The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, provides tax relief to taxpayers in certain situations. Some of these provisions may generate refunds for prior years, such as the relaxation of restrictions on the use of net operating losses (NOLs) and interest deductions as well as the retroactive availability of additional depreciation related to qualified improvement property. For our prior discussions of these, and other CARES Act provisions, see here.
Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of March 30 – April 3, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.
March 30, 2020: Economic impact payments will be sent out over the next three weeks. These payments will be distributed automatically, with no action needed by most people. However, some taxpayers who typically do not file returns will need to submit a simple tax return to receive the economic impact payment. The Treasury Department plans to develop a web-based portal for individuals to provide their banking information to the IRS for direct deposit of the economic impact payments.
March 31, 2020: The Treasury Department and the Internal Revenue Service launched the Employee Retention Credit to encourage businesses financially impacted by COVID-19 to keep employees on their payroll. The refundable tax credit is 50 percent of qualifying wages of up to $10,000 paid by an eligible employer. The credit is available to all employers regardless of size, including tax-exempt organizations, with two exceptions: state and local governments and their instrumentalities and small businesses who take small business loans.
April 1, 2020: The IRS issued corrections to T.D. 9889, which contains final regulations governing the extent to which taxpayers may elect the federal income tax benefits with respect to certain equity interests in a qualified opportunity fund. Such regulations, issued on January 13, 2020, contained errors that may be misleading to taxpayers. These corrections are effective as of April 1, 2020, applicable as of January 13, 2020, and will be published to the Federal Register on April 6, 2020.
April 1, 2020: The Treasury Department and the IRS announced that Social Security beneficiaries who are not typically required to file tax returns will not need to file an abbreviated tax return to receive an Economic Impact Payment (“EIP”). The IRS will use the information on Form SSA-1099 and Form RRB-1099 to generate $1,200 EIPs for those who did not file tax returns in 2018 or 2019. Recipients will receive the EIP as a direct deposit or by paper check, just as they would normally receive their benefits.
April 2, 2020: The IRS issued a warning about COVID-19 related scams. The IRS reiterated that the IRS will not to call you to verify or provide your financial information so you can get an EIP or your refund faster. Taxpayers should also be on the lookout for emails, text messages, websites and social media messages that request money or personal information. Scammers may emphasize the words “stimulus check” or “stimulus payment.” The official term is “economic impact payment.
April 3, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).
Special thanks to Emily Mussio [...]
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On March 25, 2020, the Internal Revenue Service (IRS) announced a new People First Initiative designed to provide relief to taxpayers on a variety of issues ranging from easing payment guidelines to postponing compliance actions in light of the challenges caused by the Coronavirus (COVID-19) pandemic. The initiative’s projected start date is April 1, 2020, and it is planned to continue through at least July 15, 2020. During this period, the IRS will avoid in-person contacts as much as possible while focusing on taking the steps necessary to protect all applicable statutes of limitation.
Recently, the US Federal District Court for the Southern District of Iowa in Meredith Corp. v. United States, No. 4:17-cv-00385 (S.D. Iowa Mar. 20, 2020), held that a magazine publisher was entitled to refund of federal income tax based for the Internal Revenue Code (IRC) section 199 domestic production deduction based upon the printing services performed by a contract manufacturer. At issue in the case was whether the publisher qualified as a printer of magazines for purposes of IRC section 199 despite hiring third-party printers to print its magazines. The Internal Revenue Service (IRS) argued that the third-party printers, not the magazine publisher, had the “benefits and burdens of ownership,” and thus only the third-party printers were eligible for the IRC section 199 deduction. The case involved tax years 2006 through 2012. The Tax Cuts and Jobs Act repealed IRC section 199 domestic production deduction for tax years after 2018.
Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of March 16 – 20, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.
March 17, 2020: The IRS published Rev. Rul. 2020-9 to provide various prescribed rates for federal income tax purposes for April 2020.
