December 28, 2022
Stock Buyback Tax Will Apply Broadly Under Initial Guidance - Chandra Wallace, Tax Notes ($):
Notice 2023-2, 2023-3 IRB 1, released December 27, provides operating rules for the tax, including a list of “economically similar” transactions subject to the tax, an exclusive — and short — list of section 317(b) redemption transactions that don’t qualify as repurchases, and guidelines for determining the fair market value of stock repurchased. The tax will be reported annually, according to the notice.
Given the statements made by policymakers about the motivations for enacting the tax, taxpayers and their advisers hoped the guidance would limit application of the excise tax to conventional stock buyback programs and similar repurchases, Richard Nugent of Jones Day told Tax Notes in an email before the initial guidance was released.
Instead, the notice expressly includes transactions like split-offs and many types of reorganizations, as well as redemptions of mandatorily redeemable preferred stock, within the scope of the tax.
The buyback tax is set at 1% of the net stock redemptions for the year.
Treasury Department Outlines Rules for New Corporate Taxes - Jim Tankersley, New York Times:
Business groups had sought to whittle that number down, by excluding certain types of buybacks from the tax. Treasury officials appeared to agree to only one of them, which concerns SPACs: special purpose acquisition companies, which sell shares to investors and use the money to buy operating businesses.
If a SPAC forms but cannot find a company to buy within two years, it must return investors’ money to them — effectively buying back their shares. The Treasury guidance does not treat that liquidation as subject to the buyback tax. But otherwise, the guidance rejects industry attempts to narrow its scope.
Related: IRS issues stock buyback tax guidance.
Treasury Clarifies Fair Market Price For Stock Buyback Tax - Kat Lucero, Law360 Tax Authority ($). "In the guidance, Treasury also outlined the appropriate methods that companies can use to calculate the fair market value if the repurchased stock was traded on an established securities market, including the daily volume weighted average price, the closing price of the repurchase date, the average of high and low prices on the repurchase date or the trading price at the time of the repurchase."
Electronic Filing Requirement for Businesses, Trusts, and Estates - Iowa Department of Revenue. "Beginning in 2023, certain business entities will be required to file their 2022 and later Iowa income tax returns electronically. Similar requirements will take effect for 2023 Iowa Fiduciary income tax returns."
The Electronic filing requirement is mandatory for corporations, partnerships, and financial institutions for calendar-year 2022 returns meeting the following thresholds:
Corporations: Gross receipts of at least $250,000, tax credits claimed $25,000, or any consolidated return.
Partnerships: 10 or more Iowa K-1s.
If the return meeting these requirements is filed on paper, rather than electronically, it will be considered not filed at all. Taxpayers will have a one-time opportunity to fix failed filings without incurring non-filing penalties. There are limited good cause exceptions - and inadequate software isn't one of them.
Changes in Iowa penalty rules make non-filing a more serious issue. For entities that don't normally pay tax - such as partnerships and S corporations - Iowa will impose late filing penalties based on a "deemed" tax on the entity's pass-through income.
Tax Watchdog, Apartment Owners Sue to Void Los Angeles's Transfer Tax - Paul Jones, Tax Notes ($). "The suit, Howard Jarvis Taxpayers Association v. City of Los Angeles, was filed December 22 in Los Angeles County Superior Court by the association and the Apartment Association of Greater Los Angeles. It argues that Measure ULA — a ballot measure approved by Los Angeles voters in November to create an additional documentary transfer tax of 4 percent on sales or transfers of property valued between $5 million and $10 million and 5.5 percent on property valued at more than $10 million — violates the state constitution's rules for transfer taxes."
Corporate AMT Guidance Provides Safe Harbor and Some Relief - Chandra Wallace, Tax Notes ($). "The notice provides guidelines for treatment of cancellation of debt income and of financial statement income resulting from nonrecognition transactions — those for which no tax gain or loss is recognized but financial statement or book gains or losses can be. It addresses the depreciation of property to which section 168 applies and the application of some credits, including the advanced manufacturing investment credit under section 48D, in calculating income for purposes of the tax."
End of the Year Opportunity Zone Considerations - Adam Sweet, Eide Bailly. "Taxpayers realizing qualified capital gains could have a 180-day period to reinvest those gains that overlaps December 31, 2022. If these taxpayers are committed to investing their qualified gains into a QOF, they could consider investing those gains by the end of 2022, which would result in a 15% basis increase if the proposed legislation is passed next year with a retroactive effective date."
Michigan Governor Vetoes Change to Deduction Calculation for Unitary Members - Emily Holllingsworth, Tax Notes ($). "S.B. 195, introduced in March 2021 by Sen. Aric Nesbitt (R), would have amended the state Income Tax Act to allow entities that are members of a unitary group to share their deductible business interest expenses among group members. The bill also sought to modify how entities within a unitary group calculate their taxable income and determine whether they are subject to the federal business interest limitation."
House committee expected to release Trump’s taxes Friday - Lisa Mascaro, Associated Press, via The Hill. "The Democratic-controlled committee voted last week to release Trump’s returns, with some redactions of sensitive information, such as Social Security numbers and contact information. The release raises the potential of additional revelations related to the finances of the longtime businessman who broke political norms by refusing to make public his returns as he sought the presidency."
Personal Use of Company Vehicle - Eide Bailly. "The personal use of a company-owned automobile is considered part of an employee’s fully taxable wage income and proper documentation is vital."
