Tax News & Views Moore Cinnamon Rolls Roundup

Supreme Court Case Risks Massive Tax Hit, Joint Panel Warns - Samantha Handler, Bloomberg ($):

Taxes on corporations’ foreign income such as Subpart F and the tax on global intangible low-taxed income, known as GILTI, would be vulnerable to legal challenge depending on how justices rule in Moore v. US, the nonpartisan tax scorekeeper wrote in a Tuesday memo to House Ways and Means Ranking Member Richard Neal (D-Mass.), obtained exclusively by Bloomberg Tax.

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Partnership taxes, taxation of shareholders of S corporations, and taxes on mark-to-market valuations also would be at risk of constitutional challenges, JCT wrote. The income of real estate mortgage investment conduits, or REMICs, also may be affected, according to the memo.

The JCT letter didn’t opine on how much revenue may be lost if those provisions are ultimately impacted. The Tax Foundation has estimated that if the court were to strike down all taxes based on undistributed business income, the government would lose $5.7 trillion in revenue over 10 years.

The Moore case challenges the 2017 "transition tax" on income of controlled foreign corporations. It reversed US tax policy that deferred tax on such earnings until they were repatriated to the US, while imposing a tax on earnings deferred to that point, payable over up to eight years.

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

Reading the Taxpayers’ Brief in Moore - Lawrence Zelenak, Tax Notes ($). "Readers unsympathetic to the Moores’ cause may be heartened not only by the problematic nature of the brief’s arguments regarding the Moores themselves but also by three implications of the brief for other tax provisions — existing and proposed — that might be challenged on Macomber’s authority. First, the brief expressly acknowledges the constitutionality of several provisions, including sections 475, 877A, and 1256, and subchapters K and S."

House GOP Leaders Still Waiting for IRS Requests on ERC Woes - Jonathan Curry, Tax Notes ($):

Despite public comments by IRS Commissioner Daniel Werfel about potential legislative solutions to the “tsunami” of fraud related to the recent spike in ERC claims, House Ways and Means Committee Chair Jason Smith, R-Mo., and Oversight Subcommittee Chair David Schweikert, R-Ariz., say they’re still waiting to see them.

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In response, Treasury Department spokeswoman Ashley Schapitl referred Tax Notes to a September 14 letter — dated the same day the IRS announced its moratorium on processing new ERC claims — by Deputy Secretary Adewale Adeyemo, which was addressed to the top lawmakers on the Senate Finance Committee.

“We would like to work with Congress on additional tools the IRS can use to protect taxpayers,” Adeyemo said before describing legislative proposals like providing the IRS with authority to regulate paid preparers or crafting legislation to address the contingency fees used by ERC mills to profit off claimants.

Maybe, just maybe, the problem was a carelessly drafted law, rather than a lack of licenses for preparers.

5th Circ. Skeptical Of Firm's Research Tax Credit Defense - Anna Scott Farrell, Law360 Tax Authority ($). "The district court ruled against Cajun Industries shareholders... in October 2022, saying they were not entitled to the share of the $1.3 million in research credits that they claimed on an amended return for 2013 and for which they received a $671,000 pass-through refund. In granting summary judgment to the government, the court found that the firm didn't own the rights to research it performed as a subcontractor, making it ineligible for the tax credits."

Related: R&D Tax Incentives.

Yellen Invokes National Security in Defense of Tax Subsidies - Alexander Rifaat, Tax Notes ($). "A key component of President Biden’s Made in America strategy, the CHIPS and Science Act of 2022 provides an advanced manufacturing tax credit worth 25 percent of the value of qualified investments in domestic semiconductor production. Companies looking to take advantage of the credit can’t use the funds for any project tied to China."

Don't fall for tax text message scams - Kay Bell, Don't Mess With Taxes:

However, I did like how the crook tried to pique my interest by annotating the fake text as an internal tax agency message. Or rather as "messageinternal-Irs."

And while I'd love to be an IRS insider, like all my tax savvy readers, I know that the IRS never sends us taxpayers emails or text messages, and definitely not as the first contact.

Kay is smart. Be like Kay, and don't click on texts or emails purporting to be from the IRS.

Supreme Court Turns Down Tax Delinquency Takings Case - Kelly Phillips Erb, Forbes. "Sinclair isn't precisely a win for the taxpayer—yet. But it's likely headed that way. It's the latest in a string of cases favoring the homeowner in foreclosure cases. The move isn't going unnoticed by state legislatures. According to the Pacific Legal Foundation, the organization that represented Geraldine Tyler at the Supreme Court, 'State by state, legislatures are banning home equity theft.'"

Should Online Sports Betting Firms Withhold Taxes On Winnings? - Renu Zaretsky, TaxVox. "But if all winnings immediately shrank because of withheld income tax, would it temper the optimism some gamblers seem to have and potentially make sports betting less attractive or addictive?"

Funds Withdrawn by Spouse Not Income to Incarcerated Individual - Leslie Book, Tax Notes/Procedurally Taxing ($). "A key consideration was that the POA arguably limited Jacqueline only to take actions to secure payment of the monthly Social Security payments, and not provide her unfettered access to and use of the IRA and the life insurance policy’s cash value for her own benefit."

