Tax News & Views Omnibus Drives to Senate Roundup

Punchbowl News reports: 

After 10 p.m. last night, the House passed a $1.5 trillion omnibus spending package that will keep federal agencies open until Sept. 30. The measure now goes onto the Senate, which is expected to pass it as well, although there may be some opposition from conservative Republicans.

The House has also approved a short-term funding bill that gives the Senate until March 15 to complete work on the omnibus. The Senate will take this up today.

While the house-passed bill has an increase for IRS funding, it has no substantive tax provisions. There is no extension of expiring provisions or the Employee Retention Credit. No tax pieces from the Build Back Better reconciliation rode the omnibus. There was no restoration of expensing for research costs. Why? 

Dems Feared Tax Provisions Would Clutter Huge Omnibus - Doug Sword, Tax Notes ($):

The number of expired tax provisions, or extenders, ballooned to 41 this year after dropping to just three after 2017’s Tax Cuts and Jobs Act. Then there were repeated bipartisan efforts to help businesses by rolling back changes to sections 174 and 163(j), and a push to reinstitute the employee retention credit for the fourth quarter of 2021.

“Literally, it comes down to how much do we have the bandwidth to do right now?” said Ways and Means member Daniel T. Kildee, D-Mich., who pointed out that the omnibus was a crushing 2,741 pages even without a tax title.

So when might tax extenders move? The government is funded until September, so maybe nothing happens at least until then. A list of the expiring provisions can be found here.

Tax modifications absent from congressional spending bill, possible action later this year - Jay Heflin, Eide Bailly. "The spending bill was expected to include tax measures aimed at retirement and undoing some of the tax provisions in the 2017 tax reform bill, namely reversing R&D amortization and removing the limitation on the interest deduction. The legislation was also expected to resuscitate several tax provisions that have already expired."

Congress Advances Increase in IRS Budget - Doug Sword, Tax Notes ($):

The IRS would get a 6 percent increase in its fiscal 2022 budget under the $1.5 trillion omnibus spending bill, with the biggest boost aimed at shoring up the agency’s troubled taxpayer services operations. The House was expected to vote on the bill late March 9. 

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Of the IRS’s three major functions, taxpayer services would see the biggest percentage budget increase, not surprising considering the litany of lawmaker complaints in recent months about the agency’s backlog of unprocessed tax returns and poor record at answering phone calls from taxpayers during tax season.

Overall, the omnibus would provide $12.6 billion to the IRS — up from fiscal 2021’s $11.9 billion but far short of the $13.6 billion in the House bill.

New Mexico Governor Signs Tax Cut, SALT Cap Workaround Bills - Paul Jones, Tax Notes ($):

New Mexico Gov. Michelle Lujan Grisham (D) has signed legislation cutting taxes and creating a passthrough entity workaround to the federal cap on the state and local tax deduction.

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The bill also eliminates taxation of Social Security benefits for individuals with annual adjusted gross income of no more than $100,000 and for married couples with AGI of no more than $150,000 ($75,000 for married persons filing separately). That’s expected to reduce tax revenue by $84 million next year, according to the release. The bill also establishes a new refundable child tax credit worth up to $175 per child and provides a refundable 2021 income tax rebate of $250 for single filers with income under $75,000 and $500 for joint filers with income under $150,000. 

Iowa Bill Would Reduce Franchise Tax, Narrow Sales Tax - Jaqueline McCool, Law360 Tax Authority ($). "S.S.B. 3154, introduced Monday by the Ways and Means Committee, would eliminate the sales tax on diapers and would make computer services sales to a public utility exempt from sales tax as long as the public utility was exclusively using the software. The bill also would exempt items used by a manufacturer to make food or food ingredients. The bill would reduce the franchise tax rate over five years from 2023 to 2027, reducing the rate from 5% to 3.9%. Under the bill, individual and corporate tax filers with net operating losses after Jan. 1, 2023, would be able to carry the losses forward."

The franchise tax is the income tax on banks. The recently-signed tax bill left financial institutions on the outside looking in.

