2018 NEW DEVELOPMENTS

Transcription

1 2018 NEW DEVELOPMENTS 1 INTRODUCTION This publication is produced by the Land Grant University Tax Education Foundation. The Land Grant University Tax Education Foundation is pleased to provide the National Income Tax Workbook to approximately 29,000 tax practitioners in tax schools taught in 32 states. This publication supplements the 2018 National Income Tax Workbook. It includes new cases and procedures, guidance, and legislation that were adopted in late 2018 and are important for filing 2018 tax returns. The 2019 National Income Tax Workbook and supplemental publications and courses will provide a comprehensive discussion of these changes. Please visit our website at taxworkbook.com for more information about online courses and tax workshops near you. Business Entities C Corporations Pacific Management Group v. Commissioner I.R.C. 162 Under the taxpayers tax shelter scheme, their C corporations paid their partnership alleged factoring fees and management fees. The C corporations claimed deductions for these payments, which offset most of the corporations taxable income. The partnership distributed a lot of this cash to its five partners, each of which was an S corporation. The distributions to each S corporation were made ratably based on the S corporation owner s ownership interest in the C corporations. The S corporations paid their shareholders salaries, and the shareholders reported those amounts as taxable income. The S corporations retained the rest of the cash and (after paying certain expenses) invested it. All the stock of each S corporation was owned by an employee stock ownership plan (ESOP). The sole participant in (and beneficiary of) each ESOP was the individual who had formed the S corporation. Because the ESOPs were tax exempt, the taxpayers claimed that the distributions the S corporations received from the partnership (net of the salaries and benefits paid to the individuals) were exempt from current federal income tax.

2 The court held that the C corporation could not deduct the factoring fees and most of the management fees because they were disguised distributions of corporate profits. The distributions were currently taxable to the individual shareholders of the C corporations as constructive dividends or as income improperly assigned to the S corporations. [Pacific Management Group v. Commissioner, T.C. Memo ] Nonprofits Notice I.R.C. 512 The Tax Cuts and Jobs Act (TCJA) enacted I.R.C. 512(a)(6), which requires an organization subject to the I.R.C. 511 unrelated business income tax to calculate unrelated business taxable income (UBTI) separately for each unrelated trade or business. The IRS has provided interim guidance and transition rules for aggregating gross income and directly connected deductions of certain investment activities, and the treatment of I.R.C. 951A global intangible low-taxed income (GILTI) inclusions for purposes of the UBTI. Notice provides guidance and solicits comments on the following: 1. General concepts for identifying separate trades or businesses for purposes of section 512(a)(6) and interim reliance on a reasonable, good-faith standard for identifying certain trades or businesses (such as the North American Industry Classification System codes) 2. Possible treatment of unrelated debt-financed income, certain payments from controlled entities, and certain insurance income [I.R.C. 512(b)(4), (13), and (17)] as gross income from a trade or business that is regularly carried on 3. General principles regarding income from partnerships, and interim and transition rules for aggregating investment income from a partnership with multiple trades or businesses, and debtfinanced income from partnerships if they meet either a de minimis test or a control test 4. The application of section 512(a)(6) to certain organizations subject to the UBTI rules of I.R.C. 512(a)(3), such as social clubs, if they have more than one trade or business 5. The exclusion of fringe benefit income under I.R.C. 512(a)(7) from the section 512(a)(6) rules 6. How to calculate net operating losses (NOLs) under section 512(a)(6) 7. The treatment of GILTI as a dividend Taxpayers can rely on the guidance in the notice pending the issuance of regulations. [Notice , I.R.B. 409]. Partnerships Notice I.R.C The IRS intends to propose regulations that will allow the IRS to determine that the centralized partnership audit regime will not apply to adjustments to partnership-related items in certain limited circumstances. The regulations will provide that the IRS may determine that the centralized partnership audit regime does not apply to adjustments to partnership-related items when the following three conditions are met:

