Tax News & Views Taxes and Tourism Roundup

Joe Kristan
May 7, 2024
San Diego

Key Takeaways

  • Calendar year nonprofits have May 15 filing deadline.
  • How IRAs can end up paying taxes.
  • Trying to move the tax bill.
  • Deducting loyalty awards.
  • 2020 refund deadline approaches.
  • Art deduction checklist.
  • Clean vehicle credit regs.
  • Engineering company loses research credit claim.
  • Another CRAT shelter injunction.
  • National Tourism Day.

IRS encourages tax-exempt organizations to file their taxes ahead of May 15 deadline - IRS:

The annual filing due date for certain returns filed by tax-exempt organizations is normally by the 15th day of the 5th month after the end of an organization's accounting period. Those operating on a calendar year (CY) basis must file a return by May 15. Returns due include:

Form 990-series annual information returns (Forms 990, 990-EZ, 990-PF).

Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ.

Form 990-T, Exempt Organization Business Income Tax Return (other than certain trusts).

Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.

The notice reminds taxpayers that electronic filing is mandatory for forms 990, 990-EZ, 990-PF or 990-T. Extensions are available by filing Form 8868.

Related: Eide Bailey Exempt Organization Tax Services.


Self-Directed IRA Investors: Beware the Specter of UBTI - Phil Karter, Tax Notes ($, footnotes omitted):

Subject to numerous exceptions, qualified retirement plans, individual retirement accounts, charitable organizations, and other organizations that otherwise are exempt from U.S. federal income tax (collectively, exempt organizations) nonetheless may be subject to the unrelated business income tax on UBTI. Generally, UBTI refers to the gross income derived by an EO from a trade or business that it regularly carries on, the conduct of which is not substantially related to the exercise or performance of its exempt purpose or function, less allowable deductions directly connected with that trade or business.

Whether an investment by a self-directed IRA through an interest in a partnership generates UBTI will be determined at the partnership level. Each year, the partnership generates a Schedule K-1 distributable to the investor partners. For those who have received a Schedule K-1 in the past from a partnership investment, whether you are a retirement investor or not, you might notice a legend explaining the potential inclusion of UBTI that resembles the following:

Box 20 Code V — Unrelated Business Taxable Income (UBTI)

The compliance cost of filing a Form 990-T for an IRA can quickly make IRA investments in partnerships unprofitable.


Meanwhile in Washington

Trying to move the tax bill to the runway - Bernie Becker, Politico:

Senate Finance Chair Ron Wyden (D-Ore.) is set to try to attach the bipartisan tax bill that he helped write to the upcoming FAA reauthorization measure, according to his office.


And yet: There isn’t much reason for supporters of the Wyden-Smith plan, which would expand the Child Tax Credit and restore key tax breaks for businesses, to be optimistic about this particular route to enactment.
The "key tax breaks" in the stalled House-passed bill include immediate expensing of domestic research costs, 100% bonus depreciation, and raised limits on business interest deductions.


IRS Stands By Rule That Cash Is King for Rewards Programs - Nathan Richman, Tax Notes ($):

The author of an IRS guidance memorandum on when taxpayers can deduct customer loyalty awards program payments said the key distinction is whether customers can redeem points for cash or cash equivalents.


The IRS concluded that the rewards program liabilities are fixed and determinable under section 461 once the customer has the right to redeem the points, that economic performance occurs on redemption, and that the issuer can opt for the recurring item exception tax accounting method. Under that method, rewards redeemed within eight and a half months of the end of the year in which they are earned can be deducted when earned rather than when redeemed.

IRS final reminder: Time to claim $1 billion in tax refunds from 2020 expires May 17 - IRS. "There's no penalty for failure to file if a refund is due. However, a return claiming a refund must be filed within three years of its due date for a refund to be allowed."


Blogs and bits

Direct File usage exceeded expectations, but future of IRS-run free tax prep program unclear - Kay Bell, Don't Mess With Taxes. "Treasury Secretary Janet Yellen told the House Ways and Means Committee on April 30 that the costs and benefits of running Direct File are still being processed, and that no official decision has been made as to whether the IRS-run option will return next year."

Treasury FY 2025 Green Book Proposes to Essentially Eliminate Written Supervisory Approval for Penalties - Erin Collins, NTA Blog. "I would rather see the law properly applied to protect taxpayer rights rather than eliminated just because the IRS has needed to concede penalties when its employees did not follow the law. The IRS should follow and consistently apply the Internal Revenue Code to all taxpayers and the IRS."

Tax Court Nixes Theft Loss Deduction for Decline in Cash Value of Life Insurance Policies - Parker Tax Pro Library. "The Tax Court held that a married couple was not entitled to an $8.2 million theft loss deduction, and subsequent loss carrybacks, that resulted from a decline in the cash value of variable life insurance policies caught up in the Madoff Ponzi scheme."


Reporting a Tax-Free Residence Sale - Thomas Gorczynski, Tom Talks Taxes. "Individuals can generally exclude up to $250,000 (or $500,000 joint) of gain from selling a primary residence under §121. Even though this generous tax benefit is widely used, the official IRS reporting requirements are pretty lax; however, it is often advisable to report the transaction on the return even if the IRS does not require it."

