Last week, the US Supreme Court ruled that North Carolina may not tax a trust’s income when the trust’s only contact with the state is the in-state residence of discretionary beneficiaries. The Due Process Clause requires a minimum connection between a state and the person it seeks to tax. The mere residency of the discretionary beneficiaries of a trust is not sufficient to satisfy this requirement.

Read the full article.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 17 – 21, 2019.

June 18, 2019: The IRS issued a news release noting that it and the US Department of the Treasury issued proposed regulations that provide guidance for cooperatives and their patrons on calculating the deduction for qualified business income and the deduction for domestic production activities for agricultural or horticultural cooperatives and their patrons (the Section 199A(g) deduction).

June 19, 2019: The IRS released issued a news release announcing that the Electronic Tax Administration Advisory Committee (ETAAC) issued its annual report to Congress featuring recommendations focused on the prevention of identity theft and refund fraud.  The recommendations were focused on the areas of enabling and expanding the IRS-sponsored Security Summit, improving security in key areas of the tax system, and protecting and enabling taxpayers.

June 19, 2019: The IRS released a proposed revenue procedure that provides computational guidance on methods and sources of data for calculating W-2 wages for purposes of tax code Section 199A(g).  The IRS proposed three methods, which would limit the amount of the deduction available to 50% of a specified agricultural or horticultural cooperative’s W-2 wages. In addition, Revenue Procedure 2006-47 is obsoleted and Notice 2019-27 is effective on June 18, 2019.

June 20, 2019: The IRS released issued a news release National Taxpayer Advocate Nina E. Olson released her 37th and final report to Congress featuring her assessment of the key challenges facing the IRS and the Taxpayer Advocate Service (TAS) in the coming years and featuring her review of the 2019 filling season.

June 21, 2019: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

 Special thanks to Alex Ruff in our Chicago office for this week’s roundup.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 10 – 14, 2019.

June 11, 2019: The IRS issued a news release noting that it and the US Department of the Treasury issued final regulations that require taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return for those contributions.

June 13, 2019: The IRS released final regulations on discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for federal income tax purposes. The final regulations update and replace existing regulations and proposed regulations to implement recent legislative changes to the Code and make a technical improvement to the derivation of loss payment patterns used for discounting.

June 13, 2019: The IRS released final regulations that allow integrating health reimbursement arrangements (HRAs) and other account-based group health plans with individual health insurance coverage or Medicare, if certain conditions are satisfied. The final regulations also set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits and finalize rules regarding premium tax credit eligibility for individuals offered an individual coverage HRA.

June 14, 2019: The IRS released issued a news release announcing that it and the US Department of the Treasury issued final regulations and proposed regulations concerning global intangible low-taxed income under section 951A, the foreign tax credit, the treatment of domestic partnerships for purposes of determining the subpart F income of a partner, and the treatment of income of a controlled foreign corporation subject to a high rate of foreign tax under section 951A.

June 14, 2019: The IRS released final regulations that ensure that the income of an S corporation will continue to be subject to US income tax when a nonresident alien is a deemed owner of a grantor trust that elects to be an electing small business trust. The final regulations adopt, without any changes, proposed regulations that were issued in April 2019.

June 14, 2019: The IRS released temporary regulations that act to limit the section 245A dividends received deduction for some dividends from current or former controlled foreign corporations and that limit the section 954(c)(6) exception to foreign personal holding company income for some dividends received by upper-tier CFCs from lower-tier CFCs. The text of these temporary regulations also serve as the text of the proposed regulations (REG-106282-18).

June 14, 2019: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

 Special thanks to Alex Ruff in our Chicago office for this week’s roundup.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 3 – 7, 2019.

June 4, 2019: The IRS issued a news release noting that it granted tax relief to victims of severe storms, tornadoes, straight-line winds and flooding in Oklahoma by postponing until September 16, 2019, various tax return filing and tax payment deadlines that occurred starting on May 7— including quarterly estimated tax payments due on June 17 and employment and excise tax returns due on July 31.

June 4, 2019: The IRS released issued a news release announcing that it will stop its tax transcript faxing service in June and will amend the Form 4506 series to end third-party mailing of tax returns and transcripts in July as part of its efforts to protect taxpayers from identity thieves.

June 5, 2019: The IRS released issued a news release announcing a decrease in interest rates for the third calendar quarter beginning July 1, 2019.

June 5, 2019: The IRS, in a memorandum dated May 21, 2019, indicated that it was withdrawing Directive LB&I 04-0018-004, Reasonably Anticipated Benefits in Cost Sharing Arrangements, which provided instructions for examiners on transfer pricing issue selection related to reasonably anticipated benefits in cost sharing agreements.

June 7, 2019: The IRS released final regulations for Section 337(d) effecting the repeal of the General Utilities doctrine by the Tax Reform Act of 1986 and preventing abuse of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The final regulations impose corporate-level tax on certain transactions in which property of a C corporation becomes the property of a REIT.

