Tax Update Blog

Tax News & Views There is No Tax Fairy Roundup

September 2, 2020 | Blog

Would Joe Biden Raise Taxes on Low- and Moderate-Income Families? It Depends on What You Mean by Taxes - Howard Gleckman, TaxVox. "Partisans will debate the incidence of corporate taxes long after the election. But if your focus is on the presidential campaign, the story is pretty clear: Low- and middle-income households will pay little if any new direct taxes under Biden’s tax plan. But some may face a small decline in their after-tax incomes as they bear a modest share of his proposed corporate tax hikes."

This Biden Tax Hike Will Hit Mom & Pop Hard - Robert W. Wood, Forbes. "Biden would levy a tax on unrealized appreciation of assets passed on at death. By taxing the unrealized gain at death, heirs would get hit at the transfer, regardless of whether they sell the asset."

Related: Estate and Gift Tax—Are You Prepared for Changes? 

 

If Democrats raise the corporate tax rate, here's what else they should do - Scott Greenberg, No Withholding:

Some of the predictable downsides of a higher corporate rate (which I’ll discuss in more detail below) include:

  1. Increasing the tax code’s bias towards debt

  2. Widening the tax code’s preference for non-corporate businesses

  3. Raising the tax code’s penalty on business investment

That said, each of consequences can be mitigated. Instead of enacting a standalone corporate tax rate increase, Democrats should consider the following policies to accompany a corporate rate hike:

  1. Restrict the business interest deduction further

  2. Eliminate the pass-through deduction (§199A)

  3. Expand the availability of expensing for investments

The first post from a new tax commentary platform.

 

Trump Golf Course Tax-Break Deal Appears Vulnerable to IRS Challenge - Richard Rubin, Wall Street Journal ($):

The deduction was tied to the Trump National Golf Club Los Angeles, overlooking the Pacific Ocean. It involved a conservation easement, a legal document that restricted development rights on a portion of the property and allowed an income tax deduction of up to $25 million.

But in recent months, federal judges have invalidated more than $275 million of similar deductions because property owners in legal documents used clauses virtually identical to one used when the Trump golf course donated an easement to a land conservancy in 2014. Such clauses were common at the time.

Related: IRS Offering Potential Settlement for Syndicated Conservation Easements

First Surrender In IRS War On Abusive Conservation Deductions - Peter Reilly, Forbes. "In the wake of last week’s damning report from the Senate Finance Committee, the IRS is crowing over the first opponent to throw in the towel in a Tax Court brawl over a syndicated conservation easement based on the IRS offer that was publicized in IR-2020-30 on June 25, 2020."

 

4 tax moves to make this September - Kay Bell, Don't Mess With Taxes. "2. Make your third estimated tax payment."

Virtual Currency Question Gains Prominence on 2020 Return - Why? - Annette Nellen, 20th Century Taxation. "The form instructions are not yet out but hopefully the IRS will explain the question better for 2020."

In the Wake of Wayfair: It’s Déjà Vu All Over Again - Roxanne Bland, Tax Notes Opinions. "In the charge to bring marketplace facilitators into the sales tax collection fold, states seem to have spared little or no thought to the realities of collecting sales taxes for so many jurisdictions, both state and local."

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

 

Minister Finds That Church Was Not Required to and Had Not Withheld FICA and He Thus Fails to Qualify for FICA or Medicare - Ed Zollars, Current Federal Tax Developments. "While generally employers are required to withhold and pay FICA taxes on wages paid to employees (see IRC §3111(a)), IRC §3121(b)(8)(A) specifically excludes from FICA withholding or the payment of employer FICA the 'service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order,…'"

 

Bad magic. It's natural to hope that if we ever have a bunch of taxable income, we can find a tax advisor with a magic strategy that will make the tax go away - a tax fairy, so to speak. A Texas couple thought they found one. They learned this week in Tax Court that they made a six-figure mistake.

The couple turned to a lawyer who came up with a clever plan:

1. Contribute cash and marketable securities to an S corporation.

2. Have the S corporation put the cash and securities into a new partnership in exchange for a 98% partnership interest. The 2% partner was a family trust.

3. Liquidate the corporation and distribute the partnership interest back to the couple - claiming a tax loss on the basis of discounts for lack of marketability and lack of control of the partnership - resulting in a loss in excess of $2 million.

Oh, and do this in about three weeks. 

The taxpayers claimed they had set up the entities to do day trading, but they just had a change of heard. Tax Court Judge Paris was unconvinced (taxpayer and attorney names omitted): 

Petitioners claim that Petitioner tried his hand at day trading for a bit but, finding that he was not making any money and did not have sufficient time, decided not to continue. This claim is contradicted by the record. Correspondence dated December 10, 2009, from Mr. Attorney to petitioners indicates that petitioners and Mr. Attorney had met to discuss the dissolution of Trading S Corp no later than that date. December 10 is also the date on which Trading S Corp executed its first stock purchase. In other words, Petitioner began taking steps to dissolve Trading S Corp, at the latest, after completing a single day trade, and likely before any day trading at all. The overwhelming majority of the day trades that Trading S Corp did transact were executed after Petitioner had begun the process of dissolving the company.

Why is that a problem?

The Court is left with the conclusion that Mr. Attorney offered petitioners a prepackaged tax strategy, one that he offered to numerous clients in 2009, designed to create an artificial loss through a circular flow of assets, the application of substantial discounts, and the misreporting of the resulting loss as an ordinary loss, rather than a short-term capital loss.

Ordinary, capital, taxes are hard. But this seems pretty bold:

When the initial loss calculation failed to eliminate fully petitioners' income, petitioners had a second return prepared for Trading S Corp, increasing the discounts and thereby the loss, and offsetting all of petitioners' income.

If at first you don't succeed...

Judge Paris concludes: "The Court holds that the transactions at issue did not have economic substance and that petitioners are not entitled to the claimed loss deduction therefrom for 2009."

But there's more! More penalties. The judge said that reliance on the attorney who put the plan together didn't get the taxpayers off of the $231,990.20 in "accuracy-related" penalties assessed by the IRS. Not to mention the $20,000 in legal fees paid for the tax strategy.

The Moral? There is no tax fairy. Don't expect to generate $2 million in ordinary loss deductions at year-end without actually losing $2 million. And don't keep amending returns until you get the "right" answer.

Cite: T.C. Memo. 2020-126

 

Today in history: On September 2, 1789, the United States Department of the Treasury is founded (History.com).


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This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.