Key Takeaways
- New Form 7217 requires partners to report distributed property basis.
- "Smile High Trust" gets dentist drilled by IRS.
- Some Illinoisans have until February to file extended 1040s.
- IRS updates extended drought livestock replacement eligibility.
- Tax battles in November and beyond.
- How to help Helene victims.
- The mysterious case of the recurring appendix.
- International Coffee Day meets National Homemade Cookie Day.
IRS Debuts New Form for Partnership Property Distributions - Kristen Parillo, Tax Notes ($):
Warren said at a September 10 Practising Law Institute conference that basis stripping has been difficult for the IRS to detect because it occurs over multiple years and typically involves a web of interlocking partnerships. Because the agency’s efforts to identify abuse have been hindered by outdated forms, it has been taking steps to enhance partnership reporting requirements, he said.
The new form is another step in a continuing IRS effort to make partnership tax forms more useful to taxpayers - and to IRS examiners. It matches a requirement added last year requiring partnerships to report the basis of distributed property on a K-1 attachment.
The IRS issued a press release on the draft Form 7217 (my emphasis):
The purpose of Form 7217 is to report all distribution of property that a partner receives from a partnership. A partner receiving a distribution of property from a partnership in a nonliquidating or liquidating distribution will use the form to report the basis of the distributed property.
...
The IRS also posted draft instructions PDF on Sept. 3, 2024. The instructions state that any partner receiving a property distribution from a partnership must file Form 7217, regardless of whether there is a basis adjustment in the hands of the partner as a result of the distribution. Form 7217 is not filed for distributions that consist of only money or marketable securities treated as money.
Partners historically were not required to report details of non-cash distributions from their partnership. Last year K-1 instructions required partnerships to report the basis of distributed property on a separate statement attached to the K-1. The new Form 7217 requires partners to take note of these disclosures for use in depreciating distributed property, and for use in determining gain or loss on sale.
Todd Laney, a partnership tax specialist with Eide Bailly, comments:
-The form is filed with the annual tax return of the partner.
-The name and EIN of the partnership is reported on the 7217, as well as the date of the distribution.
-The form doesn’t include any 704(b) capital reporting, just tax basis capital reporting, and FMV of the property distributed.
Partnerships will need provide this basis information to their preparers for 2024 tax returns.
IRS frowns on "Smile High Trust"
A Tax-Shelter Crackdown Uncovers a Dentist’s ‘Smile High Trust’ - Laura Saunders, Wall Street Journal (I have omitted the defendant's name):
...
At a key point, [the dentist] apparently trusted the shelter promoter rather than an outside adviser. To get the income into the trusts, the promoter advised [the dentist] to put his dental practice into a limited-liability company. Then the dentist assigned about 90% of its income to his first-tier entity, the Smile High Trust.
When [the dentist] asked a CPA about the transfer, the accountant questioned whether the move was legal under Colorado law and called it “wacky.” But [the dentist] went ahead.
It's a sad outcome. A certain subset of taxpayers is convinced that taxes are for suckers, and that their tax advisers just lack the creativity and courage to make their taxes go away. Now the $50,000 the dentist allegedly paid for the trust documents is the least of his problems. It's safe to assume that the IRS is looking at other taxpayers who used the same promoter.
Related: Abusive trust tax evasion schemes (IRS)
IRS Disaster News
Affected taxpayers now have until Feb. 3, 2025, to file various federal individual and business tax returns and make tax payments.
The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, this includes Cook, Fulton, Henry, St. Clair, Washington, Will and Winnebago counties in Illinois.
This means Chicagoans with extended 1040s now have an extra 3 1/2 months to get them filed. It also gives a break to affected taxpayers with extended partnership and S corporation returns that weren't filed by the September 15 deadline.
Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas - Roger McEowen, Agricultural Law and Taxation Blog. "Each year, by the end of September, the IRS provides guidance on the extension of the replacement period under I.R.C. §1033(e)(2)(B) for livestock sold on account of drought, flood or other weather-related condition. The extended replacement period allows taxpayers additional time to replace the involuntarily converted livestock with like-kind replacement animals without triggering gain on the sale. Significant parts of the Midwest and Great Plains in 2022 have experienced severe drought with many cattle being sold as a result. That makes the tax rules surrounding distress sales of livestock critical to understand.
The Politics of Taxes
Familiar Policy Battles Will Bog Down Tax Cliff Talks Into 2025 - Chris Cioffi and Samantha Handler, Bloomberg ($). "While most of the business breaks in the 2017 tax law were made permanent, Republicans have acknowledged that all provisions may be on the table as lawmakers look for ways to offset a potential package’s cost. And worried businesses have been pushing to preserve the corporate rate that TCJA slashed from 35% to 21%."