3 1. The examination being conducted is of a person other than the partnership. 2. A partnership-related item is adjusted, or a determination regarding a partnership-related item is made, as part of an adjustment to a non-partnership related item of the person whose return is being examined. 3. The treatment of the partnership-related item on the return of the partnership under I.R.C. 6031(b) or in the partnership s books and records was based in whole or in part on information provided by, or under the control of, the person whose return is being examined. The proposed regulations will provide that partnerships with a qualified subchapter S subsidiary (QSub) are not eligible to elect out of the centralized partnership audit regime except by applying a rule to the QSub partner that is similar to the rules for S corporations under I.R.C. 6221(b)(2)(A). The regulations will also provide that for purposes of determining whether a partnership has 100 or fewer partners for the tax year for purposes of the election, the partnership must include the statement the partnership is required to furnish to the QSub partner under I.R.C. 6031(b) and each statement the S corporation that holds 100% of the stock of the QSub partner is required to furnish to its shareholders under I.R.C. 6037(b). [Notice ] S Corporations Ltr. Rul I.R.C Divorcing taxpayers had shares in an S corporation, which were owned by a revocable trust. The divorce decree required the taxpayers to transfer the S corporation shares to a trust for the benefit of both spouses. The trust required separate accounting for each taxpayer s 50% share. The S corporation distributions to the trust were to be used to pay certain liabilities. One of the spouses provided consideration in exchange for lifetime distribution rights, and the other the spouse had different distribution rights. The taxpayers sought guidance on whether the trust created an impermissible second class of stock in the S corporation and whether the trust qualified as an electing small business trust (ESBT). The IRS ruled that the trust terms are disregarded in determining whether there is one class of stock. The IRS also ruled that the taxpayer s provision of consideration for the distributions was made pursuant to the divorce decree and did not disqualify the trust as an ESBT. [Ltr. Rul ] Machacek, Jr. v. Commissioner I.R.C. 61 The taxpayers, a husband and wife, were sole shareholders in an S corporation. The husband was an employee of the corporation. The corporation paid the $100,000 annual premiums on his life insurance policy under a compensatory split dollar arrangement. The corporation deducted the payment. The Tax Court found that the corporation could not deduct the premium payments and the taxpayers must include the pass-through amount of the premium in their income. The Tax Court further found that the taxpayers income also included the increased value of the policy that resulted from the payment of the premium.

4 The Sixth Circuit Court of Appeals reversed the Tax Court decision and found that the premium payment was a shareholder distribution of property, and not employee compensation. [Machacek, Jr. v. Commissioner, 122 A.F.T.R. 2d (RIA) (CA6 2018)] Practitioner Note Stock and Debt Basis Draft 2018 Form 1120-S Schedule K-1 instructions remind taxpayers that the IRS has expanded the stock basis worksheet. The new worksheet is intended to make it easier to calculate the basis of the stock and debt in the S corporation at the end of each corporate tax year. See the Worksheet for Figuring a Shareholder s Stock and Debt Basis in the Schedule K-1 instructions. If the shareholder reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from an S corporation, he or she must check the box in column (e) on line 28 of Form 1040 Schedule E, and attach the required basis computation. Business Issues Compensation Notice I.R.C. 162(m) The TCJA limits the deduction for compensation paid by a publicly-held corporation to certain covered employees. The IRS has issued guidance to explain the deduction limit. Specifically, the IRS explains who is a covered employee, and how the compensation deduction limits do not apply to remuneration payable under a written binding contract that was in effect on November 2, 2017, and that is not modified in any material respect on or after that date. [Notice , I.R.B. 418] Credits Notice I.R.C. 45S The IRS has provided questions and answers on the new I.R.C. 45S employer credit for paid family and medical leave. The credit may be claimed by eligible employers and is equal to a percentage of wages paid to qualifying employees while they are on family and medical leave. The credit generally is effective only for wages paid in tax years of the employer beginning after December 31, 2017, and before January 1, The notice provides guidance on issues arising under section 45S. Generally, the notice provides that to be eligible to claim the credit, an employer must have a written policy that satisfies the following requirements: 1. The policy must cover all qualifying employees (all employees who have been employed for a year or more and were paid not more than a specified amount during the preceding year). In general, in determining whether an employee is a qualifying employee in 2018, the employee must not have had compensation from the employer of more than $72,000 in 2017.

