May 17, 2022
Massachusetts High Court Rules for VAS Holdings in Investee Approach Suit - Andrea Muse, Tax Notes ($):
The Massachusetts Supreme Judicial Court held that the state lacks the statutory authority to tax a nonresident S corporation’s capital gains from the sale of its ownership interest in a limited liability company.
The court ruled May 16 in VAS Holdings & Investments LLC v. Commissioner that the constitutional limitations of Massachusetts's authority to tax the nonresident S corporation could be satisfied by its ownership interest in the in-state LLC, but that Massachusetts law does not authorize the taxation because there is no unitary business between the S corporation and the LLC.
This definition from Minnesota regulations is typical of how states define "unitary":
"Unitary business" means business activities or operations which result in a flow of value between them. The term is applied to a flow either between multiple entities that are related through common ownership or within a single legal entity, and without regard to whether each entity is a sole proprietorship, a corporation, a partnership, or a trust. Flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations.
Some activities that evidence a flow of value between related corporations include the following: assisting in the acquisition of equipment, assisting with filling personnel needs, lending funds or guaranteeing loans, interplay in the area of corporate expansion, providing technical assistance, supervising, providing general operational guidance, providing overall operational strategic advice, or common use of trade names and patents. Flow of value must be more than the flow of funds arising out of passive investment and consists of more than occasional financial oversight.
It's important to consider state issues in when buying or selling a business.
Mass. Justices Ax Tax On Nonresident Corp.'s Capital Gains - Paul Williams, Law360 Tax Authority:
VASHI is domiciled in Florida and had no connection to Massachusetts other than its interest in Cloud5, according to court documents. The court found that Massachusetts' tax laws and regulations reflect the unitary business principle, which allows tax on gains if there is a unitary relationship between entities based on a centralization of management, among other factors, and if an "investment in the in-state entity serves an operational function of the out-of-state corporation."
The court held that because no unitary relationship existed between the entities, the imposition of the tax was not permitted under the state's tax statutes.
While this case is a taxpayer victory, another part of the decision worries John Gupta, head of Eide Bailly's State and Local Tax practice team. The Massachusetts decision said that the state could have taxed the gain outside of a unitary analysis if the state law were written differently. Per John: "I think the constitutional analysis is incorrect in the sense that the gain can be taxed when a unitary relationship doesn’t exist between investor/investee. This opens the door for Mass to change its law and possibly other states to follow suit."
Treasury Has Two Research Amortization Guidance Releases in Mind - Nathan Richman, Tax Notes ($):
Understanding that taxpayers have to change their tax accounting methods to comply with the new version of section 174 that took effect for tax year 2022, the government wants to provide automatic accounting method changes to suit that purpose, Timothy Powell of the Treasury Office of Tax Policy said May 13. He spoke at the American Bar Association Section of Taxation meeting.
“The intent is to put out an automatic method change procedure for that before year-end so that taxpayers are not struggling to figure out, ‘Do I need to file a nonautomatic change?’ The substantive one is still a work in progress; it’s going to be issued separately, probably not at the same time,” Powell said.
The best answer is retroactive repeal of the amortization requirement, but it's not clear when, or if, Congress will do so.
Business of Tax: Some Tax Pros Want a Longer Season - Emily Hollingsworth, Tax Notes:
A Change.org petition to “Change National Tax Day” had over 1,000 signatures as of May 12. The petition is addressed to Treasury, House Ways and Means Committee Chair Richard E. Neal, D-Mass., Senate Finance Committee Chair Ron Wyden, D-Ore., Finance Committee ranking member Mike Crapo, R-Idaho, and other lawmakers.
One common point in opposition to the change that Yelvington hears is that extending the deadline won’t discourage taxpayers from waiting until the last minute on their returns. They will procrastinate anyway, and a time crunch will exist regardless.
I think that argument against a longer tax season fails. Right now the tight deadlines force everyone into a four-to-six week compliance period before the April 15 deadline, simply because key information, from brokerage 1099s to K-1s, is unavailable before then. When the current deadline was enacted almost 70 years ago, nobody envisioned the four week end-of-season crunch we see now. Blaming the filing season crunch on procrastination is like saying skiers are procrastinators because they wait until it snows to crowd the resorts.
Disclosure: I am quoted in the article as favoring a longer filing season.
Yellen Pushes Polish Prime Minister on International Tax Deal - Andrew Duehren, Wall Street Journal ($). "Ms. Yellen met with Polish Prime Minister Mateusz Morawiecki and Finance Minister Magdalena Rzeczkowska on Monday as she attempted to unlock Polish support for approving the 15% minimum tax on large multinational corporations. Poland is the one holdout in the 27-member EU for approving the implementation of the deal, which more than 130 countries created in talks last year."
Republicans split on adding semiconductor tax breaks to competition bill - Laura Weiss, Roll Call. "The top-ranking GOP member of the tax-writing Ways and Means Committee, Rep. Kevin Brady of Texas, is among those who believe giving tax breaks to chipmakers is too narrow an approach as Congress aims to get the U.S. on better footing in sectors where China leads. But Republicans who proposed the semiconductor tax credits want to see swift action, citing an urgent need for the country to attract semiconductor plants."
Asking for more from the IRS - Bernie Becker, Politico. The IRS said no taxpayers would be harmed by destroying 30 million information returns unprocessed. The article quotes retired Taxpayer Advocate Nina Olson as questioning that:
Olson raised two potential situations in an email to Weekly Tax — a taxpayer who lost all their records because of some sort of disaster, or a survivor of domestic violence who had to leave without his or her records.
