Tax News & Views Deadlines, Rewards and Raisins Roundup

February 24, 2021

IRS Has No Plans to Extend 2021 Filing Season Nationwide - Frederic Lee, Tax Notes. "The IRS doesn’t see a need to extend the 2021 filing deadline nationally, but is still considering it, Commissioner Charles Rettig said during a congressional hearing."

Top Democrat Says House Will Vote on Friday: Stimulus Update - Eric Wasson, Bloomberg Tax. "Biden on Tuesday indicated the congressional vote on the legislation would be close, speaking after GOP Senator Susan Collins said she doesn’t expect a single Republican vote in favor of it."

'Enough is enough,' W&M members say of recent IRS missteps - Kay Bell, Don't Mess With Taxes. "W&M Chairman Rep. Richard Neal (D-Massachusetts) and Rep. Bill Pascrell Jr. (D-New Jersey), chair of the tax-writing panel's Subcommittee on Oversight, took the agency to task not only for the 260,000 incorrect non-filing notices it recently sent, but also for a series of other missteps."


Tax Hikes for High Earners Are on the Table in Some States - Karen Langley, Wall Street Journal ($):

Tax increases could hit at different times in different states. In New York and Minnesota, the income-tax increases are proposed to take effect for the 2021 tax year, while Mr. Inslee has proposed the Washington state capital-gains tax would take effect at the start of 2022. In Pennsylvania, Mr. Wolf has proposed raising the personal income-tax rate effective July 1, while his changes to the state’s tax-forgiveness program would apply to all of 2021.

A $6 Billion Tax Increase Proposal in Pennsylvania Would Yield the Nation’s Highest Combined Flat-Rate Income Taxes - Jared Walczak, Tax Policy Blog. "The state’s flat personal income tax rate would increase by 46 percent, partially offset by an outsized increase in the poverty credit, which would see a family of four eligible for partial relief due to poverty until they reached $100,000 in taxable income—four times the poverty line. Even after implementation of the higher rate, the personal income tax would be low (4.49 percent), but the rate is deceptive, particularly for small business owners, given the extremely peculiar way that Pennsylvania taxes income. It would also yield flat-rate income taxes in excess of 8 percent in at least three jurisdictions, led by Philadelphia at 8.37 percent."

California FTB Suspends Some Debt Collection Activities - California Franchise Tax Board via Tax Notes. "This means state tax refunds will not be reduced to offset taxpayer debts for parking citations, tolls, and various fines. Debts for child support are the exception and will continue to be collected."


Legal Malpractice Settlement Included In Gross Income Even Though Underlying Medical Malpractice Claim Alleged Physical Injuries - Chaim Gordon:

Here, the Taxpayer suffered physical injuries and may have been compensated (tax-free) for such injuries but for the negligence of her attorneys. Her suit against those attorneys alleged that she would have recovered in her suit against the hospital but for the negligence of her attorneys. Thus, the logical conclusion should have been that the settlement payment compensated her for her loss of non-taxable compensation for her physical injuries. Inexplicably, the Tax Court avoids reaching this logical conclusion and speculates that the attorneys settled the claim for other, unspecified, reasons.

Client Sues CPA For Extra Tax Bill, CPA Settles, IRS Taxes Client On Settlement, Repeat - Robert W. Wood, Forbres ($). "If your tax lawyer or accountant costs you extra taxes, and reimburses you for those extra taxes, can the IRS tax the reimbursement? It might seem like the answer should be no, but it can be hard to convince the IRS."

Self-employed Individuals Can Claim COVID-19 Sick and Family Leave Tax Credits - Tax Warrior Chronicle. "Self-employed individuals also qualify for sick and family leave credits under FFCRA, however they must file Form 7202 to claim the benefit."

Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income - Garrett Watson and William McBride, Tax Policy Blog. "

An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, highest in the OECD, harming U.S. economic competitiveness and increasing the cost of investment in America. We estimate that this would reduce long-run economic output by 0.8 percent, eliminate 159,000 jobs, and reduce wages by 0.7 percent.


Supervillainy and the U.S. Tax Code - Leandra Lederman, Surly Subgroup. "So, there I am watching Harley Quinn struggle to recruit a crew to work for her when all of a sudden, there’s the U.S. Master Tax Guide!"

Don't leave Tax Court Without It. A Connecticut taxpayer with a physics doctorate from MIT performed some weird science with an American Express rewards program. The taxpayer and his spouse generated over $300,000 in credits over two years, according to a Tax Court opinion issued yesterday. Tax scientists at the IRS decided the experiments were too successful, and things ended up in Tax Court. 

The Taxpayer used the American Express "Blue Cash Rewards Program" energetically in 2013 and 2014, as Tax Court Judge Goeke explains:

To generate as many Reward Dollars as possible, petitioners used the 1005 Card and the 1001 Card (American Express cards) to buy as many Visa gift cards as they could from local grocery stores and pharmacies. In addition to the values of the gift cards, petitioners were charged service fees for the gift cards of between 0.8% and 1.2% of the gift cards' face values. They used the gift cards to purchase money orders and were charged service fees for the money orders between 0.07% and 0.33% of the dollar amounts of the money orders. They deposited the money orders into their bank accounts. The fees associated with a $500 gift card and a related money order purchase were between $6 and $7.

Upon a payment of their monthly American Express bills, they received the applicable percentage, either 1% or 5%, of the total purchases in Reward Dollars that they could use for a statement credit or redeem for Amazon gift cards.

Typical cash rewards programs from credit cards are generally treated as a purchase price reduction under IRS policy, and are not considered gross income. Judge Goeke held the IRS to its policy with respect to the gift card purchase rewards:

For his own reasons respondent has made a conscious choice to avoid the application of a rebate analysis to the taxability of the cash rewards as a reduction of basis. In conclusion, we hold that the Reward Dollars associated with the Visa gift card purchases were not properly included in income.

But Judge Goeke said that the money orders were a different story:

The Visa gift cards are not redeemable for cash, but the money orders purchased with the American Express cards and the infusion of cash into the reloadable debit cards are difficult to reconcile with the IRS credit card reward policy. No product or service is obtained in these uses of the American Express cards other than cash transfers. The money orders are not properly treated as a product subject to a price adjustment because they were eligible for deposit into petitioners' bank account from acquisition. Similarly, the cash infusions to the reloadable debit cards were not product purchases. The reloadable debit cards were used for Moneygram transfers, which are arguably a service. However, the Reward Dollars in dispute were issued for the cash infusions, not the transfer fees. Therefore, we uphold respondent's inclusion in income of the related Reward Dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards.

The moral: Making the most of your credit card rewards program can be lucrative, but if it becomes a cash cow, the IRS may try to skim the cream.

Link to case: T.C. Memo. 2021-23.


Celebrate! It's National Chocolate Covered Raisin Day!

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