Tax News & Views Apple Dumpling Sad Song Basis Roundup

Estate Tax Basis Consistency Regs to Reduce Compliance Burden - Chandra Wallace, Tax Notes ($):

The IRS and Treasury released final regs (T.D. 9991) on September 16, implementing a statutory mandate that estate beneficiaries take a tax basis in property they receive consistent with its tax basis in the estate. The new rules also apply reporting requirements to help enforce the mandate.

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The final regs apply generally to specified property acquired from a decedent if the relevant estate tax return is filed after September 17.

Final regs. issued on consistent-basis and basis-reporting rules - Dave Stausfeld, The Tax Adviser.

The final regulations regarding the statutory basis-reporting requirements affect executors and other persons required to file an estate tax return based on the value of the decedent's gross estate and the amount of the decedent's lifetime adjusted taxable gifts, as well as trustees making in-kind distributions of property initially acquired from a decedent that was subject to the statutory basis-reporting requirements.

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Significant changes the final regulations make from the proposed rules include removing the zero-basis rule for unreported property. The proposed regulations provided that, for property discovered after the filing of, or otherwise omitted from, an estate tax return, where that property is not reported before the expiration of the limitation period for assessing estate tax, the final value of the property would be zero (Prop. Regs. Sec. 1.1014-10(c)(3)(i)(B)).

Devin Hecht, leader of the Eide Bailly Wealth Transition Services practice, comments:

Executors have struggled with the proposed basis consistency regulations for over 8 years. For example, the proposed regulations included an onerous “Zero Basis” rule that provided for zero basis for property that was omitted from an estate tax return (Form 706) and discovered after the limitation period for assessing estate tax. The proposed regulations unfortunately added only more complexity to executors and their advisors who are already dealing with the inherently difficult issues often present in the administration of a decedent’s estate. The final basis consistency regulations include significant helpful changes for executors and their tax advisors, including removing the “Zero Basis” rule, elimination of certain reporting requirements for transfers to subsequent transferees, and expanded the list of property (including details for “cash” and “cash equivalents”) that are excluded for reporting in the basis consistency final regulations.

Microcaptive Mishap

IRS Scores Another Court Win in Microcaptive Insurance Crackdown - John Woolley, Bloomberg ($):

An Oklahoma couple became the latest on Monday to fall short in their challenge to the IRS’s enforcement against abusive microcaptive insurance arrangements.

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The IRS determined nearly $346,400 in deficiencies against RMIC, finding it ineligible to treat the reinsurance premiums it received from Sheperd Royalty as tax exempt under IRC Section 831(b). The Sheperds also face an approximately $362,800 deficiency, plus a 40% accuracy-related penalty, because Sheperd Royalty is an S corporation that passes its liabilities through to its owners.

From the Tax Court opinion:

Apart from the labels attached to the entities and documents dis-cussed above, these cases are bereft of evidence pointing to the existence of true “insurance.” The entities in question either did not exist during 2012 or were not organized or regulated as insurance companies. Sheperd Royalty achieved no transfer of risk, and RMIC, the putative reinsurer, accomplished no meaningful distribution of risk. And for six distinct reasons, the arrangements at issue did not remotely resemble insurance in the commonly accepted sense.

Congress and taxing kidnap victims.

U.S. hostages still owe taxes. Congress might not help. - Jacob Bogage and Julie Zauzmer Weil, Washington Post:

The Senate in May unanimously passed a measure that would prevent the Internal Revenue Service from assessing penalties to freed hostages who didn’t file or pay taxes during their ordeal. On Wednesday, the House Ways and Means Committee unanimously advanced similar legislation.

But the House committee packaged the hostage tax bill with a measure that would make it easier for the government to strip tax-exempt status from nonprofit groups over allegations of support for terrorism. And because of an arcane procedural step Congress took to try to speed passage of the hostage bill, that move probably prevented it from becoming law.

Tax on the Campaign Trail

Trump’s Tax-Cut Proposal Shakes Up Social Security Debate - Richard Rubin and Anne Tergesen, Wall Street Journal. "Income taxes on benefits now make up about 4% of Social Security’s revenue, and repealing the tax would hasten the day when the program can’t pay full benefits. Congress raised the tax in 1993 and directed that money to Medicare. Lawmakers intentionally set income thresholds for the tax without inflation adjustments, and it affects more people over time. Beneficiaries who pay the tax generally have wage or investment income beyond Social Security."

Harris Wants To Make Tax Filing Easier For Small Businesses - Howard Gleckman, Forbes. "In a campaign season marked by many questionable tax ideas, Democratic presidential candidate Kamala Harris has acknowledged the filing problem and offered a solution, though one missing key details. Her idea: A new standard deduction for small businesses that would supplement the existing standard deduction available to all tax filers."

Trump’s Proposal to End Taxes on Overtime Pay Could Cost Billions - Andrew Duehren, New York Times:

The pitch is part of what has become Mr. Trump’s playbook during the presidential race: tossing out potentially huge tax cuts, defined in just a few words, to try and win over middle- and working-class voters. He has also vowed to exempt tips from taxes and end taxes on Social Security benefits, two ideas that have proven popular. At the same time, he has said he would further cut the corporate tax rate.

As with his promise to end taxes on tips, though, Mr. Trump left many key details about the overtime plan unaddressed, making it hard to estimate its costs. Among the open questions is whether overtime pay would be exempt from just the income tax or if the exception would also apply to the payroll taxes that fund Social Security and Medicare.

