreciation system of Code Sec. 168(g) for purposes of calculating qualified business asset investment for purposes of the foreign-derived intangible income and GILTI provisions, and (2) which, when issued, would implement recent clarifications enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
August 2020
Accounting
IRS Issues August 2020 Applicable Federal Rates: In Rev. Rul. 2020-15, the IRS issued a ruling which prescribes the applicable federal rates for August 2020. The ruling provides various prescribed rates under Code Sec. 1274 for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.
CARES Act
Court Allows Challenge to CARES Act Economic Impact Payment Rule to Move Forward: In Amador v. Mnuchin, 2020 PTC 237 (D. Md. 2020), a district court denied a motion by the U.S. government to dismiss a case challenging the constitutionality of Code Sec. 6428(g)(1)(B), which operates in tandem with Code Sec. 6428(g)(2) to exclude otherwise eligible individuals and their children from receipt of economic impact payments (EIPs) authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) if they file a joint tax return and if their spouse lacks a social security number (SSN). The plaintiffs are 16 American citizens, some with U.S. citizen children, who are married to individuals who use an individual taxpayer identification number (ITIN) to file a federal tax return and who, but for their spouse's lack of a SSN, would otherwise be eligible to receive an EIP.
IRS Reopens Registration for Certain Individuals to Claim $500 CARES Act Rebate: In IR-2020-180, the IRS stated that it reopened the registration period from August 15, 2020, to September 30, 2020, for recipients of social security, railroad retirement, SSI and VA benefits who did not file a tax return in 2018 or 2019 to register to receive the additional $500 per-child Economic Impact Payment (EIP) amount. The IRS stated that eligible recipients could expect to receive these EIP payments in October of 2020 and that those who miss the September 30 deadline will need to file a 2020 return in order to receive the payments. Previously, in IR-2020-86 (5/1/20), the IRS had stated that non-filers had until May 6, 2020, to register for these payments.
Individuals Receiving Economic Impact Statement Should Hang onto Notice 1444: The IRS is advising that anyone who received an Economic Impact Payment (EIP) this year should keep Notice 1444, Your Economic Impact Payment, with their tax records. This notice, which the IRS said it mailed to each recipient's last known address within 15 days after the payment went out, provides information about the amount of the recipient's payment, how the payment was made, and how to report any payment that wasn't received.
Credits
COVID-19-Related Relief Provided for Certain Rehabilitation Credit Deadlines: In Notice 2020-58, the IRS provides COVID-19-related relief pursuant to Code Sec. 7508A(a) for certain requirements relating to the rehabilitation credit under Code Sec. 47. The relief relates to the measuring period under the substantial rehabilitation test and the deadline for a Tax Cuts and Jobs Act transition rule relating to the measuring period in which the requisite amount of qualified rehabilitation expenditures have to be paid or incurred in order to satisfy a substantial rehabilitation test for a building.
Deductions
Studying for Real Estate Exam Doesn't Qualify Towards Meeting 750 Hour Test: In Johnson v. U.S., 2020 PTC 230 (D. Nev. 2020), a district court held that a couple's activities related to their Schedule E real estate rental losses were passive and therefore not deductible after the court determined that the wife did not qualify as a real estate professional because she did not meet the requisite 750 hours of work in real estate activities that is necessary for qualifying for the real estate professional exemption. The court rejected the couple's argument that the time spent by the wife studying for the California real estate exam had to be counted in determining if she met the 750 hours test after noting that a license is not a requirement for meeting the material participation rules under Reg. Sec. 1.469-5T.
Marine Can Deduct Portion of Basic Housing Allowance Paid to Ex-Wife as Alimony: In Winslow v. Comm'r, T.C. Summary 2020-22, the Tax Court held that of the $24,000 of payments made by Marine for the support of his former wife and their child, the Marine was entitled to deduct $17,820 as alimony. The court noted that the Marine family support policy requires family support payments equal to two-thirds of a marine's basic housing allowance but, if no child is involved, the Marine policy is to pay one-half of the basic housing allowance which, in the taxpayer's case, was $17,820 per year.
Employee Benefits
IRS Issues Monthly Corporate Yield Curve and Segment Rates: In Notice 2020-64, the IRS provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under Code Sec. 417(e)(3), and the 24-month average segment rates under Code Sec. 430(h)(2). In addition, the notice provides guidance as to the interest rate on 30-year Treasury securities under Code Sec. 417(e)(3)(A)(ii)(II), as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under Code Sec. 431(c)(6)(E)(ii)(I).
IRS Issues Guidance on Pension Plans for Community Newspapers: In Notice 2020-60, the IRS issued guidance on the election of alternative minimum funding standards for certain defined benefit pension plans under Code Sec. 430(m), which was added by Section 115 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). In addition to summarizing the relevant provisions of Code Sec. 430(m), the guidance (1) specifies the applicable U.S. Treasury obligation yield curve that is used to determine the present value of certain increases in benefits; (2) sets forth rules and procedures relating to the election under Code Sec. 430(m), including a limited period for plan sponsors to make the election for prior years; (3) provides relief related to the impact of the election on the application of Code Sec. 436; (4) provides additional flexibility under Code Sec. 430 to facilitate retroactive elections; and (5) provides guidance on the reporting requirements that reflect the effect of the election.