5 2. The policy must provide at least 2 weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee. 3. The policy must provide for payment of at least 50% of the qualifying employee s wages while the employee is on leave. 4. If an employer employs qualifying employees who are not covered by Title I of the Family and Medical Leave Act (FMLA), the employer s written policy must include language providing noninterference protections Any leave paid by a state or local government or required by state or local law is not included in any determination of the amount of paid family and medical leave provided by the employer. Thus, any such leave is not included in determining the amount of paid family and medical leave provided by the employer, the rate of payment under the employer s written policy, or the determination of the credit. For purposes of the credit, an employer is any person for whom an individual performs services as an employee under the usual common law rules applicable in determining the employer-employee relationship. Similarly, wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA) pursuant to I.R.C. 3306(b), determined without regard to the $7,000 FUTA wage limitation. [Notice , I.R.B. 548] Deductions and Exclusions John A. Garcia and Jamie Garcia v. Commissioner I.R.C. 162, 212 The taxpayers purchased shares of stock in a South African exploration and gold mining investment company. Minority shareholders commenced litigation against the company for corporate fraud. The taxpayers and their wholly-owned S corporation paid some of the legal expenses in exchange for a share of any ultimate recovery in the litigation. They purportedly assigned their individual payment of the expenses to their S corporation. The S corporation claimed a deduction for payment of all the expenses. The IRS claimed that the expenses were not deductible I.R.C. 162 business expenses but were instead I.R.C. 212 expenses to produce non-business income. The court found that the expenses were not deductible by the corporation because they were not paid or incurred by the corporation, they did not benefit the corporation, and they also were not ordinary and necessary of the corporation. [John A. Garcia and Jamie Garcia v. Commissioner, T.C. Summary Opinion ] Legal Advice Issued by Associate Chief Counsel I.R.C. 119 The IRS Associate Chief Counsel issued legal advice regarding the "for the convenience of the employer" requirement under the I.R.C. 119 exclusion for meals provided by an employer. The advice reaches the following conclusions: 1. In determining whether an employer s reasons for furnishing meals to employees are substantial noncompensatory business reasons under Treas. Reg (a)(2)(i) for purposes of determining whether the meals are excludable from income as meals provided for the convenience of the employer

6 under section 119, the IRS should apply the test used by the Supreme Court in Kowalski v. Commissioner, 434 U.S. 77 (1977). The test provides that the section 119 exclusion applies to employer-provided meals only if the meals are necessary for the employee to properly perform his or her duties. The test does not mean that the exclusion applies only if the employee is required to accept such meals to properly perform duties. Instead, the test means that the carrying out of the employee s duties in compliance with employer policies for that employee s position must require that the employer provide the employee meals for the employee to properly discharge such duties. If the employer-provided meals are necessary for the employee to properly discharge the duties of a job position, then meals provided to employees with such duties in that job position are provided for the convenience of the employer, even if certain individual employees in that position decline the meals. 2. Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (1999) held that the IRS may not supplant an employer's business judgment with its own. Boyd Gaming does not preclude the IRS from determining whether an employer follows and enforces its stated business policies and practices, and whether these policies and practices, and the needs and concerns they address, necessitate the provision of meals so that there is a substantial non-compensatory business reason for furnishing meals to employees. 3. If an employer claims to have a business policy that, if such policy does exist and is enforced, qualifies as a substantial non-compensatory business reason, the IRS can require substantiation that the employer has communicated the policy to employees and meaningfully enforces the policy. The form and quality of substantiation that is sufficient to demonstrate a particular business policy will vary according to the facts and circumstances of each case. However, substantiation could include an employee manual, an employment contract, or disciplinary records. Substantiation of the need for a shortened meal period could include time cards or a customer count for work days that shows peak customer visits during meal hours. Substantiation for an on call for emergencies policy could include a written policy, on-call schedules, and records of emergencies that occurred during meal times. [AM ] Notice I.R.C. 274 The TCJA eliminated the deduction for entertainment, amusement, and recreation expenses. Pending the publication of proposed regulations, the IRS has issued guidance on the continued deductibility of business meals under I.R.C I.R.C. 274(k) generally allows a deduction for 50% of the cost of food or beverages if the expense is not lavish or extravagant under the circumstances, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. The IRS guidance clarifies when business meal expenses are nondeductible entertainment expenses and when they are 50% section 274 deductible expenses. The guidance states that taxpayers may deduct 50% of an otherwise allowable business meal expense if the following requirements are met: 1. The expense is an ordinary and necessary expense under I.R.C. 162(a), paid or incurred during the tax year in carrying on any trade or business. 2. The expense is not lavish or extravagant under the circumstances. 3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages. 4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact.

7 5. For food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages. Example 1.1 Meal Purchased Separately Allen Atkinson invites Belinda Bollinger, a business contact, to a baseball game. Allen purchases tickets for Allen and Belinda to attend the game. While at the game, Allen buys hot dogs and drinks for himself and Belinda. The baseball game is entertainment as defined in Treas. Reg (b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by Allen. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the section 274(a)(1) disallowance. Therefore, Allen can deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game. Example 1.2 Meal Cost Not Separately Stated Charlie Chamis invites Demetri Donaldson, a business contact, to a basketball game. Charlie purchases tickets for Charlie and Demetri to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages. The basketball game is entertainment as defined in Treas. Reg (b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by Charlie. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the section 274(a)(1) disallowance. Therefore, Charlie may not deduct any of the expenses associated with the basketball game. Example 1.3 Meal Cost Separately Stated The facts are the same as in Example 1.2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. The basketball game is entertainment and the cost of the game tickets, other than the cost of the food and beverages, is a nondeductible entertainment expense. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the section 274(a)(1) disallowance. Therefore, Charlie may deduct 50% of the expenses associated with the food and beverages provided at the game. Until the proposed regulations are effective, taxpayers can rely on the guidance in Notice [Notice , I.R.B. 599]

