Tax News & Views Tax Court Blocked Shot Roundup

NBA Team’s Timing Is Off for Deferred Comp Deduction - Kristen Parillo, Tax Notes ($)

The partnership that sold the Memphis Grizzlies professional basketball team couldn’t deduct the $10.7 million it owed to two players because of Congress’s special timing rule for deferred compensation, the Tax Court held.

Because Hoops LP didn’t pay any amounts to the players in 2012, it couldn’t claim a deduction in that tax year under the matching rule of section 404(a)(5), the court concluded in a February 23 memorandum opinion in Hoops LP v. Commissioner.

From the opinion:

Petitioner also argues that, if section 404(a)(5) and the tax accounting rules were applied in a manner that would deny Hoops a deduction, it would “lead to the ridiculous result” of Hoops including the deferred compensation liability in its sale proceeds but potentially never obtaining an offsetting deduction. Thus, petitioner contends that allowing Hoops to deduct the deferred compensation liability for the year of the 2012 sale comports with the purpose of clearly reflecting income. In contrast respondent contends that section 404(a)(5) is a congressionally mandated deviation from the clear reflection of income principle... We agree with respondent.

...

Accordingly, in the light of Congress' intent to deviate from the clear reflection of income principle and to ensure matching of income inclusion and deduction between employee and employer under nonqualified plans, we conclude that disallowing a deduction for the year of sale would not lead to a “ridiculous result.” To the contrary, under the facts of this case, such a result comports with the clear purpose of section 404.

An important item for M&A transactions and for deferred compensation planning. 

Related: Exit Strategy: Transitioning Your Business to a New Owner

Ex-NBA Owner Can't Deduct $10M On Deferred Player Pay - Emlyn Cameron, Law360 Tax Authority ($). "The Tax Court also said the company must include the liability in the amount it realized on the sale and can't reduce or offset the amount of gain it realized on the sale based on the liability."

IRS Proposes Updated Required Minimum Distribution Rules - Caitlin Mullaney, Tax Notes ($).

The SECURE Act raised the RMD age to 72 and created a 10-year distribution period for most designated beneficiaries of individuals who die in 2020 or later — similar to the five-year period that was already in effect for non-designated beneficiaries.

The proposed regulations outline potential section 401 rules, including on distributions that commence during an employee’s lifetime, death before the required distribution beginning date, and determination of designated beneficiaries. The proposed rules for beneficiaries would allow the payment of an employee’s accrued benefit to a child to be treated as if it were made to a surviving spouse. 

Interest rates increase for the second quarter of 2022 - IRS:

The Internal Revenue Service today announced that interest rates will increase for the calendar quarter beginning April 1, 2022. The rates will be:

• 4% for overpayments (3% in the case of a corporation);

• 1.5% for the portion of a corporate overpayment exceeding $10,000;

• 4% for underpayments; and

• 6% for large corporate underpayments. 

These rates apply for computing underpayments on estimated taxes and interest on refunds and deficiencies.

Virginia Governor Approves IRC Conformity Bill - Benjamin Valdez, Tax Notes. "H.B. 971, signed into law February 23, updates the state’s IRC conformity to December 31, 2021, and retroactively allows income deductions or subtractions of up to $100,000 for expenses stemming from Paycheck Protection Program loans or Rebuild Virginia grants for tax years beginning before January 1, 2021."

IRS Announces Suspension of Automated Notices, But Is It Enough? - Kelly Philips Erb, Bloomberg:

According to National Taxpayer Advocate Erin Collins, the IRS sent tens of millions of notices to taxpayers during 2021. These included nearly 14 million math error notices, automated underreporter notices, notices requesting that taxpayers authenticate their identity, correspondence examination notices, and collection notices. If that number seems high, it is. Last year, I reported that while the IRS made 628,997 math error corrections through July 15, 2020, it made about 9 million math error corrections on returns filed by taxpayers in the same period in 2021—a more than 1400% increase.

Making matters worse, when responses are required, the IRS hasn’t been able to process them. That becomes yet another domino to fall, causing more automated processes to happen, further delaying tax refunds. Collins reported that last year, the IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days—nearly seven months—to process them. That’s a significant increase from just 74 days in fiscal year 2019, the most recent pre-pandemic year.