Avoiding IRS Art Donation Audits Requires an Up-Front Checklist - Meaghan Gregg, Justin Cohen, and Samantha Lauri, Bloomberg:

For art donation deductions of more than $5,000, a taxpayer must obtain a qualified appraisal of the artwork and complete Form 8283—Noncash Charitable Contribution—signed by both a qualified appraiser and the charity.

For art donation deductions of $20,000 or more, a taxpayer must submit to the IRS the qualified appraisal and an 8-by-10-inch high-resolution photo of the donated artwork. Art donation deductions under $5,000 don’t require a qualified appraisal but still must be substantiated, with differing requirements based on the deduction amount.

No appraisal, no deduction.


Final regs. issued for new, previously owned clean vehicle credits - Martha Waggoner, The Tax Adviser. "The IRS issued final regulations (T.D. 9995) Friday for new and previously owned clean vehicle credits, including rules for how buyers can transfer credits for such vehicles to registered dealers at the point of sale rather than waiting until they file their returns. Also included in the final regulations are rules about the process for dealers to become eligible entities to receive advance payments of the transferred credits."

Related: What You Need to Know About the Clean Vehicle Credit


Tax Policy Corner 

Expiring TCJA Tax Provisions in 2026 Would Produce Substantial Tax Hike across the U.S. - Garrett Watson and Erica York, Tax Foundation. "The tax hikes from TCJA expiration would vary across the United States. The largest average tax hikes would be experienced by taxpayers who reside in California’s congressional districts. For example, the congressional district covering the San Francisco area would see an average tax hike of $16,127 per taxpayer, the highest in the U.S."

Strong Economy, Low Unemployment, and Higher Job and Wage Growth Extend Social Security Trust Funds to 2035 - Social Security Press Office:

The asset reserves of the combined OASI and DI Trust Funds declined by $41 billion in 2023 to a total of $2.788 trillion.

The total annual cost of the program is projected to exceed total annual income in 2024 and remain higher throughout the 75-year projection period. Total cost began to be higher than total income in 2021. Social Security’s cost has exceeded its non-interest income since 2010.

The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2035. At that time, there would be sufficient income coming in to pay 83 percent of scheduled benefits.

Readers who remember 2013 will realize 2035 isn't that far away. Current law would impose an across-the-board benefit cut to fit benefits to program income. While relatively modest steps taken now on the tax and benefit sides could go far in dealing with the problem, political incentives seem to be to wait for the 2035 train wreck to arrive before doing anything.


Tax in the courts

Engineering Co. Can't Claim Research Credits, 8th Circ. Says - Natalie Olivo, Law360 Tax Authority ($). "Minnesota-based Meyer Borgman & Johnson Inc. agreed to create structural designs for its clients' building projects under contracts that did not make payment contingent on the success of the engineering company's research, according to an opinion from a three-judge panel on the appellate court. Therefore, MBJ cannot claim research tax credits under Internal Revenue Code Section 41, which excludes credits when research is funded by a grant, contract or government entity, the panel said."


Court Permanently Bars Missouri CPA from Promoting Charitable Remainder Annuity Trust Tax Scheme - US Department of Justice (Defendant names omitted):

On May 3, the U.S. District Court for the Western District of Missouri permanently barred Promoters from organizing, promoting, selling or marketing tax schemes involving the use of charitable remainder annuity trusts (CRATs). In addition, the court ordered Promoter to disgorge ill-gotten gains from the scheme totaling $400,000. Promoters agreed to the court orders.

In February 2022, the United States sued Promoters and five other defendants to stop them from promoting the CRAT scheme. The court previously entered permanent injunctions against the other five defendants by their consent. 

According to the United States’ amended complaint, Promoters allegedly promoted the CRAT scheme in concert with other defendants. The government alleges that Schreiner falsely claimed to customers following the CRAT scheme that they could avoid reporting to the IRS and paying federal income tax on the sale of property by: (1) transferring it to a CRAT; (2) unlawfully inflating (stepping-up) the cost basis in the property on tax documents; (3) selling the property and using the sale proceeds to purchase an annuity; and (4) receiving payments from the annuity, but failing to report the annuity payments as income on tax forms. According to the amended complaint, Promoters also prepared tax forms to implement the CRAT scheme.

These are the so-called "Hoffman CRATs," whose debunking in Tax Court we covered here.

The Moral? If it's too good to be true, it probably is. Don't take the promoter's word for it. And if a tax plan requires the purchase of an insurance product, tread very carefully.


What day is it?

It's National Tourism Day! Maybe pretend you are a tourist in your home town and do something only tourists do.


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About the Author(s)

Joe Kristan

Joe B. Kristan, CPA

After 38 years centered on tax consulting for closely held businesses and their owners, Joe is joining Eide Bailly's National Tax Office. Joe's responsibilities include communication, process improvement and training. He is a principal contributor to the Eide Bailly Tax News and Views blog, providing daily updates on tax reform and other tax news. Joe is a Certified Public Accountant and a member of the AICPA Tax Section and Iowa Society of Public Accountants.

Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.