8 REG I.R.C. 163(j) The IRS has issued proposed regulations under I.R.C. 163(j), which limits the business interest expense deduction for certain taxpayers. The limitation does not apply to certain small businesses whose gross receipts are $25,000,000 or less, electing real property trades or businesses, electing farming businesses, and certain utility businesses. The proposed regulations would withdraw the prior proposed regulations and provide for the following: 1. Prop. Treas. Reg (j)-1 provides common definitions used throughout the proposed regulations, including a definition of adjusted taxable income (ATI), interest, trade or business, and excepted trade or business. 2. Prop. Treas. Reg (j)-2 provides general rules for the computation of a taxpayer s section 163(j) limitation. 3. Prop. Treas. Reg (j)-3 provides ordering and other rules regarding the relationship of the section 163(j) limitation and other provisions of the code that affect interest. 4. Prop. Treas. Reg (j)-4 provides rules applicable to C corporations (including REITs, RICs, and consolidated group members) and tax-exempt corporations. 5. Prop. Treas. Reg (j)-5 provides rules governing the disallowed business interest expense carryforwards of C corporations. 6. Prop. Treas. Reg (j)-6 provides special rules for applying the section 163(j) limitation to partnerships and S corporations. 7. Prop. Treas. Reg (j)-7 provides rules regarding the application of section 163(j) to foreign corporations and their shareholders. 8. Prop. Treas. Reg (j)-8 provides rules regarding the application of section 163(j) to foreign persons with effectively connected income. 9. Prop. Treas. Reg (j)-9 provides rules regarding elections for excepted trades or businesses and a safe harbor for certain REITs. 10. Prop. Treas. Reg (j)-10 provides rules to allocate expenses and income between non-excepted and excepted trades or businesses. 11. Prop. Treas. Reg (j)-11 provides certain transition rules relating to the application of the section 163(j) limitation. Taxpayers may rely on the rules in the proposed regulations until final regulations are published. [REG ] Rev. Proc I.R.C. 163(j) Rev. Proc provides a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as electing real property trades or businesses under I.R.C. 163(j)(7)(B). Taxpayers that make an election for an infrastructure trade or business to be an electing real property trade or business under section 163(j)(7)(B) are not

9 subject to the limitation on business interest expense under I.R.C. 163(j) but must use the alternative depreciation system to depreciate property described in I.R.C. 168(g)(8). This revenue procedure applies to a trade or business that is not otherwise a real property trade or business under I.R.C. 163(j)(7)(B) or 469(c)(7)(C) if the business is conducted by a party who is contractually obligated to fulfill the terms of a specified infrastructure arrangement, and the business is conducted to fulfill that obligation. A specified infrastructure arrangement is a contract or contracts with a term in excess of 5 years between a government and a private trade or business under which a private trade or business has contractual responsibility to provide one or more of the functions of designing, building, constructing, reconstructing, developing, redeveloping, managing, operating, or maintaining qualified public infrastructure property. Qualified public infrastructure property is infrastructure property that is owned by, or controlled by a government, and is available to the general public. It can include, among other things, airports, docks, ports, water and sewer facilities, energy or gas facilities, educational facilities, and transportation facilities. [Rev. Proc , I.R.B. 1018] Notice I.R.C. 132 Commencing in 2018, the TCJA eliminated the exclusion for moving expenses reimbursed or paid by an employer (except for amounts for active-duty members of the U.S. Armed Forces whose moves relate to a military-ordered permanent change of station). The IRS has issued guidance on the application of section 132(g)(2) to employer reimbursements in a tax year beginning after December 31, 2017, for qualified moving expenses incurred in connection with a move that occurred prior to January 1, Specifically, the guidance provides that the suspension of the exclusion from income provided by section 132(a)(6) under section 132(g)(2) does not apply to amounts received directly or indirectly by an individual in 2018 from an employer for expenses incurred in connection with a move occurring prior to January 1, Thus, reimbursements an employer pays to an employee in 2018 for qualified moving expenses incurred in a prior year are not subject to federal income or employment taxes. Similarly, if the employer pays a moving company in 2018 for qualified moving services provided to an employee prior to 2018, the amounts are excluded. To qualify, reimbursements or payments must be for work-related moving expenses that would have been deductible by the employee under I.R.C. 217 if the employee had directly paid them prior to January 1, The employee must not have deducted the expenses in Employers that have already treated reimbursements or payments as taxable and have withheld and paid federal employment taxes on these amounts may use the adjustment process under I.R.C or the refund claim process under I.R.C to correct the overpayment. [Notice , , I.R.B. 556] Notice I.R.C. 274 The IRS has issued guidance to determine the nondeductible amount of parking expenses for qualified transportation fringes (QTFs) paid or incurred after December 31, I.R.C. 274(a)(4) generally disallows a deduction for the expense of providing QTFs to employees. QTFs are defined in 132(f)(1) to include the following:

