Tax News & Views Faulty Tax Knowledge Fakesgiving Roundup

National Tax Literacy Poll: Understanding the Tax Code - Zoe Callaway, Tax Policy Blog:

To make sound financial decisions and support better tax policy, taxpayers should understand the taxes they face. Unfortunately, most U.S. taxpayers do not know or are unsure of basic tax concepts.

We reported results that showed more than two-thirds of respondents did not know the top federal income tax rate and over half did not know how tax brackets work. The majority of respondents also answered incorrectly when surveyed about the value of tax credits versus tax deductions.

No matter how many of these answers someone gets wrong, their vote counts the same. That empowers politicians willing to play to the misinformed.

Tax Foundation chart of tax literacy poll results

IRS wires electricity credits

IRS Guidance Amps Up Clean Electricity Tax Credit Flexibility - Mary Katherine Browne, Tax Notes ($):

In proposed regulations (REG-119283-23) issued May 29, Treasury and the IRS issued detailed guidance on the section 45Y and section 48E clean electricity credits, including rules for calculating the credits, determining greenhouse gas emissions rates, and petitioning for provisional emissions rates.

Section 45Y is the "Clean energy production credit," while Section 48E is the "Clean electricity investment credit."

Both credits have bonus amounts for projects located in historical energy communities, in low-income communities, or on tribal land; for meeting certain domestic manufacturing requirements; or for being part of a low-income residential building or economic benefit project. Taxpayers may elect direct-pay and transfer options for the credits.

Treasury Details Which Tech Would Get Clean Energy Credits - David van den Berg, Law360 Tax Authority ($):

Hydropower and nuclear fusion and fission projects would also qualify for the clean electricity production and investment tax credits under the proposed rules for Internal Revenue Code Sections 45Y and 48E. The tax credits were created by the 2022 Inflation Reduction Act and would generally apply to projects that break ground beginning next year. Meanwhile, the existing Section 45 and 48 green energy production and investment credits would phase out.

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The proposed regulations also detail how energy storage technologies could qualify for the Section 48E clean electricity investment credit. They also clarified how low-output clean energy facilities claiming the credit can include costs for improvements needed for local transmission and distribution networks to connect facilities to the grid, Treasury said.

Industry Cautiously Optimistic for ‘Tech-Neutral’ Energy Credits - Alexander Rifaat, Tax Notes ($). "Industry groups welcomed the proposed regulations (REG-119283-23) released by Treasury May 29, which provide guidance on the section 45Y clean electricity production tax credit and section 48E clean electricity investment credit. The regs expand the number of technologies eligible for the credits as long as they have net-zero emissions."

Link: IRS press release

Last-minute change in instructions; S corporation valuation

IRS Quietly Added Corporate AMT Compliance Mandate for Partners - Chandra Wallace, Tax Notes ($):

Taxpayers that may be subject to the corporate alternative minimum tax are now required to request and retain information needed to determine their distributive share of a partnership’s adjusted financial statement income.

The IRS made the post-release change to Schedule K-1 instructions for partners on its website in an update April 9. The new instruction, titled “Partner’s instructions for Schedule K-1, Box 20, Code ZZ — CAMT,” mandates that these partners submit written requests to partnerships and that they “maintain a copy of the request and information received in [their] books and records.”

Funny thing to add on April 9 for returns due on April 15.

Gifting Company Shares Eased by Tax Court Ruling on Valuations - Erin Schilling, Bloomberg ($):

Because partnerships and S corps don’t have an entity-level federal tax, the IRS and Tax Court have long rejected valuations of these companies that take into account how much the company pays in taxes. Not taking tax into account during an S corp valuation could increase the value by about 25% to 50%, said Empire Valuation Consultants CEO Bill Johnston.

That changed with Cecil v. Commissioner , in which a judge accepted the “tax affected” value—or the value that considers how future cash flows are lowered by taxes—of an S corp because it included an additional calculation that considered the benefit of the S corp ownership structure.

