Apply now for fall courses that begin in August: Enterprise Risk Analytics; Information Security Risk Management; Terrorism Risk Management; International Tax Risk Management, Data, and Analytics II; International Tax & Tax Treaties I and II; Securities Regulation; Investment & Portfolio Management; Financial Innovation (and Risk)
Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).
This week we have more information about the CARES Act, including details on qualified plan loans and health expenses paid by employers for furloughed workers. We also have the annual updates to the HSA numbers that will be in effect for 2021. How was your Memorial Day?
Calculating CARES Act Qualified Plan Loans & The One-Year Look-back Rule
The CARES Act allows plan sponsors to double the qualified plan loan limit for qualified individuals. Plan loans made between March 27, 2020 and September 23, 2020 are limited to the lesser of (1) $100,000 or (2) 100% of the participant’s vested account balance. Despite this, even if the individual is qualified, plan sponsors must remain aware of the one-year look-back rule For more information on the qualified plan loan rules, visit Tax Facts Online. Read More
2021 HSA Inflation-Adjustments
The IRS has released Revenue Procedure 2020-32 with the 2021 inflation adjusted amounts for taxpayers who contribute to health savings accounts (HSAs). For more information on the contribution limits that apply to HSAs, visit Tax Facts Online. Read More
Treasury Allows Tax Credit for Health Expenses of Furloughed Workers
Clearing up confusion (and revising initial guidance), the Treasury has announced that if an employer continues to pay an employee’s health insurance costs during a furlough period, the employer is entitled to claim a tax credit with respect to those expenses. This is the case even if the employer is not currently paying the employee’s wages. For more information on the employee retention tax credit, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-087
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Texas A&M University School of Law has launched its online wealth management, risk management, and international tax risk management graduate curricula for industry professionals. Apply now for fall courses that begin in August: Enterprise Risk Analytics; Information Security Risk Management; Terrorism Risk Management; International Tax Risk Management, Data, and Analytics II; International Tax & Tax Treaties I and II; Securities Regulation; Investment & Portfolio Management; Financial Innovation (and Risk) Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).
This week brings two updates that may affect employee benefits. The first is that mid-year changes to cafeteria plan elections are permissible. This includes FSA and dependent care accounts, which may be important as both healthcare and childcare expenditures for many people are wildly different than what they had anticipated at the end of 2019. The IRS also made some temporary FSA changes permanent. Finally in some non-COVID updates (yes there is some!), the IRS released proposed rules that change how some administrative expenses incurred by trusts and estates can be deducted.
IRS Provides Relief for Cafeteria Plan Participants in Response to COVID-19
Under normal circumstances, cafeteria plans are not permitted to allow participants to make mid-year election changes except in limited situations. Notice 2020-29 permits employees to allow certain mid-year elections made during calendar year 2020 that would otherwise be impermissible, including changes to salary reduction contribution elections. For more information on the mid-year election rules for cafeteria plans, visit Tax Facts Online. Read More
IRS Makes Temporary & Permanent Changes to the FSA Grace Period Rules
IRS Notice 2020-33 and Notice 2020-29, released concurrently, provides relief with respect to unused funds in a flexible spending account. Under Notice 2020-29, if an employee has unused amounts remaining in a health FSA or a dependent care assistance program at the end of a grace period (or plan year) ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. Notice 2020-33 makes a change to the carryover rules that apply to health FSAs, so that the amount that can be carried over to the following year will equal 20 percent of the maximum inflation-indexed salary reduction amount under Section 125 (increasing the carryover amount from $500 to $550 for 2020). For more information on the rules governing health FSAs, visit Tax Facts Online. Read More
IRS Proposes Rules Allowing Deduction of Administrative Fees for Trusts & Estates
The IRS has released proposed regulations that would permit the deduction for certain administrative fees incurred by trusts and estates (including the S portion of an ESBT). The guidance addresses the treatment of these expenses in light of the suspension of all miscellaneous itemized deductions for 2018-2025 under the 2017 tax reform legislation. For more information on the tax treatment of trusts and estates, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Texas A&M University School of Law has launched its online wealth management, risk management, and international tax risk management graduate curricula for industry professionals. Apply now for Summer courses that begin May: Legal Risk Management; Intro to Risk Management; FATCA & CRS Risk Management; International Tax Risk Management, Data, and Analytics I Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).
The devil is in the details, but where exactly? This week we are starting to see how the broad changes in the recent spate of COVID-19 legislation will be administered. We have new notices on loan forgiveness procedures (did you get your PPP loan yet?), COBRA and Medicare, and FFCRA paid leave issues.
The Finer Points of PPP Loan Forgiveness
Loan forgiveness offers powerful assistance to those small businesses who were actually able to receive Paycheck Protection Program loan funds. However, loan forgiveness is not without its costs. While amounts forgiven will not be included in income under the usual cancellation of indebtedness rules, business owners may not be entitled to their typical business deductions either. Notice 2020-32 clarifies that otherwise allowable deductions are disallowed if the payment of the expense (1) results in loan forgiveness under the PPP loan program and (2) the income associated with the loan forgiveness is excluded from income under CARES Act Section 1106(i). For more information on implications of loan forgiveness, visit Tax Facts Online. Read More
New Q&A on CARES Act Qualified Plan Loans & Distributions
The IRS released the first Q&A in what is likely to be a series of guidance on the CARES Act retirement-related provisions. One overarching issue is the IRS confirmation that plan sponsors can rely upon past guidance issued in response to Hurricane Katrina in 2005 and the RMD waiver in 2009 for help implementing the CARES Act provisions. Under initial guidance, individuals are only eligible for COVID-19 related distributions or loans if they themselves are impacted (qualification cannot currently be based on a spouse or dependent’s job loss). The Q&A also clarifies that increased loan limits are currently available between March 27, 2020 and September 22, 2020. Further, the guidance confirms that the loan and distribution relief is optional for plan sponsors–and sponsors can elect to adopt one provision and not another (including the loan repayment option). For more information on the CARES Act loan provisions, visit Tax Facts Online. Read More
New COBRA Notice in Light of Growing Employment Litigation
The DOL released a revised COBRA general notice and election notice on May 1, 2020, in response to increasing furloughs and layoffs in the wake of COVID-19–and a growing risk of employment litigation. Employers are not required to post the new notices, but may wish to in light of the evolving situation. These new notices add information about how Medicare eligibility impacts COBRA eligibility (highlighting the fact that COBRA coverage is usually secondary to Medicare). Employers who use the model notices are deemed to comply with COBRA notice requirements. For more information on COBRA coverage election requirements and COVID-19, visit Tax Facts Online. Read More
Moving to Reopen, Employers Begin Evaluating FFCRA Leave Provisions
Now that many more employers are beginning to evaluate whether to reopen as governments relax restrictions, those who have been closed for upwards of two months will have to evaluate whether they must provide paid leave under the FFCRA as COVID-19 continues to spread. The FFCRA paid sick leave and expanded FMLA provisions only applied to employers who continued to operate in the wake of the pandemic–employees who were simply laid off or furloughed were required to seek unemployment benefits. Upon first glance, the new paid leave requirements under the FFCRA seem to provide 12 weeks of paid time off for most small business employees. However, the benefit triggers differ depending on whether the employee is claiming (1) 80 hours paid sick leave or (2) expanded relief under the FMLA. For more information on the benefit triggers, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Texas A&M University School of Law has launched its online wealth management, risk management, and international tax risk management graduate curricula for industry professionals. Apply now for Summer courses that begin May: Legal Risk Management; Intro to Risk Management; FATCA & CRS Risk Management; International Tax Risk Management, Data, and Analytics I Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).
Some interesting updates this week. We already knew that NOLs could be applied retroactively under the CARES Act, but now it seems that corporate AMT credits (remember those?) can be, as well.
Also, the last item on extending the COBRA election period might end up being a big deal. Importantly, the election period (the period that you have to decide whether to take the COBRA benefits) has been extended for an unknown amount of time. There has always been a risk of “moral hazard” with the election period since you can wait to see if you need the coverage before making the decision to commit to paying the premiums. However, that risk seemed low when the election period had a hard cut-off at sixty days. Now the election period is extended to sixty days after the end of the COVID-19 national emergency, which doesn’t seem to be likely to occur anytime soon. It will be interesting to see how group health carriers react to this change.
CARES Act Provides NOL Relief for Struggling Businesses
The CARES Act allows corporations to carry back net operating losses (NOLs) incurred in 2018, 2019, and 2020 for five years (excluding offset to untaxed foreign earnings transition tax). Post-tax reform, these NOLs could only be carried forward. For tax years beginning prior to January 1, 2021, businesses can offset 100% of taxable income with NOL carryovers and carrybacks (the 80% taxable income limitation was lifted). With respect to partnerships and pass-through entities, the CARES Act amended the effective date for the new excess business loss rules created by the 2017 tax reform legislation. The new rules will only apply beginning in 2021 (rather than 2018). Pass-through taxpayers who have filed a return reflecting excess business losses will presumably be entitled to refund by filing an amended return, absent guidance to the contrary. For more information, visit Tax Facts Online. Read More
CARES Act Permits Penalty-Free Payroll Tax Deferral for Employers
The CARES Act allows both employers and independent contractors to defer payment of employer payroll taxes without penalty. Importantly, employers with fewer than 500 employees are entitled to withhold payroll taxes as an advance repayment of the tax credit for paid sick leave and expanded FMLA leave under the FFCRA. Under the CARES Act payroll tax deferral, employers are permitted to defer the employer portion of the payroll tax on wages paid through December 31, 2020 for up to two years. Payroll taxes are generally due in two installments under CARES: 50% by December 31, 2021 and the remaining 50% by December 31, 2022. Economic hardship is presumed, meaning the employer does not have to produce documentation establishing that COVID-19 impacted the business. Payroll tax deferral options apparently apply to all employers, regardless of size. However, employers who have loans forgiven under the CARES Act Payroll Protection Loan program are not eligible for the deferral. For more information, visit Tax Facts Online. Read More
CARES Act Employee Retention Tax Credit
The CARES Act creates a new refundable tax credit designed to help employers who retain employees during the COVID-19 health crisis. The credit is taken against employment taxes and is equal to 50% of the first $10,000 of qualified wages paid to the employee. The credit is available for calendar quarters where either (1) operations were either fully or partially suspended because of a government-issued order relating to COVID-19 or (2) the business’ gross receipts declined by more than 50% when compared to the same calendar quarter in 2019. For more information, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Professor William Byrnes of Texas A&M’s School of Law discusses the IRS’ Notice 2020-32 (issued April 30, 2020) denying tax deductions for payroll and other operational expenses for small business owners that take advantage of the tax-free loan forgiveness program (PPP) of the SBA. William Byrnes then presents an example when a small business may be better off using the combined Employee Retention Tax Credit (CARES Act), the Families First Act Tax Credit, and the deferral of payment of payroll tax instead of the SBA loan forgiveness.
See my article below this post for additional analysis: TheIRS Just Issued Notice Denying Deductions for PPP Loan Forgiveness and Its Dead Wrong
The IRS released on April 30th Notice 2020-32 wherein the IRS interprets general tax law principles to deny business deductions (under Internal Revenue Code Section 162) for the wage and related expenses when the business takes advantage of the SBA’s PPP loan forgiveness.
The IRS Notice is a wrong interpretation of how CARES Section 1106 (see below) and by implication, Internal Revenue Code Section 108 (discharge of indebtedness), works, as well as how Congress intends CARES to work. Congress clearly intends CARES’ SBA loan proceeds to ameliorate Covid-19s damage to small business’ earnings (and thus mitigate the Covid-19 economic recession) by pushing cash flow into, and through, small business.
The IRS is approaching this issue from a perspective that exempting from income the discharge of debt of small businesses and also allowing a deduction for the wage expenses is a ‘double benefit’ and double benefits are not allowed. Yet, this is exactly what many tax credits allow – a double benefit created from deducting the expenses that generate the tax credit. A small business that uses the maximum Sick Leave tax credit of $5,110 (Families First Act) and the $5,000 employee retention tax credit for CARES (these two tax credits may be combined) will receive the $10,110 refundable tax credit excluded from gross income AND ALSO a deduction from the small business owner’s gross income (albeit this deduction is reduced by $5,000 to reflect the Employee Retention credit amount yet no reduction is required for the Families First tax credits) which is worth the small business owner’s tax rate – federally either 37% or 29.6%. with the extra Section 199A 20% deduction for business income (see some of Robert and my Tax Facts Intelligence articles on 199A and Covid-19 at ThinkAdvisor). In New York or California, states with high personal income tax rates, the business expenses deduction is worth more than say, Texas or Florida that do not tax personal income.
So the IRS Notice creates discrimination for many small businesses in favor of the $10,110 refundable tax credits of Families First and CARES in relation to the SBA PPP Loans. Most of the House and Senate certainly did not intend to ‘give with one hand and take back with the other’ regarding the SBA Loans. Had Notice 2020-32 been published before the additional SBA funding, Congress would have been forced to take a stance on what it intended. Now we must wait until the next relief bill for Congress to confront this issue.
The IRS cites IRC Section 265 for its argument to deny the deduction for the CARES Act’s SBA PPP forgiven amount. The IRS contends that the CARES Act Section 1106 creates a “class of exempt income”. Section 265 denies business income deductions under Section 162 when the income in question falls into a class of exempt income. But if CARES creates a class of income, then that class is of ‘debt income’ and debt is excludable from gross income. The IRS’ erroneous interpretation can be stretched that all business deductions should be denied by Section 265 when those expenses are funded by debt income. Even the interest payments on the SBA loans should not be deductible based on this approach.
CARES Act Section 1106‘s Loan Forgiveness exclusion from income is in the same vein as Section 108’s exclusion from income for discharged debt. Section 108 does not create a class of income for purposes of Section 265. Administratively it would be very burdensome for the IRS to reach back to open tax years and clawback deductions for expenses funded by the discharged debt. Congress knows how to deny tax allowances when it intends to do so because Congress included denying certain allowance items in Section 108, but not a denial of tax deductions. Congress included proportional reduction of net operating loss, of general business tax credits (under Section 38), among other items, relative to the amount of loan forgiveness to overall income that generated the tax allowances.
CARES ACT Section 1106 states “(i) TAXABILITY.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection(b) shall be excluded from gross income.”
Section 108 states “(a) Exclusion from gross income (1) In general Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if …”.
Statutorily speaking, why did Congress specifically include that the SBA loan forgiveness is exempt from gross income if Congress intended that the deductions would be disallowed? Based on the IRS’ logic, if Congress had not included the exclusion then the expenditure for wages would be deductible and would offset the discharged debt, a washout. So Congress did not need to do anything to achieve the result that the IRS claims that Congress intended by doing something.
Take an example of a New York business.* Should a New York business choose SBA loan forgiveness or the sick leave plus employee retention tax credits? (Note New York’s decoupling whereby New York has chosen to deny some of the relief of the CARES Act may impact the analysis but I am leaving that aside). For a business with, by example, 100 employees, a combined $10,000 credit (rounding down) per employee is worth $1,000,000 of tax-exempt tax credit. To generate the $10,000 of tax credit, the business had to pay at least $15,000 in wages, so $1.5 million in wages for the 100 employees. At the combined federal rate of 37% and New York highest rate of 8.82%, the wage expense generates a deduction of $458,200 (because the wage deduction must be reduced for the $5,000 of Employee Retention tax). But the employer also paid 06.2% social security tax and 01.45% medicare tax, a combined 07.65% which provides an additional $76,500 deduction (again excluding the Employee Retention tax credit portion). The deduction probably exaggerates the Covid-19 loss for the year that may, pursuant to the new NOL provision for CARES, be clawed back from the previous tax years because the Tax Cuts and Jobs Act is suspended for 2020 losses. Combined benefit of $1,534,700 for the business.
An SBA PPP loan forgiveness for the wage amount of $1.5 million is worth exactly that, $1.5 million. Wage deduction lost. Thus, in this scenario, the tax credits may generate more net benefit than the SBA Loan. And if the IRS argument for Section 265 is carried out, then the interest expense on the SBA loan must be denied, which I estimate will be in the neighborhood of $52,500 until forgiven (maybe the interest will be returned vt the SBA to mitigate the disparity caused by the IRS – I am unclear if the SBA can forgive the interest as well).
What if a small business is insolvent which is just an accounting definition of debt exceeding asset? Generally, a small business with the SBA loan is going to be insolvent. Cash flow is king so the issue of asset book insolvency is not actually relevant to running the business. But for Section 108 it allows exemption from gross income the amount of canceled debt as well as the deduction for the expenses financed by the canceled debt. Perhaps then, any small business seeking the SBA loan forgiveness needs to obtain an accountant’s letter of business insolvency to trump Notice 2020-32 then file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness?
Insolvency calculation:
Total liabilities immediately before the discharge – FMV of total assets* before the discharge = Extent to which the taxpayer is insolvent
(Assets includes bankruptcy exempt assets e.g. retirement account and interest in a pension plan).
And because the tax credits can be captured from the Employer’s Social Security portion of the payroll tax, while the cash flowing of the payroll is still an issue, it is less of an issue, albeit the payroll tax on the $1.5 million is just under $80,000 so not significant. However, the business may request an advance refund of the tax credits as the business spends the wages (Form 7200, Advance Payment of Employer Credits Due to COVID-19). Thus, with the advance tax credit refund, the cash flow challenge is addressed. Regardless, the small business may obtain the CARES Act SBA Small Business Interruption Loan – just not the loan forgiveness that eliminates the deductions according to the IRS.