10 1. Transportation in a commuter highway vehicle between the employee s residence and place of employment 2. A transit pass 3. Qualified parking Qualified parking is defined as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. The term does not include any parking on or near property used by the employee for residential purposes. Parking expenses can include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments. The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park. If a taxpayer pays a third party so that its employees may park at the third party s parking lot or garage, the section 274(a)(4) disallowance generally is calculated as the taxpayer s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee s parking exceeds the I.R.C. 132(f)(2) monthly limitation on exclusion, ($260 per employee for 2018), that excess amount must be treated as compensation and wages to the employee. The employer can deduct the monthly amount in excess of $260 that is treated as compensation and wages. Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the section 274(a)(4) disallowance may be calculated using any reasonable method. Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method because section 274(a)(4) disallows a deduction for the expense of providing a QTF, regardless of its value. Also, for tax years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots cannot be a reasonable method. The IRS has provided a four-step method that is deemed a reasonable method to calculate the disallowance. Example 1.4 Parking Provided in Parking Garage Acme Holding Company pays the City of Columbia Falls for Acme s employees to park in the City parking garage. Acme has 10 employees and pays $300 per month per employee. Acme pays $36,000 in 2018 [($300 10) 12]. Of the $300 per month paid for parking for each employee, $260 is excludable under section 132(a)(5). Thus, $31,200 [($260 10) 12] is subject to the section 274(a)(4) disallowance. The excess $40 [$300 $260] per employee per month is not excludable and is treated as compensation and wages. As a result, $4,800 [$36,000 $31,200 = $4,800] is not subject to the disallowance and remains deductible. The new rules also help tax-exempt organizations determine how these nondeductible parking expenses create or increase unrelated business taxable income (UBTI). I.R.C. 512(a)(7) generally provides that a tax-exempt organization s UBTI is increased by the amount of the QTF expense that is nondeductible under section 274. The notice provides that the rules governing tax-exempt

11 organizations mirror the rules for other taxpayers under section 274 and gives several examples of how to calculate nondeductible parking expenses for a tax-exempt organization. The IRS acknowledges that this guidance falls late in the year and taxpayers that own or lease parking facilities may have already adopted reasonable methods in 2018 to determine the amount of their nondeductible parking expenses. Taxpayers may rely on the guidance or, until further guidance is issued, use any reasonable method for determining nondeductible parking expenses related to employer-provided parking. Employers will have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees, and the change will be retroactive to January 1, [Notice , I.R.B. 1067] Notice I.R.C The IRS has provided a waiver of the additions to tax for underpayment of estimated income tax for taxexempt employers to the extent that they underpay their estimated income tax due to changes to the tax treatment of certain qualified transportation fringes. [Notice , I.R.B. 1074] IR , Information Letter I.R.C. 162 IR states that business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses. This general deduction for ordinary and necessary business expenses is not limited by the proposed regulations (discussed later) that limit the individual charitable contribution deduction. Information Letter addresses amounts paid by business taxpayers pursuant to a state tax credit program that provides credits against business taxes (such as insurance premium tax, direct pay sales and use tax, corporate income tax, alcoholic beverage excise tax, oil and/or gas production tax, and state sales tax due on rent or license fee payments). The information letter concludes that these amounts are deducted under a code section other than section 170 (or section 642 if paid by a trust or estate) and are not impacted by the proposed regulations. [IR , Information Letter ] Losses IR I.R.C. 172, 461 The IRS issued very limited guidance on the excess business loss limitations and NOLs. The IRS provides the following guidance: The TCJA modified existing tax law on excess business losses by limiting losses from all types of business for noncorporate taxpayers. An excess business loss is the amount by which the total deductions

