Tax News & Views SALT Cap Workarounds Can Be a Bear Roundup

SALT Cap Workarounds Are Not Always Beneficial, Practitioner Says - Emily Hollingsworth, Tax Notes ($):

More than 30 states have adopted elective passthrough entity taxes as workarounds to the state and local tax deduction cap, but the drawbacks could outweigh the benefits for some S corporations, according to David Kirk of EY.

Passthrough entity taxes have "opened a Pandora's box," and the IRS's guidance (IRS Notice 2020-75) attempting to clarify that partnerships and S corporations can deduct the state and local income taxes they paid when computing their non-separately stated taxable income “left a lot to be desired,” Kirk said November 14 during the American Institute of CPAs National Tax Conference in Washington.

I attended the session covered in the article, and Mr. Kirk highlighted some important considerations and uncertainties in pass-through entity tax (PTET) laws. Some of the issues he covered include:

• Taxpayers in different states getting different and unfair results.
• Strange and uncertain results and reporting uncertainties from the evidently careless drafting of Notice 2020-75, the only IRS guidance on PTETs to date.
• Problems arising from changes in ownership during the year.
• Likely taxable income from refunds of PTETs.
• PTETs can undo some of the estate planning benefits of intentionally defective grantor trusts. 

One issue not directly covered in the session is the effect of retroactive PTETs, such as the ones enacted in Colorado, Nebraska, and Iowa. The deductions for these will normally go to owners at the time the retroactive tax is paid in 2023 or 2024, but if ownership has changed from that in the prior years covered by the retroactive payments, former owners may end up getting the resulting state tax credits. 

IRS Isn’t ‘Waiting Out the Clock’ on SALT Cap Workaround Guidance - Kristen Parillo, Tax Notes ($):

“We’re not waiting for 2025 for this to go away,” said Holly Porter, IRS associate chief counsel (passthroughs and special industries). “We recognize that everyone has issues right now. It’s not a situation of, ‘We're just waiting out the clock’ — that’s not what’s going on at all.”

The article notes that the Notice 2020-75, issued three years ago, remains the only official guidance on these entity taxes.

Porter acknowledged that the IRS understands the need for guidance. “We know there are questions that would be helpful to give answers to so people know what to do and what works,” she said, adding that the agency isn’t trying to create a situation in which S corporations need to request letter rulings to get relief.

For what it's worth, guidance relating to pass-through entity taxes is not an item on the most recent IRS Priority Guidance Plan.

Year-End Business Tax Break Chances Dwindle, With Window Ajar - Chris Cioffi and Samantha Handler, Bloomberg ($). "The no-frills stopgap spending bill cleared by the Senate late Wednesday would extend government funding until early next year—a timeline that puts hopes of enacting a package of business tax breaks paired with enhanced child tax credits on life support."

Look for Jay Heflin's Capitol Hill update later today for the latest on the chances, or the lack of them, for legislation on research costs, business interest deductions, and bonus depreciation.

Filing Date for Hot Asset Reporting Isn’t Doable, Tax Pros Say - Kristen Parillo, Tax Notes ($):

Tax professionals have told the IRS that nearly all partnerships will have a tough time meeting the January 31 deadline for filing the beefed-up information return for reporting partnership interest sales containing hot assets.

...

Partnerships must file the form to report a partner’s sale or exchange of a partnership interest in which all or a portion of the gain was attributable to hot assets — generally, unrealized receivables or inventory items. Under section 751(a), gain attributable to hot assets is treated as ordinary income.

Under changes made in October, Form 8308 now requires additional data, including the beneficial owner of the transferred partnership interest before and after the sale, the type of partnership interest transferred, and the selling partner’s share of ordinary income.

This information is supposed to be provided to affected partners by January 31 of the year after the exchange. As the speakers quoted in the article note, the information needed to complete the form often doesn't even exist that soon. 

Millions More People Will Be Getting IRS 1099-K Forms in 2024 - Samantha Handler, Bloomberg ($): 

Millions more freelancers, gig workers, and other taxpayers will be getting IRS 1099-K tax reporting forms next year due to a change in the law that broadens the scope of who must complete the document.

E-commerce platforms like Venmo, PayPal Holdings Inc., and eBay Inc. starting in 2024 are required to send 1099-K tax forms to users who have more than $600 in transactions. The 2021 pandemic relief law lowered the threshold from $20,000 and 200 transactions to $600. The new rule was supposed to kick in for tax year 2022, but the IRS delayed the effective date to allow for a transition period.

GAO Scolds IRS on Lack of Planning for Information Returns - Alexander Rifaat, Tax Notes ($). "In a report released November 15, the GAO found that despite the IRS anticipating Forms 1099-K to surge from 14 million filed this year to 44 million in 2024, the agency has still not devised a system to properly analyze information returns less than two months before the start of tax season."

AI Could Increase IRS Audit Scope, Scrutiny For Large Biz -- Natalie Olivo, Law360 Tax Authority:

The IRS will be going through masses of data it has on companies, including tax return information and publicly available financial data such as U.S. Securities and Exchange Commission filings, according to Robert Kovacev, a member of Miller & Chevalier Chtd. The recent announcement, with its emphasis on data analytics, is saying the agency will be launching audits based on whatever anomaly its algorithm finds, he said.