Blogs and bits

Five 529 plan facts to celebrate National 529 Day - Kay Bell, Don't Mess With Taxes. "The U.S. tax code is involved because 529 plans have several tax advantages. At the federal level, you don’t get a federal tax break on your Form 1040 for contributions to a 529 plan. But money you do put into a 529 grows free of any federal taxation. Even better, withdrawals also are federally tax-free when they're used to pay for qualifying college expenses."

It's True: These 13 States Don't Tax Retirement Income - James Brumley, Motley Fool. "In addition to the nine states that simply don't impose any income tax on anyone, four more states don't tax retirement income from 401(k) accounts, IRAs, and pensions, even though they do still tax ordinary work-based wages."

Prevent Employee Retention Credits From Scuttling a Merger Deal - Walt Cosby, Maslon via Bloomberg. "Buyers should conduct their own tax due diligence to verify the legitimacy of any ERC claims before finalizing the deal. Buyers ultimately may be responsible for any tax liabilities arising from erroneous ERCs claimed by the target company."

What is Cost of Goods Sold (CoGS) for tax? - Jeremy Wells. "So only businesses with physical goods or real property for sale, i.e. inventory, can incur costs of goods sold for federal tax purposes."

Yet many tax returns for other companies, including transportation and service businesses, show a "cost of goods sold" deduction. Sometimes this is a misclassification of legitimate deductions; yet it is often enough a place to bury questionable or imaginary expenses that the IRS has an "Inflated Cost of Goods Sold" compliance campaign in place.

Tax Court Rejects IRS's Treatment of Option and Sale Agreements as a Sham Transaction - Parker Tax Pro Library. "The Tax Court held that a corporation was not liable for a deficiency as a result of an option agreement and a subsequent sale of land because the transaction was valid and not a sham transaction that should be disregarded for tax purposes."

Economic theory and reality - Scott Sumner, Econlog. "Kevin Corcoran recently did a post discussing the distinction between being wrong in theory and wrong in fact. Here I am interested in another situation, the case where theory matches reality quite closely, but people are reluctant to accept the implications of that fact. For instance, basic economic theory suggests that higher tax rates ought to reduce hours worked. Europe has higher tax rates than America and considerably lower hours worked each year. But many people seem reluctant to accept the straightforward implications of those facts."

International Tax Corner

Nations Can Fight, But There’s No Flight From Global Minimum Tax - Alan Cole, Tax Foundation via Bloomberg:

While more than 140 countries have signed on to the global minimum tax agreement known as Pillar Two, these efforts don’t always have the backing of domestic legislative bodies, some of which have done little to adopt laws that would make Pillar Two effective.

For three of the world’s largest economies—the US, China, and India—the question of Pillar Two adoption remains a source of uncertainty for multinational enterprises. Many outcomes are possible, but they can be divided roughly into three categories: comply with Pillar Two, fight Pillar Two, or muddle through without either compliance or retaliation.

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Compliance would involve adopting three taxes that comport with the Pillar Two goal of a 15% tax rate on corporate income. The first, known as a qualified domestic minimum top-up tax, or QDMTT, would apply to domestic income. Under a QDMTT, countries calculate the effective corporate tax rate using definitions set forth by Pillar Two rules, and “top up” the tax until the 15% target is reached.

Global Minimum Tax Incentive Rules Threaten US R&D Investment - Lauren Vella, Bloomberg ($):

Unfavorable treatment of the highly lucrative US R&D credit under the global minimum tax is threatening to expose American companies to higher taxes and prompting some to rethink new investments in the US.

The US credit—which is worth hundreds of millions of dollars of tax reduction for some companies—would subject US businesses to large amounts of top-up tax by foreign governments, even when operations are on US soil, practitioners and industry groups warn.