June 7, 2019: The IRS released proposed regulations dealing with the section 897(l) exception from taxation on gain or loss of a qualified foreign pension fund attributable to specified interests in US real property. The proposed regulations also provide rules for how to certify that a qualified foreign pension fund is not subject to withholding on some dispositions of, and distributions for, US real property interests.

June 7, 2019: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Alex Ruff in our Chicago office for this week’s roundup.

On May 31, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a report indicating that changes may be in the works regarding assertion of accuracy-related penalties in examinations handled by the IRS Large Business & International (LB&I) Division.

The TIGTA report reviewed the results of closed LB&I examinations for the fiscal years 2015 through 2017 and concluded that the IRS assessed accuracy-related penalties upon only 6% of the 4,600 examined returns with additional tax assessments of $10,000 or more. In comparison, the IRS Small Business / Self Employed (SB/SE) Division assessed accuracy-related penalties upon 25% of its examined returns with additional tax assessments of $10,000 or more. Continue Reading Is an Increase in LB&I Assertion of Penalties on the Horizon?

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 27 – May 31, 2019.

May 28, 2019: The IRS released Announcement 2019-05 listing recent disciplinary sanctions against attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents and appraisers.

May 30, 2019: The IRS released a Tax Tip advising taxpayers to include tax planning in their wedding plans. The Tax Tip focuses on advice on filing a couple’s first tax return as newlyweds.

May 31, 2019: The IRS issued a news release announcing a draft of the 2020 Form W-4, Employees Withholding Allowance Certificate. The revised form is intended to be more compatible with changes made by the 2017 Tax Cuts and Jobs Act.

May 31, 2019: The IRS released Proposed Regulations regarding withholding on certain periodic and nonperiodic distributions under Section 3405. The Proposed Regulation is based on earlier guidance under Notice 87-7 which the Treasury and IRS concluded provides an administrable standard with respect to withholding under Section 3405.

May 31, 2019: The Treasury Department and the IRS in the May 31 edition of the Federal Register requested comments concerning various forms, guidance and regulations. Topics include Treasury Decision 9452, Form 13441-A, mortgage interest and reporting requirements, and the Employee Plans Compliance Resolution System (EPCRS).

May 31, 2019: The IRS issued a notice of public hearing on proposed regulations regarding the amount of the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). The hearing is scheduled for July 10, 2019, and speaker’s outlines are due July 1, 2019.

Special thanks to Terence McAllister in our New York office for this week’s roundup.

The IRS is using a new tool from its arsenal to enforce compliance for tax refund and credit claims: the Internal Revenue Code Section 6676 penalty. Taxpayers and their advisers need to be aware of the mechanics of this penalty and how best to avoid it being sustained.

Andrew R. Roberson, Kevin Spencer and Evan Walters authored a comprehensive article on IRC Section 6676. They discuss:

  • The origins of IRC Section 6676
  • How to contest the penalty and privilege concerns
  • What taxpayers who are considering filing—or have already filed—refund claims should keep in mind now that the penalty is the IRS’s favorite new compliance tool

Read the article here.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 20 – May 24, 2019.

May 20, 2019: The IRS issued a news release announcing the release of its Data Book for 2018. The Data Book contains a summary of IRS activities for the year spanning October 1, 2018, through September 30, 2018. The information covered includes details regarding tax returns, refunds, examinations and appeals.

May 20, 2019: The IRS released Announcement 2019-06 correcting a typographical error in Notice 2019-32.

May 21, 2019: The IRS released Revenue Procedure 2019-26 providing tables of limitations on depreciation deductions and inclusion amounts for owners or lessors of passenger automobiles first placed in service or leased by the taxpayer during calendar year 2019.

May 22, 2019: The IRS released Notice 2019-39 providing guidance regarding the issuance of tax-exempt state and local bonds under Section 103 and on the issuance of tax-exempt Indian tribal government bonds under Section 7871.

May 23, 2019: The IRS issued a news release urging taxpayers who work multiple jobs or may be adding a summer job to complete a Paycheck Cleanup. The IRS recommends using the withholding calculator on IRS.gov to complete this task.

May 23, 2019: The IRS issued final regulations reducing the amount determined under Section 956 with respect to certain domestic corporations. The regulations exclude corporations that are United States Shareholders as defined in Section 951(b) from the application of Section 956.

May 24, 2019: The IRS issued a notice requesting applications for the Internal Revenue Service Advisory Counsel. Written nominations are required on or before June 10, 2019.

Special thanks to Terence McAllister in our New York office for this week’s roundup.