Wash. Bank Tax Disfavors Interstate Commerce, COST Says - Maria Koklanaris, Law360 Tax Authority ($). "The tax, upheld in September by the Washington Supreme Court, enacts a special 1.2% tax on large banks with more than $1 billion in global net income. Washington's highest court held that the tax on large financial institutions doesn't unconstitutionally discriminate against interstate commerce, saying the tax applies equally to in-state and out-of-state banks and is limited to Washington-related income."

No Washington banks are large enough to be subject to the tax. 

How to Avoid Losing More Than Your Heart in a Scam - Kelly Phillips Erb, Bloomberg. "At the height of the real estate boom, I was approached by a woman looking to buy property, and, she claimed, in need of tax advice. We set up a meeting to discuss a potential representation. The meeting turned into a call with her boyfriend, who was, she explained, the reason they needed tax advice. She described her dilemma: She was a U.S. resident and her boyfriend was not. He would pay for the property since she didn’t have enough cash on hand and did not want to take out a mortgage. But, she explained, quite convincingly, she was worried about the tax consequences because he was not a U.S. person."

Ways to spend tax-favored FSA money if you're facing 3/15 (or later) deadline - Kay Bell, Don't Mess With Taxes. "1. Buy OTC treatments. FSA owners got more help from another, even earlier piece of COVID relief legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. When it was enacted in March 2020, it reversed the Affordable Care Act (ACT, or Obamacare to many) requirement of a physician's prescription for over-the-counter (OTC) meds in order for them to qualify for FSA reimbursement."

Estate and Gift Taxes 2021-2022: What’s New This Year and What You Need to Know - Laura Saunders and Richard Rubin, Wall Street Journal ($). "For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, or $23.4 million per married couple. For 2022, an inflation adjustment has lifted it to $12.06 million per individual, or $24.12 million per couple."

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy - Keith Fogg, Procedurally Taxing. "Two cases we have written about previously in which the taxpayers won after the IRS took positions that were hard to justify have recently been appealed to the Ninth Circuit seeking attorney’s fees. As we have discussed before, getting attorney’s fees is extraordinarily difficult in a tax case."

Taxpayers May Use E-Signatures on Certain Paper-Filed Forms - Wolters Kluwer Tax & Accounting. "The temporary use of e-signatures applies only to the paper-filed forms listed below. It does not apply to any other paper-file form such as Form 1040 or Form 1120. Taxpayers and their representative must still provide handwritten signatures on any other paper-filed form, unless the form can be, and is, filed electronically."

Tuition Wealth Hack Using a 529 Plan - Fin Powered Female. "The Two Main Benefits of Contributing to a 529 Plan: 1. Tax Free Growth and Withdrawals – as long as you use the funds towards qualified education expenses. 2. Potential tax deduction on your state tax return if you contribute to a 529 college savings plan (each state varies)"

Traveling Steamfitter Properly Deducted Expenses While Away from Home - Parker Tax Pro Library. "The Tax Court held that a union steamfitter who travelled for work was entitled to deduct meal and lodging expenses while travelling away from his home after concluding that the taxpayer's residence in Yakima, Washington was his tax home. Applying the three factors set forth in Rev. Rul. 73-529, the court found that the taxpayer (1) incurred duplicate living expenses while traveling and maintaining his home in Yakima, (2) had personal and historical connections to his home in Yakima, and (3) had a business justification for maintaining the home in Yakima because his membership of the Yakima union local gave him access to jobs within the union's expansive territory."

Partnership Formations and the Income-Company Exception - Jason Freeman, Freeman Law. 

The formation of a partnership is generally a nonrecognition transaction for both the contributing partner and the newly-created partnership. Thus, as a general rule, no gain is recognized by a partnership or its partners on the contribution of property to the partnership in exchange for an interest in the partnership. There are, however, potential exceptions to this general rule.

Most notably, an exception applies with respect to property transferred to a partnership that would be treated as an “investment company” (within the meaning of I.R.C. § 351) if the partnership were incorporated.