Trump’s Proposed Overtime Tax Exemption Would Distort Work Decisions - Garrett Watson and Erica York, Tax Policy Blog:

We estimate a lower-bound reduction in revenue for exempting all overtime pay from the individual income tax of $227 billion over 10 years on a conventional basis. This latest proposal would increase Trump’s already promised $6.1 trillion in tax cuts to $6.4 trillion and raise the total deficit increase of his entire tax and tariff plan to $1.6 trillion over 10 years. Further exempting all overtime pay from employee-side payroll taxes (6.2 percent for Social Security and 1.45 percent for Medicare) could further reduce tax revenues by $145 billion over 10 years.

While key details are missing from the overtime proposal, exempting overtime pay from income tax would significantly distort labor market decisions. Employees would be encouraged to take more overtime work, and hourly or salaried non-exempt jobs may become more attractive if the benefit is not extended to salaried employees who are exempt from Fair Labor Standards Act (FLSA) overtime rules.

Trump Tariffs Would Help Pay for His Tax Cuts, JD Vance Says - Tony Czuczka, Bloomberg ($):

“If we actually balance this out by penalizing some of these companies for manufacturing overseas I do think that we can get this to balance out in the right way, where we’re not blowing a hole in the deficit, we’re giving workers more of their money,” Vance said Sunday on CBS’s Face the Nation.

Can Trump replace income taxes with tariffs? - Kimberly Clausing and Maurice Obstfeld, Peterson Institute for International Economics. "The income tax is levied on incomes, which exceed $20 trillion; the US government raises about $2 trillion in individual and corporate income taxes at present. It is literally impossible for tariffs to fully replace income taxes. Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax, and as tax rates rose, the base itself would shrink as imports fall, making Trump’s $2 trillion goal unattainable."

Blogs and Bits

Capital gains tax rate is higher on sales of collectibles - Kay Bell, Don't Mess With Taxes. "And, you knew it was coming, the 28 percent capital gains rate also applies to the profit from selling collectibles, such as coins or art or stamps or other valuables."

Unpacking - the §45Z Clean Fuel Production Credit - Kristine Tidgren, Tax School Blog. "The IRA tax credits are available to the producers of the fuel, not the farmers, but the credit amount may be increased if the fuel producers purchase corn or soybeans from farmers reducing carbon emissions through practices such as cover crops and no-till farming."

Your 529 College-Savings Plan Can Now Fund a Roth IRA - Laura Saunders, Wall Street Journal:

It happens more than you think, given the spiraling costs of college: People who save money for a child’s education expenses in tax-favored 529 plans wind up with leftover dollars in them. Perhaps the student got a scholarship or chose a lower-cost school—or even took a different path in life.

Now there’s a new way to tackle this problem. A law that took effect this year allows unused 529 funds to be transferred to Roth IRAs tax-free, up to certain limits. Often this move will cost less than simply withdrawing extra funds, which could bring taxes and a penalty.

Early Bitcoin Investor Pleads Guilty to Filing Tax Return that Falsely Reported His Cryptocurrency Gains - Ronald Marini, The Tax Times. "All taxpayers are required to report any sale proceeds and gains or losses from the sale of cryptocurrency, such as bitcoin, on their IRS tax return."

Crime doesn't pay. Deductions, on the other hand...

Ohtani Interpreter’s Baseball Cards Sought by Federal Government - Maia Spoto, Bloomberg ($). "An application filed Monday, about a month ahead of Mizuhara’s US District Court for the Central District of California sentencing hearing, requests court permission to take the cards, their boxes, a card wrap device, and plastic card protectors."

Legal Expenses for Business Owner’s Fraud Defense Are Deductible - Tristan Navera, Bloomberg ($). "Legal expenses equaling about $366,000 to defend a business owner from criminal wire fraud and money laundering charges are still tax deductible because after examining the origin and character of the claim, the costs can be tied to a profit-seeking motive, the US Tax Court said Monday."

I found the Tax Court opinion mind-bending (taxpayer name omitted, my emphasis):

The criminal conviction supports allegations that Taxpayer conspired and participated in wire fraud and money laundering. Those charges involve transactions that were made between the HOCA entities and Taxpayer. Therefore, from the record, it appears that Taxpayer's plans to commit wire fraud and money laundering in addition to those transactions between Taxpayer and the HOCA entities gave rise to the claim originating the legal fees at issue. We conclude that the origin of petitioners' legal fees stem from Taxpayer's business activities as the director of the HOCA entities. While those activities have some relevance to Taxpayer's position as an elder, they were ultimately profit-seeking activities.

As indicated previously, although seemingly against public policy, legal fees relating to criminal activity may be deducted as an ordinary and necessary expense of a trade or business. The Court concludes that at least part of Taxpayer's business activities in HOCA LLC were to defraud donors and others for his personal financial benefit. Accordingly, petitioners are entitled to deduct legal and professional expenses for the year in issue.

The moral? Don't commit crimes, but if you get caught, your defense attorney costs might reduce the taxes you probably didn't pay on your crime proceeds.

What day is it?

It's National Apple Dumpling Day. Enjoy them with some tunes on International Country Music Day.

Tax News & Views Apple Dumpling Sad Song Basis Roundup

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Joe B. Kristan, CPA