Tax News & Views Don't Be Lazy With Your ESOP Roundup

August 10, 2023

IRS Asks Taxpayers to Keep an Eye Out for ESOP Abuse - Mary Katherine Browne, Tax Notes ($):

Compliance issues with ESOPs identified by the IRS include valuation issues with employee stock, prohibited allocation of shares to disqualified persons, and in some instances, failure to follow through with tax requirements for ESOP loans.

The IRS announcement provides examples of potentially abusive ESOP arrangements, including a business that creates a management S corporation whose stock is wholly owned by an ESOP for the sole purpose of diverting taxable business income to the ESOP. In this instance, the S corporation purports to have provided loans to the business owners in the amount of the business income to avoid taxation.

An example of such a case successfully litigated by the IRS may be found here

IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs - IRS:

As part of an expanded focus on ensuring high-income taxpayers pay what they owe, the Internal Revenue Service today warned businesses and tax professionals to be alert to a range of compliance issues that can be associated with Employee Stock Ownership Plans (ESOPs).

"The IRS is focusing on this transaction as part of the effort to ensure our tax laws are applied fairly and high-income filers pay the taxes they owe," IRS Commissioner Danny Werfel said. "This means spotting aggressive tax claims as they emerge and warning taxpayers. Businesses and individual taxpayers should seek advice from an independent and trusted tax professional instead of promoters focused on marketing questionable transactions that could lead to bigger trouble."

Iowa was once a hotbed of questionable ESOP transactions as a result of the efforts of one now-deceased CPA and practitioners with whom he was associated. The Eighth Circuit dealt with such a case here. Other examples include thisthis, and this

Employee-Owned Companies Put on Notice of Looming IRS Crackdown - Austin Ramsey, Bloomberg ($). "Employee ownership advocates claim ESOPs have been unfairly targeted by an 18-year DOL enforcement campaign that’s pushed third-party evaluators out of the market and left companies wary of transferring ownership. The IRS said Wednesday that ESOPs have grown increasingly complex, giving rise to employers dodging taxable income by loaning it to ESOP participants."


IRS and Treasury issue guidance for owners of solar and wind powered energy facilities in low-income communities for increased energy credit under the Inflation Reduction Act - IRS:

 The Department of the Treasury and the Internal Revenue Service today issued final regulations and Revenue Procedure 2023-27PDF to provide guidance for owners of certain solar or wind facilities built in connection with low-income communities.

The guidance issued today provides definitions, requirements and procedures applicable to the Section 48(e) low-income communities bonus energy investment credit program established under the Inflation Reduction Act. The IRS estimates that applications from individuals, businesses and tax-exempt organizations that own certain energy credit qualifying solar or wind facilities could number in the thousands.

The Inflation Reduction Act provides for an increase in the energy investment credit for solar and wind facilities that apply for and receive an allocation of environmental justice solar and wind capacity limitation. Taxpayers that receive an allocation and properly place the facility in service may then claim the increased energy investment credit in the year that the facility is placed in service.

Related: Energy Efficiency Incentives.


Washington CPAs Voice Concerns Over Capital Gains Tax Rules - Paul Jones, Tax Notes ($):

The Washington Society of CPAs (WSCPA) has voiced disagreement with some elements of the state’s proposed rules for the new capital gains tax.


First, the WSCPA said the rules “seem to preclude the ability to carry forward capital losses, which we believe contradicts the statutory language passed by the legislature.” It argued in its comments that the regulations don’t reflect language in the capital gains tax statute that allows loss carryforwards that are both “included in the calculation of an individual’s federal net long-term capital gain” and attributable to losses from sales or exchanges allocated to Washington.


Prop. regs. identify monetized installment sales as listed transactions - Martha Waggoner, The Tax Adviser. "The proposed regulations would require taxpayers who participate in monetized installment sale transactions and substantially similar transactions, and people who act as material advisers with respect to these transactions, to disclose the transactions in accordance with the regulations issued under Secs. 6011 and 6111, the IRS said. Material advisers would also be required to maintain lists as required by Sec. 6112."