Heard Loud and Clear: IRS Postpones Implementation of $600 Form 1099-K Reporting by a Year - Erin Collins, NTA Blog:
Companies such as Venmo, PayPal, and Cash App, known as Third-Party Settlement Organizations (TPSOs), are required to provide annual Forms 1099-K to the IRS and taxpayers. In March 2021, Congress modified the requirements for reporting these transactions by lowering the minimum reporting threshold to any amount over $600 for one or more transactions beginning in 2022. Prior to the change, companies were required to report transactions for a payee if (1) they exceeded $20,000 and (2) the number of transactions with that payee exceeded 200.
The Notice creates a transition period of one year, postponing the $600 Form 1099-K threshold until the January 31, 2024 reporting date. In essence, the IRS is taking the rules back to the pre-March 2021 threshold ($20,000 and 200 transactions) for any calendar year beginning before January 1, 2023. The lower reporting threshold (any number of transactions totaling $600) remains in effect for calendar years starting after December 31, 2022. This one-year delay does not apply to any of the other Form 1099-K rules not modified by the American Rescue Plan Act.
IRS Delays For A Year Onerous $600 Form 1099-K Reporting Threshold - Robert Wood, Forbes. "As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021."
IRS Delays $600 Reporting Threshold for Forms 1099-K - Christine Speidel, Procedurally Taxing. "The American Rescue Plan Act of 2021 lowered the reporting threshold to $600 for third parties that process credit card and other payments relating to business activities. In an early Christmas present to those who seek repeal of the provision, the IRS announced today that it will delay implementing new reporting threshold for another year."
Interest rates on late tax refunds, and unpaid taxes, going up in 2023 - Kay Bell, Don't Mess With Taxes. "For the first quarter of 2023, the rate for delayed individual refund amounts will be 7 percent. That's up a percentage point from the fourth quarter of 2022."
IRS Gives Automatic Approval for Accounting Method Changes for Research Expenses - Parker Tax Pro Library. "The IRS issued a revenue procedure modifying Rev. Proc. 2022-14 to provide procedures under Code Sec. 446 and Reg. Sec. 1.446-1(e) for a taxpayer to obtain automatic IRS consent to change its method of accounting for specified research or experimental expenditures to comply with Code Sec. 174, as amended by the Tax Cuts and Jobs Act (TCJA) of 2017. Under the TCJA change, beginning in 2022, businesses can no longer currently deduct their research or experimental expenses but instead must amortize such expenses over five years. Rev. Proc. 2023-8."
New York, California, and Illinois Lose AGI & Population Per IRS Data - Russ Fox, Taxable Talk. "Some of these losses are eye-popping. New York (which is dead last on this list) lost $19.5 billion in AGI and 248,305 taxpayers. California (ranking 46th) lost more in population (263,344) but “only” $17.8 billion in AGI. Meanwhile, Florida gained $23.7 billion in AGI and 166,707 in taxpayers (ranking 4th). Idaho topped the list with a gain of $2.1 billion in AGI and 36,655 in taxpayers."
Some Of The Tax Developments I Covered In 2022 - Peter Reilly, Forbes. "By the way, the biggest pointer I can give you from following #TaxTwitter is that if you are going to need help with your return, line somebody up now as there seems to be limited capacity and a lot of them are mad as hell and not going to take it anymore."
Why and When Did the IRS Stop Auditing the President? - Joseph Thorndike, Tax Notes Opinions. "But in fact, the committee had good reason to suspect that audit program might be prone to failure: The agency has a history of coddling presidents."
The IRS Audits Trump - Andy Grewal, Yale Law Journal via TaxProf Blog. "Whatever the reason for the IRS’s delayed audits, they do not appear to be politically motivated. The delays, after all, were not limited to the Trump Administration. The IRS, under the Biden Administration, did not select Trump’s 2019 return for audit until April 2022. Trump’s 2020 return still has not been selected for audit."
Court Calls Foul on Taxpayers’ Misidentified Dividends and Sales - Mary Katherine Browne, Tax Notes ($):
The couple contested the IRS’s determination that their rent-free use of the residential property owned by Bayview constituted a constructive dividend equal to $24,000 per year. While they conceded that they resided on the property, they argued that an 87 percent reduction should be applied to the stipulated value because they lived in only 13 percent of the home.
Tax Court Judge Wells explains (footnotes and citations omitted):
When a corporation confers an economic benefit upon a shareholder without expectation of reimbursement, that economic benefit becomes a constructive distribution and is taxable as such.
Respondent determined that petitioners' rent-free use of the home owned by Bayview during the years in issue constituted a constructive dividend from Bayview to petitioners equal to the $24,000 per year fair rental value of the property. It is well settled that a shareholder's use of corporate property can result in a constructive dividend to him measured by the fair market rental value of the property. Petitioners concede to residing in the home during that time without paying rent to Bayview and do not argue against the determination that their residence there constitutes a constructive dividend. Instead, they argue that an 87% reduction should be applied to the stipulated value of the constructive dividend on the basis of their self-serving testimony that they lived in only 13% of the home. We do not find this argument persuasive, and we have no obligation to accept uncorroborated self-serving testimony.
The court also found constructive dividends on transfers of corporate property to an associate of the shareholders and their son-in-law. The court found that the taxpayers failed to show business reasons or consideration for the transfers, and that the IRS properly considered the transfers to be dividends to the shareholders.
The moral? A corporation doesn't have to transfer an asset to shareholders to trigger a dividend. A transfer to a third party can count, as can shareholder use of corporate property. And that transfer is itself considered a taxable sale by the corporation.
In case you need more calories for the holidays. It's National Chocolate Candy Day!
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.