But no return deadlines are extended.

IRS Suspends certain Correspondence to Battle Backlog - Jay Heflin, Eide Bailly.

The IRS has a backlog of roughly 24 million unprocessed documents, which is comprised of 17.6 million tax returns and about 5.9 million pieces of taxpayer correspondence/Accounts Management cases (excluding amended tax returns), according to the taxpayer watchdog the National Taxpayer Advocate.

The IRS assembled a 'surge team' of 1,200 agents to tackle the backlog while also processing returns from the current season.

24 million divided by 1,200 is 20,000 documents per new agent. This just might not be enough to resolve the problem quickly.

How Did We Get Here? 2-D Barcoding and the Paper Return Backlog – A Missed Opportunity - Nina Olson, Procedurally Taxing:

This is not a new idea.  In fact, in the “most serious problem” discussion about e-filing in the 2004 National Taxpayer Advocate Annual Report to Congress (pages 89-109),...We proposed the IRS implement 2-D barcoding, by which computer-prepared returns would generate a horizontal and vertical code containing all information on the return upon printing.  Upon receiving the paper return, the IRS could scan the code, which would convert the information into digital form and allow the return to be treated the same as an e-filed return.  Although it would not eliminate the need for human beings to open returns, this approach eliminates the need for manual keystroking of data from the paper return and quality review of that keystroking; it also allows all data to be captured, rather than select fields, improving audit selection and other downstream compliance operations.

In a September 2004 memorandum responding to our inquiry about such implementation, the Director of Customer Account Services, Wage & Investment Operating Division responded that the IRS was not pursuing 2-D bar coding for individual returns because “promoting this method of paper filing would slow the growth of e-filing.” 

That worked out well.

Report Could Focus Scrutiny On Opportunity Zone Investors - Joshua Rosenberg, Law360 Tax Authority ($):

The report also identified 341 qualified funds that invested in other qualified funds during the 2019 tax year, which accounted for $1.3 billion in investments. Of those, 108 funds reported investments made to themselves, which accounted for $585 million in investments. Those types of investments would seem to be disallowed by the statute itself, Michael Meyers, partner at Reed Smith LLP, told Law360.

"I've never seen anybody doing something like that," Meyers said. "You can't form a fund to invest in another fund."

Renewable energy firms shift focus as reconciliation prospects fade -Ellen Meyers, Roll Call. 

Executives are making the pivot as Senate Democrats rethink their strategy to pass the reconciliation package dubbed the Build Back Better Act. Democrats have yet to get Sen. Joe Manchin III, D-W.Va., on board with the legislation due to his reservations on spending.

...

“As we look at that, the Build Back Better Act is not going to pass in its current form,” said Chuck Sutton, vice president of sales at REC Silicon ASA, a company that produces silicon materials used in solar panels.

Scott’s ‘Rescue America’ plan falls flat - Natalie Allison, Politico. "Privately, officials from some top Republican Senate campaigns mocked the plan, questioning why the Florida Republican senator released it in the first place — and why the GOP would ever suggest raising taxes at all during a midterm year featuring record-high inflation and unpopular Democratic control."

New tax plan from leading GOP senator would require all Americans to pay federal income taxes - Jeff Stein, Washington Post ($). "He received so much blowback to the ambiguity of his proposal within less than 24 hours that he was forced to offer two caveats, insisting the new tax wouldn’t apply to seniors or those who are not, as he described them, 'able bodied.'"

Tips for parents who share custody or alternate tax benefits - IRS. "Some parents who have a legal agreement with their child's other parent about who claims the child on their taxes may have some questions this tax season about the child tax credit and the 2021 recovery rebate credit. Here's what people in this situation need to know before filing their 2021 federal tax return."

No tax on latest group of forgiven student loans - Kay Bell, Don't Mess With Taxes.

Normally, any canceled or discharged debt amount counts as income. Officially, it's known as Cancelation of Debt Income, or CODI (you knew there had to be an acronym), and is taxed at ordinary rates. That means while a person might no longer have to pay a $3,000 loan (good), she now owes tax on that wiped-out amount (bad).