Monetized installment sales involve a purported installment sale to an intermediary, who then re-sells the assets to the real buyer for cash. Another party provides the original seller a loan for a big chunk of the installment sale price. The original seller tries to claim installment sale treatment to spread taxable gain over up to 30 years, but gets 90% or more of the cash right away.


Indicators Used to Prevent Filing of Tax Returns for Deceased Taxpayers Were Incorrectly Placed on Some Taxpayer Accounts -Treasury Inspector General for Tax Administration:

Our analysis of tax account information through January 1, 2022, identified 77,868 taxpayers with potentially erroneous deceased account locks. In these instances, the Social Security Administration’s (SSA) data did not indicate that the taxpayer was deceased, i.e., there was no date of death present. Further analysis determined that the deceased account locks were input because of the filing of a return or other actions taken by the IRS.

The IRS confirmed that 20,222 taxpayer accounts were locked in error due to both human and computer programming issues when identifying the appropriate taxpayer accounts to be locked. TIGTA updated its analysis of deceased account locks for the period of January 2, 2022, through October 29, 2022, and found that taxpayer accounts continue to be erroneously locked. Specifically, our analysis identified an additional 14,193 taxpayer accounts that had been potentially erroneously locked during this time frame.

In plain English, tens of thousands of taxpayers faced the unhappy task of convincing the IRS that they aren't dead yet.


New Tax Rules Can Save You Thousands on Home Renovations - Ashlea Ebeling, Wall Street Journal ($). "Buyers will receive the rebates as part of a $9 billion federal program passed by Congress in last summer’s Inflation Reduction Act. Household savings can range from hundreds of dollars for single items such as an electric cooktop or dryer to $8,000 for a heat pump or cutting home energy use by 35% or more. Those planning such projects may want to hold off until the program begins."

Former NBA Team Owner Can’t Deduct Deferred Comp It Didn’t Pay - Chandra Wallace, Tax Notes ($). "The panel pointed to the “clear rule” of section 404(a)(5), which specifically addresses the deductibility of deferred compensation and allows a taxpayer to take a deduction for deferred compensation only in the tax year in which it paid that compensation, either into a qualified plan or to the employees being compensated."


Chianti, steak and a windfall tax fiasco: How Italy botched its raid on banks - Hannah Roberts and Ben Munster, Politico:

In a late-night press conference on Monday, Salvini shocked international markets and his own colleagues by announcing a 40 percent windfall tax on banks’ profits, which have rocketed amid soaring interest rates. 

In the hours that followed, investors balked, bankers howled in protest as their share prices nosedived, and analysts warned that the knock-on impact on Italy’s precariously-placed economy could be severe. 

A day later, Meloni’s government was forced into a humiliating climbdown as it tried to reassure markets that banks would not be crippled by the measure. 

Italy’s Windfall Bank Tax Fails Its Stress Test - Marcus Ashworth, Bloomberg via Washington Post. "The proposal has already failed the basic criterion of any new levy — that it should raise more than it costs. The market value of Italian banks fell  by more than €10 billion ($11 billion) at one point on Tuesday, compared with the €2 billion the government aims to raise."


A quick lesson on 8 education tax breaks - Kay Bell, Don't Mess With Taxes. "Some help cover kindergarten through high school graduation costs. Others apply only to higher education expenses. There's even some federal tax help for post-graduation folks looking to improve their work skills."

Form 8300, Cryptocurrency, and Gambling - Russ Fox, Taxable Talk. "FINCEN (the Financial Crimes Enforcement Network) Form 8300 requires anyone in business–this includes individuals (sole proprietors), partnerships, LLCs, and corporations–to report cash transactions of more than $10,000.  This law isn’t new, and like almost anything related to money laundering/FINCEN there are draconian penalties for not complying.  What is new is that cryptocurrency is considered “cash” for this purpose under Section 6050I of the Infrastructure Act (which passed in November 2021).  This section of the law takes effect on January 1, 2024."