While tax credits are difficult for taxpayers but the SBA loan process is certainly not straight forward and neither is the forgiveness process, for those businesses that managed to obtain the SBA PPP loans. Depending on the size of the loan and the business’ 2020 wages, the SBA loan may not be more beneficial than the tax credits, or at least, not substantially more.
Thank goodness that the calculations necessary to determine which path is better for the small business will require expensive advice from a tax advisor. Congress certainly intended that CARES is to ameliorate (the temporarily) lost tax advisory fees resulting from the push back of the tax filing season, right?
May 1 at 3:00 pm CARES Act Webinar – Small Business Incentives – Register w/ the Tarrant County Bar Association
William Byrnes and Neal Newman, Texas A&M School of Law
– SBA PPP, Obtaining Loan, Tax-Free Forgiveness, Tax Deduction Expenses?
– Employee Retention Tax Credit and Payroll Tax Deferral?
* I’m simplifying the numbers, factors, and how tax is determined to represent the broader point. One factor is by example the potential Section 199A deduction of 20% of qualifying business income. This factor may impact the outcome of the calculation if, by example, a business would generate positive qualfied business income instead of a loss because of the SBA PPP loan forgiveness exemption from income without corresponding deductions. In such a case, the additional 20% deduction would need to be added to the business’ benefit column. However, I think that most businesses will suffer a 2020 loss year with or without SBA loan forgiveness because of loss of revenues from late February through the 3rd quarter.
On May 1st my esteemed colleague, Low Income Tax Clinic Director Professor Bob Probasco, a 30-year tax litigator veteran, responded as follows: You have a valid argument. But from the perspective of a tax litigator, rather than an academic – predicting what will happen rather than what the result should be – I’m not sure it’s that clear.
The analogy to § 108 discharge of indebtedness is not exact and could be distinguished by a court. The link between the § 108 and the specific deductions that were “funded” by the indebtedness is not as clear as the link between CARES § 1106 and the specific expenditures required to qualify for the discharge. Most discharges of indebtedness, outside CARES, are not motivated by the specific use made of the loaned funds, are they?
Similarly, the analogy to tax credits allowed based on the same expenditures that are deducted does not involve exempt income. In addition, those examples were more clearly intended by Congress. You can argue that Congress intended to allow the deductions leading to a § 1106 discharge – but it’s an inference, not as clear as Congress explicitly specifying deduction A and credit B, or credit X and credit Y. The primary purpose of the CARES Act program, and the main benefit to be derived, was the loan foregiveness itself – pre-tax, rather than tax benefit. Concluding that the income from the foregiveness would not be taxable gives some support for an inference that they intended to allow the deductions as well, but they didn’t actually say that.
The arguments from a policy perspective are stronger, but I’m not sure that would overcome the language of the statute. Courts tend to interpret the language of the Code literally, and deviate with judicial doctrines like substance over form and economic substance that benefit the government rather than the taxpayer.
As a practitioner, I could have very comfortably argued either side of the question prior to the Notice. The Notice is going to make the argument for deduction slightly harder. It could easily go either way in court, but my guess is that a court is at least slightly more likely to agree with the Notice than to allow deduction of those expenses.
Legislation that is drafted quickly often ends up needing a lot of regulatory and administrative interpretation to help taxpayers adopt the changes in the new rules, and the COVID tax changes are no different.We continue to see actions from the IRS and DOL to clarify the new provisions in COVID-19 legislation. This week those updates include new info on how to enact FFCRA leave (including what to do when employers have concurrent leave policies), the opportunity for partnerships to file amended returns to take advantage of the CARES Act Bonus depreciation fix, and additional flexibility for companies wrestling with the business interest expense deduction under the CARES Act.
DOL FAQ Clarify Concurrent Use of FFCRA Leave
The FFCRA implemented a new paid sick leave law and expanded FMLA leave options for employees impacted by COVID-19. Many employers have independent policies in place that provide employees with leave options, and the DOL regulations raised questions about when the employer can require the employee to use that leave prior to, or concurrently with, FFCRA leave. Employers cannot require employees to concurrently use leave during the first two weeks of paid sick leave for non-childcare related reasons. Employers can, under some circumstances, require use of employee leave concurrently with expanded FMLA leave for childcare reasons. Employers are only eligible for tax credits with respect to leave paid out under the new law. If the employer requires the employee to use otherwise available employer-paid leave, the tax credit is unavailable with respect to that portion of the employee’s pay. For more information, visit Tax Facts Online. Read More
Employee Rights After FFCRA Leave
Employers are generally prohibited from retaliating against employees to take paid sick leave or expanded FMLA leave under the FFCRA. However, the law does not protect employees from layoffs or furloughs undertaken for other reasons, such as the general economic downturn. Exceptions exist for key employees and very small employers with fewer than 25 employees. For more information on the exceptions to the FFCRA rules, visit Tax Facts Online. Read More
CARES Act Bonus Depreciation Fix: Amended Returns for Partnerships
The CARES Act provided retroactive relief to partnerships on multiple fronts, including by fixing the so-called “retail glitch” to allow businesses to take advantage of 100% bonus depreciation on qualified improvement property through 2022. Existing law may have prevented partnerships from filing amended Forms 1065 and Schedules K-1. Instead, partnerships would have been required to file an administrative adjustment request, so that partners would not have received relief until filing returns for the current tax year. Revenue Procedure 2020-23 allows partnerships to file amended returns and issue revised Schedules K-1 for 2018 and 2019 to take advantage of retroactive CARES Act relief (and, absent further guidance, even if they are not taking advantage of CARES Act relief). For more information, visit Tax Facts Online. Read More
IRS Guidance on CARES Act Business Interest Elections
The IRS gives businesses substantial flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. For more information about the choices that are available related to the business interest expense deduction, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Texas A&M University School of Law has launched its online wealth management, risk management, and international tax risk management graduate curricula for industry professionals. Apply now for Summer courses that begin May: Legal Risk Management; Intro to Risk Management; FATCA & CRS Risk Management; International Tax Risk Management, Data, and Analytics I Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).
Prof. William Byrnes
Robert Bloink, J.D., LL.M.
Lots of CVOID-19 legislation in the updates this week. The IRS and DOL continue to release new guidance–and update existing guidance–at an unprecedented and fast pace. For the time being, clients and advisors alike should check the actual text of the guidance before taking concrete action to make sure they are operating under the most up-to-date rules.
IRS Releases FAQ on COVID-19 Filing, Payment Extensions
The IRS FAQ clarifies that the filing and payment extensions (from April 15 to July 15) apply regardless of whether the taxpayer is actually sick or quarantined because of COVID-19. For fiscal year taxpayers with 2019 returns due April 15, the deadline is extended to July 15 regardless of whether April 15 is an original or extended filing deadline. Taxpayers facing filing or payment deadlines that are not April 15 must note that their deadlines have not generally been extended. The relief also does not apply to payroll or excise tax payments (deposit dates remain unchanged, but employers may be eligible for the new paid sick leave tax credit, see Tax Facts Q8550). Taxpayers do not have to do anything to take advantage of the extension–they simply file their returns and make required payments by the new July 15 deadline. Taxpayers who filed and schedule a payment for April 15 must, however, take action to reschedule their payment for July 15 if they wish (by contacting the credit or debit card company if the payment was scheduled directly with the card issuer). For more information, visit Tax Facts Online. Read More
DOL FAQ provides that an employer is subject to the expanded paid sick leave and FMLA rules if the employer has fewer than 500 full-time and part-time employees. Employees on leave and temporary employees should be included, while independent contractors are not included in the count. Each corporation is usually a single employer. When a corporation has an ownership interest in another corporation, the two are separate employers unless they are joint employers for Fair Labor Standards Act purposes. Joint employer status is based on a facts and circumstances analysis, and is generally the case when (1) one employer employs the employee, but another benefits from the work or (2) one employer employs an employee for one set of hours in a workweek, and another employer employs the same employee for a separate set of hours in the same workweek. For more information on the details provided by current DOL guidance, visit Tax Facts Online. Read More
Calculating Sick Pay for Part-Time and Variable Hour Workers Under the Families First Coronavirus Response Act
With respect to the FMLA extension, the rate of pay for part-time employees is based upon the number of hours they would normally be scheduled to work. For employees with variable schedules, pay is based upon a number equal to the average number of hours that the employee was scheduled per day over the 6-month period ending on the date on which the employee takes such leave, including hours for which the employee took leave of any type or (2) if the employee did not work over such period, the reasonable expectation of the employee at the time of hiring of the average number of hours per day that the employee would normally be scheduled to work. As of now, the law provides that leave may not be carried over into 2021. For more information on the law’s requirements, visit Tax Facts Online. Read More
RMDs Suspended for 2020, Penalty Waived for Coronavirus Distributions
The CARES Act suspended the required minimum distribution (RMD) rules for 2020–a suspension that applies to all 401(k), 403(b), and certain 457(b) deferred compensation plans maintained by the government, as well as IRAs. The law also contains a provision waiving the 10% early distribution penalty that applies to retirement account withdrawals. The relief generally mirrors the relief commonly granted in more localized natural disaster situations. The Act allows employees to take up to $100,000 in distributions from an employer-sponsored retirement plan (401(k), 403(b) or defined benefit plan) or an IRA without becoming subject to the penalty. Unless the participant elects otherwise, inclusion of the distribution in income is spread over three years, beginning with the tax year of distribution. The Act also provides a repayment option, where the participant has the option of repaying the distribution over the three-taxable year period beginning with the tax year of distribution. In this case, the distribution will be treated as an eligible rollover made in a trustee-to-trustee transfer within the 60-day window. For more information on expanded access to retirement funds, visit Tax Facts Online. Read More
WEBINAR
Small Business Incentives Under the CARES Act: Will it Help My Business?
Tuesday, April 7, 2020, 12:00 noon – 1:00 p.m. Central
Learn how the CARES Act affects your business.
Texas A&M Law faculty experts share practical, fact-based information regarding how the CARES Act is affecting those of us in Texas in this free webinar.
Access to and eligibility for loans for small businesses
Implications for payroll tax payments and employee tax credits
Texas A&M University School of Law has launched its online wealth management, risk management, and international tax risk management graduate curricula for industry professionals. Apply now for Summer courses that begin May: FATCA & CRS Risk Management; International Tax Risk Management, Data, and Analytics I Texas A&M University is a public university and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018). To apply for Summer, call or fill in the form https://law.tamu.edu/distance-education/
William H. Byrnes, J.D.
Robert Bloink, J.D., LL.M.
Today we are seeing our first concrete responses to the COVID-19 virus in the tax field. First, the IRS has now formally extended the income tax filing deadline for tax year 2019 to July 15. Because this is an extension of the actual filing deadline (not just an extension of time to pay owed taxes) it also pushes a number of related deadlines (e.g. for qualified plan contributions) back to July. President Trump also signed the Families First Coronavirus Response Act, which creates a paid sick leave program and related tax credits for small businesses.
Avoid Confusion Over IRS 90-Day Extension of the Federal Tax Payment Deadline
In response to the coronavirus pandemic, the IRS has announced that it will extend the tax payment deadline from April 15, 2020 to July 15, 2020. Interest and penalties during this period will also be waived. The April 15 filing deadline was also extended to July 15, although in separate guidance. Individuals and pass-through business entities owing up to $1 million in federal tax are eligible for the relief, as are corporations owing up to $10 million in federal tax. Individuals who do not anticipate being able to file by July 15 should be aware of their option for requesting a six-month filing extension to October 15. The extension is available by filing Form 4868. For more information on federal tax filing requirements, visit Tax Facts Online. Read More
Coronavirus Act Creates Paid Sick Leave Benefits for Small Business Employees
The Families First Coronavirus Response Act applies to private employers with fewer than 500 employees (and government employers), and makes several key changes to paid time off laws. The bill: (1) provides 80 hours’ additional paid sick leave for employees (pro-rated for part-time workers) and (2) expands FMLA protections. The additional paid sick leave is capped at $511 per day (total of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine. The additional paid sick leave is capped at 2/3 of the employee’s pay rate, subject to a maximum of $200 per day or $2,000 total if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing “substantially similar conditions” specified by HHS. For more information on the family and medical leave tax credit available for business owners, visit Tax Facts Online. Read More
Coronavirus Response Act: Tax Relief for Small Business Owners
The law contains a tax credit to help small business owners subject to the new paid sick leave and expanded FMLA requirements. The tax credit is computed each quarter, and allows as a credit (1) the amount of qualified paid sick leave wages paid in weeks 1-2, and (2) qualified FMLA wages paid (in the remaining 10 weeks) during the quarter. The credit is taken against the employer portion of the Social Security tax. Amounts in excess of the employer Social Security taxes due will be refunded as a credit (in the same manner as though the employer had overpaid Social Security taxes during the quarter). The Act also provides a tax credit for qualified health plan expenses that are allocable to periods when the paid sick leave or family leave wages are paid. For more information on refundable tax credits, visit Tax Facts Online. Read More
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Professor William Byrnes and Robert Bloink provide for subscribers weekly analysis of tax issues that impact wealth managers and financial planners. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Tax and Benefits sections of Final Bill described below by Senate Finance Committee (March 25, 2020)
DIVISION A – KEEPING WORKERS PAID AND EMPLOYED, HEALTH CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION
TITLE II—ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND BUSINESSES
Subtitle A—Unemployment Insurance Provisions
Section 2101. Short Title
This title is called the Relief for Workers Affected by Coronavirus Act
Section 2102. Pandemic Unemployment Assistance
This section creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for
unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
Section 2103. Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations
This section provides payment to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020 to pay
unemployment benefits.
Section 2104. Emergency Increase in Unemployment Compensation Benefits
This section provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
Section 2105. Temporary Full Federal Funding of the First Week of Compensable Regular Unemployment for States with No Waiting Week
This section provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits.
Section 2106. Emergency State Staffing Flexibility
This section provides states with temporary, limited flexibility to hire temporary staff, rehire former staff, or take other steps to quickly process unemployment claims.
Section 2107. Pandemic Emergency Unemployment Compensation
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.
Section 2108. Temporary Financing of Short-Time Compensation Payments in States with Programs in Law
This section provides funding to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the costs they incur in providing this short-time compensation through December 31, 2020.
Section 2109. Temporary Financing of Short-Time Compensation Agreements
This section provides funding to support states which begin “short-time compensation” programs. This provision would pay 50 percent of the costs that a state incurs in providing short-time compensation through December 31, 2020.
Section 2110. Grants for Short-Time Compensation Programs
This section provides $100 million in grants to states that enact “short-time compensation” programs to help them implement and administer these programs.
Section 2111. Assistance and Guidance in Implementing Programs
This section requires the Department of Labor to disseminate model legislative language for states, provide technical assistance, and establish reporting requirements related to “shorttime compensation” programs.
Section 2112. Waiver of the 7-day Waiting Period for Benefits under the Railroad Unemployment Insurance Act
This section temporarily eliminates the 7-day waiting period for railroad unemployment insurance benefits through December 31, 2020 (to make this program consistent with the change made in unemployment benefits for states through the same period in an earlier section of this subtitle).
Section 2113. Enhanced Benefits under the Railroad Unemployment Insurance Act
This section provides an additional $600 per week payment to each recipient of railroad unemployment insurance or Pandemic Unemployment Assistance for up to four months (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).
Section 2114. Extended Unemployment under the Railroad Unemployment Insurance Act
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of regular unemployment benefits are no longer available (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).
Section 2115. Funding for the Department of Labor Office of Inspector General for Oversight of Unemployment Provisions
This section provides the Department of Labor’s Inspector General with $25 million to carry out audits, investigations, and other oversight of the provisions of this subtitle.
Section 2116. Implementation
This section gives the Secretary of Labor the ability to issue operating instructions or other guidance as necessary in order to implement this subtitle, as well as allows the Department of Labor to waive Paperwork Reduction Act requirements, speeding up their ability to gather necessary information from states.
Subtitle B – Rebates and Other Individual Provisions
Section 2201. 2020 recovery rebates for individuals
All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.
For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the
alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Section 2202. Special rules for use of retirement funds
Consistent with previous disaster-related relief, the provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.
A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to
individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.
Section 2204. Allowance of partial above the line deduction for charitable contributions
The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.
Section 2205. Modification of limitations on charitable contributions during 2020
The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of
adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent. Section 2206. Exclusion for certain employer payments of student loans The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.
Subtitle C – Business Provisions
Section 2301. Employee retention credit for employers subject to closure due to COVID-19
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
Section 2302. Delay of payment of employer payroll taxes
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.
Section 2303. Modifications for net operating losses
The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.
Section 2304. Modification of limitation on losses for taxpayers other than corporations
The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.
Section 2305. Modification of credit for prior year minimum tax liability of corporations
The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.
Section 2306. Modification of limitation on business interest
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.
Section 2307. Technical amendment regarding qualified improvement property
The provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.
Section 2308. Temporary exception from excise tax for alcohol used to produce hand sanitizer
The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020
If a zombie apocalypse does not emanate from the illness known as Covid-19 caused by the coronavirus, then we still need to plan for our 2020 tax payments. It is likely that taxpayers with business or investment income will be able to reduce the 2020 quarterly estimated tax payments that will be due April 15 this year, June 15, September 15, and January 15 of 2021. Why?
2019 was a good income year for most taxpayers earning investment and business income. But 2020 will likely be a depressed income year, maybe even a recession (for those not eaten by zombies). Thus, estimated tax payments to avoid a penalty, generally, 90% of the tax that is estimated to be due for 2020, should be much reduced from the 2019 level paid. (Contrarian investor taxpayers that shorted the market may actually need to make higher estimated taxpayers because the contrarians are likely to have a great capital gain year).
