December 6, 2022
Year-End Tax Title Still in Rumor Realm - Doug Sword, Tax Notes ($):
“We are in the season where rumors are kind of like tailbones — everybody’s got one,” Senate Finance Committee Chair Ron Wyden, D-Ore., said December 5 when asked about the prospects for a year-end tax title. Another complicating factor is that it is the expensive, sweeping extenders like the child tax credit and bonus depreciation that are leading the talks, as opposed to the usual mishmash of largely energy-related tax breaks.
But tax talks are unlikely to narrow until a vehicle for the provisions becomes apparent. The overwhelming favorite would be an omnibus budget agreement.
Punchbowl News reports that a temporary funding bill is likely to pass by December 16 to give negotiators time to finish an "omnibus" bill to fund the government for another year:
So we view the real deadline as sometime between Dec. 23 and the end of the year...
Once a “topline” deal is reached, it will take time to assemble the omnibus package, send it to legislative counsel and release it publicly. It will take the House a few days to pass it, and then the Senate will need several more days to complete its work. There will be last-minute snafus as well, there always are.
This sounds daunting, but the political incentives right now point to Congress being able to figure everything out.
Whether "everything" includes tax provisions is an open question. Big tax issues in play include an increase in the child tax credit, allowing current deductions for 2022 research expenses instead of requiring them to be amortized over five years, and delaying tighter restrictions on business interest expenses.
Inside the fight for an end-of-year deal on the child tax credit - Rachel Cohen, Vox.com. "Advocates are hoping to pair any restoration of R&D tax breaks with an extension of the child tax credit. In November, Democratic Sen. Ron Wyden, who chairs the Senate finance committee, declared his intent to push for both together while Democrats still control both chambers of Congress."
Negotiators dig in over tax credits in spending bill - Tobias Burns and Aris Folley, The Hill. "But analysts say that Democrats are now holding back support for the research write-off in the hopes of getting more on the CTC as well as the earned income tax credit, worth thousands of dollars to low and middle-income families."
Second Draft of Form 1065 Schedules K-2 and K-3 Instructions Revise Domestic Filing Exception - Ed Zollars, Current Federal Tax Developments. Schedules K-2 and K-3 gather and provide to partners and S corporation shareholders information needed for foreign tax computations. The forms were first used last tax season. Practitioners were unhappy with the forms because they took a lot of time to assemble information that typically went unused by the form recipients.
Initial draft instructions for 2022 provided an option for domestic partnerships without foreign activity or owners to skip the K-2/K-3 filings if they notified owners by January 15, 2023 that they didn't intend to file the forms, and no owners objected. The new draft changes this. Ed Zollars explains:
The notice to partners no longer must be issued by January 15, 2023. Rather, it can be issued as late as the date the Schedules K-1 are provided to the partners and even provided as an attachment to the Schedule K-1
The 1-month date, for both the domestic filing exception and the Form 1116 exception, will now be one month before the Form 1065 is filed, so as late as August 15, 2023 for a calendar year partnership return placed on extension.
If the final instructions contain these rules, it will simplify tax season for preparers and reduce costs for 1065 and 1120-S filers.
U.K. Tax Change to Yield Higher Costs, but Much-Needed Certainty for Companies - Jennifer Williams-Alvarez and Nina Trentman, Wall Street Journal. "Now, under a new prime minister, the government is pledging fiscal austerity, accompanied by an increase in the corporate tax rate to 25%."
Jury Mulls Trump Org. Tax Fraud Case After Warning On Bias - Frank Runyeon, Law360 Tax Authority ($). "A Manhattan jury on Monday began deliberations in the district attorney's tax fraud case against the Trump Organization after receiving instruction on New York's peculiar corporate criminal liability law and a renewed warning against anti-Trump bias."
‘Matrix’ Producer Stuck With $5 Million California Income Tax Bill - Perry Cooper, Bloomberg ($).
Hollywood producer Joel H. Silver and his wife aren’t entitled to claim millions of dollars in pass-through losses on their California income tax returns, the California Office of Tax Appeals ruled.
The three-judge panel rejected the couple’s argument that they were at risk under loans made to Silver’s production companies, in a proposed precedential opinion posted Monday.
The case is a reminder that the tax law's "at-risk" limits still have teeth almost 50 years after they were enacted to shut down the 1970s farm and equipment-leasing tax shelters. These rules require taxpayers to actually have risk of being required to pay back debt used to finance business losses. While this is a California case, the state follows federal rules.
In this case, the taxpayer's single-member LLC guaranteed liabilities. While the LLC was treated as a disregarded entity for tax reporting purposes, the California OTA said that there was no evidence that the taxpayer, rather than the LLC he owned, was personally liable for debt that financed $19 million in losses. As a result, the taxpayer was found to not be "at-risk" for the debt, and the losses were disallowed.
Tax Court Doesn’t Buy IRS’s Tractor Collection Theory - Nathan Richman, Tax Notes ($). The case involves a part-time Iowa farmer who bought, and deducted under Sec. 179, 40-odd tractors:
The Hoakisons bought eight tractors in 2013, 12 in 2014, and nine in 2015. Many of those vehicles were built in the 1940s or 1950s.
(Tax Court Judge) Paris noted that Steven Hoakison preferred buying older equipment that he was used to so he could repair it on his own, and for the substantial price discounts. The most expensive tractor cost $8,000 and most were under $5,000 — in contrast, a new tractor could cost $120,000.
The court found the taxpayer's testimony about the use of the old tractors on non-contiguous farm plots credible. "In other words, the Hoakisons had a business purpose for accumulating so many tractors — to have each needed attachment with a ready-to-go tractor at each farm, according to Paris."