March 18, 2020: The US Tax Court announced that it will close effective March 18, 2020 until further notice. Mail will be held for delivery until the US Tax Court reopens. Taxpayers may comply with statutory deadlines for filing petitions or notices of appeal by timely mailing a petition or notice of appeal, which will be determined by the United States Postal Service’s postmark or the delivery certificate of a designated private delivery service. The eAccess and eFiling systems will remain operational. For more information, see here.
March 19, 2020: The IRS released clarifications to the Instructions for Form 1065-X, Amended Return or Administrative Adjustment Request (AAR). The clarifications relate to the changes resulting from the Bipartisan Budget Act of 2015.
March 20, 2020: The IRS announced that the due date for paying taxes and filing returns is pushed back from April 15, 2020 to July 15, 2020 for individuals and businesses in response to the COVID-19 outbreak. Associated interest, additions to tax and penalties for late payment will also be suspended until July 15, 2020 and begin to accrue on July 16, 2020. This relief is automatic, no forms need to be filed to qualify. State filing and payment deadlines vary and taxpayers should consult the rules of each applicable state. For more information, see here.
March 20, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).
Special thanks to Emily Mussio in our Chicago office for this week’s roundup.
The United States Supreme Court has picked up the pace this week, already issuing eight regular opinions and four opinions relating to orders as of today. We discuss the tax-related items here.
In Rodriguez v. FDIC, the question was how to decide which member of a consolidated group of corporations is entitled to a tax refund. The Internal Revenue Service (IRS) issued a refund to the designated agent of an affiliated group, but the dispute centered on how that refund should be distributed among the group’s members. Some courts have looked at state law to resolve the distribution issue while others crafted a federal common law rule providing that, in the absence of an unambiguous tax allocation agreement, the refund belongs to the group member responsible for the losses that led to the refund. The Supreme Court rejected the latter common law rule, finding that it was not a legitimate exercise of federal common lawmaking. In reaching its decision, the Court noted that federal judges may craft such types of rules only in limited areas and it must be “necessary to protect uniquely federal interest.” The Court, however, did not decide who, in the case before it, was entitled to the refund, but remanded the case for further proceedings.
In Baldwin v. United States, Justice Thomas dissented from the denial of certiorari in a case asking the Court to reconsider National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005). We previously discussed Baldwin here, in which the US Court of Appeals for the Ninth Circuit held that, under Brand X, its prior construction of Internal Revenue Code section 7502 did not preclude a different interpretation by the IRS because the prior construction was based on filling a statutory gap in a reasonable manner. Because the IRS’s subsequent regulatory interpretation was reasonable (in light of ambiguous statutory language), the Ninth Circuit effectively overruled its prior precedent and accepted the IRS’s subsequent contrary interpretation.
Justice Thomas, the author of Brand X, had a change of heart and wrote that his dissent that the prior opinion appeared to be inconsistent with the Constitution, the Administrative Procedure Act (APA) and traditional tools of statutory construction. In his dissent, he called into question the continuing viability of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), expressing the view that Chevron “is in serious tension with the Constitution, the APA, and over 100 years of judicial decisions.”
Practice Point: These latest developments from the Supreme Court should be noted by taxpayers and practitioners. As with the highly contested opinion in Kisor v. Wilkie last term, it is clear that many Justices are uncomfortable with granting a high level of deference to government agencies. Deference issues continue to be in the forefront in several tax cases, and likely will continue to be highly relevant in forthcoming challenges to many regulations in the wake of tax reform in 2017.
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.
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 [...]
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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:
Read the article here.
Most tax professionals are aware of the common-law “mailbox rule,” which provides that proof of proper mailing creates a rebuttable presumption that the document was physically delivered to the addressee. Internal Revenue Code (Code) section 7502 was enacted to codify the mailbox rule for tax purposes. Thus, for documents received after the applicable deadline, the document will be deemed to have been delivered on the date the document is postmarked. To protect taxpayers against a failure of delivery, Code section 7502 also provides that when a document is sent by registered mail, the registration serves as prima facie evidence that the document was delivered, and the date of registration is treated as the postmark date. In other words, if the Internal Revenue Service (IRS) claims not to have received a document, the presumption arises that such document was delivered so long as the taxpayer produces the registration.
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