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Annette Nellen
Annette Nellen
Catching up after filing season

Cases, rulings, reports, and other actions from the federal government so far this year provide some interesting and helpful reminders for tax practitioners.

May 14, 2015
by Annette Nellen, Esq., CPA, CGMA

During the first four months of 2015, about 125 Tax Court decisions, 17 sets of IRS regulations, 37 IRS notices, 30 revenue procedures, eight revenue rulings, a few hundred private IRS letter rulings, and several tax reports from the Treasury Inspector General for Tax Administration (TIGTA) and the Joint Committee on Taxation were issued. All of these developments occurred while many tax practitioners were too swamped with return filings to keep up.

This article offers practitioners help catching up on this year’s tax developments. Listed below are selected federal tax updates, in very brief format, with a focus on individuals and small businesses. Links are provided to access the source document for details.

  • Savings bonds: In a divorce, split savings bonds if one spouse doesn’t eventually want all of the income; if they are for a child, issue them in the child’s name and Social Security number (Lobs, T.C. Summ. 2015-17).
  • State tax incentives: Receiving a state tax credit in excess of the amount owed is likely a taxable subsidy or grant (an accession to wealth) (Maines, 144 T.C. No. 8 (2015)).
  • Cancellation-of-debt (COD) income: Even if a debt looks nonrecourse because it lacks a promissory note, it can still yield COD income when forgiven if circumstances indicate a debt arrangement (Wyatt, T.C. Summ. 2015-31).
  • Egg donation: Voluntarily agreeing to receive compensation for the pain, suffering, and inconvenience of donating eggs to infertile couples results in taxable income. The exclusion of Sec. 104 does not apply to payments tied to voluntary conduct (Perez, 144 T.C. No. 4 (2015)).
  • Real estate professionals: Keeping detailed contemporaneous records can pay off. It may help justify travel time and make a court more willing to allow a taxpayer to further clarify the records (Leyh, T.C. Summ. 2015-27).
  • Definition of “brokerage” for Sec. 469(c)(7)(C) purposes: An individual with a real estate agent license (but it need not be a real estate broker’s license) may be in a “real property trade or business,” but a mortgage broker is not (Chief Counsel Advice (CCA) 201504010).
  • Have ideas about reporting slot machine winnings and losses? The IRS is seeking comments by June 1, 2015, on its proposed, optional safe-harbor method for determining gambling gain or loss from “electronically tracked slot machine play” (Notice 2015-21 and Nellen, “Tax! Tax! Tax!—IRS Proposal for Taxing Slot Machine Winnings,” Tax Insider (April 9, 2015)).
  • State taxes for multistate partnership activity: The amount attributable to a partner is deductible below the line even if a state requires the partnership to withhold and submit the tax or the partner himself provides no services in that particular state (Cutler, T.C. Memo. 2015-73).
  • Mortgage interest without legal title: It is possible in certain situations for a beneficial owner to deduct mortgage interest even without legal title to the property. However, specific facts must exist, such as having the right to use the property, and state law must support the ownership (Phan, T.C. Summ. 2015-1, but see also Puentes, T.C. Memo. 2014-224).
  • Charitable contributions: Yes, taxpayers really do need to have documentation and receipts! For cash and noncash donations of $250 or more, written contemporaneous acknowledgment is needed (Sec. 170(f)(8)). To determine if a donation of noncash items exceeds $500 (requiring more documentation), taxpayers must combine similar items donated to any charity during the year (Jalloh, T.C. Summ. 2015-18; Kunkel, T.C. Memo. 2015-71; Secs. 170(f)(8), (11), and (16); Regs. Sec. 1.170A-13; and IRS Publication 526, Charitable Contributions).
  • Being in business: Having business cards and a website and talking to people in the field is not enough to be in business. Facts and circumstances must indicate actually performing activities the business was organized to perform. In the meantime, any expenses will be considered Sec. 195 startup expenditures (Tarighi, T.C. Summ. 2015-28).
  • Marijuana business: To know if expenditures are inventoriable or period, use the pre-UNICAP (Sec. 263A) rules (CCA 201504011 and Nellen, “Measuring the Taxable Income of a Marijuana Business,” Tax Insider (Feb. 12, 2015)).