Reporting Workers' Comp on W-2 May Result in Liability Under Section 7434 - Parker Tax Pro Library. "The D.C. Circuit reversed a grant of summary judgment by a district court to an employer that was sued by an employee under Code Sec. 7434 for willfully including nontaxable workers' compensation payments on the employee's Forms W-2. The D.C. Circuit found that the willfulness requirement under Code Sec. 7434 is satisfied if the employer knowingly or recklessly filed a false return and does not require specific intent."


Accounting for Amount B - Alex Parker, Things of Caesar. "A promising OECD initiative seeks to simplify routine tax matters to give some relief to beleaguered cash-strapped tax authorities. But just because the issues aren't sexy doesn't mean they won't be complicated."

Why There Are Ads About the Hydrogen Tax Credit Rules - Marie Sapirie, Tax Notes Opinions. "Section 45V(f) says that Treasury has a year from the date of enactment to “issue regulations or other guidance to carry out the purposes of this section, including regulations or other guidance for determining lifecycle greenhouse gas emissions.” That deadline, August 16, 2023, is nearly upon us. And it is a very big deal, as many surprised podcast listeners, online streaming service viewers, and newspaper readers who probably don’t follow energy tax developments have recently learned from paid advertisements. The ads are a novel and not at all positive — regardless of what direction one thinks the guidance should take — development in the tax rulemaking process. "


State and Local Government Jobs Still Haven’t Recovered from the Pandemic - Sadie Bograd and Nikhita Airi, TaxVox. "The pandemic economic recovery has been rapid in the private sector, in part because of remote work capabilities, more flexible and more generous stimulus from the federal government, and better-than-expected revenues. As a result, state tax collections boomed and local revenue growth was strong (if more complicated)."

Historic Supreme Court case could imperil the entire US tax code - Travis Nix, The Hill. "The case (Moore v. United States) concerns the constitutionality of the 2017 Tax Cut and Jobs Act (TCJA). The act imposed a mandatory repatriation tax on pre-2018 profits that companies and some U.S. shareholders stored abroad. Previously, foreign business profits went untaxed until they returned to U.S. shareholders. But under mandatory repatriation tax, passed as part of Republicans’ comprehensive international tax reform, profits were taxed even if shareholders never received the income."


Eleventh Circuit Affirms Return Preparer’s Prison Sentence - Tax Notes ($). "The Eleventh Circuit, in an unpublished per curiam opinion, affirmed a return preparation business owner’s 97-month prison sentence for aiding and assisting the preparation of false tax returns, finding that the district court didn’t err by applying organizer/leader and aggravating-role sentencing enhancements."

From the Justice Department press release on the original sentence (Defendant name omitted):

From 2013 to 2016, Defendant prepared tax returns for some of his clients claiming they owned fictitious businesses that lost tens of thousands of dollars each year. Defendant included these nonexistent companies, as well as other false deductions and tax credits, on his clients’ returns to generate refunds they were not entitled to receive. In December 2021, Defendant was convicted at trial of 22 counts of aiding and assisting the preparation of false tax returns.

Like a lot of bad tax ideas, it worked fine, until suddenly it didn't. We can safely assume the IRS wanted the money back from his clients. 


Lazy Day, Hoover Day. Today is Herbert Hoover's birthday! He was the first Iowa-born President, a mistake not since repeated. Iowa still honors him with a state income tax credit for contributions to the Iowa Hoover Library.

It is also National Lazy Day, a holiday that would probably not have much interested Mr. Hoover, but which I shall embrace.

Expand Full Article

We're Here to Help

We are here to help
From business growth to compliance and digital optimization, Eide Bailly is here to help you thrive and embrace opportunity.
Speak to our specialists