The IRS also failed in its attempt to impose Sec. 274 "strict substantiation" for the business use of the tractors. Section 274 requires detailed depreciation of vehicle expenses, but the court, sensibly, ruled that farm tractors weren't the kind of motor vehicles covered by those rules.
The taxpayer did get dinged for depreciating some tractors that had already been expensed under Section 179.
Link: TC Memo 2022-117.
American Gothic - Taishoff Law. "I give Steve’s and Miss Judy’s trusty attorney, James R. ('Good Feeling') Monroe, Esq., a Taishoff 'Good Job.' He told a real good story. Go and do thou likewise."
Year-End Tax Planning Strategies for Community Banks - Paul Sirek and Aric Radmacher, Eide Bailly. "Cost segregation studies may provide significant current-year (2022) tax deductions on buildings that have been in service for several years. A cost segregation study may identify current year tax benefits available by accelerating depreciation deductions on purchased or constructed bank buildings."
Tax-Loss Harvesting Comes With Hidden Risks - Lori Ioannou, Wall Street Journal. "In deciding what to do with the money raised by selling assets, investors must be wary of the IRS’s 'wash sale' rule, which states that an investor cannot sell an asset—such as a stock, bond, mutual fund—at a loss and then rebuy it, or a “substantially identical” asset, within 30 days before or after that sale. If investors do, they cannot take the tax loss write-off."
IRS warns that tax refunds in 2023 might be smaller. Here are 3 reasons why - Kay Bell, Don't Mess With Taxes. "The main reason for the shortfall, notes the IRS, is that there weren't any COVID-19 Economic Impact Payments (EIPs) in 2022."
Tax Court Rejects Deduction for Poorly Documented NOLs from Restaurant Franchises - Parker Tax Pro Library. "The Tax Court held that net operating losses (NOLs) from several Fuddruckers restaurant franchises owned by an accomplished and well-respected CPA were not deductible on her 2014 and 2015 tax returns because she failed to establish the basis for the underlying NOLs."
IRS Successfully Attacks Tax Shelter With Hobby Loss Rule - Peter Reilly, Forbes. "The promoters marketed a plan that would allow investors to 'zero out their taxes' by buying lenses and claiming depreciation deductions and energy credits. The systems to produce electricity never actually worked in any commercial sense and most of the lenses ended up just sitting in a warehouse."
Do IRS Agents Really Need Guns? - Robert Goulder and Joseph Thorndike, Tax Notes Opinions. "It's not like criminals have gotten any nicer over the last 90 years. The Criminal Investigation division is still chasing bad guys, and they are still working undercover with those bad guys."
Tax Wise, Should You Get Paid In 2022 Or 2023? - Robert Wood, Forbes. "This time of year, 'pay me next year' requests are common with employers, suppliers, vendors, customers and more. On a cash basis, you probably assume you can't be taxed until you receive money. But technically, if you have a legal right to payment but decide not to receive it, the IRS can tax you nonetheless. Is that fair? The IRS thinks so. The tax law includes the concept of constructive receipt. It requires you to pay tax when you merely have a right to payment even though you do not actually receive it."
Tighter Limits on U.S. Interest Deductibility Make U.S. an Outlier and Increase Pain of Rising Interest Rates - Garrett Watson, Tax Policy Blog. "As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States enacted a new limitation on interest deductions for businesses. While it is common for countries across the Organization for Economic Cooperation and Development (OECD) to set limits for interest deductions, starting this year, the U.S. became an outlier by using earnings before interest and taxes (EBIT) as the limit’s tax base."
OECD v. UN: The Dawn of Tax Justice? - Alex Parker, Things of Caesar. "That basic tension between international business, and loftier ideals of multilateralism and equity, has always been present in global taxes. What is the purpose of the international tax system–to support globalization, or to ensure fair taxation of the largest corporations? Are these even different goals?"
Four Iowa State Fair vendors booted after sales tax investigation - Todd Magel, KCCI. "We now know the identity of all four Iowa State Fair vendors booted out for allegedly not reporting all their food and beverage sales last summer."
Lawyer Michael Avenatti Sentenced to 14 Years in Federal Prison for Stealing Millions of Dollars from Clients and Tax Fraud - US Department of Justice:
Avenatti corruptly obstructed and impeded the IRS’s efforts to collect more than $3.2 million in unpaid payroll taxes, which includes money that he withheld from the paychecks of employees of Global Baristas US LLC, the Avenatti-owned company that operated Tully’s Coffee, and should have paid to the IRS but never did.
Avenatti obstructed the agency’s efforts to collect the monies that his company owed by making false statements to an IRS revenue officer; directing employees to stop depositing cash receipts; and changing the company name, Employer Identification Number, and bank account information listed with his credit card processing company to avoid IRS levies.
In addition, prosecutors argued in support of allegations in an indictment that:
Avenatti failed to file individual tax returns or pay any personal income taxes for 2011 through 2017, even though he had a substantial income and lived lavishly.
He also failed to file partnership returns or pay taxes – including payroll taxes – for his now-defunct Newport Beach-based law firm Eagan Avenatti LLP, of which he was the managing partner, for 2013 through 2017, even though the law firm received many millions of dollars during those years.
Furthermore, Avenatti failed to file corporate tax returns or pay taxes for Avenatti & Associates, of which he was president, for 2011 through 2017, even though this entity also received substantial funds.
Mr. Avenatti had a brief brush with fame in the runup to the 2020 elections. He represented adult entertainer Stormy Daniels in a lawsuit against President Trump. The notoriety from the case led to him being briefly touted as a potential presidential candidate. With 14 years in prison - to be served after five years received in another case - political ambitions will have to wait.
Stay warm. Today is both Finland's Independence Day and Mitten Tree Day. If you are outside in December in Finland, mittens are a good thing to have.
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.