12 from all trades or businesses exceed a taxpayer s total gross income and gains from those trades or businesses, plus $250,000, or $500,000 for a joint return. Excess business losses that are disallowed are treated as an NOL carryover to the following tax year. The IRS directs tax practitioners to see Form 461, Limitation on Business Losses, and the accompanying instructions for additional details. The TCJA also modified the NOL rules. Most taxpayers no longer have the option to carryback a NOL. For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. For losses arising in tax years beginning after December 31, 2017, the new law limits the NOL deduction to 80% of taxable income. [IR ] Ethics Due Diligence T.D I.R.C Effective for tax years beginning after December 31, 2017, I.R.C. 6695(g) was amended to expand the scope of the penalty to tax return preparers who fail to comply with due diligence requirements with respect to determining eligibility to file as head of household. The IRS has issued final regulations that expand the paid preparer due diligence requirement to include individual income tax returns that claim head of household filing status. Treas. Reg expands the scope of the tax return preparer due diligence penalty so that it applies to the earned income tax credit (EIC), child tax credit (CTC)/additional child tax credit (ACTC), and the American opportunity tax credit (AOTC), as well as to eligibility to file a return or claim for refund as head of household. The final regulations generally adopt the 2018 proposed regulations without substantive changes. [T.D. 9842] C.C.A I.R.C. 6695, 7701 The IRS Chief Counsel has issued an opinion regarding the applicability of the I.R.C. 6695(g) due diligence penalty to S corporations and their shareholders. An S corporation may be a tax return preparer within the definition of I.R.C. 7701(a)(36) if it employs a person who prepares a tax return for compensation. The IRS concludes that the due diligence penalty would likely not be assessed against an S corporation shareholder because it is the corporation that employs the preparer, not the shareholder. Also, to comply with the due diligence requirements, the regulations generally provide that the tax return preparer must not know or have reason to know that any information used by the tax return preparer in determining the taxpayer s eligibility for, or the amount the claimed credit is incorrect. This specific knowledge requirement would make it difficult to assess the penalty directly on a co-owner of an S corporation. The IRS concludes that the penalty may be assessed against the S corporation if

13 1. one or more members of the principal management (or principal officers) of the corporation participated in or, prior to the time the return was filed, knew of the failure to comply with the due diligence requirements; 2. the corporation failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or 3. the corporation disregarded its reasonable and appropriate compliance procedures through willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate) in the preparation of the tax return or claim for refund for which the penalty is imposed. [C.C.A ] Privilege U.S. v. Adams The taxpayer invoked the attorney-client privilege over numerous communications between himself and his accountants, who were retained by his tax counsel under a Kovel arrangement. [United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961)]. The court in Kovel held that attorney-client privilege may apply to an individual's communications with an accountant if the communications are made in confidence for the purpose of obtaining legal advice from the attorney. The government challenged the assertion of privilege. The court found that the privilege doctrine did apply, and the taxpayer s filing of amended tax returns did not waive the privilege. While privilege is lost if the communication is made to further a continuing or contemplated criminal fraud or scheme, the court found that the government failed to show that the crime fraud exception applied. [U.S. v. Adams, 122 A.F.T.R. 2d (RIA) (DC MN 2018)] Foreign Tax Issues Memorandum for Division Commissioners, November 20, 2018 The Offshore Voluntary Disclosure Program (2014 OVDP) closed on September 28, This program was designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due on those assets. It provided taxpayers potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. The IRS has provided procedures for applications received after the closing of the 2014 OVDP on September 28, The procedures include criminal investigation, processing, case development, and civil resolution. Practitioner Note Non-willful Failures Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures. Although they could be discontinued at any time, these other programs are still available.

14 REG I.R.C. 951A The IRS has issued proposed regulations implementing the I.R.C. 951A global intangible low-taxed income inclusion. Section 951A requires a United States shareholder of a controlled foreign corporation (CFC) to include in gross income the shareholder s global intangible low-taxed income (GILTI). The proposed regulations provide guidance for US shareholders to determine the amount of GILTI to include in gross income. Prop. Treas. Reg A-1 provides general rules to determine a US shareholder s GILTI inclusion amount and associated definitions. Prop. Treas. Reg A-2 through 1.951A-4 provide detailed guidance on items determined at the CFC level. [REG ] REG I.R.C. 956 The IRS has issued proposed regulations that reduce the amount determined under I.R.C. 956 for certain domestic corporations that own (or are treated as owning) stock in CFCs. The proposed regulations provide that the amount otherwise determined under section 956 with respect to a US shareholder in a CFC is reduced to the extent that the shareholder would be allowed a deduction under I.R.C. 245A if the shareholder had received a distribution from the CFC in an amount equal to the amount otherwise determined under section 956. [REG ] Q&As I.R.C. 965 The IRS has issued additional information in a question and answer format to help taxpayers meet their reporting and payment requirements for the section 965 transition tax. The Questions and Answers provide information about the 2018 obligations that result from amounts included in income for the 2017 tax year. See REG I.R.C. 904, 954 The IRS has issued proposed regulations that provide guidance on the foreign tax credit. Specifically, the proposed regulations address the following: 1. The allocation and apportionment of deductions under I.R.C. 861 through 865 and adjustments to the foreign tax credit limitation under I.R.C. 904(b)(4). 2. Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under I.R.C. 904(f) and (g), and for the carryover and carryback of unused foreign taxes under I.R.C. 904(c).