What are the changes enacted in the Tax Cuts and Jobs Act of 2017 that, because of the coronavirus, impact 2020’s estimated tax payments?
A taxpayer’s ability to reduce tax because of a net operating loss (“NOL”) in 2020 has been reduced by the TCJA. An NOL resulting in 2020 cannot be applied to taxes paid in the previous two-years of 2019 and 2018 to claw those taxes back. Before the TCJA, the NOL “carry-back” of two-years was allowed. NOLs may still be carried forward. Excess NOL in 2020 may be used to reduce 2021’s income and thus tax due.
However, the TCJA even modifies how much NOL may be used to reduce 2020’s taxable income. Starting in 2018, the TCJA modified the tax law on “excess business losses” by limiting losses from all types of business for noncorporate taxpayers. An “excess business loss” is the amount of a taxpayer’s total deductions from business income that exceeds a taxpayer’s “total gross income and capital gains from business plus $250,000 for an individual taxpayer or $500,000 for married taxpayers filing a joint return.” Said another way, the business loss in 2020 is limited to a maximum of $250,000 for an individual taxpayer. Yet, the remainder does not evaporate like a vampire stabbed with a stake in the heart. The remainder may be carried forward to 2021. The remainder is called a “net operating loss” or NOL.
But the TCJA has another limitation for the carry forward of an NOL. The NOL may only be used in 2021 to reduce the taxpayer’s taxable income by 80%. The remainder NOL in 2021, if any, that resulted from 2020’s original loss and 2021’s limitation to just 80% of taxable income may again be carried forward, to 2022, yet again subject to the 80% of taxable income limitation. The NOL may keep rolling forward indefinitely, subject to the 80% limitation until it is all used.
High net wealth taxpayers that generate gross receipts greater than $26 million may be subject to the TCJA’s limitation of interest expense for 2020. The TCJA included a rule that limits the amount of interest associated with a taxpayer’s business income when the taxpayer has on average annual gross receipts of more than $26 million since 2018. The limitation does not apply to a taxpayer whose business income is generated from providing services as an employee, and a taxpayer that generates business income from real estate may elect not to have the limitation apply.
The amount of deductible business interest expense that is above a taxpayer’s business interest income is limited to 30% of the taxpayer’s adjusted taxable income (called “ATI”). For 2020, ATI will probably be significantly lower than in 2019 and 2018. A taxpayer calculated ATI taking the year’s taxable income then reducing it by the business interest expense as if the limitation did not apply. The remaining amount is then further reduced by any net operating loss deduction; the 20% deemed deduction for qualified business income, any depreciation, amortization, or depletion deduction, and finally, any capital loss. The business interest expense allowable for 2020 is 30% of that remainder. The lost business income resulting from the coronavirus in 2020 may lead the remainder to be zero, and 30% of zero is zero. Like the NOL above, the business interest expense if not usable in 2020 does not vanish. It carries forward to 2021 and each year thereafter, applying the same limitation rules each year.
Many taxpayers may end 2020 in a capital loss position if the stock market does not fully recover by December. If a taxpayer’s capital losses are more than the year’s capital gains, then $3,000 of that loss may be deducted from the taxpayer’s 2020 regular income. Remaining capital loss above the $3,000 may be carried forward to apply against 2021 income, and so on until used up.
The IRS may offer taxpayers more time beyond the April 15th deadline to file and pay 2019’s tax in 2020. The filing and payment for 2019, and estimated tax for 2020, is due on or before April 15. But the IRS has indicated that it may extend that deadline. A taxpayer may, regardless, file a request for a six-month extension on or before April 15, 2020, that is automatically granted if filed on time. But any tax owing for 2019 will still be due April 15, 2020, after which interest begins to be charged by the IRS to the taxpayer’s tax debt. Check the IRS website here for whether, because of the coronavirus, it has extended the payment deadline beyond April 15, 2020. Can the IRS extend the deadline, legally? Yes. Because Congress enacted a section of the Internal Revenue Code (our tax law) “§ 7508A” which is aptly named “Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”. The President declared an official national emergency (see here).
Taxpayers are not required to exhaust the deductible required by a high-deductible health plan (called “HDHP”) before using the HDHP to pay for COVID-19 related testing and treatment.
I have four tax policy suggestions for Congress that it can include in a taxpayer coronavirus relief bill. I welcome acronym suggestions for this proposed bill’s name, especially a creative bill name whose acronym is “Zombie” or “Eat Brains”. The four tax relief suggestions that will mitigate damage caused by Covid-19 are:
Proposal 1 (stop medical bankruptcy): In 2020 the itemized deduction for medical expenses is reduced by 7.5% of a taxpayer’s AGI. For 2020, I propose eliminating the 7.5% reduction of medical expenses attributed to the coronavirus or any 2020 flu (or zombie bite), such as hospitalization. Medical diagnosis should suffice. Not going to be used by many people. But the people who do use will really need it – those that do not awake as zombies that is.
Proposal 2 (stop restaurant bankruptcy): The administration proposes the suspension of the Social Security and Medicare payroll tax to jump-start consumer spending, presumably after the removal of quarantine orders to stay indoors or at least six feet away from each other. Not very targeted. Someone like me may just shift the payroll tax relief and use it instead to upward adjust my 403(b) retirement savings for 2020, taking advantage of my full $19,500 contribution allowance for 2020 (and because I am 50 years old or older – add another $6,000 retirement ‘catchup’ to that $19,500 for a full $25,500), Not only have I not spent the money to help the economy rebound, I have reduced my tax due for 2020 because my retirement contributions reduce my taxable income. I have saved tax twice!! While I quite like that idea personally, I feel empathy for all the local restaurant owners who may go bankrupt unless I go out to eat at more local restaurants once I assured that 2020 was not the year of the zombie apocalypse.
A better-targeted proposal to save our nation’s local restaurants and the local farmers that supply them is to allow taxpayers an itemized deduction up to $1,000 for an individual and $2,000 for a married filing jointly 2020, beyond the standard deduction, of 100% of restaurant meals expense between June 1 and October 31, at U.S. restaurants with the last three years gross annual receipts averaging less than [$5 million – whatever is reasonable so that big chains are not included, Small Business Administration uses a maximum of $8 million for full-service restaurants (NAICS 722511)- I’m OK with that]. I know – many reasons not to do this, such as Americans will become hooked on eating out at local restaurants. Wait, why is that a bad thing? And we will need to address the tax abusers who will order one slice of pizza and 20 bottles of wine, to go. So maybe the maximum meal receipt must be set at $100 per meal receipt per adult. That should allow plenty of food for a couple, and alcohol, and leave enough for the children to still have mac & cheese. Plus it requires ten different restaurant trips. Local restauranteurs and the local farmers can hold out hope that 2020 will not require filing for bankruptcy protection. November is Thanksgiving when people eat out anyway, at least in the restaurants that have remained open. By the way, I am purposely leaving business out of this. Business has a 50% business meal deduction anyway. And my policy suggestion is about Americans being social and not talking business at the dinner table (and perhaps not politics either).
Proposal 3 (stop hotel bankruptcy): And let’s not forget about locally-owned hotels with average gross receipts below $8 million (SBA uses $35 million for hotels and $8 million for B&B Inns so maybe I am way off base with just $8 million – see NAICS subsector 721 Accomodation). A $500 itemized deduction for 2020 for a U.S. hotel stay (not Air BnB homes or apartments, actually licensed hotels/BnB Inns) for an individual or couple between June 1 and October 31. Might not buy a weekend at the Ritz but the Ritz probably exceeds the small business amount of revenue a year. Is it sound tax policy? Huey Long (I’m from Louisiana) promised a chicken in every pot and a car in every yard. I promise a get-a-way weekend at a small(ish) hotel.
Proposal 4 (keep employees employed): A tax credit (I am not sure the right amount, let the Labor Secretary decide, something around $5,000 an employee) to employers of less than 500 employees who do not reduce the monthly payroll of the employees, or fire any employees, between June 1 and September 30. October 1 employers start thinking about Christmas hiring for the shopping season. I can imagine some mathematically-inclined employees thinking “I am going to walk into my boss’ office and projectile vomit because the cost of losing the tax credits for firing me is too high.” OK, so firing ‘for cause including projectile Zombie vomiting on the boss ‘ will be allowed without loss of the tax credit. Now if a business wants to expand and hire a lot of employees up to 500 that’s great. I propose that all employees employed and start fulltime work before June 1st qualify for a reduced $4,000 tax credit (basically $1,000 a month of employment for June through September).
These four proposals are enough to keep the economy, restaurants, hotels, and employees out of recession and bankruptcy. But I have more proposals not currently part of the current bill, but common sense dictates should be (well, maybe not). Why have we heard nothing from the House to encourage donations of toilet paper rolls to local shelters? And why hotels and restaurants, but not spas? I’ll leave it to the politicians (and lobbyists) to argue about. Meanwhile, I look forward to receiving your comments while I set up my anti-zombie chicken wire barricade around the yard.
2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
The Tax Court recently decided a case, Slaughter v. Comm’r (find all the citations in 1 Taxation of Intellectual Property § 1.06 (2019), involving annual royalty payments to an author wherein the IRS argued that instead of treating the payments as royalties that are not subject to self-employment and Medicare tax, the payments should be treated as net earnings from self-employment. The dispute that the Tax Court faced was whether there is a distinction, for self-employment tax purposes, between an author’s royalty income derived from her writing and any royalty income derived from her name and likeness. The author contends that one portion of her royalty payments is derived from her writing, which is a trade or business, and that another portion is derived, not from her writing, but rather solely from her name and likeness which are personal attributes which are not part of any trade or business. The IRS argued that the entire payments the author received from her publishing contracts were derived from her trade or business as an author, thus subject to self-employment tax.
To provide context to the dispute, Karin Slaughter is a bestselling crime author: over 35 million books sold in 37 languages. The Tax Court stated the following details of her publishing contract are standard in the publishing industry. Her contracting publishers receive more than just the right to print, publish, distribute, sell, and license the works and manuscripts written, or to be written. The publisher also secures the right to use the author’s name and likeness in advertising, promotion, and publicity for the contracted works. The author is required to provide photos and be available for promotional activities. The contracts include noncompete clauses that vary in scope, from requiring that the specified manuscript be completed before others, to prohibiting the author from entry into another contract until her writing obligations are met. Publishers also secure the right to advertise other works in the author’s books, qualified by the requirement that the author’s consent to the specific advertisements. Several of the contracts allow for, but do not require, a share of advertising proceeds to be paid to the author as a condition of her consent. Finally, the contracts include an exclusive option for the respective publisher to negotiate the contract for the author’s next works.
The author also receives more than just her advances and royalties. For instance, some contracts include a marketing guaranty requiring the publisher to spend a minimum amount on marketing for the author’s books. Although the publishers fund the marketing plan, the author’s agent retains the authority over its development. Another example is the author’s option to purchase the publisher’s plates at a reduced cost for any book that goes out of print and that the publisher refuses to reissue or license. In that instance, the rights in the work also revert to the author.
On her Federal income tax returns, the author deducted as a business expense the cost of leasing a vehicle to attend media interviews and promotional events. She also deducted the cost of hosting her own promotional events. For marketing purposes, many of her meetings were scheduled in New York City. While there, the author often attended meetings, conducted media interviews, and participated in publishing industry events such as trade shows. During the years in the issue she also met with a fellow writer to collaborate on a script for a possible television series. To facilitate her various activities, the petitioner rented an apartment in New York City and deducted the rent. Petitioner also deducted the cost of business gifts to agents, editors, publishers, and others.
The authors income grew eightfold due to her brand as an author. That brand is monetized by the author’s ability to attract and engage readers, speak in front of a crowd, and recommend other authors within her publishing house. Petitioner’s promotional activities and writing have created a very successful brand and body of work. In petitioner’s case, her brand includes her name and likeness as well as her reputation, goodwill, and existing readership. She maintains contact with her readership through social media, websites, and a newsletter.
The author’s advisors concluded that any amount paid to the author for the use of her name and likeness was “investment income,” i.e., payment for an intangible asset beyond that of her trade or business as an author. The author’s name is a brand. The author’s expert concluded that the actual writing of a manuscript is but a small percentage of the value a publisher seeks from an author. An author’s work may sell on the basis of the author’s name and readers’ expectations for a particular kind of story, rather than for the quality of the writing. Thus, the author contended that the amount paid for her writing is what a publisher would pay a nonbrand author, and the residual amount is a separate and distinct payment for her brand.
The Tax Court held that the author’s brand became part of her trade or business. The Tax Court focused on the following elements of her behavior. The author was engaged in developing her brand with continuity and regularity. The author set out in a businesslike fashion to obtain stationery, a reputable agent, and a publishing contract. The author worked with a media coach and publishers to develop a successful brand. She has spent time meeting with publishers, agents, media contacts, and others to protect and further her status as a brand author. She attended interviews and promotional events and works to develop and maintain good relationships with booksellers and librarians. The author uses social media, websites, and a newsletter to maintain her brand with her readership. The Tax Court noted that royalties earned from her brand are not solely a result of her publishers’ actions.
The Tax Court then turned the fact that the author deducted advertising costs, the cost of a car used, in part, to attend promotional activities around Atlanta, and gifts sent to her contacts in the publishing world. Such expenses, stated the Tax Court, demonstrate that petitioner’s trade or business extends beyond writing to its promotion. If the author takes such promotion and brand-related expenditures on her Schedule C trade or business expenses, then the income derived from the brand to which those expenses relate must also be trade or business income. The Tax Court found on behalf of the IRS.
The Tax Court stated that there was not a particular case on point regarding an author’s income from the business of writing and that attaching to royalties for the sales of an author’s books. The Tax Court distinguished other cases decided in favor of the taxpayer regarding athletes and image rights, albeit these cases arguably are applicable to Karen Slaughter’s situation. For example, in Garcia v. Comm’r, the issues were to what extent to which payments made to the taxpayer under the endorsement agreement were compensation for the performance of the taxpayer’s personal services and the extent to which the payments were royalties for the use of the taxpayer’s image rights. The Tax Court stated that
“Courts have repeatedly characterized payments for the right to use a person’s name and likeness as royalties because the person has an ownership interest in the right.”
The Court therein cited Goosen v. Comm’r that the characterization of a taxpayer’s endorsement fees and bonuses depends on whether the sponsors primarily paid for the taxpayer’s services, for the use of the taxpayer’s name and likeness, or for both. The court held that the payments made by the company were allocated 65 percent to royalties and 35 percent to personal services.
In Kramer v. Comm’r, the Tax Court found that royalties paid primarily for the grant of the exclusive right to use the taxpayer’s name to sell sports equipment, and only secondarily for the personal services rendered by taxpayer under the royalty contract. Herein the Tax Court concluded that commercial success for sales upon which the royalty income derives depended upon accompanying aggressive promotional activities. For Mr. Kramer, the Tax Court concluded that only the portion of the royalties that reflected compensation for the personal services constituted “earned income.” In Boulez v. Comm’r, the Tax Court said if a taxpayer has an ownership interest in the property whose licensing or sale gives rise to the income, then that income should be characterized as a royalty as opposed to personal service income. Therein the Tax Court cited the Fifth Circuit decision of Patterson v. Texas Co, wherein the Court of Appeals adopted the definition of a “royalty” as
“a share of the product or profit reserved by the owner for permitting another to use the property.”
The Slaughter case is ripe for appeal. The weight of jurisprudence perhaps rests on the author’s side regarding whether the royalties should be apportioned and that a portion derives from her brand rights that are not personal service income. Like for the tennis star Mr. Kramer, aggressive promotional activities are necessary to grow the sales of the product. There can be no brand, such as a trademark, without promotion of it. But the promotional activities are not the business of the author but rather those of the publishing company to sell books.
Yet, the weight of the facts perhaps rest on the side of the IRS. If the author’s accountants claimed the full amount of the expenses, such as for the New York apartment, on the author’s Schedule C as a trade or business expense, then correspondingly, as the Tax Court presents, income associated with those expenses is also Schedule C. It does not appear that the accountants undertook any diligence, by example not reading the contracts and not seeking any support records for the guestimate by the author of her time apportionment. It does not appear the accountants undertook any research and analysis other than to dismiss that any cases applied. It does not appear that the accountants undertook any planning research, or at least, the author rejected paying for such advice because it is common practice for authors, artists, and athletes of this income level to operate via a Sub S corporation or LLC. The pass-through business is a well-understood mechanism for mitigating Medicare tax, though with its own host of issues regarding compensation versus distributions.
For more analysis and coverage on this and other related issues, see William Byrnes’ treatise Taxation of Intellectual Property and Technology (2020 edition), a 1,000-page analytical treatise to the federal tax consequences of the development, purchase, sale and licensing of intellectual properties and intangibles. Primary author William Byrnes leads a team of America’s leading tax senior counsel to analyze tax risk challenges for business and investment decisions concerning intellectual property, technology, intangibles, and the digital economy.
Nine seats remain for the Spring (4 teams of 3 students each) to join the current 4 teams January 13 – April 20 semester for the TRANSFER PRICING course taught by Dr. Lorraine Eden, Prof. William Byrnes, and several industry experts. The courses count toward the INTERNATIONAL TAX online Master curriculum of Texas A&M for tax attorneys, accountants, and economists. Taught live twice weekly using Zoom involving teams working to design positions and solutions for real-world post-BEPS client studies each week, supported by originally authored materials, videos and audio casts, PPTs, and a robust online law & business database library. For more information, contact Texas A&M Admissions https://info.law.tamu.edu/international-tax
My commentary this week… (well, it will be for a debate in my Spring Fed Income Tax course actually)
Of course, it’s not a violation of 8th because not a penalty, albeit I appreciate the (losing) argument. Yet, at this stage, cross-aisle agree both federal and state, marijuana, at least at defined dosages, it is more like Valium on Schedule IV then Vicodin Schedule II. The Schedules allow for dosage amounts. Only ardent prohibitionists I think (I am no expert) want the Schedule I classification to remain. I am sure state leaders, the financial industry (because of the AML provisions of the BSA), the IRS, and the AG industry want it reduced to at least Schedule II but preferably Schedule IV where it belongs. Or break it up by THC levels into Sch II, III, and IV.
