Tax News & Views Safe Harbor Lasting Longer Roundup

May 6, 2020

Tax Deductions Tied to Forgiven Small Business Loans Draw Support - Richard Rubin, Wall Street Journal ($). "Top lawmakers in both parties asked the Internal Revenue Service Tuesday to reverse a ruling that would deny those deductions. And senior senators backed legislation that would overturn the IRS ruling if the agency doesn’t change its position, though how quickly such a bill could move through Congress is far from certain."

The top congressional taxwriters yesterday wrote a letter to Treasury Secretary Mnuchin asking for a reversal of Notice 2020-32, which disallows deductions that make Paycheck Protection Program loans forgivable. The letter questions the IRS application of Section 265, which disallows deductions to generate tax-exempt income, to the PPP program.


IRS Extends Safe Harbor as Firms Fret Over PPP Loan Return - Jonathan Curry, Tax Notes ($):

A lack of clear guidance, the threat of penalties, and an imminent deadline combine to make the Paycheck Protection Program’s forgivable loans a potentially perilous subject for tax advisers.

Recognizing this, the IRS is giving some reprieve to businesses who received the loans unnecessarily and want to escape criminal and civil liability. The IRS, in an announcement quietly released late on May 5, extended the deadline for returning PPP loans from May 7 to May 14.

The announcement is in a new entry, item 43, to the SBA Frequently Asked Questions summary.


Some PPP Borrowers Taking a Closer Look at Good Faith Certification - Kristine Tidgren, Ag Docket. "These horrific penalties are intended to apply in situations such as applying for a loan with a false identity or fraudulently failing to include affiliates in employee counts."

Workers’ Refusal to Work Won’t Ruin Tax-Free Forgiveness - Eric Yauch, Tax Notes ($). "The guidance comes after small business owners sent comments to the SBA and Treasury asking for the relief because some of their employees won’t return to work, either because they’re worried about safe working conditions or they’ll make more money by receiving temporarily increased unemployment benefits."

The Paycheck Protection Program – Still in Need of Clarity - Roger McEowen, Agricultural Law and Taxation Blog. "As noted above, the SBA position is that loan eligibility is tied to self-employment earnings. Apparently, that position means that rental income that is not reported on Schedule F fails to qualify (such as that reported on either Schedule E or on Form 4835)."

Small Firms Still in Dark on Loan Forgiveness as Clock Ticks - Mark Niquette, Bloomberg. "Small businesses that struggled to get loans from a government pandemic relief program still don’t know how much they may have to repay after the government missed a deadline to give specific guidance."

Related: How to Maximize Your Loan Forgiveness Under the Paycheck Protection Program


More Interim Final Regulation Guidance for PPP Loans Issued on Non-Discrimination Provisions and Student Workers - Ed Zollars, Current Federal Tax Developments. "The regulation also provides an exclusion from the employee count for employees that are part of a work-study program."

The Newest Time Machine - Monte Jackel, Procedurally Taxing. "In today’s post Monte considers whether in light of retroactive law changes in CARES the IRS can force a partner to amend a return when the original tax return filed was correct."

IRS Introduces Virtual Settlement Days To Help Resolve Tax Disputes During COVID-19 - Kelly Phillips Erb, Forbes. "Now, the IRS Office of Chief Counsel has announced that their Settlement Days program will continue to allow unrepresented taxpayers to work towards resolving their pending United States Tax Court case despite 'stay-at-home' orders in many jurisdictions. The twist? It's virtual."

IRS Moves To Virtual Settlement Meetings - Peter Reilly, Forbes. “Chief Counsel anticipates that Virtual Settlement Days will be a mainstay of its Settlement Day efforts even after this crisis is over.


Smaller Sellers Searching for Relief in Post-Wayfair World - Jennifer McLoughlin, Tax Notes ($). "The 2018 South Dakota v. Wayfair Inc. decision, which retired the physical presence nexus standard for sales and use tax purposes, triggered a seismic shift for businesses selling across state lines. Businesses have since been navigating a deluge of state laws and regulations requiring sales and use tax collection from remote retailers."