Keep It Simple - Leonard Wagenaar, Leonard's Tax Post. "The conventional wisdom after the P2 rules came out was that it would push everyone to adopt a QDMTT, so that each country would collect the minimum tax they needed for that jurisdiction to be outside the scope of that rules. And indeed, many countries adopted or are in the process of adopting a QDMTT, including countries with tax rates below 15% (meaning that QDMTT almost always applies for in scope MNEs). But that strategy means that MNEs still have to do full GloBE calculations for your country, creating a lot of compliance burden. So, are those countries really winning?"

Tax in the courts: a candidate with conviction, a teacher expelled.

Presidential Candidate Convicted For $15.5M Tax Fraud - Anna Scott Farrell, Law360 Tax Authority ($). "A minor candidate in the 2024 Republican primary, John Anthony Castro was found guilty on all counts of his indictment Friday after a five-day bench trial and now faces 99 years in prison for preparing false tax returns, according to the U.S. Department of Justice."

That probably does nothing for his chances at the upcoming convention. The Department of Justice press release has more:

Mr. Castro claimed deductions based on extreme and unsupported legal theories, including deductions such as (1) those for any expense related to preventing an illness qualified as an “impairment related work expense,” (2) those for expenses related to commuting to and from work, (3) the full value of one’s mortgage and utilities as long as the taxpayer had some type of Schedule C business to claim, (4) those related to dry-cleaning for work clothes, and (5) the full value of one’s cell phone bill even when their employer provided them with a work phone. For example, with respect to one client, Mr. Castro deducted over $26,000 in expenses that he claimed related to a nascent cupcake business that had generated only $250 in revenue.

A tad aggressive. Of course, his clients don't get to keep their taxes "saved."

Teacher schooled. A Georgia public school teacher has repeatedly failed his 1040 exam, according to a Federal Judge in Georgia. Now he may get expelled. From an recent court order (taxpayer name omitted):

Plaintiff is a public-school teacher that worked for the McDuffie County Board of Education in McDuffie County, Georgia. In 2021, Plaintiff earned $91,019.00 in wages from McDuffie County Board of Education and $33,060.00 in retirement distributions from Defense Finance and Accounting Service. However, on his 2021 federal income tax return. Plaintiff reported the retirement distributions as income and indicated he received a primary economic impact payment of $5,600.00, but he did not report any of his wages as income.

The IRS computers noticed this when the wages on the 2021 1040 didn't match the school district's W-2. And this isn't the first time:

As mentioned previously, Plaintiff is no stranger to this Court. Indeed, this is the fourth case Plaintiff has filed in this Court arguing he is entitled to a refund after he failed to report his wages as income on his tax return. Plaintiff made similar arguments before the Tax Court on at least two occasions. In three of the cases Plaintiff filed before filing this action, Plaintiff was told his argument that his wages were not income was frivolous, and he was given monetary sanctions for making such an argument...

Plaintiff’s time has come. The Court will no longer tolerate his frivolous filings because they impair the Court’s ability to adjudicate the legitimate claims of other litigants. Accordingly, Plaintiff is ORDERED to SHOW CAUSE within FOURTEEN (14) DAYS of this Order why the following permanent injunction should not be imposed.

The injunction would bar the schoolteacher "from filing or attempting to file any lawsuit in this Court or any other federal court seeking to obtain a tax refund for a tax year in which [he] failed to report his wages as income." So, expelled.

The Moral? Tax protesting is a strange hobby, and it gets expensive, with the frivolous return penalties and all.

What day is it?

It's Fakesgiving - "In terms of the core elements that make up the holiday, it is hardly any different from the Thanksgiving holiday itself; a meal is prepared, family and friends are present, everyone gathers around a table and says what they’re ‘fakesful’ for, and generally everyone has fun and creates memories with one another."

Other than the airports aren't as busy and you don't get time off from work.

Tax News & Views Faulty Tax Knowledge Fakesgiving Roundup

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Joe B. Kristan, CPA