But I think that the DEA is the real problem. I do not understand why the DEA will not remove marijuana from the blacklist (Schedule I) unless the DEA needs it on Schedule I to maintain its significant funding for global marijuana crop eradication programs because govt agencies never shrink themselves by giving up jurisdiction or budget. But I do not believe that the FDA, HHS, et al who inform the DEA want to keep it at Schedule I. Read the DEA’s current policy regarding CBD and THC-Cannabis. The medical pharmacological evidence is building of the benefits for various ailments, see the 2017 National Institutes of Health meta analysis (Medicinal Cannabis: History, Pharmacology, And Implications for the Acute Care Setting). All pharma has side effects so the fact that some participants who ingested the THC Cannabis (“got high”) reported being dizzy is very mild (‘don’t operate heavy machinery or drive’ warning labels mandatory). Prolonged and heavy use of any pharma, any drug like caffeine (of which I have much experience, but not willing to kick the habit yet) and alcohol, is probably going to be harmful to very harmful to just out-right early death. I am not saying something new – everyone in the debate already knows all the arguments for and against. So it’s either the teetotaler lobby, the DEA not wanting to give up ‘the war against marijuana”, or a combination, keeping marijuana on Schedule I.
So lots of pressure on Treasury to fix two insurmountable issues to marijuana state-licensed businesses from being federally legit and compliant. The BSA problem for AML compliance (keeps this a cash business) and the IRC 280E problem (makes marijuana industry a federal tax evader or unprofitable because effective rates of taxation of state and federal are in many cases greater than 100% of net income). And Treasury wants to fix it. But its hands are technically tied because the DEA will not delist marijuana from Schedule I. That forces 280E and AML rules to kick in. I’d be happy for Treasury to ignore the law but it’s too dangerous for Treasury or any agency to pick and choose what laws to adhere to. Of course, the discretion of enforcement is a totally different issue.
The AML issue Treasury issued, albeit the former prohibitionist AG basically said DOJ is not playing ball, a soft guidance explaining to banks how to distinguish good and bad marijuana dollars (the Marijuana SAR guidance). (See marijuana SAR results for 2018) For 280E though, Treasury would need to tell the IRS to ignore 280E marijuana stated licensed businesses fraudulent filed returns to circumvent the prohibition of deductions. It would be really hard to administer the audits.
If Treasury cannot do it, but wants to do it, that leaves the Tax Court. The Tax Court judges have over the past two years have concluded that marijuana should be removed from Schedule I so that 280E is not an issue. In this case, once again the conclusion is:
“Congress, rather than this Court, is the proper body to redress petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in section 280E for businesses that operate lawfully under State law.”
It’s only doing so because the IRS Counsel (must I think) express this in arguments to the Court, begging the Court for a way out of this mess. So the Tax Court has written that Congress or an agency needs to fix the problem. It hasn’t been fixed. And then this case where a powerful voice on the Tax Court said to the DEA and Congress: ‘do not force us to rectify the problem because you are not going to like the theoretical hoop we must jump through to do it.’
So, the theoretical argument that could gain some traction about the denial of all deductions by 280E is that it imposes the tax rate (say 37%) on revenue which may violate the intention of the 16th Amendment. This is what Gustafon is musing about at page 23. I agree.
At page 26 the point is driven home (pun coming..):
“Very different would be an attempt by Congress to tax gross proceeds from the sale of a capital asset, without allowing a taxpayer to account for his “basis” in the property in calculating his taxable gain.”
So imagine Congress imposes the ordinary tax rate on the sale price of an individual taxpayer’s sale of the home. Say 37% on $500,000. Taxpayer not allowed the basis reduction of the acquisition cost of $450,000 three years ago. TP owes $185,000 tax (and also the additional 3.8% Net Investment Income Tax), on the $50,000 – expenses of the transaction gain. Of course, this is absurd because property requires financing and the remaining would be less than any mortgage secured loan. Same scenario but now shares in Apple bought at $220 last year by our home owing taxpayer and 13 months later sold for $250. Economic collapse. TP rebellion. Not a pretty civil scenario.
Well, 280E does not deny deductions for the cost of goods (of the narcotics like marijuana or heroin – I do not think marijuana should be a black-listed scheduled narcotic). But why not? Because, simply put, an ‘income’ tax on business ‘income’ should be imposed on the ‘income’ and not on the revenue which is not a business’ income. A tax imposed on a business revenue is something other than an ‘income tax’. Excise tax maybe, but not an income tax. See Judge Gustafson explain this at page 26-27.
“Likewise, a congressional attempt to tax the gross receipts of a business engaged in sales should fail. A taxpayer who purchased 100 widgets at a cost of $10 each and sold them at a price of $9 each would have gross receipts or sales of $900, which after being reduced by the “cost of goods sold” (“COGS”) of $1,000 (analogous to basis in the Blackacre example) would yield a loss of $100. Given that obvious loss, Congress could not tax the gross receipts of $900 as if it were “income”. Rather, as the Court of Appeals for the Tenth Circuit has explained: “To ensure taxation of income rather than sales, the ‘cost of goods sold’ is a mandatory exclusion from the calculation of a taxpayer’s gross income.””
Can Congress levy a tax on revenue under the 16th? We know the answer is no because that is why COG is allowed to be above the line to derive an income, and then 280E applies. Well settled. See page 27.
“The taxation of “income” must take account of the “basis” in a capital asset and of the COGS of inventory–not merely as an exercise of “legislative grace” but as mandatory under the Sixteenth Amendment of the Constitution.”
So some expenses are allowed being COG, and other, operating expenses, not allowed. Already 280E is in a quagmire of discriminating between good and bad expenses to fit into the 16th. Thus, the Tax Court could force a bushel of marijuana through a 280E keyhole using the pressure of the 16th Amend if it must to deal with this situation. Gustafson’s push through the keyhole is the second part of his sentence highlighted below at page 29.
“Congress taxes something other than a taxpayer’s “income” when it taxes gross receipts without accounting for basis or COGS--and, I would hold, when it taxes gross receipts without accounting for the ordinary and necessary expenses that are incurred in the course of business and must be paid before one can be said to have gain.”
The argument requires stretching the keyhole with a lot of 16th Amend pressure (though I personally quite like the 16th argument) and Appellate Circuits may want to keep the keyhole rather small and deflate that pressure. But I think that the 1st, 9th, and 10th judges have to live in states where education or other government funding is significantly helped by the state-legal licensed marijuana industry. Judges look at neighbor farmers who cannot sell to China about to go belly up with their grains and soybean – where marijuana can save the farm. I have no litigation or controversy experience but I imagine some Appellate judges know these situations from reading or table talk.
So if the stretch of the 280E keyhole is not totally implausible by using the 16th Amend, a panel may just agree to send a message like the Tax Court to the DEA and failing that, Congress. Anyway, the Supremes can sort out the ramifications of using the 16th to stretch the 280E keyhole. And by that time, maybe the DEA did what the public pressure wants it to do, and is the right thing to do based on medical evidence being generated, move marijuana, based on amount of THC, to the relevant schedules of II through IV.
Anyway, my take on this case. Look forward to our Spring debate.
Tuition Waiver for International Tax Online Courses (more information here) Texas A&M University School of Law International Tax online curriculum. Deadline is August 26 to apply, Transcripts must be received by September 3. Books free as well, as well as access to LexisNexis and Texas A&M’s online tax library.
DOL Releases Final MEP Regulations
The DOL has released its final regulations governing multiple employer plans (MEPs). In general, to qualify as an MEP under the final regulations, a plan must satisfy five basic requirements. First, the association must have at least one substantial business purpose that is not related to offering the plan. The employer-members of the association must control its activities and any employers that participate in the MEP must control the MEP in substance and in form, directly or indirectly. The association must adopt a formal organizational structure. Only employees of the association’s employer-members and certain working owners may participate in the MEP. Finally, some commonality of interest must exist between the employers participating in the MEP, such as the same industry or geographic location. The regulations are effective September 30, 2019. For more information on small business retirement planning options, visit Tax Facts Online. Read More
IRS Announces Campaign Aimed at Holders of Virtual Currency
The IRS has announced that it will begin sending letters to holders of various forms of cryptocurrency informing those taxpayers of potential misreporting (or failure to report) on virtual currency transactions. The IRS advises taxpayers who receive such a letter to review past tax filings to uncover any errors or underreporting, and amend those returns in order to pay back taxes, interest and penalties as soon as possible. These letters are part of a larger campaign designed by the IRS to crack down on misreporting or underreporting of virtual currency transactions, which are currently taxed according to the rules governing transactions in property. For more information on the tax treatment of virtual currency, visit Tax Facts Online. Read More
IRS Provides Summertime Tax Checkup Tips
The IRS has released a list of summertime tax tips to help clients avoid surprises as we move closer to the end of the summer, especially with respect to part-time and seasonal workers. The IRS reminds business owners of the need to withhold Social Security and Medicare taxes from part-time and seasonal employees’ pay even if the worker is unlikely to meet the federal income tax filing threshold. Further, business owners must pay close attention to properly classifying these workers as either employees or independent contractors, remembering that independent contractors, although not subject to withholding, are required to pay their own Social Security and Medicare taxes, in addition to applicable income taxes. For more information on the Social Security and Medicare tax requirements, visit Tax Facts Online. Read More
2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Tax Facts, authored by renown experts William Byrnes and Robert Bloink, for 60 years continues to be the leading tax book and online strategic client resource for the financial professional and advanced products underwriter industry. Reducing complicated tax questions to understandable answers that can be immediately put into a client’s solution. Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Professor Jeffrey Kadet (University of Washington Law) responds below to my thoughts about Nike’s state aid case (Thank you Professor Kadet for your very informed counter to my contentions)
William, it was a pleasure reading your piece on the Nike situation (below in this blog). I have a few thoughts. Please feel free to add this to your blog if you think these thoughts would be useful to the discussion.
I of course agree with your analysis of transfer pricing and the various functions that are performed (or not performed) in various places. My focus is rather on how groups like Nike, Starbucks, and Apple have potentially hoisted themselves on their own petards.
What do I mean by this? I mean that these groups created structures that make no sense except in light of a tax ruling that never should have been issued in the first place. They were so excited about their respective rulings that they didn’t build into their structures any Plan B in case the ruling were unexpectedly revoked or disappeared for any reason. They of course didn’t anticipate the European Commission actions; nobody anticipated it. But now that it’s there, they’re stuck with the structures they created.
Nike chose to place ownership of certain production and marketing intangibles through a cost-sharing agreement in a special purpose company (initially Nike International Limited and then later Nike International CV) with no personnel or operations of its own. The SPC then licensed whatever IP it held to Nike European Operations Netherlands BV, which clearly conducts an operating business. Since the focus here is Dutch taxation and not U.S. taxation, we ignore the check-the-box structure that Nike presumably created in which the SPC and NEON are merely divisions within one Nike CFC. I haven’t seen any public information on the group’s actual structure in this regard except within the July 29, 2016, Tax Court petition, which described NEON as “a disregarded subsidiary of NIKE Pegasus”.
In any case, the European Commission decision notes that NEON was established and began operations in 1994. The decision goes on to say that NEON has been acting as a principal and regional HQ since 2006. This at least implies that it conducted activities prior to 2006 as either an agent or distributor. In any case, it would have in all years conducted real operations locally and within Europe that added to the group’s marketing intangibles.
Maybe on the surface, NEON is just distributing branded products. However, contractually and economically, it is a manufacturer. How does it do its manufacturing? Prior to a 2009 restructuring, it contracted directly with contract manufacturers using Nike Inc. as an agent for arranging and contracting with these manufacturers. As described in the decision, Nike Inc. conducted for NEON as its agent the types of functions described in Reg §1.954-3(a)(4)(iv)(b) [Foreign base company sales income – (4)Property manufactured, produced, or constructed by the controlled foreign corporation]. Following the 2009 restructuring when the Singapore branch of Nike Trading Company BV was added to the mix, things are less clear but it seems doubtful that many production functions changed. Likely, a few functions might have been moved from the U.S. to Singapore. That, however, logically shouldn’t change NEON’s character as a manufacturer.
With the above in mind, Nike has voluntarily created NEON, which has conducted an active business now for 25 years. Over those years, it has created to some extent the marketing intangibles that it uses. This is in addition to whatever IP rights it secures from the SPC under the license agreement. Further, either through its own personnel or through its agents it is conducting all production activities aside from the physical production itself. NEON has never suggested that it has a PE in the U.S. or elsewhere that is conducting purchasing functions.
Nike structured an active manufacturing and sales business within NEON, which pays (i) a royalty for manufacturing IP and some marketing IP to an SPC with no operations of its own, and (ii) service fees (the arm’s length nature of which no one is questioning) to Nike Inc. and NTC for their production functions. NEON has no PE outside the Netherlands to which any profits could be attributed. Any royalty that NEON pays should be an arm’s length royalty for manufacturing IP and any marketing IP that NEON does not already hold based on its activities since its formation in 1994. To suggest that commercial returns in excess of this arm’s length royalty should be included in an expanded royalty to the SPC is completely contrary and out of phase with the structure that Nike voluntarily created. The revenues, production costs, and other expenses that NEON earns or incurs should be fully within the Dutch tax computation; there’s nowhere else it can go.
The same issue of creating a structure dependent on a tax ruling that invites, in the absence of that ruling, full taxation in the country where operations are being conducted is true as well for Starbucks in the Netherlands and Apple in Ireland. The latter, of course, created Apple Sales International, which manufactures products through contract manufacturers and sells them. With all the manufacturing functions (aside from the physical manufacturing performed by contract manufacturers) presumably being conducted by related parties under service agreements, there again is no basis to suggest that any of ASI’s profits should be attributed to some location outside of Ireland. Should the service fee payable to Apple U.S. group members be higher? Probably, but Apple chose its structure and the level of intercompany service fees. The ruling that created an allocation to a home office with no personnel or physical operations is creating a fiction. With the ruling being negated by the Commission’s decision and with no Plan B, Apple created its own mess.
William, I hope the above is useful to your thinking.
These statistics cover outward and inward direct investment positions, financial transactions, and income in 2018 and will provide information answering the following questions:
How much did U.S. multinationals repatriate following the 2017 Tax Cuts and Jobs Act?
Which countries and industries repatriated the most in 2018?
Which countries are the largest destinations for U.S. multinational enterprises’ direct investment?
Which countries’ multinational enterprises have the largest direct investment positions in the United States?
In which industries is foreign direct investment concentrated?
Statistics on foreign direct investment in the United States include data by the country of the immediate foreign parent as well as data by the country of the ultimate beneficial owner. Statistics on U.S. direct investment abroad will include data by the country and industry of the foreign affiliate as well as data by the industry of the U.S. parent.
Effects of the 2017 Tax Cuts and Jobs Act (TCJA) on U.S. Direct Investment Abroad
The TCJA generally eliminated taxes on dividends, or repatriated earnings, to U.S. multinationals from their foreign affiliates. Dividends of $776.5 billion in 2018 exceeded earnings for the year, which led to negative reinvestment of earnings, decreasing the investment position for the first time since 1982. Contrast $155.1 billion repatriated dividends in 2017.
By country, nearly half of the dividends in 2018 were repatriated from affiliates in Bermuda ($231.0 billion) and the Netherlands ($138.8 billion). Ireland was the third-largest source of dividends, but its value is suppressed due to confidentiality requirements. By industry, U.S. multinationals in chemical manufacturing ($209.1 billion) and computers and electronic products manufacturing ($195.9 billion) repatriated the most in 2018.
The U.S. direct investment abroad position, or cumulative level of investment, decreased $62.3 billion to $5.95 trillion at the end of 2018 from $6.01 trillion at the end of 2017, according to statistics released by the Bureau of Economic Analysis (BEA). The decrease was due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliates, largely in response to the 2017 Tax Cuts and Jobs Act. The decrease reflected a $75.8 billion decrease in the position in Latin America and Other Western Hemisphere, primarily in Bermuda. By industry, holding company affiliates owned by U.S. manufacturers accounted for most of the decrease.
The foreign direct investment in the United States position increased $319.1 billion to $4.34 trillion at the end of 2018 from $4.03 trillion at the end of 2017. The increase mainly reflected a $226.1 billion increase in the position from Europe, primarily the Netherlands and Ireland. By industry, affiliates in manufacturing, retail trade, and real estate accounted for the largest increases.
U.S. direct investment abroad (tables 1 – 6) see tables here: BEA tables
U.S. multinational enterprises (MNEs) invest in nearly every country, but their investment in affiliates in five countries accounted for more than half of the total position at the end of 2018. The U.S. direct investment abroad position remained the largest in the Netherlands at $883.2 billion, followed by the United Kingdom ($757.8 billion), Luxembourg ($713.8 billion), Ireland ($442.2 billion), and Canada ($401.9 billion).
By industry of the directly-owned foreign affiliate, investment was highly concentrated in holding companies, which accounted for nearly half of the overall position in 2018. Most holding company affiliates, which are owned by U.S. parents from a variety of industries, own other foreign affiliates that operate in a variety of industries. By industry of the U.S. parent, investment by manufacturing MNEs accounted for 54.0 percent of the position, followed by MNEs in finance and insurance (12.1 percent).
