Tax News & Views Opening Day Opening Arguments Roundup

Justices Grapple With Estate Tax Value of Closely Held Company - Chandra Wallace, Tax Notes ($):

The key question in Connelly v. United States is whether life insurance proceeds received by a closely held corporation upon the death of a shareholder are corporate assets for estate tax valuation purposes and aren’t offset by the corporation’s obligation to redeem the deceased shareholder’s stock.

The difference in valuation before the Court is stark. The government contends that the total value of Crown C Supply Co. Inc., a closely held Missouri building materials company, was $6.86 million when shareholder Michael Connelly died in 2013. Petitioner Thomas Connelly, Michael’s brother and executor of his estate as well as the surviving shareholder in Crown, valued the company at $3.86 million.

High Court Signals Doubt Over Estate Insurance Tax Treatment - John Woolley, Bloomberg ($):

“It seems the fundamental problem with your approach is that Thomas’s asset has quadrupled in value,” Justice Elena Kagan told Connelly’s counsel—Kannon Shanmugam of Paul, Weiss, Rifkind, Wharton & Garrison LLP—at oral argument Wednesday. “And it’s quadrupled in value without him putting a single cent more into the company.”

...

The IRS says Michael’s redeemed Crown stock was worth more than was reported because Crown increased in value when the company received the insurance payout. It says Michael’s redeemed 77% equity interest was worth $5.3 million, or $2.3 million more than the estate reported when omitting the insurance.

Justices Grapple With Complex $3M Estate Tax Dispute - Anna Scott Farrell, Law360 Tax Authority ($):

Only Justice Brett Kavanaugh — who said he found the case "extremely difficult" — and Justice Elena Kagan sounded like they might be starting to take sides in the dispute, with Justice Kavanaugh telling Dubin he thought it was strange that the company's net worth would drop to half its value after Michael Connelly's death.

...

Justice Kagan took the opposite view, telling Shanmugam that it "just doesn't seem to make a lot of sense" to argue that the redemption obligation was a normal one when it benefited an equity interest in the company.

Link: Transcript of oral argument.

Tax Season News

IRS further extends tax relief for Hawaii wildfire victims; 2023 returns, payments, other deadlines postponed to Aug. 7 - IRS:

In general, this means that affected individuals, businesses and tax-exempt organizations will now have until Aug. 7, 2024, to file their 2023 returns and pay any taxes due. This is in addition to the expansive relief, announced last August, shortly after the wildfires occurred.

The IRS is offering relief to Maui and Hawaii counties, the two areas designated by the Federal Emergency Management Agency (FEMA). Individuals and households that reside or have a business in these localities qualify for tax relief. The current list of eligible localities is always available on the Tax relief in disaster situations page on IRS.gov.

State Officials Urge IRS to Nix Direct File Program - Emily Hollingsworth, Tax Notes ($):

The letter argues that the direct-file program would confuse taxpayers who might not be aware that it can't be used to file state tax returns, which could lead to penalties for taxpayers who fail to file those returns. Those taxpayers "will not receive anticipated state refunds this spring," the letter continues.

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According to the IRS’s March 12 release announcing the launch of the pilot program, taxpayers in Arizona, California, Massachusetts, and New York — the only pilot states that have a state income tax — will be directed to state-sponsored tools to complete their state tax returns after completing their federal returns. The other pilot states — Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — don’t have state income taxes.

How to Prevent a Refund Offset If You Are Experiencing Economic Hardship - Erin Collins, NTA Blog:

Taxpayers are often surprised after they file their tax return requesting a refund to receive a smaller amount or no refund at all. Many are not familiar with the law that provides the IRS the ability to reduce their refund and apply it to prior federal and state liabilities. The IRS’s authority to offset a taxpayer’s refund is found in IRC § 6402. Each year, many taxpayers rely on their tax refund to pay necessary living expenses or other critical expenses. For a taxpayer who is relying on their refund to pay basic utilities or stay in their home, an immediate economic hardship can arise if the IRS applies their refund to satisfy another state or federal debt. TAS has recommended that Congress pass legislation prohibiting the IRS from offsetting certain portions of a taxpayer’s refund, such as the Earned Income Tax Credit, intended as an anti-poverty program to help low- to moderate-income workers and families.

Your Tax Refund May Be Offset If You Owe Taxes, Child Support Or Other Debt Thanks To A Federal Program - Kelly Phillips Erb, Forbes ($):

The government has long had the authority to seize tax refunds and other payments to resolve certain debts. However, in 2008, the rules that limited the time to seize those funds were rewritten. The change was made in the Food, Conservation, and Energy Act of 2008. The applicable provision, tucked at the end, is titled "Elimination of statute of limitations applicable to collection of debt by administrative offset" and reads, "Notwithstanding any other provision of law, regulation, or administrative limitation, no limitation on the period within which an offset may be initiated or taken pursuant to this section shall be effective."

Related: IRS Collection Issues.

Blogs and bits.

Don't overlook these 24 tax deductions that don't require itemizing - Kay Bell, Don't Mess With Taxes. "But even if you find the easier standard deduction option the way to file, stop. You might be missing some tax breaks that are available to every taxpayers, both those who claim the standard deduction and those who itemized."

