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Weekly IRS Roundup December 4 – December 8, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of December 4, 2023 – December 8, 2023.

December 4, 2023: The IRS released Internal Revenue Bulletin 2023-49, which includes the following:

  • Revenue Ruling 2023-22, which establishes certain interest rates pursuant to § 6621 of the Internal Revenue Code (Code) for the calendar quarter beginning January 1, 2024.
  • Notice 2023-76, which updates the corporate bond monthly yield curve and corresponding spot segment rates for November 2023 used under § 417(e)(3)(D), the 24-month average segment rates for November 2023 and the 30-year Treasury rates, as reflected by the application of § 430(h)(2)(C)(iv).
  • Proposed regulations regarding excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund. Comments and requests for a public hearing must be received by January 16, 2024.
  • Announcement 2023-34, which revokes § 501(c)(3) determinations for certain organizations and stipulates that contributions made to the organizations by individual donors are no longer deductible under § 170(b)(1)(A).
  • Proposed regulations that provide guidance on the statutory disallowance of qualified conservation contributions made by partnerships and S corporations if the amount of the charitable contribution exceeds 2.5 times the sum of each partner’s or S corporation shareholder’s relevant basis. Comments must be received by December 20, 2023.
  • A Notice of Proposed Rulemaking that reopens the comment period for proposed regulations relating to the determination and recognition of taxable income or loss and foreign currency gain or loss with respect to a qualified business unit pursuant to § 987. Comments and requests for a public hearing must be received by February 12, 2024.
  • Revenue Ruling 2023-21, which provides the applicable federal rates for December 2023.

December 6, 2023: The IRS announced that it sent more than 20,000 letters to taxpayers disallowing Employee Retention Credit (ERC) claims. These letters are part of the ongoing IRS initiative against dubious ERC claims involving entities that did not exist or did not pay wages during the eligibility period.

December 7, 2023: The IRS requested applications for nomination to the Electronic Tax Administration Advisory Committee through January 31, 2024.

December 7, 2023: The IRS released Revenue Procedure 2023-41, which prescribes discount factors for the 2023 accident year for use by insurance companies in computing discounted unpaid losses pursuant to § 846 and discounted estimated salvage recoverable pursuant to § 832.

December 8, 2023: The IRS released Notice 2023-79, which sets forth the 2023 Required Amendments List that applies to § 401(a) and § 403(b) individually designated plans.

December 8, 2023: The IRS released Revenue Procedure 2024-8, which provides a list of qualified census tracts for each state, the District of Columbia and Puerto Rico for issuers of qualified mortgage bonds [...]

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IRS and Taxpayers Continue to Battle over the IRC Section 199 Deduction for Computer Software

On October 20, 2017, the Internal Revenue Service (IRS) published Office of Chief Counsel Internal Revenue Service Memorandum 20174201F (FSA), legal advice written by a field attorney in the Office of Chief Counsel that was reviewed by an associate office, which deals with a merchant bank’s claim that its revenue from merchant discount fees qualifies as Domestic Product Gross Receipts (DPGR) under Internal Revenue Code (Code) Section 199. According to the FSA, on its amended return the taxpayer claimed a Code Section 199 deduction with respect to its merchant discount fees based on the third-party comparable exception for online software found in Treasury Regulation § 1.199-3(i)(6)(ii)(B). The taxpayer argued that the merchant discount fees were derived from the use of computer software, the software “Platform.” The taxpayer took solace in the fact that third parties derived gross receipts from the disposition of substantially identical software. Accordingly, the taxpayer argued that the merchant discount fees should be treated as DPGR pursuant to the third party comparable exception.

The IRS, however, had a very different perspective. Its analysis began with the threshold question of whether there was a “disposition” of the Platform. The IRS concluded that the taxpayer did not dispose of the Platform because the taxpayer did not lease, rent, license, sell, exchange or otherwise dispose of the Platform as required by Treasury Regulation § 1.199-3(i)(6)(i). Moreover, the IRS concluded that the merchant discount fees represented remuneration for “online services” (e.g., online banking services) per Treasury Regulation §1.199-3(i)(6)(i). Because the taxpayer did not establish that there was a disposition of the Platform, the third party comparability exception in Treasury Regulation § 1.199-3(i)(6)(ii)(B) is inapplicable—the merchant discount fees were derived “from the provision of merchant acquiring services.”

Practice Point: We have reported extensively on the IRS’s attacks on taxpayer’s ability to claim the IRC section 199 deduction for computer software and qualified film production. The issue is also on the IRS’s annual Guidance Plan as an area in which the IRS expects to issue regulations within the next year. The FSA is further proof that taxpayers and the IRS do not see eye-to-eye on these issues. Indeed, there are presently several docketed cases seeking judicial determinations regarding the applicability of the third-party comparable exception. Because we have several clients who have this same issue, we are watching it closely, and will report back with any developments.

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