The concept of limited scope representation is not a new one in the legal arena. Rule 1.2(c) of the ABA Model Rules of Professional Conduct provides that “A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.” This rule has been broadly embraced by states. The idea of limited representation in Tax Court cases has been floating around for years. It has mostly come up in the context of pro se taxpayers who appear at calendars calls. There may be one or more volunteers willing to assist the taxpayer but are unable to enter an appearance on the spot for various reasons (e.g., inability to conduct a conflicts search, uncertainty as to whether the taxpayer will be responsive in the future, inability to determine whether case has merit). In this situation, the volunteer is usually not allowed to speak on the taxpayer’s behalf to the Court to try to assist with resolving the case and handling procedural matters.

In 2018, Special Trial Judge Carluzzo and Special Trial Judge Panuthos invited suggestions for better assisting unrepresented and low-income taxpayers in the Tax Court. In response, the American Bar Association Section of Taxation recommended that the Tax Court consider amending its rules to permit counsel to enter an appearance for a limited time or purpose. At the time of the recommendation, approximately 69% of all Tax Court petitioners and 91% of petitioners in small tax cases were self-represented. The Section of Taxation pointed out that many self-represented petitioners before the Tax Court do not understand the law or court rules and therefore are unable to make an effective legal argument. This results in inefficiencies in the Tax Court, as well as inequality because the IRS is always represented by counsel. Continue Reading Tax Court Announces Limited Entries of Appearance

A recent case decided by the United States Court of Appeals of the Tenth Circuit reminds taxpayers to be aware that the Internal Revenue Service (IRS) is not necessarily locked in to the positions and arguments stated in the Notice of Deficiency. In particular, the IRS is allowed to revise penalty determinations, or to make penalty determinations for the first time, during litigation in the Tax Court, notwithstanding any arguably inconsistent determination in the Notice of Deficiency.

In Roth v. Commissioner, 123 AFTR.2d 2019-1676 (10th Cir. 2019) , the taxpayers owned 40 acres of land in Prowers County, Colorado. In 2007, the taxpayers donated to the Colorado Natural Land Trust a conservation easement, which prohibited them from mining gravel upon the land. The taxpayers valued the easement at $970,000 and claimed charitable contribution deductions with respect to this amount on their 2007 and 2008 income tax returns.

The IRS examined the position, and determined that the easement was worth only $40,000. The revaluation resulted in underpayments of tax. The IRS revenue agent assigned to the case imposed an enhanced 40% gross valuation misstatement penalty pursuant to Internal Revenue Code (IRC) section 6662(h), because the claimed value of the easement had exceeded 200% of its actual value. The 40% penalty was approved on IRS administrative review, but due to an alleged clerical error, the Notice of Deficiency sent to the taxpayers listed only the standard 20% accuracy-related penalty under IRC section 6662(a).

The taxpayers filed a Petition in the US Tax Court. In its Answer, the IRS reasserted the 40% penalty. The taxpayers challenged the imposition of the enhanced penalty, citing IRC section 6751(b), which provides that a penalty can only be assessed pursuant to an approved “initial determination.” The taxpayers argued that the Notice of Deficiency was the “initial determination,” and because the enhanced penalty was not stated in the Notice of Deficiency, the IRS did not have the authority to impose a penalty in excess of the amount indicated thereon. The Tax Court ruled in favor of the IRS, considering itself bound by its decision Greav v. Commissioner (Graev III), 149 T.C. 485 (2017), which allows the IRS to assert additional penalties in an Answer to a taxpayer’s Tax Court petition.

The Tenth Circuit affirmed the Tax Court’s ruling. The Tenth Circuit rejected the taxpayers’ argument that the “initial determination” of a penalty was the amount shown on a Notice of Deficiency. The Tenth Circuit noted that IRC section 6212(a) provides that the IRS is authorized to send a Notice of Deficiency after having determined a tax deficiency, suggesting that the “initial determination” of a tax deficiency or penalty can occur prior to the sending of a Notice of Deficiency. The Tenth Circuit concluded that the 40% penalty determined by the IRS revenue agent was the “initial determination” for purposes of IRC section 6751(b).

The Tenth Circuit also cited Graev III for the proposition that an IRC section 6751(b) initial determination can be made by an IRS attorney in Tax Court proceedings. Therefore, the Tenth Circuit held that, even if the Notice of Deficiency was an initial determination of a 20% penalty, the IRS’s answer to the taxpayer’s Petition constituted a separate initial determination that a 40% penalty should apply instead. The Tenth Circuit rejected the taxpayers’ argument that only one initial determination could be made in a given case, noting that such an interpretation would deprive the Tax Court of the jurisdiction it possesses under IRC section 6214(a) to redetermine the amounts of tax deficiencies and additions to tax in the course of Tax Court proceedings.

Practice Point: Taxpayers cannot escape a tax penalty merely because it was not determined before a court proceeding. So why is this important? Because in each tax matter that goes to court you must consider the possibility of a penalty and how to defend against it.