The IRS has released new informal guidance (“Questions and Answers”) regarding section 965, containing information on making successive installment payments, filing transfer agreements as a result of certain acceleration or triggering events, and other matters related to S corporation shareholders making the section 965(i) election.

Consistent with prior advice issued by the IRS (see coverage here and here), the Questions and Answers provide that the IRS cannot make a refund or apply as a credit any amount of an installment payment until the entire income tax liability is satisfied (i.e., any overpayments of an installment obligation will be used to satisfy future section 965 installment payments).

The Questions and Answers also provides details on payment obligations with respect to successive installment payments under section 965(h). In particular, the IRS will “make every effort to issue an installment notice and payment voucher” for each successive installment payment, but taxpayers who do not receive a notice may contact the IRS to obtain the amount to be paid.

The Questions and Answers reiterates that transfer agreements will be considered timely filed “only if filed within 30 days of the date that the acceleration event occurs” (i.e., relief is not available under §§ 301.9100-2 or -3 to file a late election).

In addition, S corporation shareholders that previously filed a section 965(i) election may enter into a consent agreement with the IRS within 30 days of the occurrence of the triggering event in order to pay the section 965 net tax liability in eight annual installments. The Questions and Answers clarify that a consent agreement does not take the place of a section 965(h) election, and that S corporation shareholder must also make a section 965(h) election to pay the section 965 net tax liability in eight annual installments. Finally, the Questions and Answers clarifies that the S corporation and the transferor of the S corporation shares remain jointly and severally liable for the section 965 tax liability after making a section 965(h) election to pay in eight annual installments.

Laura L. Gavioli, PC, recently wrote an article for Law360 on a US Court of Appeals for the District of Columbia Circuit’s decision that may provide an equitable avenue for hearing of late-filed petitions in US Tax Court. The Law360 article, “Myers May Make It Easier to Find Equitable Relief in Tax Court,” can be accessed here.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of July 8 – 12, 2019.

July 9, 2019: The IRS updated its frequently asked questions page for the Tax Cuts and Jobs Act (TCJA) changes to Charitable Contributions and Foreign Taxes Taken into Account in Determining Limitations on Allowance of Partner’s Share of Loss. The updated FAQ page addresses the extent a partner is allowed to take into account its distributive share of partnership losses, the effect of charitable contributions or foreign taxes on the basis limitation, and the new rules for determining losses subject to the basis limitation.

July 10, 2019: The IRS issued a news release noting that National Taxpayer Advocate Nina Olson had released a special report on the Earned Income Tax Credit (EITC), which makes recommendations designed to increase the participation rate of eligible taxpayers and reduce overclaims by ineligible taxpayers. Also, the Taxpayer Advocate Service (TAS) published a subway map that depicts a taxpayer’s “journey” through the tax system to help taxpayers and policymakers to better understand the tax administration process.

July 11, 2019: The IRS issued a notice in which it released corporate bond weighted average interest rates and the permissible range of interest rates used to calculate pension plan minimum funding for plan years beginning in July 2019. The IRS updated the yield curve and 24-month segment rates, the 30-year Treasury securities interest rates, and the minimum present value segment rates.

July 11, 2019: The IRS issued a T.D. in which it introduced a correction to regulations relating to organizations under common control for purposes of certain rules relating to pension, profit-sharing, and stock bonus plans. The IRS stated that the regulations were corrected on May 9, 1988, but that the corrections were never properly incorporated into the Code of Federal Regulations. The correction updates a cross reference to regulations under tax code Section 414 in Treasury Regulations Section 1.52-1.

July 11, 2019: The IRS issued a T.D. in which it introduced the removal of Treasury Regulations Section 1.451-5. The removed regulations dealt with advance payments for goods and long-term contracts. The IRS deemed those regulations to no longer be necessary after enactment of the TCJA. The regulations affect accrual method taxpayers who receive advance payments for goods, including those for inventoriable goods. Also, in the preamble to this T.D., the IRS stated that Tax code Section 451(c), enacted by the 2017 tax act, and its election to defer advance payments override the deferral method provided by Treas. Reg. Section 1.451-5.

July 12, 2019: The IRS issued a notice that stated that the continuity safe harbor for placing energy property in service may be tolled and extended in certain limited circumstances involving significant national security concerns. The continuity safe harbor for the energy credit and production tax credit allows a taxpayer to be deemed to satisfy the continuous construction test or the continuous efforts test based on the date the facility is placed in service. When a plan to construct energy property is delayed due to national security concerns involving the Department of Defense, the continuity safe harbor can be tolled and extended. In this notice, the IRS outlined the requirements for such action to happen and the IRS noted that on the date that the tolling period ends the continuity safe harbor resumes.

July 12, 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 July 1 – 5, 2019.

July 2, 2019: The IRS issued a Chief Counsel Notice wherein the Chief Counsel’s Office advised that accruing interest and failure to pay penalties on restitution amounts cannot accrue consistent with the holding in Klein v. Commissioner, 149 T.C. No. 15. The Chief Counsel’s Office stated that any accrued interest and penalties should be abated. This guidance updates Notice CC-2011-018.

July 3, 2019: The IRS issued proposed regulations that would provide an exception to the unified plan rule for defined contribution multiple employer plans where an employer fails to satisfy the qualification requirement or to provide information to determine compliance. The proposed regulations would also provide a threshold condition for the exception. Specifically, the proposed regulations would require the plan administrator to have established practices and procedures that are reasonably designed to promote and facilitate overall compliance with applicable tax code requirements, including procedures for obtaining information from participating employers.