U.S. MNEs earned income of $531.0 billion in 2018 on their cumulative investment abroad, a 12.8 percent increase from 2017.
Foreign direct investment in the United States (tables 7 – 10) see tables here: BEA tables
By country of the foreign parent, five countries accounted for more than half of the total position at the end of 2018. The United Kingdom remained the top investing country with a position of $560.9 billion. Canada ($511.2 billion) moved up one position from 2017 to be the second-largest investing country, moving Japan ($484.4 billion) into third, while the Netherlands ($479.0 billion) and Luxembourg ($356.0 billion) switched places as the fourth and fifth largest investing countries at the end of 2018.
By country of the ultimate beneficial owner (UBO), the top five countries in terms of position were the United Kingdom ($597.2 billion), Canada ($588.4 billion), Japan ($488.7 billion), Germany ($474.5 billion), and Ireland ($385.3 billion). On this basis, investment from the Netherlands and Luxembourg was much lower than by country of foreign parent, indicating that much of the investment from foreign parents in these countries was ultimately owned by investors in other countries.
Foreign direct investment in the United States was concentrated in the U.S. manufacturing sector, which accounted for 40.8 percent of the position. There was also sizable investment in finance and insurance (12.1 percent).
Foreign MNEs earned income of $208.1 billion in 2018 on their cumulative investment in the United States, a 19.7 percent increase from 2017.
Updates to Direct Investment Statistics Delayed
Updates to BEA’s detailed country and industry statistics for U.S. direct investment abroad and for foreign direct investment in the United States for 2016 and 2017 were delayed due to the impact of the partial federal government shutdown that started in late December 2018. BEA will update the 2016 and 2017 statistics in 2020 along with updates to the 2018 statistics.”
From April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. Large multi-national enterprises with revenue derived from the provision of a social media platform, a search engine or an online marketplace (‘in scope activities’) to UK users.
The Digital Services Tax will apply to businesses that provide a social media platform, search engine or an online marketplace to UK users. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.
If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.
The provision of a social media platform, internet search engine or online marketplace by a group includes the carrying on of any associated online advertising business. An associated online advertising business is a business operated on an online platform that facilitates the placing of online advertising, and derives significant benefit from its connection with the social media platform, search engine or online marketplace. There is an exemption from the online marketplace definition for financial and payment services providers.
The revenues from the business activity will include any revenue earned by the group which is connected to the business activity, irrespective of how the business monetises the platform. If revenues are attributable to the business activity and another activity, the business will need to apportion the revenue to each activity on a just and reasonable basis.
Revenues are derived from UK users if the revenue arises by virtue of a UK user using the platform. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user.
A UK user is a user that is normally located in the UK.
Where one of the parties to a transaction on an online marketplace is a UK user, all the revenues from that transaction will be treated as derived from UK users. This will also be the case when the transaction involves land or buildings in the UK. However, the revenue charged will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located in a country that operates a similar tax to the Digital Services Tax.
Businesses will be able to elect to calculate the Digital Services Tax under an alternative calculation under the ‘safe harbour’. This is intended to ensure that the tax does not have a disproportionate effect on business sustainability in cases where a business has a low operating margin from providing in-scope activities to UK users
The total Digital Services Tax liability will be calculated at the group level but the tax will be charged on the individual entities in the group that realise the revenues that contribute to this total. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. Revenues will consequently be counted towards the thresholds even if they are recognised in entities which do not have a UK taxable presence for corporation tax purposes.
A single entity in the group will be responsible for reporting the Digital Services Tax to HMRC. Groups can nominate an entity to fulfil these responsibilities. Otherwise, the ultimate parent of the group will be responsible.
The Digital Services Tax will be payable and reportable on an annual basis.
the weekly tax debate transcribed from Tax Facts authors Professors Robert Bloink and William Byrnes, both of Texas A&M University Law School’s Wealth Management graduate program for professionals.
2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience
Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone. Questions? Contact customer service: TaxFactsHelp@alm.com| 800-543-0874
Raising our Taxes and Killing Social Security via the Republican’s Proposal for an Inflation Tax in Tax Reform
This so-called “Tax Reform” is going to raise our tax burdens while killing social security. The Republicans have proposed, and Democrats have agreed, that actual inflation should not be recognized in future years, limiting inflation adjustments of tax brackets to increase tax on persons who earn more because of inflation, and decreasing social security benefits by half over 20 years. This Tax Reform, besides reducing retirement opportunities for public employees, imposes “Chained CPI” (also known as the inflation tax) upon social security benefits to keep them from increasing and upon tax brackets to keep them from increasing as well. But tax brackets not increasing is bad for taxpayers. Tax brackets that do not move up to account for actual inflation require a higher tax rate be paid on future income as actual inflation pushes it into the next bracket.
I thought Republicans wanted lower taxes imposed on people who sweat and toil? Or do Republicans actually want lower taxes only on idle passive investors?
What if I like organic apples?
How’s that again? “Chained CPI” is sold as the savior of Social Security (see Heritage Foundation explanation). The example employed by Heritage in favor of Chained CPI: if apples go up in price, then consumers stop eating apples and eat cheaper oranges instead. What if I prefer apples? What if I am allergic to oranges? To my actual point: it is not a ‘choice of apples versus oranges world. It’s a choice between quality and cheaper (generally imported) goods. Chained CPI over time eliminates the local farmer’s organic apples in favor of the imported, genetically modified, pesticide grown cheap apples. Chained CPI requires that we reduce lean meat (sorry vegans) in favor of affordable fast food.
Chained CPI is a system built on forcing a degrading quality of life onto retirees.
Compounded over time, it’s a choice between affording medication and going without medication, giving up restaurant dates with my spouse in favor of TV dinners. The monthly annuity from social security, as little as it is relative to a 15.4% pay-in of salary (albeit capped, but so are benefits) over 40 years, could be cut significantly over 20 years (see New Republic explanation) in respect to what it can actually buy in today’s terms. In 20 years when my generations retirees wake up to this death by a thousand substitutions, the monthly social security annuity is so relatively inconsequential, it won’t be worth discussing any longer. Worse, over these 20 years, our tax bills will increase annually via the Chained CPI bracket creep that keeps brackets from adjusting upward as our wages hopefully increase. So inflationary tax takes away our ability to try to mitigate the loss of our catchup retirement and social security. We MUST work, if able, until we drop dead, assuming that we are not substituted for a cheaper wage worker.
Retired, Older Experience Hirer Inflation Than Younger Population
The Congressional Research Service has published a study that finds that elderly persons actually experience higher inflation than younger ones (see CRS Research Report A Separate Consumer Price Index for the Elderly?). Instead of going the wrong direction to a Chained CPI, the CRS suggests a CPI for the elderly spending patterns to be called CPI-E.
Follow the impact analysis of the 2018 tax updates after these pass by a team of experts who will map out how these affect your clients and what planning you need to do – TaxFacts Online.
It has been several years since President Obama pushed the Patient Protection and Affordable Care Act of 2010 (the “ACA”), which is a health care overhaul aimed at providing millions of American with health insurance, through Congress. Read the article here.
According to the White House, the goal of the ACA is to improve health security by: (1) creating comprehensive health insurance reform that provides more ways to hold insurance companies accountable, (2) lowering health care costs, (3) guaranteeing more health care options, and (4) enhancing the overall quality of the American health care system.
As many American, corporations and small businesses are aware, the gateway to an improved healthcare system commenced October 1, 2013 with the implementation of the exchange system. However, some may not be aware of the potential tax benefits awaiting employers. This highlight will specifically address the tax incentives that are available to both large and small businesses.
Critics argue that such competition leads inevitably to a “race to the bottom,” with the result ofreducing tax rates and revenue everywhere. But Dr. Andrew Morriss, Texas A&M Law explains, that anyone who has ever filled out a tax return knows, tax rates are just one facet of tax competition. Jurisdictions can compete over a wide range of tax system attributes – all the way from the complexity of the system to special provisions designed to advantage particular forms of investment to general depreciation rules.
Did you know there’s a free, online program to help teachers and students learn the “hows” and “whys” of taxes? The IRS calls it “Understanding Taxes.” It was designed by the IRS and teachers to make learning about federal taxes as easy as A-B-C.
Accessible (web-based)
Brings learning to life
Comprehensive
Here are six more reasons to check out the Understanding Taxes program:
1. There are thirty-nine easy, relevant and fun lessons available 24/7.
2. A student can quickly look through the program and skip around.
3. A series of tax tutorials guides through the basics of tax preparation. Another feature is a chance to test knowledge through tax trivia. There’s also a glossary of tax terms.
4. Teachers can customize the interactive program. It’s easy to add to a school’s curriculum.
5. No need to register or login to use the program.
6. The program is a great way to learn about the history and theory of taxes in the USA.
The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are concerned that certain recent inversion transactions are inconsistent with the purposes of sections 7874 and 367 of the Internal Revenue Code (Code). The Treasury Department and the IRS understand that certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion. In light of these concerns, this notice announces that the Treasury Department and the IRS intend to issue regulations under sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874 of the Code.
Section 2 of this notice describes regulations that the Treasury Department and the IRS intend to issue that will address transactions that are structured to avoid the purposes of sections 7874 and 367 by (i) for purposes of section 7874, disregarding certain stock of a foreign acquiring corporation that holds a significant amount of passive assets; (ii) for purposes of sections 7874 and 367, disregarding certain non-ordinary course distributions; and (iii) for purposes of section 7874, providing guidance on the treatment of certain transfers of stock of a foreign acquiring corporation (through a spin-off or otherwise) that occur after an acquisition.
Section 3 of this notice describes regulations that the Treasury Department and the IRS intend to issue that will address certain tax avoidance by (i) preventing the avoidance of section 956 through post-inversion acquisitions by controlled foreign corporations (CFCs) of obligations of (or equity investments in) the new foreign parent corporation or certain foreign affiliates; (ii) preventing the avoidance of U.S. tax on pre-inversion earnings and profits of CFCs through post-inversion transactions that otherwise would terminate the CFC status of foreign subsidiaries and/or substantially dilute the U.S. shareholders’ interest in those earnings and profits; and (iii) limiting the ability to remove untaxed foreign earnings and profits of CFCs through related party stock sales subject to section 304.
Section 4 of this notice provides the effective dates of the regulations described in this notice. Section 5 of this notice requests comments and provides contact information for purposes of submitting comments.
Combing through the IRS’ income tax data by county and by zipcode can provide valuable insight for, by example, where to locate a business that depends on foot traffic, where to live (for a well funded local public school) and where to direct marketing efforts for financial planning and wealth management.
Take for instance California. Some counties have substantially more tax filers in the category above $200,000 income, than others. The entire state has 802,100 tax filers reporting $200,000 and greater income, 83% being married couples (665,110). That’s almost twice New York State’s with just 413,720 (of course, to understand New York City, I would need to add in the metropolitan stats from the tri-state Connecticut and New Jersey suburbs of the City). However, Texas beat out New York at 433,150 high earner returns, whereas Florida only had 278,560.
Circular 230 is a document containing the statute and regulations detailing a tax professional’s duties and obligations while practicing before the IRS; authorizing specific sanctions for violations of the duties and obligations; and, describing the procedures that apply to administrative proceedings for discipline. Circular 230 is the common name given to the body of regulations promulgated from the enabling statute found at Title 31, United States Code § 330. This statute and the body of regulations are the source of OPR’s authority. Title 31 seeks to insure tax professionals possess the requisite character, reputation, qualifications and competency to provide valuable service to clients in presenting their cases to the IRS. In short, Circular 230 consists of the “rules of engagement” for tax practice. The underlying issue in all Circular 230 cases is the tax professional’s “fitness to practice” before the IRS.
Watch the recorded hearing’s webcast (link via Logo above)
Wyden Statement on Corporate Inversions and the Need for Comprehensive Tax Reform (excerpt):
The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red, white and blue jobs here at home. They are a significant drag on the economy and are harming U.S. competitiveness. The latest outbreak of this contagion is the growing wave of corporate inversions, where American companies move their headquarters out of the U.S. in pursuit of lower tax rates.
The inversion virus now seems to be multiplying every few days. Medtronic, Mylan, Mallinckrodt and many more deals have either occurred recently or are currently in the works. Medtronic’s proposed $42 billion merger with Covidien was record-breaking when it was announced in June. But the ink in the record books had barely dried when AbbVie announced its intention on Friday to acquire Shire for almost $55 billion. According to the July 15th edition of Marketplace, “What’s going on now is a feeding frenzy … Every investment banker now has a slide deck that they’re taking to any possible company and saying, ‘you have to do a corporate inversion now, because if you don’t, your competitors will.’”
Over the past few months, we’ve seen a handful of legislative proposals to address the issue of inversions. Most of them are punitive and retroactive. Rather than incentivizing American companies to remain in the U.S., these bills would build walls around U.S. corporations in order to keep them from inverting. …
Hatch Statement at Finance Committee Hearing on International Taxation (excerpt):
For example, in 2013, the OECD launched its Base Erosion & Profit Shifting, or BEPS, project. While we appreciate the OECD’s efforts in bringing tax authorities together to discuss and work through issues, many of us have expressed concern that the BEPS project could be used by other countries as a way to increase taxes on American taxpayers. ….
This approach, in my view, completely misses the mark.
While it may put a stop to traditional inversions it could actually lead to more reverse acquisition inversions as our U.S. multinationals would, under this approach, become more attractive acquisition targets for foreign corporations.
Whether it is traditional corporate acquisition inversion or a reverse acquisition inversion, the result is the same: continued stripping of the U.S. tax base. …
Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), Paris, France
Two global banks, Deutsche Bank and Barclays Bank, and more than a dozen hedge funds, such as RenTec, misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has concluded. The improper use of this structured financial product, known as basket options, is the subject of a 93-page report and 5 hours of testimony.
Two global banks and more than a dozen hedge funds misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has found.
The HNWU, which was set up in 2009, is made up of about 400 staff in 31 customer teams. HNWU deals with the tax affairs of the 6,200 wealthiest individual customers of HM Revenue and Customs (HMRC) – those with a net worth of £20 million or more.
When the unit takes ownership of a customer’s tax affairs, both the customer and their authorised tax agent or adviser will receive a letter welcoming them to HNWU. This letter also contains contact details for their Customer Relationship Manager. The relationship manager has detailed oversight over the customer and develops a close understanding of the wealthy individuals tax risks.
The High Net Worth Unit (HNWU) deals with the tax affairs of HM Revenue & Customs (HMRC) wealthiest individual customers. By focusing primarily on this customer group, the unit aims to:
build relationships to better understand these customers and make it easier for them to pay the right amount of tax
tailor service delivery for these customers through proactive engagement and provide a single point of contact and a holistic approach to their tax affairs
The program, through good customer engagement with a focus on influencing behaviour, has led to voluntary compliance of the majority of customers, enabling HMRC to allocate its audit resources against noncompliant taxpayers.
Cooperative compliance means enhancing the relationship between HMRC and our customers to deliver an outcome where both parties work together to achieve the highest possible level of compliance at appropriate cost. This approach is increasingly being recommended as a feature for revenue organisations for customers with complex affairs. It reflects the growing mutual interest in being as certain as possible about tax liabilities and in ensuring that there are no surprises in any later reviews of these liabilities.
Cooperative compliance is not any kind of preferential treatment which compromises the legal position. In essence it forms part of the compliance risk management process – adding deeper and broader understanding of the world in which your client operates to our ongoing dialogue. This approach is one that we wish to have with our HNWU customers. It does of course rely on the foundation stones of a relationship characterised by trust, openness and transparency. We want to move away from only using reactive time consuming formal enquiries to a position where we can have productive pre-filing discussions which help us better understand our customers’ actions, processes and intentions.
Certainty of Positions
… The objective is to give earlier assurance, where appropriate, that we don’t intend to open an enquiry or don’t require further information. Where we are able, we will write to you and your client if no further action is needed to let you know this, rather than letting you wait until the end of the statutory enquiry period. This is more likely to be the case where we have established an ongoing dialogue about your client’s tax affairs. Customers who participated in the trial were positive about the benefits of this approach.
New Individual and Corporate Rate Structure: Flattens the code by reducing rates and collapsing today’s brackets into two brackets of 10 and 25 percent for virtually all taxable income, ensuring that over 99 percent of all taxpayers face maximum rates of 25 percent or less. The plan also reduces the corporate rate to 25 percent.
Larger Standard Deduction: Makes the code simpler and fairer by providing a significantly more generous, inflation-adjusted standard deduction of $11,000 for individuals and $22,000 for married couples.
Larger Child Tax Credit: Increases the child tax credit to $1,500 per child, adjusts it for inflation going forward and expands the number of families that can claim the credit.
Simpler, Improved Taxation of Investment Income: Taxes long-term capital gains and dividends as ordinary income, but exempts 40 percent of such income from tax – resulting in a three percentage point decrease from the maximum rates individuals pay today on such income while also achieving the lowest level of double taxation on investment income in modern history.
No AMT: In addition to lowering tax rates for families and all job creators, the plan repeals the Alternative Minimum Tax (AMT) for individuals, pass-through businesses and corporations.
Easier Education Benefits: Adopts recommendations stemming from the bipartisan working groups to consolidate education tax benefits so, along with the additional money from stronger economic growth, families can more easily afford the costs of a college education.
Modernized International System: Modernizes the international tax code for the first time in more than 50 years while protecting jobs, wages and profits from being shipped overseas.
Permanent R&D Incentive: Invests in innovation by making permanent an improved Research & Development Tax Credit.