  • Property foreclosures: For an overview of the federal rules on foreclosures, short sales, deed in lieu of foreclosure, and abandonments, as well as IRS examination techniques for these actions, see Real Estate Property Foreclosure and Cancellation of Debt Audit Technique Guide, released by the IRS in February 2015.
  • Accounting method changes: New revenue procedures exist with the procedures for both automatic and nonautomatic changes in Rev. Proc. 2015-13 and the list of automatic changes in Rev. Proc. 2015-14 (and subsequent modifications to it).
  • Patient Protection and Affordable Care Act: Change is a constant. The premium tax credit and individual mandate both include inflation adjustments. The IRS was fairly responsive to new problems, such as excess premium tax credit resulting in unexpected underestimation and underpayment penalties for individuals. In June, the U.S. Supreme Court will be issuing its decision in King v. Burwell,which will answer the question of whether a premium tax credit can be obtained when coverage is purchased through a federal (rather than a state) exchange (see Nellen, “An Update on Affordable Care Act Busy Season Developments,” Tax Insider (March 12, 2015)).
  • Authority to petition the Tax Court: An entity that has lost its status under state law, such as for failure to pay state taxes, likely won’t be able to file a petition in U.S. Tax Court (Medical Weight Control Specialist, T.C. Memo. 2015-52).
  • Temporary provisions: The Joint Committee on Taxation issued an updated report listing expiring tax rules. It lists 52 items that expired Dec. 31, 2014, as well as several more that expire from Dec. 31, 2015, through Dec. 31, 2021 (List of Expiring Federal Tax Provisions 2014–2025 (JCX-1-15) (Jan. 9, 2015)).
  • Worker classification in the sharing economy: Are workers who are paid by one party for performing services for another party properly treated as contractors or as employees of either the direct payer or the service recipient? New models, such as web-based businesses that match drivers with people needing a ride, challenge both worker classification and information reporting rules. Litigation has arisen on this topic outside of the tax area, but it also has tax consequences (Cotter v. Lyft, Inc., No. 13-cv-04065-VC (N.D. Cal. 3/11/15), and O’Connor v. Uber Technologies, Inc., No. C-13-3826-EMC (N.D. Cal. 3/11/15)).
  • Are your business clients typical? Among 84 reports issued by the Joint Committee on Taxation in the first four months of 2015 is one with lots of data about the size and prevalence of different entity forms (Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations (JCX-71-15) (April 10, 2015)).
  • Tax administrative issues: Every year, TIGTA issues numerous reports, usually pointing out tax administration problems. Often these result in administrative or legislative changes on the horizon. Some of the topics addressed in early 2015 include improvements needed to the partnership audit process, addressing excess contributions to IRAs, proper carryforward of business tax credits, and improper claiming of education tax credits (TIGTA Audit Reports—FY2015).
  • Federal tax reform: In the first few months of 2015, the Senate Finance Committee held five hearings on tax reform. The committee also formed five bipartisan working groups to examine individual income tax, business income tax, savings and investment, international, and community development and infrastructure. Public comment was sought by April 15, 2015. On April 29, 2015, the committee posted the 1,462 comment letters it received. The Democratic staff of the Senate Finance Committee released How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions. The House FY 2016 budget report calls for comprehensive tax reform (page 12). President Barack Obama’s FY 2016 revenue proposals include many suggestions for tax law changes.
  • Sales tax nexus: In a concurring opinion in Direct Marketing Association v. Brohl, No. 13-1032 (U.S. 3/3/15), Justice Anthony Kennedy posited that perhaps given “changes in technology and consumer sophistication,” it is time to revisit the Court’s 1992 decision in Quill, 504 U.S. 298 (1992). He also noted that Quill was a case “questionable even when decided, [that] now harms States to a degree far greater than could have been anticipated earlier.”

Looking forward

The first few months of 2015 have mostly brought “repeats.” That is, cases mostly highlighting known rules, but often with interesting fact patterns. Congress continues to study tax reform, rather than do tax reform. One change, though, from earlier years is the possibility that technology changes may drive the issuance of new or updated rules. We’ll see.

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Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.