Republicans eager to keep House control are open to Trump’s SALT reversal - Emily Brooks and Tobias Burns, The Hill. "'If we have a thin majority, it means that those SALT-state Republicans have a larger and more proportional voice in the conversation,' said Rep. Andy Barr (R-Ky.), a member of the Financial Services Committee. Barr noted he voted in favor of the cap on SALT and praised the Trump tax bill’s effect on businesses moving out of high-tax states like New York and California."
Walz and Vance both tout child-care issues, with some differences - Abha Bhattarai, Washington Post:
Trump and Vance have also made similar promises. Vance last month said he’d “love to see” a federal tax credit of $5,000 per child, regardless of a family’s income, but noted that it would be up to Congress “to see how possible and viable that is.”
No Indication Vance Will Release Tax Returns - Alexander Rifaat, Tax Notes ($):
Vance and his wife’s net worth has been estimated to be as high as $10 million. In addition to his Senate salary, Vance earns royalties from his 2016 memoir, Hillbilly Elegy. According to his most recent financial disclosure form, he and his wife also have a number of investment accounts that include stock and cryptocurrency holdings, and they earn rent on residential real estate in Washington.
Further reading: Tax Notes Presidential Tax Returns webpage, which includes all publicly available returns for current and prior candidates.
Blogs and Bits
Bad tax shelter advice (and more) leads to Florida man's federal indictment - Kay Bell, Don't Mess With Taxes:
This was done by allegedly instructing clients participating in the shelter to transfer money, in amounts they wished to claim as federal tax deductions, to a company he or his co-conspirators controlled.
You'll never guess what happened next.
Here’s How To Help Those Impacted By Hurricane Helene - Kelly Phillips Erb, Forbes. "Be smart. Be wary of personal solicitations on your doorstep or over the phone. Make sure that gifts made by checks or credit card gifts are secure. And don't send money by text or using apps like Venmo without verifying the organization and contact information. If you don't want to donate online or by text, most organizations have alternatives, like donation forms that you can mail together with a check. Never send cash through the mail."
Legal Fees Incurred for Criminal Defense Were Deductible Business Expenses - Parker Tax Pro Library. "The court found that although there was some doubt as to whether one of the entities was a legitimate business, the charges against the taxpayer involved transactions that were made between the entities and the taxpayer and therefore, the origin of the legal fees stemmed from the taxpayer's profit-seeking activities."
Beneficial ownership reporting deadline is fast approaching - National Association of Tax Professionals. "Barring a federal court intervention, the filing deadline for all businesses created prior to 2024 that are required to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) is Jan. 1, 2025. While an Arkansas federal judge has found the Corporate Transparency Act (CTA) to be unconstitutional and barred the enforcement of provisions requiring the filing of BOI reports, that decision only bars enforcement against members of the National Small Business Association, which filed the lawsuit."
Related: Corporate Transparency Act Mandates Stricter Federal Disclosures
The Penalty on American Savers and How USAs Fix It - Adam Michel and Joshua Loucks, Liberty Taxed. "Money deposited in qualified accounts cannot be used flexibly based on an individual’s or their family’s immediate needs. If someone cannot confidently commit to leaving their savings untouched until the government-designated time, it may be wiser for them to avoid using a qualified account altogether."
Why the Economic Effects of Taxes (Including Tariffs) Matter - Erica York, Tax Foundation. "Tariffs have a net negative impact. Yes, they divert business toward protected domestic producers, but they generate losses for consumers and unprotected businesses of a greater magnitude."
Miracle appendix trips up California man
San Francisco software engineering manager convicted of tax evasion - IRS (Defendant name omitted, emphasis added):
According to court documents and evidence presented at trial, Defendant, of San Francisco, evaded his personal income taxes for tax years 2017, 2018, and 2019 by claiming to owe only about $28,496 in total tax when he made over $1.2 million as a software engineering manager. Defendant did so by declaring over $1.1 million in medical expenses on his tax returns, overstating those expenses by more than $945,000.
Defendant received tax refunds totaling over $165,000 for the three charged tax years, according to evidence presented at trial. Defendant then lied to an IRS revenue agent in two audit interviews, stating that the $1.1 million of medical expenses were related to an appendectomy. But according to the court record, Defendant paid no more than a few hundred dollars for treatment related to the appendectomy, which took place in 2010, not 2017, 2018, or 2019. As Defendant explained to one of his representatives in the tax audit, Defendant deducted nonexistent medical expenses from his taxes for multiple years because he had not been “caught” the first time he did it.
As they say in investing, past performance is no guarantee of future results.
What day is it?
It's International Coffee Day and National Homemade Cookie Day - a fine match.
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