Tax News & Views Cooks the Lame Duck Roundup

Lame-Duck Extenders Bill Looks Low-Odds, Lawmakers Say - Doug Sword, Tax Notes ($):

After a year filled with legislative action — from the $79 billion Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) to taxwriters prepping for the 2025 “Super Bowl of Tax” — 2024 appears likely to end with sunsetting tax provisions and unextended tax provisions.

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The extenders talked about most this year have been a revised child tax credit, a rollback of research and development amortization, resetting bonus depreciation at 100 percent, restoring a more liberal formula for expensing net interest, an expanded low-income housing tax credit, and a renewal of expiring biodiesel tax credits, to name a few.

Startups with heavy research costs will continue to pay taxes on phantom income indefinitely because Congress can't quite rouse itself to kill a tax provision that nobody expected to take effect and nobody supports.

But not everyone thinks the tax extenders are dead for this year. Bloomberg's Chris Cioffi reports ($) "There’s always a chance! Lawmakers will likely be in a dealmaking mood as they try to clear the decks for the next Congress that begins in January. That means passing a fiscal 2025 funding bill and addressing other priorities such as the defense authorization bill and farm bill. There are whispers on and off the Hill about the potential for short-term provision extensions in areas including health care or tax to get tacked on to legislative packages."

Want to hear the latest? Tune in tomorrow (2:30 Central) for our Quarterly Legislative Update. Eide Bailly's Legislative Affairs Director, Mel Shwarz, will update you on what to expect in the lame duck session and beyond. Register here.

Employee Retention Credit Update

IRS Is ‘Daring People to Sue’ Over Pandemic Credit Crackdown - Erin Slowey and John Woolley, Bloomberg ($):

Many businesses expected to reap thousands or millions in cash in the form of the employee retention tax credit after staying open and keeping employees on the payroll during the Covid-19 pandemic. ERC claims at first came in slower than expected but that quickly changed as pop-up firms skyrocketed, conning companies into claiming the credit when they didn’t qualify.

The IRS was caught flat-footed. It subsequently went on offense to manage the influx—pausing the processing of new claims for months, offering relief options for those that wrongly claimed the credit, and denyinginvalid claims. The agency became laser-focused on catching fraud.

More than a year after those initial fraud-prevention efforts, there doesn’t appear to be an end in sight to its crackdown, leaving businesses—both those that are still waiting for the credit and those who were denied—to read the tea leaves about what they should do next.

Cryptology

IRS Summons for Coinbase Records Survives Crypto User’s Appeal - John Woolley, Bloomberg ($):

James Harper, who used Coinbase to buy and sell cryptocurrency, sought the US Court of Appeals for the First Circuit’s review after a federal court in New Hampshire rejected his petition quash a John Doe summons. The IRS said it believed virtual currency transactions hadn’t been properly reported, and it sought a number of users’ account activity, balances, and the names of counterparties to virtual currency transactions on the platform.

Harper told the appeals court that the IRS was required to meet a standard of individualized suspicion to acquire his papers, but the agency and lower court said he had no reasonable expectation of privacy over information that the IRS obtained through a third-party summons.

It's unwise to assume that cryptocurrency is a magic bullet for tax avoidance.

Election-Time Tax Antics

Harris to pitch U.S. manufacturing revival in new economic speech - Jeff Stein and Cat Zakrzewski, Washington Post:

In a speech on the economy slated for Pittsburgh, Harris will try to contrast former president Donald Trump’s plans to impose trillions of dollars in new tariffs with her proposals to spur U.S. production through targeted tax incentives. Advisers have in particular eyed tax benefits to bolster advanced domestic manufacturing, such as biotechnology, shipbuilding, semiconductors, data centers and forms of clean energy production beyond the incentives in Democrats’ 2022 climate law, the people said. It’s still unclear which of these will be included in the speech’s final version.

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Harris’s coming embrace of industrial policy — though it’s unknown whether she will use that specific term — reflects the renewed popularity among Democrats of major federal investments to support specific industries. Such measures remain controversial among economists who traditionally oppose favoring specific sectors through federal subsidies.

Trump’s Low-Tax, High-Tariff Strategy Could Clash With Economic Realities - Alan Rappeport, New York Times:

The former president proposed creating “special” economic zones on federal land, areas that he said would enjoy low taxes and relaxed regulations. He called for companies that produce their products in the United States — regardless of where their headquarters are — to pay a corporate tax rate of 15 percent, down from the current rate of 21 percent. Businesses that try to route cars and other products into the United States from countries like Mexico would face tariffs as high as 200 percent.

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The results of Mr. Trump’s efforts to attract foreign companies to set up shop in the United States have also been mixed.

In 2018, at the groundbreaking in Wisconsin for Foxconn’s factory to make flat-screen televisions, Mr. Trump called the project by the Taiwanese company the “eighth wonder of the world.” Plans for the $10 billion factory later sputtered amid changing market dynamics. Much of the planned site remains undeveloped, and most of the promised jobs have yet to materialize.

Democrats to unveil ACA tax-credit plan, teeing up next health-care fight - Dan Diamond, Washington Post. "Lawmakers have spent years battling over the future of the expanded tax credits —often referred to as the enhanced premium tax credits, or enhanced PTCs, on Capitol Hill — and whether the coverage gains provided by the subsidies outweigh their cost. The nonpartisan Congressional Budget Office this year projected that permanently extending the tax credits would help several million people obtain health coverage each year — but also cost the federal government about $335 billion during the next 10 years."