But the American Rescue Plan Act, the COVID-19 relief bill signed by President Joe Biden back in March 2021, eliminated the tax cost of forgiven student debt. The educational cost tax exclusion will last through 2025.

These 3 last-minute moves can still slash your 2021 tax bill - Kate Dore, CNBC. "If you participate in a workplace retirement plan and make too much money for a regular IRA deduction, you may still qualify for a write-off for spousal IRA contributions since there are higher income thresholds."

Taxing Venmo?!? - Sam Brunson, The Surly Subgroup. "Again, I want to emphasize that the reduction in the de minimis payment amount doesn’t change the substantive tax law. If you sold three mouthpieces on eBay in 2020 for a combined total of $900, you had to pay taxes on your gain in 2020 even though Paypal didn’t have to report the gain to the IRS. In 2022, you have the same tax obligation. Only this time the IRS will know that you received $900 through Paypal."

UPDATED - Tax preparers take note: another change for 2021 tax season with Schedules K-2 and K-3 - NATP Blog. "The updated guidance, released Feb. 16, explains that, for the 2021 tax year, the new Schedules K-2 and K-3 for partnerships and S corporations are only required when needed to report foreign activities at the partner or shareholder level."

Yes, You Can Fight IRS In Court, But Which Court? - Robert Wood, Forbes. "If you fail to protest, or if you do not resolve your case at IRS Appeals, you’ll next receive an IRS Notice of Deficiency, which always comes via certified mail. It can’t come any other way. A Notice of Deficiency is often called a '90-day letter”' because you’ll have 90 days to respond. Don’t write the IRS to protest a Notice of Deficiency. Only one response to a Notice of Deficiency is permitted: filing a Tax Court petition in the U.S. Tax Court clerk’s office in Washington, D.C"

Tax Treaty-Based Return Reporting Disclosures - Jason Freeman, Freeman Law. "A treaty-based return position is a tax reporting position, maintaining that a U.S. tax treaty overrules or modifies an otherwise applicable provision of the Internal Revenue Code, resulting in a lower tax.  Generally, a separate IRS Form 8833 must be filed for each treaty-based return position."

10 Tax Reforms for Growth and Opportunity - Tax Policy Blog. "Remove the double taxation of corporate income: Shareholder taxes on capital gains and dividends are layered on top of corporate taxes. Many countries have reduced the double taxation of corporate income by more fully integrating the individual and corporate tax codes, which reduces distortions, lowers the cost of capital, and encourages investment."

Gasoline Excise Tax Is Not Too High - Annette Nellen, 21st Century Taxation. "What is the point of having this system of trying to fund road projects if the tax is suspended? The tax is already half of what it should be if it had been adjusted for inflation since 1993. It also might not lower the cost of gasoline as those in the supply chain might just raise prices to absorb that tax cut."

The Misbegotten Bidding War Over Public Subsidies for Washington’s Football Team - Howard Gleckman, TaxVox. "Like the team’s long-suffering fans, those local pols have fallen victim to the triumph of hope over experience. They believe a new football stadium is a fast track to massive economic development. Yet, extensive research suggests this outcome is about as rare as a Super Bowl victory for Washington’s football team.  Here is one example.  Here is another. And another."

Today is Estonian Independence Day. The Tax Foundation notes that Estonia has perhaps the best business tax system in the world:

In addition to having relatively low corporate tax rates of 20 percent, Estonia and Latvia have a cash-flow tax model for business taxation. Instead of annually taxing business profits, taxes only apply when profits are distributed to shareholders. If a business makes a profit in a certain year, the business owners can choose to invest those profits in growing the business without facing a tax. This is equivalent to providing full expensing for new investments.

Estonia has had its system in place since 2000, and Latvia adopted the system in 2018.

Instead of creating special incentives for certain business activities or industries, these countries have cracked the code of applying simple, straightforward tax policy in a way that promotes investment and competitiveness.

This source says per-capita GDP in Estonia, formerly part of the Soviet Union, exceeds Russia's by 47%. A good reason to celebrate independence. If you want to raise a glass, today is conveniently World Bartender Day.