It’s certainly possible that those taxpayers could ask the IRS for a transcript that includes information returns to help reconstruct their income situation, and the agency wouldn’t have them, Olson said.
What triggers a sales tax audit and how do you reduce the risks? - Thomson Reuters Tax & Accounting. "High risk industry – Your industry is known for substantial non-compliance or under-reporting sales taxes."
Related: Identifying Your Sales Tax Risks.
ABLE Accounts For Disabled Have Many Advantages And Should Be Better Known - Peter Reilly, Forbes. "ABLE accounts are defined under Section 529A of the Internal Revenue Code. If that number rings a bell it is probably because of Section 529 qualified tuition programs. The accounts have some similarity. ABLE accounts are managed by state agencies. Most states now have them. In order to qualify to be the designated beneficiary of an account, they must be entitled to social security benefits on the basis of blindness or disability that arose before age 26 or have filed a disability certification that establishes that they have a medically determinable physical or mental impairment that arose before age 26."
$163 billion in unemployment fraud run up during pandemic - Kay Bell, Don't Mess With Taxes. "Identity theft and other sophisticated criminal schemes siphoned billions from pandemic unemployment benefits, according to an article in today's Washington Post. Specifically, write reporters Tony Romm and Yeganeh Torbati, fraudulent unemployment claims contributed to $163 billion in waste."
Taxpayer Materially Participated in Activity Moved to New Entity in Reorganization - Ed Zollars, Current Federal Tax Developments. "A key issue for dealing with the passive activity provisions of §469 is identifying whether or not a taxpayer materially participates in a business activity. Only if the taxpayer does not materially participate in an activity will it be deemed to be a passive activity whose income can be offset by losses from other passive activities."
Who is rich in America? - Tyler Cowen, Marginal Revolution. "The study didn’t tell us about the small number of well-known tech and shopping billionaires but instead about the more than 140,000 Americans who earn more than $1.58 million per year. The researchers found that the typical rich American is, in their words, the owner of a 'regional business,' such as an 'auto dealer' or a 'beverage distributor.'"
Deducting Soil and Water Conservation Expenses - Roger McEowen, Agricultural Law and Taxation Blog. "The tax Code allows a farmer to deduct expenses that were incurred during the tax year for the purpose of soil or water conservation of farmland, or to prevent the farmland’s erosion of land used in farming. Not deducting the expenses constitutes an election not to deduct which is binding in subsequent years."
College athletes confront tax consequences from NIL revenue - Michael Cohn, Accounting Today. “The problem is going to be, and we’re already starting to see it, is student athletes are starting to make decent sums of money, but they’re unaware of the tax consequences or even the fact that they have to pay taxes"
Public and Private R&D are Complements, Not Substitutes - Alex Muresianu, Tax Policy Blog. "One welcome addition being considered is a restoration of the full deductibility of R&D expenses. As we have written before, as of this year, corporations must spread deductions for R&D costs out over 5 years, instead of taking deductions immediately. Factors like inflation reduce the value of future deductions, creating a tax penalty on R&D and disincentivizing new investment. Our economic model shows restoring full deductibility of R&D (the status quo of the U.S. tax code since at least 1954) would increase economic output and jobs for relatively low long-run fiscal cost."
Taxing Capital Gains at Death at A Higher Rate Than During Life - Steven Rosenthal, TaxVox. "To fix this longstanding flaw, our plan would tax unrealized gains at death for the very rich (couples with more than $100 million and singles with more than $50 million) at the tax rate for ordinary income—currently 37 percent. But profits from sales or gifts of assets during life would still be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes."
CPA Liable for Taxes and Penalties for Defrauding Investors and Lenders - Parker Tax Pro Library. "The court rejected the couple's argument that the jewelry they purchased was acquired for the company's benefit, not for their own, after finding testimony about the jewelry being bartered to acquire tea from Tibetan monks 'utterly implausible.'"
Man Pleads Guilty to Multimillion Dollar Tax Fraud Scheme Involving Professional Athletes and PPP Loan Fraud - U.S. Department of Justice (Defendant name omitted):
First, from May of 2019 through his arrest in December of 2021, Defendant and his co-conspirators prepared and filed with the IRS a series of false and fraudulent income tax returns on behalf of at least nine professional athletes that reported fabricated business and personal losses in order to get large refunds to which they were not entitled. Defendant and the co-conspirators represented to the professional athletes that Defendant was knowledgeable and experienced in the preparation of tax returns. Defendant represented that Mana Tax could obtain large refunds for the athletes and that he had specialized knowledge that their prior CPAs and tax professionals did not have. Not only did Defendant assist in the preparation of original tax returns for his professional athlete clients, but he also filed amended tax returns for past years to correct what he falsely characterized as “errors” made by the athletes’ previous accountants. Mana Tax then charged the athletes a fee of 30% of whatever amount of tax refunds the IRS issued. As a result of Defendant’s scheme to defraud the United States, the IRS paid refunds to the athletes totaling millions of dollars.
The press release doesn't provide the names of the athletes involved. As they likely will have to repay the entire "refund," including the 30% taken by the defendant, it will be expensive tax advice.
It's difficult for non-professionals to evaluate the expertise of tax pros. It can be tempting to believe there is a pot of cash to be picked up on amended returns, especially when other people you know are getting big refunds. Claims of "specialized knowledge" that other tax pros don't have should be looked at skeptically. The tax law is overwhelmingly public, and word of "special" breaks spreads rapidly in the tax world.
It might look messy, but I know where everything is. Today is National Pack Rat 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.