July 5, 2019: The IRS issued a notice that provided the 2019 renewable energy production credit and refined coal production credit inflation adjustment factors and reference prices.

July 5, 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.

The enactment of the Taxpayer First Act, H.R. 3151 (116th Cong.) (TFA) brings with it several changes to the procedures and operations of the Internal Revenue Service (IRS). The TFA touches on the following subjects:

  • Establishing the IRS Independent Office of Appeals
  • Improving customer service
  • Changes to enforcement
  • Modernization of the Office of the National Taxpayer Advocate and the IRS
  • Cybersecurity and identity protection, technological changes, and expanded use of electronic systems
  • IRS hiring and disclosure changes
  • Provisions relating to exempt organizations
  • Changes to the penalty for failure to file
  • Determination of budgetary effects
  • Other miscellaneous provisions

This post does not discuss each subject, but rather focuses on changes to the IRS Appeals process. Continue Reading Taxpayer First Act: Changes to the IRS Appeals Process

On June 20, 2019, the United States Court of Federal Claims published its long-awaited opinion in California Ridge Wind Energy, LLC v. United States, No. 14-250 C. The opinion addressed how taxpayers engaging in related party transactions may appropriately determine the cost basis with respect to a wind energy project under the Internal Revenue Code (IRC). Central to the case was whether the taxpayer was allowed to include a $50 million development fee paid by a project entity to a related developer in the cost basis of a wind project for purposes of calculating the cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). Section 1603 allowed taxpayers to take a cash grant in lieu of the production tax credit of up to 30% of the eligible cost basis of a wind project. The eligible cost basis under Section 1603 is determined in the same manner as under Section 45 for purposes of the investment tax credit (ITC). The Justice Department disagreed with the taxpayer’s position that the development fee should be included in the cost basis for calculating the Section 1603 cash grant. The Justice Department argued that the development fee was a “sham.”

The court agreed, and held for the government. The court’s opinion focused on the taxpayer’s failure to provide evidence that the payment of the development fee had “economic substance.” Indeed, the court was troubled that none of the taxpayer’s witnesses could explain what was actually done to earn the $50 million development fee. Other than a three‑page development agreement and the taxpayer’s bank statements identifying the wire transfers for payment of the development fee, which started and ended with the same entity, the court found that the taxpayer provided no other factual evidence to support the payment of the fee. Indeed, the court pointed to the taxpayer’s trial testimony, which the court found lacked the specificity needed to support the development fee. Because the taxpayer failed to carry its burden of proof and persuasion, the court concluded that the taxpayer was not entitled to include the $50 million development fee in the cost basis of the wind project for purposes of computing the Section 1603 cash grant.

Importantly, the court did not, however, rule that a development fee paid to a related party is not permitted to be included in the cost basis of a facility for purposes of determining the Section 1603 cash grant. Instead, the court simply ruled that the taxpayer failed to provide it with sufficient proof that in substance the taxpayer performed development services for which a development fee is appropriately considered part of the cost basis of a facility for purposes of determining the Section 1603 cash grant.

Practice Point: In court, the plaintiff has the burden of proving its entitlement to the relief sought. Before filing a case, it’s best to make sure that you have all of the evidence you need to prove your case. Without substantial and verifiable proof, a court is likely to rule against your position. Taxpayers entering into ITC transactions should carefully plan as they negotiate their transaction documents to sufficiently demonstrate the substance of the transactions.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of June 24 – 28, 2019.

June 24, 2019: The IRS updated its frequently asked questions for Opportunity Zones page. In the updated FAQs, the IRS now poses, and answers in the affirmative, the question of whether a taxpayer can still make a valid deferral election based on an investment that was lower than the total tax code Section 1231 gain but realized within the 180-day period after the last day of the 2018 tax year under proposed regulations.

June 24, 2019: The IRS issued a technical correction to its final regulations Section 1.956-1 that acts to reduce the amount determined under tax code Section 956 with respect to certain domestic corporations. The correction updates a cross reference table in the instructions to Treas. Reg. Section 1.956-1 that had misidentified a subparagraph affected.

June 27, 2019: The IRS posted a page for General Section 965 Questions and Answers. In addition to discussing various frequently asked questions (FAQs) with regards to Section 965, the page also discusses filing transfer and consent agreements arising under Section 965(h) and Section 965(i).

June 28, 2019: The IRS issued a news release noting that it had issued proposed regulations concerning the new 1.4 percent excise tax on the net investment income of certain private colleges and universities provided for under section 4968.

June 28, 2019: The IRS issued corrections to its regulations concerning the recognition and deferral of Section 987 Gain or Loss (IRC §987) which will become effective on July 1, 2019. The corrections relate to combinations and separations of qualified business units (QBUs) subject to Section 987 and the recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Section 987 in connection with certain QBU terminations and certain other transactions involving partnerships. Specifically, the corrections were made to Treas. Reg. Section 1.987-2 and Treas. Reg. Section 1.987-4 to properly identify regulation sections references. The substance of the regulations were not changed.

June 28, 2019: The IRS issued final regulations clarifying the employment tax treatment of partners in a partnership that owns a disregarded entity. The rules provide that if a partnership is the owner of an entity that is disregarded as an entity separate from its owner, the entity is not treated as a corporation for purposes of employing a partner of the partnership that owns the entity; instead, the entity is disregarded as an entity separate from the partnership for this purpose and is not the employer of any partner of the partnership that owns the entity. A partner of a partnership that owns an entity that is disregarded as an entity separate from its owner is subject to the same self-employment tax rules as a partner of a partnership that does not own an entity that is disregarded as an entity separate from its owner, according to the regulations.

June 28, 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.

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.