"I think a lot of large businesses that haven't been audited in a long time will receive audit notices seemingly out of the blue," Kovacev said. "Those are likely to be technology-driven."

Are Gift Cards Taxable to Employees? - Eide Bailly.  "You might think you can give your employees a gift card or certificate for under $25 without any tax issue, but gift cards given to employees in any amount count as taxable income and must be reported on Form W-2. According to the IRS’s gift card tax rules, since cash and cash-equivalent fringe benefits like gift cards and certificates have a readily ascertainable value, they do not constitute de minimis fringe benefits."

Inflation eases tax bites in 2024 on capital gains, estates, and other wealth-related income - Kay Bell, Don't Mess With Taxes. "Next year, long-term investors will see more of their capital gains fall into lower tax rate brackets. Those who've parlayed their market acumen into multimillions will be able to pass along even more of that large estate tax-free to heirs. We can give more while still around. And youngsters getting an early start in unearned income efforts can shield more of their dollars."

IRS releases inflation adjustments for 2024 - National Association of Tax Professionals. "The IRS issued its annual inflation adjustments for more than 60 items that will apply for the 2024 tax year. The adjustments outlined in Revenue Procedure 2023-43 include changes to the standard deduction amounts, the marginal income tax rates, the alternative minimum tax exemption, the earned income tax credit and many other items. "

IRS Spared As House Passes Temporary Funding Bill - Kelly Phillips Erb, Forbes. "The House bill extends funding for government services at current spending levels. That means there were no spending cuts, including those targeted to the IRS."

Children Deserve More than Shutdown Threats and Continuing Resolutions - Elaine Maag and Eugene Steuerle, TaxVox. "The maximum child tax credit, the single largest child subsidy, is not even adjusted for inflation. Recently, the child tax credit shrunk after a temporary expansion in 2021 and is set to be cut in half in 2026."

Tax History: Nixon’s Oldsmobile: An Automotive Claim to Innocence Turns 50 - Joseph Thorndike, Tax Notes ($):

As he turned to specifics, Nixon shifted blame to his predecessor, suggesting that former President Lyndon Johnson had provided some crucial tax advice.

...

Rather, Nixon said, his modest tax payments were a direct result of Johnson’s suggestions. “Lyndon Johnson came in to see me shortly after I became President,” Nixon explained. “He told me that he had given his Presidential papers — or at least most of them — to the Government.”

Perhaps one's political opponents should not be relied on for tax tips.

Cayman Islands Hedge Fund Liable for Over $57 Million Tax Bill - Caitlin Mullaney, Tax Notes ($):

A Cayman Islands-organized hedge fund is liable for over $57 million, plus penalties, after failing to pay over withholding taxes under section 1446, the Tax Court held.

In a November 15 opinion in YA Global Investments LP v. Commissioner, Tax Court Judge James S. Halpern said that all the taxable income that YA Global Investments LP reported was effectively connected with a U.S. trade or business and that its non-partnership deductions had no bearing on its withholding tax liabilities.

$57 million is a fair amount of money. International tax rules aren't always straightforward, and errors are expensive. 

Link: 161 T.C. No. 11

Related: Eide Bailly International Tax. 

Agoura Hills property developer sentenced to nearly three and a half years in prison for lying on bankruptcy petition and filing false federal tax returns - IRS (Defendant name omitted, emphasis added):

Defendant was sentenced by United States District Judge Otis D. Wright II, who also fined Defendant $20,000 and ordered him to forfeit approximately $3,545,712, which represents the proceeds of the sale of real estate in Alameda County. Judge Wright also ordered Defendant to pay the IRS approximately $1,618,836 in outstanding tax liabilities, including penalties and interest.

Defendant pleaded guilty on February 23 to one count of making a false statement in bankruptcy and one count of subscribing to a false tax return.

...

In April 2015, Defendant filed a bankruptcy petition in Los Angeles in which he claimed under penalty of perjury he had no income from 2013 until April 2015. In fact, he earned approximately $2,263,221 in income through DTMM Construction Inc., his West Los Angeles-based real estate development company, which, according to court documents, stood for "Don't Touch My Money." To further conceal his income from the bankruptcy court and creditors, Defendant arranged for DTMM to be registered in his wife's name but used the company to deposit the profits from his own work as a real estate developer and to pay for his and his family's living expenses.

Defendant concealed his income from his creditors by depositing it into DTMM's accounts. Among the assets Defendant hid from creditors included his interest in real estate in Livermore, California, which later was sold for approximately $3,545,712, the proceeds of which he agreed to forfeit.

In October 2016, Defendant signed and filed a false federal income tax return for the tax year 2015 that failed to disclose approximately $1,096,175 in additional income. For the tax years 2010 to 2017, Defendant failed to report a total of approximately $6,886,877 of income on his federal tax returns

They are touching his money. 

Or at least take it to lunch, even if your friends all stop and stare. It's Have a Party With Your Bear Day!