Tax News & Views Short Staff Long Rent Roundup

August 15, 2023

IRS Pins IT Security Shortfalls on Staff Shortage - Jonathan Curry, Tax Notes ($):

TIGTA interviewed IRS representatives from eight business units and listed staffing and funding restraints as the top challenge faced by the agency in its efforts to manage information security risks. Managers from several business units indicated they had been unable to hire the technical personnel needed to resolve some information security issues.

“Throughout the IRS, staffing levels associated with this [plans of action and milestones, or POA&Ms] process have not kept pace with increasing workloads,” the IRS said in its response to the report. The IRS agreed to prioritize efforts to build up staff to address POA&Ms.

IT hiring will be key as the agency works to both modernize its systems and implement its own free filing program.

Link: TIGTA report

Everything Is in the Best of Hands: “Security Weaknesses Are Not Timely Resolved and Effectively Managed” - Russ Fox, Taxable Talk. "If you wonder why some don’t feel confident with the IRS preparing tax returns, look no further."

Tax Prep Cos., GOP Unlikely To Stymie IRS Free File Pilot - Asha Glover, Law360 Tax Authority ($). "Adam Ruben, vice president of campaigns and political strategy at the Economic Security Project, an initiative backed by Facebook co-founder Chris Hughes, told Law360 that despite lobbying efforts, the Free File program pilot will likely make it to launch. While he understands why House Republicans and lobbyists are pushing back against the program, it's unlikely that Democrats and the White House will acquiesce to their demands, he said."


Hawaii Wildfire Victims Get Relief on State Tax Requirements - Laura Mahoney, Bloomberg ($).

Hawaii residents affected by August wildfires are eligible for state tax relief under disaster declarations from Gov. Josh Green (D) and President Joe Biden, the Department of Taxation said.

The relief applies to victims of fires occurring between Aug. 9 and Aug. 31. A wildfire that swept through the town of Lahaina, in Maui, on Aug. 8 has become the mostly deadly US wildfire in a century. Fires also erupted the same week in the Mauna Kea and Waimea areas on the big island of Hawaii.


Hedge Fund Giant Takes IRS to Court on Limited Partner Exception - Kristen Parillo, Tax Notes ($):

At issue is the scope of section 1402(a)(13), a provision enacted in 1977 that generally excludes a limited partner’s distributive share of partnership income or loss from SECA tax. The exclusion doesn’t apply to guaranteed payments that a limited partner receives for services rendered to the partnership.


The adjustments challenged in the recent Tax Court petitions are believed to have come from the SECA compliance campaign launched in March 2018 by the IRS Large Business and International Division, which said the campaign would target “individual partners, including service partners in service partnerships organized as state-law limited liability partnerships, limited partnerships, and limited liability companies, [who] have inappropriately claimed to qualify as ‘limited partners’ not subject to SECA tax.”

SECA tax = self-employment tax. The case involves New York Mets owner Steve Cohen, who surely hopes for a better result in Tax Court than he's having in the National League East this year. 


Biden wants rich companies to pay higher taxes. Some are fighting back. - Tony Romm, Washington Post:

It was a simple idea: Major U.S. corporations should pay at least a 15 percent tax on their income, ending an era when some of the country’s most profitable firms owed the federal government little or nothing at all.


Nearly a year after its enactment, the U.S. government still has not yet fully implemented the new corporate alternative minimum tax, as the Biden administration races to finalize a complex and critical element of Democrats’ broader economic agenda. Its fate rests in the hands of the Treasury Department, whose forthcoming rules will determine if Biden can achieve his promises to lower the federal deficit and force businesses to pay their fair share.

Maybe, just maybe, it wasn't so simple after all. 


Democrats look to generate buzz around Inflation Reduction Act - Brett Samuels and Al Weaver, The Hill:

Signed with fanfare in August 2022, the White House was hoping the Inflation Reduction Act could serve as a political springboard heading into a campaign cycle.

But as the White House marks the anniversary of the law, sending officials out on the road and seeking to lean into one of President Biden’s signature legislative accomplishments, there are signs it isn’t living up to those hopes. 


Help Hawai'ian fire victims, but check out charities first - Kay Bell, Don't Mess With Taxes. "My to-the-point post Don't fall for disaster charity scams, published last year following Hurricane Ian's lashing of Florida, offers tips to ensure that your gifts really do go to disaster victims, and not into the pockets of crooks."

Reduction in Nonrecourse Debt Was Part of Sales Price in Short Sale, Could Not Be Excluded from Income Under IRC §108 - Ed Zollars, Current Tax Developments. "A taxpayer with property secured by a nonrecourse loan, who returns said property to the lender via foreclosure, deems the entire loan balance as the sales price for income tax purposes. This holds true even if the property’s fair market value is below the loan balance. But what happens when the lender consents to a payment less than the loan’s face value, facilitating a short sale by aligning with the buyer’s offer? Does this debt reduction equate to canceled debt income, or does it remain part of the sales price? Why does the distinction matter?"


Inconsistent Tax Treatment of Student Loan Debt Forgiveness Creates Confusion - Arnav Gurudatt, Garrett Watson, and William McBride, Tax Policy Blog. "Under current law, the tax code treats forgiven or canceled debt as taxable income, with some exceptions. If a borrower has debt forgiven, it is treated as if the borrower earned additional income in the previous tax year equal to the amount of forgiven debt."