15 3. The addition of separate categories under I.R.C. 904(d) and other necessary updates to the regulations under section 904, including revisions to the look-through rules and other updates to reflect statutory amendments. 4. The calculation of the exception from subpart F income for high-taxed income under I.R.C. 954(b)(4). 5. The determination of deemed paid credits under I.R.C. 960 and the gross up under I.R.C The application of the election under I.R.C. 965(n). [REG ] Norman v. U.S. The taxpayer failed to file a Report of Foreign Bank and Financial Account (FBAR) for her Swiss bank account. In 2013, the IRS assessed a $803,530 penalty for a willful failure to file the FBAR. After considering the documents, hearing the taxpayer s testimony, and observing her demeanor, the court found that she willfully failed to file an FBAR. Although the Bank Secrecy Act capped the penalty at $100,000, the American Jobs Creation Act of 2004 raised the maximum penalty for willful violations to the greater of $100,000, or 50% of the balance of the account. The court found that the cap on the penalty is no longer valid because it is inconsistent with the amended statute, and the taxpayer was properly assessed a penalty equal to 50% of the balance of her unreported foreign account [Norman v. U.S., 122 A.F.T.R. 2d (RIA) (Ct Fed Cl 2018)] Individual Issues ACA Rev. Proc I.R.C. 5000A The IRS has provided the 2018 monthly national average premium for qualified health plans that have a bronze level of coverage. This figure is used in determining the maximum individual shared responsibility payment under I.R.C. 5000A(c)(1)(B) for the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges is $283 per individual and $1,415 for a shared responsibility family with five or more members. For tax years after 2018, the TCJA eliminates the individual shared responsibility payment. [Rev. Proc , I.R.B. 425] Texas v. United States of America I.R.C. 5000A The United States District Court for the Northern District of Texas ruled that following the passage of the TCJA, which eliminates the individual mandate after 2018, the individual mandate is not a valid exercise of Congress s tax power, and the individual mandate is essential to and inseverable from the rest of the ACA. Thus, the court held that the ACA is unconstitutional. It is expected that the decision will be appealed. [Texas v. United States of America, Civil Action No. 4:18-cv O]

16 Notice I.R.C. 5000A This notice supplements Notice , I.R.B. 946, as supplemented by Notice , I.R.B. 783, by identifying additional hardship exemptions from the individual shared responsibility payment under I.R.C. 5000A that a taxpayer may claim on a 2018 federal income tax return without obtaining a hardship exemption certification from the Health Insurance Marketplace. The additional exemptions are as follows: 1. The taxpayer experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase in essential expenses that prevented him or her from obtaining coverage under a qualified health plan. 2. The expense of purchasing a qualified health plan would have caused the taxpayer to experience a serious deprivation of food, shelter, clothing, or other necessities. 3. The taxpayer has experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan. [Notice ] Notice I.R.C. 36B, 151, 5000A I.R.C. 151(d)(5) reduces the amount of the personal exemption deduction to zero for tax years beginning after December 31, 2017, and before January 1, The IRS has provided interim guidance clarifying how the reduction of the personal exemption deduction to zero applies for purposes of certain rules under I.R.C. 36B and 6011 relating to the premium tax credit and under I.R.C. 5000A relating to the individual shared responsibility provision. The following rules apply: 1. A taxpayer is considered to have claimed a personal exemption deduction for himself or herself for a tax year if the taxpayer files an income tax return for the year and does not qualify as a dependent of another taxpayer under I.R.C. 152 for the year. 2. A taxpayer is considered to have claimed a personal exemption deduction for an individual other than the taxpayer if the taxpayer is allowed a personal exemption deduction for the individual [taking into account I.R.C. 151(d)(5)(B)] and lists the individual s name and taxpayer identification number on the taxpayer s Form 1040, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Income Tax Return. [Notice , I.R.B. 768] Credits Notice I.R.C. 24 The IRS intends to issue proposed regulations to clarify who is a qualifying relative for the $500 credit for other dependents and for claiming head of household filing status in years when the exemption amount is zero (2018 through 2025). The proposed regulations will provide that the reduction of the personal exemption amount to zero will not be taken into account for purposes of the $500 credit and