More Affordable Healthcare: While the plan generally leaves ObamaCare policies untouched and for a later debate on healthcare, there are two main exceptions given strong bipartisan support for: (1) repeal of the medical device tax and (2) repeal of the medicine cabinet tax, which prohibits use of funds from tax-free accounts to purchase over-the-counter medication without first obtaining a prescription.
IRS Accountability: Cracks down on IRS abuses and reduces massive waste, fraud and abuse. The plan also contains provisions prohibiting implementation of recently proposed rules affecting 501(c)(4) organizations and provides victims with information regarding the status of investigations into violations of their taxpayer rights.
Infrastructure Investment: Dedicates $126.5 billion to the Highway Trust Fund (HTF) to fully fund highway and infrastructure investment through the HTF for eight years.
Simplification for Seniors: Reflecting a proposal supported by AARP and ATR, the plan requires the IRS to develop a simple tax return to be known as Form 1040SR, for individuals over the age of 65 who receive common kinds of retirement income like annuity and Social Security payments, interest, dividends and capital gains.
Charitable Giving: Expands opportunities to make tax-deductible contributions past the end of the tax year, makes permanent conservation easement incentives, simplifies exempt organization taxes and sets a floor instead of a cap to the amount of donations that can be deducted. The economic growth in this plan will increase charitable giving by $2.2 billion annually.
Shrinks and Simplifies the Income Tax Code: In addition to easing complexity and compliance burdens by adopting a larger standard deduction, enhanced child tax credit and lower rates, the plan repeals over 220 sections of the tax code; cutting the size of the income tax code by 25 percent.
In keeping with previously released drafts, the Committee seeks input and feedback on technical and policy issues raised by the draft released today. The Committee also invites input on the accompanying technical explanation prepared by the JCT staff, a document that could serve as the basis for similar legislative history on any future tax reform legislation that may be considered by the Committee. Additionally, as it further examines options arising from the budgetary and economic analysis, the Committee is especially interested in receiving constructive feedback on areas listed below.
1. Extenders Policy ($1 Trillion): The proposal has been scored by JCT as deficit neutral; it does not increase the budget deficit relative to the projected deficits for the FY2014-23 budget window. CBO’s revenue baseline for this period assumes that a number of tax policies expire and are not renewed. However, CBO has noted that “[n]early all of those provisions have been extended previously; some, such as the research and experimentation tax credit, have been extended multiple times.” Including a permanent extension of these policies would result in the revenue baseline being almost $1 trillion lower over the FY2014-23 budget window than projected. In such a scenario, the proposal would therefore reduce the deficit – mostly through revenue increases – potentially by as much as $1 trillion (without considering all potential interactions among those policies and the proposal). CBO annually presents an “alternative fiscal scenario” that assumes these tax provisions are made permanent – the same assumption generally used for spending programs in CBO’s traditional baseline. The Committee is interested in feedback on which (including none or all) of these expiring tax provisions should be included in the revenue baseline for purposes of determining whether the proposal is deficit neutral.
2. Dynamic Revenue ($700 Billion): JCT’s analysis shows that the additional economic growth that would result from the enactment of tax reform would generate up to an additional $700 billion in tax receipts over the FY 2014-2023 budget window as a result of increased employment and higher wages. This additional revenue, however, is not taken into account as part of JCT’s determination that the proposal is deficit neutral. As a result, under the proposal as currently structured, this additional revenue would be available to the Federal government for a variety of purposes. The Committee is interested in feedback on how this additional revenue should be treated (e.g., should it be used to further lower tax rates or to provide other tax benefits, should it be dedicated to deficit reduction, or should it be dedicated to some combination of the two).
3. Household Impact: The proposal has been scored by JCT as being distributionally neutral; it does not significantly change the share of taxes paid by or the average tax rate for each income cohort reported by JCT. However, each income cohort reported by JCT includes a heterogeneous mix of taxpayers. For example, the combination of lower rates, the increase in the size of the standard deduction, and the reforms to the child tax credit and EITC will affect households differently depending on the number of children in the household and whether the taxpayer files jointly. The Committee is interested in feedback as to whether and how these more detailed circumstances should be analyzed and whether there are certain distributional outcomes that are more preferable than others (e.g., effects on households with multiple children versus households without children within the same income cohort).
4. Economic Modeling: JCT’s analysis of the proposal includes an analysis of the macroeconomic effects of tax reform on the U.S. economy, which is sometimes referred to as a dynamic score. This dynamic score shows that the proposal would result in substantial additional economic growth and job creation as compared to the status quo. JCT used two different economic models and a variety of assumptions to calculate the dynamic score. The two models take different approaches to modeling the impact of the proposal on the U.S. economy. For example, one model, the MEG model, cannot fully account for the breadth of the changes to international tax policy made by the proposal and therefore understates the extent of additional investment in the U.S economy, particularly for investment in high-technology, IP-intensive sectors. The OLG model, on the other hand, contains a fiscal constraint that requires the debt to GDP ratio to be held constant between the pre- and post-reform economy, thus failing to capture the full benefits of reduced budget deficits on the economy. The Committee is interested in feedback on the methodology and parameter estimates used by JCT in performing the macroeconomic analysis and recommendations on how this analysis can be improved.
5. Greater Compliance: The current complexity of the tax code makes compliance difficult and facilitates billions of dollars in improper payments and fraud. The most recent estimate shows that the tax gap amounts to $450 billion annually. The proposal includes a number of reforms that would substantially simplify the tax code and improve reporting and compliance. This improved compliance is partially – but not fully – incorporated into JCT’s analysis of the proposal. The Committee is interested in feedback on how to analyze the impact of the proposal on improving compliance, closing the tax gap, and reducing improper payments and fraud. The Committee is interested in receiving analysis that would quantify the extent of the improved compliance and recommendations for how measurements of improved compliance should be factored into any analysis in determining whether the proposal is deficit neutral.
Section 213 of the Internal Revenue Service (IRS) Code provides for the deduction of medical expenses not otherwise covered by insurance for medical care of the taxpayer, his spouse, or a dependent. Under Section 213 medical care is defined as “amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease.” Prescribed drug means “a drug or biological requiring a prescription of a physician.”
Regulation Section 1.213-1(e)(2) defines medicine or drug “as items legally procured and generally accepted as falling within a category of medicine or drugs.” At first glance based on the Code it would appear that so long as the taxpayer met the requirements of Section 213, in states where medical marijuana is authorized, expenses incurred for its purchase would be deductible.
Read attorney Sean Barber’s analysis of this issue in his article published on > AdvisorFYI <
The National Taxpayer Advocate provides the following > report information < on the Earned Income Tax Credit (EITC).
Earned Income Tax Credit and Family Credits
The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low to moderate income-earning individuals and families. If you qualify, the credit could be a maximum amount of up to $6,044 in 2013. This means you could pay less or no federal tax or even get a refund.
The EITC is based on your earned income and whether or not there are qualifying children in your household. You must file a tax return to claim the EITC and if you have children, they must meet the relationship, age and residency requirements.
A taxpayer may qualify for the EITC if you worked any part of last year and made less than $51,000 in 2013. Read more about the EITC, how to file for it, and how to receive a refund:
IRS Incorrectly Bans Many Taxpayers from Claiming EITC
The National Taxpayer Advocate reported that the IRS Incorrectly Bans Many Taxpayers from Claiming EITC (see > Taxpayer Advocate Report on EITC < ) Excerpted from the National Taxpayer Advocate report…
Section 32(k) of the Internal Revenue Code (IRC) authorizes the IRS to ban taxpayers from claiming the earned income tax credit (EITC) for two years if the IRS determines they claimed the credit improperly due to reckless or intentional disregard of rules and regulations. This standard requires more than mere negligence on the part of the taxpayer.
According to IRS Chief Counsel guidance, a taxpayer’s failure to participate in an EITC audit does not justify imposing the ban. Once the IRS imposes the ban, any EITC claimed in the next two years will be disallowed even if the taxpayer is otherwise eligible for the credit.
IRS data shows:
The IRS imposed the ban improperly almost 40 percent of the time in 2011;
Taxpayers who were (but for the 2011 ban) eligible for the credit in the following two years were deprived of a tax benefit that averaged more than $4,600 for the two years combined.
In a representative sample of two-year ban cases, the Taxpayer Advocate Service (TAS) found:
In 19 percent of the cases, the IRS imposed the ban solely because EITC had been disallowed in a previous year;
In only 10 percent of the cases did a taxpayer’s response to the audit raise the possibility that he or she had the requisite state of mind to justify the two-year ban;
In 69 percent of the cases, the ban was imposed without required managerial approval;
In almost 90 percent of the cases, neither IRS work papers nor communications to the taxpayer contained the required explanation of why the ban was imposed; and
Taxpayers’ average income was about $15,500.
Low income taxpayers face unique obstacles in learning EITC rules and substantiating their entitlement to the credit, but IRS procedures do not take this into account. Instead, the IRS applies the two-year ban on the basis of unexamined assumptions about the taxpayer’s state of mind or even presupposes reckless or intentional disregard of the rules and regulations, potentially causing significant harm to taxpayers who may be entitled to EITC in a subsequent year.
Treasury > reports < that the other benefit programs results in high administrative costs and low error because of the necessity of the pre-qualification for benefits by a caseworker, whereas the EITC’s program’s administrative costs are less than 1% of the program benefits. The Treasury report continues that “the IRS screens EITC claims against certain criteria and also conducts approximately 500,000 audits of claims annually.”
Almost a Quarter of EITC Payments are in Error
Yet, considering that the IRS improperly bans taxpayers from the EITC program and performs 500,000 audits of EITC claims annually, 22.7% of the EITC is improperly paid. A challenging problem to be addressed. Low administrative cost but high rate of improper denial of eligibility and high rate of improper payment. Send me (or use comments below) suggestions of how these problems may be mitigated.
2012: $55.4B Total Payments (Outlays) with $12.6B Improper Payments = 22.7% Improper Payment Rate
FISCAL REPORTING YEAR
IMPROPER AMOUNT (IN BILLIONS)
IMPROPER RATE
2010
$16.9
26.3%
2011
$15.2
23.5%
2012
$12.6
22.7%
2013
$13.2
22.8%
2014
$11.8
22.8%
Treasury’s EITC Program Comments
A number of factors unique to the EITC program trigger errors. The complexity of the law contributes to confusion around eligibility requirements, mainly qualifying child relationship and residency rules. Other factors include high program turnover of one-third annually, return preparer errors, and fraud.
The IRS will continue to address EITC noncompliance through its aggressive compliance program which includes examinations, reviews of income misreporting, systemic corrections during tax return processing, and an enhanced focus on paid return preparers. Because tax return preparers handle two-thirds of returns claiming the EITC, the Department of the Treasury expects the implementation of new preparer requirements for registration, competency testing, continuing education, and compliance checks will improve EITC compliance, decrease fraud, and reduce overall program noncompliance.
For more than half a century, Tax Facts has been an essential resource designed to meet the real-world tax-guidance needs of professionals in both the insurance and investment industries.
Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.
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This > article < by Professor William Byrnes describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy.
The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.
The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor. The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity.
This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code.
However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.
This > article < by Professor William Byrnes studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations. The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s.
To create perspective, a short brief of the modern economic significance of the foundation sector follows. Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption. The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption. The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations. Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.
This > article < by Professor William Byrnes traces Roman charity from its incipient meager beginnings during Rome’s infancy to the mature legal formula it assumed after intersecting with the Roman emperors and Christianity. During this evolution, charity went from being a haphazard and often accidental private event, to a broad undertaking of public, religious, and legal commitment. Charitable giving within ancient Rome was quite extensive and longstanding, with some obvious differences from the modern definition and practice of the activity.
The main differences can be broken into four key aspects. First, as regards the republican period, Roman charity was invariably given with either political or ego-driven motives, connected to ambitions for friendship, political power or lasting reputation. Second, charity was almost never earmarked for the most needy. Third, Roman largesse was not religiously derived, but rather drawn from personal, or civic impetus. Last, Roman charity tended to avoid any set doctrine, but was hit and miss in application. It was not till the imperium’s grain dole, or cura annonae, and the support of select Italian children, or alimenta were established in the later Empire that the approach became more or less fixed in some basic areas. It was also in the later Empire that Christianity made an enormous impact, helping motivate Constantine – who made Christianity the state religion – and Justinian to develop legal doctrines of charity.This study of Roman charitable activities will concern itself with several streams of enquiry, one side being the historical, societal, and religious, versus the legal. From another angle, it will follow the pagan versus Christian developments. The first part is a reckoning of Roman largesse in its many expressions, with explanations of what appeared to motivate Roman benefactors. This will be buttressed by a description of the Roman view of society and how charity fit within it. The second part will deal with the specific legal expressions of euegertism (or ‘private munificence for public benefit’ ) that typify and reveal the particular genius that Romans had for casting their activities in a legal framework. This is important because Rome is the starting point of much of charity as we understand the term, both legally and institutionally in the modern world. So studying Roman giving brings into highlight and contrast the beginnings of Charity itself – arguably one of the most important developments of the civilized world, and the linchpin of the Liberal ethos.
Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS on January 9, 2014, National Taxpayer Advocate Nina E. Olson released her 2013 annual report to Congress. The Taxpayer Advocate, replying on State Department statistics, cited that “7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012.”{1} The Taxpayer Advocate noted that “more than one million U.S. citizens reside in Mexico and many Mexican citizens reside in the U.S.” The Report pointed out that most persons that worked in Mexico had to pay into a government mandated retirement account (known as a AFORES), and that this retirement account may be reportable to the IRS as a foreign trust.
Regarding individual international tax compliance initiatives, the IRS Newswire reported that “Analyzing results from the IRS’s 2009 OVD program, the Advocate found the median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances, and 580% of the tax assessed for taxpayers with the smallest account balances (i.e., the bottom 10%, with an average $44,855 account balance). Taxpayers who “opted out” of the OVD program and agreed to subject themselves to audits fared better but still faced penalties of nearly 70% of the tax and interest.”
The Report stated: “Since 2009, the IRS has generally required those who failed to report offshore income and file one or more related information returns (e.g., the Report of Foreign Bank and Financial Accounts (FBAR)) to enter into successively more punitive offshore voluntary disclosure (OVD) programs. … The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. … On average, the IRS assessed penalties of nearly 70% of the unpaid tax and interest in the audits of those who opted out.” The FBAR penalty of 50% of the account balance, for up to six years of non-compliance, equals a potential maximum FBAR penalty of 300% of the account itself, without regard to the actual tax due, interest thereupon, and tax penalties.
The finding that small account holding benign taxpayers paid penalties of nearly 600% of the actual tax due appears to be a miscarriage of the intent of policy makers. This situation has also led the Taxpayer Advocate to conclude that benign actors, in particular those with small non-reported accounts, made either soft disclosures or prospectively began to comply “… without subjecting themselves to the lengthy and seemingly-unfair OVD process.”
Regarding the 2012 IRS Streamlined OVD program, the taxpayer Advocate found that as of September 2013 2,990 taxpayers had submitted returns reporting an additional $3.8 million in taxes.
Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS, National Taxpayer Advocate Nina E. Olson today released her 2013 annual report to Congress, urging the Internal Revenue Service to adopt a comprehensive Taxpayer Bill of Rights (TBOR).
The Newswire reminds the public that in a prior report, Olson analyzed the IRS’s processing of applications for tax-exempt status and concluded its procedures violated eight of the ten taxpayer rights she has proposed. The current Report though provided a broad rationale, based on internal coherence, collection efficiency, and international practices for Congress to codify a Taxpayer Bill of Rights, and for the meanwhile the IRS to issue its own. Examples of international practice included, by example, references to OECD Reports and to Canada’s practice. The Report quotes Thomas Jefferson: “A bill of rights is what the people are entitled to against every government on earth, general or particular; and what no just government should refuse, or rest on inferences.”{1}
The Newswire quotes the Report “Taxpayer rights are central to voluntary compliance. If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the system, they will be more likely to comply.”
Regarding efficiency, the Newswire focuses on the report’s emphasis that the U.S. tax system is built on voluntary compliance: 98% percent of all tax revenue the IRS collects is paid timely and voluntarily. Only 2% results from IRS enforcement actions. While arguing that knowledge of taxpayer rights promotes voluntary compliance, the report cites a survey of U.S. taxpayers conducted for TAS in 2012 that found less than half of respondents believed they have rights before the IRS and only 11 percent said they knew what those rights are.
Regarding coherence, the Report states: “The Internal Revenue Code provides dozens of real, substantive taxpayer rights. However, these rights are scattered throughout the Code and are not presented in a coherent way. Consequently, most taxpayers have no idea what their rights are and therefore often cannot take advantage of them.”
The report calls on the IRS to take the taxpayer rights that already exist and group them into ten broad categories, modeled on the U.S. Constitution’s Bill of Rights. The report says the “simplicity and clarity” of a thematic, principle-based Taxpayer Bill of Rights would help taxpayers understand their rights in general terms.
1. The Right to Be Informed
2. The Right to Quality Service
3. The Right to Pay No More than the Correct Amount of Tax
4. The Right to Challenge the IRS’s Position and Be Heard
5. The Right to Appeal an IRS Decision in an Independent Forum
6. The Right to Finality
7. The Right to Privacy
8. The Right to Confidentiality
9. The Right to Retain Representation
10. The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service
On December 10, 2013, Senate Budget Committee chairman Patty Murray (D-WA) and House Budget Committee chairman Paul Ryan (R-WI) announced that they have reached a two-year budget agreement in advance of the budget conference’s December 13th deadline.