IRS Issues Final Regs Allowing Assessments of Erroneous Refunds of COVID-19 Credits - Parker Tax Pro Library. "The final regulations clarify that the common law employer clients of third-party payors of employment taxes may be assessed for an erroneous refund of credits."

Post-Bittner, IRS Gets Tougher on “Nonwillful” FBAR Penalties - Virginia La Torre Jeker, U.S. Tax Talk. "Taxpayers with FBAR problems can (and should) fix them.  A competent tax professional can provide proper guidance and assist in determining if one of the Streamlined Offshore Procedures, or the Delinquent FBAR Procedure can work and avoid all FBAR penalties."

Related: IRS Dispute Resolution & Collections


Simplify and modernize by removing exclusive use for a home office deduction - Annette Nellen, 21st Century Taxation. "Modern life makes it unlikely that anyone uses a home office only for business activities. Most people, for example, have a smartphone in their hands and might get a personal call or text message or use a weather app while in their home office."

Why Should We Have To Pay Somebody To Help Us File An Individual Income Tax Return? - Howard Gleckman, TaxVox. "Do you have to hire somebody to help you report for jury duty? Or to vote? Yet taxpayers, policy analysts, journalists, and lawmakers all have normalized the idea of having to effectively pay a tax for the ability to pay your taxes. This seems…wrong."

You don't have to pay someone to help you with your taxes. You don't have to pay someone to prepare a will, or write a contract, or fix your plumbing. But it often works out better if you do.


Well, raise my rent! Two anesthesiologists and an orthopedic representative walk into a Planet Fitness franchise. They walked out of Tax Court yesterday with lower rent and marketing deductions.

The trio together ran a Mississippi fitness franchise through an S corporation, Planet LA, LLC ("Planet"). It apparently had the happy problem of too much income. The IRS took issue with two methods they used to ease the tax consequences of this problem.

The first method was to use shareholder homes for business meetings. The S corporation rented each shareholder residence as meeting venues. Tax Court Judge Goeke explains (taxpayer names omitted):

 Initially, the monthly rent to each petitioner (based on the size of the common space) was different. Sometime in 2016 through September 2017 Planet began paying $3,000 in monthly rent to each petitioner...

For each year at issue Dr. S1 and Dr. S2 (the anesthesiologist shareholders) reported the rent as income on Schedule E of their personal returns and excluded it from their gross income pursuant to section 280A(g), which provides that rental income from the rental of a taxpayer's residence is not included in gross income if the residence is rented for no more than 14 days in a taxable year. Mr. H. (the other shareholder) reported the rent for 2015 and 2017 and excluded it from gross income. He did not report it for 2016.

So each shareholder received $36,000 of rent annually for under 14 days of rental use. It seems like they could have done better with AirBNB. The IRS had questions.

The IRS also questioned "marketing" expenses paid by the company to C corporations controlled by each shareholder. Judge Goeke explains: 

When Planet started its business, it paid local advertising expenses directly to the local advertisers. In November 2014 Planet changed this practice. Each petitioner organized a C corporation under the laws of Mississippi...

 Petitioners instructed Planet's local advertisers to bill the marketing companies, and Planet began to pay fees to the marketing companies (marketing fees). The marketing fees were the marketing companies' only source of income. The marketing companies did not perform marketing or other services for other businesses. They did not report any wage expenses on their corporate returns.

The amount paid by Planet to the C corporations exceeded the amount the C corporations actually paid out in advertising expenses by (rounded) $280,000 in 2015, $436,000 in 2016, and $252,000 in 2017. The IRS examiner disallowed these amounts. 

The Tax Court addressed the rent deduction first:

Petitioners have not established the reasonableness of the rent with documentation or credible testimony. Planet deducted $290,900 in rent that it purportedly paid to petitioners over less than three years. We agree with respondent that it seems that petitioners adopted a tax savings scheme to distribute Planet's earnings to petitioners through purported rent payments, claim rent deductions, and exclude the rent from their gross income relying on section 280A(g)

The court allowed deductions of $500 rent for each meeting actually substantiated.

Then the Court tackled the marketing:

There is a total lack of evidence in the record to support the excess marketing fees. The testimony regarding these fees was vague, self-serving, and not credible. No applicable documentation was offered. Petitioners did not establish through credible testimony or documentation that Planet paid the excess marketing fees for advertising services. They did not establish with credible evidence that the marketing companies performed any services other than paying bills or that they had employees. We do not find credible their testimony about the marketing companies including the reason that they started the marketing companies.

If you think that sounds like bad news for the taxpayers, you are correct. The Tax Court sided with the IRS and disallowed the deduction - even though the C corporations included the amounts as income and paid tax.

The Moral? When you rent meeting space, shop around. And, as a wise man says, "So it pays to advertise…if you do advertise."

Link: T.C. Memo. 2023-105

Other coverage:  Opportunity and Greed On Display: Tax Court Disallows Gym Franchisee Owners Rental And Advertising ExpensesLeslie Book, Procedurally Taxing.


Suspect In Tylenol Murders Dead At 76, Had Long-Time Tax Ties - Kelly Phillips Erb, Forbes. "At the time of his sentencing for the extortion letter, Lewis was already in prison for a mail fraud conviction. In that scheme, he had been convicted on six counts of mail fraud—he had used information from his tax prep clients to apply for credit cards. According to investigators, Lewis would fill out the applications and use fake addresses along rural routes. He would then install a new mailbox and wait for the new credit cards to arrive—it was an early example of identity theft."


Unwind. It's National Relaxation Day


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