Estate Administrator's Refund Lawsuit Kept Alive by IRS Processing Delays - Parker Tax Pro Library. "A district court held that a taxpayer's claim for a refund of taxes paid in years 2015 through 2018 was not barred by the three-year lookback period of Code Sec. 6511(b)(2) because the taxpayer requested the refund in 2019, which was not rejected by the IRS until 2022 after the IRS asked the taxpayer several times to resubmit documents establishing the taxpayer's entitlement to the refund. "

IRS Leaker Of IRS Tax Data To The Press Is Charged With Tax Crimes - Robert Wood, Forbes. "Does the IRS and the rest of the government care about such disclosures? You bet, and federal law is harsh on this subject. Leaks of taxpayer data face strict consequences. Section 6103 of the Internal Revenue Code requires confidentiality for tax return information. Section 7213 of the tax code sets out the consequences of authorized disclosures of such information. There is a fine of up to $5,000 or five years in prison, or both. If you consider that many tax crimes do not result in long term imprisonment, the potential for up to five years is a lot."

Nikki Haley is Right: Repeal the Federal Gas Tax - Adam Michel and Chris Edwards, Liberty Taxes. "The states should have responsibility for highway funding, and we need to start reversing the increase in central control over infrastructure supported by many Republicans and Democrats."

Basic Arithmetic: Short-Run Tax Increases And Long-Run Benefit Cuts To Fix the National Budget - Eugene Steuerle, Government We Deserve. "First, the need for taxes: A very large share of federal outlays is scheduled to go to current and near-term retirees, whose benefit levels already are well in excess of the taxes collected to pay for them. Unless Congress is willing to cut benefits on which people have become dependent, the near-term pressure will be mainly on tax increases. Second, the need for benefit cuts: The automatic rate of growth of health and retirement benefits scheduled in the law exceeds forever the rate of growth of national income and revenues. Those promises can’t be sustained no matter how much taxes are increased."

Tax Trends in European Countries - Cristina Enache, Tax Policy Blog. "Many countries introduced temporary rate reductions to excise duties and value-added taxes on energy and food products as a price support measure to cushion the impact of a sharp rise in energy prices and inflation. This is despite the fact that the effectiveness of using reduced VAT rates to address equity, environmental, and other policy goals is questionable."

Amount B and Digital Goods - Alex Parker, Things of Caesar. "Through Amount B, the OECD seeks to set up simplified formulas for pricing–within the range of how they’re supposed to be priced now–so that neither the taxpayers or the tax administrations have to go through the comparables analysis every single time. It still hasn’t been decided if this would be something that the tax authority could impose on corporations, or a safe harbor that could be elected into. But either way, it could free up resources for governments while also giving taxpayers more certainty."

CPA Didn’t Substantiate Deductions, Liable for Penalty - Tax Notes ($). "The Tax Court, in a summary opinion sustaining an accuracy-related penalty, held that a CPA and his wife were not entitled to the cost of goods shown on their schedule C, they weren’t entitled to travel expense deductions or a home office expense deduction, but they did substantiate some office and operating expenses and were entitled to deduct them."

One feature of this case is the way the taxpayer lumped his claimed business expenses as "cost of goods sold." From Special Trial Judge Carluzzo's opinion:

Petitioner prepared the return. The return includes a Schedule C that shows: (1) $66,976 as “gross receipts”; (2) $69,233 as “cost of goods sold”; and (3) a negative $2,257 as “gross profit” (which is also shown as the net loss from business). A detailed computation of the cost of goods sold is not shown on the return; instead the $69,233 is merely shown as “other costs.” The cost of goods sold is disallowed in the notice. No deductions are claimed on the Schedule C. Petitioner now acknowledges that he improperly included what might otherwise be allowable trade or business expense deductions in the cost of goods sold shown on the Schedule C.

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Little else really need be said on the point. Petitioners did not suggest, much less establish, that they may reduce the gross receipts shown on the Schedule C for any amount attributable to cost of goods sold.

As you learn in Introductory Accounting, Cost of Goods Sold is the expression of the cost of inventory purchased or manufactured and sold during a year. It doesn't apply to a service business. The practice of burying non-deductible costs in "costs of goods sold" is likely a factor behind the new IRS Cost of Goods Sold compliance campaign.

But if the costs are really deductible, does it really matter what tax return line they are on? Well, in this case, most of them weren't. The original return claimed $69,233 in expenses; the Tax Court said the taxpayer could substantiate $6,238 and disallowed the rest. The special trial judge was not pleased (my emphasis): 

Petitioners have presented inadequate substantiation for many of the trade or business expenses they now claim. Worse, they treated otherwise ordinary and necessary business expenses as components includible in cost of goods sold while engaged in a trade or business that did not require accounting for inventories. Petitioners offered no reasonable explanation for doing so. As a CPA who prepared the return, petitioner should have known better. Accordingly, to the extent Rule 155 computations show there is a substantial understatement of income tax, we sustain respondent's imposition of a section 6662(a) penalty.

The moral? Don't use cost of goods sold as a dumping ground for non-deductible costs in hopes that nobody will notice.

Former senior executive in College Admissions Case sentenced for tax fraud in connection with payments to secure son’s admission to USC - IRS (Defendant name omitted):

According to evidence presented at trial, in 2013, Defendant agreed to pay William "Rick" Singer $220,000 to facilitate his son's admission to USC as a purported water polo recruit in exchange for payments to the water polo team account. Defendant requested that Singer provide him with a fake invoice for business consulting fees so that he could make the payments using his private investment firm's corporate account. Defendant asked, "Can we make it for consulting or whatever from The Key so that I can pay it from the corporate account?" After Defendant's son was accepted to USC, Defendant used his firm's corporate account to wire $100,000 to Singer's sham charity, the Key Worldwide Foundation, $100,000 to Singer's for-profit company, The Key, and $20,000 directly to Singer. Defendant falsely deducted part of the payments as a business expense and the remainder as a charitable contribution.

"Can we make it for consulting or whatever..." apparently isn't enough to make just anything a deductible business expense.

I only have time for one. Today is National Cinnamon Roll Day and National Kale Day.