The Bipartisan Budget Act of 2013 would set overall discretionary spending for the current fiscal year at $1.012 trillion—about halfway between the Senate budget level of $1.058 trillion and the House budget level of $967 billion. The agreement would provide $63 billion in sequester relief over two years, split evenly between defense and non-defense programs. In fiscal year 2014, defense discretionary spending would be set at $520.5 billion, and non-defense discretionary spending would be set at $491.8 billion.
The sequester relief is fully offset by savings elsewhere in the budget. The agreement includes dozens of specific deficit-reduction provisions, with mandatory savings and non-tax revenue totaling $85 billion. The agreement would reduce the deficit by $23 billion.
The Summary of the Bipartisan Budget Act of 2013 includes:
PREVENTION OF WASTE, FRAUD, AND ABUSE
Improving the collection of unemployment insurance overpayments
Restriction on access to the Death Master File (fee based access going forward to cover its costs)
Identification of inmates requesting or receiving improper payments
FEDERAL CIVILIAN AND MILITARY RETIREMENT
Federal Employees Retirement System for new employees
Annual adjustment of retired pay and retainer pay amounts for retired members of the Armed Forces under age 62
HIGHER EDUCATION
Default Reduction Program
Elimination of nonprofit servicing contract
TRANSPORTATION
Aviation security service fees
Transportation cost reimbursement
MISCELLANEOUS PROVISIONS
Limitation on allowable government contractor compensation costs: limits how much a contractor could charge the federal government for an employee’s compensation to $487,000, adjusted annually to reflect changes in the Employment Cost Index. (Comment: does this mean that government contractors are receiving more than $487,000 annually for an employee? How do I sign up?).
Last week on December 5, 2013 the Treasury Inspector General for Tax Administration (TIGTA) publicly released its September 27 report titled: “Foreign Account Tax Compliance Act: Improvements Are Needed To Strengthen Systems Development Controls For The Foreign Financial Institution Registration System”.[1] TIGTA’s objective was to assess the IRS’s systems development approach for the FATCA Registration Portal. Specifically, TIGTA evaluated the IRS’s established management controls and processes over information technology program management, security control processes, testing documentation, requirements management, and fraud prevention controls.
The IRS estimates that between 200,000 and 400,000 entities will register on its FATCA Online Portal. Industry groups have produced larger estimates based on by example various trust arrangements being categorized as Foreign Financial Institution (FFIs). April 25, 2014 is the deadline for registration to be included on the participating FFI (PFFI) list that will be issued in time to avoid FATCA withholding that will begin July 1, 2014.
Once an FFI is registered on the FATCA Portal, if it is not protected by an intergovernmental agreement (IGA) between the U.S. and its country or jurisdiction, the FFI will need to provide (and the IRS capture) identifying information for certain U.S. accounts maintained by the institution such as account number, balance, gross receipts, and withdrawals. TIGTA identified three key groups that FATCA directly impacts:
(1) taxpayers who meet the reporting requirements threshold for foreign financial assets;
(2) FFIs that report to the IRS foreign financial account information exceeding certain thresholds held by U.S. taxpayers; and
(3) withholding agentswho withhold a 30 percent tax on taxpayers who fail to properly report their specified financial assets related to U.S. investments.
An October 2014 industry poll of 100 financial firms, half large firms, founds that more than 55 percent rated average to poor their understanding of FATCA.[2] The four critical challenges identified in that survey include: (1) lack regulatory requirement clarity, (2) FATCA expertise scarcity, (3) operational impact, and (4) data issues. According to the tax department of a tier 1 European bank, the signature of IGAs could reduce cost estimates to roughly US$100 million per institution covered by the respective IGA. Given the U.S.-U.K. IGA, the national cost estimate of the U.K. Revenue for impacted U.K. financial institutions is a one-off cost of approximately £900 million – £1.600 billion with an ongoing cost of £50 million – £90 million a year.[3]
In its report, TIGTA stated six recommendations for the IRS to improve system development, documentation, management, and testing.
(1) The Chief Technology Officer (CTO) and the Commissioner, LB&I Division, should ensure that the FATCA Organization PMO and FATCA information technology management timely identify and communicate system changes to minimize costs and reduce waste for future information technology development projects.
(2) The CTO should ensure that adequate program management controls are in place and are consistently followed to guide the future system development activities needed for the FATCA and to better position the IRS to accomplish its goals for improving the benefits of its FATCA goals and objectives.
(3) The CTO should ensure that the SCA Test Plan and Developer Security Test and Evaluation Plan are prepared so that all security requirements, security controls, and test cases are identified, traced, and tested, and all security testing is performed before deployment of Drop 1 to ensure that the FRS operates as intended.
(4) The CTO should ensure that all testing groups follow the recently established Internal Revenue Manual (IRM) procedures for documenting test cases for consistency in testing requirements and in detecting and correcting errors to ensure that the FRS meets all of its requirements as needed.
(5) The Commissioner, LB&I Division should establish IRM procedures for all testing groups to ensure that documentation of test cases is consistent with and supports the IT Organization requirements testing process.
(6) The CTO should ensure that IRM guidelines are followed so that the RTVM is established at the beginning of the testing life cycle and updated and maintained throughout the requirements management and testing processes, and that the RTVM is utilized on a regular basis to ensure that all FRS and future FATCA system requirements are included in test cases and tested.
Before the first version (Release 1.0) was shelved, the IRS expended $8.6 million of a $14.4 million forecast budget over 19 months on the FATCA Registration Portal (FFI Registration System or “FRS”). The current version (Release 1.1) is in development with a final forecast price tag to roll out a working version of the FRS of $16.6 million, i.e. $2.2 million over budget.
Examples of Key Capabilities and Features of FRS Release 1.0
Capabilities
Features
The FRS is a modern web-based application with 24/7 accessibility. Specifically, it:Ø Allows Financial Institution (FI) users to establish an online account, including the ability to choose a password and create challenge questions.Ø Displays a customized home page for FIs to manage their accounts.
Ø Ensures security for all data provided on behalf of FIs.
Ø Provides FIs with tools to oversee member and/or branch information.
Ø Establishes a streamlined environment for FIs to register in one place.
The FRS provides flexibility for FIs to report on and manage information throughout their corporate structure (branch and members). Specifically, the system:Ø Generates automatic notifications when an FI status changes.Ø Implements a universal numbering system (Global Intermediary Identification Number) that can be used by local taxing authorities.
Ø Allows FIs to appoint delegates (points of contact) to perform registration tasks.
Source: FRS overview presented by the IRS to the Treasury Inspector General for Tax Administration on February 21, 2013.
In comparison of the expenditure overruns and technical glitches of the state and federal affordable health care (ACA or Obama Care) exchanges, the FRS budget overrun and push back seem quite successful. Of course, it remains to be seen if the FRS does not go further over-budget and if its roll out is not further pushed back. Yet it must be noted that the 2012 GAO report stated that: “In addition to its internal control deficiencies, IRS faces significant ongoing financial management challenges arising from its continued need to safeguard the large volume of sensitive hard copy taxpayer receipts and related information and to address its exposure to significant improper refunds based on identity theft.”
The 2012 TIGTA report on the Information Technology Program recognized that the IRS will have responsibility for the tax system but also for the Patient Protection and Affordable Care Act (PPACA). As a result of PPACA, the IRS has been assigned the job of overseeing all U.S. persons’ healthcare records in the new healthcare system. TIGTA identified weaknesses “over system access controls, configuration management, audit trails, physical security, remediation of security weakness, and oversight and coordination on security-related issues.” TIGTA further stated: “Until the IRS addresses security weaknesses, it will continue to put the confidentiality, integrity, and availability of financial and taxpayer information and employee safety at risk.”
Finally, the IRS was supposed to, has it already been five year ago now(?), have web-based access for each taxpayer of his/her IRS tax account. Still waiting on this customer service feature… But it must also be noted that over the past five years Congress has the IRS tasked with substantial new responsibilities without additional substantial resources to accomplish them all (too bad Congress pulled the plug on the additional 1099 reporting by all taxpayers – that would have been interesting to watch the IRS cope on top of the ACA and FATCA). Billions in incorrectly paid earned income tax credit payments has certainly made the headlines, with the implication being that Congress should have the IRS fix current challenges before forcing it to initiate new ones.
Maybe private enterprise would better accomplish certain tasks, or to take over certain functions – which leads to a different discussion about government / private partnerships and/or outsourcing of tax administration and collection (the Romans did that, as did feudal lords, and if I recall correctly, Bush II’s administration with regard to collections). But as a colleague shared with me today – medicare only has a 3% administrative cost whereas private enterprise runs as high as 70% administrative cost. So private enterprise may not be a cost effective solution. I look forward to discussing this topic in class….
[2] NICE Actimize Financial Services Poll Finds That More Than 55 Percent of
Financial Institutions Rate Understanding of FATCA Legislation ‘Average’ to ‘Poor’, October 9, 2013.
[3] HMRC, Tax information and Impact Note – The International Tax Compliance (United States of America) Regulations 2013, August 7, 2013, http://www.hmrc.gov.uk/fatca/itc-regs-2013.pdf (accessed November 30, 2013).
As we inch closer to 2014, many clients are gearing up for a potential reduction in covered health benefits as employer-sponsored health plans are modified and insurers have begun cancelling coverage in anticipation of the Affordable Care Act (ACA) effective date.
Planning for these costs is heating up, and the IRS has placed the significance of the health flexible spending account (FSA) as a tax-free funding tool in the spotlight. While reducing taxable income in light of higher tax rates is a priority for many clients, the potential for increased out-of-pocket medical expenses under the ACA may provide an even stronger motivation in 2014. As a result, the double tax benefits offered by FSAs have become more valuable than ever, and the IRS has recently taken steps to ease the restrictions that may have previously dissuaded clients from taking advantage of these vehicles.
In his first volley to start a serious discussion for reform of the U.S. taxation of the international activities of U.S. parent companies, Max Baucus, Senate Finance Committee Chairman released several draft tax bills yesterday. His release statement included, “The proposal — the first in a series of discussion drafts to overhaul America’s tax code — details ideas on how to reform international tax rules to spark economic growth, create jobs, and make U.S. businesses more competitive.”
The primary components of the proposed draft Bills include:
Income from selling products and providing services to U.S. customers is taxed annually at full U.S. rates.
Passive and highly-mobile income is taxed annually at full U.S. rates.
The drafts include two options that apply an annual minimum tax to income from products and services sold into foreign markets:
(1) apply a minimum tax rate to all such income, or
(2) tax such income at a lower minimum tax rate if derived from active business operations and at the full U.S. rate if not
Examples provided of a minimum rate include 60% and 80% of applicable U.S. tax, with an allowance for tax credit maintained.
The proposal calls for a ‘deemed repatriation’ of all historical earnings of foreign subsidiaries that have not been previously subject to U.S. tax, imposing a one-off tax at an example rate of 20%, payable over eight years. Tax credits would also be allowed as offset against this one-off tax.
The proposal seeks to eliminate of the international aspects of the “check-the-box” rule. Finally, the proposal explores mitigating ‘base profits erosion’ (BEPS) arrangements used by foreign multinationals to avoid U.S. tax.
Senator Baucus is quoted, “Over the past three years, the Finance Committee has examined every aspect of the tax code in an effort to fix a broken system. Through hearings, option papers and blank slate proposals, we’ve received input from key stakeholders and nearly every member of the Senate. These discussion drafts are the next step. They represent proposals collected throughout this process and provide a path forward on tax reform. Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideas worth exploring.”
The Ranking (aka Minority) Member of the Committee, Republican Senator Orrin Hatch, released a statement that significant policy differences must still be bridged before international tax reform is realized: “…. but the fact is that significant policy differences remain between both sides and a final agreement was never reached. I hope that once the budget conference negotiations have concluded that we can renew our discussions to determine whether we can find common ground to overhaul our tax code.”
The Affordable Care Act (ACA) mandate that will require employers with more than 50 full-time employees to provide health coverage for those employees or pay a penalty that can reach $3,000 per employee has many small business clients scrambling to plan for years ahead. Because independent contractors are not counted toward the 50-employee limit, some small business clients may be tempted to reclassify common law employees as independent contractors to avoid the mandate.
Read Professor William Byrnes and Robert Bloink’s analysis of the issues, challenges, pitfalls and solutions for addressing a business’ future in a world of Obama Care at > Think Advisor <
The latest figures from America’s Health Insurance Plans tell the story: Enrollment in Health Savings Accounts has reached nearly 15.5 million, growing by almost 15 percent since last year and more than tripling in the past six years.
HSAs, for the uninitiated, are a central element in the so-called consumer-driven health care realm, designed to give individuals more control where and how their health care dollars are spent.
Six burning questions are answered about HSAs by William Byrnes and Robert Bloink at > Benefits Pro < in an open media format…
As of June 2013, Master Limited Partnerships (“MLPs”) have reached a market capital of $400 billion, with over 100 MLPs traded on major exchanges.[1] Generally established as LLCs with advantageous partnership flow through tax treatment, MLPs present attractive return vehicles to attract long term capital to the energy extraction, energy transportation (“midstream”), and most recent, energy distribution (“downstream”), markets. However, MLPs may result in unfavorable tax treatment for investors as well.
The Mertens Federal Income Taxation August 2013 Highlight by William Byrnes, Robert Bloink and Theron West examines the tax issues for MLP investors pre- and post- the 1986 Code, imposed MLP investment restrictions, and gradual relaxation thereof. The Highlight concludes with an analysis of the April 2013 legislative bi-partisan proposal, the Master Limited Partnership Parity Act, to extend MLP tax treatment to renewable (“green”) energy, and why this proposal is contentious.
Given the continuing Congressional gridlock over deficit reduction and heightened sensitivity of energy industry tax breaks in light of this, even with bipartisan support, renewable energy lobbyists will probably not realize passage this year. According to J.P. Morgan, “MLP distribution yields have generated 6-7%, and over the past twenty years, capital growth has totaled approximately 8% annually.[2] Regardless of whether MLPs eventually are expanded to encourage renewable energy investments, for the time being they present an alternative asset class that has the potential to produce high-yield returns, and therefore high investor interest.[3]
This article describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy. The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.
The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor. The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity. This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code. However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.
“. . . [w]hen the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’ It is now 585 pages . . . . Much of this complexity stems from the many sophisticated ways wealthy individuals – using the best advice that money can buy – have found ways to shift their income from high tax brackets to low ones, and in many instances to make themselves completely tax free. It takes complicated amendments to end complicated devices.” Senator Russell Long, Chairman, Finance Committee
From the turn of the twentieth century, Congress and the states have uniformly granted tax exemption to charitable foundations, and shortly thereafter tax deductions for charitable donations. But an examination of state and federal debates and corresponding government reports, from the War of Independence to the 1969 private foundation reforms, clearly shows that politically, America has been a house divided on the issue of the charitable foundation tax exemption. By example, in 1863, the Treasury Department issued a ruling that exempted charitable institutions from the federal income tax but the following year, Congress rejected charitable tax exemption legislation. However thirty years later, precisely as feared by its 1864 critics, the 1894 charitable tax exemption’s enactment carried on its coat tails a host of non-charitable associations, such as mutual savings banks, mutual insurance associations, and building and loan associations.
Yet, the political debate regarding tax exemption for the non-charitable associations did not nearly rise to the level expended upon that for philanthropic, private foundations established by industrialists for charitable purposes in the early part of the century. But the twentieth century debate upon the foundation’s charitable exemption little changed from that posited between the 1850s and 1870s by Presidents James Madison and Ulysses Grant, political commentator James Parton and Dr. Charles Eliot, President of Harvard. The private foundation tax exemption evoked a populist fury, leading to numerous, contentious, investigatory foundation reports from that of 1916 Commission of Industrial Relations, 1954 Reece Committee, 1960 Patman reports, and eventually the testimony and committee reports for the 1969 tax reform. These reports uniformly alleged widespread abuse of, and by, private foundations, including tax avoidance, and economic and public policy control of the nation. The private foundation sector sought refuge in the 1952 Cox Committee, 1965 Treasury Report, and 1970 Petersen Commission, which uncovered insignificant abuse, concluded strong public benefit, though recommending modest regulation.
During the charitable exemption debates from 1915 to 1969, Congress initiated and intermittently increased the charitable income tax deduction while scaling back the extent of exemption for both private and public foundations to the nineteenth century norms. At first, the private foundation’s lack of differentiation from general public charities protected their insubstantially regulated exemption. But in 1943, contemplating eliminating the charitable exemption, Congress rather drove a wedge between private and public charities. This wedge allowed the private foundation’s critics to enact a variety of discriminatory rules, such as limiting its charitable deduction from that of public charities, and eventually snowballed to become a significant portion of the 1969 tax reform’s 585 pages.
This article studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations. The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s. To create perspective, a short brief of the modern economic significance of the foundation sector follows. Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption. The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption. The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations. Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.
Searching for some good examples of American populist rhetoric to amuse a Law and Economics class, I re-stumbled upon William Jennings Bryan’s “Cross of Gold” speech. For my non-U.S. students, the “Cross of Gold” speech is heralded as one of the best rhetorical speeches delivered in the U.S. Congress. My memory of grade school, reading Bryan’s folksy style, quickly refreshed with his opening …
“I would be presumptuous, indeed, to present myself against the distinguished gentlemen to whom you have listened if this were but a measuring of ability; but this is not a contest among persons. The humblest citizen in all the land when clad in the armor of a righteous cause is stronger than all the whole hosts of error that they can bring. “ …
And of course his crescendo against the gold standard:
“Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”[1]
A week past, chatting with Professor Denis Kleinfeld as he was preparing for his course on International (Offshore) Financial Centers), he referred me author Jay Starkman’s book that includes numerous entertaining anecdotes about tax and U.S. history: The Sex of a Hippopotamus: A Unique History of Taxes and Accountancy. http://www.starkman.com/hippo/index.html (I’ve ordered a copy)
What happenstance to be reminded of Bryan’s Congressional speech in favor of the income tax. Besides having rhetorical merit near that of the Cross of Gold speech, Bryan provides a brief summary of income tax levied right ‘round the world (well, at least Europe). This opening certainly beats that of Cross of Gold:
“Mr. Chairman, if this were a mere contest in oratory, no one would be presumptuous enough to dispute the prize with the distinguished gentlemen from New York; but clad in the armor of a righteous cause I dare oppose myself to the shafts of his genius, believing that “pebbles of truth” will be more effective than the “javelin of error,” even when hurled by the giant of the Philistines.”