Related: A Sales Tax Reform Game Changer: How Wayfair Changed the Sales Tax Reform Landscape


Treasury Audit Highlights the Need for Clearer Eligibility Guidelines for the EITC - Taylor LaJoie, Tax Policy Blog. "Improper payments mean that scarce resources are not properly reaching their intended recipients in the right amounts. A simpler credit structure would reduce complexity for taxpayers as they try to claim the credit and improve the administrability of the credit."

Tax rules for donating + different ways to give = special Giving Tuesday Now options - Kay Bell, Don't Mess With Taxes:

First, make sure your charity is IRS qualified. Only donations to eligible organizations are tax-deductible.

Use the IRS' Exempt Organizations Select Check to make sure the charity is OK. This searchable online tool lists most organizations that are eligible to receive deductible contributions. In addition, notes the IRS, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations even if they are not listed in the tool’s database.

And not just on Tuesdays.


Thanks, Bro! Nathan Richman of Tax Notes reports ($) a fraternal scheme to foil the taxman gone bad.

The plan involved brothers Larry and Jack. District Court Judge Ted Stewart takes up the story (footnotes omitted):

On or about August 1, 2010, Jack and Larry entered into an oral agreement whereby Jack would act as Larry’s nominee ("Nominee Agreement"). Under the Nominee Agreement, Jack would hold, for Larry’s benefit, all of Larry’s real property and his ownership interest in various legal entities, including Akirix and other companies. Larry put various assets in Jack’s name. For use of his name, Jack accepted 10% of Larry’s earnings with Larry retaining the remaining 90%.

Larry admits that he transferred the assets into Jack’s name as part of a strategy to avoid pre-existing tax claims by the United States Internal Revenue Service ("IRS"). In Larry’s words "if you can’t trust your brother, whom can you trust." Larry openly acknowledges that the Nominee Agreement was "ill-conceived [in] nature," and undertaken "to avoid or delay payment of federal taxes." In short, Larry wanted to build Akirix without paying the IRS’s claims.

The key asset involved is an 86% interest in a company, Akirix. To put a belt and suspenders on the plan to "avoid pre-existing tax claims," they executed a new operating agreement naming Jack the owner of 89% of the company, leaving Larry out entirely. After all, "if you can’t trust your brother, whom can you trust?"

Then Jack decided the agreement meant what it said. Larry wasn't amused, and things ended up in litigation. Again, Judge Stewart:

Interestingly, Jack does not challenge the authenticity of Plaintiffs’ allegations regarding the Nominee Agreement or that Akirix’s OA was executed, in part, to defraud the IRS. Instead, Jack states that these facts are "[i]mmaterial as to the ownership of Akirix." 


Jack correctly notes that Larry cannot use fraud as a defense to the OA’s integration clause when he instigated and participated in the fraud. Enforcement of the Nominee Agreement in spite of the OA’s integration clause requires equitable relief that Larry is not entitled to because he did not come before the Court with clean hands. Larry does not dispute that he willingly and freely transferred his assets, property, and interest in Akirix to his brother, Jack. He admits that he did so as a scheme to defraud the IRS. The Court will not invalidate the OA simply because the parties’ fraud was revealed and Larry was forced to come clean about his scheme to defraud the IRS. Larry’s post hoc confession does not clean his soiled hands...

Likewise, the Court will not permit Larry to transfer his assets as part of a fraudulent scheme, and then recover those same assets when the fraudulent scheme was derailed.

Thanksgiving should be fun this year.

The Moral? Don't expect the courts help you undo your fraudulent transfers. And, as every sibling could tell you, don't trust your brother all that much.

Link to court order: Case 1:20-cv-00012-TS-PMW Document 66 Filed 05/04/20

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