Foreign Corporate Tax – How Will it Impact the US Taxpayer of a CFC or PFIC? - Virgina La Torre Jeker, US Tax Talk. "The CFC tax regime is designed to prevent deferral of US taxation by abuse of offshore corporations. The CFC rules require that any “United States shareholder” (generally, a 10% or greater shareholder) of the CFC include in the shareholder’s current-year taxable income so called “Subpart F” income of the CFC (comprised predominantly of “passive” income) regardless whether such income is actually distributed to the shareholder in the current year. Subpart F income is explained in greater detail here."

Related: Tax Reform: What Does It Mean for My International Business.

The Uncertain Future of the IRS Free File Program - Aravind Boddupalli, TaxVox. "Why do so few eligible tax filers participate? Some may not meet the commercial tax preparers’ rules. Others may find even Free File too complicated. But many tax filers simply may be unaware that the service exists. And outreach efforts by the IRS and others have failed to spread the word."

Tax Reform Framework Would Improve Nebraska’s Competitiveness - Katherine Loughead, Tax Policy Blog. "LB1264 would overhaul Nebraska’s individual income tax by replacing the four-bracket, graduated-rate structure with a large zero percent bracket plus a single tax rate on income exceeding the specified threshold (see the following table). In the first year, this proposal would reduce individual income tax collections by roughly 64 percent compared to the most recent revenue projections."

Dysfunctional IRS Can’t Be Trusted to Pre-Fill Tax Forms - Andrew Wilford, Inside Sources. "But even if taxpayers could count on the IRS to have their best interests at heart (they can’t), there’s little reason to think the IRS can handle the responsibility. After all, the IRS is in bad enough shape trying to take care of the duties it already has this filing season."

Georgia Bar Owner Pleads Guilty to Tax Evasion, Helped Co-Owners Evade Taxes - U.S. Department of Justice (Defendant name omitted):

According to court documents and statements made in court, Defendant, 44, engaged in a scheme to evade taxes he and others owed on income earned from bars in Statesboro and Milledgeville, Georgia. Defendant was nominally the sole owner of Chrysha Inc., which operated a bar in Statesboro, and BGRG Inc., which operated a bar and a restaurant in Milledgeville. In practice, however, both companies had multiple partners with varying percentages of ownership.

Defendant provided false information to an accountant who prepared the companies’ 2014 corporate tax returns. Specifically, he underreported gross receipts and omitted cash distributions made to the true partners. As a result, Defendant caused false corporate tax returns to be filed with the IRS. By filing false corporate tax returns, Defendant also enabled the true owners of the bars and restaurant to evade their respective individual income tax liabilities. Additionally, Defendant underreported his own income on his 2014 individual tax return filed with the IRS.

I don't recall seeing a case where someone was a built-in fall guy for other owners to evade taxes. According to the criminal information filed in the case, it worked like this: 

Chrysha, Inc. was a corporation formed in the State of Georgia on or about April 3, 2002, which elected to be taxed as an S corporation. Chrysha, Inc. did business as Rum Runners, a bar in Statesboro, Georgia.

BGRG, Inc. was a corporation formed in the State of Georgia on or about September 23, 2010, which elected to be taxed as an S corporation. BGRG, Inc. did business as Capital City and 119 Chops, a bar and restaurant, respectively, in Milledgeville, Georgia.

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Even though the Defendant was nominally the sole owner of BGRG, Inc., in truth, he did not own any percentage of the business.

The Defendant, along with the other partners of Chrysha, Inc., received his share of the company’s profits from Individual A, who collected cash generated from the business’s operations and, after paying expenses, would disburse the funds to the partners according to their ownership shares. 

So the Defendant pretended to own these businesses and, it seems, got paid for filing false tax returns reporting only a fraction of the income, while hidden partners actually owned and profited - presumably without paying taxes.  This seems like a fraught business plan. The court documents don't show how the IRS figured this out. In other cases IRS secret shoppers have pretended to be interested in buying taverns, convincing the owners to show them the "real" financial records of the business. 

The Moral? Don't be a straw taxpayer for your tax-shy associates. And beware of prospective bar buyers. The Defendant here has agreed to cooperate against his associates, which may not be entirely pleasant.

Hitch up your kilt and take a deep breath. It's International Bagpipe Day!