His income tax speech crescendo in favor of a 2% (aghast!) maximum rate lay prelude to the expatriation regimes of today:
“Of all the mean men I have ever known, I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 per cent deep.”[2]
Now, for my Law & Econ class, I’m quite partial to the rhetoric of Huey P. Long, being that we share that great, sovereign, State of Louisana. Thus, I went with a couple of his quotes instead. For those of you who don’t know the folksy speeches of Huey P. Long, a good one-minuter about the (lack of) difference between Republicans and Democrats – view him here: http://www.youtube.com/watch?feature=player_embedded&v=avGl7k4OGJY
While most political economic students will know his “Every Man a King” radio address (http://www.americanrhetoric.com/speeches/hueyplongking.htm), only students of political rhetoric will have been exposed to his 1928 “Evangeline” campaign speech:
“…It is here under this oak where Evangeline waited for her lover, Gabriel, who never came. This oak is an immortal spot, made so by Longfellow’s poem, but Evangeline is not the only one who has waited here in disappointment.
Where are the schools that you have waited for your children to have, that have never come?
Where are the roads and the highways that you send your money to build, that are no nearer now than ever before?
Where are the institutions to care for the sick and disabled?
Evangeline wept bitter tears in her disappointment, but it lasted only through one lifetime. Your tears in this country, around this oak, have lasted for generations. Give me the chance to dry the eyes of those who still weep here.”
The over-arching requirements for FATCA [the Foreign Account Tax Compliance Act] are three-fold:
obtain appropriate due diligence information and documentation for account holders, investors and payees;
report on relevant parties such as U.S. account holders, recalcitrant account holdersand non-participating foreign financial institutions (“FFIs”); and
coordinate withholding as appropriate and if necessary. The requirements are largely intertwined, with due diligence serving as the foundation for the reporting and withholding requirements.
Now that the final FATCA Regulations are published and a number of intergovernmental agreements (“IGAs”) have been signed, FFIs must implement practical steps to be FATCA compliant by January 1, 2014.There is no one-size-fits-all compliance plan for FFIs; however, there are many similar and consistent steps FFIs, regardless of location, can take to develop a FATCA compliance program to meet the broad goal of FATCA: to combat offshore tax evasion by U.S. persons and become FATCA compliant.
Before a FFI can become FATCA compliant, a FFI should take certain preliminary steps to determine the impact FATCA will have on the FFI as well as plan the path toward compliance in an efficient and timely manner.
Early in the process, the FFI should develop a FATCA task force or program team that will oversee the day-to-day operations to becoming FATCA compliant. The task force should include representatives from tax, anti-money laundering (“AML”) and customer on-boarding groups, technology, change management and operations as well as, potentially, other stakeholders. The task force will oversee the broad program plan for the FFI and likely report to the FATCA sponsoring executives or steering committee.
FFIs have to determine what, if any, communications they will prepare for both internal and external stakeholders concerning FATCA. An internal awareness and training program should be developed to teach FFI employees about FATCA and its importance to the FFI. The awareness program should start at the highest level to establish the necessary “tone at the top.”
The FFI may also want to prepare a list of questions, a “FAQs of FATCA,” to ensure the FFI’s clients are receiving a consistent message, regardless of where in the world they are located. FFIs should also determine what if any message they want to provide directly to clients or put on their websites, although it is very important that the FFI does not give unintentional tax advice to its clients.
Additionally, some training of FFI staff, including client-facing personnel, could assist with customers of the FFI receiving a clear and consistent message. It may likely be the FFI’s client-facing personnel are already receiving questions from customers regarding FATCA.
FFIs should take a proactive approach to minimize costs and interference with the customer experience at the FFI. With that in mind, prior to developing a FATCA compliance strategy, FFIs should conduct an assessment of the impact FATCA will have on the FFI by collecting information relating to:
Number and activity of each legal entity and/or business line;
Products and services offered by the business line;
Types and volume of accounts;
Relevant policies and procedures; and
Identification of information technology (“IT”) systems and databases that maintain relevant information and may require updates.
The FFI should also determine what past interactions it has had with the IRS or home country tax authority relating to information reporting on their customers. FFIs may be able to leverage past reporting for FATCA compliance.
FFIs around the globe may rely on other parties to take on certain responsibilities. For example, a foreign fund may outsource some or all of its asset custody, compliance and regulatory functions, transfer agency services and/or distribution. In this case, the FATCA compliance program will only be as strong as the weakest link.
Coordinating and ensuring all relevant parties are working towards FATCA compliance will be important since a FATCA compliance failure on behalf of an agent of the FFI can be construed as a failure by the FFI itself. Asking questions of the FFI’s third-party service providers will be an important early step. If a third-party service provider is not working towards FATCA compliance, the FFI may want to re-assess their relationship and engagement with that party.
After the impact assessment is complete, the FFI will need to plan a path forward that not only makes all of the information technology systems and policy changes, but also develops a working corporate governance structure and functioning compliance program. …
Chapter contributors:
Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.
Jeffrey Locke, Esq. is Director at Navigant Consulting. Prior to joining Navigant, he served as an assistant New York state attorney general in the Criminal Prosecutions Bureau and worked in the prosecutor’s office for the United Nations in Kosovo.
The Foreign Account Tax Compliance Act (“FATCA”) provides for withholding taxes to enforce reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S. owned foreign entities.
FATCA requires specified U.S. persons (U.S. citizen, residents and certain non-resident aliens) and specified domestic entities to report interests in specified foreign financial assets (SFFAs) if the aggregate value of those assets exceeds certain threshold. The regulations apply to domestic entities formed or availed of to hold, directly or indirectly, specified foreign financial assets. These specified entities include certain closely held corporations and partnerships that meet certain conditions and aggregation rules. Specified entities include domestic trusts if they meet certain criteria and exceed certain reporting threshold.
A U.S. owned foreign entity is an entity with one or more substantial U.S. owners. With certain exceptions, a substantial U.S. owner is any U.S. person with greater than 10% direct or indirect ownership interest in the foreign entity.
FATCA applies to U.S. persons who have specified foreign financial assets (SFFAs) whose value exceeds certain thresholds. The IRS announced in January 2013 that reporting by domestic entities with interests in specified foreign financial assets will not be required to file the IRS reporting form for FATCA, Form 8938, until after the date specified by final regulations, which will not be earlier than taxable years beginning after December 31, 2012.1
All foreign entities and foreign trusts are potentially subject to FATCA, in addition to the current Qualified Intermediary (QI) rules. Withholding rules and reporting requirements under FATCA depend upon the entity’s classification. FATCA classifies foreign entities as either financial entities or non-financial entities. Financial entities are classified as Foreign Financial Institutions (FFIs) [see infra. Chapter 7] while non-financial entities are classified as Non-Financial Foreign Entities (NFFEs) [see infra. Chapter 8].
Entities and trusts are very different under U.S. law. Entities include partnerships, limited liability companies (LLCs), international business companies (IBCs), foundations, usufructs, and corporations. In entities, the title to the property owned is not divided.
In a trust, however, U.S. law splits the ownership of the title into two parts, legal and equitable. The trustee of the trust owns the legal title for the benefit of the beneficiary, who owns the equitable title. A trust is a relationship, not an entity, and is treated differently under both the existing QI rules and FATCA.
Specified Foreign Financial Assets (SFFAs)
Financial Accounts
The most common type of SFFA that banks will encounter is a financial account such as any depository or custodial account that is maintained by an FFI.2 A financial account also includes non-publically traded equity or debt interest in a depository or custodial institution, an insurance company, or an investment entity.3 …
Moreover, a financial account includes a non-publically traded equity or debt interest in a holding company or treasury center in an expanded affiliated group [See infra. Chapter 8]. This applies if the holding company or treasury center has at least one investment entity or passive NFFE and the income of the investment entity or passive NFFE in the group exceeds 50% of the group’s aggregate income.4 …
Assets
SFFAs include assets not held in an account. Stocks and securities issued by a non-U.S. person that are held for investment are SFFAs whether they are held in an account with a FFI or not. The same holds true for capital or profits interests in a foreign partnership, any form of debt issued by a non-U.S. person, or a beneficial interest in a foreign trust, foreign estate, or foreign entity. A litany of financial instruments collectively referred to as “swaps” are also SFFAs whether held in an account or not. Options and derivative instruments that have any non-U.S. parties or are issued by a non-U.S. issuer are also SFFAs.5 …
Exemptions from SFFA Definitions
FATCA does provide exemptions. An interest in a foreign security or social insurance program is not a SFFA. A stock of precious metals held in a foreign safe deposit box is not a SFFA. Any security or partnership interest used or held in the conduct of normal trade or business is considered not to be held for investment under FATCA. Stock, however, cannot be considered to be held in the conduct of normal trade or business for purposes of FATCA. Therefore, foreign stock is a SFFA.6 …
Example of SFFA
To clarify what may be considered an SFFA, consider the following example. Mr. Smith, a U.S. person resident in the U.S., has $1 million in a Swiss bank account. He owns a partnership interest in a hedge fund established in the Cayman Islands, and directly owns 5,000 shares of a publically traded Japanese corporation, JapanCo. He also has social security benefits in a foreign country. …
1. IRS Notice 2013-10, “Information Reporting by Domestic Entities under Section 6038D with Respect to Specified Foreign Financial Assets”.
3. IRC §1471(d)(2), Treas Reg §1.1471-5(b)(1)(iii)(A). “Investment entity” is defined in Treas Reg §1.1471-5(e)(4)(i).
4. IRC §1471(d)(2), Treas Reg §1.1471-5(b)(1)(iii)(B)(1). “Treasury center” is defined in Treas Reg §1.1471-5(e)(1)(v).
5. See generally IRS Form 8938, Statement of Specified Foreign Financial Assets.
6. See generally IRS Form 8938, Statement of Specified Foreign Financial Assets.
7. Foreign social security or social insurance programs are not specified as FFA, so they are not subject to FATCA reporting. Instructions to IRS Form 8938, Statement of Specified Foreign Financial Assets, p. 4.
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The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies, in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions. A sample chapter from the 25 is available on LexisNexis: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf
Contributing FATCA Expert Practitioners
Kyria Ali, FCCA is a member of the Association of Chartered Certified Accountants (“ACCA”) of Baker Tilly (BVI) Limited.
Michael Alliston, Esq. is a solicitor in the London office of Herbert Smith Freehills LLP.
Ariene d’Arc Diniz e Amaral, Adv. is a Brazilian tax attorney of Rolim, Viotti & Leite Campos Advogados.
Maarten de Bruin, Esq. is a partner ofStibbe Simont.
Jean-Paul van den Berg, Esq. is a tax partner of Stibbe Simont.
Amanda Castellano, Esq. spent three years as an auditor with the Internal Revenue Service.
Luzius Cavelti, Esq. is an associate at Tappolet & Partner in Zurich.
Bruno Da Silva, LL.M. works at Loyens & Loeff, European Direct Tax Law team and is a tax treaty adviser for the Macau special administrative region of the People’s Republic of China.
Prof. J. Richard Duke, Esq. is an attorney admitted in Alabama and Florida specializing over forty years in income and estate tax planning and compliance, as well as asset protection, for high net wealth families. He served as Counsel to the Ludwig von Mises Institute for Austrian Economics 1983-1989.
Dr. Jan Dyckmans, Esq. is a German attorney at Flick Gocke Schaumburg in Frankfurt am Main.
Arne Hansen is a legal trainee of the Hanseatisches Oberlandesgericht (Higher Regional Court of Hamburg), Germany.
Mark Heroux, J.D. is a Principal in the Tax Services Group at Baker Tilly who began his career in 1986 with the IRS Office of Chief Counsel.
Rob. H. Holt, Esq. is a practicing attorney of thirty years licensed in New York and Texas representing real estate investment companies.
Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.
Denis Kleinfeld, Esq., CPA. is a renown tax authoroverfour decades specializing in international tax planning of high net wealth families. He is Of Counsel to Fuerst Ittleman David & Joseph, PL, in Miami, Florida and was employed as an attorney with the Internal Revenue Service in the Estate and Gift Tax Division.
Richard L. Knickerbocker, Esq. is the senior partner in the Los Angeles office of the Knickerbocker Law Group and the former City Attorney of the City of Santa Monica.
Saloi Abou-Jaoude’ Knickerbocker Saloi Abou-Jaoude’ Knickerbocker is a Legal Administrator in the Los Angeles office of the Knickerbocker Law Group concentrated on shari’a finance.
Jeffrey Locke, Esq. is Director at Navigant Consulting.
Josh Lom works at Herbert Smith Freehills LLP.
Prof. Stephen Polak is a Tax Professor at Thomas Jefferson School of Law’s International Tax & Financial Services Graduate Program where he lectures on Financial Products, Tax Procedure and Financial Crimes. As a U.S. Senior Internal Revenue Agent, Financial Products and Transaction Examiner he examined exotic financial products of large multi-national corporations. Currently, Prof. Polak is assigned to U.S. Internal Revenue Service’s three year National Research Program’s as a Federal State and Local Government Specialist where he examines states, cities, municipalities, and other governmental entities.
Dr. Maji C. Rhee is a professor of Waseda University located in Tokyo.
Jean Richard, Esq. a Canadian attorney, previously worked for the Quebec Tax Department, as a Senior Tax Manager with a large international accounting firm and as a Tax & Estate consultant for a pre-eminent Canadian insurance company. He is currently the Vice President and Sr. Wealth Management Consultant of the BMO Financial Group.
Michael J. Rinaldi, II, CPA. is a renown international tax accountant and author, responsible for the largest independent audit firm in Washington, D.C.
Edgardo Santiago-Torres, Esq., CPA, is also a Certified Public Accountant and a Chartered Global Management Accountant, pursuant to the AICPA and CIMA rules and regulations, admitted by the Puerto Rico Board of Accountancy to practice Public Accounting in Puerto Rico, and an attorney.
Hope M. Shoulders, Esq. is a licensed attorney in the State of New Jersey whom has previously worked for General Motors, National Transportation Safety Board and the Department of Commerce.
Jason Simpson, CAMS is the Director of the Miami office for Global Atlantic Partners, overseeing all operations in Florida, the Caribbean and most of Latin America. He has worked previously as a bank compliance employee at various large and mid-sized financial institutions over the past ten years. He has been a key component in the removal of Cease and Desist Orders as well as other written regulatory agreements within a number of Domestic and International Banks, and designed complete AML units for domestic as well as international banks with over three million clients.
Dr. Alberto Gil Soriano, Esq. worked at the European Commission’s Anti-Fraud Office in Brussels, and most recently at the Legal Department of the International Monetary Fund’s Financial Integrity Group in Washington, D.C. He currently works at the Fiscal Department of Uría Menéndez Abogados, S.L.P in Barcelona (Spain).
Lily L. Tse, CPA. is a partner of Rinaldi & Associates (Washington, D.C.).
Dr. Oliver Untersander, Esq. is partner at Tappolet & Partner in Zurich.
Mauricio Cano del Valle, Esq. is a Mexican attorney who previously worked for the Mexican Ministry of Finance (Secretaría de Hacienda) and Deloitte and Touche Mexico. He was Managing Director of the Amicorp Group Mexico City and San Diego offices, and now has his own law firm.
John Walker, Esq. is an accomplished attorney with a software engineering and architecture background.
Bruce Zagaris, Esq. is a partner at the Washington, D.C. law firm Berliner, Corcoran & Rowe, LLP.
Prof. William Byrnes was a Senior Manager then Associate Director at Coopers & Lybrand, before joining academia wherein he became a renowned author of 38 book and compendium volumes, 93 book & treatise chapters and supplements, and 800+ articles. He is Associate Dean of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.
Dr. Robert J. Munro is the author of 35published books is a Senior Research Fellow and Director of Research for North America of CIDOEC at Jesus College, Cambridge University, and head of the anti money laundering studies of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.
As the world becomes “smaller,” the dynamics of global financial transactions are intensifying. This is why the Foreign Account Tax Compliance Act (FATCA) is one of the most important awareness issues in today’s tax policy and compliance arena. As new developments emerge almost daily in this ever-changing environment, the importance of working knowledge is increasingly pronounced. The LexisNexis® Guide to FATCA Compliance, scheduled for release in May 2013, will be an invaluable resource of insight into FATCA principles, the reasons behind them, and the best practice steps financial institutions must follow in order to comply. Comprehensive coverage in this work, authored by Professor William Byrnes and Dr. Robert Munro, is complemented by content provided by highly qualified international contributors to render meaningful information about all aspects of FATCA.
The impact of FATCA is far-reaching: Affected financial institutions of many descriptions must navigate complex and challenging regulations to maintain compliance. In broad terms, foreignbanks, brokerages, pension funds, insurance companies and a host of other foreign businesses that disburse payments to U.S. citizens and residents are all subject to FATCA compliance. As agreements between nations are consummated and other FATCA developments unfold, the importance of awareness will only grow.
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