Subsidizing demand without addressing supply constraints may not work entirely well.

Insurable Interests

High-End Life Insurance Policies Lured Offshore by Relaxed Rules - Lauren Loricchio, Sarah Paez, Kiarra Strocko, and Chandra Wallace, Tax Notes ($):

“There are people who are willing to be very aggressive about the kind of tax planning that they can do offshore, where . . . transparency is quite low,” said Andrew Granato of Yale Law School and Yale School of Management, coauthor of a recently released draft research paper on cash value life insurance.

“Frozen cash value” life insurance, a type of offshore PPLI that is consistent with the laws of a foreign jurisdiction but is designed to fail legal tests for life insurance under section 7702(a), is an example of the aggressive planning taking place offshore, Granato said.

“Not everyone in the estate planning world thinks that this would hold up in court,” Granato said.

Tax Court: Step Transaction Inapplicable to Life Insurance Trust - Kristen Parillo, Tax Notes ($):

The Tax Court rejected an IRS argument that a Maryland doctor’s estate should include $19.5 million in proceeds from a life insurance trust set up by the doctor by applying the step transaction doctrine.

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Rejecting both of the IRS’s arguments, [Tax Court Judge] Nega agreed with the estate’s position that the insurance policies were valid because they satisfied the insurable interest requirement under Maryland law.

Nega dismissed the IRS’s contention that when collapsing the transactions under the step transaction doctrine, the proceeds weren’t primarily for the benefit of the trust beneficiaries but for LT Funding. Under the IRS’s theory, that meant the trust lacked insurable interests in the two policies on the dates of issuance, which in turn meant that the insurance contracts violated Maryland’s insurable interest statute.

Devin Hecht, Practice Leader of Eide Bailly's Wealth Transition Services Practice, comments:

Taxpayers should remain vigilant in the formalities in their estate planning trust structures, particularly with irrevocable trusts that are the sole owners of life insurance policies. Thoughtful advisors should consider the overall economics of these structures, and be mindful that the IRS stands ready to deploy the step-transaction doctrine, substance over form doctrine, and related arguments for incidents of ownership for life insurance policies. Estate of Larry Becker reminds us that state law controls the determination for the taxpayer’s interest in property. While the Estate/taxpayer prevailed in this case, fiduciary advisors and planners should take note.

International Terminal

IRS Wary Of Adding Complexity In Min. Tax Regs, Official Says - Natalie Olivo, Law360 Tax Authority ($). "The potential for duplication stems from the apparent overlap of two CAMT calculation measures: the requirement for companies to include dividends received from their controlled foreign corporations and the requirement for companies to factor in the pro rata share of their CFCs' income."

France’s new government considers tax rises on businesses and the rich - Leila Abboud, Financial Times. "The politically charged issue of whether France should reestablish a wealth tax, which was abolished by Macron and replaced with a tax on real estate holdings, has also cropped up again amid calls from leftwing parties to force the rich to contribute more to public coffers."

U.S. Taxation of Canadian RRSP - Olivier Wagner, 1040 Abroad. "Canadian Registered Retirement Savings Plans (RRSPs) are subject to taxation in the United States, but the specifics depend on several factors, including the U.S.-Canada tax treaty."

Blogs and Bits

Are you ready for some football bets? Be sure to report your winnings on your tax return - Kay Bell, Don't Mess With Taxes. "Also remember that if you’re still betting illegally, those winnings also are taxable. Sure, it’s a bit harder for the IRS to track down these wagers. But do you really want to press your luck when it comes to dealing with the tax collector?"

IRS Finalizes Regulations on Consistent Basis Reporting Requirement for Estates - Parker Tax Pro Library. "The IRS issued final regulations that provide guidance on the requirement in Code Secs. 1014(f) and 6035 that a recipient's basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for federal estate tax purposes. In addition, the final regulations provide guidance on the statutory requirements that executors and other persons provide basis information to the IRS and to the recipients of certain property."

IRS increases special per diem rate for business travel - Kevin Brewer, The Tax Adviser. "The special per diem rates that a taxpayer may use in substantiating travel and business expenses under the per diem substantiation method (set out in Rev. Proc. 2019-48) will be higher starting Oct. 1, as provided by the IRS in Notice 2024-68."

Have AI Do Your Tax Return? Taxpayer Beware - Dean Zerbe, Forbes. "While there is certainly a role for AI in tax preparation – especially repeatable tasks with predictable outcomes – AI cannot replace the need for informed and knowledgeable tax experts making determinations on behalf of their client."

A Bad Tax Bet

Jury finds local restaurant owner found guilty of tax crimes - IRS (defenant name removed, emphasis added):

Defendant employed between 22 and 34 employees at the time. Defendant withheld federal taxes from employees’ paychecks but failed to transmit the funds to the IRS. Instead, Defendant spent hundreds of thousands of dollars for his personal benefit, including using business proceeds to engage in more than $1 million of gambling activity.

The gambler made more than one bad bet. Employees will claim the withholding on their own returns when they file, and the IRS will come around asking where the money is. And they have ways of collecting it.

What day is it?

It's National Cooking Day and National Lobster Day. Draw your own conclusions.

Tax News & Views Cooks the Lame Duck Roundup

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Joe B. Kristan, CPA