IRS to Change User Fees for Certain Employee Plan Rulings: In Announcement 2020-14, the IRS announced changes to user fees relating to certain requests for letter rulings and determinations that will take effect on January 4, 2021. According to the IRS, the increased user fees will be reflected in Rev. Proc. 2021-4.
Excise Taxes
IRS Issues Proposed Regulations Relating to Air Transportation Excise Taxes: In REG-112042-19, the IRS issued proposed regulations relating to excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the proposed regulations (1) address the exemption for amounts paid for certain aircraft management services; (2) amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete; (3) generally update the existing regulations to incorporate statutory changes, case law, and other published guidance; and (4) withdraw a provision that was included in a prior notice of proposed rulemaking that was never finalized and re-propose it.
Deadline Extended for First Quarter Excise Tax for Sport Fishing or Archery Equipment: In Notice 2020-55, the IRS postponed until October 31, 2020, the deadline for excise tax filing and payment deadlines, and associated interest, penalties, and additions to tax, for taxpayers who owe a federal excise tax for sales of sport fishing or archery equipment for the first quarter of 2020. Previously, in Notice 2020-48, the IRS postponed certain federal tax filing and payment deadlines related to second quarter 2020 sport fishing and archery equipment excise taxes.
Gross Income
Native American Treaties Don't Create Individual Exemption from Taxes: In Perkins v. Comm'r, 2020 PTC 249 (2d Cir. 2020), the Second Circuit, in an issue of first impression, agreed with the Tax Court that neither the 1794 Treaty of Canandaigua nor the 1842 Treaty with the Seneca Nation of Indians create an individualized exemption from federal income taxes for income derived from Seneca land. The court (1) rejected an argument that suggested otherwise made by a couple operating a company that sold gravel mined from land belonging to the Seneca Nation of Indians because, the court said, the couple's view was premised upon the erroneous presumption that an exemption from federal taxes for income derived from land held in trust for American Indians extends to land that remains in the possession of the Seneca Nation of Indians and (2) concluded that, to the extent the 1842 Treaty with the Seneca created an exemption from taxes on Seneca land, that exemption does not cover income derived from Seneca land by individual enrolled members of the Seneca Nation.
Procedure
IRS Withdraws Prop. Regs on Non-governmental Attorneys' Participation in Exams: In REG-132434-17, the IRS withdrew proposed regulations which would have, with limited exception, excluded non-government attorneys from (1) receiving summoned books, papers, records, or other data, or (2) participating in the interview of a witness summoned by the IRS to provide testimony under oath. Current regulations permit any person authorized to receive returns and return information under Code Sec. 6103(n) and the regulations thereunder to receive and review summoned books, papers, and other data, and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a witness in a summons interview.
IRS Announces That Taxpayers Can Now Submit Amended Returns Electronically: In IR-2020-182 (8/17/20), the IRS announced that taxpayers can now submit Form 1040-X, Amended U.S. Individual Income Tax Return, electronically using commercial tax-filing software. The IRS noted that for the initial phase, only tax year 2019 Forms 1040 and 1040-SR can be amended electronically, and that taxpayers still have the option to submit a paper version of the Form 1040-X.
Couple Can't File Refund Actions Where They Didn't Sign Amended Returns: In Clark v. U.S., 2020 PTC 219 (Fed. Cl. 2020), the Federal Claims Court held that a couple could not file a refund claim action in the court because they did not first "duly file" claims for tax refunds with the IRS. The court agreed with the government that because the taxpayers did not sign their amended tax returns and verify them under penalty of perjury, Code Sec. 7422(a) precluded the court from exercising subject-matter jurisdiction over their refund claims and thus granted the government's motion to dismiss the taxpayers' complaint.
Public Utilities
Normalization Requirements for TCJA Corporate Tax Reduction Clarified: In Rev. Proc. 2020-39, the IRS issued a revenue procedure clarifying the normalization requirements following the corporate tax rate reduction enacted as part of the Tax Cuts and Jobs Act (TCJA). The revenue procedure applies to public utilities subject to normalization that have a difference in tax rates due to accelerated depreciation resulting from the corporate tax rate reduction.
Retirement Plans
IRS Modifies Safe Harbor Explanations for Sec. 402(f) Notice on Rollover Distributions: In Notice 2020-62, the IRS modifies the two safe harbor explanations in Notice 2018-74, that may be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The safe harbor explanations, as modified, take into consideration certain legislative changes, including changes related to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was enacted as part of the Further Consolidated Appropriations Act, 2020.
IRS Provides Special Guidance Relating to CARES Act Changes for Defined Benefit Plans: In Notice 2020-61, the IRS provides guidance regarding the special rules on single-employer defined benefit pension plans under Sec. 3608 of the CARES Act. According to the IRS, an employer may elect to apply the benefit restrictions applicable to underfunded plans under Code Sec. 436 for the 2020 plan year (or a fiscal plan year that contains any part of 2020) using the plan's funded status for the last plan year ending in 2019.
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