17 head of household filing status. Instead, the exemption amount for the application of these provisions will be treated as $4,150, as adjusted for inflation. Taxpayers may rely on the rules of this notice prior to the issuance of the proposed regulations. [Notice , I.R.B. 441] Deductions REG I.R.C. 164, 170 Proposed regulations provide rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit. The amendments to the regulations are proposed to apply to contributions made after August 27, I.R.C. 170(c)(1) provides a deduction for a contribution or gift to or for the use of a state, a possession of the United States, or any political subdivision of the foregoing, but only if the contribution or gift is made exclusively for public purposes. Section 170(c)(2) includes, in general, a contribution or gift to or for the use of certain corporations, trusts, or community chests, funds, or foundations, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. I.R.C. 164 generally allows an itemized deduction for the payment of certain taxes, including state and local, and foreign, real property taxes; state and local personal property taxes; and state and local, and foreign, income, war profits, and excess profits taxes. For tax years , the TCJA limits an individual's deduction for the aggregate amount of state and local taxes paid during the calendar year to $10,000 ($5,000 for MFS). The proposed regulations generally provide that if a taxpayer makes a payment or transfers property to or for the use of an entity listed in section 170(c), and the taxpayer receives or expects to receive a state or local tax credit in return for such payment, the tax credit constitutes a return benefit, or quid pro quo, to the taxpayer and reduces the charitable contribution deduction. To provide consistent treatment for state or local tax deductions and state or local tax credits that provide a benefit that is generally equivalent to a deduction, the proposed regulations include a de minimis exception under which a taxpayer may disregard a state or local tax credit if such credit does not exceed 15% of the taxpayer s payment or 15% of the fair market value of the property transferred by the taxpayer. The proposed regulations thus allow taxpayers to disregard dollar-for-dollar state or local tax deductions. However, the proposed regulations state that, if the taxpayer receives or expects to receive a state or local tax deduction that exceeds the amount of the taxpayer's payment or the fair market value of the property transferred, the taxpayer's charitable contribution deduction must be reduced The regulations also propose amendments to the I.R.C. 642(c) regulations to apply similar rules to payments made by a trust or decedent s estate when a taxpayer receives or expects to receive a state or local tax credit in return for a payment or transfer to an entity listed in section 170(c). Example 1.5 Contribution to State Government for Credit Arbor Town state government is an entity listed in I.R.C. 170(c). Contributions to Arbor Town are eligible for a dollar-for-dollar state tax credit. Rena Sanders lives in Arbor Town. Rena will owe more than $1,000 in state tax, and she can use the full credit. Rena is in the 24% federal tax bracket, itemizes

18 federal tax deductions, and has a state tax rate of 5%. She has a state tax liability that is more than $1,000 above the state and local tax (SALT) cap. She is not subject to the AMT. Under prior law, if Rena contributes $1,000 to Arbor Town, she will receive a $1,000 state tax credit. Her deduction for charitable contributions increases by $1,000, her deduction for state and local taxes decreases by $1,000, and her federal tax liability does not change. Under current law, Rena s SALT deduction is limited. Her deduction for charitable contributions increases by $1,000, but the deduction for state and local taxes does not change. Consequently, her itemized deductions increase by $1,000, and her taxable income decreases by $1,000. Under the proposed regulations, the entire $1,000 deduction is not deductible under section 170(a), and the deduction for state and local taxes paid is unchanged. Rena s net increase in itemized deductions is $0 (as it was under prior law). Example 1.6 Contribution to State Government for Deduction Rena instead lives in Bay Town. Bay Town state government is an entity listed in I.R.C. 170(c). Contributions to Bay Town are not eligible for a credit but are deductible from state taxable income. Under prior law, if Rena contributed $1,000 to Bay Town, she would receive a $50 state tax deduction ($1,000 5%). Her federal itemized deduction increases by $950 ($1,000 charitable contribution $50 reduction in state taxes). Under current law, her deduction for charitable contributions increases by $1,000, but the deduction for state and local taxes does not change because of the SALT cap. Consequently, her itemized deductions increase by $1,000. The result is the same under the proposed regulations [REG ] PBBM-Rose Hill, Limited v. Commissioner I.R.C. 170 The taxpayer claimed a charitable contribution deduction of $15,160,000 for its donation of a conservation easement to the North American Land Trust. The conservation easement area included a 27- hole golf course and a clubhouse. The IRS determined that the taxpayer was not entitled to the deduction and assessed a penalty. The Tax Court concluded that the contribution was not exclusively for conservation purposes because it did not protect any of the conservation purposes under I.R.C. 170(h)(4)(A)(i) (iii) and it failed to satisfy the perpetuity requirement of I.R.C. 170(h)(5)(A). The Court of Appeals found that the contribution served the purpose of preserving land for outdoor recreation by the general public, but it did not meet the perpetuity requirement. [PBBM-Rose Hill, Limited v. Commissioner, 900 F.3d 193 (CA 5 8/14/2018)]