Tax changes small business owners should be aware of as the tax deadline looms - Mae Anderson, Associated Press. "The best thing small businesses can do to help their tax advisers file their taxes is stay organized. A shoe box full of receipts isn’t helpful when trying to file timely taxes. Owners should log receipts in an orderly database they can turn over to their adviser. And stay on top of quarterly estimated payments."

Higher Taxes or Lower Benefits? - Scott Sumner, Econlog. "One way or another, higher taxes are on the way. I had this view even before the GOP switched to being a populist big government party. Now, I’m almost certain."

The author is talking about Social Security funding.

International Tax Corner

Dividend Tax Rates in Europe, 2023 - Cecilia Perez Weigel, Tax Foundation.

Ireland has the highest top dividend tax rate among the covered European countries at 51 percent. Denmark and the United Kingdom follow, at 42 percent and 39.4 percent, respectively.

Estonia, Latvia, and Malta are the only European countries covered that do not levy a tax on dividend income. For Estonia and Latvia, this is due to their cash-flow-based corporate tax system: instead of levying a dividend tax, they levy a corporate income tax of 20 percent when a business distributes its profits to shareholders.

Does the Tax System Need FDII? - Alex Parker, Things of Caesar:

The Tax Cuts and Jobs Act’s deduction for foreign-derived intangible income is normally known by its acronym FDII, which tax practitioners tend to pronounce “Fiddy”--similar to how the rapper 50 Cent begins his stage name. Perhaps it’s appropriate, as the deduction is nearly 50 (per)Cent, reducing the tax rate by half for income that qualifies.

Well, not quite half–the deduction is actually 37.5 percent now, and will decrease to 21.875 percent in 2026. That equals a tax rate of 13.125 percent and 16.406 percent, respectively. (The tax rate on global intangible low-taxed income, or GILTI, is actually 50 percent of the 21 percent U.S. corporate tax rate, for a 10.5 percent rate.)

The point being, FDII is a very valuable deduction.

Adjusting To Amount B's Rules May Bring Growing Pains - Natalie Olivo, Law360 Tax Authority ($). "Countries designed a new tax framework known as Amount B to streamline the pricing of certain cross-border operations, but the criteria for determining whether transactions qualify for the regime, which negotiators recently made optional, may complicate the goal of simplicity."

Vladimir Putin Wants a Tax Hike - Leon Aron, Wall Street Journal. "Vladimir Putin is threatening to raise taxes. Earlier this month he broached the idea of a 'progressive tax.' The idea, which is sure to provoke widespread resentment from Russians, is one of the most telling signs of the tightening financial straits into which the war on Ukraine is pushing Moscow."

Outgoing IRS Criminal Investigation Head Sees Data-Driven Future - Nathan Richman, Tax Notes ($). "

Departing IRS Criminal Investigation division Chief Jim Lee worked to apply data analytics as a way to bring the division to the cutting edge of law enforcement, he told Tax Notes.

...

CI’s emphasis on data analytics has meant a revolution in case selection, according to Lee.

Tax Crime and Punishment

Off the Beaten Tax: IRS Investigating in Baseball Gambling Scandal - Andy Sheets, Tax Notes ($):

The interpreter for Los Angeles Dodgers phenom Shohei Ohtani is being investigated by the IRS for alleged illegal gambling.

Ippei Mizuhara came to authorities’ attention during an investigation of an alleged Los Angeles bookmaker, Matthew Bowyer, the Los Angeles Times reported March 20. More than $4.5 million was transferred from Ohtani’s bank account to Bowyer’s operation, ESPN said in a March 20 report.

Without judging whether the allegations are true, we can note that theft proceeds are taxable, and that they seldom are properly reported - explaining why the IRS might be interested. If funds were given out of disinterested generosity, they would not be taxable income, but might instead be reportable by Mr. Ohtani on a gift tax return.

Filing fraudulent tax return results in prison for tax preparer - IRS (Defendant name omitted, emphasis added):

U.S. District Judge Lee H Rosenthal has now ordered Defendant to serve 12 months and one day in federal prison to be immediately followed by one year of supervised release. At the hearing, the court heard how Defendant and her business executed a long-running scheme to claim false credits on her clients’ behalf, and sought to evade IRS scrutiny. The court also ordered Defendant to pay $336,847 in restitution.

Defendant operated JNL Tax Services in Houston.

Defendant admitted that between 2016 and 2019, she filed fraudulent tax returns for taxpayers. In those fraudulent returns, Defendant knowingly reported false education credits and expenses on Schedule C forms to generate larger income tax refunds for her clients.

In 2019, she prepared an income tax return that contained two false $2,500 education credits as well as $70,743 in false expenses that were listed on Schedule C. As a result, the government suffered a tax loss of approximately $22,101. Defendant also prepared a false return containing education credits and Schedule C expenses for an undercover agent in February 2020.

The IRS secret shopper program strikes again.

What day is it?

Happy Major League Baseball Opening Day, for those who celebrate. If that doesn't do it for you, it's also National Hot Tub Day.

Tax News & Views Opening Day Opening Arguments Roundup

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Joe B. Kristan, CPA